1) On January 2, 2009, Portier Enterprises issued $2,400,000 of 8 percent, 15-year
semiannual coupon bonds to yield 7.5 percent. Each bond is convertible into 40 shares
of $15 par common stock, which was trading at $20 per share on the date of the bond
issue. The bonds were issued at 106. Without the conversion feature, the bonds would
have been issued for 104.5.
On January 3, 2014, all of the bonds were converted into common stock. The market
price of the stock was $28 per share on the date of conversion. The issue premium is
amortized using the straight-line method.
2) The following transactions of the Macheski Company were completed during the
fiscal year just ended:
Prepare the entries necessary to record the above transactions.
3) Which of the following creates a temporary difference between financial and taxable
income?
a. Fines from violation of law
b. Interest on municipal bonds
c. Accelerated cost recovery on plant and equipment
d. Premiums paid for officer’s life insurance (company is beneficiary)
4) Which of the following would not be classified as an operating activity?
a. Interest income
b. Income tax expense
c. Dividend income
d. Payment of dividends
5) Selected financial data of Nicholas Corporation for the year ended December 31,
2014, is presented below:
Common stock dividends were $120,000. The times-interest-earned ratio is
a. 2.9 to 1
b. 3.6 to 1
c. 4.3 to 1
d. 5.3 to 1
6) A company providing maintenance services on equipment for a fixed periodic fee
would recognize
a. an equal amount of service revenue for each act
b. service revenue over the fixed period by the straight-line method
c. service revenue in proportion to the direct costs to the provider of the services to
perform each act
d. service revenue only when the fixed period has ended
7) In a statement of cash flows, interest payments to lenders and other creditors should
be classified as cash outflows for
a. borrowing activities
b. operating activities
c. investing activities
d. financing activities
8) Changes in fair value of securities are reported in the stockholders’ equity section of
the balance sheet for which type of securities?
a. Marketable equity securities
b. Available-for-sale securities
c. Trading securities
d. Held-to-maturity securities
9) The following is a comparative balance sheet of Conumdrum Corporation for
December 31, 2014 and 2013:
Additional information:
(a) Net income for 2014, $545,600.
(b) Depreciation reported on income statement, $140,000.
(c) Fully depreciated equipment, no salvage value, was scrapped. Equipment was
purchased for $560,000.
(d) Bonds of $400,000 were retired at their face value.
(e) 10,000 shares of common stock were issued for cash at $28 per share.
(f) Cash dividends declared and paid, $240,000.
(g) Available-for-sale securities with a book value of $200,000 were sold for $300,000.
Prepare a statement of cash flows for Conumdrum Corporation for 2014, using the
indirect method. Compute the cash flow to net income and cash flow adequacy ratios.
10) See information regarding Dingo Boot Company above. The net cash provided by
(used in) all activities is
a. $580,000
b. $410,000
c. $380,000
d. $(60,000)
11) Wolfe Co. was incorporated on July 1, 2014, with $200,000 from the issuance of
stock and borrowed funds of $30,000. During the first year of operations, net income
was $10,000. On December 15, Wolfe paid an $800 cash dividend. No additional
activities affected owners’ equity in 2014. At December 31, 2014, Wolfe’s liabilities had
increased to $37,600. In Wolfe’s December 31, 2014, balance sheet, total assets should
be reported at
a. $239,200
b. $240,000
c. $246,800
d. $276,800
12) Selected financial data of Rodham Corporation for the year ended December 31,
2014, is presented below:
Common stock dividends were $120,000. The times-interest-earned ratio is
a. 2.8 to 1
b. 4.8 to 1
c. 6.0 to 1
d. 8.0 to 1
13) The FASB’s conclusion relating to the computation of the service cost component of
pension expense is that the projected benefit obligation computed using
a. future salary levels provides a reasonable measure of future pension obligation and
expense
b. future salary levels provides a reasonable measure of present pension obligation and
expense
c. present salary levels provides a reasonable measure of future pension obligation and
expense
d. present salary levels provides a reasonable measure of present pension obligation and
expense
14) Treasury stock was acquired for cash at a price in excess of its par value. The
treasury stock was subsequently reissued for cash at a price in excess of its acquisition
price. Assuming that the cost method of accounting for treasury stock transactions is
used, what is the effect on retained earnings?
Acquisition of Reissuance of
Treasury Stock Treasury Stock
a. No effect Increase
b. Increase No effect
c. No effect No effect
d. Increase Decrease
15) The primary measurement basis currently used to value assets in external financial
statements of an enterprise is the
a. current market price if the assets currently held by an enterprise were sold on the
open market
b. current market price if the assets held by an enterprise were purchased on the open
market
c. present value of the cash flows the assets are expected to generate over their
remaining useful lives
d. market price of the assets held by an enterprise at the date the assets were acquired
(although some assets may be valued at their current selling price or net realizable
value)
16) Complete the following statement by choosing the best response:
If the functional currency of a foreign subsidiary is the local currency of the country in
which the foreign subsidiary operates, then
a. only retained earnings must be remeasured into U.S. dollars
b. the foreign subsidiarys financial statements must be remeasured into U.S. dollars
c. only the foreign subsidiarys assets and liabilities must be remeasured into U.S.
dollars
d. the foreign subsidiarys financial statements are translated into U.S. dollars
17) Using the information above, what was Evasives liability relative to the January
payroll after the employees received and cashed their payroll checks?
