1) When the stated rate of interest exceeds the effective rate, the present value of the
note receivable will be less than its face value.
2) In most situations, an auditor issues a qualified opinion or disclaims an opinion.
3) Verifiability and predictive value are two ingredients of faithful representation.
4) The objective of financial reporting is the foundation of the conceptual framework.
5) A controlling interest occurs when one corporation acquires a voting interest of more
than 50 percent in another corporation.
6) The present value of an ordinary annuity is the present value of a series of equal rents
withdrawn at equal intervals.
7) A company discloses gain contingencies in the notes only when a high probability
exists for realizing them.
8) While IFRS requires an impairment test at each reporting date for long-lived assets,
it requires no such test for intangibles once a legal or useful life has been determined.
9) The asset turnover ratio is computed by dividing net sales by ending total assets.
10) Examples of taxable temporary differences are subscriptions received in advance
and advance rental receipts.
11) The SEC requires that companies report to it certain substantive information that is
not found in their annual reports.
12) Under IFRS, bond issue costs are recorded as an asset.
13) Both U.S. GAAP and IFRS permit the use of the LIFO method to account for
inventories.
14) Under the accrual basis of accounting, net income is usually the same as net cash
flow from operating activities.
15) The FASB concluded that if a company sells its product but gives the buyer the
right to return the product, revenue from the sales transaction shall be recognized at the
time of sale only if all of six conditions have been met. Which of the following is not
one of these six conditions?
a.The amount of future returns can be reasonably estimated
b.The seller’s price is substantially fixed or determinable at time of sale
c.The buyer’s obligation to the seller would not be changed in the event of theft or
damage of the product
d.The buyer is obligated to pay the seller upon resale of the product
16) Leon Corp. purchased Spinks Co. 4 years ago and at that time recorded goodwill of
$480,000. The Sinks Divisions net assets, including goodwill, have a carrying amount
of $1,150,000. The fair value of the division is estimated to be $1,200,000.
Instructions
(a)Explain whether or not Leon Corp. must prepare an entry to record impairment of the
goodwill. Include the entry, if necessary.
(b)Repeat instruction (a) assuming that the fair value of the division is estimated to be
$1,070,000 and the implied goodwill is $360,000.
17) Sawyer Corporation has a machine (Machine A) that it acquired on 1/1/14 for
$540,000. On 12/31/14 such machines have a selling price and fair value of $621,000.
When used in production, such machines have an estimated useful life of 10 years with
no salvage value. Use the straight-line method.
Brown Corporation has a machine (Machine B) that it acquired on 1/1/14 for $729,000.
On 12/31/14 such machines have a selling price and fair value of $540,000. When used
in production, such machines have an estimated useful life of 10 years with no salvage
value. Use the straight-line method.
On 12/31/14 Brown gave Machine B plus $81,000 cash to Sawyer in return for
Machine A.
Given the assumptions in 10 above, at what amount will Machine B be recorded on
Sawyer’s books?
a.$469,565
b.$729,000
c.$540,000
d.$631,566
18) Which assumption or principle requires that all information significant enough to
affect a decision of reasonably informed users should be reported in the financial
statements?
a.Matching
b.Going concern
c.Historical cost
d.Full disclosure
19) Financial statements for Kiner Company are given below:
Kiner Company
Balance Sheet
January 1, 2015
AssetsEquities
Cash$ 640,000Accounts payable$ 304,000
Accounts receivable576,000
Buildings and equipment2,400,000
Accumulated depreciation
buildings and equipment(800,000)Common stock1,840,000
Patents 288,000Retained earnings 960,000
$3,104,000$3,104,000
Kiner Company
Statement of Cash Flows
For the Year Ended December 31, 2015
Increase (Decrease) in Cash
Cash flows from operating activities
Net income$800,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accounts receivable$(256,000)
Increase in accounts payable128,000
Depreciationbuildings and equipment240,000
Gain on sale of equipment(96,000)
Amortization of patents 32,000 48,000
Net cash provided by operating activities848,000
Cash flows from investing activities
Sale of equipment192,000
Purchase of land(400,000)
Purchase of buildings and equipment (768,000)
Net cash used by investing activities(976,000)
Cash flows from financing activities
Payment of cash dividend(240,000)
Sale of common stock 640,000
Net cash provided by financing activities 400,000
Net increase in cash272,000
Cash, January 1, 2015 640,000
Cash, December 31, 2015$912,000
Total assets on the balance sheet at December 31, 2015 are $4,432,000. Accumulated
deprecia-tion on the equipment sold was $224,000.
