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ACCT 370 Quiz 3 Assets, Taxes & Postretirement Benefits solutions complete answers
ACCT 370 Quiz 3 Assets, Taxes & Postretirement Benefits solutions complete answers
A net operating loss may offset this percentage in taxable income of a specific subsequent year
During its first year of operations a company recorded accrued expenses totaling $375,000 for book purposes. For tax purposes, $175,000 of the expenses are deductible during the first year of operations and $200,000 are deductible during the second year of operations. The enacted income tax rate was 21% during the first year of operations and 25% during the second year of operations. The balance sheet at the end of the first year of operations will report a deferred tax:
Smith Company reported $350,000 in book income before income tax during 20X1, its first year of operation. The tax depreciation exceeded its book depreciation by $30,000. The tax rate for 20X1 and all future years was 21%.
What amount of deferred tax liability should Smith report in its December 31, 20X1, balance sheet?
If Smith paid no estimated taxes, what amount of income tax payable should Smith report in its December 31, 20X1, balance sheet?
Income tax expense reported in the income statement for the year ending December 31, 20X1 would be:
A corporation that incurs a net operating loss may carry the loss back to earlier years before it can carry the loss forward.
A lessor classifies leases that do not meet one of the five lease classification criteria as
Prior to FASB issuing pre-codified Statement of Financial Accounting Standards (SFAS) No. 13, lessees classified virtually all leases as _______ leases, which under current GAAP is consistent with accounting for _______ leases.
On January 1, 20X1, Lessee Company entered into a five-year lease which required annual payments of $120,000. The first payment was due at the inception of the lease. The present value of the mini-mum lease payments to initially record the lease was $500,384; the applicable discount rate was 10%. Lessee Company treated the lease as a finance lease under ASC 842. What is the balance of Lessee Company's lease liability immediately after the January 1, 20X2 payment was made?
Under ASC 842, the difference between the expense charged relating to a finance lease and an operating lease is:
Under ASC 842, over the life of a lease, the amount charged to expense is:
When a lessee has a finance lease under ASC 842, the amount shown for the asset and the amount shown for the related liability are equal
GAAP establishes specific criteria for the treatment of leases under ASC 842. If any of the criteria are met, the lessee
Consistent with ASC Topic 842, the amortization of the right-to-use asset fluctuates for a(n)
Under ASC 842, long-term operating leases are reported on the lessee's balance sheet, and depreciation expense will be recorded for the right-of-use asset.
Consistent with ASC 842, accounting for assets and liabilities associated with a long-term operating leases is identical to accounting for financing leases.
Under ASC 842, when accounting for a long-term operating lease, a liability is recognized on the lease commencement date.
Secured bonds are __________ by assets held by the bond issuer.
The most common types of bonds are unsecured bonds that also are referred to as:
Debentures are bonds that:
On January 1, 20X1 when the effective interest rate was 14%, a company issued bonds with a maturity value of $1,000,000. The stated rate of interest is 12%, the bonds pay interest semi-annually and sold for $893,640. The amount of bond discount amortized on July 1, 20X1 is approximately:
Hocker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 20X1. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.
The bond carrying amount at the end of 20X1 is:
The bond interest expense for 20X1 is:
The amount of cash interest paid in 20X1 on the bonds is:
The bond carrying value at the end of 20X2 is:
The amount of bond discount amortization for 20X2 is:
The amount of cash interest paid in 20X2 is:
The amount of bond interest expense for 20X2 is:
Consistent with GAAP, bonds are reported on the balance sheet at market value.
Doggy Co. began construction of a new cutter for the U.S. Coast Guard on January 1, 20X1 and completed construction of the ship on October 31, 20X2. To finance construction, Doggy took out an $8,000,000, 2-year, 6% construction loan on February 1, 20X1. Interest on the loan was to be paid annually on the anniversary date of the loan. Doggy has no other outstanding interest-bearing debt. Doggy made the following expenditures in conjunction with this construction project:
Date Amount
2/1/20X1 $1,050,000
3/31/20X1 $900,000
6/1/20X1 $750,000
10/1/20X1 $1,000,000
12/31/20X1 $600,000
3/1/20X2 $900,000
9/1/20X2 $250,000
What is the amount of Doggy's cumulative weighted average expenditures during 20X1 related to the cutter project?
How much interest should Doggy capitalize in 20X1 related to the cutter project?
How much interest should Doggy expense in 20X1?
What is the amount of Doggy's cumulative weighted average expenditures during 20X2 related to the cutter project?
What amount would appear in Doggy's construction in progress (CIP) account at December 31, 20X1?
Kitty Co. broke ground on its new building on March 1, 20X1, and completed construction November 30, 20X1. Kitty made the following expenditures in conjunction with this project:
Date Expenditure
April 1, 20X1 $450,000
June 1, 20X1 $200,000
Sept. 1, 20X1 $400,000
Nov. 30, 20X1 $100,000
Kitty's cumulative weighted average expenditures on this project would be
Which of the following is not a proper description of the pension Accumulated Benefit Obligation (ABO)?
When employers retroactively amend pension plans to increase benefits to participants, which one of the following is created?
Stone Company reported pre-tax book income of $700,000 in 20X1, the first year of operation. The tax depreciation exceeded the book depreciation by $90,000. The tax rate for 20X1 and all future years was 21%.
If Stone paid no estimated taxes, what amount of income tax payable should Stone report in its December 31, 20X1, balance sheet?
What amount of deferred tax liability should Stone report in its December 31, 20X1, balance sheet?
If Stone paid no estimated taxes, what amount of income tax payable should Stone report in its December 31, 20X1, balance sheet?
Income tax expense reported in the income statement for the year ending December 31, 20X1 would be:
Morey Corporation leases a tractor from Equity Leasing with a five-year non-cancelable lease on January 1, 20X1 under the following terms:
Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year.
The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor.
The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term.
The tractor has a six-year economic life.
Morey has an excellent credit rating.
Equity offers no warranty on the tractor other than the manufacturer’s two-year warranty that is handled directly with the manufacturer.
For Equity Leasing, this is treated as a(n)
Consistent with ASC Topic 842, operating lease expense is equal to
Blume Corporation leases equipment for a ten-month period. The entire related lease payment is due at the end of the ten-month period. The journal entry to recognize the monthly accrual related to the lease will include a debit to:
Flimm Company leases an asset over its estimated useful life of six years. At the inception of the lease, the present value of the lease payments is $240,000. The market value of the leased asset is $258,000.
Flimm’s journal entry to recognize the inception of the lease includes a credit to
The "property rights approach" is evident under ASB Topic 842 and IFRS No. 16 because both standards require that the
On January 1, 20X1, Lessee Corporation entered into a ten-year lease agreement. The lease terms required annual year-end payments of $160,000. The lease agreement does not contain either a bargain purchase option or a transfer of title. The fair value of the equipment at the inception of the lease was $1,100,000; estimated life of the leased assets was fourteen years. Lessee Corporation’s incremental borrowing rate was 10%; the implicit rate of interest, known to the lessee, was 12%. Applicable time value of money values are as follows:
Ten-year, 10% ordinary annuity
6.144
Ten-year, 12% ordinary annuity
5.650
Ten-year, 10% annuity due
6.759
Ten-year, 12% annuity due
6.328
Lessee Corporation should classify this lease agreement as a(n):
Adoption of new GAAP for leases is expected to have this estimated effect on the financial statements of U.S. companies.
Under IFRS, research must be expensed but some development expenditures may be capitalized. To capitalize development expenditures, firms must demonstrate several factors that include all of the following except:
Which item is not a component included by analysts in assessing short-term pension risk?
