1) If the cash balance shown in a company’s accounting records is less than the correct
cash balance, and neither the company nor the bank has made any errors, there must be
a. outstanding checks
b. deposits in transit
c. deposits credited by the bank but not yet recorded by the company
d. bank charges not yet recorded by the company
2) Ringer Corporation had a current ratio of 3.1 at the end of 2013. Current assets and
current liabilities increased by equal amounts during 201 The effects on net working
capital and on the current ratio, respectively, were
a. no effect; increase
b. no effect; decrease
c. increase; increase
d. decrease; decrease
3) Builder Construction Company’s projects extend over several years and collection of
receivables is reasonably certain. Each project has a contract that specifies a price and
the rights and obligations of all parties. Both the contractor and the customer are
expected to fulfill their contractual obligations on each project. Reliable estimates can
be made of the extent of progress and cost to complete each project. The method that
the company should use to account for construction revenue is
a. installment sales
b. percentage-of-completion
c. completed-contract
d. cost recovery
4) Which of the following depreciation methods applies a uniform depreciation rate
each period to an asset’s book value?
a. Straight-line
b. Declining-balance
c. Units-of-production
d. Sum-of-the-years’-digits
5) Moortown Incorporated has 1,750,000 shares of common stock outstanding on Dec
31, 2014. An Additional 125,000 shares of common stock were issued on Feb 1, 2015
and also on May 1, 2015. On Oct 1, 2015, Mooretown issued 3,000, $1,000 face value,
8% convertible bonds. Each bond is convertible into 50 shares of common stock in
2015.
Required:
Compute the number of shares to be used in
a) Basic EPS
B) Diluted EPS
Show your calculations.
6) The cost of land to be used in the operations of a business should include all of the
following except
a. commissions related to the acquisition of the land
b. excavation in preparation for the construction of a new building on the land
c. property taxes to the date of acquisition assumed by the purchaser
d. the cost of surveys of the land
7) Cronie Enterprises purchased 10,000 shares of stock in Vector Corporation for $15
per share. Cronies broker arranged for Cronie to pay only $4 cash per share at the date
of purchase with the remaining balance to be paid in monthly installments.
Cronie should record the investment by:
a. debiting the investment account for $40,000
b. debiting the investment account for $150,000
c. debiting the investment account for $100,000, and crediting a contra account for
$60,000
d. not making an entry until the cost of the securities is paid in full
8) What is the maximum amount at which inventory can be valued when the goods
have experienced a permanent decline in value?
a. Net realizable value reduced by a normal profit margin
b. Sales price
c. Historical cost
d. Net realizable value
9) Lunes Company, a U.S. company, owns a 100% interest in its subsidiary, Placido,
S.A., located in Italy. Placido, S.A., began operations on January 1, 2014. The
subsidiarys operations consist of leasing space in an office building. The building,
which cost one million euros, was financed primarily by Italian banks. All revenues and
expenses are received and paid in euros. The subsidiary also maintains its accounting
records in euros. In light of these facts, management of the U.S. parent has determined
that the euro is the functional currency of the subsidiary.
The subsidiarys balance sheet at December 31, 2014, and income statement for the year
then ended, are presented below, in euros:
The following are relevant exchange rates for the year 2014:
1 = $1.50 at the beginning of 2014, at which time the common stock
was issued and the land and building were financed by the mortgage.
1 = $1.55 weighted average for 2014.
1 = $1.58 at the date the dividends were declared and paid and
the unearned rent was received.
1 = $1.62 at the end of 2014.
Required:
Prepare in U.S. dollars a balance sheet at December 31, 2014, and an income statement
for the year then ended.
10) Which of the following is NOT required to be reported in the financial statements or
disclosed in the accompanying notes?
a. Balances of major classes of noncurrent operating assets at the balance sheet date
b. Gross historical cost and accumulated amortization for intangible assets at the
balance sheet date
c. Gross historical cost and accumulated depreciation for tangible noncurrent operating
assets at the balance sheet date
d. A general description of the cost allocation methods used with respect to major
classes of noncurrent operating assets
11) The following errors were made in preparing a trial balance: the $1,350 balance of
Inventory was omitted; the $450 balance of Prepaid Insurance was listed as a credit;
and the $300 balance of Salaries Expense was listed as Utilities Expense. The debit and
credit totals of the trial balance would differ by
a. $1,350
b. $1,800
c. $2,100
d. $2,250
12) At December 31, 2014, the Carboneer Company had 150,000 shares of common
stock issued and outstanding. On April 1, 2015, an additional 30,000 shares of common
stock were issued. Carboneer’s net income for the year ended December 31, 2015, was
$517,500. During 2015, Carboneer declared and paid $300,000 in cash dividends on its
nonconvertible preferred stock. The basic earnings per common share, rounded to the
nearest penny, for the year ended December 31, 2015, should be
a. $3.00
b. $2.00
c. $1.45
d. $1.26
13) Which of the following is NOT true of the perpetual inventory method?
