1) Excluding some revenues, expenses, gains, losses from the earnings figure calculated
using generally accepted accounting principles is an example of
a. income smoothing
b. “big bath” accounting
c. a “cookie jar” reserve
d. proforma earnings
2) On September 1, 2012, Star Corp. issued a note payable to Federal Bank in the
amount of $450,000. The note had an interest rate of 12 percent and called for three
equal annual principal payments of $150,000. The first payment for interest and
principal was made on September 1, 2013. At December 31, 2013, Star should record
accrued interest payable of
a. $11,000
b. $12,000
c. $16,500
d. $18,000
3) The debit and credit analysis of a transaction normally takes place when the
a. entry is posted to a subsidiary ledger
b. entry is recorded in a journal
c. trial balance is prepared
d. financial statements are prepared
4) For a capital lease, the amount recorded initially by the lessee as a liability should
a. exceed the present value at the beginning of the lease term of minimum lease
payments during the lease term
b. exceed the total of the minimum lease payments during the lease term
c. not exceed the fair value of the leased property at the inception of the lease
d. equal the total of the minimum lease payments during the lease term
5) When computing earnings per share on common stock, dividends on cumulative,
nonconvertible preferred stock should be
a. deducted from net income only if the dividends were declared or paid in the current
period
b. deducted from net income regardless of whether the dividends were not paid or
declared in the period
c. deducted from net income only if net income is greater than the dividends
d. ignored
6) Carson Distributing, which began operating on January 1, appropriately uses the
installment method of accounting. The following information pertains to Carson’s
operations for the first year:
The balance in the deferred gross profit account at December 31 should be
a. $400,000
b. $320,000
c. $240,000
d. $200,000
7) When treasury stock is purchased for cash at more than its par value, what is the
effect on total stockholders’ equity under each of the following methods?
Cost Method Par Value Method
a. No effect Decrease
b. Decrease No effect
c. Increase Increase
d. Decrease Decrease
8) Which of the following is least likely to affect the retained earnings balance?
a. Conversion of preferred stock into common stock
b. Stock splits
c. Treasury stock transactions
d. Stock dividends
9) The Racing Company had taxable income of $12,000 during 2014. Racing used
accelerated depreciation for tax purposes ($3,400) and straight-line depreciation for
accounting purposes ($2,000). Assuming Racing had no other temporary differences,
what would the company’s pretax accounting income be for 2014?
a. $1,400
b. $6,600
c. $13,400
d. $17,400
10) See Teeming Company information above. If Teeming bases its estimate of bad
debts on the aging of accounts receivable, doubtful accounts expense for the current
year ending December 31 is
a. $47,000
b. $48,000
c. $50,000
d. $54,000
11) Osborne Company acquired three machines for $200,000 in a package deal. The
three assets together had a book value of $160,000 on the seller’s books. An appraisal
costing the purchaser $2,000 indicated that the three machines had the following market
values (book values are given in parentheses):
Machine 1: $60,000 ($40,000)
Machine 2: $80,000 ($50,000)
Machine 3: $100,000 ($70,000)
The three assets should be individually recorded at a cost of (rounded to the nearest
dollar)
Machine 1 Machine 2 Machine 3
a. $40,000 $53,333 $66,667
b. $50,000 $62,500 $87,500
c. $40,000 $50,000 $70,000
d. $50,500 $67,333 $84,167
12) For which type of investments would unrealized increases and decreases be
recorded directly in an owners’ equity account?
a. Equity method securities
b. Available-for-sale securities
c. Trading securities
d. Held-to-maturity securities
13) Sapphire Company reported the following information for the year 2014: Sales
revenue of $280,000; cost of goods sold of $100,000; selling expenses of $40,000;
administrative expenses of $35,000; depreciation of $25,000; interest expense of
$8,000; and income tax expense of $28,000. All sales were made for cash and all
expenses (other than depreciation and bond premium amortization of $2,000) were paid
in cash. All current assets and current liabilities remained unchanged. How much cash
was provided by operations for Sapphire Company during 2014?
a. $44,000
b. $69,000
c. $67,000
d. $71,000
14) Bodner Corporation’s income statement for the year ended December 31, 2014,
shows pretax income of $1,000,000. The following items are treated differently on the
tax return and in the accounting records:
Assume that Bodner’s tax rate for 2014 is 30 percent. What is the amount of income tax
payable for 2014?
a. $360,000
b. $320,000
c. $294,000
d. $267,000
15) Trade secrets are an example of which general category of intangible asset that
should be recognized separately according to current generally accepted accounting
principles?
a. Marketing-related
b. Customer-related
c. Artistic-related
d. Technology-based
16) On July 1, 2014, Martinez Manufacturing Co. issued a five-year note payable with a
face amount of $250,000 and an interest rate of 10 percent. The terms of the note
require Martinez to make five annual payments of $50,000 plus accrued interest, with
the first payment due June 30, 2015. With respect to the note, the current liabilities
section of Martinez’ December 31, 2014, balance sheet should include
a. $12,500
b. $50,000
c. $62,500
d. $75,000
17) When a large number of individuals, using the same measurement method,
demonstrate that a high degree of consensus can be secured among independent
measurers, then the result exhibits the characteristic of
a. verifiability
b. neutrality
c. relevance
d. reliability
18) On June 1, Continental Company issued 8,000 shares of its $10 par common stock
to Divide for a tract of land. The stock had a fair market value of $18 per share on this
date. On Divide’s last property tax bill, the land was assessed at $96,000. Continental
should record an increase in Additional Paid-In Capital of
a. $96,000
b. $64,000
c. $40,000
d. $16,000
19) Which of the following would be considered part of the category “trade
receivables”?
a. Advances to employees
b. Amounts due from customers
c. Dividends receivable
d. Income tax refunds receivable
20) Which of the following could never be subject to interperiod tax allocation?
a. Interest revenue on municipal bonds
b. Depreciation expense on operational assets
c. Estimated warranty expense
d. Rent revenue
21) On April 30, 2014, Brother, Inc. purchased for $30 per share all 200,000 of Cousin
Corp.’s outstanding common stock. On this date Cousin’s balance sheet showed net
assets of $5,000,000. Additionally, the fair value of Cousin’s identifiable assets on this
date was $400,000 in excess of their carrying amount. On Brother’s April 30, 2014,
consolidated balance sheet, what amount should be reported as goodwill?
a. $350,000
b. $400,000
c. $600,000
d. $1,000,000
22) Badger Corporation purchased a machine for $132,000 on January 1, 2011, and
depreciated it by the straight-line method using an estimated useful life of eight years
with no salvage value. On January 1, 2014, Badger determined that the machine had a
useful life of six years from the date of acquisition and will have a salvage value of
$12,000. A change in estimate was made in 2014 to reflect these additional data. What
amount should Badger record as the balance of the accumulated depreciation account
for this machine at December 31, 2014?
a. $73,000
b. $77,000
c. $61,250
d. $63,600
23) What is the correct order of the following events in the accounting process?
I. Financial statements are prepared.
II. Adjusting entries are recorded.
III. Nominal accounts are closed.
a. I, II, III
b. II, I, III
c. III, II, I
d. II, III, I
24) On January 1, 2010, Elaine Company purchased for $600,000, a trademark with an
estimated useful life of 16 years. In January 2014, Elaine paid $90,000 for legal fees in
a successful defense of the trademark. Trademark amortization expense for the year
ended December 31, 2014, should be
a. $37,500
b. $43,125
c. $45,000
d. $90,000
25) On March 1, 2014, Hardy Corp. became the lessee of new equipment under a
noncancelable six-year lease. The total estimated economic life of this equipment is ten
years. The fair value of this equipment on March 1, 2014, was $100,000. The lease does
not meet the criteria for classification as a capital lease with respect to transfer of
ownership of the leased asset, or bargain purchase option, or lease term. Nevertheless,
Hardy must classify this lease as a capital lease if, at inception of the lease, the present
value of the minimum lease payments (excluding executory costs) is equal to at least
a. $67,500
b. $75,000
c. $90,000
d. $100,000
26) A gain on the sale of a plant asset in the ordinary course of business should be
presented in a statement of cash flows prepared using the indirect method as
a. a cash inflow from investing activities
b. a cash inflow from financing activities
c. a deduction from net income
d. an addition to net income
27) 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 January 1, 2015, is 12 percent, what will be Panther’s settlement
payment to/from Aegean?