Smith, Inc. has a pension plan with the following data available for 20X1 and 20X2:
20X1
20X2
Service cost
$
30,000
$
34,000
Interest cost
$
18,000
$
20,000
Actual return on plan assets
$
15,000
$
21,600
Beginning of year plan assets
$
200,000
$
240,000
Discount rate
8
%
8
%
Expected return on plan assets
8
%
8
%
The adjustment to OCI for gain or loss from the return on plan assets for 20X1 is:
The trustee for the Bronson Corporation defined benefit pension plan sent a report to the CEO with the following information for the fiscal year:
Beginning balance of plan assets at fair value
$
1,560,000
Actual return on plan assets
$
210,000
Employer’s contribution
$
150,000
Distributions to retirees
$
75,000
Service cost
$
125,000
Interest cost
$
156,000
Loss from changes in benefits or assumptions
$
35,000
Beginning balance of the PBO
$
1,580,000
The ending balance of the projected benefit obligation (PBO) is:
Who bears the risk associated with underperforming investments of a defined benefit pension plan?
An analyst has reviewed Blunt Company’s note disclosures for its deferred taxes and noted a large increase in Blunt’s deferred tax liability. This increase could be caused by:
The accounting principle violated if temporary differences are not taken into account is the:
During 20X1, a company reported an increase in the deferred tax liability account of $47,790, a decrease in the deferred tax asset account of $17,225, and an income tax liability as per the 20X1 income tax return of $198,375. What is the income tax expense to be reported on the income statement for the year ending December 31, 20X1?
On January 1, 20X1, Lessor Corporation entered into a lease which was treated as a sales-type lease by Lessor Corporation. The leased asset’s book value within Lessor Corporation’s financial statements was $350,000 as of January 1, 20X1. The lease required the lessee to make ten annual payments of $50,000; the first payment was due at the beginning of the lease term and each January 1 thereafter. The present value of the minimum lease payments was $362,345. The implicit rate of interest, known to the lessee, was 8%, while the lessee’s incremental borrowing rate was 10%. The increase in Lessor Corporation’s net income for the year ended December 31, 20X1 was approximately
When accounting for a long-term operating lease under ASC 842, which one of the following accounts are charged with the expense on the lessee’s income statement?
Which of the following is NOT considered an executory cost associated with a leased asset?
On January 1, 20X1 Lessee Company entered into a five-year lease which required annual payments of $60,000. The first payment was due at the inception of the lease. The present value of the minimum lease payments to record the lease was $250,192; the applicable discount rate was 10%. What is the balance of Lessee Company’s lease liability as of December 31, 20X1?
Consistent with ASC Topic 842, at the inception of the lease, lessees must recognize a “right-of-use” asset for which type of lease(s)?
Consistent with ASC Topic 842, lease contracts are classified in these categories:
Margot leases equipment with an estimated useful life of five years, for a term of four years. Margot should classify this lease as a (n)
Dot Company issued $200,000 of bonds on January 1, 20X1 with interest payable each year. The bonds had a stated rate of 8%. The bonds were set up as floating-rate debt with the rated pegged to LIBOR plus 3%.
Which of the following will be the interest expense for year 1 if LIBOR is 5% ?
Which of the following will be the interest expense for year 1 if LIBOR is 5%?
Which of the following is not an accurate statement regarding the retirement of debt?
Using the effective interest method, amortization of a discount or premium behave in this manner over the life of the outstanding bonds.
The use of the lower of cost or net realizable value (LCNRV) method to value inventory for reporting purposes is a departure from the accounting principle of:
Konan, Inc. needs to determine its inventory value. The following information pertains to the individual products in ending inventory:
Product
Cost
Replacement Cost
Selling Price
Cost of Completion
Normal Profit
L-19
$40
$38
$50
$2
$11
M-23
52
40
60
10
8
N-05
20
24
30
2
6
Assuming Konan uses the LIFO method for costing its inventory, the minimum limit for market value of product M-23 is:
Assuming Konan uses the LIFO method for costing its inventory, the “market” value for item N-05 is:
Assuming Konan uses the LIFO method for costing its inventory, the maximum limit for market value of product L-19 is:
Assuming Konan uses the LIFO method for costing its inventory, the lower of cost or market for product N-05 is:
Assuming Konan uses the LIFO method for costing its inventory, the lower of cost or market for item M-23 is:
Assuming Konan uses the FIFO method for costing its inventory, the net realizable value for product L-19 is:
Assuming Konan uses the FIFO method for costing its inventory, the reported value of product M-23 is:
Assuming Konan uses the FIFO method for costing its inventory, write-down of inventory value for item M-23 is:
Assuming Konan uses the FIFO method for costing its inventory, the writedown of inventory value for Product N-05 is:
The following information pertains to the Fan Company’s inventory item B1008:
March
1
Inventory Balance
400
units
@
$
3.10
5
Purchase
1,400
units
@
$
3.20
14
Purchase
280
units
@
$
3.25
31
Inventory Balance
520
units
In a periodic inventory system, the ending LIFO inventory is:
Deuce Company purchased a truck for $50,000 on January 2, 20X1. The asset has an expected salvage value of $5,000 at the end of its five-year useful life.
What depreciation method is used if depreciation expense is $6,000 in 20X4?
How much is the depreciation expense in 20X2 if double-declining balance depreciation is used?
Under IFRS, deferred taxes:
Which of the following items used for resolving intra-firm comparisons is not generally disclosed?
Which of the following does not properly describe the presentation by the lessor under ASC 842?
Which of the following statements is correct with respect to the use of fair value accounting for liabilities under IFRS?
Which of the following is not a true statement regarding the fair value accounting option?
The interest rate on a revolving loan will usually:
In a common size cash flow statement, all items are expressed as a percentage of:
Which of the following people outside the company do not demand financial statement information as a key input?
All financial statements:
Which of the following statements is not true?
Which of the following correctly describes the tax rates used under U.S. GAAP and IFRS for deferred taxes?
Analysts can use the deferred tax portion of the income tax note to the financial statements to undo differences in financial reporting choices across firms and thereby:
Which of the following is included in the definition of a "tax position"?
Which of the following statements does not correctly describe required income tax disclosures in the notes to the financial statements?
Sand engaged in operations at the start of 2018 and reported $550,000 in pre-tax book income for the year. Tax depreciation for Sand exceeded book depreciation by $50,000. The tax rate for 2018 was 30%, and Congress had enacted a tax rate of 20% for the years after 2018.
What is the deferred tax liability for Sand at December 31, 2018?
Which of the following is not a correct statement regarding deferred tax asset valuation allowance?
During its first three years of operations a company reported pre-tax book income of $1,000,000 in year 1, ($1,800,000) in year 2, and $3,000,000 in year 3. The income tax rate applicable to each of the years was 40%.
Assume that there weren’t any temporary differences and a valuation allowance was not necessary.
What is the amount of the deferred tax asset reported in the year 2 year-end balance sheet if the company elected a loss carryback?
A corporation that incurs a pre-tax operating loss must:
Financial accounting and reporting for deferred taxes:
The allocation of income tax expense across periods when book and tax income differ is called:
Under international accounting standard IAS 17, a lessee may classify some assets held under leases as investment property which allows the lessee to:
Under international accounting standard IAS 17, which of the following is a correct answer choice?
Under ASC 840, the lessor’s treatment of leases is guided according to Type I and Type II characteristics. Type II characteristics are linked to:
On January 1, 2019, Lessee Company entered into a five-year lease which required annual payments of $120,000. The first payment was due at the inception of the lease. The present value of the minimum lease payments to initially record the lease was $500,384; the applicable discount rate was 10%. Lessee Company treated the lease as a finance lease under ASC 842. What is the balance of Lessee Company’s lease liability immediately after the January 1, 2020 payment was made?
Under ASC 840, operating leases require note disclosure of minimum lease payments for the:
Executory costs of a lease are treated by the lessee as:
On January 1, 2018 Lessee Company entered into a five-year lease which required annual payments of $60,000. The first payment was due at the inception of the lease. The present value of the minimum lease payments to record the lease was $250,192; the applicable discount rate was 10%. Lessee Company treated the lease as a capital lease under ASC 840. What is the balance of Lessee Company’s lease liability as of December 31, 2018?
A lease is legally a/an _______ contract.
On January 1, 2018 when the effective interest rate was 12%, Philips Co. issued bonds with a maturity value of $200,000. The stated rate of interest is 12% and the bonds pay interest semi-annually. Philips Co. paid $2,000 in bond issue costs on this date.
Under IFRS the bonds will be recorded on the January 1, 2018 balance sheet of Philips Co. at:
A contingent liability that is probable and can be reasonably estimated will immediately result in:
A hedged item can be any of the following except:
A variation of a forward contract that is traded daily in a market with many buyers and sellers and does not have a predetermined settlement date is a/an:
Special financial statement disclosures are required so that investors and analysts can understand all of the following except:
Investors need to review transactions involving debt-for-debt swaps carefully to ensure that there is an underlying:
Which of the following is not a valid statement regarding floating-rate debt?
Which of the following statements with respect to floating-rate debt is incorrect?
Hooker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2018. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.
The bond carrying amount at the end of 2018 is:
Which of the following would only be found in current liabilities on the balance sheet?
When an asset’s fair value has increased and a firm elects the revaluation method,
The allocation of the cost of a copyright to future periods of benefit is termed as:
An impairment loss is the difference between the carrying value of the asset and the:
According to U.S. GAAP, technological feasibility is established when an entity has completed all of the following activities necessary to establish that a product can be produced, except:
Which of the following statements about research and development costs is not valid?
Which one of the following items would be charged to the cost of a building rather than the cost of land?
Long-lived assets are:
Strategies to gain a competitive advantage include product differentiation and:
Which of the following is not considered an unusual or infrequently occurring item on an income statement?
Under ASC Topic 606 guidance for revenue recognition, which of the following factors is not a consideration when determining the transaction price of a contract?
1.
Accounting errors or irregularities can occur for which reasons?
simple oversight.
misapplication of GAAP.
management exploitation of the flexibility in GAAP.
all of these answer choices are correct.
2.
The basic accounting equation may be expressed as:
assets = liabilities - owners’ equity
liabilities = assets + owners’ equity
owners’ equity = assets - liabilities
assets = owners’ equity - liabilities
3.
big bath
4.
The Canon Corporation sells ten copiers to the Title Company on October 15 for $40,000. Canon delivers the copiers to Title on October 20 and Title pays $16,000, agreeing to pay the balance on November 10.
Under the accrual basis, how much revenue should Canon recognize in November?
$0
$16,000
$24,000
$40,000
5.
Contract Efficiency
6.
Contracts must be:
legally enforceable.
in writing.
communicated verbally.
drafted by an attorney.
7.
cookie jar
8.
The costs of providing financial information is ultimately borne by:
-management.
-shareholders.
-auditors.
-professional analysts.
9.
Disclosure Benefits:
10.
Disclosure Costs:
11.
Earnings management can occur through a variety of manipulations including:
Manipulating accrual estimates to impact expenses.
Misapplications of GAAP deemed immaterial on an account by account basis.
Big bath restructuring charges.
All of these answer choices are correct.
12.
Example of competitive disadvantage cost
13.
Example of information collecting cost
14.
Example of litigation cost
15.
Examples of managing earnings:
16.
Examples of political cost
17.
Examples of variable consideration include all of the following except:
penalties for not completing performing on a contract on time.
bonuses for completing performance on a contract early.
discounts on transaction prices.
all of the answer choices are correct.
18.
For what reasons does management have incentive to meet analysts’ expectations?
To build credibility with capital markets.
To convey future earnings prospects to investors.
To increase stock price.
All of these answer choices are correct.
19.
GAAP
20.
Goal of GAAP
21.
The goal of generally accepted accounting principles is to ensure that a company’s financial statements:
-do not contain any representation that could jeopardize management.
-provide stockholders all of the information they need to assess management’s performance.
-are accurate and free from fraud.
-clearly represent its economic condition and performance of the company.
22.
Hargren Publishing offers its Accounting textbooks as e-texts through its online homework management system. Purchase of an access code provides the student with access to the e-text and online learning materials for six months. During that time, students have access to updates to the text and learning materials. Hargren should recognize revenue for purchases of access codes:
at the end of the six-month access period.
when they occur.
over the six-month period during which the customer has access.
at the beginning of the semester in which the student will use the access code.
23.
How do auditors use financial statements?
24.
How do creditors use financial statements?
25.
How do equity investors use financial statements?
26.
If consideration is received before a contract is identified and the consideration is nonrefundable, revenue may be recognized if:
the contract has been terminated.
goods have been delivered.
there is no remaining obligation to transfer goods.
any of these answer choices is correct.
27.
If the financial reporting environment were unregulated, disclosure would occur voluntarily:
-as long as other companies in the reporting company’s industry voluntarily disclosed financial information.
-only to analysts that the company believes will report favorably on the company’s prospects.
-only when managers wanted to raise additional capital.
-as long as the incremental benefits to the company from supplying financial information exceeded the incremental costs of providing the information.
28.
In accounting for revenue recognition under ASC Topic 606, revenue can be recognized before a contract exists when cash has been received and:
Goods have already been delivered to a customer, and there is no further obligation for the seller to deliver goods or services.
The cash has been received for goods identified to be delivered and the cash is refundable.
The cash has been received for goods or services to be delivered and the cash is nonrefundable.
Revenue should never be recognized before a contract exists.
29.
Incentive for managers to manage earnings:
30.
Income statements are classified into sections to:
separate revenue recognized from deferred revenue.
distinguish between sustainable and transitory income.
separate real income from book income.
distinguish between book income and taxable income.
31.
In the case of sales where the customer is billed before delivery of the goods,
the seller should always recognize revenue before the products are delivered to the customer.
the goods belong to the customer and revenue recognition is deferred until delivery.
the seller may recognize revenue if control of the goods has been transferred to the customer even though physical delivery has not taken place.
revenue will not be recognized until the goods are shipped to the customer.
32.
Investors and analysts must have certain capabilities regarding financial reporting which include:
-an understanding of current financial reporting standards.
-recognition that management selects the financial reporting standards used.
-an ability to recognize that financial statement information reported is grounded in judgment as well as facts.
-all of these answer choices are correct.
33.
The key accounting issue related to bundled products such as software licenses and technical support:
Multiple Choice
is the method of revenue recognition.
is the amount of revenue to recognize over the life of the contract.
depends on whether the customer is able to pay for the contracted services.
concerns the amount of transaction price to allocate to each contract element.
34.
The new ASC Topic 606 for revenue recognition:
addresses when and how revenue should be recognized in contracts that provide both goods and services to customers.
eliminates both the percentage-of-completion method and the installment sales method of revenue recognition.
will require companies to recognize a net liability contract position on all new contracts; revenue will then arise from increases in the net contract position over the life of the contract.
is more rules based than are existing standards.
35.
The new ASC Topic 606 provides a model for revenue recognition that includes:
five steps.
four steps.
three steps.
two steps.
39.
A patient of Dr. Jones presents his Medicare card after his appointment. The total charge for the services was $100; however, Medicare will pay only $60 for this service and the patient is to pay $20. Acceptance of the patient’s Medicare insurance creates a contract:
for payment of $100, regardless of what Medicare will pay.
for $20 and an $80 discount or price concession.
for payment of $80 and a $20 discount or price concession.
for payment of $60 and a price concession of $40.
