1) Below is a list of items. Classify each into one of the following balance sheet
categories:
a.Cashc.Short-term Investments
b.Receivablesd.Other
1>Compensating balances held in long-term borrowing arrangements
2>Savings account
3>Trust fund
4>Checking account
5>Postage stamps
6>Treasury bills maturing in six months
7>Post-dated checks from customers
8>Certificate of deposit maturing in five years
9>Common stock of another company (to be sold by December 31, this year)
10>Change fund
2) The following list of accounts and their balances represents the unadjusted trial
balance of Alt Company at December 31, 2014:
Cash$ 27,290
Equity Investments (trading)60,000
Accounts Receivable69,000
Allowance for Doubtful Accounts$ 500
Inventory54,720
Prepaid Rent36,000
Plant Assets160,000
Accumulated Depreciation-Plant Assets14,740
Accounts Payable11,370
Bonds Payable90,000
Common Stock170,000
Retained Earnings97,180
Sales Revenue214,800
Cost of Goods Sold154,400
Freight-Out11,000
Salaries and Wages Expense32,000
Interest Expense2,040
Rent Revenue21,600
Miscellaneous Expense890
Insurance Expense 12,850
$620,190$620,190
Additional Data:
1>The balance in the Insurance Expense account contains the premium costs of three
policies:
Policy 1, remaining cost of $2,550, 1-yr. term, taken out on May 1, 2013;
Policy 2, original cost of $9,000, 3-yr. term, taken out on Oct. 1, 2014;
Policy 3, original cost of $1,300, 1-yr. term, taken out on Jan. 1, 2014 .
2>On September 30, 2014, Alt received $21,600 rent from its lessee for an eighteen
month lease beginning on that date.
3>The regular rate of depreciation is 10% per year. Acquisitions and retirements during
a year are depreciated at half this rate. There were no purchases during the year. On
December 31, 2013, the balance of the Plant and Equipment account was $220,000.
4>On December 28, 2014, the bookkeeper incorrectly credited Sales Revenue for a
receipt on account in the amount of $20,000.
5>At December 31, 2014, salaries and wages accrued but unpaid were $4,200.
6>Alt estimates that 1% of sales will become uncollectible.
7>On August 1, 2014, Alt purchased, as a short-term investment, 60 $1,000, 6% bonds
of Allen Corp. at par. The bonds mature on August 1, 2015 . Interest payment dates are
July 31 and January 31 .
8>On April 30, 2014, Alt rented a warehouse for $3,000 per month, paying $36,000 in
advance.
Instructions
(a)Record the necessary correcting and adjusting entries.
(b)Indicate which of the adjusting entries may be reversed at the beginning of the next
accounting period.
3) Which of the following is an example of an accrued expense?
a.Office supplies purchased at the beginning of the year and debited to an expense
account
b.Property taxes incurred during the year, to be paid in the first quarter of the
subsequent year
c.Depreciation expense
d.Rent recognized during the period, to be received at the end of the year
4) Duncan Inc. uses the accrual method of accounting for financial reporting purposes
and appropriately uses the installment method of accounting for income tax purposes.
Profits of $600,000 recognized for books in 2014 will be collected in the following
years:
Collection of Profits
2015$100,000
2016$200,000
2017$300,000
The enacted tax rates are: 40% for 2014, 35% for 2015, and 30% for 2016 and 2017 .
