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Chapter
8
Multiple
Choice
1.
Of
the following items, the one that should be classified as a current asset is
a.
Trade
installment receivables normally collectible in 18 months
b.
Cash
designated for the redemption of callable preferred stock
c.
Cash
surrender value of a life insurance policy of which the company is beneficiary
d.
A
deposit on machinery ordered, delivery of which will be made within six months
Answer
2.
The
advantage of relating a company’s bad debt experience to its accounts
receivable is that this approach
a.
Gives a reasonable correct statement of
receivables in the balance sheet
b.
Relates
bad debts expense to the period of sale
c.
Is
the only generally accepted method for valuing accounts receivable
d.
Makes
estimates of uncollectible accounts unnecessary
Answer
3.
Assuming
that the ideal measure of short-term receivables in the balance sheet is the
discounted value of the cash to be received in the future, failure to follow
this practice usually does not make the balance sheet misleading because
a.
Most
short-term receivables are not interest bearing
b.
The
allowance for uncollectible accounts includes a discount element
c.
The
amount of the discount is not material
d.
Most
receivables can be sold to a bank or factor
Answer
4.
An
account that would be classified as a current liability is
a.
Dividends
payable in stock
b.
Accounts
payable - debit balance
c.
Reserve
for possible losses on purchase commitments
d.
Excess
of replacement cost over LIFO cost of basic inventory temporarily liquidated
Answer
5.
Which
of the following statements is not valid as it applies to inventory costing
methods?
a.
If
inventory quantities are to be maintained, part of the earnings must be
invested (plowed back) in inventories when FIFO is used during a period of
rising prices.
b.
LIFO
tends to smooth out the net income pattern, since it matches current cost of
goods sold with current revenue, when inventories remain at constant
quantities.
c.
When
a firm using the LIFO method fails to maintain its usual inventory position
(reduces stock on hand below customary levels), there may be a matching of old
costs with current revenue.
d.
The
use of FIFO permits some control by management over the amount of net income
for a period through controlled purchases, which is not true with LIFO.
Answer
6.
Jamison
Corporation’s inventory cost on its statement of financial position was lower
using first-in, first-out than last-in, first-out. Assuming no beginning
inventory, what direction did the cost of purchases move during the period?
a.
Up
b.
Down
c.
Steady
d.
Cannot
be determined
Answer
7.
If
inventory levels are stable or increasing
an argument that favors the FIFO method as compared to LIFO is
a.
Income
taxes tend to be reduced in periods of rising prices
b.
Cost
of goods sold tends to be stated at approximately current cost in the income
statement
c.
Cost
assignments typically parallel the physical flow of the goods
d.
Income tends to be smoothed as prices change
over time
Answer
8.
An
inventory pricing procedure in which the oldest costs incurred rarely have an
effect on the ending inventory valuation is
a.
FIFO
b.
LIFO
c.
Conventional
retail
d.
Weighted
average
Answer
9.
When
inventory declines in value below original (historical) cost, and this decline
is considered other than temporary, what is the maximum amount that the
inventory can be valued at?
a.
Sales
price net of conversion costs
b.
Net
realizable value
c.
Historical
cost
d.
Net
realizable value reduced by a normal profit margin
Answer
10. Which of the following inventory
cost flow methods involves computations based on broad inventory pools of
similar items?
a.
Regular
quantity of goods LIFO
b.
Dollar-value
LIFO
c.
Weighted
average
d.
Moving
average
Answer
11. When the allowance method of
recognizing bad debt expense is used, the entries at the time of collection of
an account previously written off would
a.
Increase
net income
b.
Have
no effect on total current assets
c.
Increase
working capital
d.
Decrease
total current liabilities
Answer
12. The original cost of an inventory
item is above the replacement cost. The replacement cost is below the net
realizable value less the normal profit margin. Under the lower of cost or
market method the inventory item should be priced at its
a.
Original
cost
b.
Replacement
cost
c.
Net
realizable value
d.
Net
realizable value less the normal profit margin
Answer
13. Liquidity is the ability
a. To increase net assets through regular operations
b. To generate cash from sources other than
regular operations
c. To convert existing assets into cash
d. Of financial statement users to predict a
company’s cash flows
Answer
14. Liquidity ratios measures the
a. Operating
success of a company over a period of time
b. The
ability of a company to survive over a long period of time
c. The
short-term ability of a company to pay its maturing obligations and to meet
unexpected needs for cash
d. The number
of times interest is earned
Answer
15. Working capital is a measure
of
a. Financial flexibility
b. Liquidity.
c. Profitability.
d. Solvency.
Answer
16. A common measure of
liquidity is
a. Return on assets.
b. Accounts receivable turnover.
c. Profit margin.
d. Debt to equity.
Answer
1. The net realizable value of receivables is calculated
as the face value of the receivables less adjustments for
a. Credit sales
b. Actual uncollected amounts adjusted for purchase
discounts.
c. Bad debts already written off.
d. Estimated uncollectible accounts
18. A
successful discount retail store such as Wal-Mart would probably have
a. A low inventory turnover
b. A high inventory turnover
c. Zero profit margin
d. Low volume
Answer
Use the following information to answer questions
Acme Auto Supplies
Balance Sheet
December 31, 2007
Cash $
60,000 Accounts Payable $ 65,000
Prepaid Insurance 40,000 Salaries
Payable 10,000
Accounts Receivable 50,000 Mortgage Payable 90,000
Inventory 70,000 Total Liabilities $165,000
Land held for investment 80,000
Land 95,000
Building $100,000
Common Stock $120,000
Less Accumulated Retained Earnings 250,000
Depreciation (30,000) 70,000 Total
stockholders’ equity $370,000
Trademark 70,000 Total Liabilities and
Total Assets $535,000 Stockholders’ Equity $535,000
19. The total amount of working capital is
a. $155,000.
b. $145,000.
c. $60,000.
d. $150,000.
Answer
20. The current ratio is
a. 1.86 : 1.
b. 2.00 : 1.
c. 3.38 : 1.
d. 2.93 : 1.
Answer
Essay
1.
Define
working capital.
2.
Define
the following terms:
a.
Cash
equivalents
b.
Temporary
investments
c.
Receivables
d.
Inventories
e.
Payables
f.
Deferrals
g.
Current
maturities
3.
Define
the following terms:
a.
LIFO
liquidation
b.
LIFO
conformity
c.
Lower
of cost or market inventory valuation
.
4.
List
and briefly define the methods of accounting for investments under SFAS No. 115“Accounting
for Certain Investments in Debt and Equity Securities” (FASB ASC 320).
5.
Define
and discuss the two methods of estimating bad debts on receivables.
6.
Why
are cost flow assumptions used to determine inventory valuations? Define and
explain the rationale for using each of the cost flow assumptions.
.
7.
Obtain
a company’s financial statements and ask
the students to compute the following:
a.
Working
capital
b.
Current
ratio
c.
Acid
test ratio
d.
Cash
flow from operations to current liabilities ratio
e.
Accounts
receivable turnover
f.
Inventory
turnover
Chapter
9
Multiple
Choice
1.
When
a closely held corporation issues preferred stock for land, the land should be
recorded at the
a.
Total par value of the stock issued
b.
Total book value of the stock issued
c.
Appraised
value of the land
d.
Total
liquidating value of the stock issued
Answer
2. A principal objection to the
straight-line method of depreciation is that it
a.
Provides
for the declining productivity of an aging asset
b.
Ignores
variations in the rate of asset use
c.
Tends
to result in a constant rate of return on a diminishing investment base
d.
Gives
smaller periodic write-offs than decreasing charge methods
Answer
3. Property, plant, and equipment
are conventionally presented n the balance sheet at
a.
Replacement
cost less accumulated depreciation
b.
Historical
cost less salvage value
c.
Original
cost adjusted for general price level changes
d.
Acquisition
cost less depreciated portion thereof
Answer
4. As generally used in accounting,
depreciation
a.
Is
a process of asset valuation for balance sheet purposes
b.
Applies
only to long-lived intangible assets
c.
Is
used to indicate a decline in market value of a long-lived asset
d.
Is
an accounting process that allocates long-lived asset cost to accounting
periods
Answer
5. Lyle, Inc., purchased certain
plant assets under a deferred payment contract on December 31, 2011. The
agreement was to pay $20,000 at the time of purchase and $20,000 at the end of
each of the next five years. The plant assets should be valued at
a.
The
present value of a $20,000 ordinary annuity for five years
b.
$120,000
c.
$120,000
less imputed interest
d.
$120,000
plus imputed interest
Answer
6. For income statement purposes,
depreciation is a variable expense if the depreciation method used for book
purposes is
a.
Units
of production
b.
Straight
line
c.
Sum-of-the-year’s-digits
d.
Declining
balance
Answer
7. A method that excludes salvage
value from the base for the depreciation calculation is
a.
Straight
line
b.
Sum-of-the-year’s
digits
c.
Double-declining
balance
d.
Productive
output
Answer
8. When a company purchases land
with a building on it and immediately tears down the building so that the land
can be used for the construction of a plant, the cost incurred to tear down the
building should be
a.
Expensed
as incurred
b.
Added
to the cost of the plant
c.
Added
to the cost of the land
d.
Amortized
over the estimated time period between the tearing down of the building and the completion of the plant
Answer
9. A machine with a four-year
estimated useful life and an estimated 15 percent salvage value was acquired on
January 1, 2010. On December 31, 2012, the accumulated depreciation using the
sum-of-year’s digits method would be
a.
(Original
cost less salvage value) multiplied by 9/10
b.
Original
cost multiplied by 9/10
c.
Original
cost multiplied by 9/10 less total salvage value
d.
(Original
cost less salvage value) multiplied by 1/10
Answer
10. The theoretical justification for
reporting depreciation expense is
a.
Depreciation
expense represents a decrease in the value of the asset that has occurred
during the accounting period.
b.
Depreciation
expense represents the impairment of the asset that has occurred during the
accounting period.
c.
Depreciation
expense represents the unrealized loss that has been incurred by using the
asset during the accounting period.
d.
Depreciation
expense represents the allocation of the historical cost of the asset that has
been applied to the accounting period.
Answer
11. A company using the group
depreciation method for its delivery trucks retired one of its delivery trucks
due to damage before the average service life of the group was reached. An insurance
recovery was received. The net book value of these group asset accounts would be decreased by
the
a.
Original
cost of the truck
b.
Original
cost of the truck less the insurance recovery received
c.
Original
cost of the truck less depreciation on the truck to the date of retirement
d.
Insurance
recovery received
Answer
12. When equipment is retired,
accumulated depreciation is debited for the original cost less any residual
recovery under which of the following depreciation methods?
Composite Group
Depreciation Depreciation
a.
No
No
b.
No
Yes
c.
Yes
No
d.
Yes
Yes
Answer
13. Recognizing depletion expense is
an example of the accounting process of
AllocationAmortization
a.
No No
b.
No Yes
c.
Yes Yes
d.
Yes
No
Answer
14. A donated plant asset for which the fair value
has been determined, and for which incidental costs were incurred in acceptance
of the asset, should be recorded at an amount equal to its
a.
Incidental
costs incurred
b.
Fair
value and incidental costs incurred
c.
Book
value on books of donor and incidental costs incurred
d.
Book
value on books of donor
Answer
Essay
1. List the objectives of accounting
for property, plant and equipment.
2. Describe how cost is assigned to
individual assets when they are acquired in a lump-sum group purchase.
3. Discuss the three approaches to
allocating fixed overhead to a self-construction project.
4. Discuss the issue of allocating
interest to self construction projects. That is, when should interest be
allocated and how much interest should be allocated?
5. Explain the concept of commercial
substance originally outlined in SFAS No. 158.
6. How did SFAS No. 116, now FASB ASC 605-10-15-3, change the accounting for
donated assets?