a. Purchases are recorded as debits to the inventory account
b. The entry to record a sale includes a debit to Cost of Goods Sold and a credit to
Inventory
c. After a physical inventory count, Inventory is credited for any missing inventory
d. Purchase returns are recorded by debiting Accounts Payable and crediting Purchase
Returns and Allowances
14) When enacted tax rates change, the asset and liability method of interperiod tax
allocation recognizes the rate change as
a. a cumulative effect adjustment
b. an adjustment to be netted against the current income tax expense
c. a separate charge to the current year’s net income
d. a separate charge or benefit to income tax expense
15) Which of the following does NOT help explain why income tax expense is different
from the product of pretax income times the current tax rate?
a. Permanent differences
b. Temporary differences
c. The fact that future and current tax rates are different
d. A change in the valuation allowance account for the deferred tax asset.
16) How much interest expense should Gunnison record on December 31, 2014?
a. $25,000.00
b. $23,810.15
c. $19,920.10
d. $22,628.80
17) When a property dividend is declared and the book value of the property exceeds its
market value, the dividend is recorded at the
a. market value of the property at the date of distribution
b. book value of the property at the date of declaration
c. book value of the property at the date of distribution if it still exceeds the market
value of the property at the date of declaration
d. market value of the property at the date of declaration
18) Unearned rent would normally appear on the balance sheet as a
a. plant asset
b. current liability
c. long-term liability
d. current asset
19) How would the declaration of a 20 percent stock dividend by a corporation affect
each of the following on its books?
Retained Total Stock-
Earnings holders’ Equity
a. Decrease No effect
b. Decrease Decrease
c. No effect Decrease
d. No effect No effect
20) A change from the straight-line method of depreciation to an accelerated method
should be accounted for as a(n)
a. change in an accounting estimate
b. change in an accounting principle
c. prior period adjustment
d. accounting error
21) On December 31, 2014, Omar Corporation’s current liabilities total $60,000 and
long-term liabilities total $160,000. Working capital at December 31, 2014, is equal to
$90,000. If Omar Corporation’s debt-to-equity ratio is .40 to 1, total long-term assets
must equal
a. $620,000
b. $770,000
c. $550,000
d. $680,000
22) Under international accounting standards, cash paid for income taxes (associated
with income tax expense) can be shown on the statement of cash flows as an
a. operating activity only
b. operating activity, or may be split between operating, investing, and financing
activities depending on the nature of the transaction giving rise to the tax payment
c. operating activity, or may be split between operating and investing activities
depending on the transaction giving rise to the tax payment
d. operating activity, or may be split between investing and financing activities
depending on the transaction giving rise to the payment
23) In its accrual basis income statement for the year ended December 31, 2014,
Braxton Company reported revenue of $3,500,000. Additional information is as
follows:
Nelson should report cash collected from customers in its 2014 statement of cash flows
(direct method) in the amount of
a. $3,760,000
b. $3,380,000
c. $3,100,000
d. $3,140,000
24) When an investor uses the cost method to account for investments in common
stock, cash dividends received by the investor from the investee should normally be
recorded as
a. a deduction from the investment account
b. dividend revenue
c. an addition to the investor’s share of the investee’s profit
d. a deduction from the investor’s share of the investee’s profit
25) Lex Soaps purchased a machine on January 1, 2013, for $18,000 cash. The machine
has an estimated useful life of four years and a salvage value of $4,700. Lex uses the
double-declining-balance method of depreciation for all its assets. What will be the
machine’s book value as of December 31, 2014?
a. $5,100
b. $4,700
c. $4,500
d. $4,300
26) In October 2014, Pollock Company exchanged a used packaging machine having a
book value of $240,000 for a new machine and paid a cash difference of $30,000. The
market value of the used packaging machine was determined to be $280,000. The
exchange had commercial substance. In its income statement for the year ended
December 31, 2014, how much gain should Pollock recognize on this exchange?
a. $0
b. $10,000
c. $30,000
d. $40,000
27) In recording the trade of one asset for another, which of the following accounts is
usually debited?
a. Cash
b. Accumulated Depreciation-Old Asset
c. Gain on Exchange of Asset
d. None of these
28) Which of the following statements is correct?
a. Minimum (corridor) amortization of net unrecognized gain or loss is not allowed for
postretirement benefit plans
b. Immediate recognition of gains and losses is allowed for postretirement benefit plans
but not for pension plans
c. Immediate recognition of gains and losses is allowed for pension plans but not for
postretirement benefit plans
d. Minimum (corridor) amortization of net unrecognized gain or loss is the only
amortization method allowed for postretirement benefit plans
29) Which of the following payroll taxes are paid by the employer?
a. FICA taxes
b. Federal unemployment taxes
c. State unemployment taxes
d. All of these
30) Bowie Company had 100 shares of common stock issued and outstanding at
December 31, 2013. On July 1, 2014, Bowie issued a 10 percent stock dividend.
