1) If a firm can earn a return on net assets (common equity book value) that exceeds its
cost of equity capital, it will generate positive abnormal earnings.
2) Selling, general, and administrative expenses relating to installment sales are
deferred until the revenue is recognized.
3) The key accounting issue related to bundled (multiple-element) sales transactions is
the amount of revenue to be recognized over the contract period.
4) Research has found that companies “manage” earnings by increasing the bad debt
provision when earnings are otherwise low, and decreasing the bad debt provision when
earnings are high.
5) Under IFRS, firms may elect the fair value option only in cases where it eliminates
an accounting mismatch or when a group of assets is managed and evaluated using fair
values.
6) The shareholders’ equity account, Revaluation Surplus, is likely to be found on the
balance sheet of a company reporting under U.S. GAAP.
7) A securitization entity is a trust or corporation that is legally distinct from the
transferor and may be created solely for the purpose of undertaking securitization
transactions.
8) Early in 2015, a plant manager at one of ABC Corporation’s 19 manufacturing
facilities suffered a fatal heart attack. This information would normally be disclosed by
ABC in notes to its 2014 financial statements.
9) For a firm using the indirect method, changes in inventories due to acquisitions are
not included as part of the inventory adjustment to accrual-basis income.
10) The most important criteria related to revenue recognition when the right of return
exists is that the amount of future returns can be reasonably estimated.
11) IFRS often permits different accounting treatments for similar business transactions
and events.
12) If Firm A and Firm B are identical in every sense except that Firm A has a capital
lease and Firm B an operating lease, the operating cash flows for Firm A will be greater
than those for Firm B.
13) Factoring without recourse means that the company must buy back any bad
receivables from the factor.
14) On a common-size balance sheet, each balance sheet account is expressed as a
percentage of net assets.
15) Which one of the following entries would be made in Year 3 to record the
completion and acceptance of the project using the completed-contract method of
revenue recognition?
A.
B.
C.
D.
16) At the acquisition date, when the cost of the shares acquired exceeds the underlying
book value, the investor is required to amortize any excess that is attributable to
separately identifiable assets have an indefinite life. Which of the following is a
separately identifiable asset that might not be recognized on the investee’s balance
sheet?
A.Goodwill
B.Land
C.Patent
D.Inventory
17) Henry Co. manufactures DVD players. At the end of Year 1, Henry’s management
believes the growing popularity of streaming video content will reduce the demand for
Henry’s DVD players. The DVD players are manufactured using specialized equipment
with a historical cost of $3,000,000 and accumulated depreciation of $1,520,000. The
managers estimate the equipment has a remaining useful life of 4 years and will
generate the following undiscounted cash flows:
If the equipment were sold today, the sales price would be $1,600,000. Is the equipment
considered impaired, why or why not?
A.Yes impaired because undiscounted cash flow are lower than the carrying amount of
the asset by $155,000.
B.Not impaired because the fair value of the equipment is greater than the carrying
value of the asset by $120,000.
C.Yes impaired because the undiscounted cash flows are less than the fair value of the
equipment by $275,000.
D.Cannot determine impairment without discounted cash flows.
18) Edsel Inc. has the following unadjusted year end trial balance information available
for 2014:
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.
19) The Shasta Corporation began operations in 2014. Shasta’s investment portfolio
reported the following on December 31, 2014:
Which of the following is correct with respect to the accounting for Shasta’s investment
portfolio?
A.Net income was decreased $55,000 during 2014.
B.Total stockholders’ equity was decreased $55,000 as of December 31, 2014.
C.Net income was increased $15,000 during 2014.
D.Total stockholders’ equity was decreased $15,000 as of December 31, 2014.
The unrealized loss ($15,000) on the trading portfolio reduces net income and
stockholders’ equity; the unrealized loss ($40,000) on the available-for-sale portfolio
reduces stockholders’ equity but not net income.
20) Current U.S. GAAP permits firms to display the components of other
comprehensive income in which of the following formats?
A.as a schedule appearing in the financial statement footnotes.
B.in a two-statement approach, one in which net income comprises one statement and a
second, which presents a separate statement of comprehensive income.
C.as a part of the statement of changes in stockholders’ equity.
D.as a part of the statement of cash flows.
21) Central Investments bought 4,000 shares of Benet Company common stock on
January 1, 2015, for $20,000, and 4,000 shares of Roy Company common on July 1,
2015, for $24,000. Benet declared dividends on December 31, 2015 of $3,000. At the
end of 2015, the market value of Roy was $30,000 and the market value of Benet was
$28,000. At the end of 2016, the market value of Roy was $32,000 and the market value
of Benet was $24,000. The stocks were considered to be held for their long-term
investment potential. Central owns 8% of Benet Company and 12% of Roy Company.
How much income was reported on the 2015 income statement?
A.$240
B.$14,240
C.$14,000
D.$0
22) The once-revised exposure draft on revenue recognition issued by the IASB and the
FASB
A.addresses when and how much revenue should be recognized in contracts to provide
both goods and services to customers.
B.proposes to eliminate alternate methods of revenue recognition such as the
percentage-of-completion and installment sales methods.
C.will require companies to recognize a net liability contract position on all new
contracts; revenue will then arise from increases in the net contract position over the
life of the contract.
D.All of these are correct regarding the FASB/IASB exposure document.
23) Condensed financial data are presented below for the Phoenix Corporation:
The long-term debt to assets for 2014 is (rounded):
A.9.4%
B.10.2%
C.40.0%
D.43.4%
24) The section of a loan agreement that describes circumstances in which the creditor
obtains additional rights is called the
A.events of compliance section.
B.certificate of compliance section.
C.events of termination section.
D.events of default section.
25) The Sarver Farm has completed the fall harvest with 50,000 bushels of premium
wheat. The wheat cost $75,000 from planting to harvest and the market price of the
wheat on the day it is placed in the silo is $2.50 per bushel. Sarver sells 42,000 bushels
in Year 1 and holds the remaining 8,000 until Year 2 when it sells for $3.00 per bushel.
Using the completed transaction (sales) method, how much net income should Sarver
recognize in Year 1?
A.$42,000
B.$50,000
C.$105,000
D.$125,000
26) The Heath Corporation reported net income for 2015 of $177,500. Heath began the
year with 100,000 shares of $5 par value common shares outstanding and 2,500 shares
of $100 par value 8% preferred shares outstanding. On October 1, Heath sold 10,000
shares of common stock for $6 per share. Heath paid dividends to the common
shareholders in December.
If each share of preferred stock is convertible into 8 shares of common stock, the
diluted earnings per share for 2015 is (rounded)
A.$1.29 per share.
B.$1.45 per share.
C.$1.54 per share.
D.$1.73 per share.
27) Which one of the following entries properly records realized gross profit on
installment sales of Year 1 in Year 2?
A.
B.
C.
D.
28) Condensed financial data are presented below for the Phoenix Corporation:
The inventory turnover for 2014 is (rounded):
A.2.61 times.
B.3.12 times.
C.3.45 times.
D.3.80 times.
29) Under U.S. GAAP, assets are presented in decreasing order of liquidity. Under
IFRS,
A.fixed assets may be presented first followed by the current assets displayed in
increasing order of liquidity.
B.the current assets are displayed in increasing order of liquidity.
C.investments are listed first in descending order of maturity.
D.a company may present its assets in alphabetical order if it so desires.
30) Andy’s Skateboards, Inc. reported a retained earnings balance of $300,000 at
December 31, 2013. In June 2014, Andy’s internal audit staff discovered two errors that
were made in preparing the 2013 financial statements that are considered material:
a. Merchandise costing $50,000 that was on consignment at various consignee locations
was mistakenly omitted from the 2013 ending inventory.
b. Equipment purchased in January 2, 2013 for $150,000 was capitalized and
depreciated using straight-line depreciation, a 10-year useful life, and $5,000 salvage
value. The capitalized amount included $30,000 for repairs of the equipment which
suffered major damage when it was struck by a forklift during installation.
Required:
a. What amount should Andy’s Skateboards report as a prior period adjustment to
beginning retained earnings at January 1, 2014? (Ignore taxes)
b. Prepare the journal entries that Andy’s Skateboards would make in June 2014 to
correct the errors made in 2013. Assume that depreciation for 2014 is made as a
year-end adjusting entry. (Ignore taxes)
31) Under IFRS, when the cost recovery method is applied to installment sales, the
seller will recognize gross profit only after the cumulative amount of cash collected
exceeds the cost of sales.
32) If a material event is either unusual in nature or an infrequent occurrence-such as a
one-time charge resulting from a major restructuring€it may be classified on the income
statement as a special or unusual item in continuing operations or treated as an
extraordinary item if it has been a number of years since the company’s last major
restructuring.
34) Blimpy’s Doughnuts Inc.’s, adjusted trial balance appears below. Prepare a
classified balance sheet at December 31, 2011 for Blimpy’s. Hint: Account categories
for several of the items listed are found in parenthesis.
35) John Hamilton, D.D.S. keeps his accounting records on the cash basis. During 2014
Dr. Hamilton collected $220,000 in fees from his patients. At December 31, 2013 Dr.
Hamilton had accounts receivable of $30,000. At December 31, 2014 Dr. Hamilton had
accounts receivable of $35,000 and had collected unearned fees of $8,000.
Required:
On the accrual basis, what was Dr. Hamilton’s patient service revenue for 2014?
36) On November 15, 2014, Jones Co. sold a segment of its business for $2,750,000.
The net book value of the segment at the time of its disposal was $2,900,000. Jones had
pretax operating income of $1,750,000 for 2014 which included $360,000 earned by the
discontinued segment prior to its disposal. Assume Jones’ tax rate is 30%.
Required:
Prepare a partial income statement for Jones Co. for 2014, beginning with pretax
income from continuing operations.
38) At the beginning of 2013, the Arbuckle Construction Company signed a contract
with the state to build a highway for $10,000,000. The project is estimated to be
completed by the end of 2015. Arbuckle will bill the state in installments over the
construction period per a schedule in the contract. Information related to the contract is
as follows:
Because the highway is being built in an area that is home to the Eastern Spadefoot
Toad (an endangered species), Arbuckle is required to construct a toad habitat to replace
the one being lost in the project. As Arbuckle has no prior experience building swamps,
it believes it is not able to reasonably estimate the contract’s completion costs. Assume
that Arbuckle follows IFRS rules when accounting for construction contracts.
Required:
Prepare the journal entry that Arbuckle would make at the end of each year to
appropriately recognize profit on the project.
