1) A revenue included in the determination of book income this year but not included in
taxable income until next year is an example of a timing difference.
2) “Triggers” enable the lender to decide whether it might be appropriate to modify or
waive restrictions, or to demand immediate repayment.
3) The balance sheet provides critical information for understanding an entity’s
profitability.
4) In franchise arrangements, the franchisee gives the franchisor the exclusive right to
sell a product or service in a given locale and use the franchisee’s name for a specified
period of time.
5) IFRS guidelines can trigger an impairment loss that would not be triggered by U.S.
GAAP.
6) When accounts receivables growth exceeds sales growth, this usually indicates an
aggressive revenue recognition policy or some other accounting irregularity.
7) Research indicates that investors generally ignore R&D expenditures.
8) Two companies, Company A and Company B, issue convertible bonds at par. If
Company A uses IFRS and Company B follow U.S. GAAP, the amount Company A
records for the debt will be greater than the amount Company B records for the debt.
9) Revenue is recognized at the earliest moment in time that the revenue is “earned” and
“realized or realizable.”
10) The income tax benefit associated with a loss carryback or carryforward is recorded
as an adjustment to income tax expense in the year of the loss.
11) Ford Appliance Center records revenue on the installment sales method. The
following information is available for the first two years of business.
Which one of the following entries properly records the installment sales for Year 2?
A.Option a
B.Option b
C.Option c
D.Option d
12) Entering the DR or CR amount in the appropriate left or right side of the affected
T-account is called
A.posting
B.cross-referencing
C.journalizing
D.recording
13) Blue Manufacturing produces lathes at an inventory cost of $25,000 each that sell
for $32,000. For credit-approved customers, Blue leases the lathes for $8,500 per year
for five years. The lathes are guaranteed to last four years and generally have a six-year
life.
What is the manufacturing profit of Blue Manufacturing on a leased lathe?
A.$7,000
B.$8,500
C.$10,500
D.$17,500
14) Research has shown that research and development expenditures during the years
immediately prior to a CEO’s retirement tend to
A.increase by a large amount
B.increase by a small amount
C.decline
D.show no change
15) The minimum limit for market value of product M-23 is
A.$42
B.$46
C.$56
D.$60
16) All of the statements below are true of futures contracts except that futures contracts
A.result in predictable cash flows
B.eliminate downside risk and upside potential
C.eliminate downside risk while allowing for upside potential
D.result in predictable gross profits
17) Cash flows arising from the purchase or sale of productive assets are cash flows
from
A.investing activities
B.operating activities
C.financing activities
D.research activities
18) A 3-for-1 stock split will reduce the per share par value and will
A.decrease the number of shares proportionately
B.decrease earnings per share
C.increase owners’ equity
D.increase the total par value of the common stock
19) When reporting a change in an accounting principle, the general rule requires that
the current year’s income from continuing operations reflect
A.use of the newly adopted principle for the current year recognition
B.use of the old principle for the current year recognition
C.management’s choice of either the old or newly adopted principle for the current year
recognition
D.FASB’s designation of either the old or newly-adopted principle based on the item
being changed
20) Which of the following can’t be assessed by analyzing a company’s deferred tax
note to the financial statements?
A.Earnings quality
B.The effective income tax rate
C.The degree of conservatism with respect to accounting choices
D.The impact of economic changes on deferred taxes
21) Autumn Company uses IFRS to prepare its external financial reporting. During
2012, Autumn Company had the following information related to cash flows:
With regard to the above information, which of the following is acceptable as part of
preparation of the statement of cash flows?
A.Option a
B.Option b
C.Option c
D.Option d
22) When certain kinds of assets are built that require public welfare and safety
expenditures at the end of the asset’s life,
A.these estimated future expenditures are subtracted from the carrying value of the
asset
B.these “asset retirement” costs are expensed when asset retirement occurs
C.this fact is only reported in the notes to the financial statements
D.a liability simultaneously arises
23) Hatfield Corporation leases a tractor from Star 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) due at the end each year.
2> The fair value of the tractor is $100,000.
3> The lease is nonrenewable and the tractor reverts to Star at the end of the lease term.
4> The tractor has a six-year economic life.
5> Hatfield has an excellent credit rating.
6> Star offers no warranty on the tractor other than the manufacturer’s two-year
warranty that is handled directly with the manufacturer.
With which one of the following entries will Hatfield prepare to record the payment on
December 31, 2011?
A.Option a
B.Option b
C.Option c
D.Option d
24) Financial ratio, percentage, and trend comparisons can be distorted by all of the
following except
A.the presence of nonrecurring items among the firms being analyzed
B.aggressive revenue recognition practices
C.the timing of asset purchases
D.accounting for similar economic fundamentals in similar fashion
25) Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an
implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray’s
incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray
believes that the equipment has a 10-year service life but has reason to suspect that a
major overhaul might be required in the fifth to seventh year. Since this is the first year
of the equipment’s production, Ray warrants equipment for eight full years anyway.
Assuming that the lease is a capital lease for Ray, which one of the following interest
rates will Ray use to record this lease?
A.Use 8.5% because it is the lessor’s incremental borrowing rate
B.Use 9.0% because it is the lessee’s incremental borrowing rate
C.Use 10.0% because it is the implicit lease rate of return to the lessor
D.Use 8.5% because it is the lesser of the implicit rate and Ray’s incremental borrowing
rate
26) To obtain a better current price, the net present value of future growth opportunities
(NPVGO) can be calculated and
A.added to the price per share calculated from the P/E ratio
B.subtracted from the price per share calculated from the P/E ratio
C.multiplied by the price per share calculated from the P/E ratio
D.divided into the price per share calculated from the P/E ratio
27) Packwood, Inc. sells $250,000 of its accounts receivable to M&B Finance with
recourse. M&B charges a fee of 2% and withholds 8% of the face amount of the
receivables to cover possible uncollectible accounts and sales returns. Packwood
estimates the fair value of the recourse obligation is equal to the $13,500 allowance for
uncollectibles associated with these accounts.
Required:
a. Prepare the journal entry Packwood, Inc. would make to record the factoring.
b. Prepare Packwood’s journal entry to record any subsequent cash received from M&B
if M&B collects all of the receivables except for $6,500 due to a sales return and
$12,000 resulting from a bad debt.
28) When troubled debt is restructured via continuation with modification of debt
terms, the original loan is
A.continued but interest and principal payments may be reduced or eliminated
B.continued but the repayment schedule may be extended over a longer time period
C.continued but the amount of collateral securing the loan is increased
D.cancelled and a new loan agreement is signed
29) Changes in the balance sheet accounts at June 30, 2011 and 2012 for the Poker
Company are presented below:
Additional Information for 2012:
Net income was $480,000 and dividends of $400,000 were declared.
Common stock was issued for cash.
A Long-term investment was sold for $160,000.
A new Long-term investment was acquired for $360,000.
Equipment that cost $600,000 was sold for $200,000. The book value of those assets
was $150,000.
The cash flow from financing activities for 2012 is a
A.$200,000 outflow
B.$400,000 inflow
C.$600,000 inflow
D.$700,000 inflow
30) Non-interest bearing notes are initially recorded at
A.historical cost
B.maturity value because they bear no interest
C.present value, based on the prevailing interest for loans of this type
D.future value, based on the prevailing interest for loans of this type
31) Under the indirect method, the gain on sale of equipment should be
A.added back to net income to arrive at cash flow from operating activities
B.subtracted from net income to arrive at cash flow from operating activities
C.a source of funds in the financing activities
D.a source of funds in the investing activities
32) The “critical event” for revenue recognition is
A.defined by generally accepted accounting principles for every situation
B.the same for every industry
C.dependent upon the exact nature of the business and industry
D.easily defined by the FASB
33) The apportionment of the cost of a wasting asset to future periods under the
matching principle is
A.depletion
B.amortization
C.depreciation
D.allocation
34) Jade, Inc. develops and markets computer software. During 2011, one of Jade’s
engineers began developing a new and very innovative software product. On April 1,
2012, a team of Jade’s engineers determined that the software product was
technologically feasible. Jade engineers continued to ready the software for general
release and in January 2013 the first product sales were made. Total costs incurred were
as follows:
Required:
a. How should Jade account for the costs incurred during 2011 and what is the rationale
for your answer?
b. How should Jade account for the costs incurred during 2012? If your answer differs
from your answer in requirement 1, explain why.
35) Hansel Corporation’s condensed balance sheets appear below:
Trend statements are better than common size statements at indicating which of the
following?
A.Stability
B.Monetary changes
C.Profitability
D.Growth and decline
36) The trustee for the Bronson Corporation pension sent a report to the CEO with the
following information for the fiscal year:
The ending balance of plan assets is
A.$1,770,000
B.$1,845,000
C.$1,920,000
D.$1,955,000
37) The statement, “linkage between these costs and individual sales is difficult to
establish,” refers to
A.period costs
B.expired costs
C.product costs
D.traceable costs
38) The Matrix Company began operations as of the beginning of 2012 . During 2012,
Matrix reported GAAP (book) income before taxes of $789,500. For income tax
purposes, depreciation expense was $150,000; for GAAP (book) purposes, depreciation
expense was $74,000. Matrix accrued $900,000 of revenue for GAAP (book) purposes
during 2012; $600,000 of the accrued revenue was taxable during 2012 . Matrix earned
interest of $79,800 from a municipal bond investment during 2012 . Matrix’s marginal
income tax rate is 40%. Matrix did not make any income tax payments during 2012 .
Requirements:
1> Determine Matrix’s taxable income for the year ended December 31, 2012 .
2> Prepare the 2012 year-end journal entry to record income tax expense.
39) The Sting Company began operations at the beginning of 2012 and had GAAP
(book) income of $350,000 and taxable income of $280,000. During 2012, depreciation
expense for tax purposes exceeded GAAP (book) depreciation expense by $210,000,
while warranty expense for GAAP (book) purposes exceeded warranty expense for tax
purposes by $140,000. These two timing differences will reverse as follows:
The enacted income tax rate for 2012 and 2013 is 38%, while the enacted income tax
rate for 2014 and 2015 is 40%. Sting did not make any income tax payments during
2012 .
Requirement:
Prepare the journal entry to record income tax expense for the year ended December 31,
2012 .
40) Give at least three examples of low-quality earnings items.
41) Schlegel Department Store sells gift certificatesredeemable for store
merchandisethat expire one year after their issuance. Schlegel has the following
information pertaining to its gift certificates sales and redemptions:
Schlegel’s experience indicates that 10% of gift certificates will not be redeemed. The
company’s policy is to record revenue on gift certificates when they are redeemed or
expire.
Required:
In its 2011 income statement, what amount should Schlegel report as gift certificate
revenue?
42) Foal Company’s December 31, 2011 balance sheet reported the following current
assets:
An analysis of the accounts disclosed that accounts receivable consisted of the
following:
Required:
What are the correct totals for cash, accounts receivable, and inventories at December
31, 2011?