Capital stock (plus any additional paid-in capital) at December 31, 2015 was
a.$1,600,000
b.$1,840,000
c.$1,040,000
d.$2,480,000
20) The income statement reveals
a.resources and equities of a firm at a point in time
b.resources and equities of a firm for a period of time
c.net earnings (net income) of a firm at a point in time
d.net earnings (net income) of a firm for a period of time
21) Application of the full disclosure principle
a.is theoretically desirable but not practical because the costs of complete disclosure
exceed the benefits
b.is violated when important financial information is buried in the notes to the financial
statements
c.is demonstrated by the use of supplementary information explaining the effects of
financing arrangements
d.requires that the financial statements be consistent and comparable
22) On May 31, 2015, Armstrong Company paid $3,500,000 to acquire all of the
common stock of Hall Corporation, which became a division of Armstrong. Hall
reported the following balance sheet at the time of the acquisition:
Current assets$ 900,000Current liabilities$ 600,000
Noncurrent assets 2,700,000Long-term liabilities500,000
Stockholders equity 2,500,000
Total liabilities and
Total assets$3,600,000stockholders equity$3,600,000
It was determined at the date of the purchase that the fair value of the identifiable net
assets of Hall was $2,800,000. At December 31, 2015, Hall reports the following
balance sheet information:
Current assets$ 800,000
Noncurrent assets (including goodwill recognized in purchase)2,400,000
Current liabilities(700,000)
Long-term liabilities (500,000)
Net assets$2,000,000
It is determined that the fair value of the Hall division is $2,200,000. The recorded
amount for Halls net assets (excluding goodwill) is the same as fair value, except for
property, plant, and equipment, which has a fair value of $200,000 above the carrying
value.
Instructions
(a)Compute the amount of goodwill recognized, if any, on May 31, 2015 .
(b)Determine the impairment loss, if any, to be recorded on December 31, 2015 .
(c)Assume that the fair value of the Hall division is $2,050,000 instead of $2,200,000.
Prepare the journal entry to record the impairment loss, if any, on December 31, 2015 .
23) The activity method of depreciation
a.is a variable charge approach
b.assumes that depreciation is a function of the passage of time
c.conceptually associates cost in terms of input measures
d.all of these answers are correct
24) Lexington Company sells product 1976NLC for $60 per unit. The cost of one unit
of 1976NLC is $54, and the replacement cost is $52. The estimated cost to dispose of a
unit is $12, and the normal profit is 40%. At what amount per unit should product
1976NLC be reported, applying lower-of-cost-or-market?
a.$24
b.$48
c.$52
d.$54
25) Lyons Company deducts insurance expense of $126,000 for tax purposes in 2014,
but the expense is not yet recognized for accounting purposes. In 2015, 2016, and 2017,
no insurance expense will be deducted for tax purposes, but $42,000 of insurance
expense will be reported for accounting purposes in each of these years. Lyons
Company has a tax rate of 40% and income taxes payable of $108,000 at the end of
2014 . There were no deferred taxes at the beginning of 2014 .
What is the amount of the deferred tax liability at the end of 2014?
a.$50,400
b.$43,200
c.$18,000
d.$0
26) The accountant for Marlin Corporation has developed the following information for
the company’s defined-benefit pension plan for 2015:
Service cost$500,000
Actual return on plan assets250,000
Annual contribution to the plan920,000
Amortization of prior service cost125,000
Benefits paid to retirees60,000
Settlement rate10%
Expected rate of return on plan assets8%
The accumulated benefit obligation at December 31, 2015, amounted to $3,250,000.
Instructions
(a)Using the above information for Marlin Corporation, complete the pension work
sheet for 2015 . Indicate (credit) entries by parentheses. Calculated amounts should be
supported.
(b)Prepare the journal entry to reflect the accounting for the company’s pension plan for
the year ending December 31, 2015 .
Marlin Corporation
Pension Work Sheet2015
General Journal Entries Memo Entries
Annual OCIPension Projected
PensionGain /Asset /BenefitPlan
ExpenseCashPSCLossLiabilityObligationAssets
Bal., Dec. 31, 2014625,000 1,250,000(4,000,000)2,750,000
Service Cost
Interest Cost
Actual return
Unexpected
gain/loss
Amortization
of PSC
Contributions
Benefits
Gain/loss amort.
Journal entry
for 2015
Balance, Dec. 31, 2015
Answer:
Marlin Corporation
Pension Work Sheet2015
General Journal Entries Memo Entries
OCI
AnnualPriorGain /PensionProjected
PensionServiceLossAsset / BenefitPlan
ExpenseCashCostLiabilityObligationAssets
Bal., Dec. 31, 20141,250,000 Cr. 4,000,000 Cr. 2,750,000 Dr.
