1) The following information appears in Molsone Company’s records for the year ended
December 31:
On December 31, a physical inventory revealed that the ending inventory was only
$210,000. Molsones gross profit on net sales has remained constant at 30 percent in
recent years. Molsone suspects that some inventory may have been pilfered by one of
the company’s employees. At December 31, what is the estimated cost of missing
inventory?
a. $75,000
b. $82,500
c. $210,000
d. $292,500
2) Which of the following would be a cash outflow from operating activities for Poe
Company?
a. Cash paid for dividends on Poe Co. common stock
b. Cash paid for treasury stock
c. Cash paid for the purchase of an investment in securities of Raven Company
classified as trading securities
d. Cash paid for dividends on Poe Co. preferred stock
3) Which of the following is characteristic of a change in accounting principle?
a. Requires the reporting of pro forma amounts for prior periods
b. Does not affect the financial statements of prior periods
c. Never needs to be disclosed
d. Should be reported by retrospectively adjusting the financial statements for all years
reported, and reporting the cumulative effect of the change in income for all preceding
years as an adjustment to the beginning balance of retained earnings for the earliest year
reported
4) Wrench Repairs acquires equipment under a noncancelable lease at an annual rental
of $45,000, payable in advance for five years. After five years, there is a bargain
purchase option of $75,000. The appropriate interest rate is 12 percent. What is the total
present value of the lease and the first year’s interest expense?
a. $224,234 and $26,908
b. $224,234 and $21,508
c. $204,771 and $21,508
d. $204,771 and $19,173
5) During 2014, Larson Corp. acquired buildings for $325,000, paying $75,000 cash
and signing a 10% mortgage note payable in 10 years for the balance. How should the
transaction be shown in the cash flow statement for Larson in 2014?
a. As a $325,000 reduction in cash flows from investing activities and a $250,000
increase in cash flows from financing activities
b. As a $325,000 reduction in cash flows from investing activities
c. As a $75,000 reduction in cash flows from investing activities
d. As a $250,000 increase in cash flows from financing activities
6) Funnies-R-Us, Inc. committed to sell its comic book division (a component of the
business) on September 1, 2014. The book value of the division’s net assets was
$400,000 and the fair value of the net assets was $350,000. The disposal date is
expected to be June 1, 2015. The division reported a net loss of $15,000 for the year
ended December 31, 2014. Ignoring taxes, choose the correct reporting for discontinued
operations in the income statement of Funnies-R-Us, Inc., for the year ended December
31, 2014.
Income (Loss) From Gain (Loss) From Disposal
Discontinued Operations of Discontinued Operations
a. $(15,000) $ 50,000
b. $(15,000) $(50,000)
c. $-0- $(50,000)
d. $-0- $ 50,000
7) Internal users are provided information by the following branch of accounting:
a. auditing
b. managerial accounting
c. financial accounting
d. income tax accounting
8) Which of the following is not true regarding reserves that appear in the equity section
of the balance sheet of foreign companies?
a. Reserves represent cash set aside to fund capital projects
b. Reserves are different categories found in the equity section of the balance sheet
c. The balances in reserve accounts can affect an entitys legal ability to pay cash
dividends
d. An extensive description of each reserve shown on the balance sheet is provided
9) The completed-contract method (as opposed to the percentage-of-completion
method) of accounting for revenue from long-term construction contracts should be
used in which of the following circumstances?
a. The contractor has been in business for many years and has completed many
contracts in the past
b. Reasonably accurate estimates of the degree of completion cannot be made due to the
lack of experience with similar types of contracts
c. Reasonable accurate estimates of the degree of completion can be made based on past
experience
d. The contracts are of a relatively long duration
10) Net realizable value can be defined as
a. selling price
b. selling price less costs to complete and sell
c. selling price plus costs to complete and sell
d. acquisition cost plus costs to complete and sell
11) How should the balances of Progress Billings and Construction in Progress be
shown at reporting dates prior to the completion of a long-term contract?
a. Progress Billings as income, Construction in Progress as inventory
b. Net, as income from construction if credit balance, and loss from construction if debit
balance
c. Progress Billings as deferred income, Construction in Progress as a current asset
d. Net, as a current asset if debit balance and current liability if credit balance
12) A cash dividend that is declared during an accounting period, to be paid in the next
accounting period, may be presented in the statement of cash flows in which of the
following ways?
a. A use of cash from operating activities
b. A noncash transaction presented in a separate schedule
c. A use of cash from financing activities
d. A use of cash from investing activities
13) Which of the following statements most accurately reflects the approach the FASB
and IASB have identified for reaching convergence of U.S. and international
accounting standards?