7. Discuss the factors comprising
the depreciation process.
8. Discuss the distinction between
capital and revenue expenditures for long-term assets.
9. Define and discuss accounting for
asset retirement obligations under SFAS No. 14FASB ASC 410-20.
10. Discuss the guidelines for
accounting for property, plant and equipment outlined in IAS No. 16.
11. How does IAS no. 23 define
borrowing costs?
12. Discuss accounting for the
impairment of assets as outlined in IAS No. 36.
Chapter
10
Multiple Choice
1.
Under
the equity method of accounting for investments, an investor recognizes its
share of the earnings in the period in which the
a.
Investor
sells the investment
b.
Investee
declares a dividend
c.
Investee
pays a dividend
d.
Earnings
are reported by the investee in its financial statements
Answer
2.
Pence
Corporation, which accounts for its investments in the common stock of Walsh
Company by the equity method, should ordinarily record a dividend received from
Walsh as
a.
An
addition to the carrying value of the investment
b.
Dividend
revenue
c.
A
reduction of the carrying value of the investment
d.
Revenue
from affiliate
Answer
3.
On
January 15, 2002, a corporation was granted a patent on a product. On January
2, 2010, to protect its patent, the corporation purchased a patent on a
competing product the originally was issued on January 10, 2008. Because of its
unique plant, the corporation does not feel the competing patent can be used in
producing a product. The cost of the competing patent should be
a.
Amortized
over a maximum period of 17 years
b.
Amortized
over a maximum period of 13 years
c.
Amortized
over a maximum period of 9 years
d.
Expensed
in 2010
Answer
4.
Pacer
Company purchased 300 of the 1, 000 outstanding shares of Queen Company’s
common stock for $80,000 on January 2, 2008. During 2009, Queen Company
declared dividends of $8,000 and reported earnings for the year of $20,000.
If Pacer Company uses
the equity method of accounting for its investment in Queen Company, its Investment
in Queen Company account at December 31, 2009 should be
a.
$100, 000
b.
$88,000
c.
$83,600
d.
$80,000
Answer
5.
Refer
to the facts in problem (4). If Pacer Company uses the lower of cost or market
method of accounting for its investment in Queen Company, and the value of its
investment hasn’t changed, its Investment in Queen Company account on December
31, 2009, should be
a.
$100,
000
b.
$88,000
c.
$80,000
d.
$73,600
Answer
6.
A
large, publicly held company developed and registered a trademark during 2010.
The cost of developing and registering the trademark should be accounted for by
a.
Charging it to an asset account that should
not be amortized
b.
Expensing it as incurred
c.
Amortizing it over 25 years if in accordance
with management’s evaluation
d.
Amortizing it over its useful life or 17
years, whichever is shorter
Answer
7.
Goodwill
should be written off
a.
As soon as possible against retrained earnings
b.
When
there is evidence that its carrying value has been impaired
c.
By
systematic charges against retained earnings over the period benefited, but
not more than 40 years
d.
By
systematic charges to expense over the period benefited, but not more than
40 years
Answer
8.
A
net unrealized loss on a company’s long-term portfolio of available for sale securities should be reflected in the current
financial statements as
a.
An
extraordinary item shown as a direct reduction from retained earnings
b.
A
current loss resulting from holding marketable equity securities
c.
A
footnote or parenthetical disclosure only
d.
A component of other comprehensive income
Answer
9. Changes in the fair value of a
long-term available for sale equity securities portfolio should be reported as a
component of
a.
Other
comprehensive income
b.
Noncurrent
assets
c.
Noncurrent
liabilities
d.
Net
income
Answer
10. Cash dividends declared out of
current earnings are distributed to an investor. How will the investor’s
investment account be affected by those dividends under each of the following
accounting methods?
Fair
ValueMethod Equity Method
a.
Decrease No effect
b.
Decrease Decrease
c.
No
effect Decrease
d.
No effect No effect
Answer
11. An activity that would be expensed
currently as research and development costs is the
a.
Testing
in search for or evaluation of product or process alternatives
b.
Adaptation
of an existing capability to a particular requirement or customer’s need as a
part of continuing commercial activity
c.
Legal
work in connection with patent applications or litigation, and the sale or
licensing of patents
d.
Engineering
follow-through in an early phase of commercial production
Answer
12. Should the following fees
associated with the registration of an internally developed patent be
capitalized?
Registration
Legal fees fees
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
Answer
13. Which of the following assets
acquired in 2010 are amortizable?
GoodwillTrademarks
a.
No
No
b.
No
Yes
c.
Yes
No
d.
Yes
No
Answer
14. A purchased patent has a
remaining life of 15 years. It should be
a.
Expensed
in the year of acquisition
b.
Amortized
over 15 years regardless of its useful life
c.
Amortized
over its useful life if less than 15 years
d.
Amortized
over 40 years
Answer
15. Which of the following amounts
incurred in connection with a trademark should be capitalized?
Cost
of a
Registration
Successful
defensefees
a.
Yes
No
b.
Yes
Yes
c.
No
Yes
d.
No
No
Answer
16. Zink Company owns 32% of Ace Company's outstanding
voting stock. Zink Company normally should account for its investment in Ace
Company using the
a.
Fair value method.
b.
Cost method.
c.
Consolidation procedure.
d.
Equity method.
Answer
2.
An
investor purchased a bond as a long-term investment on January 1. Annual
interest was received on December 31. The investor’s interest income for the
year would be lowest if the bond was purchased at
a.
A discount
b.
A premium
c.
Par
d.
Face value
Answer
19. The theoretical justification for
expensing research and development (R&D) cost as it is incurred is based on
which of the following arguments?
a.
R&D
costs provide no future benefits, thus it does not meet the definition of an
asset
b.
R&D
costs are incurred to generate current period revenue, thus the matching
concept requires that it be expensed as incurred.
c.
Whether
R&D costs that have been incurred will provide future benefit is uncertain,
thus it does not meet the definition of an asset.
d.
Since
R&D costs have been incurred during the current period, they meet the
definition of an expense.
Answer
20. When a patent is successfully
defended in court, the cost of the lawsuit
a.
Should
be expensed as incurred because it is a period cost.
b.
Should
be added to the cost of the patent and depreciated over the remaining useful
life of the patent.
c.
Should
be added to the cost of the patent which is then expensed as a period cost.
d.
Has
already been expensed so there is no further action to take.
Answer
21. Goodwill is an intangible asset
a.
That
has a definite life and its cost should be amortized over its useful life.
b.
That
is recorded when the company has projected earnings in excess of earnings
expected for an investment in a similar company in the same industry.
c.
That
is reviewed for impairment when circumstances indicate that impairment may have
occurred.
d.
That
is reviewed annually to determine whether impairment has occurred.
Answer
22. A trading security is measured at
fair value on the balance sheet date and reported as
a.
A
current asset, and changes in fair value are reported in earnings as unrealized
gains and losses.
b.
A
current asset, and changes in fair value are reported in earnings as realized
gains and losses.
c.
Either
a current or noncurrent asset depending on whether they meet the definition of
a current asset.
d.
A
current asset, and changes in fair value are reported in accumulated other
comprehensive income as unrealized gains and losses.
Answer
23. Current accounting for an
available-for-sale (AFS) security is consistent with
a.
The
financial capital maintenance concept of income because AFS security unrealized
gains and losses are reported in earnings.
b.
The
financial capital maintenance concept of income because AFS security unrealized
gains and losses are reports in other comprehensive income.
c.
The
physical capital maintenance concept of income because AFS security unrealized
gains and losses are reported in earnings.
d.
The
physical capital maintenance concept of income because AFS security unrealized
gains and losses are reported in other comprehensive income.
Answer
24. The physical capital maintenance
concept of income would require that an investment in the common stock of
another entity be
a.
Reported
in the balance sheet at historical cost and that only realized gains and losses
be reported in earnings.
b.
Reported
in the balance sheet at historical cost and that unrealized gains and losses be
reported in earnings.
c.
Reported
in the balance sheet at fair value and that unrealized gains and losses be
reported in earnings.
d.
Reported
in the balance sheet at fair value and that unrealized gains and losses be reported
in other comprehensive income.
Answer
25. The economic concept of income
would require that an investment in the common stock of another entity be
a.
Reported
in the balance sheet at historical cost and that only realized gains and losses
be reported in earnings.
b.
Reported
in the balance sheet at historical cost and that unrealized gains and losses be
reported in earnings.
c.
Reported
in the balance sheet at fair value and that unrealized gains and losses be
reported in earnings.
d.
Reported
in the balance sheet at fair value and that unrealized gains and losses be
reported in other comprehensive income.
Answer
26.
Under the fair value option, an investment in the
common stock of another entity will be
a.
Reported
as a current asset
b.
Reported
as a noncurrent asset
c.
Reported
as either a current or noncurrent asset depending on managerial intent.
d.
Reported
as a current asset only if it was not previously reported as an equity method
investment.
Answer
27. When a company reports goodwill
in its balance sheet, we know that
a.
It
was internally generated because the company has earnings in excess of those of
other companies in the industry.
b.
The
company purchased it.
c.
The
company will be reporting amortization expense for the goodwill.
d.
The
company will not be reporting an impairment loss for the goodwill.
Answer
Essay
1. How are income and balance sheet
values determined under the equity method?
2. Discuss accounting for equity
securities under the cost method.
3. Discuss accounting for equity
securities under the SFAS No. 115 now contained at FASB ASC 320.
4. Summarize the accounting
requirements for investments in equity securities. That is, what methods are
available and when is each method appropriate?
5. Discuss the use of the fair value
option originally described in SFAS No. 159 now contained at FASB ASC 825-10.
6. Discuss accounting for
investments in debt securities.
7. What is an intangible asset? How
is the cost of an intangible asset amortized?
8. What is goodwill? How is goodwill
written off under the provisions of SFAS No. 142 now FASB ASC 350?
9. Define research and
development. How are research and
development costs recorded
10. How does IAS No 39 define fair
value?
Chapter
11
Multiple
Choice
1.
A
loss from early extinguishment of debt, if material, should be reported as a
component of income
a.
After
cumulative effect f accounting changes and after discontinued operations
of a segment of a business
b.
After
cumulative effect of accounting changes and before discontinued operations of a
segment of a business
c.
Income
from continuing operations
d.
Before
cumulative effect of accounting changes and before discontinued operation s
of a segment of a business
Answer
2.
Unamortized
debt discount should be reported on the balance sheet of the issuer as
a.
A direct deduction from the face amount of
the debt
b.
A direct deduction from the present value of
the debt
c.
A deferred charge
d.
Part of the issue costs
Answer
3.
An
example of an item that is not a liability is
a.
Dividends payable in stock
b.
Advances from customers on contracts
c.
Accrued estimated warranty costs
d.
The portion of long-term debt due within one
year
Answer
4.
If
bonds are issued initially at a discount and the straight-line method of
amortization is used for the discount, interest expense in the earlier years
will be
a.
Greater than if the compound interest method
were used
b.
The same as if the compound interest method
were used
c.
Less than if the compound interest method
were used
d.
Less
than the amount of the interest payments
Answer
5.
Cole
Manufacturing Corporation issued bonds with a maturity amount of $200,000 and a
maturity 10 years from date of issue. If the bonds were issued at a premium,
this indicates that
a.
The yield (effective or market) rate of
interest exceeded the nominal (coupon) rate
b.
The nominal rate of interest exceeded the
yield rate
c.
The yield and nominal rates coincided
d.
No necessary relationship exists between the
two rates
Answer
6.
“Trading
on the equity” (financial leverage) is likely to be a good financial strategy
for stockholders of companies having
a.
Cyclical high and low amounts of reported
earnings
b.
Steady amounts of reported earnings
c.
Volatile fluctuation in reported earnings
over short periods of time
d.
Steadily declining amounts of reported
earnings
Answer
7.