a. $28,800
b. $23,760
c. $21,600
d. $21,200
18) A loss on the sale of machinery in the ordinary course of business should be
presented in a statement of cash flows prepared under the indirect method as a(n)
a. inflow from operating activities
b. inflow from investing activities
c. adjustment to reconcile net income to cash from operating activities
d. outflow from investing activities
19) When a dividend is declared and paid in stock,
a. total stockholders’ equity does not change
b. total stockholders’ equity decreases
c. the current ratio increases
d. the amount of working capital decreases
20) A change in the estimated useful life of a building
a. is not allowed by generally accepted accounting principles
b. affects the depreciation on the building beginning with the year of the change
c. must be handled as a retroactive adjustment to all accounts affected, back to the year
of the acquisition of the building
d. creates a new account to be recognized on the income statement reflecting the
difference in net income up to the beginning of the year of the change
21) A wholesale bakery would normally recognize revenue when
a. the product is available for sale to a customer
b. goods are delivered to the customer
c. cash is received from the customer
d. management chooses to do so
22) Arthur Enterprises had the following long-term debt:
The total of the serial bonds amounted to
a. $900,000
b. $1,500,000
c. $2,000,000
d. $2,400,000
23) Which of the following is true?
a. Trading securities can be classified as current or noncurrent depending on
management’s intent
b. Held-to-maturity securities should not be classified as current under any
circumstance
c. Available-for-sale securities can be classified as current or noncurrent depending on
management’s intent
d. Trading securities should not be classified as current under any circumstance
24) When the allowance method of recognizing bad debt expense is used, the entry to
record the write-off of a specific uncollectible account would decrease
a. allowance for doubtful accounts
b. net income
c. net realizable value of accounts receivable
d. working capital
25) The earnings per share figure is viewed by many users of financial statements as the
single most important piece of information within the financial statements. A companys
earnings and its earnings per share are the most commonly reported statistics reported
about a companys yearly activities.
Required:
Briefly discuss the following issues:
26) A company would most likely choose the carryforward option for a net operating
loss if the company expected
a. higher tax rates in the future compared to the past
b. lower tax rates in the future compared to the past
c. lower earnings in the future compared to the past
d. higher earnings in the future compared to the past
27) Undistributed stock dividends should be reported as
a. a current liability
b. an addition to capital stock outstanding
c. a reduction in total stockholders’ equity
d. a note to the financial statements
28) The mission statement of the Financial Accounting Standards Board includes a goal
of promoting international comparability of accounting standards. Furthermore, the
International Accounting Standards Board has begun over the last 20 years to issue
international accounting standards designed to create a common set of international
accounting and reporting standards.
Identify reasons why such a set of international accounting standards would be
desirable.
29) Achievous Medical is a medical equipment manufacturer. The company reported a
loss before income taxes of $20.9 million in 2014. Despite this fact, the income tax
effect was a savings of only $0.7 million. The effective income tax rate is only 3.3
percent (0.7/20.9). Achievous reported a loss before income taxes of $1.7 million in
2013, yet had income tax expense of $1.6 million–an effective tax rate of 94.1 percent.
Assume a statutory income tax rate of 35 percent.
The following schedule is from the notes to the 2014 annual report and explains the
deferred tax assets and deferred tax liabilities (in thousands of dollars):
Required:
30) Statement of Financial Accounting Standards No. 128, “Earnings Per Share,”
requires that earnings per share figures be presented only by companies with publicly
held common stock or potential common stock.
List arguments for and against the exclusion of nonpublic companies from the
requirement of reporting earnings per share.
31) On January 1, 2014, Nonsuch Corporation sold specialized equipment originally
costing $20,000 and having a book value of $16,000. The market value of the
equipment was not readily determinable.
Nonsuch received a $5,000 downpayment and a $10,000, 4 percent note payable in four
equal annual installments beginning December 31, 2014. The current market rate on
notes of a similar nature and risk is 10 percent.
Required:
Prepare the entries to record the sale of the equipment on January 1, 2014, and the first
interest payment received on December 31, 2014.
32) Current standards of financial accounting and reporting for disaggregated
information focus primarily on disclosure of quantitative financial information.
Additional information about the nature of the business environments in which an
enterprise’s activities are conducted also may be necessary to help financial statement
users better assess the risk and return prospects of an enterprise’s business operations.
Identify items of descriptive or explanatory information currently not required by
existing standards that might be useful to financial statement users in assessing the risk
and return prospects of an enterprise’s business operations.
33) On August 10, Bushmills Corporation reacquired 8,000 shares of its $100 par value
common stock at $134. The stock was originally issued at $110. The shares were resold
on November 21 at $145.
Provide the entries required to record the reacquisition and the subsequent resale of the
stock using the:
34) The following information was available from the inventory records of the Dunn
Company for January 2014:
35) Show the U. S. Approach and the U. K. Approach to compute the cash flow from
operating activities using the following information:
36) SFAS No 109 takes a decidedly different approach to the treatment of operating loss
carryforwards. Under APB Opinion No. 11, the presumption was that operating losses
would not be realizable. As a result, the entity experiencing the loss would not provide
for the effects of carryforwards in its financial statements until the benefits were in fact
later realized for tax purposes. SFAS No. 96 was even more stringent in its approach in
that net deferred tax debits were prohibited to the extent they exceeded amounts which
would be recoverable through operating loss carrybacks as of the date of the balance
sheet. SFAS No. 109 treats net operating loss carryforwards in the same manner as the
tax effects of other deductible temporary differences and allow both to be recognized as
deferred tax assets. The approach of SFAS No. 109 has been criticized by some,
however.
Required:
Identify what you perceive to be the weaknesses in the approach promulgated by SFAS
No. 109.