1) The economic entity assumption means that economic activity can be identified with
a particular legal entity.
2) Companies can recognize revenue prior to completion and delivery of the product
under certain circumstances.
3) GAAP requires start-up costs and initial operating losses during the early years to be
capitalized.
4) The issuance of stock dividends is entered on the cash flow worksheet, but is not
reported in the statement of cash flows.
5) Assets purchased on long-term credit contracts should be recorded at the present
value of the consideration exchanged.
6) The intrinsic value of a stock option is the difference between the market price of the
stock and the exercise price of the options at the grant date.
7) If an employee fails to exercise a stock option before its expiration date, the
company should decrease compensation expense.
8) A company must accrue a liability for sick pay that accumulates but does not vest.
9) Companies frequently use the composite approach when the assets are similar in
nature and have approximately the same useful lives.
10) The dollar-value LIFO method measures any increases and decreases in a pool in
terms of total dollar value and physical quantity of the goods in the inventory pool.
11) Which of the following ratios measures long-term solvency?
a.Acid-test ratio
b.Accounts receivable turnover
c.Debt to assets
d.Current ratio
12) The net assets of a business are equal to
a.current assets minus current liabilities
b.total assets plus total liabilities
c.total assets minus total stockholders’ equity
d.none of these answer choices are correct
13) On August 1, 2014, Mendez Corporation purchased a new machine on a deferred
payment basis. A down payment of $2,000 was made and 4 annual installments of
$12,000 each are to be made beginning on September 1, 2014 . The cash equivalent
price of the machine was $46,000. Due to an employee strike, Mendez could not install
the machine immediately, and thus incurred $600 of storage costs. Costs of installation
(excluding the storage costs) amounted to $1,600. The amount to be capitalized as the
cost of the machine is
a.$46,000
b.$47,600
c.$48,200
d.$52,000
14) A company records an unrealized loss on short-term securities. This would result in
what type of difference and in what type of deferred income tax?
Type of DifferenceDeferred Tax
a.TemporaryLiability
b.TemporaryAsset
c.PermanentLiability
d.PermanentAsset
15) In 2014, Mordica Co. issued 300,000 of its 500,000 authorized shares of $10 par
value common stock at $35 per share. In January, 2015, Mordica repurchased 25,000
shares at $30 per share. Assume these are the only stock transactions the company has
ever had.
Instructions
(a)What are the two methods of accounting for treasury stock?
(b)Prepare the journal entry to record the purchase of treasury stock by the cost method.
(c)9,000 shares of treasury stock are reissued at $33 per share. Prepare the journal entry
to record the reissuance by the cost method.
16) Presented below is the stockholders’ equity section of Oaks Corporation at
December 31, 2014:
Common stock, par value $20; authorized 75,000 shares;
issued and outstanding 45,000 shares$ 900,000
Paid-in capital in excess of par value350,000
Retained earnings 300,000
$1,550,000
During 2015, the following transactions occurred relating to stockholders’ equity:
3,000 shares were reacquired at $28 per share.
3,000 shares were reacquired at $35 per share.
1,800 shares of treasury stock were sold at $30 per share.
For the year ended December 31, 2015, Oaks reported net income of $450,000.
Assuming Oaks accounts for treasury stock under the cost method, what should it report
as total stockholders’ equity on its December 31, 2015, balance sheet?
a.$1,865,000
b.$1,861,400
c.$1,857,800
d.$1,415,000
17) Which of the following is a fundamental quality of useful accounting information?
a.Comparability
b.Relevance
c.Neutrality
d.Materiality
18) An income statement shows income before income taxes and extraordinary items in
the amount of $3,425,000. The income taxes payable for the year are $1,800,000,
including $600,000 that is applicable to an extraordinary gain. Thus, the income before
extraordinary items is
a.$2,225,000
b.$1,025,000
c.$2,325,000
d.$1,125,000
19) Gomez, Inc. began work in 2014 on contract #3814, which provided for a contract
price of $14,400,000. Other details follow:
2014 2015
Costs incurred during the year$2,400,000$7,350,000
Estimated costs to complete, as of December 317,200,0000
Billings during the year2,700,00010,800,000
Collections during the year1,800,00011,700,000
Assume that Gomez uses the completed-contract method of accounting. The portion of
the total gross profit to be recognized as income in 2015 is
a.$1,800,000
b.$2,700,000
c.$4,650,000
d.$14,400,000
20) Putnam Companys 2014 financial statements contain the following selected data:
Income taxes$40,000
Interest expense15,000
Net income60,000
Putnams times interest earned for 2014 is
a.4.0 times
b.5.0 times
c.6.7 times
d.7.7 times