1) Which of the following statements regarding assets is NOT true?
a. An asset represents a probable future economic benefit
b. Assets are obtained or controlled as a result of past or probable future transactions or
events
c. Assets reported on the balance sheet include both monetary and nonmonetary
resources
d. Assets include costs that have not yet been matched with revenues
2) The book value per share of common stock measures
a. liquidity
b. profitability
c. equity position and coverage
d. efficiency
3) The balance in Locksome Company’s accounts payable account at December 31,
2014, was $1,100,000 before considering the following information:
What amount should Locksome report as accounts payable in its December 31, 2014,
balance sheet?
a. $1,120,000
b. $1,115,000
c. $1,085,000
d. $1,065,000
4) Oleander Corporation was organized on January 3, 2014, with authorized capital of
100,000 shares of $10 par common stock. During 2014, Oleander had the following
transactions affecting stockholders’ equity:
The cost method was used to record the treasury stock transaction. Oleander’s net
income for 2014 is $300,000. What is the amount of stockholders’ equity at December
31, 2014?
a. $640,000
b. $702,000
c. $708,000
d. $720,000
5) Which of the following is not correct regarding the provisions of IAS No. 8 on
accounting changes and error corrections?
a. IAS No. 8 requires that results from prior periods be presented for all changes in
accounting principles
b. IAS No. 8 allows a change in accounting principle to be accounted for by reflecting
the cumulative effect of the change in the income of the current period without restating
prior-period results
c. Under IAS No. 8, the recommended approach for a change in accounting principle is
that results from prior periods should be restated
d. IAS No. 8 requires a change in accounting estimate to be reflected in the current and
future periods
6) Backhoe Construction Company recently exchanged an old truck, which cost
$118,000 and was one-third depreciated, and paid $80,000 cash for a used crane having
a current fair value of $140,000. Assuming the exchange has commercial substance, at
what amount should the crane be recorded on the books of Backhoe?
a. $80,000
b. $118,000
c. $140,000
d. $152,000
7) The asset-liability method of interperiod tax allocation currently required by U.S.
GAAP is an example of the
a. discounted comprehensive recognition approach
b. no-deferral approach
c. partial recognition approach
d. comprehensive recognition approach
8) Which of the following qualitative characteristics of financial information requires
that information NOT be biased in favor of one group of users to the detriment of
others?
a. Relevance
b. Reliability
c. Verifiability
d. Neutrality
9) Which of the following is true regarding the lease term?
a. The lease term does not include all periods covered by bargain renewal options
b. The lease term includes all periods for which failure to renew imposes a penalty
sufficiently high that the lessee probably will renew
c. The lease term may extend beyond the date a bargain purchase option becomes
exercisable
d. The lease term does not include all periods representing renewals or extensions of the
lease at the lessor’s option
10) An entity that reports a discontinued operation or an extraordinary item shall
present basic and diluted earnings per share amounts for those line items
a. either on the face of the income statement or in the notes to the financial statements
b. only in the notes to the financial statements
c. only on the face of the income statement
d. only if management chooses to do so as these amounts are not required to be
disclosed either in the financial statements or the notes thereto
11) On January 1, 2014, Stillman Inc. purchased 30 percent of the outstanding common
stock of Overrun Corporation for $516,000 cash. Stillman is accounting for this
investment using the equity method. On the date of acquisition, the fair value of
Overrun’ net assets was $1,240,000. Stillman has determined that the excess of the cost
of the investment over its share of Overrun’ net assets is attributable to goodwill.
Overrun’ net income for the year ended December 31, 2014, was $360,000. During
2014, Overrun declared and paid cash dividends of $40,000. There were no other
transactions between the two companies. Ignoring income taxes, Stillman’ statement of
income for the year ended December 31, 2014, should include “Income From
Investment in Overrun Corporation Stock” in the amount of
a. $54,600
b. $74,000
c. $108,000
d. $126,000
12) Which of the following items results in a temporary difference deductible amount
for a given year?
a. Premiums on officer’s life insurance (company is beneficiary)
b. Premiums on officer’s life insurance (officer is beneficiary)
c. Vacation pay accrual
d. Accelerated depreciation for tax purposes; straight-line for financial reporting
purposes
13) Which of the following regarding accrual versus cash-basis accounting is true?
a. The FASB believes that the cash basis is appropriate for some smaller companies,
especially those in the service industry
b. The cash basis is less useful in predicting the timing and amounts of future cash
flows of an enterprise
c. Application of the cash basis results in an income statement reporting only revenues
d. The cash basis requires a complete set of double-entry records
14) Which of the following is NOT an adjustment to reconcile net income to cash from
operating activities?
a. Increase or decrease in an accrued liability
b. Amortization of premium or discount on bonds payable
c. Cash dividend declared but not yet paid
d. Increase or decrease in a prepaid expense
15) Other-than-temporary impairments in the value of equity securities classified as
available-for-sale should be made
a. on the individual security level
b. in the aggregate for each type of security (i.e., common or preferred)
c. either on the individual security level or in the aggregate
d. in none of these approaches
16) On January 2, 2012, Lynch Company acquired machinery at a cost of $800,000.
This machinery was being depreciated by the double-declining-balance method over an
estimated useful life of eight years, with no residual value. At the beginning of 2014,
Lynch decided to change to the straight-line method of depreciation. Ignoring income
tax considerations, the cumulative effect of this accounting change is
a. $0
b. $100,000
c. $155,556
d. $177,778
17) Soundesign Company entered into a lease of special equipment to LabCorp
Company. The lease term was six years. The equipment cost Soundesign $40,000 and
Soundesign plans to earn a $4,000 dealer profit. Soundesigns implicit rate on the lease
is 12 percent.
As a result of this agreement, Soundesign will receive year-end lease payments of
a. $7,333
b. $8,213
c. $10,702
d. $12,090
18) In January 2014, Router Mining Corporation purchased a mineral mine for
$7,200,000 with removable ore estimated by geological surveys at 4,320,000 tons. The
property has an estimated value of $720,000 after the ore has been extracted. Router
incurred $2,160,000 of development costs preparing the property for the extraction of
ore. During 2014, 540,000 tons were removed and 480,000 tons were sold. For the year
ended December 31, 2014, Router should include what amount of depletion in its cost
of goods sold?
a. $720,000
b. $810,000
c. $960,000
d. $1,080,000
19) When Progress Billings are made by a contractor on a long-term contract, what
account is credited?
a. Contract Billings, a contra-asset account
b. Contract Revenue, a revenue account
c. Contract Receivable, an asset account
d. Contract Billings, a contra-revenue account
20) Of the following, select the incorrect statement concerning earnings per share.
a. During periods when all income is paid out as dividends, earnings per share and
dividends per share under a simple capital structure would be identical
b. Under a simple capital structure, no adjustment to shares outstanding is necessary for
a stock split on the last day of the fiscal period
c. During a period, changes in stock issued or reacquired by a company may affect
earnings per share
d. During a loss period, the amount of loss attributed to each share of common stock
should be computed
21) During 2013, Rubble Company purchased marketable equity securities as a
short-term investment and classified them as trading securities. The cost and market
value at December 31, 2013, were as follows:
Rubble sold 1,000 shares of Company Y stock on March 16, 2014, for $24 per share,
incurring $1,300 in brokerage commissions and taxes. On the sale, Rubble should
report a realized loss of
a. $0.
b. $1,550
c. $2,300
d. $2,800
22) On January 1, 2014, Roger Inc. issued its 10 percent bonds in the face amount of
$1,500,000. They mature on January 1, 2024. The bonds were issued for $1,329,000 to
yield 12 percent, resulting in bond discount of $171,000. Roger uses the
effective-interest method of amortizing bond discount. Interest is payable July 1 and
January 1. For the six months ended June 30, 2014, Roger should report bond interest
expense of
a. $75,000
b. $79,740
c. $83,550
d. $85,260
23) Carlton Company sold equipment for $3,700 that originally cost $22,000. The
balance of the Accumulated Depreciation account related to this equipment was
$19,000. The entry to record the disposal of this equipment would include a
a. debit to Loss on Sale of Equipment of $700
b. credit to Gain on Sale of Equipment of $700
c. credit to Equipment of $3,000
d. debit to Gain on Sale of Equipment of $700
24) The balance in Wellstocked Company’s accounts payable account on December 31,
2014, was $1,225,000 before the following information was considered:
What amount should Wellstocked report as accounts payable in its December 31, 2014,
balance sheet?
a. $1,330,000
b. $1,285,000
c. $1,270,000
d. $1,225,000
25) In June 2015, the enterprise decided to reclassify the Flash bonds as securities
available-for-sale. The bonds had a market value of $31,000 at the time of the
reclassification.
What amount of holding gain or loss is immediately recognized in 2015 earnings?
a. $2,000 gain
b. $3,000 gain
c. $1,000 gain
d. $1,000 loss
26) Which of the following is not included in the highest authoritative level of GAAP?
a. FASB Statements
b.
c. FASB Staff Positions
d. Accounting Principles Board (APB) Opinions
27) On December 2, 2014, Loofa Company, which operates a furniture rental business,
traded in a used delivery truck with a carrying amount of $5,400 for a new delivery
truck having a list price of $16,000 and paid a cash difference of $7,500 to the dealer.
The used truck had a fair value of $6,000 on the date of the exchange. The exchange
has commercial substance. At what amount should the new truck be recorded on
Loofa’s books?
a. $10,600
b. $12,900
c. $13,500
d. $16,000
28) Which of the following items is usually classified as a noncurrent asset?
a. Prepaid rent
b. Plant expansion fund
c. Supplies
d. Goods that are in the process of being completed for another company
29) Under international accounting standards, revenue is recognized
a. only when a sale and delivery have occurred
b. upon the increase in the fair value of biological assets (e.g., cattle) without waiting
for the assets to be sold
c. upon the increase in the fair value of agricultural produce (e.g., harvested wheat)
without waiting for the assets to be sold
d. upon the increase in the fair value of both biological assets (e.g., cattle) and
agricultural produce (e.g., harvested wheat) without waiting for the assets to be sold
30) Which of the following concepts is often given as justification not to value
noncurrent operating assets at their current values?
a. The revenue principle
b. Verifiability
c. Relevance
d. Predictive value
31) Everheat Company is an oil and gas exploration firm. During 2014, Everheat
engaged in five different exploration projects. The costs associated with these projects
are as follows:
Only Projects 2 and 5 were successful. As of the end of the year, production had not yet
started at either of these two sites.
Assuming that all exploration costs were paid for in cash, make the journal entry to
record the expenditures for the year using
32) The income statement of Faster Computers, Inc. showed the following information
on December 31, 2014.
Compute earnings per share figures for common stock under the assumption that Faster
Computer Inc. has
Note: Assumption (1) is independent of (2).
33) The Financial Accounting Standards Board had several goals in issuing ASC Topic
320 (Investments Debts and Equity Securities) and changing the accounting for certain
debt and equity securities from a lower-of-cost-or-market basis to a fair value basis.
Among these goals was the elimination of what is termed “gains trading.”
Explain the meaning of the term “gains trading.”
34) Debt securities frequently are issued with a convertible feature that permits the
holder to convert the bond certificates into a determinable number of shares of common
stock at any time before the conversion privilege expires. The conversion feature offers
many advantages and some disadvantages both to the issuer and the investor, however.
Required:
Identify the advantages of convertible debt both to the issuer and the investor.
35) You are the auditor of Donaldson Corporation, a newly organized company that
manufactures plastic cups using an extrusion process. One of the promoters of the
company was formerly involved in an enterprise that used the extrusion process and has
agreed to contribute an extrusion machine to the new company in return for shares of
stock of Donaldson Corporation. What concerns would you have as the auditor of
Donaldson Corporation regarding this transaction?
36) The globalization of business has caused many changes in how enterprises are
managed. One such change is illustrated by U.S. enterprises obtaining loans
denominated in foreign currencies.
Identify reasons why such borrowings may occur.