Service Cost500,000 Dr.500,000 Cr.
Interest Cost (1)400,000 Dr.400,000 Cr.
Actual return250,000 Cr.250,000 Dr.
Unexpected
gain/loss (2)30,000 Dr.30,000 Cr.
Amortization
of PSC125,000 Dr.125,000 Cr.
Contributions920,000 Cr.920,000 Dr.
Benefits60,000 Dr.60,000 Cr.
Gain/loss Amort..
Journal entry
for 2015805,000Dr.920,000Cr 125,000 Cr.30,000 Cr. 270,000 Dr.
AOCI, 12/31/14 625,000 Dr. -0-
Bal., Dec. 31, 2015500,000 Dr.30,000 Cr. 980,000 Cr. 4,840,000 Cr. 3,860,000 Dr.
(1)$4,000,000 x 10% = $400,000
(2)$250,000 – ($2,750,000 x 8%) = $30,000
(b)Pension Expense805,000
Pension Asset / Liability270,000
Cash920,000
Other Comprehensive Income (PSC) 125,000
27) Which of the following is true?
a.Rents occur at the beginning of each period of an ordinary annuity
b.Rents occur at the end of each period of an annuity due
c.Rents occur at the beginning of each period of an annuity due
d.None of these answer choices are correct
28) Martin Industries maintains its accounting records using IFRS. The company
purchases equipment with a price of $400,000. The manufacturer has offered a payment
plan that would allow Martin to make 10 equal annual payments of $49,316, with the
first payment due one year after the purchase.
How much total interest will Martin pay on this payment plan?
a.$93,160
b.$49,316
c.$160,000
d.$40,000
29) On September 10, 2014, Jenks Co. incurred the following costs for one of its
printing presses:
Purchase of attachment$45,000
Installation of attachment5,000
Replacement parts for renovation of press18,000
Labor and overhead in connection with renovation of press7,000
Neither the attachment nor the renovation increased the estimated useful life of the
press. However, the renovation resulted in significantly increased productivity. What
amount of the costs should be capitalized?
a.$0
b.$57,000
c.$68,000
d.$75,000
30) Molina Companys reported net incomes for 2015 and the previous two years are
presented
below.
2015 2014 2013
$105,000$95,000$70,000
2015s net income was properly determined after giving effect to the following
accounting changes, error corrections, etc. which took place during the year. The
incomes for 2013 and 2014 do not take these items into account and are stated at the
amounts determined in those years. Ignore income taxes.
Instructions
(a)For each of the six accounting changes, errors, or prior period adjustment situations
described below, prepare the journal entry or entries Molina Company should record
during 2015 . If no entry is required, write none.
(b)After recording the situation in part (a) above, prepare the year-end adjusting entry
for December 31, 2015 . If no entry, write none.
1>Early in 2015, Molina determined that equipment purchased in January, 2013 at a
cost of $1,075,000, with an estimated life of 5 years and salvage value of $75,000 is
now estimated to continue in use until December 31, 2019 and will have a $25,000
salvage value. Molina recorded its 2015 depreciation at the end of 2015 .
2>Molina determined that it had understated its depreciation by $20,000 in 2014 owing
to the fact that an adjusting entry did not get recorded.
3>Molina bought a truck January 1, 2012 for $60,000 with a $6,000 estimated salvage
value and a six-year life. The company debited an expense account and credited cash on
the purchase date. The truck is expected to be traded at the end of 2017 . Molina uses
straight-line depreciation for its trucks.
4>During 2015, Molina changed from the straight-line method of depreciating its
cement plant to the double-declining-balance method. The following calculations
present depreciation on both bases. (Ignore income taxes.) The 2015 amount applies
double-declining balance to the 1/1/15 carrying amount after straight-line was used.
2015 2014 2013
Straight-line$100,000$100,000$100,000
Double-declining$200,000$160,000$200,000
5>Molina, in reviewing its provision for uncollectibles during 2015, has determined
that 1/2 of 1% is the appropriate amount of bad debt expense to be charged to
operations. The company had used 1% as its rate in 2014 and 2013 when the expense
had been $20,000 and $14,000, respectively. The company would have recorded
$60,000 of bad debt expense on December 31, 2015 under the old rate.
6>During 2015, Molina decided to change from the LIFO method of valuing
inventories to average cost. The net incomes involved under each method were as
follows:
2015 2014 2013
LIFO$51,000$59,000$42,000
Average cost$63,000$67,000$48,000
Assume no difference between LIFO and average cost inventory values in years prior to
2013 .
