1) Continuing franchise fees should be recorded by the franchisor
a.as revenue when earned and receivable from the franchisee
b.as revenue when received
c.in accordance with the accounting procedures specified in the franchise agreement
d.as revenue only after the balance of the initial franchise fee has been collected
2) The double-entry accounting system means
a.Each transaction is recorded with two journal entries
b.Each item is recorded in a journal entry, then in a general ledger account
c.The dual effect of each transaction is recorded with a debit and a credit
d.None of these answer choices are correct
3) Which of the following statements is true about specific-goods pooled LIFO
approach?
a.It determines and measures any increases and decreases in a pool in terms of total
dollar value
b.Most companies using a LIFO system prefer specific-goods pooled LIFO approach
over dollar-value LIFO
c.It usually results in large LIFO liquidation
d.The reduction of one quantity in the pool may be offset by an increase in another
4) Which of the following is shown on a statement of cash flows?
a.A stock dividend
b.A stock split
c.An appropriation of retained earnings
d.None of these answers are correct
5) Dream Home Inc., a real estate developing company, was accounting for its
long-term contracts using the completed contract method prior to 2015 . In 2015, it
changed to the percentage-of-completion method.
The company decided to use the same for income tax purposes. The tax rate enacted is
40%.
Income before taxes under both the methods for the past three years appears below.
20132014 2015
Completed contract$300,000$200,000$100,000
Percentage-of-completion 500,000 250,000 180,000
Which of the following will be included in the journal entry made by Dream Home to
record the income effect?
a.A debit to Retained Earnings for $150,000
b.A credit to Retained Earnings for $150,000
c.A credit to Retained Earnings for $100,000
d.A debit to Retained Earnings for $100,000
6) Presented below is pension information related to Woods, Inc. for the year 2015:
Service cost$82,000
Interest on projected benefit obligation54,000
Interest on vested benefits24,000
Amortization of prior service cost due to increase in benefits12,000
Expected return on plan assets18,000
The amount of pension expense to be reported for 2015 is
a.$118,000
b.$154,000
c.$172,000
d.$130,000
7) Sawyer Corporation has a machine (Machine A) that it acquired on 1/1/14 for
$540,000. On 12/31/14 such machines have a selling price and fair value of $621,000.
When used in production, such machines have an estimated useful life of 10 years with
no salvage value. Use the straight-line method.
Brown Corporation has a machine (Machine B) that it acquired on 1/1/14 for $729,000.
On 12/31/14 such machines have a selling price and fair value of $540,000. When used
in production, such machines have an estimated useful life of 10 years with no salvage
value. Use the straight-line method.
On 12/31/14 Brown gave Machine B plus $81,000 cash to Sawyer in return for
Machine A.
Given the assumption in 12 above, at what amount will Sawyer record Machine B?
a.$557,609
b.$405,000
c.$503,604
d.$422,609
8) If management wishes to “capitalize” part of the earnings, it may issue a
a.cash dividend
b.stock dividend
c.property dividend
d.liquidating dividend
9) Which of the following is often reported as an extraordinary item?
a.Amortization expense
b.Impairment losses for intangible assets other than goodwill
c.Impairment losses on goodwill
d.None of these answer choices are correct
10) John won a lottery that will pay him $250,000 at the end of each of the next twenty
years. Zebra Finance has offered to purchase the payment stream for $3,397,500. What
interest rate (to the nearest percent) was used to determine the amount of the payment?
a.7%
b.6%
c.5%
d.4%
11) The major difference between convertible debt and stock warrants is that upon
exercise of the warrants
a.the stock is held by the company for a defined period of time before they are issued to
the warrant holder
b.the holder has to pay a certain amount of cash to obtain the shares
c.the stock involved is restricted and can only be sold by the recipient after a set period
of time
d.no paid-in capital in excess of par can be a part of the transaction
12) Stine Inc. had 500,000 shares of common stock issued and outstanding at December
31, 2014 . On July 1, 2015 an additional 500,000 shares were issued for cash. Stine also
had stock options outstanding at the beginning and end of 2015 which allow the holders
to purchase 150,000 shares of common stock at $28 per share. The average market price
of Stines common stock was $35 during 2015 . The number of shares to be used in
computing diluted earnings per share for 2015 is
a.1,120,000
b.1,030,000
c. 870,000
d. 780,000
13) Overton Corporation, a manufacturer of household paints, is preparing annual
financial statements at December 31, 2014 . Because of a recently proven health hazard
in one of its paints, the government has clearly indicated its intention of having Overton
recall all cans of this paint sold in the last six months. The management of Overton
estimates that this recall would cost $800,000. What accounting recognition, if any,
should be accorded this situation?
a.No recognition
b.Note disclosure only
c.Operating expense of $800,000 and liability of $800,000
d.Appropriation of retained earnings of $800,000
14) Farr Co. adopted the dollar-value LIFO inventory method on December 31, 2014 .
Farr’s entire inventory constitutes a single pool. On December 31, 2014, the inventory
was $640,000 under the dollar-value LIFO method. Inventory data for 2015 are as
follows:
12/31/15 inventory at year-end prices$880,000
Relevant price index at year end (base year 2014)110
Using dollar value LIFO, Farr’s inventory at December 31, 2015 is
a.$704,000
b.$816,000
c.$800,000
d.$880,000
15) Metcalf Company leases a machine from Vollmer Corp. under an agreement which
meets the criteria to be a capital lease for Metcalf. The six-year lease requires payment
of $136,000 at the beginning of each year, including $20,000 per year for maintenance,
insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessors
implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1
for six years at 10% is 4.79079. The present value of an annuity due of 1 for six years at
8% is 4.99271. Metcalf should record the leased asset at
a.$679,008
b.$651,548
c.$579,154
d.$555,732
16) The accounting principle of expense recognition is best demonstrated by
a.not recognizing any expense unless some revenue is realized
b.associating effort (expense) with accomplishment (revenue)
c.recognizing prepaid rent received as revenue
d.establishing an Appropriation for Contingencies account
17) Wooten Co. is being sued for illness caused to local residents as a result of
negligence on the company’s part in permitting the local residents to be exposed to
highly toxic chemicals from its plant. Wooten’s lawyer states that it is probable that
Wooten will lose the suit and be found liable for a judgment costing Wooten anywhere
from $1,600,000 to $8,000,000. However, the lawyer states that the most probable cost
is $4,800,000. As a result of the above facts, Wooten should accrue
a.a loss contingency of $1,600,000 and disclose an additional contingency of up to
$6,400,000
b.a loss contingency of $4,800,000 and disclose an additional contingency of up to
$3,200,000
c.a loss contingency of $4,800,000 but not disclose any additional contingency
d.no loss contingency but disclose a contingency of $1,600,000 to $8,000,000