1) When analyzing a company’s risk of bankruptcy using Altman’s Z-score, a high
Z-score indicates low risk of default.
2) Changes in accounting principles and changes in the reporting entity are reported
under the prospective approach.
3) Under IFRS, sensitivity analysis for assumption changes is a required disclosure only
for OPEB plans.
4) Temporary differences this year that will cause taxable income to be higher than
book income give rise to a deferred tax asset.
5) To qualify as avoidable interest, the interest must arise from borrowing that is
directly linked to a construction loan.
6) Because IFRS do not permit the use of LIFO, inventory holding gains are included in
income.
7) Fundamental investors buy undervalued stocks and avoid buying overvalued stocks.
8) A relatively new asset base makes it difficult for financial analysts to use trend
analysis.
9) When establishing credit policies, companies choose what they believe is a
profit-minimizing balance between the expected cost of credit sales and benefits of
increased credit sales.
10) Issuing preferred stock is advantageous to financially weak companies because of
the flexibility associated with the timing of the dividend payments.
11) Financial structure leverage is calculated by dividing average assets by average
common shareholders’ equity.
12) The disclosures with respect to deferred income taxes can be used to analyze the
differences in financial reporting choices across firms and therefore enhance interfirm
comparisons.
13) The Vernon Corporation was formed on January 2, 2011 . The company sold 20,000
shares of $8.00 par value stock for $20.00 per share. On July 1, 2011, Vernon bought
back 4,000 shares of stock for $24.00 per share. The treasury stock was resold on
September 1, 2011 for $32.00 per share.
Which one of the following is the correct entry to record the sale of treasury stock?
A.Option a
B.Option b
C.Option c
D.Option d
14) Most executive compensation plans link bonus awards to one or more
A.non-accounting based performance measures
B.accounting-based performance measures
C.marketing-based performance measures
D.management-based performance measures
15) Which of the following results in an increase in income tax expense for a particular
time period?
A.An increase in the deferred tax asset account during the period
B.An increase in the income tax rate for future years that was enacted during the time
period for a company reporting a deferred tax asset at the end of the period
C.A decrease in the deferred liability account during the period
D.An increase in the income tax rate for future years that was enacted during the time
period for a company reporting a deferred tax liability at the end of the period
16) If it is more likely than not that future benefits from a deferred tax asset will not be
realized in its entirety, a/an
A.revenue is established
B.valuation allowance is established
C.expense allowance is established
D.equity account is increased
17) Perry Investments bought 2,000 shares of Able, Inc. common stock on January 1,
2012, for $20,000 and 2,000 shares of Baker, Inc. common stock on July 1, 2012 for
$24,000. Baker paid $2,400 of previously declared dividends to Perry on December 31,
2012 . At the end of 2012, the market value of the Able stock was $18,000 and the
market value of the Baker stock was $28,000. The stocks were purchased for short-term
speculation. Perry owns 10% of each company.
If the securities purchased are classified as available-for-sale securities, Perry should
record the year-end adjustment as
A.Option a
B.Option b
C.Option c
D.Option d
18) Deuce Company purchased a truck for $50,000 on January 2, 2011 . The asset has
an expected salvage value of $5,000 at the end of its five-year useful life. (DDB
switches to straight-line in year 2013.)
How much is the depreciation expense in 2012 if double-declining balance depreciation
is used?