31) External events do not include
a.interaction between an entity and its environment
b.a change in the price of a good or service that an entity buys or sells
c.improvement in technology by a competitor
d.using buildings and machinery in operations
32) Noncumulative preferred dividends in arrears
a.are not paid or disclosed
b.must be paid before any other cash dividends can be distributed
c.are disclosed as a liability until paid
d.are paid to preferred stockholders if sufficient funds remain after payment of the
current preferred dividend
33) The following information is taken from French Corporation’s financial statements:
December 31
2015 2014
Cash$73,000$ 27,000
Accounts receivable102,00080,000
Allowance for doubtful accounts(4,500)(3,100)
Inventory155,000175,000
Prepaid expenses7,5006,800
Land100,00060,000
Buildings289,000244,000
Accumulated depreciation(32,000)(13,000)
Patents 20,000 35,000
$710,000$611,700
Accounts payable$ 90,000$ 84,000
Accrued liabilities54,00063,000
Bonds payable125,00060,000
Common stock100,000100,000
Retained earningsappropriated80,00010,000
Retained earningsunappropriated276,000302,700
Treasury stock, at cost (15,000) (8,000)
$710,000$611,700
For 2015 Year
Net income$73,300
Depreciation expense19,000
Amortization of patents5,000
Cash dividends declared and paid30,000
Gain or loss on sale of patentsnone
Instructions
Prepare a statement of cash flows for French Corporation for the year 2015 . (Use the
indirect method.)
34) Gibbs Manufacturing Co. was incorporated on 1/2/14 but was unable to begin
manufacturing activities until 8/1/14 because new factory facilities were not completed
until that date. The Land and Buildings account at 12/31/14 per the books was as
follows:
Date Item Amount
1/31/14Land and dilapidated building$200,000
2/28/14Cost of removing building4,000
4/1/14Legal fees6,000
5/1/14Fire insurance premium payment5,400
5/1/14Special tax assessment for streets4,500
5/1/14Partial payment of new building construction190,000
8/1/14Final payment on building construction190,000
8/1/14General expenses30,000
12/31/14Asset write-up 75,000
$704,900
Additional information:
1>To acquire the land and building on 1/31/14, the company paid $100,000 cash and
1,000 shares of its common stock (par value = $100/share) which is very actively traded
and had a fair value per share of $160.
2>When the old building was removed, Gibbs paid Kwik Demolition Co. $4,000, but
also received $1,500 from the sale of salvaged material.
3>Legal fees covered the following:
Cost of organization$2,500
Examination of title covering purchase of land2,000
Legal work in connection with the building construction 1,500
$6,000
4>The fire insurance premium covered premiums for a three-year term beginning May
1, 2014 .
5>General expenses covered the following for the period 1/2/14 to 8/1/14.
President’s salary$20,000
Plant superintendent covering supervision of new building 10,000
$30,000
6>Because of the rising land costs, the president was sure that the land was worth at
least $75,000 more than what it cost the company.
Instructions
Determine the proper balances as of 12/31/14 for a separate land account and a separate
buildings account. Use separate T-accounts (one for land and one for buildings) labeling
all the relevant amounts and disclosing all computations.
35) Briefly describe some of the similarities and differences between U.S. GAAP and
IFRS with respect to balance sheet reporting.
36) Presented below is certain information pertaining to Edson Company.
Assets, January 1$250,000
Assets, December 31230,000
Liabilities, January 1150,000
Common stock, December 3180,000
Retained earnings, December 3141,000
Common stock sold during the year10,000
Dividends declared during the year13,000
Compute the net income for the year.
37) Under what circumstances is it appropriate to record goodwill in the accounts? How
should goodwill, properly recorded on the books, be written off in accordance with
generally accepted accounting principles?
38) Bell Company has stock outstanding as follows: Common, $10 par value per share,
140,000 shares; Preferred, 4%; $100 par value per share, 8,000 shares. The Preferred is
cumulative and participating up to an additional 3% of par; two years are in arrears (not
including the current year); and the total amount of cash dividends declared for both
classes of stock is $192,000.
Instructions
Prepare the entry for the dividend declaration, separating the dividend into the common
and preferred portions.
39) 1> What are intangible assets?
2> How are limited-life intangibles accounted for subsequent to acquisition?
40) Indicate the principal effects of a stock dividend versus a stock split on the issuing
corporation. Respond in the spaces as follows: “C” for change; “NC” for no change.
Stock DividendStock Split
Number of Shares Outstanding
Par Value per Share
Total Par Outstanding
Retained Earnings
Total Stockholders’ Equity
Composition of Stockholders’ Equity
