1) The issuance price of a bond does not depend on the
a. face value of the bond
b. riskiness of the bond
c. method used to amortize the bond discount or premium
d. effective interest rate
2) Underwood Company purchased a machine on January 2, 2013, for $1,000,000. The
machine has an estimated useful life of five years and a salvage value of $100,000.
Depreciation was computed by the 150% declining-balance method. The accumulated
depreciation balance at December 31, 2014, should be
a. $360,000
b. $459,000
c. $490,000
d. $510,000
3) Halen Company factored $50,000 of its accounts receivable with recourse. The factor
retained 8% for sales adjustments and charged $3,000 as a financing fee. For simplicity,
assume the estimated and actual amounts of the following items are equal:
Sales adjustments $2,500
Uncollectible accounts 500
Assume the transfer is recorded as a sale by Halen Company. What is the loss or
financing expense to be recognized on the transfer?
a. $11,000
b. $6,000
c. $3,000
d. $8,000
4) On February 1, Rapido Corporation entered into a firm commitment to purchase
specialized equipment from the Yamasake Trading Company for 65,000,000 on April 1.
Rapido would like to reduce the exchange rate risk that could increase the cost of the
equipment in U.S. dollars by April 1, but Rapido is not sure which direction the
exchange rate may move. What type of contract would protect Rapido from an
unfavorable movement in the exchange rate while allowing them to benefit from a
favorable movement in the exchange rate?
a. Interest rate swap
b. Forward contract
c. Call option
d. Put option
5) Big Bike Plating Company uses chrome to plate motorcycle parts. Big Bike forecasts
a need for 100,000 kilos of chrome on January 1, 2015. On November 1, 2014, Big
Bike purchased a call option for 100,000 kilos of chrome on January 1, 2015, at a price
of $1.05 a kilo, which is the market price on November 1. Big Bike paid $900 for the
call option and designated this option as a hedge against price fluctuations for their
January purchase of chrome. On December 31, 2014 and January 1,2015, the prevailing
market price for chrome is $1.25 a kilo. On January 1, 2015 Big Bike purchased
100,000 kilos of chrome.
Required: Make the necessary entries on Big Bikes books at:
(a) November 1, 2014
(b) December 31, 2014
(c) January 1, 2015
6) Hagar Corporation reported depreciation of $250,000 on its 2014 tax return.
However, in its 2014 income statement, Hagar reported depreciation of $100,000. The
difference in depreciation is a temporary difference that will reverse over time.
Assuming Hagar’s tax rate is constant at 30 percent, what amount should be added to
the deferred income tax liability in Hagar’s December 31, 2014, balance sheet?
a. $30,000
b. $37,500
c. $45,000
d. $75,000
7) McCallister, Inc., a nonpublic enterprise, is negotiating a loan for expansion purposes
and the bank requires audited financial statements. Before closing the accounting
records for the year ended December 31, 2015, McCallister’ controller prepared the
following comparative financial statements for 2015 and 2014:
During the audit, the following additional information was obtained:
(a) The investment portfolio consists of investments in trading securities with a total
market value of $156,000 at December 31, 2015. The securities were purchased
February 3, 2015, at a cost of $142,000.
(b) As a result of errors in physical count, inventories were overstated by $30,000 at
December 31, 2015.
(c) On January 2, 2015, the cost of equipment purchased for $80,000 was mistakenly
charged to repairs and maintenance. McCallister depreciates this type of equipment
over a 5-year life using the straight-line method, with no residual or salvage value.
(d) McCallister was named as a defendant in a lawsuit in October 2015. McCallister’
counsel is of the opinion that McCallister has a good defense and does not anticipate
any impairment of McCallister’ assets or that any significant liability will be incurred.
However, McCallister’ counsel admits that loss of the suit is “possible.” McCallister’
management wished to be conservative and established a loss contingency of $200,000
at December 31, 2015.
(e) On January 24, 2016, before the 2015 financial statements were issued, McCallister
was notified that one of its largest customers had filed for bankruptcy as the result of a
flood that destroyed a substantial portion of the company’s assets on January 16, 2016.
The customer’s accounts receivable balance at December 31, 2015, was $144,000.