A.$6,000
B.$9,000
C.$12,000
D.$15,000
19) When the ownership percentage of stock exceeds 20 percent but is less than 50
percent, GAAP presumes that the investor
A.has no influence to exert over the investee company
B.is only investing for a short term trading position
C.is able to exert influence over the investee company
D.is trying to take over the investee company
20) The interest rate charged on bank loans must be sufficient to cover all of the
following except
A.a risk premium when loans are personally guaranteed by the borrower
B.the lender’s cost of borrowing funds
C.the costs of administering, monitoring, and servicing the loan
D.a premium for exposure to default risk
21) Everwood Co. had net income of $1,000,000 for the year ending December 31,
2011 . During this time period, Everwood also had a permanent tax difference of
$120,000 and its adjusted pre-tax book income is $1,220,000. Analysts have
approximated Everwood’s taxable income per the tax return at $735,000 for the year
ending December 31, 2011 . Everwood’s earnings conservatism ratio is
A.1.36
B.1.66
C..60
D.1.82
22) If the critical event and measurability conditions are not satisfied, revenue may be
recognized after the sale
A.when legal ownership passes to the seller
B.when cash is collected
C.as the goods are shipped
D.on the receipt of goods by the customer
23) Managers cater to Wall Street (i.e., try to meet earnings benchmarks) for all of the
following reasons except
A.to build credibility with the capital market
B.to maintain or increase the firm’s stock price
C.to build the external reputation of management
D.All of the above are reasons managers cite for meeting earnings benchmarks
24) Accumulated depreciation is a/an
A.expense account
B.liability account
C.contra-asset account
D.owners’ equity account
25) The exercise price for stock option plans on the grant date is
A.always higher than the market price of the underlying shares
B.always lower than the market price of the underlying shares
C.usually lower than the market price of the underlying shares
D.usually equal to or higher than the market price of the underlying shares
26) The method of measuring long-lived assets at their estimated value in an input
market is the
A.expected benefit approach
B.economic sacrifice approach
C.discounted present value approach
D.net realizable value approach
27) On January 1, 2012, Ramsey Company purchased 35% of the outstanding common
shares of the Vapor Company for $70,000 when the net assets were $200,000. During
2012, Vapor Company earned $80,000 and declared a dividend of $40,000. Ramsey
accounted for the investment using the equity method.
Ramsey’s share of Vapor’s income for 2012 is
A.$14,000
B.$28,000
C.$42,000
D.$40,000
28) Which of the following transactions would be reported within the financing
activities section of the cash flow statement?
A.An issue of preferred stock in exchange for a parcel of land
B.The accrual of a cash dividend
C.The cash payment of interest associated with bonds payable
D.The sale of treasury stock for cash
29) When market rates of interest decrease, the use of floating-rate debt benefits
A.investors
B.issuing companies
C.all parties
D.no one
30) The amount reported as net cash provided by investing activities is
A.$25,000
B.$50,000
C.$275,000
D.$300,000
31) The percentage of assets financed by long-term debt is best described by the
A.debt to equity ratio
B.interest coverage ratio
C.long-term debt to asset ratio
D.long-term debt to tangible assets ratio
32) Davis Company began manufacturing operations on January 2, 2011 . During 2011
Davis earned a pre-tax book income of $85,000 and had taxable income of $75,000.
Davis had a temporary difference relating to a prepaid asset that will be expensed as
follows for book purposes:
The enacted tax rates are 30% for 2011 and 2012; and 40% for subsequent years.
If no other timing differences occurred subsequent to 2011, the deferred tax asset at the
beginning of 2013 is
A.$750
B.$1,000
C.$4,000
D.$2,500
33) When an investor is capable of influencing the investee company’s dividend policy,
the investor is able to augment its own reported income when using
A.minority passive accounting treatment
B.minority active accounting treatment
C.majority active accounting treatment
D.the equity method
34) Capitalization of interest for the construction of long-lived assets is limited to
interest arising from actual borrowings from
A.owners
B.stockholders
C.outsiders
D.the board of directors
35) Morey Corporation leases a tractor from Equity Leasing with a five-year
non-cancelable lease on January 1, 2011 under the following terms:
1> Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end
each year.
2> The payments were calculated based on the fair value (which is also the book value
for Equity) of the tractor.
3> The lease is nonrenewable and the tractor reverts to Equity at the end of the lease
term.
4> The tractor has a six-year economic life.
5> Morey has an excellent credit rating.
6> Equity offers no warranty on the tractor other than the manufacturer’s two-year
warranty that is handled directly with the manufacturer.
With which of the following entries will Equity Leasing prepare to record the revenue
earned on December 31, 2011?
A.Option a
B.Option b
C.Option c
D.Option d
36) Which of the following statements is correct?
