1) Book income tax expense could equal current taxes payable to the IRS plus the
increase in deferred tax liabilities minus the increase in deferred tax assets.
2) For firms using the straight-line depreciation method, dividing average net property,
plant, and equipment by depreciation expense provides a rough approximation of the
estimated useful life of the average asset.
3) As per the SEC, nonrefundable up-front initiation fees to activate services contracts
(e.g., telecommunications services) may be immediately recognized as revenue as long
as the fees are greater than the costs to activate the contracted services.
4) An accrual of warranty expense for book income calculations this year creates a
deferred tax liability in the balance sheet.
5) The FASB/IASB discussion paper on financial statement presentation, if adopted,
would fundamentally alter the current objectives of financial reporting in the U.S.
6) Before computing ROA, analysts isolate a company’s sustainable operating profits by
removing nonoperating or nonrecurring items from reported income.
7) Period costs would include costs like advertising or insurance where the linkage
between these costs and individual sales is difficult to establish.
8) The degree of conservatism associated with a firm’s accounting choices will have a
direct bearing on the relationship among share price, earnings, and the firm’s equity
book value.
9) Firms must disclose at each reporting date the hierarchy level at which the fair values
were determined.
10) The FASB/IASB joint discussion paper on financial statement presentation sets
forth two core presentation principles: (1) coherence principle, and (2) disaggregation
principle.
11) Consolidation adjustments that are made to prepare consolidated financial
statements of the parent and subsidiary are required to avoid double counting.
12) Under the FASB’s exposure draft on financial statement presentation, the
discontinued operations section of the Statement of Comprehensive Income (SCI)
modifies existing requirements by reporting gains and losses from a component of an
entity that is being discontinued as a category within the business section of the SCI.
13) When the outcome of a contract can be reliably estimated, IFRS rules allow firms to
recognize contract revenue and expenses using the percentage-of-completion method.
14) An example of a derivative instrument is a forward contract.
15) A liability that is satisfied through the payment of cash is referred to as a
denominational liability.
16) The Retained Earnings account is comprised of the cumulative earnings less
dividends since the inception of the corporation.
17) Debit means increase.
18) Errors in computing inventory are fairly commonplace.
19) The unrealized holding gain or loss on trading securities is recorded on
A.the income statement in the period after the security price change
B.the income statement in the period of the security price change
C.the balance sheet as a deferred charge in the period of the security price change
D.the balance sheet as a separate component of stockholders’ equity
20) The difference between the expense charged with a capital lease and an operating
lease is
A.the amount of total expense, with a capital lease higher than an operating lease
B.the amount of total expense, with an operating lease higher than a capital lease
C.the number of years that recognize expense
D.the timing of the expense recognition
21) Call provisions on convertible bonds protect the
A.investor against extreme stock price increases
B.company against extreme stock price increases
C.bank against extreme stock price decreases
D.company against extreme stock price decreases
22) Companies with a history of net operating losses are prone to issue which one of the
following to raise money?
A.Debenture bonds
B.Serial bonds
C.Preferred stock
D.Notes payable
23) Which one of the following types of disclosure costs is the cost of disclosing the
company’s pricing strategies?
A.Political cost
B.Litigation cost
C.Competitive disadvantage cost
D.Information collection, processing, and dissemination cost
24) The lower of cost or market for item M-23 is
A.$40
B.$42
C.$46
D.$52
25) Vent, Inc. reported net income of $770,000 for 2011 . Vent sold 15,000 shares of
treasury stock acquired in a previous year on July 1 and 15,000 new shares on
November 1 . At year-end, 180,000 shares were outstanding. Vent had 20,000 shares of
$100 par value 7% preferred stock outstanding all year. Vent paid dividends to the
preferred shareholders.
The basic earnings per share for 2011 is (rounded)
A.$3.50 per share
B.$3.94 per share
C.$4.81 per share
D.$6.10 per share
26) Losses must be accrued if they are
A.remote and estimable
B.reasonably possible and estimable
C.probable and reasonably estimable
D.probable and not estimable
27) GAAP establishes specific criteria for the treatment of leases. Which of the
following does not accurately describe the criteria applicable to a lessee?
A.The lease agreement contains a bargain purchase option
B.The lease term is equal to or exceeds 75% of the leased asset’s useful life
C.The lease agreement transfers title of the leased asset to the lessee at the end of the
lease term
D.The present value of the minimum lease payments is equal to or greater than 75% of
the leased asset’s fair value
28) Corona Industries purchased a stamping machine on January 2, 2008, for $100,000.
It paid $20,000 down and financed the balance over 5 years at State Bank. Terms of the
loan were 10% interest payable on December 31 each year with a required $16,000
principal payment. 2011 proves to be a difficult year and on December 1, Corona
negotiates a debt restructuring with State Bank. The settlement calls for cash payment
of accrued interest plus $4,000 on December 1 and the transfer of 200 acres of land held
by Corona that cost $15,000. The land has a current market value of $22,000.
On December 1, 2011, how much interest is accrued on this loan?
A.$2,933
B.$3,200
C.$6,933
D.$18,933
29) An increase in accounts receivable of $6,000 for the year
A.decreases cash flow from operations by $3,000
B.increases cash flow from operations by $3,000
C.decreases cash flow from operations by $6,000
D.increases cash flow from operations by $6,000
30) Uncertain tax positions
A.are prohibited under GAAP
B.are recognized if they might be sustained solely on technical merits
C.require a two-step process to determine how much benefit should be recognized
D.are measured as the smallest amount of benefit that is cumulatively greater than 50
percent likely of being realized
31) Smith, Inc. has a pension plan with the following data available for 2011 and 2012:
If the market value of the plan assets is $260,000 at the beginning of 2012, the
beginning of the year projected benefit obligation is $250,000, the unrecognized gains
are $30,000 at the beginning of 2011, and the average remaining service period of
active employees is 10 years, then the amortization of accumulated unrecognized gains
for 2012 is
A.$0
B.$200
C.$225
D.$2,600
32) The major issue in inventory accounting is
A.determining whether to take inventory using cycle counts as opposed to counting all
inventory only at the end of the year
B.deciding whether to maintain records on a periodic or perpetual basis
C.determining what goods to include in inventory
D.choosing the method for allocating goods available for sale to ending inventory and
cost of goods sold
33) A corporation which incurs a net operating loss may carry the loss back 2 years and
forward
A.10 years
B.12 years
C.20 years
D.25 years
34) The size of the divergence between FIFO cost of goods sold and replacement cost
of goods sold depends on
A.the severity of input cost changes
B.the rapidity of physical inventory turnover
C.both a and b
D.a multitude of factors including a. and b. above
35) Condensed financial data are presented below for the Phoenix Corporation:
The days inventory held for 2012 is (rounded):
A.96 days
B.106 days
C.116 days
D.138 days
36) Examples of variable costs include all of the following except
A.raw materials costs
B.the plant manager’s salary
C.direct labor costs
D.electricity used in running production machinery
37) Condensed financial data are presented below for the Phoenix Corporation:
The interest coverage for 2012 is:
A.12.8 times
B.13.8 times
C.20.5 times
D.21.5 times
38) Over the vesting period for employee stock options, current GAAP requires that the
entire compensation expense be recognized
A.in the first year of the vesting period
B.in the last year of the vesting period
C.equally in each year of the vesting period
D.only if the options are exercised
39) Which of the following correctly describes U.S. GAAP accounting for convertible
bonds and the implication of that requirement?
A.separation of debt and equity components; interest expense is overstated
B.no separation of debt and equity components; interest expense is understated
C.no separation of debt and equity components; interest expense is overstated
D.separation of debt and equity components; interest expense is understated
40) Selected data for Kris Corporation’s comparative balance sheets for Year 1 and Year
2 are as follows:
How much cash did Kris pay to suppliers for inventory during Year 2? Assume all
purchases are on credit.
A.$150,000
B.$400,000
C.$500,000
D.$700,000
41) Expenditures included in the cost of a long-lived asset are
A.charged off
B.expensed
C.intangible
D.capitalized
42) The following information pertains to the Fan Company’s inventory item B1008:
In a periodic inventory system, the LIFO cost of goods sold is
A.$4,952
B.$4,967
C.$4,993
D.$5,006
43) Minority ownership occurs when a corporate investor owns less than which of the
following percentages of the stock of another company?
A.20%
B.30%
C.40%
D.50%
44) On January 1, 2012, Como Company purchased 45% of the outstanding common
shares of the Lite Company for $200,000. The net assets of Lite Company totaled
$400,000. The inventory had a book value of $100,000 and a fair value of $120,000.