(f) $100,000 of 5-year notes payable will mature September 30, 2016. In view of
McCallister’ plans for expansion, management is seriously considering refinancing the
notes when they become due.
(1) Prepare a properly classified balance sheet for McCallister, Inc., as of December 31,
2015. (Income tax considerations should be ignored.)
(2) Identify the events and other information that should be disclosed in the notes to
McCallister’ financial statements. (Do not prepare the notes.)
8) Under the direct method, cash paid to suppliers can be computed as cost of goods
sold for the period
a. minus a decrease in inventory and plus an increase in accounts payable.
b. plus a decrease in inventory and minus an increase in accounts payable.
c. minus an increase in inventory and plus an increase in accounts payable.
d. plus an increase in inventory and minus an increase in accounts
9) Shutters Company adopted a defined benefit pension plan on January 1, 2014.
Shutters amortizes the prior service cost over 16 years and funds prior service cost by
making equal payments to the fund trustee at the end of each of the first ten years. The
service cost is fully funded at the end of each year. The following data are available for
2014:
If interest cost for 2014 is equal to the return on plan assets, then Shutters’s prepaid
pension cost at December 31, 2014, is
a. $228,800
b. $166,800
c. $62,000
d. $0
10) Transit Importing Company. converts its foreign subsidiary financial statements
using the translation process. The companys French subsidiary reported the following
for 2014: revenues and expenses of 10,500,000 and 6,505,000 francs, respectively,
earned or incurred evenly throughout the year, dividends of 500,000 francs were paid
during the year. The following exchange rates are available:
Translated net income for 2014 is
a. $910,860
b. $838,950
c. $805,860
d. $733,950
11) Morgan Trucking traded a used truck with a book value of $1,700 and a fair market
value of $2,300 for a new truck with a list price of $17,800. Morgan agreed to pay
$13,000 in cash for the exchange in addition to giving up the used truck. Assuming the
exchange has commercial substance, at what amount should the new truck be recorded?
a. $17,800
b. $15,300
c. $14,700
d. None of these
12) The accounts and balances shown below were gathered from Primer Corporation’s
trial balance on December 31, 2014. All adjusting entries have been made.
The amount that should be reported as current assets on Primer Corporation’s balance
sheet is
a. $151,300
b. $164,900
c. $217,300
d. $267,300
13) Under GAAP, an entry should be made to the Bad Debt Expense account
a. when an account receivable with terms 2/10, n30 is past thirty days due
b. when an account receivable previously written off is determined to be collectible
c. when an account receivable is determined not to be collectible and is written off
d. in the period when a sale is made and not when the receivable associated with the
sale is determined to be uncollectible
14) The effective-interest method of amortizing bond premiums
a. is too complicated for practical use
b. uses a constant rate of interest
c. is another name for the straight-line method
d. is needed to determine the amount of cash to be paid to bondholders at each interest
date
15) Which of the following is true?
a. Prepaid expenses are increased by a credit
b. Gains are increased by a debit
c. Losses are increased by a credit
d. Accumulated depreciation is increased by a credit
16) Place Company started construction of a new office building on January 1, 2014,
and moved into the finished building on July 1, 2015. Of the building’s $5,000,000 total
cost, $4,000,000 was incurred in 2014 evenly throughout the year. Place’s incremental
borrowing rate was 12 percent throughout 2014, and the total amount of interest
incurred by Place during 2014 was $204,000. What amount should Place report as
capitalized interest at December 31, 2014?
a. $480,000
b. $300,000
c. $240,000
d. $204,000
17) On January 1, 2014, Madrid Corp. issued 2,000 of its 9 percent, $1,000 bonds at 95.