A.Amortization of discount on bonds payable (bond discount) results in an increase in a
bond’s carrying value
B.Amortization of discount on bonds payable (bond discount) results in a decrease in
bond interest expense
C.Amortization of premium on bonds payable (bond premium) results in an increase in
a bond’s carrying value
D.Amortization of premium on bonds payable (bond premium) results in an increase in
bond interest expense
37) When a note receivable has a stated interest rate that is lower than the prevailing
rate for similar loans, it is recorded at
A.present value based on the stated interest rate
B.present value based on the prevailing rate of interest
C.maturity value
D.net realizable value
38) What is the balance in the investment account as of December 31, 2012?
A.$70,000
B.$98,000
C.$56,000
D.$84,000
39) When a company changes from LIFO to another inventory method, the change is
reported
A.prospectively because it is impractical to determine the effects of this change on prior
years’ income
B.as an error correction
C.as a change in an accounting estimate
D.using the retrospective approach
40) Valuing an entire company, an operating division of that company, or its ownership
shares involves three basic steps. These steps include all of the following except:
A.Forecasting future amounts of some financial attribute that ultimately determine how
much a company is worth
B.Determining the risk or uncertainty associated with the forecast future amounts
C.Determining the discounted present value of the expected future amounts using an
appropriate discount rate
D.Determining the dividends the company will pay in the future based on the
company’s dividend policy and expected future earnings
41) The determining factor for accounting treatment of a troubled debt restructuring
when there is a continuation with modification of terms is whether
A.there is a gain or loss on the transaction to the debtor
B.there is a gain or loss on the transaction to the lender
C.the undiscounted sum of the future cash flows under the restructured note is above or
below the note’s book value (including accrued interest) at the restructuring date
D.the discounted sum of the future cash flows under the restructured note is above or
below the note’s book value (including accrued interest) at the restructuring date
42) Non-current monetary liabilities are initially recorded at their
A.future value
B.historical value
C.present value when incurred
D.undiscounted amount due
43) Which one of the following is a primary limitation of the earnings conservatism
(EC) ratio?
A.Earnings conservatism deterioration arising from LIFO dipping is not reliably
captured in the EC ratio
B.Earnings conservatism deterioration arising from LIFO dipping is reliably captured in
the EC ratio
C.Comparisons across companies in different industries are always reliable
D.Earnings comparisons for a single company over time are always reliable
44) An award of stock that is not transferable or subject to forfeiture for a period of
years is called
A.phantom stock
B.treasury stock
C.restricted stock
D.preferred stock
45) When a company transfers receivables with recourse
A.GAAP requires note disclosure of the contingent liability
B.the transferee is responsible for uncollected receivables
C.there is no contingent liability so no disclosure is required
D.the transfer may be reported in a variety of ways as GAAP provides no specific
reporting guidance related to such transactions
46) Creditors assess credit risk by comparing a firm’s required principal and interest
payments to estimates of the firm’s current and future
A.net assets
B.gross income
C.net income
D.cash flows
47) A bond that is considered unsecured is referred to as a
A.debenture
B.sinking fund bond
C.senior bond
D.callable bond
48) Jones Co. sells on credit and maintains an allowance for doubtful accounts equal to
2% of the company’s $3,450,000 receivables balance. Due to a cash shortfall, Jones
sells $275,000 of its receivables with recourse to Ninth National Bank, and the bank
withholds $12,000 from the factoring proceeds to cover possible noncollections. If the
noncollections eventually amount to $15,000, the entry on Jones’ books when notified
of this fact would be:
A.Option a
B.Option b
C.Option c
D.Option d
49) With a leveraged lease, the lessor must treat the lease as a/n
A.operating lease
B.ordinary capital lease
C.direct financing capital lease
D.sales-type capital lease
50) Harry Jones accepted a six-month, 8% $40,000 note receivable from a customer on
July 1, 2011 . Jones has an arrangement with the National Bank to discount selected
customer notes at 10%.
If the note were discounted on August 1 under the terms of agreement with National
Bank, which one of the following journal entries would Jones record?
A.Option a
B.Option b
C.Option c
D.Option d
51) Financial statement users must recognize that interest expense may seriously
A.overstate the true cost of debt financing when convertible debt is used
B.understate the true cost of debt financing when convertible debt is used
C.impact the dividend rate
D.impact the amount of dividend declared
52) Tyler Company, which began operations at the beginning of 2011, has provided you
with the following information:
GAAP (book) income before taxes was $1,600,000 during 2011 and $2,000,000 during
2012 .
