Under the market method, the investment in another company’s stock is recorded at
acquisition cost and is adjusted for the investor’s share of dividends and for any
earnings or losses experienced by the investee after the date of investment.
Depreciation is a noncash expense and therefore not tax-deductible.
Different measures of income such as net income and earnings before interest and taxes
are used to calculate different financial ratios.
Compound interest is calculated by multiplying an interest rate by a principal amount.
The principal amount increases each time interest is earned. The accumulated interest is
added to the principal to become the new principal for the next period.
The indirect method is used by the majority of US corporations in preparing the
statement of cash flows.
Marketable securities are notes, bonds, or stocks that can be readily sold on stock
exchanges or over-the-counter markets.
A contra asset account is created under the allowance method because of the inability to
write down a specific customer’s account at the time bad debts expense is recognized.
T-accounts facilitate the preparation of financial statements at any instant if the account
balances are kept up-to-date.
Given the following data, what is cost of goods sold?
A) $12,000
B) $ 9,000
C) $ 8,000
D) $ 7,000
E) $ 1,000
Trend analysis and common-size financial statements are important analytical
techniques used to evaluate the strength of published financial statements.
a. Define:
1. trend analysis
2. common-size financial statements
b. How is each of these techniques helpful in the analysis of financial statements?
Jets Company buys Pack Company for $11 million. Pack Company has assets with a
fair value of $9 million and liabilities with a fair value of $2 million. Pack’s
stockholders’ equity is recorded at $6 million. What goodwill should Jets Company
record?
A) $10 million
B) $8 million
C) $4 million
D) $2 million
E) $0 million
Milton Manufacturing manufactures and sells ornamental statues. Because of good
styling and marketing, sales have grown briskly. Milton has no pre-existing deferred tax
liability. During 20X3, the following transactions occurred:
1. On January 1, 20,000 new shares of common stock were sold at $100 per share.
2. Half of the proceeds from the stock sale were immediately invested in tax-free bonds
yielding 8% per annum. The bonds were held throughout the year, resulting in interest
revenue of $1,000,000 x .08 = $80,000.
3. Sales for the year were $9,000,000, with expenses of $4,300,000 reported under
GAAP (not including income tax expense).
4. Tax depreciation exceeded depreciation included in item 3 above by $500,000.
What is the total amount of the permanent difference?
A) $-0-.
B) $80,000.
C) $500,000.
D) $85,000.
E) $580,000.
To ensure proper application of a CPA’s technical knowledge, the Public Company
Accounting Oversight Board issues:
A) Generally Accepted Accounting Principles.
B) Statements of Financial Accounting Standards.
C) Accounting Standards Updates.
D) Generally Accepted Auditing Standards.
E) Sarbanes-Oxley Acts for Accounting.
Darla Documentation, paid $1,900 to the local newspaper for advertising that will begin
in 30 days and continue for the following 6 weeks. How would Darla Documentation
record this transaction?
A) Debit Cash and credit Advertising Expense for $1,900
B) Debit Prepaid Advertising and credit Advertising Expense for $1,900
C) Debit Advertising Expense and credit Prepaid Advertising for $1,900
D) Debit Cash and credit Prepaid Advertising for $1,900
E) Debit Prepaid Advertising and credit Cash for $1,900
If the ending inventory is overstated by $18,000 in 20X3, and assuming a constant 30%
tax rate, then what will be the effect on net income in 20X4?
A) Net income will be understated by $5,400 in 20X4.
B) Net income will be overstated by $5,400 in 20X4.
C) Net income will be understated by $12,600 in 20X4.
D) Net income will be overstated by $12,600 in 20X4.
E) Net income will not be overstated or understated in 20X4.
Direct Solutions held two securities. Direct Solutions purchased 100 Bucket
Organization, Inc., securities on January 1, 2X09 for $15 per share and classified it as a
trading security and purchased 80 Sunk Options Company securities on the same day
for $34 per share and classified it as an available-for-sale security. Market values for
both securities as of December 31, for 2X09, 2X10, 2X11, 2X12 follow.
1. Prepare journal entries for the investment in Bucket Organization, Inc. as of
a. December 31, 2X09.
b. December 31, 2X10.
c. December 31, 2X11.
d. December 31, 2X12.