Theoretically,
a bond payable should be reported at the present value of the interest
discounted at
a.
Stated interest rate for both principal and
interest
b.
Effective interest rate for both principal
and interest
c.
Stated interest rate for principal and
effective interest rate for interest
d.
Effective interest rate for principal and
stated interest rate for interest
Answer
8.
A
threat of expropriation of assets that is reasonably possible, and for which
the amount of loss can be reasonably estimated, is an example of a (an)
a.
Loss contingency that should be disclosed,
but not accrued
b.
Loss contingency that should be accrued and
disclosed
c.
Appropriation of retained earnings against
which losses should be charged
d.
General business risk which should not be accrued and need not be disclosed
Answer
9.
When
it is necessary to impute an interest rate in connection with a note payable,
the rate should be
a.
Two-thirds
of the prime rate effective at the time the obligation is incurred
b.
The
same as that used in the GNP Implicit Price Deflator
c.
At
least equal to the rate at which the debtor can obtain financing of a similar nature from other sources at the
date of the transaction
d.
As
near zero as can be justified
Answer
10.
Taft Company sells Lee Company a machine, the
usual cash price of which is $10,000, in exchange for an $11,800
non-interest-bearing note due three years from date. If Taft records the note
at $10,000, the overall effect will be
a.
A correct sales price and correct interest
revenue
b.
A correct sales price and understated
interest revenue
c.
An understated sales price and understated
interest revenue
d.
An overstated interest price and understated
interest revenue
Answer
11.
In
the situation described in problem 10, if Lee records the asset and note at
$11,800, the overall effect will be
a.
A correct acquisition cost and correct
interest expense
b.
A correct acquisition cost and understated
interest expense
c.
An understated acquisition cost and
understated interest expense
d.
An overstated acquisition cost and
understated interest expense
Answer
12.
How
would the amortization of premium bonds payable affect each of the following?
Carrying value of
Bond Net Income
a.
Increase
Decrease
b.
Increase Increase
c.
Decrease Decrease
d.
Decrease Increase
Answer
13.
For
a trouble debt restructuring involving only modification of terms, it is
appropriate for a debtor to recognize a gain when the carrying amount of the
debt
a.
Exceeds the total future cash payments
specified by the new terms
b.
Is less than the total future cash payments
specified by the new terms
c.
Exceeds the present value specified by the
new terms
d.
Is less than the present value specified by
the new terms
Answer
14.
How
should the value of warrants attached to a debt security be account for?
a.
No value assigned
b.
A separate portion of paid-in capital
c.
An appropriation of retained earnings
d.
A liability
Answer
15.
For
the issuer of a 10-year term bond, the amount of amortization using the
interest method would increase each year if the bond was sold at a
Discount Premium
a.
No No
b.
Yes Yes
c.
No Yes
d.
Yes No
Answer
16.
Gain
contingencies are usually recognized in the income statement when
a.
Realized
b.
Occurrence is reasonably possible and the
amount can be reasonably estimated
c.
Occurrence is probable and the amount can be
reasonably estimated
d.
The amount can be reasonably estimated
Answer
17.
An estimated loss from a loss contingency
should be accrued when
a.
It
is probable at the date of the financial statements that a loss has been
incurred and the amount of the loss can
be reasonably estimated
b.
The
loss has been incurred by the date of the financial statements and the amount
of the loss may be material
c.
It
is probable at the date of the financial statements that a loss has been
incurred and the amount of the loss may be material
d.
It is probable that a loss will be incurred in
a future period and the amount of the loss can be reasonably estimated
Answer
18.
When
the issuer of bonds exercises the call provision to retire the bonds, the
excess of the cash paid over the carrying amount of the bonds should be
recognized separately as a (an)
a.
Extraordinary loss
b.
Extraordinary gain
c.
Loss from continuing operations
d.
Loss from discontinued operations
Answer
19.
A
two-year note was issued in an arm’s-length transaction at face value solely
for cash at the beginning of the year. There were no other rights or privileges
exchanged. The interest rate is specified at 10 percent per year. Principal and
interest are payable at maturity. The prevailing rate of interest for a loan of
this type is 15 percent per year. What annual interest rate should be used to
record interest expense for this year and next year?
This year Next Year
a.
10 percent 15
percent
b.
10 percent 10 percent
c.
15 percent 10
percent
d.
15 percent 15
percent
Answer
20.
The interest rate used to calculate the cash interest payments by the issuer of
bonds is
a. The market rate of interest
b. The effective interest rate
c. The stated interest rate
d. Equal
to the actual interest expense rate
Answer
21. Ace Corporation has a debt to total assets ratio of
65%. This tells the user of Ace’s
financial statements
a.
Ace is getting a 35% return on its
assets
b. There
is a risk Ace cannot pay its debts as they come due
c. 65% of
the assets are financed by the stockholders
d. Ace should issue more debt to reduce its risk
Answer
22. Trading on the equity (leverage) refers to
the
a. Amount of working capital
b. Amount of capital provided by
owners
c. Use of borrowed money to
increase the return to owners
d. Number of times interest is
earned
Answer
23.
The
current accounting treatment for convertible debt is to treat it as straight
debt. This treatment can be defended on
what basis?
a.
Convertible
debt is a complex financial instrument.
b.
Convertible
debt comprises two financial instruments – a debt instrument and the option to
convert.
c.
The
debt instrument and the option to convert are not separable.
d.
The
option to convert is equity.
Answer
24.
XYZ
Company’s yearend is December 31, 20x1 and its financial statements are issued
in the following March. On January 24,
20x2. A 10 year note payable came due
and was paid by issuing XYZ common stock to the creditor. In its December 31, 20x1 balance sheet, XYZ
should
a.
Report
the note as a current liability because it was due on January 24, 20x2 – only
24 days after the year end.
b.
Report
the note as a long-term liability because it was not paid off with a current
asset or replaced by another current liability.
c.
Report
the note as a long-term liability because it was extinguished (paid off) on
January 24, 20x2 – only 24 days after the year end.
d.
Report
the note as a long-term liability because it was a 10 year note.
Answer
25.
A
zero coupon bond is different from a typical bond issue because
a.
The
investor can clip the coupons and get paid for the periodic interest on the
bond while a typical bond does not have coupons.
b.
It
is reported in the balance sheet net of the discount on the bond.
c.
The
zero coupon bond’s deep discount is reported as an asset and a typical bond
that is issued at a discount is reported net of the discount.
d.
It
does not pay any periodic interest while the typical bond does.
Answer
26. An unearned revenue is an example
of a(an)
a.
Deferred
credit.
b.
Accrued
liability.
c.
Customer
billing that takes place before a job is finished.
d.
Accounts
receivable.
Answer
27.
A
deferred credit meets the definition of a liability because
a.
It
is a probable future sacrifice of assets as the result of a past transaction or
event.
b.
It
is a present obligation to transfer assets to another entity.
c.
It
is an accrual representing an obligation to pay money in the future.
d.
It
is a present obligation to provide services to another entity.
Answer
28.
The
physical capital maintenance concept of income would require that a company’s
bonds payable be
a.
Reported
in the balance sheet at their amortized issue price and that changes in their
market values be reported in earnings.
b.
Reported
in the balance sheet at their amortized issue price and that changes in
their market values not be reported in
earnings.
c.
Reported
in the balance sheet at their fair market values and that changes in their
market values be reported in earnings.
d.
Reported
in the balance sheet at their fair market values and that changes in their
market values be reported in other comprehensive income.
Answer
29.
ABC
Company has a note payable that is due six months after its year end. Under which of the following conditions will
ABC be able to classify the note as a long term debt.
a.
ABC
cannot classify the note as long term because it is due within the current
operating cycle or one year, whichever is longer.
b.
ABC
can classify the note as long term because it is due next year.
c.
ABC
can classify the note as long term because management intends to refinance it
with long term debt and has an agreement to do so with a qualified creditor.
d.
ABC
can classify the note as long term because it is a 10 year note and management
intends to pay the maturity value at the end of the 10 year period.
Answer
30.
Current
accounting treatment for gain contingencies is different from the accounting
treatment for loss contingencies. Which
accounting concept is this differential concept consistent with?
a.
Conservatism
b.
Materiality
c.
Full
disclosure
d.
Revenue
recognition
Answer
31. In general, derivative
instruments are
a.
Not
reported in a company’s balance sheet because their impact on the company is
not yet known..
b.
Reported
in the balance sheet at fair value and changes in their fair value are reported
in earnings.
c.
Reported
in the balance sheet at historical cost and changes in their fair value are
reported in earnings.
d.
Reported
in the balance sheet at fair value and changes in their fair value are reported
in other comprehensive income.
Answer
32. Under a troubled debt
restructuring that results in a modification of terms the debtor will report
interest expense when
a.
The
debtor reports a gain on restructuring.
b.
The
future cash flows under the restructuring agreement are less than the company’s
obligation at the date the restructuring takes place.
c.
Always
because the troubled debtor has a new agreement that obligates the company to
make payments in the future.
d.
The
debtor reports no gain on restructuring.
Answer
Essay
1.
List
and discuss five factors that may be employed to determine if a particular
financial instrument is a debt or equity security.
2. Discuss the definition and the
proper accounting for mandatorily redeemable preferred stock.
3.
Discuss
the four basic reasons why a corporation may wish to issue debt rather than
equity securities
4.
Define
the following terms:
a.
Mortgage
bonds
b.
Debenture
bonds
5.
Explain
how the selling price of a bond is determined.
6. What
is a zero coupon bond? Discuss accounting for zero-coupon bonds.
7.
Discuss
the difference between the straight-line and the effective interest methods of
bond premium or discount amortizations.
8.
List
the three methods of accounting for bonds refunding. Under current GAAP, how are
9.
Discuss
the factors thatmight motivate corporate management to decide to issue
convertible debt.
10. Discuss accounting for long-term
notes payable as originally described in APB Opinion No. 21.
11. Discuss accounting for
contingencies
12. What is a derivative? Describe
the accounting treatment for fair value and cash flow hedges required by SFAS
No. 133.
13. Define the following terms:
a.
Forward
b.
Future
c.
Option
d.
Swap
e.
Hybrid
14. What is a troubled debt
restructuring? How is a troubled debt restructuring accomplished?
15. Obtain the financial statements
of a company and ask the students to compute the:
a.
Long-term
debt to assets ratio
b.
Interest
coverage ratio
c.
Debt
service coverage ratio
16. How are compound financial
instruments accounted for under IAS No. 32?
17. According to IAS No. 39, when are
financial liabilities recognized?
Chapter
12
Multiple
Choice
1.
With
respect to the difference between taxable income and pretax accounting income,
the tax effect of the undistributed earnings of a subsidiary included in
consolidated income should normally be
a.
Accounted
for as a timing difference
b.
Accounted
for as a permanent difference
c.
Ignored
because it must be based on estimates and assumptions
d.
Ignored
because it cannot be presumed that all undistributed earnings of a subsidiary
will be transferred to the parent company
Answer
2.
Income
tax allocation procedures are not appropriate when
a.
An
extraordinary loss will cause the amount of income tax expense to be less than
the tax on ordinary net income
b.
An
extraordinary gain will cause the amount of income tax expense to be greater
than the tax on ordinary net income
c.
Differences
between net income for tax purposes and financial reporting occur because tax
laws and financial accounting principles do not concur on the items to be
recognized as revenue and expense
d.
Differences
between net income for tax purposes and financial reporting occur that will not
reverse.
Answer
3.
Which
of the following would cause a deferred tax expense?
a.
Writedown
of goodwill due to impairment
b.
Use
of equity method where undistributed earnings of a 30 percent owned investee are related to
probable future dividends
c.
Premiums
paid on insurance carried by company (beneficiary) on its officers or employees
d.
Income
is taxed at capital gains rates
Answer
4.
Differences
between taxable income and pretax accounting income arising from transactions
that, under applicable tax laws and regulations, will not be offset by
corresponding differences or “turn around” in future periods is a definition of
a.
Permanent
differences
b.
Timing
differences
c.
Intraperiod
tax allocation
d.
Interperiod
tax allocation
Answer
5.
The
tax effect of a difference between taxable income and pretax accounting income
attributable to losses of a subsidiary is normally recognized for
a.
Neither carrybacks nor carryforwards
b.
Both carrybacks and carryforwards
c.
Carrybacks but not carryforwards
d.
Carryforwards but not carrybacks
Answer
6.
Which
of the following is not affected by tax allocation within a period?
a.
Income before extraordinary items
b.
Extraordinary events
c.
Adjustments of prior periods
d.
Operating revenues
Answer
7.
Under
the comprehensive deferred interperiod method of tax allocation, deferred taxes
are determined on the basis of
a.
Tax
rates in effect when the timing differences originate without adjustment for
subsequent changes in tax rates
b.
Tax
rates expected to be in effect when the items giving rise to the timing
differences reverse themselves
c.
Net valuations of assets or liabilities
d.
Averages
determined on an industry-by-industry basis
Answer
8.
The
accounting recognition of the benefit from a tax loss carryforward in most
situations should be reported as
a.
A
reduction of the loss in the year of the loss with an appropriate valuation
allowance
b.
A prior period adjustment in whichever year
the benefit is realized
c.
An extraordinary item in the year in which
the benefit is realized
d.
An item on the retained earnings statement,
not the income statement
Answer
9.
Intraperiod
tax allocation arises because
a.
Items included in the determination of taxable
income may be presented in different sections of the financial statements
b.
Income
taxes must be allocated between current and future periods
c.
Certain
revenues and expenses appear in the financial statements either before or after
they are included in taxable income
d.
Certain
revenues and expenses appear in the financial statements but are excluded from
taxable income
Answer
10.
Assuming no prior period adjustments, would
the following affect net income?
Interperiod Intraperiod
Income tax Income
tax
Allocation Allocation
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No
No
Answer
11.
A
machine with a 10-year useful life is being depreciated on a straight-line
basis for financial statement purposes, and over 5 years for income tax
purposes under the accelerated recovery cost system. Assuming that the company
is profitable and that there are and have been no other timing differences, the
related deferred income taxes would be reported in the balance sheet at the end
of the first year of the estimated useful life as a
a.
Current liability
b.
Current asset
c.
Noncurrent liability
d.
Noncurrent asset
Answer
12.
Smith
Corporation owns only 25 percent of the voting stock of Jones Corporation, but
exercises significant influence over its operating and financial policies. The
tax effect of differences between taxable income and pretax accounting income
attributable to undistributed earnings of Jones Corporation should be
a.
Accounted
for as a timing difference
b.
Accounted
for as a permanent difference
c.
Ignored because it must be based on estimates
and assumptions
d.
Ignored because Smith holds less than 51
percent of the voting stock of Jones
Answer
13.
A
company has four “deferred income tax” accounts arising from timing differences
involving (1) current assets, (2) noncurrent assets, (3) current liabilities,
and (4) noncurrent liabilities. The presentation of these four “deferred income
tax “ accounts in the statement of financial position should be shown as
a.
A single net amount
b.
A net current and a net noncurrent amount
c.
Four accounts with no netting permitted
d.
Valuation
adjustments of the related assets and liabilities that gave rise to the
deferred tax
Answer
14. A company’s only temporary
difference results from using double declining balance depreciation for tax
purposes and straight-line depreciation for financial reporting. The company purchases new plant assets each
year. If currently enacted tax law will
result in a higher tax rate for all future tax years, which accounting approach
for deferred taxes will result in the lowest net income for this current year?
a.
Nonallocation
of deferred taxes.
b.
Partial
allocation of deferred taxes under the asset/liability method.
c.
Comprehensive
allocation of deferred taxes under the asset/liability method.
d.
Comprehensive
allocation of deferred taxes under the deferred method.
Answer
15.
Which
of the following is not an argument that an advocate of nonallocation of
deferred taxes might use to support his/her position?
a.
Income
taxes result only from taxable income.
b.
Income
taxes are an expense of doing business and should be treated the same as other
expenses of doing business under accrual accounting.
c.
Income
taxes are not levied on individual items of income or expense.
d.
The
current provision for income taxes is a better predictor of future cash flows
than is income tax expense that includes deferred taxes.
Answer
16.
Which
of the following is an argument that an advocate of interperiod income tax
allocation might use to support his/her position?
a.
Income
taxes result from taxable income.
b.
Income
taxes are an expense of doing business and should be treated the same as other
expenses of doing business under accrual accounting.
c.
Nonallocation
of income taxes hides an economic difference between a company that employs tax
strategies that reduce current tax payments than one that does not.
d.
Income
taxes are not incurred in anticipation of future benefits, nor are they
expirations of cost to provide facilities to generate revenues.
Answer
17.
A
net operating loss carryover that occurs in a company’s second year of
operations
a.
May
cause a company to report a tax benefit in the current period income statement.
b.
Has
no effect on income tax expense of the current period because no taxes are
paid.
c.
Causes
a company to report a deferred income tax liability for taxes that are not paid
currently.
d.
Results
in future taxable amounts.
Answer
18.
Which
of the following will result in a deferred tax asset?
a.
Using
the installment sales method for tax purposes, while using point of sale for
financial reporting.
b.
Reporting
an unrealized gain for a trading security.
c.
Using
accelerated depreciation for tax purposes and straight-line depreciation for
financial reporting.
d.
Reporting
an expected loss on from a lawsuit in the income statement, when it cannot be
reported on the tax return until it is actually incurred.
Answer
19.
Which
of the following will result in a deferred tax liability?
a.
A
net operating loss carryover.
b.
Reporting
an unrealized gain for a trading security.
c.
Reporting
an unrealized gain for an available-for-sale security.
d.
Reporting
an expected loss on from a lawsuit in the income statement, when it cannot be
reported on the tax return until it is actually incurred.
Answer
20.
Which
of the following causes a permanent difference between taxable income and
financial accounting income?
a.
The
useful life of an asset is 10 years. The
asset is depreciated over 7 years for tax purposes.
b.
Rent
received in advance is taxable upon receipt.
c.
A
life insurance premium paid by the corporation on a policy that names the
corporation as the beneficiary.
d.
A
penalty paid to a bank when a CD is cashed before its maturity date.
Answer
21.
Which of the following approaches to interperiod tax
allocation best represents an example of the matching principle?
a.
The
deferred method of interperiod income tax allocation
b.
Discounting
deferred income taxes
c.
Nonallocation
of income taxes
d.
The
asset/liability method of income tax allocation.
Answer
22.
A
company that has both short-term deferred tax assets of $22,000, long-term
deferred tax liabilities of $36,000, short-term deferred tax liabilities of
$51,000 and short-term deferred tax assets of $60,000 should report
a.
A
current asset for $22,000, a current liability for $36,000, a long-term asset
for $60,000, and a long-term liability for $51,000.
b.
A
current liability for $14,000 and a long-term asset for $9,000.
c.
A
current asset for $5,000.
d.
A
current liability for $14,000, a long-term asset for $60,000, and a long-term
liability for $51,000.
Answer
23.
An
increase in the deferred income tax asset valuation allowance
a.
Occurs
when there is an operating loss carryforward.
b.
Has
no effect on income tax expense.
c.
Occurs
when there is an expected increase in future taxable icnome.
d.
Increases
income tax expense.
Answer
Essay
1.
What
are the objectives of accounting for income taxes?
2.
Define
the following types of differences between financial accounting income and
taxable income:
3.
Describe
the three types of permanent differences.`
4.
List
and give examples of the f our types of differences that cause financial
accounting income to be either greater than or less than taxable income.
5.
Describe
the accounting treatment for net operating losses.
6.
Discuss
the arguments for and against interperiod tax allocation.
7.
Discuss
the arguments for comprehensive vs. partial allocation of interperiod taxes.
8.
Discuss
the arguments for and against discounting deferred taxes.
9.
Define
the following:
a.
Deferred
method of income tax allocation
b.
Asset-liability method of income tax allocation
c.
Net-of-tax
method
10. Discuss how SFAS No. 109, now
FASB ASC 740, changed the accounting for deferred tax assets.
11. Describe the use of the valuation
allowance for deferred tax assets.
12. Describe accounting for uncertain
tax positions under FIN No. 48, now FASB ASC 740-10-25.
13. Discuss the rationale behind the
calculation of a company’s earnings conservatism ratio.
Chapter 13
1. Under the capital method of
accounting for leases the excess of aggregate rentals over the cost of leased
property should be recognized as revenue of the lessor
a.
In increasing amounts during the term of the
lease
b.
In constant amounts during the term of the
lease
c.
In decreasing amounts during the term of the
lease
d.
After the cost of leased property has been
fully recovered through rentals
Answer
2. When measuring the present value of future
rentals to be capitalized as part of the purchase price in a lease that is be
accounted for as a purchase, identifiable payments to cover taxes, insurance,
and maintenance should be
a.
Included
in the future rentals to be capitalized
b.
Excluded
from future rentals to be capitalized
c.
Capitalized
but at a different discount rate and recorded in a different account than
future rental payments
d.
Capitalized
but at a different discount rate and for a relevant period that tends to be
different than that for future rental payments
Answer
3. Equal monthly rental payments for a particular
lease should be charged to rental expense by the lessee for which of the
following?
Capital
lease Operating
lease
a.
Yes No
b.
Yes Yes
c.
No No
d.
No Yes
Answer
4. In a lease that is recorded as a sales-type
lease by the lessor, the difference between the gross investment in the lease
and sum of the present values of the components of the gross investment should
be recognized as income
a.
In full at the lease’s expiration
b.
In full at the lease’s inception
c.
Over the period of the lease using the
interest method of amortization
d.
Over the period of the lease using the
straight-line method of amortization
Answer
5. For a six-year capital lease, the
portion of the minimum lease payment in the third year applicable to the
reduction of the obligation should be
a.
Less than in the second year
b.
More than in the second year
c.
The same as in the fourth year
d.
More than in the fourth year
Answer
6. Based solely upon the
following sets of circumstances,
indicate below which set gives rise to a sales type or direct financing lease
of a lessor:
Transfers Contains
Ownership bargain
By end of purchase
Lease? Provision?
a.
No Yes
b.
Yes No
c.
Yes Yes
d.
No No
Answer
7. Generally accepted accounting
principles require that certain lease agreements be accounted for as purchases.
The theoretical basis for this treatment is that a lease of this type
a.
Effectively
conveys all of the benefits and risks incident to the ownership of property
b.
Is an example of form over substance
c.
Provides the use of the leased asset to the
lessee for a limited period of time
d.
Must be recorded in accordance with the
concept of cause and effect
Answer
8. The appropriate valuation of an
operating lease on the statement of financial position of a lessee is
a.
Zero
b.
The
absolute sum of the lease payments
c.
The
present value of the sum of the lease payments discounted at an appropriate
rate
d.
The
market value of the asset at the date of the inception of the lease
Answer
9. A six-year-capital lease entered into on
December 31, 2008, specified equal minimum annual lease payments due on
December 31, 2010. Minimum payment applicable to which of the following
increased over the corresponding December 31, 2010, minimum payment?
Reduction
of
Interest
Expense
Liability
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
Answer
10. Office equipment recorded under a
capital lease containing a bargain purchase option should be amortized
a.
Over the period of the lease using the
interest method of amortization
b.
Over the period of the lease using the
straight-line method of amortization
c.
In
a manner consistent with the lessee’s normal depreciation policy for owned
assets
d.
In
a manner consistent with the lessee’s normal depreciation policy for owned assets except that the period of amortization
should be the lease term
Answer
11. What is the primary accounting
issue for lessees?
a.
Recording
interest expense on the lease obligation.
b.
Determining
whether the lease meets the 90% of fair value test.
c.
Off-balance
sheet financing.
d.
The
measurement of the leased asset under a capital lease.
Answer
12. What is the primary accounting
issue for lessors?
a.
Off-balance
sheet financing.
b.
Revenue
recognition and expense allocation over the lease term.
c.
Treating
the lease in the same manner as the lessee does.
d.
Determining
whether the lease is a sales-type lease or a direct financing lease.
Answer
13. For the lessor to recognize a
lease as a sales-type lease, the following must occur.
a.
At
least one of the capital lease criteria is met, at least one of the certainty
criteria is met, and there is a manufacturer or dealer’s profit.
b.
At
least one of the capital lease criteria is met, both certainty criteria are
met, and there is a manufacturer or dealer’s profit.
c.
More
than one of the capital lease criteria are met, both certainty criteria are
met, and there is a manufacturer or dealer’s profit.
d.
Only
one of the capital lease criteria is met, both certainty criteria are met, and
there is a manufacturer or dealer’s profit.
Answer
14. A net operating loss carryover
that occurs in a company’s second year of operations
a.
May
cause a company to report a tax benefit in the current period income statement.
b.
Has
no effect on income tax expense of the current period because no taxes are
paid.
c.
Causes
a company to report a deferred income tax liability for taxes that are not paid
currently.
d.
Results
in future taxable amounts.
Answer
15. For a sales-type lease, the net
investment is equal to
a.
The
present value of the minimum lease payments plus executor costs.
b.
The
net investment minus unearned income.
c.
Sales
minus the gross profit recognized on the sale.
d.
The
present value of the gross investment.
Answer
16. When a lease contract does not
transfer title to the lessee, there is no bargain purchase option, and the
lease term is not at least 75 percent of the estimated useful life of the
leased asset.
a.
The
lessee must classify the lease as an operating lease.
b.
The
amount of unguaranteed salvage value, if any, determines whether the lease is a
capital lease or an operating lease.
c.
The
interest rate used to determine the present value of the minimum lease payments
also determines whether the lease is a capital lease or an operating lease.
d.
The
lessee must use the greater of the lessor’s rate of return or the lessee’s
incremental borrowing rate to determine whether the lease is a capital lease or
an operating lease.
Answer
17. When does the lessee report
executory costs as an expense?
a.
When
they are spelled out in the lease agreement.
b.
Only
when they are incurred by the lessee and the lease is classified as a capital
lease.
c.
When
they are incurred by the lessee.
d.
Only
when they are incurred by the lessee and the lease is classified as an
operating lease.
Answer
18. If the lessor incurs initial
direct cost to bring about the lease, when are those costs expensed in total
during the first year of the lease term.
a.
When
the lease is classified as a sales-type lease.
b.
When
the lease is classified as a direct financing lease.
c.
When
the lease is classified as an operating lease.
d.
Initial
direct costs are always expensed during the first year of the lease term.
Answer
19. When a sale and leaseback occurs
a.
A
gain or loss on the sale of the leased asset is deferred and amortized over the
lease term .
b.
A
gain on sale of the leased asset is deferred and amortized over the lease term.
c.
Whether
a gain or loss on sale of the leased asset is deferred and amortized over the
lease term depends on whether the lease is classified as a capital lease or an
operating lease.
d.
Both
gains and losses are recognized in earnings when the asset is sold.
Answer
20. Which of the following would
indicate that the lessee should not classify a lease as a capital lease?
a.
The
fair value of the leased asset is $100,000 and the present value of the minimum
lease payments is $95,000.
b.
The
lease provides for no unguaranteed salvage value.
c.
The
lessee has the option to purchase the leased asset in 4 years for $2 when the
asset’s salvage value is expected to be $20,000.
d.
The
asset’s useful life is 20 years, a 4 year lease occurs when the asset is 26
years old.
Answer
Essay
1.
List
four advantages of leasing over the purchase of property for use by a business.
2.
Define
the following:
a.
Capital
lease
b.
Operating
lease
3.
List
the four criteria for recording a lease transaction as a capital lease.
4.
How
is the recorded amount of a lessee capital lease determined?
5.
What
is the difference between a sales-type and a direct financing type of capital
lease?
6.
What
is a leveraged lease? How do lessees and
lessors record leveraged leases?
Chapter
14
Multiple
Choice
1.
APB
Opinion No. 8 set minimum and maximum limits on the annual provision for
pension cost. An amount that was always included in the calculation of both the
minimum and the maximum limit is
a.
Normal cost
b.
Amortization of past service cost
c.
Interest on unfunded past and prior service
costs
d.
Retirement benefits paid
2.
In
accounting for a pension plan, any difference between the pension cost charged
to expense and the payments into the fund should be reported as
a.
An offset to the liability for prior service
cost
b.
Accrued or prepaid pension cost
c.
An operating expense in this period
d.
An accrued actuarial liability
Answer
3.
Benefits
under a pension plan that are not contingent upon an employee’s continuing
service are
a.
Granted under a plan of defined contribution
b.
Based upon terminal funding
c.
Actuarially unsound
d.
Vested
Answer
4.
According
to SFAS No. 87, “Employer’s Accounting for Pensions,” gains and losses should
be
a.
Fully
allocated to current and future periods
b.
Offset
against pension expense in the year of occurrence
c.
Allocated
if any unrecognized gain or loss at the beginning of the year is in excess of
10 percent of the greater of the projected benefit obligation or the market
value of the plan assets
d.
Disclosed
in a note to the financial statements only
Answer
5.
According
to SFAS No. 87, prior service costs should be
a.
Charged to retained earnings as a cost
relating to the past
b.
Amortized over the service period of each
employee expected to receive benefits
c.
Taken into consideration only by expensing
interest on the unfunded amount
d.
Recorded in full as a liability at their
discounted present value
Answer
6.
According
to SFAS No. 87, which of the following is never recorded as a component of
annual pension cost?
a.
Amortization
of the intangible asset recorded as the offset to the minimum pension liability
b.
Amortization
of prior service cost
c.
Amortization
of gains and losses
d.
Amortization
of the transition amount
7.
In
determining whether to accrue employee’s compensation for future absences,
among the conditions that must be met are that the obligation relates to rights
that
Accumulate Vest
a.
No No
b.
No Yes
c.
Yes
No
d.
Yes Yes
8.
The
funded status of a defined benefit pension plan is equal to the
a.
Vested
benefit obligation minus the fair value of the pension plan assets.
b.
Accumulated
benefit obligation minus the fair value of the pension plan assets.
c.
Projected
benefit obligation minus the fair value of the pension plan assets.
d.
Projected
benefits plus the fair value of the pension plan assets minus employer
contributions to the pension plan.
Answer
9.
If
the projected benefit obligation of a defined benefit pension plan exceeds the
fair value of the pension plan assets, the employer must report
a.
The
difference as a liability in the balance sheet and a corresponding adjustment
to the amount of pension expense reported in earnings.
b.
The
difference as a liability in the balance sheet and a corresponding adjustment
to other comprehensive income, net of deferred income taxes .
c.
The
difference as an asset in the balance sheet and a corresponding adjustment to
the amount of pension expense reported in earnings.
d.
The
difference as an asset in the balance sheet and a corresponding adjustment to
other comprehensive income, net of deferred income taxes.
Answer
10. The funded status of a defined
benefit pension plan is reported in the balance sheet.
a.
As
an asset, if the pension plan is underfunded.
b.
As
a liability, if the pension plan is underfunded.
c.
Because
it measures the minimum pension plan liability.
d.
When
it exceeds the projected benefit obligation.
Answer
11. Some theorists argue that the
best measure of the employer’s defined benefit pension plan obligation is the
accumulated benefit obligation.
a.
Since
the accumulated benefit obligation is measured using current salaries, it
represents the conservative floor for a company’s pension obligation to its
employees.
b.
It
is consistent with the measurement of pension expense.
c.
Since
the accumulated benefit obligation is measured using future salaries, it
represents the conservative floor for a company’s pension obligation to its
employees.
d.
The
accumulated benefit obligation measures the present value of the amounts that
employees will receive from the pension plan once they retire.
12. benefits that are not contingent on the
employee continuing in the service of the company are
a.
Accumulated
benefits.
b.
Projected
benefits.
c.
Benefits
earned to date.
d.
Vested
benefits.
Answer
13. The corridor approach
a.
Is
used to determine how much interest to add to the service cost and amortization
of prior service in order to calculate pension expense for the period.
b.
Is
used to determine the minimum amount of accumulated unamortized net gains or
losses that must be amortized during the accounting period.
c.
Is
used to determine the amount of prior service cost to expense each accounting
period.
d.
Is
use to determine the pension plan’s funded status.
Answer
14. What effect did the requirement
to replace the minimum liability requirement with the funded status of a
pension plan have for underfunded pension plans?
a.
Return
on assets decreased.
b.
There
was no effect on return on assets.
c.
The
debt-to-Equity ratios increased.
d.
Working
capital increased.
Answer
15. What effect did the requirement
to replace the minimum liability requirement with the funded status of a
pension plan have for overfunded pension plans?.
a.
Return
on assets decreased.
b.
There
was no effect on return on assets.
c.
The
debt-to-Equity ratios increased.
e.
Return
on common stockholders’ equity increased.
16. Which of the following is not
a difference between defined benefit pension plans and other postretirement benefits
(ORBS)
a.
Unlike
defined benefit pension plan payments, there is no cap on the amount of OORB
benefit to be paid to participants .
b.
Unlike
defined benefit pension plans, management promises OORB payments in exchange
for current services.
c.
Unlike
defined benefit pension plans, employees do not accumulate additional OORB benefits
with each year of service.
d.
Unlike
defined benefit pension plans, OORBs do not vest.
Answer
17. The expected postretirement
benefit obligation (EPBO) is
a.
Similar
to the defined benefit pension plan’s projected benefit obligation because it
is the obligation attributable to employee service rendered to date.
b.
Used
to calculate the interest component of OORB expense before full eligibility is
achieved.
c.
Recognized
over the life expectancy of the employees when most participants are fully
eligible to receive benefits.
d.
The
actuarial present value of the total benefits expected to be paid assuming full
eligibility is achieved.
Answer
Essay
1.
Discuss
the difference between defined benefit and defined contribution pension plans.
2.
Discuss
the cost approach and benefits approach actuarial funding methods.
3.
Define
the following components of pension cost: under SFAS No. 87 (FASB ASC 715):
a.
Service cost
b.
Interest cost
c.
Return on plan assets
d.
Amortization of unrecognized prior service cost
e.
Amortization of gains and losses
4.
What four categories of information are required to be
disclosed under the provisions of SFAS No. 35 (FASB ASC 960)?
5.
Discuss the characteristics that make accounting for
other postretirement benefits more difficult than accounting for pensions.
6.
What
changes in accounting for pensions were required by SFAS No. 158 (FASB ASC 715)?
Chapter 15
Multiple Choice
1.
For
a compensatory stock option plan for which the date of grant and measurement
date are the same, compensation cost
should be recognized in the income statement
a.
At the date of retirement
b.
Of each period in which services are rendered
c.
At the exercise date
d.
At the adoption date of the plan
Answer
2. Payment of a dividend in stock
a.
Increases the current ratio
b. Decreases the amount of working capital
c. Increases total stockholders’ equity
d.
Decreases book value per share of stock outstanding
Answer
3. The directors of Corel
Corporation, whose $40 par value common stock is currently selling at $50 per
share, have decided to issue a stock dividend. The corporation has an
authorization for 200,000 shares of common, has issued 110,000 shares of which
10,000 shares are now held as treasury stock, and desires to capitalize
$400,000 of the retained earnings balance. To accomplish this, the percentage
of stock dividend that the directors should declare is
a. 10
b. 8
c. 5
d. 2
Answer
4.
When
a stock dividend is small, for example a 10% stock dividend,
a.
Retained
earnings is not reduced because the dividend is immaterial .
b.
Retained
earnings is reduced by the fair value of the stock.
c.
Retained
earnings is reduced to the par value of the stock.
d.
Paid-in
capital in excess of par value is unaffected.
Answer
5.
The
par value method of reporting a treasury stock transaction
a.
Will
be reported in the balance sheet as a reduction of total stockholders’ equity.
b.
Results
in no change to total stockholders’ equity.
c.
Results
in a reduction in the number of shares that are available to be sold to prospective
investors.
d.
Assumes
constructive retirement of the treasury shares.
Answer
6. On December 31, 2010, when the Conn Company’s
stock was selling at $36 per share, its capital accounts were as follows
Capital stock (par value $20,
100,000 shares issued) $2,000,000
Premium on capital stock 800,000
Retained Earnings 4,550,000
If a 100 percent stock dividend were
declared and the par value per share remained at
$20
a.
No entry would need to be made to record the
dividend
b.
Capital stock would increase to $5,600,000
c.
Capital stock would increase to $4,000,000
d.
Total capital would decrease
Answer
7. A company has not paid dividends on its
cumulative nonvoting preferred stock for 20 years.
Healthy earnings have been reported each
year, but they have been retained to support the growth of the company. The
board of directors appropriately authorized management to offer the preferred
shareholders an exchange of bonds and common stock for all the preferred stock.
The exchange is about to be consummated. Which of the following best describes
the effect of the exchange on the company?
a.
The
statute of limitations applies; hence, cumulative dividends of only seven years
need to be paid on the preferred stock exchanged.
b.
The
company should record an extraordinary gain for income determination purposes
to the extent that dividends in arrears do not have to be paid in the exchange
transaction.
c.
Gain
or loss should be recognized on the exchange by the company, and the exchange
would have to be approved by the Securities and Exchange Commission.
d.
Regardless of the market value of the bonds
and common stock, no gain or loss should be recognized by the company on the
exchange, and no dividends need to be paid on the preferred stock exchanged.
Answer
8. A restriction of retained
earnings is most likely to be required by the
a. Exhaustion
of potential benefits of the investment credit
b.
Purchase of treasury stock
c.
Payment of last maturing series of a serial bond issue
d. Amortization of past service costs related to
a pension plan
Answer
9. A
feature common to both stock splits and stock dividends is
a. A reduction in total capital of a
corporation
b. A transfer from earned capital to paid-in
capital
c. A reduction in book value per share
d. Inclusion in conventional statement of source
and application of funds
Answer
10. Assuming the issuing company has only one
class of stock, a transfer from retained earnings to capital stock equal to the market value of
the shares issued is ordinarily a characteristic of
a.
Either a stock dividend or a stock split
b.
Neither a stock dividend nor a stock split
c.
A stock split but not a stock dividend
d.
A stock dividend but not a stock split
Answer
11. When a stock option plan for employees is
compensatory, the measurement date for determining compensation cost is the
a.
Date
the option plan is adopted, provided it precedes the date on which the options
may first be exercised by less than one operating cycle
b.
Date
on which the options may first be exercised (if the first actual exercise is
within the same operating period) or the date on which a recipient first
exercises any of his options
c.
First
date on which are known both the number of shares than an individual employee
is entitled to receive and the option or purchase price, if any
d.
Date
each option is granted
Answer
12. As a minimum, how large in
relation to total outstanding shares may a stock distribution be before it
should be accounted for as a stock split instead of a stock dividend?
a.
No less than 2 to 5 percent
b.
No less than 10 to 15 percent
c.
No less than 20 to 25 percent
d.
No less than 45 to 50 percent
Answer
13. The dollar amount of total
stockholders’ equity remains the same when there is a (an)
a.
Issuance of preferred stock in exchange for
convertible debentures
b.
Issuance of nonconvertible bonds with
detachable stock purchase warrants
c.
Declaration of a stock dividend
d.
Declaration of a cash dividend
Answer
14. A company with a substantial
deficit undertakes a
quasi-reorganization. Certain assets will be written down to their present fair
market value. Liabilities will remain the same. How would the entries to record
the quasi-reorganization affect each of the following?
Contributed
Capital Retained Earnings
a.
Increase
Decrease
b.
Decrease
No effect
c.
Decrease
Increase
d.
No effect Increase
Answer
15. What is the most likely effect of
a stock split on the par value per share and the number of shares outstanding?
Par Value
Number of shares
Per shareoutstanding
a.
Decrease
Increase
b.
Decrease
No effect
c.
Increase
Increase
d.
No effect No effect
Answer
16. Gilbert Corporation issued a
40percent stock split-up of its common stock that had a par value of $10 before and after the split-up. At
what amount should retained earnings be capitalized for the additional shares
issued?
a.
There should be no capitalization of retained
earnings
b.
Par value
c.
Market value on the declaration date
d.
Market value on the payment date
Answer
17. How would the declaration and
subsequent issuance of a 10 percent stock dividend by the issuer affect each of
the following when the market value of the shares exceeds the par value of the
stock?
Common Stock Additional Paid-in Capital
a.
No effect No effect
b.
No
effect Increase
c.
Increase No
effect
d.
Increase Increase
Answer
18. A company with a $2,000,000
deficit undertakes a quasi-reorganization on November 1, 2010. Certain assets
will be written down by $400, 000 to their present fair market value.
Liabilities will remain the same. Capital stock was $3,000,000 and additional
paid-in capital was $1,000,000 before the quasi-reorganization. How would the
entries to accomplish these changes on November 1, 2010, affect each of the
following?
Capital Stock Total Stockholders’
Equity
a.
No effect No effect
b.
No
effect Decrease
c.
Decrease Decrease
d.
Decrease No effect
Answer
19. How would a stock split affect
each of the following?
Total
Stockholders’ Additional
AssetsEquityPaid-in
Capital
a.
Increase Increase No effect
b.
No effect No effect No effect
c.
No effect No effect Increase
d.
Decrease Decrease Decrease
Answer
20. The purchase of treasury stock
a.
Decreases common stock authorized
b.
Decreases common stock issued
c.
Decreases common stock outstanding
d.
Has no effect on common stock outstanding
Answer
21. The equation, assets = equities,
expresses which of the following theories of equity?
a.
Proprietary
theory.
b.
Commander
theory.
c.
Entity
theory.
d.
Enterprise
theory.
Answer
22. Under the residual equity theory
a.
A
business is viewed as a social institution.
b.
Management
is responsible for maximizing the wealth of common stockholders.
c.
A
manager’s goals are considered as important as those of the common
stockholders.
d.
Equities
are viewed as restrictions on assets..
Answer
23. Under which of the theories of
equity is a manager’s goals considered as important as those of the common
stockholder.
a.
Proprietary
theory.
b.
Commander
theory.
c.
Entity
theory.
d.
Enterprise
theory.
Answer
24. Which of the theories of equity
is consistent with the definition of equity that is found in Statement of Financial Accounting
ConceptsNo. 6?
a.
Proprietary
theory.
b.
Commander
theory.
c.
Entity
theory.
d.
Enterprise
theory.
Answer
25. Which of the following securities
must be reported as a liability because they have the characteristics of both
liabilities and equity, but the liability characteristic is dominant?
a.
Redeemable
preferred stock.
b.
Stock
options issued with a debt security .
c.
Detachable
stock options.
d.
Mandatorily
redeemable preferred stock.
Answer
26. When a dividend paid to
stockholders who own mandatorily redeemable preferred stock, the company must
report the dividend
a.
As
an adjustment to retained earnings in its statement of owners’ equity .
b.
As
an expense in the income statement.
c.
As
a reduction to other comprehensive income.
d.
In
the financing activities section of the statement of cash flows.
Answer
27. When preferred stock is converted
to common stock
a.
The
debt-to-equity ratio decreases.
b.
The
debt-to-equity ratio increases.
c.
The
debt-to-equity ratio is unchanged.
d.
A
gain or loss is reported in earnings for the difference between the fair value
of the common stock and the book value of the preferred stock that was
converted .
Answer
28. When employees are granted
options as part of a compensatory stock option plan,
a.
Total
compensation is measured using a fair value method.
b.
Total
compensation is measured using the intrinsic method.
c.
Total
compensation is measured when the options are in the money.
d.
Total
compensation is measured using the difference between the strike price and the
fair value of the options on the grant date.
Answer
Essay
1.
Discuss
the following theories of equity:
a.
Proprietary
b.
Entity
c.
Fund
d.
Commander
e.
Enterprise
f.
Residual
equity
2.
What
is mandatorily redeemable preferred stock and how is it accounted for under the
provisions of SFAS No. 150 (FASB ASC 480-10)?
3.
List
and discuss four advantages of the
corporate form of organization..
4.
Discuss
the components of a corporation’s balance sheet capital section.
5.
Discuss
the following special features of preferred stock:
a.
Convertible
b.
Call
c.
Cumulative
d.
Participating
e.
Redemption
6.
How
did SFAS No. 123R change accounting for stock options?
7.
Define
and discuss accounting for stock warrants.
8.
Discuss
the difference between a stock dividend and a stock split. Include in your discussion,
the reasons a company might issue either a stock dividend or a stock split.
9.
Define
and discuss the two methods of accounting for treasury stock.
10. Obtain the financial statements of a company
and ask the students to compute the:
a.
Return
on common stockholders’ equity.
b.
Financial
structure ratio
Chapter 16
Multiple Choice
1.
Consolidated
statements are proper for Neely, Inc., Randle, Inc., and Walker, Inc., if
a.
Neely
owns 80 percent of the outstanding common stock of Randle and 40 percent of
Walker; Randle owns 30 percent of Walker.
b.
Neely
owns 100 percent of the outstanding common stock of Randle and 90 percent of
Walker; Neely bought the stock of Walker one month before the balance sheet
date and sold it seven weeks later.
c.
Neely
owns 100 percent of the outstanding common stock of Randle and Walker; Walker
is in legal reorganization.
d.
Neely
owns 80 percent of the outstanding common stock of Randle and 40 percent of
Walker; Reeves, Inc., owns 55 percent of Walker.
Answer
2.
On
October 1, Company X acquired for cash all of the outstanding common stock of
Company Y. Both companies have a December 31 year end and have been in business
for many years. Consolidated net income for the year ended December 31 should
include net income of
a.
Company
X for3 months and Company Y for 3 months
b.
Company
X for 12 months and Company Y for 3 months
c.
Company
X for 12 months and Company Y for 12 months
d.
Company
X for 12 months, but no income from Company Y until Company Y distributed a
dividend
Answer
3.
Arkin,
Inc., owns 90 percent of the outstanding stock of Baldwin Company. Curtis,
Inc., owns 10 percent of the outstanding stock of Baldwin Company. On the
consolidated financial statements of Arkin, Curtis should be considered as
a.
A holding company
b.
A subsidiary not to be consolidated
c.
An affiliate
d.
A noncontrolling interest
Answer
4.
A
sale of goods, denominated in a currency other than the entity’s functional
currency, resulted in a receivable that was fixed in terms of the amount of
foreign currency that would be received. Exchange rates between the functional
currency and the currency in which the transaction was denominated changed. The
resulting gain should be include as a (an)
a.
Other comprehensive income
b.
Deferred credit
c.
Component of income from continuing
operations
d.
Extraordinary item
Answer
5.
Which
of the following is not a consideration in segment reporting for diversified enterprises?
a.
Allocation of joint costs
b.
Transfer pricing
c.
Defining the segments
d.
Consolidation policy
Answer
6.
Which
of the following is the appropriate basis for valuing fixed assets acquired in
a business combination carried out by exchanging cash for common stock?
a.
Historic cost
b.
Book value
c.
Cost plus any excess of purchase price over
book value of asset acquired
d.
Fair value
Answer
7.
Goodwill
represents the excess of the cost of an acquired company over the
a.
Sum
of the fair values assigned to identifiable assets acquired less liabilities
assumed
b.
Sum of the fair values assigned to tangible
assets acquired less liabilities assumed
c.
Sum of the fair values assigned to intangible
assets acquired less liabilities assumed
d.
Book value of an acquired company
Answer
8.
The
theoretically preferred method of presenting noncontrolling interest on a consolidated balance sheet is
a.
As a separate item with the deferred credits
section
b.
As a reduction from (contra to) goodwill from
consolidation, if any
c.
By means of notes or footnotes to the balance
sheet
d.
As a separate item within the stockholders’
equity section
Answer
9.
Meredith
Company and Kyle Company were combined in an acquisition transaction. Meredith
was able to acquire Kyle at a bargain price. The sum of the market or appraised
values of identifiable assets acquired less the fair value of liabilities
assumed exceeded the cost to Meredith. After revaluing noncurrent assets to
zero there was still some of the bargain purchase amount remaining (formerly
termed negative goodwill). Proper
accounting treatment by Meredith is to report the amount as
a.
An extraordinary item
b.
Part of current income in the year of
combination
c.
A deferred credit and amortize it
d.
Paid-in capital
Answer
10. When translating foreign currency
financial statements, which of the following accounts would be translated using
current exchange rates?
Property, Plant, and Inventories
Equipment carried at
cost
a.
Yes
Yes
b.
No
No
c.
Yes
No
d.
No Yes
Answer
11. In financial reporting for
segments of a business enterprise, the operating profit or loss of a segment
should include
Reasonably allocated
Common Traceable
Operating costs operating costs
a.
No
No
b.
No
Yes
c.
Yes
No
d.
Yes Yes
Answer
12. The profitability information
that should be reported for each reportable segment of a business enterprise
consists of
a.
An
operating profit-or-loss figure consisting of segment revenues less traceable
costs and allocated common costs
b.
An
operating profit-or-loss figure consisting of segment revenues less traceable
costs but not allocated common costs
c.
An
operating profit-or-loss figure consisting of segment revenues less allocated
common costs but not traceable costs
d.
Segment
revenues only
Answer
13. A foreign subsidiary’s function
currency is its local currency that has not experienced significant inflation.
The weighted average exchange rate for the current year would be the
appropriate exchange rate for translating
Sales to
Wages
expense Customers
a.
Yes Yes
b.
Yes No
c.
No No
d.
No Yes
Answer
14. A subsidiary’s functional
currency is the local currency that has not experienced significant inflation.
The appropriate exchange rate for translating the depreciation on plant assets
in the income statement of the foreign subsidiary is the
a.
Exit exchange rate
b.
Historical exchange rate
c.
Weighted average exchange rate over the
economic life of each plant asset
d.
Weighted average exchange rate for the
current year
Answer
15. In a business combination that is
accounted for under the acquisition method the entity that obtains control over
one or more businesses and establishes the acquisition date that control was
achieved is called the
a.
Controller.
b.
Acquirer.
c.
Proprietor.
d.
Controlling
interest.
Answer
16. Under the acquisition method for
a business combination, the cost incurred to effect the business combination,
such as finders and legal fees are
a.
Considered
part of the historical cost of the business.
b.
Expensed
as incurred.
c.
Allocated,
along with the purchase price of the acquired company’s stock to the assets of
the acquiree company.
d. Deferred until a full accounting
of all costs to acquire the acquire company are known.
Answer
17. Under which of the theories of
equity is a manager’s goals considered as important as those of the common
stockholder.
a.
Proprietary
theory.
b.
Commander
theory.
c.
Entity
theory.
d.
Enterprise
theory.
Answer
18. For a business combination, we
measure all assets and liabilities of an acquired company at fair value. Fair value
a.
Is
an exit value.
b.
Is
an entry value.
c.
Is
an appraisal value.
d.
Can
be either an exit value or an entry value depending on the circumstances.
Answer
19. Under the acquisition method of
accounting for a business combination, restructuring costs are
a.
Capitalized
and amortized over a period not exceeding ten years.
b.
Fees
paid to lawyers and accountants to bring about the business combination .
c.
Costs
incurred to effect the business combination.
d.
Treated
as post acquisition expenses.
Answer
20. Under the acquisition method
of accounting for a business
combination, goodwill is equal to
a.
The
acquired company’s ability to generate excess profits .
b.
The
excess of the cost of the acquisition plus the fair value of the noncontrolling
interest over the fair value of the acquiree’s net assets.
c.
The
excess of the cost of the acquisition over the fair value of the acquiree’s net
assets.
d.
The
excess of the fair value of acquiree’s net assets over the cost of acquisition.
Answer
21. Under the acquisition method of
accounting for a business combination, a bargain purchase is
a.
Reported
as goodwill in the balance sheet.
b.
Tested
annually for impairment.
c.
Reported
as a gain in the income statement.
d.
Reported
as an adjustment to other comprehensive
income.
Answer
22. The acquisition method of
accounting for a business combination is consistent with
a.
Entity
theory.
b.
Proprietary
theory.
c.
Parent
company theory.
f.
Residual
interest theory.
Answer
23. Under the acquisition method of
accounting for a business combination when the parent company has acquired only
90% of the voting stock of a subsidiary,
a.
10%
of the goodwill will be reported in a separate section of the balance sheet
because it belongs to the noncontrolling interest .
b.
The
consolidated balance sheet will report 100% of the value of goodwill.
c.
The
consolidated balance sheet will report 90% of the value of goodwill.
d.
Goodwill
will be amortized over its useful life or 40 years whichever comes first.
Answer
24. The noncontrolling interest in a
subsidiary is reported in the consolidated balance sheet
a.
As
an investment.
b.
As
a liability.
c.
At
fair value, as determined on the acquisition date.
d.
As
an element of stockholders’ equity.
Answer
Essay
1. List and explain three reasons
why businesses combine.
2.
Discuss
the issues that are to be addressed in an acquisition method business
combination effected by an exchange of equity shares.
3. How is the recorded cost
determined in an acquisition business combination?
4. What are the two principles that
are used to guide the preparation of consolidated financial statements?
5. Explain the concept of control as
it applies to recording consolidated financial statement.
6. Discuss the following two
theories of consolidation:
a.
Entity
b.
Patent
company
7. Define noncontrolling interest.
Historically, how has noncontrolling interest been disclosed on corporate balance sheets
8. According to SFAS No. 131(FASB
ASC 280-10-50-20 to 25), what information should be disclosed for each
operating segment?
9. How are operating segments
defined by SFAS No. 131 (FASB ASC 280-10-50-1)?
10. Discuss the criteria used
todetermineifanoperating segment is a
reportable segment.
11. Discuss how foreign currency
translation occurs under each of the following methods
a.
Current
– noncurrent
b.
Monetary
– nonmonetary
c.
Current
d.
Temporal
12. How does SFAS No. 52 (FASB ASC
830) define functional currency?
13.
What are the two situations in which the local currency
would not be the functional currency:?
14. Discuss the difference between
translation and remeasurement.
15. Describe the four general
procedures involved in the foreign currency translation process when the local
currency is defined as the functional currency.
16.
How
are noncontrolling interested defined in IAS No. 27 and where are they to be disclosed?
Chapter
17
Multiple
choice
1. Footnotes to financial statements
should not be used to
a.
Describe the nature and effect of a change in
accounting principles
b.
Identify substantial differences between book
and tax income
c.
Correct an improper financial statement
presentation
d.
Indicate bases for valuing assets
Answer
2. Assuming that none of the
following have been disclosed in the financial statements, the most appropriate
item for footnote disclosure is the
a.
Collection
of all receivables subsequent to year end
b.
Revision
of employees’ pension plan
c.
Retirement
of president of company and election of new president
d.
Material
decrease in the advertising budget for the coming year and its anticipated
effect upon income
Answer
3. The primary responsibility for
the adequacy of disclosure in the financial statements and footnotes rests with
the
a.
Partner assigned to the engagement
b.
Auditor in charge of fieldwork
c.
Staffman who drafts the statements and
footnotes
d.
Client
Answer
4. Which of the following situations
would require adjustment to or disclosure in the financial statements?
a.
A
merger discussion
b.
The
application for a patent on a new production process
c.
Discussions
with a customer that could lead to a 40 percent increase in the client’s sales
d.
The
bankruptcy of a customer who regularly purchased 30 percent of the company’s
output
Answer
5. With respect to disclosure, the
unqualified short-form report
a.
States
that disclosure is adequate in the financial statements including the footnotes
thereto
b.
States
that disclosure is sufficiently adequate to make the statements not misleading
c.
States
that all material items are disclosed in conformity with the generally accepted
accounting principles
d.
Implies
that disclosure is adequate in the financial statements including the footnotes
thereto
Answer
6. Which of the following should be
disclosed in the Summary of Significant Accounting Policies?
a.
Composition of plant assets
b.
Pro forma effect of retroactive application
of an accounting change
c.
Basis of consolidation
d.
Maturity dates of long-term debt
Answer
7. An Account Principles Board
Opinion was concerned with disclosure of accounting policies. A singular
feature of this particular opinion is that it
a.
Calls
for disclosure of every accounting policy followed by a reporting entity
b.
Applies
to immaterial items whereas most opinions are concerned solely with material
items
c.
Applies
also to accounting policy disclosures by not-for-profit entities, whereas most
opinions are concerned solely with accounting practices of profit-oriented
entities
d.
Prescribes a rigid format for the disclosure
of policies to be reported upon
Answer
8. Significant accounting policies
may not be
a.
Selected on the basis of judgment
b.
Selected from existing acceptable
alternatives
c.
Unusual or innovative in application
d.
Omitted from financial statement disclosure
on the basis of judgment
Answer
9. The stock of Gates, Inc., is
widely held, and the company is under the jurisdiction of the Securities and
Exchange Commission. In the annual report, information about the significant
accounting policies adopted by Gates should be
a.
Omitted because it tends to confuse users of
the report
b.
Included
as an integral part of the financial statements
c.
Presented
as supplementary information
d.
Omitted
because all policies must comply with the regulations of the Securities and
Exchange Commission
Answer
10. The basic purpose of the
securities laws of the United States is to regulate the issue of investment
securities by
a.
Providing
a regulatory framework in those states which do not have their own securities
laws
b.
Requiring
disclosure of all relevant facts so that investors can make informed decisions
c.
Prohibiting
the issuance of securities which the Securities and Exchange Commission
determines are not of investment grade
d.
Channeling
investment funds into uses which are economically most important
e.
Ensuring that all shareholders have the right
to vote in the election of directors
Answer
11. The Securities and Exchange
Commission (SEC) was established in1934 to help regulate the U.S. securities
market. Which of the following statements is true concerning the SEC?
a.
The
SEC prohibits the sale of speculative securities.
b.
The
SEC regulates only securities offered for public sale.
c.
Registration
with the SEC guarantees the accuracy of the registrant’s prospectus.
d.
The
SEC’s initial influence and authority has diminished in recent years as the
stock exchanges have become more organized and better able to police
themselves.
e.
The
SEC’s powers are broad with respect to enforcement of its reporting
requirements as established in the 1933 and 1934 acts, but narrow with respect
to new reporting requirements because these require confirmation by the Congress
Answer
12. One of the major purposes of
federal security regulation is to
a.
Establish the qualifications for accountants
who are members of the profession
b.
Eliminate
incompetent attorneys and accountants who participate in the registration of
securities to be offered to the public
c.
Provide
a set of uniform standards and test for accountants, attorneys, and others who
practice before the Securities and Exchange Commission
d.
Provide sufficient information to the
investing public who purchases securities in the marketplace
Answer
13. Under the Securities Act of 1933,
subject to some exceptions and limitations, it is unlawful to use the mails or
instruments of interstate commerce to sell or offer to sell a security to the
public unless
a.
A
surety bond sufficient to cover potential liability to investors is obtained
and filed with the Securities and Exchange Commission
b.
The
offer is made through underwriters qualified to offer the securities on a
nationwide basis
c.
A registration statement has been properly
filed with the Securities and Exchange Commission, has been found to be
acceptable, and is in effect
d.
The Securities and Exchange Commission
approves of the financial merit of the offering
Answer
14. Major, Major, and Sharpe, CPA’s , are the
auditors of MacLain industries. In connection with the public offering of $10
million of MacLain securities, Major expressed an unqualified opinion as to the
financial statements. Subsequent to the offering, certain misstatements and
omissions are revealed. Major has been sued by the purchasers of the stock
offered pursuant to the registration statement, which include the financial
statements audited by Major. In the ensuing lawsuit by the MacLain investors,
Major will be able to avoid liability if
a.
The
errors and omissions were caused primarily by MacLain
b.
It can be shown that at least some of the
investors did not actually read the audited financial statements
c.
It
can prove due diligence in the audit of the financial statements of MacLain
d.
MacLain had expressly assumed any liability in
connection with the public offering
Answer
15. A major impact of the Foreign
Corrupt Practices Act of 1977 is that registrants subject to the Securities
Exchange Act of 1934 are now required to
a.
Keep
records which reflect the transactions and dispositions of assets and maintain
a system of internal accounting controls
b.
Provide
access to records by authorized agencies of the federal government
c.
Records
all correspondence with foreign nations
d.
Prepare
financial statements in accordance with international accounting standards
e.
Produce
full, fair, and accurate periodic reports on foreign commerce and/or foreign
political party affiliations
Answer
16. The Securities and Exchange
Commission’s fraud rule prohibits trading on the basis of inside information of
a business corporation’s stock by
a.
Officers
b.
Officers and directors
c.
All officers, directors, and stockholders
d.
Officers, directors, and beneficial holders
of 10 percent of the corporation’s stock
Answer
17. A CPA is subject to a criminal
ability if the CPA
a.
Refuses to turn over the working papers to
the client
b.
Performs an audit in a negligent manner
c.
Willfully omits a material fact required to
be stated in a registration statement
d.
Willfully breaches the contract with the
client
Answer
18. For interim financial reporting,
an inventory loss from a temporary market decline in the first quarter which
can reasonably be expected to be restored in the fourth quarter
a.
Should
be recognized as a loss proportionately in each of the first, second, third,
and fourth quarters
b.
Should
be recognized as a loss proportionately in each of the first, second, and third
quarters
c.
Need
not be recognized as a loss in the
first quarter
d.
Should
be recognized as a loss in the first quarter
Answer
19. An inventory loss from a market
decline occurred in the first quarter that was not expected to be restored in
the fiscal year. For interim financial reporting purposes, how would the dollar
amount of inventory in the balance sheet be affected in the first and fourth
quarters?
First Quarter Fourth Quarter
a. Decrease No effect
b.
Decrease Increase
c. No effect Decrease
d.
No effect No effect
Answer
20. Footnotes to a company’s financial
statements are used to
a. More fully explain certain items in the
financial statements.
b. Reflect financial notes personalized by the
company’s executive team.
c. Show the detail of salaries of every
employee.
d.
Justify fraudulent business practices.
Answer
21. The statement that “the financial statements
were prepared in accordance with generally accepted accounting principles” is
found in the
a. Management letter
b. Management discussion and analysis
c. Footnotes to the balance sheet.
d.
Auditor’s report.
Answer
22. According to the disclosure
requirements outlined in Statement of
Accounting Concepts No. 5, the following is an example supplementary
information that should be disclosed because it affects an area that is
directly affected by existing FASB Standards
a.
Management
discussion and analysis.
b.
Segment
information.
c.
Accounting
policies.
d.
A
statement of cash flows.
Answer
23. According to the disclosure
requirements outlined in Statement of
Accounting Concepts No. 5, the following is an example information that should be disclosed in the
notes to financial statements because it is basic to the financial statements
a.
Management
discussion and analysis.
b.
Accounting
policies.
c.
Segment
information.
d.
The
auditor’s report.
Answer
24. According to the disclosure
requirements outlined in Statement of
Accounting Concepts No. 5, the following is an example supplementary
information that should be disclosed because it affects an area that is
directly affected by existing FASB Standards
a.
Management
discussion and analysis.
b.
Segment
information.
c.
Accounting
policies.
d.
A
statement of cash flows.
Answer
25. According to the disclosure
requirements outlined in Statement of
Accounting Concepts No. 5, the following is an example information that should be disclosed in the
notes to financial statements because it is basic to the financial statements
a.
Management
discussion and analysis.
b.
Accounting
policies.
c.
Segment
information.
d.
The
auditor’s report.
Answer
26. Norris Company settled a lawsuit
in February for an amount that was significantly different from the amount that
was originally accrued as an estimate of potential loss. The company’s yearend is December 31 and its financial
statements are issued in March. This is an example of
a.
A
subsequent event that must be disclosed, but because it happened after the
balance sheet date no adjustment is needed .
b.
A
subsequent event that provided evidence of a condition that did not exist at
the balance sheet date.
c.
A
subsequent event that need not be disclosed because it did not occur before the
company’s yearend.
d.
A
subsequent event that provided further evidence of conditions that existed on
the balance sheet.
Answer
27. Footnote disclosure that
summarizes information that does not meet the measurement and reporting
requirements for presentation in a company’s financial statements, but is
useful to informed readers, is required in order to meet the concept of
a.
Understandability.
b.
Reliability.
c.
Representational
faithfulness.
d.
Cost/benefit.
Answer
28. A disclaimer of opinion is issued
when
a.
All
informative disclosures have not been made in the financial statements.
b.
Circumstances
prevent the auditor from performing all audit procedures necessary to comply
with generally accepted auditing standards.
c.
The
financial statements are not prepared in accordance with generally accepted
accounting principles.
d.
There
is a potential going concern issue.
Answer
29. The discrete view of interim
reporting
a.
Holds
that an interim period is a separate accounting period; thus, revenues and
expenses should be treated as though they occurred only in one period.
b.
Holds
that revenues and expenses should be allocated to the various interim periods.
c.
Holds
that revenues and expenses should be reported as they occur.
d.
Holds
that an interim period is an integral part of the annual reporting period.
Answer
30. The inclusion of MD&A
(Management Discussion and Analysis) in annual reports is required by the
a.
FASB.
b.
AICPA.
c.
SEC.
d.
APB.
Answer
31. Which SEC reporting form is the
normal registration statement for securities to be sold to the public?
a.
Form
10.
b.
Form
10-K.
c.
Form
10-Q.
g.
Proxy
Statement.
Answer
32. The Securities act of 1933
a.
Regulates
the trading of securities of publicly held companies .
b.
Regulates
the initial public sale and distribution of a corporation’s securities.
c.
Addresses
the personal duties of corporate officers.
d.
Specifies
information that is to be contained in a company’s annual report.
Answer
33. The Sarbanes-Oxley (SOX) Act of
2002 created the PCAOB. The PCAOB
a.
Is
primarily responsible for establishing generally accepted accounting
principles.
b.
Provides
legal and expert services to CPA firms when they are involved in class-action
law suits.
c. Oversees
the conduct of acts that are intended to influence, coerce, manipulate, or
mislead a CPA when he/she is preparing a company’s financial statements.
d. Oversees
audits of companies whose securities are public traded.
Answer
34. Norris Company settled a lawsuit
in February for an amount that was significantly different from the amount that
was originally accrued as an estimate of potential loss. The company’s yearend is December 31 and its financial
statements are issued in March. This is an example of
a.
A
subsequent event that must be disclosed, but because it happened after the
balance sheet date no adjustment is needed .
b.
A
subsequent event that provided evidence of a condition that did not exist at
the balance sheet date.
c.
A
subsequent event that need not be disclosed because it did not occur before the
company’s yearend.
d.
A
subsequent event that provided further evidence of conditions that existed on
the balance sheet.
Answer
35. Footnote disclosure that
summarizes information that does not meet the measurement and reporting
requirements for presentation in a company’s financial statements, but is
useful to informed readers, is required in order to meet the concept of
a.
Understandability.
b.
Reliability.
c.
Representational
faithfulness.
d.
Cost/benefit.
Answer
36. A disclaimer of opinion is issued
when
a.
All
informative disclosures have not been made in the financial statements.
b.
Circumstances
prevent the auditor from performing all audit procedures necessary to comply
with generally accepted auditing standards.
c.
The
financial statements are not prepared in accordance with generally accepted
accounting principles.
d.
There
is a potential going concern issue.
Answer
37. The discrete view of interim
reporting
a.
Holds
that an interim period is a separate accounting period; thus, revenues and
expenses should be treated as though they occurred only in one period.
b.
Holds
that revenues and expenses should be allocated to the various interim periods.
c.
Holds
that revenues and expenses should be reported as they occur.
d.
Holds
that an interim period is an integral part of the annual reporting period.
Answer
38. The inclusion of MD&A
(Management Discussion and Analysis) in annual reports is required by the
a.
FASB.
b.
AICPA.
c.
SEC.
d.
APB.
Answer
39. Which SEC reporting form is the
normal registration statement for securities to be sold to the public?
a.
Form
10.
b.
Form
10-K.
c.
Form
10-Q.
d.
Proxy
Statement.
Answer
40. The Securities act of 1933
a.
Regulates
the trading of securities of publicly held companies .
b.
Regulates
the initial public sale and distribution of a corporation’s securities.
c.
Addresses
the personal duties of corporate officers.
d.
Specifies
information that is to be contained in a company’s annual report.
Answer
41. The Sarbanes-Oxley (SOX) Act of
2002 created the PCAOB. The PCAOB
a.
Is
primarily responsible for establishing generally accepted accounting
principles.
b.
Provides
legal and expert services to CPA firms when they are involved in class-action
law suits.
c.
Oversees
the conduct of acts that are intended to influence, coerce, manipulate, or
mislead a CPA when he/she is preparing a company’s financial statements.
d.
Oversees
audits of companies whose securities are public traded.
Answer
Essay
1.
List
the building blocks to disclosure
described in SFAC No. 5.
2.
List
and discuss the types of information commonly disclosed in the footnotes to
corporate financial statements.
3.
List
and discuss the recognition criteria for the two types of subsequent events.
4.
List
and discuss the three paragraphs contained in a standard unqualified audit
option.
5.
List
and discuss the circumstances that might cause an auditor to issue each of the
four types of audit opinions.
6.
What
information is required to be included in the MD & A section of the 10-K
annual report. (Do not include the information required by item 7a).
7. Define market risk and the types
of market risk to be disclosed in item &a of a company’s MD&A.
1.
8.
How
is the quantitative information about market risk–sensitive instruments to be
disclosed according to the SEC?
9.
What
are the purposes of the letter to stockholders?
10. List and explain the three types
of financial analysts.
11. Discuss the general purposes of:
a.
The
Securities Act of 1933
b.
The
Securities Exchange Act of 19
c.
The
Foreign Corrupt Practices Act of 1977
12. Discuss three general provisions
of the Sarbanes-Oxley Act.
13. Discuss the general requirements
of Sections 404(a) and 404(b) of the Sarbanes-Oxley Act.
14. Discuss the framework for
analysis that may be used in the resolution of ethical dilemmas.
15. List the six criteria identified
by the Anderson report and are indicative of effective auditor performance.
16. List the four sections of the
AICPA Code of Professional Conduct.
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