Municipal bond interest of $40,000 was earned in both 2011 and 2012 .
Depreciation expense for tax purposes exceeded depreciation for GAAP (book)
purposes by $180,000 during 2011 and by $150,000 during 2012 . The depreciation
timing difference created during 2011 and 2012 will reverse equally during the next
three years ( 2013 – 2015).
A three-year insurance policy costing $54,000 was purchased using cash at the
beginning of 2011 . A reasonable tax deduction of $24,000 was taken in 2011, and
$15,000 will be taken in 2012 and in 2013 .
Gross profit of $600,000 from installment sales was recognized for GAAP (book)
purposes during 2011 . For tax purposes, $100,000 of the profit was recognized during
2011, the remaining profit will be recognized equally during 2012 and 2013 .
During 2012, a customer paid $325,000 in advance for services to be provided during
2012 and 2013 . Services valued at $120,000 were provided during 2012 .
The income tax rate was 35% during 2011 and 2012 and 40% for all subsequent years.
Requirements:
1> Determine taxable income for 2011 .
2> Prepare the journal entry to record income tax expense for the year ended December
31, 2011 .
3> Determine taxable income for 2012 .
4> Prepare the journal entry to record income tax expense for the year ended December
31, 2012 .
53) The quarterly cash flows from operations for two technology companies are as
follows:
Required:
Explain why Firm 2 has more credit risk than Firm 1 .
54) Fischer Corporation leased new equipment to Swix Company on January 1, 2011 .
The lease is for an eight-year period and requires equal annual payments of $35,000 due
on January 1 of each year. The first payment was made at the inception of the lease. The
fair value of the equipment and the present value of the payments was $217,223. The
implicit interest rate is 8%. The equipment cost Fischer Corporation $160,000, has an
estimated eight-year life, and a residual value of zero. Fischer Corporation uses
straight-line depreciation. Fischer Corporation should have recorded the lease as a
sales-type lease but mistakenly recorded the lease as an operating lease.
Required: Determine the amount of the lease classification error on the following
financial statement elements of Fischer Corporation, and whether the amount is
overstated or understated:
Total assets as of 12/31/12 ____________
Net Income for the year ended 12/31/11 ____________
55) Krabby, Inc. had the following reconciliation at December 31, 2011:
The following assumptions are being used for the pension plan in 2012:
You have the following additional information for 2012:
Required:
1> Compute pension expense for 2012 .
2> Compute plan assets at December 31, 2012 .
3> Compute the projected benefit obligation at December 31, 2012 .
4> Compute the Unrecognized Actuarial (Gain) Loss that will appear in Krabby’s
reconciliation of funded status to prepaid (accrued) pension cost at December 31, 2012 .
5> Compute the amount of the prepaid (accrued) pension cost that will appear on
Krabby’s December 31, 2012 balance sheet.
56) Conroy Company leased equipment on January 1, 2012 . Information pertinent to
the lease is as follows:
The lease term is 6 years.
Annual payments of $60,000 are due on January 1 of each year; the first payment was
made at the inception of the lease.
Conroy’s incremental borrowing rate is 12%.
The implicit interest rate is 10%; Conroy knew the implicit interest rate.
The unguaranteed residual value is $50,000.
The useful life of the equipment is 10 years.
Conroy uses the straight-line depreciation method.
The fair value of the equipment is $325,000.
The lease agreement did not contain either a bargain purchase option or a transfer of
title.
Required:
Prepare all the necessary journal entries for the year ended December 31, 2012 with
respect to Conroy Company’s lease.
57) For the year 2011, the gross profit of Alpha Company was $80,000; the cost of
goods manufactured as $400,000; the beginning inventories of goods in process and
finished goods were $28,000 and $50,000, respectively; and the ending inventories of
goods in process and finished goods were $38,000 and $75,000, respectively.
Required:
What is the dollar amount of Alpha’s sales for 2011?
The following information pertains to the Fan Company’s inventory item B1008:
58) On January 1, 2011 Creek Company’s beginning inventory was $500,000. During
2011 the company purchased $2,400,000 of additional inventory, and on December 31,
2011 Creek’s ending inventory was $300,000.
Required:
What was Creek’s inventory turnover for 2011?