Interest is payable semiannually on July 1 and January 1. The bonds mature on January
1, 2024. Madrid paid bond issue costs of $80,000, which are appropriately recorded as a
deferred charge. Madrid uses the straight-line method of amortizing bond discount and
bond issue costs. On Madrid’s December 31, 2014, balance sheet, how much would be
shown as the carrying amount of the bonds payable?
a. $2,110,000
b. $2,090,000
c. $1,982,000
d. $1,910,000
18) When a company with a complex capital structure has a loss from continuing
operations and potentially dilutive securities, the calculation of earning per share (EPS)
results in
a. simple EPS (no potentially dilutive securities are included in the calculation)
b. no EPS being reported
c. EPS being reported, using the same calculation of dilutive EPS as would be used if
net income were positive
d. EPS being reported, using securities in the calculation of dilutive EPS that would be
anti-dilutive if income were positive
19) Astro Incorporated’s financial statements for the years 2014 and 2015 contained the
following errors:
Assuming that none of the errors were detected or corrected, and that no additional
errors were made in 2016, by what amount will current assets at December 31, 2016, be
overstated or understated?
a. $0
b. $3,000 overstated
c. $9,000 understated
d. $9,000 overstated
20) A markup of 25 percent on cost is equivalent to what markup on selling price?
(rounded)
a. 15 percent
b. 20 percent
c. 25 percent
d. 33 percent
21) On January 1 Murphy Company acquired a machine with a four-year useful life.
Murphy estimates the salvage value of the machine will be equal to ten percent of the
acquisition cost. The company is debating between using either the
double-declining-balance method or the sum-of-the-years’-digits method of
depreciation. Comparing the depreciation expense for the first two years computed
using these methods, the depreciation expense for the double-declining-balance method
(compared to the sum-of-the-years’-digits method) will match which of the patterns
shown below?
First Second
Year Year
a. Lower Lower
b. Lower Higher
c. Higher Lower
d. Higher Higher
22) Which of the following is a characteristic of the Financial Accounting Standards
Board?
a. The FASB is composed of five members
b. FASB members must come from CPA firms
c. FASB members are part-time
d. FASB members may retain their positions with previous employers
23) F & R Construction, Inc. has consistently used the percentage-of-completion
method of recognizing revenue. Last year F & R started work on a $5,000,000
construction contract, which was completed this year. The accounting records disclosed
the following data for last year:
How much revenue should F & R have recognized on this contract last year?
a. $1,500,000
b. $1,700,000
c. $1,100,000
d. $400,000
24) Paltry Corporation has a pension plan that has a provision that employees will
receive benefits upon retirement even though the employees are not working for the
company at the time of retirement. Such a plan is characterized as
a. defined benefit
b. defined contribution
c. noncontributory
d. vested
25) Using the information above, choose the following:
a. $4,000 RE $55,000
b. $7,000 RE $58,000
c. $4,000 Earnings $55,000
d. $7,000 Earnings $58,000
26) Recording as an asset expenditures that have no future economic benefit is an
example of
a. strategic matching
b. change in methods or estimates with full disclosure
c. a fictitious transaction
d. non-GAAP accounting
27) How would proceeds received in advance from the sale of nonrefundable tickets for
the Super Bowl be reported in the sellers financial statements published before the
Super Bowl?
a. Revenue for the entire proceeds
b. Revenue less related costs
c. Unearned revenue less related costs
d. Unearned revenue for the entire proceeds
28) International Accounting Standard 8 requires
a. a restatement of prior years’ income for a change in accounting principle
b. the reporting of the cumulative effect of a change in accounting principle as part of
net income in the year of the change
c. the reporting of the cumulative effect of a change in accounting principle as a direct
adjustment to beginning retained earnings in the year of the change
d. the amortization of the cumulative effect of a change in accounting principle over the
future periods expected to be affected by the change
29) At December 31, 2013, Nightstyle Inc. had 190,000 shares of common stock
outstanding. On October 1, 2014, an additional 70,000 shares of common stock were
issued for cash. Nightstyle also had 2,000,000 of 8 percent convertible bonds
outstanding at December 31, 2014, which are convertible into 55,000 shares of common
stock. The bonds are dilutive in the 2014 earnings per share computation. No bonds
were issued or converted into common stock during 2014. What is the number of shares
that should be used in computing diluted earnings per share for the year ended
December 31, 2014?
a. 160,000
b. 175,000
c. 205,000
d. 262,500
30) The following private-sector organization was created by the Sarbanes-Oxley Act of
2002 to perform required audits on U. S. publicly traded companies:
a.
b. Public Company Accounting Oversight Board
c. Financial Executives Institute.
d. Financial Accounting Standards Board.
31) The 2014 net income of Beguile Inc. was $200,000 and 100,000 shares of its
common stock were outstanding during the entire year. In addition, there were
outstanding options to purchase 10,000 shares of common stock at $10 per share. These
options were granted in 2011 and none had been exercised by December 31, 2014.
Market prices of Beguile’s common stock during 2014 were
The amount that should be shown as Beguile’s diluted earnings per share for 2014
(rounded to the nearest cent) is
a. $2.00
b. $1.95
c. $1.89
d. $1.86
32) Certain assets currently are omitted from the balance sheet. For example, the value
of the human resources of the firm are not reported. Nevertheless, investors and others
might greatly benefit from a knowledge of the extent to which human assets have
increased or decreased during a given period. Values certainly may be attributed to
individuals or groups based on their ability to render future economic services. A major
issue is the method that should be employed in measuring human assets.
Identify some possible ways of measuring human resources.
33) The following information relates to the defined benefit pension plan of the
Bamberger Co.:
34) The enacted tax rates for this year and the next four years are as follows:
35) The data below are from the December 31, 2014, balance sheet of the Handy Mart
Corporation:
During 2015, the following transactions affecting corporate capital were recorded:
Assuming the cost method is used for treasury stock and that retained earnings are to be
reduced minimally in stock reacquisition transactions, provide the entries required to
record the above transactions.
36) Stone Company, a publicly traded company, delivers twenty truckloads of Stone to
Mortar Company prior to December 31, 2014, the end of Stone’s fiscal year. Stone
normally enters into a written sales agreement with customers similar to Mortar
Company. The written sales agreement must be signed by both companies in order to be
binding. Although the purchasing department of Mortar has orally agreed to the sale,
Mortar management cannot sign the agreement until it is approved by the legal
department of Mortar. Personnel of the legal department of Mortar will be on vacation
until January 5, 2015.
Can Stone recognize on its income statement for the year ending December 31, 2014,
the revenue related to the twenty truckloads delivered to Mortar? Explain.
37) On June 17, it was discovered that a material amount of inventory had been stolen.
A physical count discloses that $55,000 of merchandise was on hand as of June 17. The
following additional data is available from the accounting records:
Records indicate that the company’s gross profit has averaged 40 percent of selling
prices.
Required:
Estimate the amount of loss due to theft.
38) A sale of the receivables.
Both of these types of transactions require a transfer of the receivables to a new holder,
typically a financial institution.
Required:
Distinguish between a secured borrowing and a sale of receivables as regards the rights
of the transferor and transferee as well as regards the accounting for each type of
transaction.
39) Schroeder Co. had the following transactions pertaining to the fiscal year ended
October 31, 2011.
Provide the appropriate journal entries to record the preceding transactions. Adjust the
accounts at year-end assuming that no entries have been made between the transaction
date and year-end and assuming that:
40) Management of the Singer Company is currently considering the possibility of
changing from the FIFO method to the LIFO method of inventory valuation for income
tax and financial reporting purposes. The companys president, Diane Singer, is
concerned that using LIFO will tend to distort the companys balance sheet over time.
She believes that the difference between the current cost of the companys inventory and
the reported LIFO valuation will tend to grow larger each year, and that the companys
reported LIFO inventory valuation will be progressively understated in relation to
current cost. Singer Company relies heavily on short-term bank credit, and Ms. Singer
feels that the companys bankers will tend to downgrade the companys short-term
debt-paying ability if a switch to LIFO is made.
Required:
41) In 2013, Bootcamp Mining Inc. purchased land for $5,600,000 that had a natural
resource supply estimated at 4,000,000 tons. When the natural resources are removed,
the land will have an estimated value of $640,000. The present value of the expected
cash outflows for the required restoration cost for the property is estimated to be
$800,000.
Development and road construction costs on the land were $560,000, and a building
was constructed at a cost of $88,000 with an estimated $8,000 salvage value when all
the natural resources have been extracted.
During 2014, additional development costs of $272,000 were incurred, but additional
resources were not discovered. Production for 2013 and 2014 was 700,000 tons and
900,000 tons, respectively.
Compute the depletion charge for 2013 and 2014. (Include depreciation on the building,
if any, as a depletion charge.) Round depletion charge to the nearest cent.