40.
The rationale behind the rules for multiple-step income statements is to subdivide the income in a manner that facilitates:
cash flows.
forecasting.
tax return preparation.
audits.
41.
Relevant financial information:
-is free from bias and error.
-is measured in a similar manner among different companies.
-can be independently verified.
-is capable of making a difference in a decision.
42.
The residual approach to allocate transaction prices to multiple performance obligations in a contract is appropriate when:
The stand-along price of one or more of the goods or services is highly variable or uncertain.
None of the goods and services included in the contract are not sold on a stand-alone basis.
The stand-alone price of all of the goods or services is known.
None of these.
43.
Revenue for goods to be sold under a consignment arrangement of a manufacturer and a retail store should be recognized by the manufacturer when:
the manufacturer delivers the product to a retail store.
the seller promises to pay the manufacturer.
the goods are sold by the retail store.
the seller receives payment for the goods.
44.
Supply of financial reporting is driven by:
45.
To achieve faithful representation, the financial information must be:
-consistent, unbiased, and relevant.
-relevant, comparable, and timely.
-relevant, consistent, and timely.
-complete, neutral, and free from material error.
46.
Under ASC Topic 606 guidance for revenue recognition, all of the following conditions must be met to account for a contract with a customer, except:
the contract has commercial substance.
collection is likely.
each party’s rights are identified regarding goods or services to be exchanged.
all parties to the contract have approved the contract.
48.
Voluntary disclosure should only occur when
49.
What are the four supporting accounting characteristics?
50.
What characteristics make F/S valuable?
51.
What is the difference between cash flow and accrual accounting?
52.
When financial statements are used by shareholders and investors to evaluate the performance of a company’s top executives it is referred to as the _____________ function of financial reports.
-proxy.
-fundamental.
-technical.
-stewardship.
53.
Which of the following are correct with respect to information contained in financial statements?
-Information asymmetry occurs when management has access to more and better information than do people outside the company.
-Financial statements cannot solve the issue of information asymmetry.
-Financial statements help solve the issue of information asymmetry.
-Financial statements help solve the issue of information asymmetry which is when management has access to more and better information than do people outside the company.
54.
Which of the following are primary qualitative characteristics of accounting information?
Relevance and Timeliness.
Relevance and Faithful Representation.
Comparability and Timeliness.
Verifiability and Understandability.
55.
Which of the following parties are responsible for the detection of errors and accounting irregularities in a company’s financial statements?
external auditors.
the SEC staff during their review process.
internal audit staff and audit committee of the board of directors.
all of these answer choices are correct.
56.
Which of the following statements best describes expenses?
They are recorded in the accounting period when they are "earned" and become "measurable."
They consist of amounts paid for consumable items and services rendered to the organization during the accounting period.
They are the expired costs or assets "used up" during the accounting period.
They consist of cash payments to employees during the period for services rendered.
57.
Which of the following statements is correct with respect to economic incentives to release financial information?
-Because companies have an economic incentive to supply information investors want, regulatory groups have little influence over the amount and type of financial information that companies disclose.
-Because financial disclosures are regulated, owners and managers have little economic incentive to supply the amount and type of financial information that will enable them to raise capital most cheaply.
-Companies have an economic incentive to supply the information investors want in order to raise capital at the lowest possible cost.
-Owners and managers do not have an economic incentive to supply the amount and type of financial information because it has no effect on the company’s ability to raise capital at the lowest cost.
58.
Which of the following statements is not correct regarding a company’s financial statements?
-They may present a picture of the company at a moment in time.
-They may describe changes that took place over a period of time .
-They reflect economic events that affect the company.
-They are comparable to the statements of other companies as all publicly held companies follow the very precise science of accounting.
59.
Which of the following statements is not true regarding revenue recognition regarding gift cards?
"Breakage" refers to the unused portion of gift card balances.
"Breakage" can only be recognized as revenue to the extent that it is probable a reversal will not be necessary.
The amount received from the sale of gift cards is required to be recognized as revenue when the gift cards are sold.
It is typical that a portion of gift card sales will go unused by customers.
60.
Which one of the following types of disclosure costs is the cost of disclosing the company’s pricing strategies?
Political cost
Litigation cost
Competitive disadvantage cost
Information collection, processing, and dissemination cost
61.
Which statement below is not correct with respect to earnings management?
It is increasingly common because of the pressure to meet analysts’ expectations.
More firms just beat rather than just miss the analyst expectations.
More than 80% of CEOs surveyed indicated that reporting a profit is an important benchmark.
More than 70% of CEOs surveyed indicated that beating consensus EPS is an important benchmark.
66.
Why are there tradeoffs with accounting rules and what is an example?
67.
Working capital accounts include:
all assets.
all assets and liabilities.
current assets and all liabilities.
current assets and current liabilities.
68.
Yashito Corporation sells cameras and accessories. The company’s newest model, popular with preteens, takes wallet-sized instant photos. The wholesale price for this camera is $50. In addition, the company sells carrying cases ($25), film cartridges ($15), and selfie lenses ($10) made especially for this camera. During the holiday season, Yashito offers the camera, film, carrying case, and selfie lens as a package for $75. For each package sold, the transaction price allocated to the camera is:
$100.
$75.
$50.
$37.50.
2.
Accounting errors or irregularities can occur for which reasons?
A) simple oversight.
B) misapplication of GAAP.
C) management exploitation of the flexibility in GAAP.
D) all of these answer choices are correct.
3.
Accounting treatment for changes in accounting principle are best described as:
A) Changes in accounting principle that are only permitted when FASB issues a standard that revises GAAP.
B) Changes in accounting principle that are always accounted for using the retrospective approach which requires only a restatement of prior years’ presented financial information.
C) Changes in accounting principle that may require both a restatement of prior years’ financial information and the recording of a cumulative adjustment to retained earnings.
D) Tax effects are ignored when reporting changes in accounting principles.
4.
Accrual accounting decouples measured earnings from operating cash inflows and outflows.
5.
Accumulated depreciation is a/an:
A) expense account.
B) liability account.
C) contra-asset account.
D) owners’ equity account.
6.
Adjusting entries are used in all but which of the following situations?
A) Prepayments.
B) Deferred Revenue and Expenses.
C) Accrued Revenue and Expenses.
D) Prepayments, Deferred Revenue, Accrued Expenses, Accrued Revenue.
7.
Adjusting entries must be made:
A) to correct errors in the accounts.
B) to reconcile the accounts to the budget.
C) because auditing standards require them.
D) because certain types of events will otherwise not be recorded in the accounts.
8.
Any increase in an asset may be offset by:
A) a corresponding decrease in a liability.
B) a decrease in some other asset account.
C) a corresponding decrease in owner’ equity.
D) an increase in another asset account.
9.
The basic accounting equation may be expressed as:
A) assets = liabilities - owners’ equity
B) liabilities = assets + owners’ equity
C) owners’ equity = assets - liabilities
D) assets = owners’ equity - liabilities
10.
The basic accounting equation may be expressed as assets = liabilities - owners’ equity.
11.
The best measure of a firm’s sustainable income is:
A) income from continuing operations.
B) income before income tax.
C) income before unusual items and change in accounting principle.
D) net income.
12.
Black and Decker decides to discontinue producing toasters in lieu of more versatile toaster ovens. In the process of discontinuing this line, the company disposes of the old production equipment and buys new equipment. The disposal of the old equipment would be reported in the income statement as:
A) gain or loss on the sale of equipment as part of continuing operations.
B) gain or loss on the sale of production equipment as part of cost of goods manufactured and sold.
C) gain or loss on the disposal of discontinued business component.
