1) The effective interest rate on bonds is lower than the stated rate when bonds sell
a. above face value
b. at maturity value
c. below face value
d. at face value
2) Sailor Construction Company has consistently used the percentage-of- completion
method. On January 10, 2014, Sailor began work on a $3,000,000 construction contract.
At the inception date, the estimated cost of construction was $2,250,000. The following
data relate to the progress of the contract:
How much gross profit should Sailor recognize for the year ended December 31, 2015?
a. $150,000
b. $262,500
c. $300,000
d. $450,000
3) When an entity reduces its interest in an investment in equity securities accounted for
by the equity method, and changes to the fair value method, what is the initial cost
value for purposes of subsequent changes in market value?
a. Original cost
b. Book value at the date of change
c. Market value at the date of the change
d. Market value at the date of acquisition
4) When comparing the allowance method of accounting for bad debts with the direct
write-off method, which of the following is true?
a. The direct write-off method is exact and also better illustrates the matching principle
b. The allowance method is less exact but it better illustrates the matching principle
c. The direct write-off method is theoretically superior
d. The direct write-off method requires two separate entries to write off an uncollectible
account
5) An example of an inventory accounting policy that should be disclosed is the
a. effect of inventory profits caused by inflation
b. classification of inventory into raw materials, work in process, and finished goods
c. identification of major suppliers
d. method used for inventory costing
6) Eastern Company sells products covered by a 3-year warranty. Based on past
experience of other entities in the industry, Eastern expects to incur warranty costs
equal to 1% of sales. Easterns sales were $45,000 in 2013 and $50,000 in 2014. In
2014, the company spent $200 to repair goods sold in 2013 and $300 to repair goods
sold in 2014. Eastern received no warranty servicing demands from its customers in
2013, the companys first year of operations.
What is the balance in the warranty liability account on January 1, 2015?
a. $450
b. $500
c. $300
d. $0
7) Which of the following would NOT be reflected in the income statement?
a. An extraordinary item
b. Cumulative effect of a change in depreciation methods
c. Loss on disposal of a segment of a business
d. Correction of an error in previously issued financial statements
8) Which of the following statements best describes a subsequent event?
a. A subsequent event affects only subsequent reporting periods
b. A subsequent event is, in some cases, reflected in the statements of the preceding
period
c. A subsequent event may occur any time after financial statements are issued
d. A subsequent event is not covered by the independent auditor’s report
9) A company enters into a futures contract with the intent of hedging an account
payable of DM350,000 due on December 31. The contract requires that if the U.S.
dollar value of DM350,000 is greater than $175,000 on December 31, the company will
be required to pay the difference. Alternatively, if the U.S. dollar value is less than
$175,000, the company will receive the difference. Which of the following statements is
correct regarding this contract?
a. The Deutsche mark futures contract effectively hedges against the effect of exchange
rate changes on the U.S. dollar value of the Deutsche mark payable
b. The futures contract is a contract to buy Deutsche marks at a fixed price
c. The futures contract is a contract to sell Deutsche marks at a fixed price
d. The contract obligates the company to pay if the value of the U.S. dollar increases
10) For a liability to exist,
a. the identity of the party owed must be known
b. the exact amount must be known
c. a past transaction or event must have occurred
d. an obligation to pay cash in the future must exist
11) Which of the following is not a required note disclosure related to pension plans
under FASB ASC Topic 715?
a. Fair value of plan assets
b. Actuarial discount rate
c. Projected benefit obligation
d. Number of employees covered by the plan
12) Which of the following is not a component of net periodic pension cost?
a. Interest cost
b. Actual return on plan assets
c. Benefits paid to retirees
d. Amortization of prior service cost
13) On December 31, 2013 and 2014, Tomlin Corporation had 100,000 shares of
common stock and 50,000 shares of noncumulative and nonconvertible preferred stock
issued and outstanding. Additional information:
The price-earnings ratio on common stock at December 31, 2014, was
a. 10 to 1
b. 12 to 1
c. 14 to 1
d. 16 to 1
14) In a period of rising prices, the inventory cost allocation method that tends to result
in the lowest reported net income is
a. LIFO
b. FIFO
c. moving average
d. weighted average
15) On March 1, 2014, Wunder Furniture Co. issued $950,000 of 10 percent bonds to
yield 8 percent. Interest is payable semiannually on March 31 and September 30. The
bonds mature in ten years. Wunder Furniture Co. is a calendar-year corporation.