Taxable income is expected in all future years. What amount should be included in the
December 31, 2014, balance sheet for the deferred tax liability related to the above
temporary difference?
a.$ 35,000
b.$150,000
c.$185,000
d.$240,000
5) In order to retain certain key executives, Jensen Corporation granted them incentive
stock options on December 31, 2014 . 90,000 options were granted at an option price of
$35 per share. Market prices of the stock were as follows:
December 31, 2015$46 per share
December 31, 201651 per share
The options were granted as compensation for executives’ services to be rendered over a
two-year period beginning January 1, 2015 . The Black-Scholes option pricing model
determines total compensation expense to be $900,000. What amount of compensation
expense should Jensen recognize as a result of this plan for the year ended
December 31, 2015 under the fair value method?
a.$450,000
b.$900,000
c.$990,000
d.$3,150,000
6) Assume that Darcy Industries had the following inventory values:
Inventory cost (on December 31, 2014) = $500
Inventory market (on December 31, 2014) = $450
Inventory net realizable value (on December 31, 2014) = $440
Inventory market (on June 30, 2015) = $520
Inventory net realizable value (on June 30, 2015) = $525
Under IFRS, what is the inventory carrying value on December 31, 2014?
a.$500
b.$450
c.$440
d.$525
7) Occasionally a franchise agreement grants the franchisee the right to make future
bargain purchases of equipment or supplies. When recording the initial franchise fee,
the franchisor should
a.increase revenue recognized from the initial franchise fee by the amount of the
expected future purchases
b.record a portion of the initial franchise fee as unearned revenue which will increase
the selling price when the franchisee subsequently makes the bargain purchases
c.defer recognition of any revenue from the initial franchise fee until the bargain
purchases are made
d.None of these
8) On January 1, 2012, Nobel Corporation acquired machinery at a cost of $1,200,000.
Nobel adopted the straight-line method of depreciation for this machine and had been
recording depreciation over an estimated life of ten years, with no residual value. At the
beginning of 2015, a decision was made to change to the double-declining balance
method of depreciation for this machine.
The amount that Nobel should record as depreciation expense for 2015 is
a.$120,000
b.$168,000
c.$240,000
d.none of these are correct
9) Operating income and tax rates for C.J. Companys first three years of operations
were as
follows:
Income _Enacted tax rate
2014 $300,00035%
2015($750,000)30%
2016 $1,260,00040%
Assuming that C.J. Company opts only to carryforward its 2015 NOL, what is the
amount of deferred tax asset or liability that C.J. Company would report on its
December 31, 2015 balance sheet?
Amount _Deferred tax asset or liability
a.$225,000Deferred tax liability
b.$262,500Deferred tax liability
c.$300,000Deferred tax asset
d.$225,000Deferred tax asset
10) Storm Corporation purchased a new machine on October 31, 2014 . A $2,400 down
payment was made and three monthly installments of $7,200 each are to be made
beginning on November 30, 2014 . The cash price would have been $23,200. Storm
paid no installation charges under the monthly payment plan but a $400 installation
charge would have been incurred with a cash purchase. The amount to be capitalized as
the cost of the machine on October 31, 2014 would be
a.$24,400
b.$24,000
c.$23,600
d.$23,200
11) IFRS requires which of the following disclosures regarding related parties?
I.The name of the related party.
II.The amount and terms of the outstanding balance.
III.Doubtful amounts related to the outstanding balance.
a.I, II, and III
b.I and II
c.I and III
d.II and III
12) Which of the following items should be included in accounts receivable reported on
the balance sheet?
a.Notes receivable
b.Interest receivable
c.Allowance for doubtful accounts
d.Advances to related parties and officers
13) During 2013, Salton Co. introduced a new line of machines that carry a three-year
warranty against manufacturers defects. Based on industry experience, warranty costs
are estimated at 1% of sales in the year of sale, 3% in the year after sale, and 4% in the
second year after sale. Sales and actual warranty expenditures for the first three-year
period were as follows: (assume the accrual method)
SalesActual Warranty Expenditures
2013$ 1,400,000$ 26,000
20141,000,00040,000
2015 1,400,000 90,000
$3,800,000$156,000
What amount should Salton report as a liability at December 31, 2015?
a.$0
b.$14,000
c.$22,000
d.$148,000
14) Mathis Co. at the end of 2014, its first year of operations, prepared a reconciliation
between pretax financial income and taxable income as follows:
Pretax financial income$ 800,000
Estimated litigation expense2,000,000
Installment sales (1,600,000)
Taxable income$ 1,200,000
The estimated litigation expense of $2,000,000 will be deductible in 2016 when it is
expected to be paid. The gross profit from the installment sales will be realized in the
amount of $800,000 in each of the next two years. The estimated liability for litigation
is classified as noncurrent and the installment accounts receivable are classified as
$800,000 current and $800,000 noncurrent. The income tax rate is 30% for all years.
The deferred tax asset to be recognized is
a.$0
b.$120,000 current
c.$600,000 current
d.$600,000 noncurrent
15) An unearned revenue can best be described as an amount
a.collected and currently matched with expenses
b.collected and not currently matched with expenses
c.not collected and currently matched with expenses
d.not collected and not currently matched with expenses
16) Emporia Corporation is a lessee with a capital lease. The asset is recorded at
$810,000 and has an economic life of 8 years. The lease term is 5 years. The asset is
expected to have a fair value of $270,000 at the end of 5 years, and a fair value of
$90,000 at the end of 8 years. The lease agreement provides for the transfer of title of
the asset to the lessee at the end of the lease term. What amount of depreciation expense
would the lessee record for the first year of the lease?
a.$162,000
b.$144,000
c.$108,000
d.$90,000
17) Under what circumstances should a company with high rate of return on sales
consider the inventory sold?
a.When it can reasonably estimate the amount of returns
b.When the retailer gives a confirmation that the goods wont be returned
c.When the goods are sold on installment
d.When the payment for goods is received
18) On January 1, 2015, Foley Company (as lessor) entered into a noncancelable lease
agreement with Pinkley Company for machinery which was carried on the accounting
records of Foley at $6,795,000 and had a market value of $7,200,000. Minimum lease
payments under the lease agreement which expires on December 31, 2024, total
$10,650,000. Payments of $1,065,000 are due each January 1 . The first payment was
made on January 1, 2015 when the lease agreement was finalized. The interest rate of
10% which was stipulated in the lease agreement is the implicit rate set by the lessor.
The effective interest method of amortization is being used. Pinkley expects the
machine to have a ten-year life with no salvage value, and be depreciated on a
straight-line basis. Collectibility of the rentals is reasonably predictable, and there are
no important uncertainties surrounding the costs yet to be incurred by the lessor.
Instructions
(a)From the lessee’s viewpoint, what kind of lease is the above agreement? From the
lessor’s viewpoint, what kind of lease is the above agreement?
(b)What should be the income before income taxes derived by Foley from the lease for
the year ended December 31, 2015?
(c)Ignoring income taxes, what should be the expenses incurred by Pinkley from this
lease for the year ended December 31, 2015?
(d)What journal entries should be recorded by Pinkley Company on January 1, 2015?
(e)What journal entries should be recorded by Foley Company on January 1, 2015?
19) Haystack, Inc. owns 30% of the outstanding stock of Hallmark, Inc. and
accordingly uses the equity method to account for its investment. The stock was
purchased on January 1, 2015 for $880,000. During the year ended December 31, 2015,
Hallmark, Inc. reported the following:
Dividends declared and paid $ 400,000
Net income 2,400,000
Haystack, Inc. uses the FIFO method for costing its inventories, while Hallmark, Inc.
uses the LIFO method to conform with other companies in its industry. Haystack, Inc.
determines that if Hallmark, Inc. had used the FIFO method, its income would have
been $350,000 higher during 2015 . What is the balance in the Investment in Hallmark,
Inc. that will be reported on Haystack, Inc.s balance sheet at December 31, 2015
assuming Haystack, Inc. follows IFRS for its external financial reporting?
a.$1,825,000
b.$1,480,000
c.$1,585,000
d.$1,375,000
20) A contingent liability
a.definitely exists as a liability but its amount and due date are indeterminable
b.is accrued even though not reasonably estimated
c.is not disclosed in the financial statements
d.is the result of a loss contingency