D) income from operation of a discontinued business component.
13.
The Canon Corporation sells ten copiers to the Title Company on October 15 for $40,000. Canon delivers the copiers to Title on October 20 and Title pays $16,000, agreeing to pay the balance on November 10.
Under the accrual basis, how much revenue should Canon recognize in November?
A) $0
B) $16,000
C) $24,000
D) $40,000
14.
The Canon Corporation sells ten copiers to the Title Company on October 15 for $40,000. Canon delivers the copiers to Title on October 20 and Title pays $16,000, agreeing to pay the balance on November 10.
Under the cash basis, how much revenue should Canon recognize in October?
A) $0
B) $16,000
C) $24,000
D) $40,000
15.
Cash-basis accounting provides the most useful measure of future operating performance.
16.
The change in equity of an entity during a period from transactions and other events from non-owner sources is known as:
A) net income.
B) net operating income.
C) comprehensive income.
D) net change in assets.
17.
The change in equity of an entity during a period from transactions and other events from non-owner sources is known as comprehensive income.
18.
A component of an entity may be a/an:
A) reportable or operating segment.
B) subsidiary.
C) asset group.
D) reportable or operating segment, subsidiary, or asset group.
19.
A cumulative effect of a change in an accounting principle is measured as:
A) the difference between prior periods’ net income under the old method and what would have been reported if the new method had been used in the prior years.
B) the after-tax difference between prior periods’ net income under the old method and what would have been reported if the new method had been used in the prior years.
C) the difference between prior periods’ net income and current net income under the old method and what would have been reported if the new method had been used in the prior years and the current year.
D) the after-tax difference between prior periods’ net income and current net income under the old method and what would have been reported if the new method had been used in the prior years and the current year.
20.
Current U.S. GAAP permits firms to display the components of other comprehensive income in which of the following formats?
A) as a schedule appearing in the notes to the financial statements.
B) in a two-statement approach, one in which net income comprises one statement and a second, which presents a separate statement of comprehensive income.
C) as part of the statement of changes in stockholders’ equity.
D) as a part of the statement of cash flows.
21.
A debit:
A) increases Accounts Payable.
B) increases Cost of Goods Sold.
C) decreases Accounts Receivable.
D) decreases Equipment.
22.
A debit does which of the following?
A) Increases the value in an asset account.
B) Increased the value in a contra-asset account.
C) Decreases the value in a liability account.
D) Increases the value in an asset account and also decreases the value in a liability account.
23.
The discontinued operations section of the income statement is comprised of which one of the following?
A) Income from the operation of a discontinued business component and gain or loss from the disposal of the discontinued component.
B) Income from the operation of a discontinued business component, net of tax, and gain or loss from the disposal of the discontinued component, net of tax.
C) Income from the operation of a discontinued business component, net of tax, and gain or loss from the disposal of the discontinued component.
D) Gain or loss from the disposal of the discontinued component, net of tax.
24.
Each set of EPS numbers includes separately reported numbers for income from continuing operations and the items that appear below it on the income statement.
25.
Earnings management can occur through a variety of manipulations including:
A) Manipulating accrual estimates to impact expenses.
B) Misapplications of GAAP deemed immaterial on an account by account basis.
C) Big bath restructuring charges.
D) All of these answer choices are correct.
26.
Entering the DR or CR amount in the appropriate left or right side of the affected T-account is called:
A) posting.
B) cross-referencing.
C) journalizing.
D) recording.
27.
The expense matching principle states that:
A) Expenses are recognized when paid.
B) All expenses are recognized when the corresponding revenue is recorded.
C) Some expenses are recognized when the corresponding revenue is recognized and some are spread over time.
D) Expenses are recognized when the invoice is received.
28.
For a disposal group to be considered held for sale, which of the following conditions are required to be met?
A) Management has committed to a plan to see the component.
B) The sale is probable and is expected to be completed within one year.
C) The component is available for immediate sale in its present condition subject only to usual and customary terms for such sales.
D) All of these conditions must be met.
29.
For each transaction, the dollar total of the debits must equal the dollar total of the credits.
30.
For what reasons does management have incentive to meet analysts’ expectations?
A) To build credibility with capital markets.
B) To convey future earnings prospects to investors.
C) To increase stock price.
D) All of these answer choices are correct.
31.
GAAP requires firms to report comprehensive income:
A) at the end of the income statement.
B) as one separate statement of comprehensive income.
C) in the statement of changes in stockholders’ equity.
D) in a statement that is displayed with the same prominence as other financial statements.
32.
GAAP requires that each set of EPS numbers includes separately reported numbers for all of the following except:
A) special or unusual items.
B) income from continuing operations.
C) discontinued operations.
D) net income.
33.
Gains and losses from continuing operations that are not typical recurring costs are presented as a separate line in the income from continuing operations section of the income statement.
34.
Hickory Furniture Company paid for the following costs during the month of May:
Inventory purchases
$
40,000
Advertising costs
8,000
Delivery costs
2,000
Hickory sold $32,000 of the inventory and has agreed to pay warranty expenses for its customers. These are expected to be $1,600 and occur evenly over the next four months (i.e., starting in June).
What is the amount of Hickory’s cash-basis expenses for the month of May?
A) $33,600
B) $42,400
C) $50,000
D) $51,600
35.
Hickory Furniture Company paid for the following costs during the month of May:
Inventory purchases
$
40,000
Advertising costs
8,000
Delivery costs
2,000
Hickory sold $32,000 of the inventory and has agreed to pay warranty expenses for its customers. These are expected to be $1,600 and occur evenly over the next four months (i.e., starting in June).
What is the amount of Hickory’s May expenses when applying the matching principle?
A) $33,600
B) $42,400
C) $43,600
D) $50,000
36.
Hickory Furniture Company paid for the following costs during the month of May:
Inventory purchases
$
40,000
Advertising costs
8,000
Delivery costs
2,000
Hickory sold $32,000 of the inventory and has agreed to pay warranty expenses for its customers. These are expected to be $1,600 and occur evenly over the next four months (i.e., starting in June).
What type of cost is the advertising expense?
A) Product cost
B) Traceable cost
C) Inventory cost
D) Period cost
37.
Income statements are classified into sections to:
A) separate revenue recognized from deferred revenue.
B) distinguish between sustainable and transitory income.
C) separate real income from book income.
D) distinguish between book income and taxable income.
38.
In its accrual-basis income statement for the year ended December 31, 2018, Ralph Company reported revenue of $2,565,000. Additional information was as follows:
Accounts receivable 12/31/17
$
418,500
Uncollectible accounts written off during 2018
17,200
Accounts receivable 12/31/18
391,700
Required:
Under the cash basis of net income determination, how much should Ralph report as revenue for 2018?
39.
John Hamilton, D.D.S. keeps his accounting records on the cash basis. During 2018 Dr. Hamilton collected $220,000 in fees from his patients. At December 31, 2017, Dr. Hamilton had accounts receivable of $30,000. At December 31, 2018 Dr. Hamilton had accounts receivable of $35,000 and had collected deferred fee revenue of $8,000.
Required:
On the accrual basis, what was Dr. Hamilton’s patient service revenue for 2018?
40.
The matching principle requires that expenses be recognized:
A) in the same period in which all the assets are used up.
B) in the same period in which the revenue generated by these expenses is recognized.
C) when the costs are paid by the entity.
D) in the same period in which the revenue generated by these expenses is received.
41.
The matching principle says that expenses are matched to the revenue recognized during the period, not that revenue is matched to the period’s expenses.
42.
Misstatements of tax expense, improper restructuring charges, asset impairment charges and gains/losses related to acquisitions are which type of restatement?
A) those related to revenue recognition
B) items related to core expense issues
C) items related to non-core expense issues
D) reclassification and disclosure issues
43.