Excess cost attributable to inventory is written off in 2012 . During 2012, Lite Company
earned $200,000 and declared a dividend of $40,000 for the year.
The excess amount paid for Lite Company attributable to inventory is
A.$9,000
B.$11,000
C.$20,000
D.$22,000
45) If Edsel uses the sales revenue approach for estimating bad debt expense, the
income statement should show an expense of
A.$10,000
B.$12,000
C.$14,000
D.$20,000
46) The use of perpetual inventory systems is preferred where a
A.large number of expensive inventory units exist
B.small number of expensive inventory units exist
C.large number of inexpensive inventory units exist
D.small number of inexpensive inventory units exist
47) On June 30, 2011 Howard Company acquired a 5-acre tract of land. On the tract
was a warehouse that Howard intended to use as a distribution center. At the time of the
purchase, the land had an assessed tax valuation of $2,250,000 and the building had an
assessed tax value of $7,750,000. Howard paid $16,750,000 for the land and building.
After the purchase the company paid $750,000 to have various modifications made to
the building.
Required:
a. At what amount should Howard record the land and building?
b. For financial reporting purposes, why might the managers of Howard prefer to assign
a larger portion of the $16,750,000 to the land rather than the building?
48) Vent, Inc. reported net income of $770,000 for 2011 . Vent sold 15,000 shares of
treasury stock acquired in a previous year on July 1 and 15,000 new shares on
November 1 . At year-end, 180,000 shares were outstanding. Vent had 20,000 shares of
$100 par value 7% preferred stock outstanding all year. Vent paid dividends to the
preferred shareholders.
The weighted average number of common shares used to compute earnings per share
for 2011 is
A.150,000
B.160,000
C.165,000
D.180,000
49) The present value of the expected pension benefits that will ultimately be paid is the
A.accumulated benefit obligation
B.projected benefit obligation
C.minimum balance sheet liability
D.accrued pension liability
50) According to authoritative accounting literature, the determination of whether a
transfer of receivables is a sale or collateralized borrowing hinges on whether the
A.transfer was with or without recourse
B.transferor collects payments directly from the customer
C.transferor surrenders control over the receivable
D.customer ultimately defaults
51) Which of the following does not properly describe the accounting for an investment
using the equity method when the fair value option has been elected?
A.The carrying value of the investment is the fair value of the investment
B.A retroactive adjustment is required if the investor switches from the fair value
method
C.Dividends received by the investor increase net income
D.Unrealized gains and losses resulting from changes in market value are reported in
the investor’s income statement
52) It is common for shareholders to initiate litigation when
A.the company reports record profits, but does not declare dividends
B.there’s a sudden drop in stock price
C.the company introduces new products that are found to be harmful to the
environment
D.rumors about the company appear in the media that, if true, would result in slower
growth in future profits
53) An earnings surprise
A.usually precedes a negative drift downward in a company’s stock price
B.means that some bias must exist (as unbiased means that the market’s earnings
expectations will be correct)
C.demonstrates the inherent inefficiency of securities markets
D.occurs when earnings deviate from investors’ expectations
54) On January 2, 2012, Cannon Company issued $10,000,000 of convertible debt. The
bonds are zero-coupon, and each $1,000 bond is convertible into 10 shares of Cannon
Company’s common stock at the bond holder’s option. The bonds mature in 2016 and
were issued at par. Companies with similar credit profiles were issuing non-convertible
debt at an effective rate of interest of 8%. The present value factor for $1 for 5 periods
at 8% is .68058. For each of the following assumptions, prepare the journal entry to
record the issuance of debt and entries for 2012 and 2013 to record interest expense. No
bonds were converted during 2012 or 2013 .
A. Cannon Company uses U.S. GAAP to prepare its external financial reporting to
shareholders and regulators.
B. Cannon Company uses IFRS to prepare its external financial reporting to
shareholders and regulators.
55) Pooling of interests method for accounting for business combinations has been
criticized because it tends to allow recording of acquisitions
A.at artificially high amounts
B.at artificially low amounts
C.at exact amounts
D.at amounts equal to fair value
56) The smoothing of pension expense is
A.unethical and not allowed by GAAP
B.allowed through amortization and deferral to prevent volatility in earnings
C.not allowed by GAAP if the sole purpose is to prevent earnings volatility
D.illegal and prohibited by SEC