(1) Determine the issue price of the bonds. Show your computations.
(2) Prepare an amortization table through the first two interest periods using the
effective-interest method.
(3) Prepare the journal entries to record bond-related transactions as of the following
dates:
(a) April 1, 2014
(b) September 30, 2014
(c) January 31, 2015
(d) March 31, 2015
16) Which of the following accounts most likely would not appear in a post-closing trial
balance?
a. Retained Earnings
b. Inventory
c. Sales Revenue
d. Common Stock
17) The use of computers in processing accounting data
a. eliminates the need for accountants
b. eliminates the double entry system as a basis for analyzing transactions
c. eliminates the need for financial reporting standards such as those promulgated by
the FASB
d. may result in the elimination of document trails used to verify accounting records
18) A contract giving the owner the right, but not the obligation, to buy or sell an asset
at a specified price any time during a specified period in the future is referred to as a(n)
a. interest rate swap
b. option
c. futures contract
d. forward contract
19) A loss on the sale of machinery in the ordinary course of business should be
presented in a statement of cash flows as a(n):
a. adjustment to reconcile net income to cash from operating activities
b. operating activity
c. investing activity
d. noncash exchange
20) A company purchased land to be used as the site for the construction of a plant.
Timber was cut from the building site so that construction of the plant could begin. The
proceeds from the sale of the timber should be
a. classified as other income
b. deducted from the cost of the land
c. deducted from the cost of the plant
d. netted against the costs to clear the land and expensed as incurred
21) Under the cash basis of accounting,
a. revenues are recorded when they are earned
b. accounts receivable would appear on the balance sheet
c. depreciation of assets having an economic life of more than one year is recognized
d. the matching principle is ignored
22) A change in the unit depletion rate would be accounted for as a
a. correction of an accounting error
b. change in accounting principle
c. change in accounting estimate
d. change in accounting estimate effected through a change in accounting principle
23) Which of the following statements regarding cash equivalents is correct?
a. A one-year Treasury note could not qualify as a cash equivalent
b. All investments meeting the FASB’s criteria for cash equivalents must be reported as
such
c. The date a security is purchased determines its “original maturity” for cash equivalent
classification purposes
d. Once established, management’s policy for classifying items as cash equivalents
cannot be changed
24) The operating cycle
a. measures the time elapsed between cash disbursement for inventory and cash
collection of the sales price
b. refers to the seasonal variations experienced by business enterprises
c. should be used to classify assets and liabilities as current if it is less than one year
d. cannot exceed one year
25) The specific identification method of inventory costing
a. eliminates all opportunity for profit manipulation
b. matches the flow of recorded costs with the physical flow of goods
c. can be used only with a perpetual inventory system
d. is a violation of generally accepted accounting principles
26) Under international accounting standards, the standard for accounting for
construction contracts
a. allows only the completed-contract method
b. expresses a preference for the completed-contract method only in some
circumstances
c. does not allow the completed-contract method
d. does not allow the percentage-of-completion method
27) Which of the following contingencies should be accrued in the accounts and
reported in the financial statements?
a. The company is forcefully contesting a personal injury lawsuit and a loss is possible
and reasonable estimable
b. An accommodation endorsement involving a remote loss
c. It is probable that a company will receive $50,000 in settlement of a lawsuit
d. The estimated expenses of a one-year product warranty
28) Assume that you have just been hired as the controller of the Tonnage
Manufacturing Company. In order to be fully apprised of the financial and operating
condition of the company, you have decided to analyze several of the key accounts
appearing on the company’s financial statements. An account of obvious interest to you
is the company’s trade accounts receivable.
Identify specific attributes of the accounts receivable that you would examine as well as
any ratios that might be useful to you in your analysis.
29) On January 1, 2014, Tillit Corporation changed its method of accounting for bad
debts from the direct write-off method to the allowance method. Tillit’s controller
determined that an allowance of $33,000 should be established on that date.
30) Current generally accepted accounting principles do not require operating leases to
be shown on the balance sheet. Consider the case of Barren Company. If the operating
leases of Barren Company were added to the companys liabilities at December 31,
2014, the companys current ratio would decline from 0.69 to 0.57 and total debt would
increase from $239 million to $1,105 million. Significant changes would also occur in
the return on assets since assets would be increased and the related increase in
depreciation and interest expense would exceed the rent expense currently included in
the companys income statement.
Required:
31) Narcissus Corporation has entered into a debt agreement that restricts its
debt-to-equity ratio to less than two-to-one. The corporation is planning to expand its
facilities, creating a need for additional financing. The board of directors is considering
leasing the additional facilities but is concerned that leasing may violate its existing
debt agreement. A violation of the debt agreement would place the corporation in
default. The potential lessor insists that the lease be structured in such a way that it can
be accounted for as a capital lease by the lessor (the lessor is a dealer and wants to
recognized the dealers gross profit on the transaction immediately). In addition, the
lessor requires that the residual value of the leased asset be guaranteed when it reverts
to the lessor at the end of the lease term. Narcissuss board has asked you to analyze the
following alternative:
Alternative 1–Narcissus would enter into a lease that qualifies as a capital lease (to
Narcissus). If this alternative is selected, Narcissuss reported debt-to-owners-equity
ratio would be 1.9, and its ability to issue debt in the future would be seriously
constrained.
Alternative 2–Narcissus would enter into a lease and pay a third party to guarantee the
residual value of the leased property. The lease would be structured in such a way as to
qualify as an operating lease to Narcissus and as a capital lease to the lessor. In this
case, Narcissuss reported debt-to-equity ratio would be unaffected by the lease contract.
Required:
Explain the consequences of each of these alternatives, including any ethical
considerations that might exist.
32) The harmonization of world accounting standards is viewed by many accountants,
analysts, standard setters, and others as being among the most important issues facing
business throughout the world. Advocates of harmonization seek to establish a common
set of international accounting and reporting standards. Such a task has proven
formidable, however.
Identify factors that would hinder the process of harmonization of accounting standards.
33) Whereis Company is expected to pay a $0.50 per share dividend at the end of the
year. The required rate of return on the stock is 15 percent.
Required:
What is the value per share of the companys stock?
34) The following summarized information is available for Saunders Company at
December 31 of the current year:
The debt of Saunders has a before-tax cost rate of 12%, preferred stock has a cost of
12.3%, and common equity has a cost of 14.6%. The tax rate for Saunders is 34%.
Calculate the weighted average cost of capital for Saunders at December 31 of the
current year.
35) During all of 2014 Rambler Manufacturing Company had 950,000 shares of
common stock outstanding. On June 30, 2014, the company issued 10,000 7 percent
convertible bonds at par. The maturity value of each bond is $1,000. Each bond is
convertible into 20 shares of common stock. None were converted during 2014.
Rambler also had 60,000 stock warrants outstanding for all of 2014. The option price is
$10 per share. The market price of the common stock was $40 on December 31, 2014,
and the average market price for 2014 was $30.
Rambler reported a net income of $3,650,000 for 2014. Assume the company had a 40
percent income tax rate.
36) During a recent two-week period, the employees of Super Choppers, Inc. earned
gross wages of $90,000. The following are the employee withholdings and payroll taxes
pertinent to the period:
Only $68,000 of wages are subject to FICA, and $31,000 are subject to unemployment
taxes.