Net asset valuation and net income determination are inextricably intertwined.
44.
Net income recognition always increases:
A) assets.
B) net assets.
C) liabilities.
D) net liabilities.
45.
On the income statement, income from discontinued operations is shown:
A) as a separate section of income from continuing operations.
B) as an accounting principle change.
C) without any income tax effect.
D) net of taxes after income from continuing operations.
46.
Other Comprehensive Income (OCI) is used both in U.S. GAAP and IFRS. Which of the following statements is correct?
A) As a general rule, U.S. GAAP allows more opportunities for managers to change balance sheet valuations of certain assets even when management has no intention to sell these assets.
B) Changes in the valuation of property, plant, and equipment create a Revaluation Surplus used in both IFRS and U.S. GAAP.
C) Both IFRS and U.S. GAAP require companies to report in other comprehensive income each period the valuation changes from changes in actuarial estimates affecting defined benefit pension plans.
D) U.S. GAAP requires a separate statement of OCI to immediately follow the income statement in the financial reporting statement.
47.
Period costs would include costs like advertising or insurance where the linkage between these costs and individual sales is difficult to establish.
48.
The point within the operating cycle when the company’s net assets have increased is the point when revenue should be recognized.
49.
The rationale behind the rules for multiple-step income statements is to subdivide the income in a manner that facilitates:
A) cash flows.
B) forecasting.
C) tax return preparation.
D) audits.
50.
The real accounting issue in net income recognition is the:
A) quantity of income recognized.
B) type of income recognized.
C) timing of the recognition.
D) basis of net income recognition.
51.
Recent changes in ________ accounting standards require companies to group items within OCI based on ________:
A) U.S. GAAP; whether they will be reclassified subsequently into net income or whether they will be subsequently reclassified into income when specific conditions are met.
B) IFRS; whether they will be reclassified subsequently into net income or whether they will be subsequently reclassified into income when specific conditions are met.
C) U.S. GAAP; their expected future categorization on the income statement into income from continuing operations and discontinued operations.
D) IFRS; their expected future categorization on the income statement into income from continuing operations and discontinued operations.
52.
Restatements occur for a number of reasons. Which of the following is the most common type of restatement?
A) those related to revenue recognition.
B) items related to core expense issues.
C) items related to non-core expense issues.
D) reclassification and disclosure issues.
53.
Revenue is recognized when:
A) a contract is signed by both parties.
B) the seller completes performance required by an agreement.
C) the buyer completes payment required under an agreement.
D) the buyer accepts delivery and completes required payments.
54.
Royal, Inc. discovered that equipment purchased on January 1, 2018 for $300,000 will not last as long as originally estimated. The firm was depreciating the equipment at the rate of $40,000 per year with an estimated salvage value of $20,000. New estimates on January 1, 2021 indicate that the equipment will last a total of five years with no salvage value. How much should Royal, Inc. record as depreciation in 2021?
A) $40,000
B) $60,000
C) $90,000
D) $120,000
55.
Schlegel Department Store sells gift certificates—redeemable for store merchandise—that expire one year after their issuance. Schlegel has the following information pertaining to its gift certificates sales and redemptions:
Unredeemed certificates at 12/31/17
$
90,000
2018 sales
400,000
2018 redemptions of prior year sales
60,000
2018 redemptions of current year sales
325,000
Schlegel’s experience indicates that 10% of gift certificates will not be redeemed. The company’s policy is to record revenue on gift certificates when they are redeemed or expire.
Required:
In its 2018 income statement, what amount should Schlegel report as gift certificate revenue?
56.
Selected unrealized gains (or losses) sometimes bypass the income statement and are reported as direct adjustments to a stockholders’ equity account.
57.
A special one-time charge resulting from corporate restructurings would be reported on the income statement as a/an:
A) operating item before gross profit.
B) special item in continuing operations.
C) special item in continuing operations, shown net of tax.
D) special item in discontinued operations, shown net of tax.
58.
The statement, "linkage between these costs and individual sales is difficult to establish," refers to:
A) period costs.
B) expired costs.
C) product costs.
D) traceable costs.
59.
T-account analysis can be used to gain insights into why accrual basis earnings and cash basis earnings differ and to:
A) journalize future transactions.
B) reconstruct transactions that have occurred during a given reporting period.
C) post transactions that have occurred during a given reporting period.
D) determine the current market price of common stock.
60.
) The Canon Corporation sells ten copiers to the Title Company on October 15 for $40,000. Canon delivers the copiers to Title on October 20 and Title pays $16,000, agreeing to pay the balance on November 10.
Using the accrual basis, which one of the following entries would properly record Canon’s revenue recognition for October?
A)
DR Cash
40,000
CR Copier sales
40,000
B)
DR Cash
16,000
CR Copier sales
16,000
C)
DR Cash
16,000
DR Accounts receivable
24,000
CR Copier sales
40,000
D)
DR Accounts receivable
40,000
CR Copier sales
40,000
61.
To get revenue and expense account balances to zero an adjusting entry is made.
62.
To get revenue and expense account balances to zero requires a/an:
A) adjusting entry.
B) closing entry.
C) operating entry.
D) reversing entry.
63.
Traceable costs are also called:
A) period costs.
B) expired costs.
C) product costs.
D) administrative costs.
64.
Traditional financial reporting presents forecasted cash flow information.
65.
Under Bart Company’s accounting system, all insurance premiums paid are debited to prepaid insurance. For interim reports, Bart makes monthly estimated charges to insurance expense with credits to prepaid insurance. Additional information for the year ended December 31, 2018 is as follows:
Prepaid insurance at December 31, 2017
$
310,000
Charges to insurance expense during 2018, including a year-end adjustment of $50,000
975,000
Unexpired insurance premiums at December 31, 2018
265,000
Required:
What was the total amount of insurance premiums paid by Bart during 2018?
66.
U. S. GAAP permits companies to report components of other comprehensive income (OCI) as part of the statement of changes in stockholders’ equity.
67.
When a company changes from any inventory method to LIFO, the change is reported
A) prospectively because it is usually impractical to determine the effects of this change on prior years’ net income.
B) as an error correction.
C) as a change in an accounting estimate.
D) using the retrospective approach.
68.
When a company changes from LIFO to another inventory method, the change is reported
A) prospectively because it is impractical to determine the effects of this change on prior years’ net income.
B) as an error correction.
C) as a change in an accounting estimate.
D) using the retrospective approach.
69.
When a company changes from straight-line depreciation to double-declining-balance depreciation, the change is reported
A) prospectively because it is impractical to determine the effects of this change on prior years’ net income.
B) as an error correction.
C) as a change in an accounting estimate.
D) using the retrospective approach.
70.
When actuarial estimates related to defined benefit pension plans are adjusted:
A) Both U.S. GAAP and IFRS require companies to report these valuation changes in OCI each period.
B) Only U.S. GAAP requires companies to report these valuation changes in OCI each period.
C) Only IFRS requires companies to report these valuation changes in OCI each period.
D) Neither U.S. GAAP nor IFRS requires companies to report these valuation changes in the financial statements.
71.
When analysts provide basic EPS for income from continuing operations that exclude the effects of special (i.e., nonrecurring) gains or losses and certain other non-cash charges, such earnings are frequently referred to as:
A) normal earnings.
B) pro forma earnings.
C) sustainable earnings.
D) real earnings.
72.
When reporting a change in an accounting principle, the general rule requires that the current year’s income from continuing operations reflect:
A) use of the newly adopted principle for the current year recognition.
B) use of the old principle for the current year recognition.
C) management’s choice of either the old or newly adopted principle for the current year recognition.
D) FASB’s designation of either the old or newly-adopted principle based on the item being changed.
73.
When reporting unusual or infrequent items in the income statement which of the following is not correct?
A) If a material event is either unusual in nature or an infrequent occurrence it is classified on the income statement as a special or unusual item in continuing operations.
B) If a material event is either unusual in nature or an infrequent occurrence—such as a one-time charge resulting from a major restructuring—it may be classified on the income statement as a special or unusual item in continuing operations or treated as an extraordinary item if it has been a number of years since the company’s last major restructuring.
C) Firms that use early debt retirement on a recurring basis as part of their ongoing risk management practices will report the associated gains and losses as part of income from continuing operations with separate line-item disclosure.
D) The write-off of obsolete inventory would be reported on the income statement as a special item in continuing operations.
74.
When transitory earnings are present, which of the following correctly depicts the order used on the income statement?
A) Income from continuing operations, unusual items, income tax expense, discontinued operations, net income.
B) Income from continuing operations, discontinued operations, income tax expense, net income.
C) Income from continuing operations, income tax expense, discontinued operations, net income.
D) Income tax expense, income from continuing operations, unusual items, discontinued operations, net income.
75.
When using the retrospective approach for a change in accounting principle, disclosure rules require that:
A) prior years’ income statements presented for comparative purposes be restated to reflect use of the new principle unless it is impractical to do so.
B) all prior years’ income statements be restated to reflect use of the new principle, and include a pro forma net income figure of the previously reported income.
C) no prior years’ income statements be restated, but a pro forma net income figure be provided to reflect use of the new principle for each year presented.
D) no prior years’ income statements be restated, and no pro forma net income figures be provided.
76.
Which item is not correct with respect to the treatment of sustainable and transitory items and a company’s income statement?
A) Financial reporting assists statement users in forecasting future cash flows by providing an income statement format that segregates components of net income.
B) Income statements prepared in accordance with GAAP differentiate between income components that are believed to be sustainable and those that are transitory.
C) The income statement isolates a key figure called "income from sustainable operations."
D) Transitory items are disclosed separately on the income statement so that statement users can place less weight on these earnings components when forecasting future profitability.
77.
Which of the following best describes the reporting for discontinued operations?
A) Discontinued operations will not generate future cash flows and thus the results of transactions related to operations the firm intends to discontinue, or has already discontinued, must be reported separately from other income items on the income statement.
B) Discontinued operations presentation is used only when a component of an entity has been sold.
C) There are 4 criteria that must be met to classify a disposal group as held for sale.
D) Discontinued operations may generate future cash flows and thus there will be results of transactions related to operations the firm intends to discontinue. If the firm does generate future transactions before disposing of the disposal group, it will report that revenue in continuing operations revenue.
78.
Which of the following causes basic EPS to differ from fully diluted EPS?
A) Convertible preferred stock.
B) Warrants.
C) Management stock options.
D) All of these answer choices are correct.
79.
Which of the following does not properly state the reporting requirements when a change in reporting entity occurs?
A) Comparative financial statements for prior years must be restated to reflect the new reporting entity as if it had been inexistence during all the years presented.
B) Comparative financial statements for the prior year only must be restated to reflect the new reporting entity.
C) The effect of the change on income before extraordinary items, net income and other comprehensive income must be restated.
D) Per share amounts must be disclosed for all periods presented.
80.
Which of the following is a true statement?
A) Revenue decreases owners’ equity and increases liabilities.
B) Expenses increase owners’ equity and decrease liabilities.
C) Revenue increases owners’ equity and expenses decrease owners’ equity.
D) Revenue decreases owners’ equity and expenses increase owners’ equity.
81.
Which of the following is not a change in reporting entity?
A) When combined statements replace statements of individual entities.
B) When there is a change in the subsidiaries to be consolidated or combined.
C) When a business combination is accounted for under the acquisition method.
D) All of these answer choices are correct.
83.
Which of the following is not correct with respect to accrual accounting?
A) Accrual accounting can produce large discrepancies between the firm’s reported profit performance and the amount of cash generated from operations.
B) The principles that govern revenue and expense recognition under accrual accounting are designed to alleviate the mismatching problems that exist under cash-basis accounting.
C) Reported accrual accounting net income for a period always provides an accurate picture of underlying economic performance.
D) Accrual accounting does not decouple measured earnings from operating cash inflows and outflows.
84.
Which of the following items is not a type of accounting change?
A) Change in accounting principles used; for example, a change from LIFO to FIFO.
B) Change in the majority owner of the company.
C) Change in accounting estimate; for example, a change in the useful life or salvage value of a depreciable asset.
D) Change to consolidated financial statements from individual financial statements.
85.
Which of the following parties are responsible for the detection of errors and accounting irregularities in a company’s financial statements?
A) external auditors.
B) the SEC staff during their review process.
C) internal audit staff and audit committee of the board of directors.
D) all of these answer choices are correct.
86.
Which of the following situations may create an accounting error?
A) Simple oversight.
B) Parties disagree on accounting for a transaction resulting in a misapplication of GAAP.
C) Management exploits the flexibility in GAAP to inflate earnings.
D) All of these answer choices are correct.
87.
Which of the following statements best describes expenses?
A) They are recorded in the accounting period when they are "earned" and become "measurable."
B) They consist of amounts paid for consumable items and services rendered to the organization during the accounting period.
C) They are the expired costs or assets "used up" during the accounting period.
D) They consist of cash payments to employees during the period for services rendered.
88.
Which of the following statements is correct regarding revenue and expense accounts?
A) These are really owners’ equity accounts.
B) These are really contributed capital accounts.
C) They have no impact on the balance sheet.
D) These are balance sheet accounts.
89.
Which of the following would not be considered a revenue recognition abuse?
A) Recording goods on consignment as part of inventory when there is a right of return.
B) Recording goods on layaway for a customer as a final sale.
C) Recording revenue on a large shipment to a customer whose ability to pay is not reasonably assured.
D) Recording revenue on goods ready for delivery to the customers, segregated in the company warehouse without a bill-and-hold arrangement in the contract.
90.
Which one of the following events would be considered an unusual or infrequent event?
A) a tornado in Kansas.
B) an earthquake in New York.
C) a flood in St. Louis near the Mississippi River.
D) an earthquake in southern California.
91.
Which one of the following is part of other comprehensive income (OCI)?
A) Unrealized gains resulting from translating foreign currency financial statements of majority-owned subsidiaries to U.S. dollar amounts.
B) Gains on sales of treasury stock.
C) Receipt of land donated by a governmental unit.
D) Sale of common stock above par.
92.
Which statement below best describes when to record an expense?
A) When the expense is paid.
B) When the resource paid for is consumed.
C) Always taken in one period only.
D) Never is recognized before revenue is recognized.
93.
Which statement below is not correct with respect to earnings management?
A) It is increasingly common because of the pressure to meet analysts’ expectations.
B) More firms just beat rather than just miss the analyst expectations.
C) More than 80% of CEOs surveyed indicated that reporting a profit is an important benchmark.
D) More than 70% of CEOs surveyed indicated that beating consensus EPS is an important benchmark.
94.
While the earnings process is the result of many separate activities, it is generally acknowledged that there is usually one critical event or key stage considered to be absolutely essential to the ultimate increase in net asset value of the firm.
95.
Working capital accounts include:
A) all assets.
B) all assets and liabilities.
C) current assets and all liabilities.
D) current assets and current liabilities.
1.
An analytical tool that measures a company’s performance against a predetermined standard is a/an:
A) profitability analysis.
B) common-size statement.
C) benchmark comparison analysis.
D) time-series analysis.
2.
As transitory components become a more important part of a firm’s reported earnings, the reported earnings:
A) are a less reliable indicator of sustainable cash flows.