a. Convergence will be achieved primarily by modifying FASB standards to conform
with IASB standards
b. Convergence will be achieved primarily by modifying IASB standards to conform
with FASB standards
c. FASB and IASB will create new standards rather than trying to eliminate differences
between standards that are in need of significant improvement
d. FASB and IASB will try to eliminate differences between standards by eliminating
differences between existing standards of the two standard-setting bodies that can be
easily resolved and will then work jointly on more complex issues
14) Antoine Construction Company has consistently used the percentage-of completion
method of recognizing income. During 2014, Antoine entered into a fixed-price contract
to construct an office building for $10,000,000. Information relating to the contract is as
follows:
Contract costs incurred during 2015 were
a. $3,200,000
b. $3,300,000
c. $3,500,000
d. $4,800,000
15) Which of the following is an example of a contingent loss (expense) likely to be
recognized in the accounts on a regular basis each year?
lawsuit loss warranty expense bad debt expense
a. yes no no
b. no yes no
c. no yes yes
d. yes yes yes
16) Albritton Inc. bought a patent for $900,000 on January 2, 2010, at which time the
patent had an estimated useful life of ten years. On February 2, 2014, it was determined
that the patent’s useful life would expire at the end of 2016. How much would Albritton
record as amortization expense for this patent for the year ending December 31, 2014?
a. $200,000
b. $180,000
c. $110,000
d. $90,000
17) The revenue principle states that revenue should be recognized at a point when
a. an exchange transaction involving goods and services has occurred and the earnings
process is essentially complete
b. an order for shipment of a definite amount of merchandise has been received
c. a contract between buyer and seller has been signed by both parties
d. the seller has shipped merchandise to a customer under the terms that the customer
need not pay for the merchandise until it is sold
18) If a company issues both a balance sheet and an income statement with comparative
figures from last year, a statement of cash flows:
a. is no longer necessary; but may be used at the companys option
b. should not be issued
c. should be issued for the current year only
d. should be issued for each period for which an income statement is presented
19) The following information relates to the capital structure of Quantico Corp.:
During 2014 Quantico paid $90,000 in dividends on the preferred stock. Quantico’s net
income for 2014 was $1,960,000 and the income tax rate was 40 percent. For the year
ended December 31, 2014, the diluted earnings per share is
a. $7.29
b. $7.43
c. $8.17
d. $8.29
20) On December 31 of the current year, Holmgren Company’s bookkeeper made an
entry debiting Supplies Expense and crediting Supplies on Hand for $12,600. The
Supplies on Hand account had a $15,300 debit balance on January 1. The December 31
balance sheet showed Supplies on Hand of $11,400. Only one purchase of supplies was
made during the month, on account. The entry for that purchase was
a. debit Supplies on Hand, $8,700 and credit Cash, $8,700
b. debit Supplies Expense, $8,700 and credit Accounts Payable, $8,700
c. debit Supplies on Hand, $8,700 and credit Accounts Payable, $8,700
d. debit Supplies on Hand, $16,500 and credit Accounts Payable, $16,500
21) The net amount required to retire a bond before maturity (assuming no call
premium and constant interest rates) is the
a. face value of the bond plus any unamortized premium or minus any unamortized
discount
b. issuance price of the bond plus any unamortized discount or minus any unamortized
premium
c. face value of the bond plus any unamortized discount or minus any unamortized
premium
d. maturity value of the bond plus any unamortized discount or minus any unamortized
premium
22) On January 1, 2014, Panther Company received a two-year $600,000 loan. The loan
calls for payments to made at the end of each year based on the prevailing market rate
at January 1 of each year. The interest rate at January 1, 2014, was 10 percent. Aegean
company also has a two-year $600,000 loan, but Aegean’s loan carries a fixed interest
rate of 10 percent.
Panther Company does not want to bear the risk that interest rates may increase in year
two of the loan. Aegean Company believes that rates may decrease and they would
prefer to have variable debt. So the two companies enter into an interest rate swap
agreement whereby Aegean agrees to make Panther’s interest payment in 2015 and
Panther likewise agrees to make Aegean’s interest payment in 2015. The two companies
agree to make settlement payments, for the difference only, on December 31, 2015. If
the interest rate on January 1, 2015 is 8 percent, what will be Panther’s settlement
payment to/from Aegean?
a. $6,000 payment
b. $6,000 receipt
c. $12,000 payment
d. $12,000 receipt
23) An enterprise provides for paid vacation periods for many of its employees. It is
probable that these vacations will be taken, and there is a definite amount that accrues
each year for each employee. Vacation benefits accrue in the amount of one paid
vacation day per complete month of service, that is, an employee must work a complete
month before receiving the benefits of another paid vacation day.
