1) Costs in the research phase are expensed under U.S. GAAP, but capitalized under
IFRS.
2) Both a guaranteed and an unguaranteed residual value affect the lessees computation
of amounts capitalized as a leased asset.
3) Under the expense warranty approach, companies charge warranty costs only to the
period in which they comply with the warranty.
4) The replacement of an existing bond issue with a new one is called refunding.
5) When a corporation sells treasury stock below its cost, it usually debits the difference
between cost and selling price to Paid-in Capital from Treasury Stock.
6) Reclassification in and out of trading securities is permitted under IFRS, although
this type of reclassification should be rare.
7) According to the FASB conceptual framework, which of the following elements
describes transactions or events that affect a company during a period of time?
a.Assets
b.Expenses
c.Equity
d.Liabilities
8) A company is constructing an asset for its own use. Construction began in 2014 . The
asset is being financed entirely with a specific new borrowing. Construction
expenditures were made in 2014 and 2015 at the end of each quarter. The total amount
of interest cost capitalized in 2015 should be determined by applying the interest rate on
the specific new borrowing to the
a.total accumulated expenditures for the asset in 2014 and 2015
b.weighed-average accumulated expenditures for the asset in 2014 and 2015
c.weighed-average expenditures for the asset in 2015
d.total expenditures for the asset in 2015
9) Arlington Company is constructing a building. Construction began on January 1 and
was completed on December 31 . Expenditures were $4,800,000 on March 1,
$3,960,000 on June 1, and $6,000,000 on December 31 . Arlington Company borrowed
$2,400,000 on January 1 on a 5-year, 12% note to help finance construction of the
building. In addition, the company had outstanding all year a 10%, 3-year, $4,800,000
note payable and an 11%, 4-year, $9,000,000 note payable.
What are the weighted-average accumulated expenditures?
a.$8,760,000
b.$6,310,000
c.$14,760,000
d.$7,380,000
10) Leonard Corporation reports the following information:
Correction of overstatement of depreciation expense
in prior years, net of tax$ 430,000
Dividends declared320,000
Net income1,000,000
Retained earnings, 1/1/14, as reported4,000,000
Leonard should report retained earnings, 12/31/14, at
a.$3,570,000
b.$4,250,000
c.$4,680,000
d.$5,110,000
11) Which of the following is a real (permanent) account?
a.Goodwill
b.Service Revenue
c.Accounts Receivable
d.Both Goodwill and Accounts Receivable
12) Black, Inc. is a calendar-year corporation whose financial statements for 2014 and
2015 included errors as follows:
YearEnding InventoryDepreciation Expense
2014$162,000overstated$135,000overstated
201564,000understated45,000understated
Assume that purchases were recorded correctly and that no correcting entries were
made at December 31, 2014, or at December 31, 2015 . Ignoring income taxes, by how
much should Black’s retained earnings be retroactively adjusted at January 1, 2016?
a.$154,000 increase
b.$46,000 increase
c.$19,000 decrease
d.$8,000 increase
13) At December 31, 2014 Raymond Corporation reported a deferred tax liability of
$180,000 which was attributable to a taxable type temporary difference of $600,000.
The temporary difference is scheduled to reverse in 2018. During 2015, a new tax law
increased the corporate tax rate from 30% to 40%. Raymond should record this change
by debiting
a.Retained Earnings for $60,000.
b.Retained Earnings for $18,000.
c.Income Tax Expense for $18,000.
d.Income Tax Expense for $60,000.
14) Which intangible assets are amortized?
Limited-LifeIndefinite-Life
a. Yes Yes
b. Yes No
c. No Yes
d. No No
15) On January 1, 2015, Gridley Corporation had 250,000 shares of its $2 par value
common stock outstanding. On March 1, Gridley sold an additional 500,000 shares on
the open market at $20 per share. Gridley issued a 20% stock dividend on May 1 . On
August 1, Gridley purchased 280,000 shares and immediately retired the stock. On
November 1, 400,000 shares were sold for $25 per share. What is the weighted-average
number of shares outstanding for 2015?
a.1,020,000
b.750,000
c.477,777
d.344,444
16) Pearson Corporation makes an investment today (January 1, 2014). They will
receive $9,000 every December 31st for the next six years (2014 2019). If Pearson
wants to earn 12% on the investment, what is the most they should invest on January 1,
2014?
a.$37,003
b.$41,443
c.$73,036
d.$81,801
17) Gannon Company acquired 10,000 shares of its own common stock at $20 per share
on February 5, 2014, and sold 5,000 of these shares at $27 per share on August 9, 2015 .
The fair value of Gannon’s common stock was $24 per share at December 31, 2014, and
$25 per share at December 31, 2015 . The cost method is used to record treasury stock
transactions. What account(s) should Gannon credit in 2015 to record the sale of 5,000
shares?
a.Treasury Stock for $135,000
b.Treasury Stock for $100,000 and Paid-in Capital from Treasury Stock for $35,000
c.Treasury Stock for $100,000 and Retained Earnings for $35,000
d.Treasury Stock for $120,000 and Retained Earnings for $15,000
18) Given below are the future value factors for 1 at 8% for one to five periods.