a. $6,000 payment
b. $6,000 receipt
c. $12,000 payment
d. $12,000 receipt
28) During the year, The Mound Company purchased $1,920,000 of inventory. The cost
of goods sold for the year was $1,800,000 and the ending inventory at December 31
was $360,000. What was the inventory turnover for the year?
a. 6.0
b. 5.0
c. 5.3
d. 6.4
29) Which of the following is correct?
a. Discontinued operations are shown as the last category after income from continuing
operations
b. The discontinued operations section of the income statement consists only of the gain
or loss on disposal of the discontinued component net of the tax effect
c. The discontinued operations section of the income statement consists only of the
income or loss from operating the discontinued component net of the tax effect
d. The discontinued operations section of the income statement consists of the income
or loss from operating the discontinued component net of the tax effect as well as the
gain or loss on disposal of the discontinued component net of the tax effect
30) A company uses the percentage-of-completion method to account for a four-year
construction contract. Progress billings sent in the second year that were collected in the
third year would
a. be included in the calculation of the income recognized in the second year
b. be included in the calculation of the income recognized in the third year
c. be included in the calculation of the income recognized in the fourth year
d. not be included in the calculation of the income recognized in any year
31) The following data are extracted from the stockholders’ equity section of the
balance sheet of Guthrie Corporation:
During 2014, the corporation declared and paid cash dividends of $7,500 and also
declared and issued a stock dividend. There were no other changes in stock issued and
outstanding during 2014. Net income for 2014 was
a. $2,300
b. $9,800
c. $10,800
d. $14,800
32) Net income is a key number for shareholders, creditors, and analysts alike. Indeed,
analysts projections of net income for a company are viewed as a standard a company
must achieve for a period of time. Failure to achieve this standard can have devastating
effects on a companys stock price and its management.
The importance of net income in the eyes of analysts and others can tempt managers to
take steps to ensure that the appropriate level of net income is achieved. The process of
manipulated net income to achieve a desired level of earnings is referred to as earnings
management.
Required:
List and explain the economic motivations for earnings management.
33) The accounts from the stockholders’ equity section of the balance sheet of Bahia
Honda Company showed the following at December 31, 2013:
Bahia Honda issued 475,000 shares of the $1 par value common stock on January 1,
2013.
The company also is authorized to issue 500,000 shares of $5 par value, 6% preferred
stock.
During 2014, Bahia Honda had the following transactions:
Prepare a statement of changes in stockholders’ equity for 2014 using the information
given above.
34) The president of the Santander Company is upset! The president has just received
the first draft of the companys annual financial statements for the year ended December
31, 2014, prepared by the companys controller. The statements show an overdraft in one
of the companys bank accounts as an item in the current liabilities section of the
balance sheet. The company experienced a very difficult year during 2014, although the
first month of 2015 has shown some improvement. The Santander Company is a public
company and may wish to issue additional common shares in the near future. The
proceeds of the stock issuance would be used to acquire new equipment that could
prove vital in reversing the companys decline.
Required:
Has the controller properly reported the bank overdraft? What factors should be
considered in reporting this item?
35) Sunrise Technological, Inc., a U.S. multinational producer of computer hardware,
has subsidiaries located throughout the world. Sunrise Technology purchased Einstein
Technology Company, a Swiss producer of computer hardware components, on January
1, 2013. Einsteins financial statements are prepared and submitted in Swiss francs to
Sunrises headquarters. Einsteins adjusted trial balance at December 31, 2014, is
presented below:
Einstein Technology Company
Adjusted Trial Balance
December 31, 2014
(in Swiss Francs)
Relevant exchange rates for 2014 and 2013 are as follows:
The statement of retained earnings for the year ended December 31, 2013, is as follows
(in U.S. dollars):
Required:
Prepare a translated statement of income and retained earnings, and a translated
statement of financial position in U.S. dollars for Einstein Technology for 2014.
36) The claim is sometimes made that the retail cost method is an approximation of the
weighted-average method since the cost-to-retail percentage is computed as a weighted
average of the cost-retail relationship of all goods available for sale during the period.
Required:
Evaluate the validity of the statement above.