2. Prepare journal entries for the investment in Sunk Options Company as of the dates
in (1) above.
3. Where would gains and losses recorded in (1) and (2) above be reported for:
a. Bucket Organization, Inc.?
b. Sunk Options Company?
The accounting equation can be stated as which of the following?
A) Assets – liabilities = owners’ equity
B) Assets + liabilities = owners’ equity
C) Liabilities + assets = owners’ equity
D) Owners’ equity + assets = liabilities
E) Liabilities – owners’ equity = assets
Machiel Manufacturing acquired a $60,000 machine on January 1, 2009. The machine
is estimated to have a useful life of 4 years, and a residual value of $10,000. For
units-of-production depreciation purposes, the machine is expected to produce 500,000
units. Machiel Manufacturing uses units-of-production depreciation, and the company
produces 80,000 units in 2009; 130,000 units in 2010; 160,000 units in 2011 and 70,000
units in 2012; what is the net book value of the machine at December 31, 2012?
A) $ 8,000
B) $13,000
C) $12,800
D) $16,000
E) $37,000
The Financial Accounting Standards Codification
A) classifies U.S. GAAP to make it easy to research financial reporting issues.
B) classifies U.S. tax laws to make it easy to research U.S. tax laws.
C) classifies International Financial Reporting Standards to make it easy to research
reporting issues.
D) classifies international tax laws to make it easy to research international tax laws.
E) classifies financial statements by type of organization and structure.
Those shares which have been sold to outside investors at one time or another are
known as
A) authorized shares.
B) issued shares.
C) outstanding shares.
D) treasury shares.
E) convertible shares.
An example of an entry that is not an adjusting entry is
A) reducing Prepaid Rent to record rent expense for the current month.
B) reducing Unearned Revenue to record revenue for services provided during the
month.
C) accruing wage expense for labor costs which have been incurred but not yet paid.
D) purchase of land for cash and a note payable.
E) accruing revenue for services that have been provided but not yet billed.
On March 1, 20X3, Environmental Impacts acquired inventory on account. The cost of
the inventory was $85,000. The terms of the purchase were 2/10, n/30. Upon inspection
of the inventory on March 2, $4,800 worth of inventory was returned. Environmental
Impacts paid for the inventory on March 8. The company uses a periodic inventory
system. What journal entry will Environmental Impacts make on March 2, 20X3?
What does a positive free cash flow tell investors about a company’s ability to produce
cash flows from operations and make necessary investments?
Oleke Manufacturing performed services for a client during January valued at $5,000.
The client was billed on February 9. What adjusting entry would Oleke Manufacturing
make on January 31?
E) No adjusting entry is necessary on June 30.
Seesten Company was ready to sell 8-year, 10% bonds at a face value of $2,000,000 on
January 1, 20X9. Because of delays and market conditions, the bonds were not sold
until March 1, 20X9. The bonds pay interest every June 30 and December 31. The
bonds were sold at par plus accrued interest. What are the necessary journal entries for
Seesten Company on March 1, 20X9, and June 30, 20X9?
Brock Investing Group granted 25,000 stock options to its employees on January 1,
2X03. Each option can be exercised to buy one share of common stock. The exercise
price is $40 per share. The options vest at the end of 3 years on December 31, 2X05. At
the grant date, the fair value of the options is $4 per option. The shares had a par value
of $1. The stock options are all exercised on December 31, 2X05.
Required:
1. Prepare the journal entry on December 31, 2X03.
2. Prepare the journal entry on December 31, 2X04.
3. Prepare the journal entries on December 31, 2X05.
In general, what are the principal rights of shareholders?
The replacement costs have increased from $5.60 per unit to $6.20 per unit from the
time 200 units of inventory were purchased. The year-end audit found 120 units
remaining in stock. What entry is required?
E) Make no entry.
Highland Cutlery acquired as a long-term investment some of the common stock of
LTS Company on December 31, 2X12. During 2X13, LTS Company had net income of
$300,000 and declared and paid cash dividends of $90,000. What journal entry would
Highland Cutlery make for 2X13 to recognize the net income of LTS Company,
assuming that Highland Cutlery acquired 12% of the outstanding common stock of LTS
Company?