PeriodsFuture Value of 1 at 8%
11.080
21.166
31.260
41.360
51.469
What amount should be deposited in a bank account today to grow to $15,000 three
years from today?
a.$15,000 x 1.260
b.$15,000 x 1.260 x 3
c.$15,000 / 1.260
d.$15,000 / 1.080 x 3
19) The following transactions involving intangible assets of Minton Corporation
occurred on or near December 31, 2014 . Complete the chart below by writing the
journal entry (ies) needed at that date to record the transaction and at December 31,
2015 to record any resultant amortization. If no entry is required at a particular date,
write “none needed.”
On DateOn
of TransactionDecember 31, 2015
1>Minton paid Grand Company $500,000 for the exclusive right to market a particular
product, using the Grand name and logo in promotional material. The franchise runs for
as long as Minton is in business.
2>Minton spent $600,000 developing a new manufacturing process. It has applied for a
patent, and it believes that its application will be successful.
3>In January, 2015, Minton’s application for a patent (#2 above) was granted. Legal and
registration costs incurred were $180,000. The patent runs for 20 years. The
manufacturing process will be useful to Minton for 10 years.
4>Minton incurred $140,000 in successfully defending one of its patents in an
infringement suit. The patent expires during December, 2018 .
5>Minton incurred $480,000 in an unsuccessful patent defense. As a result of the
adverse verdict, the patent, with a remaining unamortized cost of $252,000, is deemed
worthless.
6>Minton paid Sneed Laboratories $104,000 for research and development work
performed by Sneed under contract for Minton. The benefits are expected to last six
years.
20) Below is the information relative to an exchange of assets by Stanton Company.
The exchange lacks commercial substance.
Which of the following would be correct for Stanton to record in Case I?
21) Presented below is data relative to the 12/31/14 inventory of Lance Company:
Number UnitsOriginal CostTotalCurrent
ItemIn InventoryPer UnitOriginal CostReplacement Cost
A5,000$1.09$5,450$1.08
B5,0001.306,5001.25
C5,0001.507,5001.05
D5,0001.608,0001.65
E5,0001.80 9,0001.50
Total25,000$36,450
Appropriate
UpperLowerInventory
LimitLimitDesignatedValuation
Item(“Ceiling”)(“Floor”)Market(Totals)
A
B
C
D
E
Total
Additional Data:
Selling price is $2.00/unit for all items. Disposal costs amount to 10% of selling price
and a “normal” profit is 35% of selling price.
Instructions
Complete the last four columns above.
22) Briefly explain the four basic assumptions that underlie financial accounting.
23) Prepare the necessary entries from 1/1/14-2/1/16 for the following events using the
fair value method. If no entry is needed, write “No Entry Necessary.”
1>On 1/1/14, the stockholders adopted a stock option plan for top executives whereby
each might receive rights to purchase up to 18,000 shares of common stock at $40 per
share. The par value is $10 per share.
2>On 2/1/14, options were granted to each of five executives to purchase 18,000 shares.
The options were non-transferable and the executive had to remain an employee of the
company to exercise the option. The options expire on 2/1/16. It is assumed that the
options were for services performed equally in 2014 and 2015 . The Black-Scholes
option pricing model determines total compensation expense to be $1,900,000.
3>At 2/1/16, four executives exercised their options. The fifth executive chose not to
exercise his options, which therefore were forfeited.
24) Accounts receivable in the amount of $500,000 were assigned to the Fast Finance
Company by Marsh, Inc., as security for a loan of $400,000. The finance company
charged a 4% commission on the face amount of the loan, and the note bears interest at
9% per year.
During the first month, Marsh collected $260,000 on assigned accounts. This amount
was remitted to the finance company along with one month’s interest on the note.
Instructions
Make all the entries for Marsh Inc. associated with the transfer of the accounts
receivable, the loan, and the remittance to the finance company.
25) Place T or F in front of each of the following statements.
1> The straight-line method of depreciation is based on the assumption that
depreciation expense can be regarded as a constant function of time.
2> Plant assets should be written down (below cost) when their market value has
declined temporarily.
3> The accounting profession has developed specifically recommended procedures for
recording appraisal increases with respect to plant assets.
4> An asset’s cost minus its accumulated depreciation equals its book value.
5> The sum-of-the-years’-digits method of depreciation ignores salvage value in the
computation of an asset’s depreciable base.
6> When using the double-declining balance method of determining depreciation, a
declining percentage is applied to a constant book value.
7> The book value of plant assets initially declines more rapidly under
decreasing-charge methods than under the straight-line method.
8> Accounting depreciation is computed by determining the change in the market value
of a company’s plant assets during the period under review.
9> The methods of depreciation based upon output assume that obsolescence will not
significantly affect the usefulness of the asset.
10> The revision of prior periods’ depreciation estimates would be disclosed on the
retained earnings statement.
26) Generally accepted accounting principles require the use of accruals and deferrals
in the determination of income. How is income determined under the accrual-basis of
accounting? Include in your answer what constitutes an accrued item and a deferred
(prepaid) item, and give appropriate examples of each.