Given the above information, which of the following statements is correct?
a. Given only the above information, vacation pay should be accrued monthly, as
employees render service
b. Only if the benefits vest should vacation pay be accrued before payment
c. Only if the benefits accumulate should the vacation pay be accrued before payment
d. If the benefits neither vest nor accumulate, then the vacation pay should be
recognized as expense only when paid
24) See information regarding Ding Boot Company above. The net cash provided by
(used in) investing activities is
a. $220,000
b. $140,000
c. $60,000
d. $(80,000)
25) The Morris Corporation acquired land, buildings, and equipment from a bankrupt
company at a lump-sum price of $180,000. At the time of acquisition, Morris paid
$12,000 to have the assets appraised. The appraisal disclosed the following values:
What cost should be assigned to the land, buildings, and equipment, respectively?
a. $64,000, $64,000, and $64,000
b. $90,000, $60,000, and $30,000
c. $96,000, $64,000, and $32,000
d. $120,000, $80,000, and $40,000
26) The September 30, 2014, physical inventory of Pollack Corporation appropriately
included $6,300 of merchandise purchased on account that was not recorded in
purchases until October 2014. What effect will this error have on September 30, 2014,
assets, liabilities, retained earnings, and earnings for the year then ended, respectively?
a. Understate; no effect; overstate; overstate
b. No effect; overstate; understate; understate
c. No effect; understate; overstate; overstate
d. No effect; understate; understate; overstate
27) Which of the following liabilities is NOT contingent?
a. A liability to replace a specific defective television set already returned to the
manufacturer
b. A liability to pay pension benefits if a specific employee lives to retirement
c. A liability to pay any adverse judgment for a product liability case currently on
appeal
d. A liability to pay for books received by a college bookstore under terms that allow for
the return for full refund of any books not sold
28) The December 31, 2014, balance sheet of Giorgio Inc., reported total assets of
$1,050,000 and total liabilities of $680,000. The following information relates to the
year 2015:
The stockholders’ equity section of the December 31, 2015, balance sheet would report
a balance of
a. $400,000
b. $685,000
c. $525,000
d. $835,000
29) Which of the following utilizes the straight-line depreciation method?
Composite Group
Depreciation Depreciation
a. Yes Yes
b. Yes No
c. No Yes
d. No No
30) Belvenie Company has competed for many years in product lines that have recently
experienced a great increase in global competition. These products have long been
dominated by U.S. firms. The company has no foreign operations and few personnel
with experience in international trade. The company has made a few product changes in
recent years and is not actively engaged in product innovation or research and
development.
The following information is selected from the companys financial statements and notes
for the period 2012 to 2014 ($000):
The company also did the following:
Required:
Provide an interpretation of the companys statement of cash flows in light of its
situation. Consider ethical matters in the context of company strategy and financial
disclosure.
31) Python Mining Company has a copper mine in Nevada operating at a reduced level
of production for the past two years. The market for copper has been adversely affected
by weak prices, low demand, and foreign competition. Management believes that the
market likely will improve next year and does not plan to abandon this facility.
Nevertheless, the controller of the company plans to test the plant and equipment of the
operation for impairment due to the decrease in its use. The plant and equipment used in
this operation were acquired five years ago for $1,600,000 and have been depreciated
using straight-line depreciation over a 20-year life with no residual value. The
controller estimates that the assets have a remaining useful life of 15 years and that the
following two cash flow scenarios are possible, with the indicated probabilities:
The fair value of the plant and equipment is estimated to be $890,000.
Prepare the entry (if any) required to recognize the impairment loss.
32) The unaudited quarterly financial statements issued by many corporations are
prepared on the same basis as annual statements, with some exceptions.
Required:
33) The following is a comparative balance sheet for Cool Covers Clothiers Inc. for the
years 2014 and 2013:
The income statement for the year ended December 31, 2014, follows:
After paying cash dividends, the decrease in retained earnings totaled $95,000.
Management is alarmed by the shrinkage in the company’s cash position during 2014.
Prepare a statement of cash flows for 2014 using the direct method.
34) Listed below are the current liability section and the note 5 for short-term
obligations of the balance sheet of Gaunt Corporation:
5 Short-Term Obligations
Gaunts short-term obligations consist of notes payable and commercial paper. Notes
payable as December 31, 2014, totaled $36 million at an average annual interest rate of
5.7 percent, compared with $7 million at an average annual interest rate of 5.7 percent
at year-end 2013. Commercial paper borrowings at December 31, 2014, were $699
million at an average annual interest rate of 5.7 percent, compared with $217 million at
an average annual interest rate of 5.9 percent as of December 31, 2013.
Bank lines of credit available to support existing commercial paper borrowings of the
corporation amounted to $490 million at both December 31, 2014, and 2013. All of
these were supported by commitment fees.
The corporation also maintains compensating balances with a number of banks for
various purposes. Such arrangements do not legally restrict withdrawal or usage of
available cash funds. In the aggregate, they are not material in relation to total liquid
assets.
Required:
35) The balance sheet for the Big Bunny Corp. showed liabilities and stockholders’
equity balances at the end of each year as given below:
Based on the data provided, compute the following ratios for 2014: