1. An organization that has not published accounting standards is the (Points: 6)
American Institute of Certified Public Accountants.
Securities and Exchange Commission.
Financial Accounting Standards Board.
All of these have published accounting standards.
2. Members of the Financial Accounting Standards Board are (Points: 6)
employed by the American Institute of Certified Public Accountants (AICPA).
required to hold a CPA certificate.
independent of any other organization.
3. The following published documents are part of the “due process” system used by the FASB in the evolution of a typical FASB Statement of Financial Accounting Standards:
1. Exposure Draft
2. Statement of Financial Accounting Standards
3. Discussion Memorandum
The chronological order in which these items are released is as follows: (Points: 6)
1, 2, 3.
1, 3, 2.
2, 3, 1.
3, 1, 2.
4. Which of the following best illustrates the accounting concept of conservatism? (Points: 6)
Use of the allowance method to recognize bad debt losses from credit sales
Use of the lower of cost or market approach in valuing inventories
Use of the same accounting method from one period to the next in computing depreciation expense
Utilization of a policy of deliberate understatement of asset values in order to present a conservative net income figure
5. Allowing firms to estimate rather than physically count inventory at interim (quarterly) periods is an example of a trade-off between (Points: 6)
verifiability and reliability.
reliability and comparability.
timeliness and verifiability.
neutrality and consistency.
6. A prepaid expense can best be described as an amount (Points: 6)
paid and currently matched with revenues.
paid and not currently matched with revenues.
not paid and currently matched with revenues.
not paid and not currently matched with revenues.
7. An unearned revenue can best be described as an amount (Points: 6)
collected and currently matched with expenses.
collected and not currently matched with expenses.
not collected and currently matched with expenses.
not collected and not currently matched with expenses.
8. In November and December 2007, Lane Co., a newly organized magazine publisher, received $90,000 for 1,000 three-year subscriptions at $30 per year, starting with the January 2008 issue. Lane included the entire $90,000 in its 2007 income tax return. What amount should Lane report in its 2007 income statement for subscriptions revenue? (Points: 6)
$90,000 / 3 years x 2/12 = $5,000
9. On June 1, 2007, Nott Corp. loaned Horn $400,000 on a 12% note, payable in five annual installments of $80,000 beginning January 2, 2008. In connection with this loan, Horn was required to deposit $5,000 in a noninterest-bearing escrow account. The amount held in escrow is to be returned to Horn after all principal and interest payments have been made. Interest on the note is payable on the first day of each month beginning July 1, 2007. Horn made timely payments through November 1, 2007. On January 2, 2008, Nott received payment of the first principal installment plus all interest due. At December 31, 2007, Nott’s interest receivable on the loan to Horn should be (Points: 6)
$400,000 x 12% x 2/12 = $8,000
10. Allen Corp.’s liability account balances at June 30, 2007 included a 10% note payable in the amount of $2,400,000. The note is dated October 1, 2005 and is payable in three equal annual payments of $800,000 plus interest. The first interest and principal payment was made on October 1, 2006. In Allen’s June 30, 2007 balance sheet, what amount should be reported as accrued interest payable for this note? (Points: 6)
($2,400,000 – $800,000) x 10% x 9/12 = $120,000
11. Colaw Co. pays all salaried employees on a biweekly basis. Overtime pay, however, is paid in the next biweekly period. Colaw accrues salaries expense only at its December 31 year end. Data relating to salaries earned in December 2007 are as follows:
Last payroll was paid on 12/26/07, for the 2-week period ended 12/26/07.
Overtime pay earned in the 2-week period ended 12/26/07 was $10,000.
Remaining work days in 2007 were December 29, 30, 31, on which days there was no overtime.
The recurring biweekly salaries total $180,000.
Assuming a five-day work week, Colaw should record a liability at December 31, 2007 for accrued salaries of (Points: 6)
$10,000 + ($180,000 / 10 days × 3 days) = $64,000.
12. Which of the following is a change in accounting principle? (Points: 6)
A change in the estimated service life of machinery
A change from FIFO to LIFO
A change from straight-line to double-declining-balance
A change from FIFO to LIFO and a change from straight-line to double-declining- balance
13. Which of the following is never classified as an extraordinary item? (Points: 6)
Losses from a major casualty
Losses from an expropriation of assets
Gain on a sale of the only security investment a company has ever owned
Losses from exchange or translation of foreign currencies
14. Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business? (Points: 6)
The gain or loss on disposal should be reported as an extraordinary item.
Results of operations of a discontinued component should be disclosed immediately below extraordinary items.
Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement.
The gain or loss on disposal should not be segregated, but should be reported together with the results of continuing operations.
15. Income taxes are allocated to (Points: 6)
prior period adjustments.
all of these.
16. Which of the following is true about intraperiod tax allocation? (Points: 6)
It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return.
It is required for extraordinary items and cumulative effect of accounting changes but not for prior period adjustments.
Its purpose is to allocate income tax expense evenly over a number of accounting periods.
Its purpose is to relate the income tax expense to the items which affect the amount of tax.
17. Gross billings for merchandise sold by Otto Company to its customers last year amounted to $15,720,000; sales returns and allowances were $370,000, sales discounts were $175,000, and freight-out was $140,000. Net sales last year for Otto Company were (Points: 6)
$15,720,000 – $370,000 – $175,000 = $15,175,000
18. If plant assets of a manufacturing company are sold at a gain of $820,000 less related taxes of $250,000, and the gain is not considered unusual or infrequent, the income statement for the period would disclose these effects as (Points: 6)
a gain of $820,000 and an increase in income tax expense of $250,000.
operating income net of applicable taxes, $570,000.
a prior period adjustment net of applicable taxes, $570,000.
an extraordinary item net of applicable taxes, $570,000.
19. Sam Hurd Company has the following items: write-down of inventories, $120,000; loss on disposal of Sports Division, $185,000; and loss due to strike, $113,000. Ignoring income taxes, what total amount should Sam Hurd Company report as extraordinary losses? (Points: 6)
20. Fleming Company has the following items: write-down of inventories, $240,000; loss on disposal of Sports Division, $370,000; and loss due to an expropriation, $226,000. Ignoring income taxes, what total amount should Fleming Company report as extraordinary losses? (Points: 6)
21. Cole Company, with an applicable income tax rate of 30%, reported net income of $210,000. Included in income for the period was an extraordinary loss from flood damage of $30,000 before deducting the related tax effect. The company’s income before income taxes and extraordinary items was (Points: 6)
($210,000 / 70%) + $30,000 = $330,000
22. In preparing a statement of cash flows, cash flows from operating activities (Points: 6)
are always equal to accrual accounting income.
are calculated as the difference between revenues and expenses.
can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash.
can be calculated by appropriately adding to or deducting from net income those items in the income statement that do affect cash.
23. In preparing a statement of cash flows, which of the following transactions would be considered an investing activity? (Points: 6)
Sale of equipment at book value
Sale of merchandise on credit
Declaration of a cash dividend
Issuance of bonds payable at a discount
24. The cash debt coverage ratio is computed by dividing net cash provided by operating activities by (Points: 6)
average long-term liabilities.
average total liabilities.
ending long-term liabilities.
ending total liabilities.
25. The current cash debt coverage ratio is often used to assess (Points: 6)
26. A measure of a company’s financial flexibility is the (Points: 6)
cash debt coverage ratio.
current cash debt coverage ratio.
free cash flow.
cash debt coverage ratio and free cash flow.
27. Free cash flow is calculated as net cash provided by operating activities less (Points: 6)
capital expenditures and dividends.
capital expenditures and depreciation.
28. In a statement of cash flows, receipts from sales of property, plant, and equipment and other productive assets should generally be classified as cash inflows from (Points: 6)
29. In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash outflows for (Points: 6)
30. At the beginning of 2006, Finney Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Finney reported this note as a $1,000 trade note receivable on its 2006 year-end statement of financial position and $1,000 as sales revenue for 2006. What effect did this accounting for the note have on Finney’s net earnings for 2006, 2007, 2008, and its retained earnings at the end of 2008, respectively? (Points: 6)
Overstate, overstate, understate, zero
Overstate, understate, understate, understate
Overstate, overstate, overstate, overstate
None of these
31. The accounts receivable turnover ratio measures the (Points: 6)
number of times the average balance of accounts receivable is collected during the period.
percentage of accounts receivable turned over to a collection agency during the period.
percentage of accounts receivable arising during certain seasons.
number of times the average balance of inventory is sold during the period.
32. Which inventory costing method most closely approximates current cost for each of the following:
Ending Inventory Cost of Goods Sold (Points: 6)
33. In situations where there is a rapid turnover, an inventory method which produces a balance sheet valuation similar to the first-in, first-out method is (Points: 6)
34. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is (Points: 6)
35. In a period of rising prices, the inventory method which tends to give the highest reported net income is (Points: 6)
36. In a period of rising prices, the inventory method which tends to give the highest reported inventory is (Points: 6)
37. Which of the following is a capital expenditure? (Points: 6)
Payment of an account payable
Retirement of bonds payable
Payment of Federal income taxes
None of these
38. In accounting for plant assets, which of the following outlays made subsequent to acquisition should be fully expensed in the period the expenditure is made? (Points: 6)
Expenditure made to increase the efficiency or effectiveness of an existing asset
Expenditure made to extend the useful life of an existing asset beyond the time frame originally anticipated
Expenditure made to maintain an existing asset so that it can function in the manner intended
Expenditure made to add new asset services
39. When a plant asset is disposed of, a gain or loss may result. The gain or loss would be classified as an extraordinary item on the income statement if it resulted from (Points: 6)
an involuntary conversion and the conditions of the disposition are unusual and infrequent in nature.
a sale prior to the completion of the estimated useful life of the asset.
the sale of a fully depreciated asset.
an abandonment of the asset.
40. Which of the following statements about involuntary conversions is false? (Points: 6)
An involuntary conversion may result from condemnation or fire.
The gain or loss from an involuntary conversion may be reported as an extraordinary item.
The gain or loss from an involuntary conversion should not be recognized when the enterprise reinvests in replacement assets.
All of these.
41. Pine Company purchased a depreciable asset for $360,000. The estimated salvage value is $24,000, and the estimated useful life is 8 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset? (Points: 6)
Double Declining Rate = 1 / 8 x 2 = 25%
$360,000 x 25% = $90,000 First Year
($360,000 – $90,000) x 25% = $67,500 Second Year
42. On July 1, 2006, Rodriguez Corporation purchased factory equipment for $150,000. Salvage value was estimated to be $4,000. The equipment will be depreciated over ten years using the double-declining balance method. Counting the year of acquisition as one-half year, Gonzalez should record depreciation expense for 2007 on this equipment of (Points: 6)
Double Declining Rate = 1 / 10 x 2 = 20%
$150,000 x 20% x 6/12 = $15,000 First Year
($150,000 – $15,000) x 20% = $27,000
43. On April 13, 2006, Foley Co. purchased machinery for $120,000. Salvage value was estimated to be $5,000. The machinery will be depreciated over ten years using the double-declining balance method. If depreciation is computed on the basis of the nearest full month, Foley should record depreciation expense for 2007 on this machinery of (Points: 6)
Double Declining Rate = 1 / 10 x 2 = 20%
Depreciation (2006) = $120,000 x 20% x 9 / 12 = $18,000
Depreciation (2007) = ($120,000 – $18,000) x 20% = $20,400
44. Vinson Co. purchased machinery that was installed and ready for use on January 3, 2006, at a total cost of $69,000. Salvage value was estimated at $9,000. The machinery will be depreciated over five years using the double-declining balance method. For the year 2007, Vinson should record depreciation expense on this machinery of (Points: 6)
Double Declining Rate = 1 / 5 years x 2 = 40%
Depreciation (2006) = $69,000 x 40% = $27,600
Depreciation (2007) = ($69,000 – $27,600) x 40% = $16,560
45. A plant asset has a cost of $24,000 and a salvage value of $6,000. The asset has a three-year life. If depreciation in the third year amounted to $3,000, which depreciation method was used? (Points: 6)
Cannot tell from information given
46. On January 1, 2006, Carson Company purchased a new machine for $2,100,000. The new machine has an estimated useful life of nine years and the salvage value was estimated to be $75,000. Depreciation was computed on the sum-of-the-years’-digits method. What amount should be shown in Carson’s balance sheet at December 31, 2007, net of accumulated depreciation, for this machine? (Points: 6)
Sum of the Years = 9 x (9+1) / 2 = 45
Depreciation Rate (2006) = 9 / 45 = 20%
Depreciation Rate (2007) = 8 / 45 = 17.78%
Accumulated Deprecation (as of 2007) = (20% + 17.78%) x ($2,100,000 – 75,000) = $765,000
Machine, Net of Accum. Depr’n = $2,100,000 – $765,000 = $1,335,000
47. On January 1, 2000, Barnes Company purchased equipment at a cost of $50,000. The equipment was estimated to have a salvage value of $5,000 and it is being depreciated over eight years under the sum-of-the-years’-digits method. What should be the charge for depreciation of this equipment for the year ended December 31, 2007? (Points: 6)
Sum of the Years = 8 x (8+1) / 2 = 36
Depreciation Rate (2007) = 1 / 36 = 2.78%
Depreciation Expense (2007) = ($50,000 – 5,000) x 2.78% = $1,250
48. Malrom Manufacturing Company acquired a patent on a manufacturing process on January 1, 2006 for $10,000,000. It was expected to have a 10 year life and no residual value. Malrom uses straight-line amortization for patents. On December 31, 2007, the expected future cash flows expected from the patent were expected to be $800,000 per year for the next eight years. The present value of these cash flows, discounted at Malrom’s market interest rate, is $4,800,000. At what amount should the patent be carried on the December 31, 2007 balance sheet? (Points: 6)
49. Twilight Corporation acquired End-of-the-World Products on January 1, 2008 for $2,000,000, and recorded goodwill of $375,000 as a result of that purchase. At December 31, 2008, the End-of-the-World Products Division had a fair value of $1,700,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $1,450,000 at that time. What amount of loss on impairment of goodwill should Twilight record in 2008? (Points: 6)
$375,000 – ($1,700,000 – $1,450,000) = $125,000
50. Fleming Corporation acquired Out-of-Sight Products on January 1, 2008 for $4,000,000, and recorded goodwill of $750,000 as a result of that purchase. At December 31, 2008, the Out-of-Sight Products Division had a fair value of $3,400,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $2,900,000 at that time. What amount of loss on impairment of goodwill should Fleming record in 2008? (Points: 6)
$750,000 – ($3,400,000 – $2,900,000) = $250,000