Unexercised stock options to purchase 20 shares of common stock (adjusted for the
2014 stock dividend) at $20 per share were outstanding at the beginning and end of
2014. The average market price of Bowies common stock (which was not affected by
the stock dividend) was $25 per share during 2014. The ending market price was $40.
Net income for the year ended December 31, 2014, was $2,200. What was Bowies 2014
diluted earnings per share, rounded to the nearest cent?
a. $19.30
b. $20.00
c. $20.20
d. $18.33
31) Which of the following items would be added to the book balance on a bank
reconciliation?
a. Outstanding checks
b. A check written for $96 entered as $69 in the accounting records
c. Interest paid by the bank
d. Deposits in transit
32) The Montoya Corporation reports the following differences between financial and
taxable income for the current year:
(a) Excess of tax depreciation over book depreciation …. $55,000
(b) Interest revenue on municipal bonds ……………… 6,500
(c) Excess of estimated warranty expense over actual
expenditures ………………………………….. 44,000
(d) Unearned rent received …………………………. 14,000
(e) Fines paid ……………………………………. 20,000
(f) Excess of income reported under percentage-of-completion accounting for financial
reporting over completed-contract accounting used for tax reporting . 35,000
(g) Interest on indebtedness incurred to purchase tax-exempt
securities ……………………………… 2,500
(h) Unrealized losses on marketable securities recognized for financial
reporting ………………………… 21,000
Assume that Montoya Corporation had pretax accounting income [before considering
items (a) through (h)] of $850,000 for the current year. Compute the taxable income for
the current year.
33) Which of the following will result if the current year’s ending inventory amount is
understated in the cost of goods sold calculation?
a. Cost of goods sold will be overstated
b. Total assets will be overstated
c. Net income will be overstated
d. Both cost of goods sold and net income will be overstated
34) A chart of accounts is a
a. subsidiary ledger
b. listing of all account titles
c. general ledger
d. general journal
35) Arid Company paid $1,704 on June 1, 2013, for a two-year insurance policy and
recorded the entire amount as Insurance Expense. The December 31, 2013, adjusting
entry is
a. debit Prepaid Insurance and credit Insurance Expense, $497
b. debit Insurance Expense and credit Prepaid Insurance, $497
c. debit Insurance Expense and credit Prepaid Insurance, $1,207
d. debit Prepaid Insurance and credit Insurance Expense, $1,207
36) A major conclusion of the FASB’s standard on accounting for stock options is that
fixed option plans for which the option price is equal to the market price of the stock at
the date of grant will result in compensation cost. Under APB Opinion No. 25, such
plans generated no such compensation cost if the exercise price was greater than or
equal to the market price at the grant date. Under the FASB standard, compensation
expense would be measured by the value of the option rather than the spread between
the option price and the market price of the stock at the grant date.
One means of measuring the value of the option itself is the use of a mathematical
model, such as the Black-Scholes option pricing model. This model considers both the
minimum value and volatility values in measuring the fair value of an option. The
minimum value is the current price of the stock minus both the present value of the
exercise price and the present value of expected dividends on the stock during the term
of the option, both discounted at the risk-free rate of return. The volatility value is a
measure of the amount by which the price of the stock has fluctuated or is expected to
fluctuate during a period. Volatility is measured by the standard deviation of a
probability distribution. The larger the standard deviation in relation to average price
level, the more variable the price.
Identify the objections that might be raised to the use of the Black-Scholes
mathematical option pricing model in valuing options issued as part of a stock
compensation plan.
37) On July 1, 2014, The Plumbing Group purchased for cash 35 percent of the
outstanding capital stock of Classet Studios. Both The Plumbing Group and Classet
Studios have a December 31 year-end. Classet Studios, whose common stock is actively
traded in the over-the-counter market, reported its total net income for the year to The
Plumbing Group and also paid cash dividends on November 15, 2014, to The Plumbing
Group and its other stockholders.
How should The Plumbing Group report the above facts in its December 31, 2014,
balance sheet and its income statement for the year then ended? Discuss the rationale
for your answer.
38) Employers use a discount rate to compute the actuarial present value of benefits,
pension expense, and the obligation of the employer under the pension plan. The choice
of the discount rate can have a great effect on measures of pension cost and benefit
obligations. Assumptions regarding discount rates must be made carefully in order to
ensure that differences in pension plans are properly reflected in the annual reports of
companies sponsoring such plans.
Identify factors employers should consider when choosing the discount rate to be used
in accounting for pension plans of the enterprise.
39) The following information is provided by Horizons Company:
Horizons Company
Balance Sheet
December 31, 2014 and 2013
Horizons Company
Income Statement
For the Years Ended December 31, 2014 and 2013
Additional information pertinent to this company is as follows:
Required:
Determine the following amounts:
40) Salvage Company reported the following net income amounts: