What is the effect of the error on Berkshire’s 2016 income statement?
Berkshire Inc. uses a periodic inventory system. At the end of 2015, it missed counting
some inventory items, resulting in an inventory understatement by $600,000. Assume
that Berkshire has a 30% income tax rate and that this was the only error it made.
a. Net income is understated by $420,000.
b. Cost of goods sold is understated by $420,000.
c. There are no errors in the 2016 income statement.
d. None of these answer choices is correct.
On June 30, 2016, Hardy Corporation issued $10 million of its 8% bonds for $9.2
million. The bonds were priced to yield 10%. The bonds are dated June 30, 2016, and
mature on June 30, 2026. Interest is payable semiannually on December 31 and July 1.
If the effective interest method is used, by how much should the bond discount be
reduced for the six months ended December 31, 2016?
a. $32,000.
b. $40,000.
c. $46,000.
d. $60,000.
A customer of Razor Sharpeners alleges that Razor’s new razor sharpener had a defect
that resulted in serious injury to the customer. Razor believes the customer has a 51%
chance of winning the case, and that if the customer wins the case, there is a range of
losses of between $1,000,000 and $3,000,000 in which any number is equally likely to
occur. Under IFRS, Razor should accrue a liability in the amount of:
a. $0.
b. $1,000,000.
c. $2,000,000.
d. $3,000,000.
Molly’s Auto Detailers maintains its records on the cash basis. During 2016, Molly’s
collected $72,000 from customers and paid $21,000 in expenses. Depreciation expense
of $5,000 would have been recorded on the accrual basis. Over the course of the year,
accounts receivable increased $4,000, prepaid expenses decreased $2,000, and accrued
liabilities decreased $1,000. Molly’s accrual basis net income was:
a. $38,000.
b. $54,000.
c. $49,000.
d. $42,000.
Plutonic Inc. had $400 million in taxable income for the current year. Plutonic also had
a decrease in deferred tax assets of $50 million and recognized tax expense of $80
million. The company is subject to a tax rate of 40%. The change in deferred tax asset
was a/an:
a. increase of $30 million.
b. increase of $130 million.
c. decrease of $30 million.
d. decrease of $130 million.
What would be the total compensation indicated by these options?
Pastore Inc. granted options for 1 million shares of its $1 par common stock at the
beginning of the current year. The exercise price is $35 per share, which was also the
market value of the stock on the grant date. The fair value of the options was estimated
at $8 per option.
a. $ 3 million.
b. $27 million.
c. $ 8 million.
d. $35 million.
The single accounting number in the annual report that receives the most attention by
investors is:
a. Total revenue.
b. Book value per share.
c. Equity per share.
d. Earnings per share.
An extended warranty typically results in the seller:
a. Accruing an expense for anticipated warranty costs at the time the warranty is sold.
b. Estimating the contingent liability associated with the warranty at the time the
warranty is sold.
c. Recognizing revenue over the life of the extended warranty.
d. Refunding warranty payments upon expiration of the warranty.
On September 1, 2016, Custom Shirts Inc. entered into a lease agreement appropriately
classified as an operating lease. The lease term is three years. The annual payments are
(a) $20,000 for year 1, (b) $24,000 for year 2, and (c) $28,000 for year 3. How much
rent expense will Custom Shirts recognize for 2016?
a. $ 6,667.
b. $24,000.
c. $20,000.
d. $ 8,000.
Enhancing qualitative characteristics of accounting information include:
a. Relevance and comparability.
b. Comparability and timeliness.
c. Understandability and relevance.
d. Neutrality and consistency.
Below is information relative to an exchange of similar assets by Grand Forks Corp.
Assume the exchange has commercial substance.
In Case B, Grand Forks would record a gain/(loss) of:
a. $ 5,000.
b. $ 3,000.
c. $(5,000).
d. $(3,000).
Using the dollar-value LIFO retail method for inventory:
a. Is the same as dollar-value LIFO, except that the inventory is measured at retail,
rather than at cost.
b. Combines retail LIFO accounting with dollar-value LIFO accounting.
c. Allows companies to report inventory on the balance sheet at retail prices.
d. All of these answer choices are correct.
Assume a contract for the sale of goods specifies that payment is to be made four
months after delivery of a product. The seller is likely to do which of the following,
with respect to the time value of money over the life of the contract?
a. Recognize interest expense.
b. Recognize interest revenue.
c. Recognize additional cost of goods sold.
d. Ignore the time value of money.
Bert’s Meat Market sells quarters and sides of beef on the installment basis. Losses on
receivables are very difficult to predict, and meat products cannot be repossessed. The
revenue recognition method used by Bert would be:
a) Point of sale.
b) Installment sales.
c) Cost recovery.
d) Installment sales or cost recovery.
Explodia.com sells fireworks over the Internet. Customers access Explodia’s website
and select particular products, and Explodia refers the customer order to a fireworks
manufacturer who fulfills the order, ships to the customer, and pays Explodia a 20%
commission. Which of the following is true about Explodia?
a. Explodia is an agent in this transaction.
b. Explodia is primarily responsible for providing the product to the customer.
c. Explodia’s income statement would report gross revenue and cost of sales associated
with these transactions.
d. Explodia warehouses inventory.
What will Angel report as diluted earnings per share for 2016, rounded to the nearest
cent?
During 2016, Angel Corporation had 900,000 shares of common stock and 50,000
shares of 6% preferred stock outstanding. The preferred stock does not have cumulative
or convertible features. Angel declared and paid cash dividends of $300,000 and
$150,000 to common and preferred shareholders, respectively, during 2016.
On January 1, 2015, Angel issued $2,000,000 of convertible 5% bonds at face value.
Each $1,000 bond is convertible into five common shares.
Angel’s net income for the year ended December 31, 2016, was $6 million. The income
tax rate is 20%.
a. $6.43.
b. $6.25.
c. $6.22.
d. None of these answer choices is correct.
When calculating diluted earnings per share, stock options:
a. Are included if they are antidilutive.
b. Should be ignored.
c. Are included if they are dilutive.
d. Increase the numerator while not affecting the denominator.
The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown
below.
The acid-test ratio is (rounded):
a. 0.25.
b. 0.88.
c. 1.17.
d. 1.58.
Tiger Inc. adopted dollar-value LIFO on January 1, 2016, when the inventory value was
$360,000 and the cost index was 1.25. On December 31, 2016, the inventory was
valued at year-end cost of $395,000 and the cost index was 1.30. Tiger would report a
LIFO inventory of:
a. $410,800.
b. $374,400.
c. $379,808.
d. $380,600.
Alamos Co. exchanged equipment and $18,000 cash for similar equipment. The book
value and the fair value of the old equipment were $82,000 and $90,000, respectively.
Assuming that the exchange has commercial substance, Alamos would record a gain/
(loss) of:
a. $26,000.
b. $ 8,000.
c. $(8,000).
d. $ 0.
Assume that, on April 1, 2016, a customer visits MicrosoftStore.com and purchases
Microsoft Windows 7 Ultimate for $170. Windows 7 Ultimate comes in a DVD format
which the customer can use permanently, and Microsoft does not expect that its actions
subsequent to April 1, 2016 will affect the value the customer obtains from using the
software.
Required: How much revenue should Microsoft recognize in 2016 with respect to this
particular
transaction?
Using the chart of accounts provided, indicate by account number the account or
accounts that would be debited and credited in the following transactions and indicate
the type of transaction as: (1) an external transaction, (2) an internal transaction
recorded as an adjusting journal entry, or (3) a closing entry. The company uses a
perpetual inventory system. All prepayments are initially recorded in permanent
accounts.
Collected cash on account from customers.
Briefly define discontinued operations and explain how they are reported according to
U.S. GAAP.
On January 1, 2016, Hobart Mfg. Co. purchased a drill press at a cost of $36,000. The
drill press is expected to last 10 years and has a residual value of $6,000. During its
10-year life, the equipment is expected to produce 500,000 units of product. In 2016
and 2017, 25,000 and 84,000 units, respectively, were produced. Required:
Compute depreciation for 2016 and 2017 and the book value of the drill press at
December 31, 2016 and 2017, assuming the double-declining-balance method is used.
Listed below are five terms followed by a list of phrases that describe or characterize
each of the terms. Match each phrase with the number for the correct term.
Missoula Inc. reported the following selected financial statement data:
Required: Compute the asset turnover ratio for 2016.
The Tucson Corporation’s fiscal year ends on December 31. Tucson determines
inventory quantity by a physical count of inventory on hand at the close of business on
December 31. The company’s controller has asked for your help in deciding if the
following items should be included in the year-end inventory count. 1> Goods
purchased from a vendor shipped f.o.b. shipping point on December 24 that arrived on
January 4
2> Goods shipped f.o.b. shipping point on December 27 arrived at the customer’s
location on January 4
3> Goods purchased from a vendor shipped f.o.b. destination on December 27 that
arrived on January 5
4> Freight charges on goods purchased in 1
5> Merchandise held on consignment for Masterwear, Inc.
6> Goods shipped f.o.b. destination on December 29 that arrived at the customer’s
location on January 2 Required: Determine if each of the six items above should be
included or excluded from the company’s year-end inventory.
Lasagna Corporation has a defined benefit pension plan. Lasagna received the
following information for the current calendar year:
The expected long-term return on plan assets is 10%. There were no other relevant data
for the year.
Required:
1) Determine Lasagna Corporation’s pension expense for the year.
2) Prepare the journal entries to record the pension expense and funding for the year.
Tweet Inc. included the following disclosure note in an annual report:
Share-Based Compensation (in part)
‘¦. compensation expense related to these grants is based on the grant date fair value of
the RSUs and is recognized on a straight-line basis over the applicable three-year
vesting period.
The following table summarizes the activities for our unvested RSUs for the year
ended December 31, 2016:
Granted 54,00029.5
Required:
(1) Ignoring taxes, determine compensation expense Tweet reported in the year ended
December 31, 2017, for the restricted stock units granted during the year ended
December 31, 2016.
(2) Based on the information provided in the disclosure note, prepare the journal entry
that summarizes the vesting of RSUs during the year ended December 31, 2016.
(Tweet’s common shares have a par amount per share of $0.01.)
