1) Stock shares classified as trading securities are typically purchased by the investor to
generate profits on holding gains.
2) An unrealized loss for an equity securities investment classified as trading securities
does not reduce net income.
3) Basic earnings per share (EPS) is always computed by dividing net income by the
weighted average number of common shares of stock outstanding.
4) Constructive capitalization provides a preview of how the FASB/IASB proposals
will affect lessee financial statements.
5) A Certificate of Compliance affirms that the creditor’s managers have reviewed the
financial statements and found no violation of any covenant provision.
6) The accrual of wages expense for book purposes at year-end creates a deferred tax
asset on the year-end balance sheet.
7) A covenant that specifies a required minimum level of net worth and working capital
is a compliance covenant.
8) If a company purchases treasury stock its earnings per share will increase.
9) Revenues increase owners’ equity and expenses decrease owners’ equity.
10) An increase in prepaid expenses of $8,000 for the year increases cash flow from
operating activities by $8,000.
11) Compared to a firm with a capital lease, operating leases help the lessee firm earn a
higher return on assets in the early years of the lease.
12) With a leveraged lease, the lessor must treat the lease as a direct financing lease.
13) IFRS rules do not permit reversals of previously recognized impairment losses
when there has been a change in the estimates that were previously used to measure the
loss.
14) For ratio analysis, a distortion in the current ratio under LIFO inventory costing
may be adjusted by subtracting the LIFO reserve from current assets.
15) Mandatorily redeemable preferred stock is reported on the balance sheet as
A.a liability
B.an equity item
C.a temporary investment
D.a separate line between liabilities and shareholders’ equity
16) A cumulative effect of a change in an accounting principle is measured as
A.the difference between prior periods’ income under the old method and what would
have been reported if the new method had been used in the prior years
B.the after-tax difference between prior periods’ income under the old method and what
would have been reported if the new method had been used in the prior years
C.the difference between prior periods’ income and current income under the old
method and what would have been reported if the new method had been used in the
prior years and the current year
D.the after-tax difference between prior periods’ income and current income under the
old method and what would have been reported if the new method had been used in the
prior years and the current year
17) The Carrasco Company has provided you the following information pertaining to its
defined benefit pension plan that was adopted on January 1, 2011:
The service cost was $750,000 during 2011 and $1,125,000 during 2012 .
The contribution to the pension plan was $600,000 on December 31, 2011 and
$1,200,000 on December 31, 2012 .
The actuarially determined discount rate and the expected return on plan assets was
10%.
The actual return on plan assets was 10.5%.
Retirement benefits pertaining to years of service prior to 2011 were not granted to the
employees.
How much is the projected benefit obligation as of December 31, 2012?
A.$1,875,000
B.$1,200,000
C.$1,950,000
D.$2,062,500
18) Bonzo Co. owns a building in Pennsylvania. The historical cost of the building is
$1,050,000 and $540,000 of accumulated depreciation has been recorded to date.
During 2011, Bonzo incurred the following expenses related to the building:
Required:
a. Which of the building related costs incurred by Bonzo Co. should be capitalized in
2011?
b. What is the subsequent carrying amount of the building?
19) Hansel Corporation’s condensed balance sheets appear below:
In a common size cash flow statement, all items are expressed as a percentage of
A.sales
B.total assets
C.net income
D.total equity
20) Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus
$8,000 accrued interest on October 1, 2011 . Island and Mutual Bank enter into an
agreement whereby Island will pay Mutual $128,000 on the due date of the note on
October 1, 2013 .
What effective interest rate will Island use for the restructured note?
A.8.7%
B.8.9%
C.10.0%
D.13.1%
21) Earnings Before Interest (EBI) adjusts net income for which one of the following
groups of items?
A.Nonrecurring items, interest, and distortions related to accounting quality concerns
B.Nonoperating items, after-tax interest, and distortions related to accounting quality
concerns
C.Nonoperating items, nonrecurring items, and after-tax interest
D.Nonrecurring items, after-tax interest, and distortions related to accounting quality
concerns
22) Noah Construction Company is building a large complex for a contract price of
$5,000,000. This is a three-year project estimated to cost $4,000,000 and the following
information is available:
Using the percentage-of-completion method of revenue recognition, how much income
is recognized in Year 2?
A.$250,000
B.$375,000
C.$625,000
D.$3,125,000
23) When the income effect of a LIFO liquidation is material, the SEC requires that the
10-K report disclose
A.the dollar impact of LIFO liquidation on both a before- and after-tax basis
B.the dollar impact of LIFO liquidation on the year-end inventory balance
C.this fact following a prescribed format
D.the dollar impact of LIFO liquidation on net income
24) Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at
$25,000 at the end of each year. The equipment has a fair value of $175,000 and an
estimated useful life of 10 years. The lease includes a guaranteed residual value of
$10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a
maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The
lessor’s implicit lease rate, known to the lessee, is 10%. Round all calculations to the
nearest whole dollar amount.
Present value interest factors are:
Upon acquisition, the leased equipment will be valued on Pepper’s balance sheet at
A.$144,475
B.$157,469
C.$175,000
D.$250,000
25) Firms that use FIFO inventory cost assumptions always include some realized
holding gains in reported income in periods of
A.level prices
B.deflation
C.falling prices
D.rising prices
26) Carrying amounts in a GAAP balance sheet are measured using all of the following
except
A.historical cost
B.net realizable value
C.discounted present value
D.fair value
E.All of the above are carrying amounts that may be found in a GAAP balance sheet
27) Hooker Company sells $200,000 of ten-year, 8% bonds to yield 10% on January 1,
2011 . The bonds pay interest annually on December 31 . The bonds were sold at a
discount of $24,578. The bond interest expense for 2011 is
A.$16,000
B.$17,542
C.$20,000
D.$21,542
28) If a transfer of receivables is really a borrowing but is erroneously treated as a sale
A.then both assets and liabilities are understated
B.then both assets and liabilities are overstated
C.then both assets and equity are understated
D.then ratios like debt-to-equity are consequently distorted by the overstatements
29) Which one of the following items would be charged to the cost of a building rather
than the cost of the land?
A.Architectural fees
B.Grading of land
C.Demolition of existing an structure
D.Cost of hauling material from a demolished structure
30) Peachpit Software Developers shipped its accounting package to a customer on
September 10, 2011 . In addition to the software, Peachpit’s contract requires the
company to provide: (1) training to the customer’s accounting staff during October of
2011 and again in January 2012 when the upgrade is released75% of the training hours
are provided during October, (2) technical product support for one year starting October
1, 2011, and (3) a major upgrade to the software early in 2012 . The customer paid the
total contract price of $80,000 upon receipt of the invoice on September 17, 2011 .
Peachpit would charge the following if these individual contract elements were sold
separately:
Required:
a. Prepare a journal entry to record receipt of the cash payment.
b. Determine the amount of revenue to be recognized in 2011 and prepare the necessary
journal entry.
31) During its first three years of operations a company reported income before taxes of
$1,000,000 in year 1, ($1,800,000) in year 2, and $3,000,000 in year 3 . The income tax
rate applicable to each of the years was 40%. Assume that there weren’t any temporary
differences and a valuation allowance was not necessary.
How much income tax expense was reported in year 3 if the company elected a loss
carryback?
A.$1,200,000
B.$880,000
C.$480,000
D.$400,000
32) Below are the condensed balance sheets and income statement for the Beltway
Company, Inc. Assume all purchases and sales are on credit. Assuming there were no
disposals of fixed assets during 2011, provide the following items for the year ended
December 31, 2011:
a. Collections from customers
b. Payments to suppliers
c. Insurance premium payment
d. Interest payment
e. Utility payments
f. Wages payment
g. Capital expenditures
Condensed balance sheet December 31, 2011
Condensed income statement for year ended December 31, 2011
33) Which one of the following contingencies must be accrued on the balance sheet?
A.The likely loss on a lawsuit that the firm’s attorneys believe will be dropped
B.The probable loss on a lawsuit that the firm’s attorneys believe will be settled for
$50,000
C.The reasonably possible loss on a lawsuit that the firm’s attorneys believe will be
dropped
D.The reasonably possible loss on a lawsuit that the firm’s attorneys believe will be
settled for $50,000
34) The Marino Company has provided you the following information pertaining to its
defined benefit pension plan that was adopted on January 1, 2011:
The service cost was $950,000 during 2011 and $1,045,000 during 2012 .
The prior service cost amortization each year was $290,000.
The contribution to the pension plan was $1,500,000 on December 31, 2011 and
$1,800,000 on December 31, 2012 .
The actuarially determined discount rate and the expected return on plan assets was
10%.
The actual return on plan assets was 9.5%.
Retirement benefits pertaining to years of service prior to 2011 were granted to the
employees. The prior service cost is being amortized over the remaining ten-year life of
the employees.
What is the projected benefit obligation as of December 31, 2012?
A.$5,599,000
B.$2,090,000
C.$2,575,000
D.$4,895,000
35) On January 1, 2011 Lessee Company entered into a five-year lease which required
annual payments of $60,000. The first payment was due at the inception of the lease.
The present value of the minimum lease payments to record the lease was $250,192; the
applicable discount rate was 10%. Lessee Company treated the lease as a capital lease.
What is the balance of Lessee Company’s lease liability as of December 31, 2011?
A.$209,211
B.$275,211
C.$190,192
D.$149,211
36) On January 1, 2011, Waddle Company adopted a compensatory stock option plan
and granted its managers 10,000 options to buy shares of common stock; each option
can be used to acquire a share of common stock at a price of $25 a share. The fair value
of each option was $7.50 on January 1, 2011 . The options can be converted into
common stock after July 1, 2011 . The required service period is three years.
What is the balance in paid-in capital-stock options as of December 31, 2012 assuming
that the fair value approach is used?
A.$0
B.$25,000
C.$50,000
D.$100,000
37) The SEC specifies four criteria for revenue recognition and allows recognition of
revenue when
A.all the criteria are met
B.3 out of 4 criteria are met
C.2 out of 4 criteria are met
D.only one criterion is met
38) The cash flow statement of the United Company is in process for 2012 . The United
Company is reporting the following balances:
During 2012, United sold equipment costing $30,000 for $12,000 and made several
purchases of new equipment for cash.
If these were the only investing activities, the cash flow from investing activities is a
net cash
A.outflow of $12,000
B.inflow of $12,000
C.outflow of $88,000
D.inflow of $88,000
39) Recent research indicates that stock returns correlate better with
A.accrual earnings than realized operating cash flows
B.cash basis earnings than realized operating cash flows
C.realized operating cash flows than accrual earnings
D.future operating cash flows than accrual earnings
40) Manero Company included the following information in its annual report:
In a common size income statement for 2012, the cost of goods sold is expressed as
A.64.5%
B.100.0%
C.112.3%
D.130.0%
41) Under the GAAP hierarchy that prioritizes the information used to arrive at fair
value,
42) The Squash Company’s shareholders’ equity on January 1, 2012 was $3,125,500.
During 2012, Squash Company reported the following:
Net income of $575,325.
Declared cash dividends totaling $125,000; the dividends had not been paid as of
December 31, 2012 .
Issued 10,000 shares of $5 par value common stock at $9 per share.
Purchased 5,000 shares of its common stock for $9.75 per share; the shares are being
held as treasury shares.
Sold 1,500 shares of treasury stock for $9.25 per share.
Issued 2,000 shares of $5 par value common stock resulting from the declaration of a
stock dividend during 2012; the market value of the common stock on the date of
declaration was $10.25 per share.
What was shareholders’ equity as of December 31, 2012?
43) The following Income Statement and Operating Cash Flow information pertain to
Receivership Inc.’s operations for the year ended December 31, 2011 .
44) List the techniques that management can use to improve a company’s reported
performance in the short run.
45) One measure for determining expected earnings this quarter (t) could be
considering earnings for the same quarter last year (t-4). List some of the disadvantages
to using this measure.
46) For sale of receivables without recourse, what is, if any, the required disclosure?
Explain the importance of this point.
47) The Bravo Company manufactures a single product. On December 31, 2008 Bravo
adopted the dollar-value LIFO inventory method. The inventory on that date using the
dollar-value LIFO inventory method was determined to be $500,000. Inventory data for
succeeding years are as follows:
Required:
Compute the inventory amount at December 31, 2009, 2010, and 2011 using the
dollar-value LIFO inventory method for each year. (Round all amounts to the nearest
dollar.)
48) On October 1, 2011, Kelly Company leased a boat from Grant Company. The lease
is noncancelable and requires five equal annual payments of $50,000 each. The lease
payments are due each October 1, beginning October 1, 2011 . The boat is recorded on
Grant’s books at $180,000, but its fair value is $207,542. Grant expects that the boat’s
residual value at the end of the lease term will be $10,000, but it is not guaranteed by
Kelly. However, Kelly has an option to purchase the boat for $10,000 at the end of the
lease term. At the inception of the lease, the boat has a remaining economic life of six
years with a $2,500 estimated salvage value at the end of its life. Both firms use the
straight-line method of depreciation and have December 31 year-ends for financial
reporting purposes. The interest rate used by Grant Company to calculate the annual
lease payment is 12%, and known by Kelly. Collection of the lease payments is
reasonably predictable by Grant.
Required:
Complete the following table for Grant’s and Kelly’s December 31, 2011 income
statements:
Grant (Lessor) Kelly (Lessee)
Sales
Interest income
Rent revenue
Cost of goods sold
Depreciation expense
Rent expense
Interest expense
Be sure to show and clearly label all calculations.