B) are a more reliable indicator of fundamental value.
C) are more quality enhanced.
D) become a more reliable indicator of sustainable cash flows.
3.
At the acquisition date of an active investment, when the cost of the shares acquired exceeds the underlying book value, the investor is required to amortize any excess that is attributable to separately identifiable assets have an indefinite life. Which of the following is a separately identifiable asset that might not be recognized on the investee’s balance sheet?
A) Goodwill B) Patent C) Inventory D) Land
4.
Carrying amounts in a GAAP balance sheet are measured using all the following except:
A) projected ROI.
B) historical cost.
C) discounted present value.
D) net realizable value.
5.
Changes in deferred tax assets and liabilities from one year to the next that are not included in the income tax entry based on continuing operations are explained by:
A) interperiod tax allocation.
B) current income tax allocation.
C) constructive receipt allocation.
D) intraperiod tax allocation.
6.
A clawback provision in an employment contract:
A) requires managers to become more conservative in their business decision-making.
B) requires managers to refrain from making discretionary accruals. C) requires managers to return bonuses received in the event of a financial statement restatement.
D) requires managers to respond to compensation committee requests for information.
7.
Common-size financial statements recast each statement item as:
A) a percentage of some "base number" on the financial statement in question.
B) a percentage of the "bottom line."
C) a percentage using a base year number for each line item.
D) a percentage using industry averages for the "base number."
8.
Companies that consistently earn rates of return above the competitive floor in the industry are considered to possess a:
A) dominant market share.
B) competitive advantage.
C) monopolistic advantage.
D) niche market.
9.
Company A’s interest ratio has fallen below the level required by its lender. The lender may not take which action?
A) Demand repayment of the loan.
B) Replace the CEO of the company.
C) Gain representation on the company’s board of directors.
D) Veto payment of a dividend.
10.
A company instituted an IRS-approved plan to contribute monies to a plan that would pay each employee a percentage of his or her highest year of salary for each year of service upon termination of services. This plan is a:
A) postretirement benefit plan.
B) defined contribution pension plan.
C) defined benefit pension plan.
D) government sponsored pension plan
11.
Compensation incentives that motivate and reward executives for three to seven years of growth and prosperity are called:
A) long-term incentives.
B) base salaries.
C) short-term incentives.
D) executive compensation packages.
12.
The components of pension expense are:
A) service cost, plus interest cost, minus expected return on plan assets, plus (or minus) net amortization.
B) service cost, plus interest cost, plus net amortization.
C) service cost, plus interest cost, minus return on plan assets, minus net amortization.
D) service cost, plus interest cost, plus return on plan assets, plus net amortization
13.
A component that is valuation-relevant, but is not expected to persist into the future is a:
A) quiet component.
B) permanent earnings component.
C) noise component.
D) transitory earnings component.
14.
Consolidation adjustments that are made to prepare consolidated financial statements of the parent and subsidiary are required in order to:
A) avoid double counting.
B) eliminate transactions with third parties.
C) follow tax laws.
D) obey the state laws.
15.
A covenant that specifies a required minimum level of net worth and working capital is a/an:
A) negative covenant.
B) financial covenant.
C) implicit covenant.
D) compliance covenant.
16.
Debt covenants benefit:
A) lenders.
B) both lenders and borrowers.
C) borrowers.
D) neither borrowers nor lenders, but are required by the SEC as a condition of issuing debt securities.
17.
Defined contribution plans are preferred by companies for all except which of the following reasons?
A) Defined contribution plans may not be at risk if the employer declares bankruptcy.
B) Defined contribution plans carry less risk for the employee.
C) Defined contribution plans cost less to manage.
D) Defined contribution plans improve job mobility for the employee.
18.
The degree to which cash needs can be satisfied during periods of fiscal stress is known as:
A) financial flexibility.
B) credit worthiness.
C) working capital.
D) credit availability.
19.
The disclosure rules pertaining to GAAP accounting for business combinations complicates financial analysis for which of the following reasons?
A) The inclusion of acquired goodwill in the retroactively adjusted financial
statements complicates the analysis.
B) Comparative financial statements are not retroactively adjusted to include data for the acquired company for periods prior to the acquisition.
C) The inclusion of the acquired firm’s equity within the retroactively adjusted
financial statements complicates the analysis.
D) The inclusion of noncontrolling interest in the retroactively adjusted financial statements complicate the analysis.
20.
The fact that a firm’s stock price does not change when earnings are announced indicates that:
A) per share earnings were the same as the previous quarter.
B) the earnings deviate from investors’ expectations.
C) the information contained in the earnings release was fully anticipated by investors.
D) the securities markets are rational and efficient.
21.
The financial statement reporting "filter" is:
A) SEC required reporting regulations for all entities.
B) management’s discretion to choose alternative accounting procedures with in GAAP
C) management’s distortion of accounting data.
D) SEC reporting regulations that vary from GAAP for publicly traded companies
22.
Firms must provide detailed disclosure of three broad executive pay categories. Which of the following is not one of these categories? A) Retirement and other post-employment compensation
B) Costs incurred by the corporation for executive travel, entertainment, and other "expense account" items
C) Holdings of equity-related interests that relate to compensation D) Compensation for the last fiscal year and the two preceding years
23.
For income tax purposes, pension plan sponsors deduct the amount of the:
A) pension expense.
B) plan contribution.
C) service cost plus net amortization and deferral.
D) service cost.
24.
The fundamental valuation approach to business valuation uses basic accounting measures to assess the amount, timing and:
A) uncertainty of a firm’s future operating cash flows or earnings.
B) uncertainty of a firm’s future non-operating cash flows or earnings.
C) certainty of a firm’s future non-operating cash flows or earnings. D) certainty of a firm’s past operating cash flows or earnings
25.
The GAAP solution for avoiding distortions that would result from setting income tax expense equal to taxes owed is called:
A) intraperiod tax allocation.
B) intraperiod book allocation of income.
C) book income allocation.
D) interperiod tax allocation.
26.
If the parent company owns more than 50% of the subsidiary’s voting stock, and effectively has control of the subsidiary, consolidated financial statements are:
A) required.
B) required only by the SEC.
C) not possible.
D) optional.
27.
In 2018 under the rules for minority passive investments in equity securities, which of the following statements is not correct?
A) An exception will be for investments where fair value is not readily determinable.
B) The income statement and balance sheet treatment will be the same as the current accounting for available-for-sale securities.
C) Cash flows from the purchase and sale of equity securities will be classified based on the nature and purpose of the investment.
D) There will no longer be a distinction between trading securities and available-for-sale securities for minority passive equity investments.
28.
In a common-size balance sheet, all items are expressed as a percentage of:
A) total sales.
B) total assets.
C) total liabilities.
D) total equity.
29.
In a trend balance sheet, each balance sheet item is expressed as a percentage of:
A) the base year item.
B) sales.
C) equity.
D) total assets.
30.
Income from continuing operations, excluding special or nonrecurring items, is generally regarded as:
A) transitory earnings.
B) value-irrelevant earnings.
C) abnormal earnings.
D) permanent earnings.
31.
Income or loss from discontinued operations is regarded as:
A) value-irrelevant earnings.
B) abnormal earnings.
C) permanent earnings.
D) transitory earnings.
32.
Information about a company’s executive compensation practices can be found in a company’s:
A) form 10-Q.
B) proxy statement.
C) form 10-K.
D) annual report.
33.
In general, the growth rate in earnings will depend on the portion of earnings reinvested each period and:
A) the rate of return earned on new investment.
B) the firm’s cost of equity capital.
C) the earnings retention rate.
D) the firm’s weighted average cost of capital.
34.
The interest cost component of a defined benefit pension plan is computed as the:
A) beginning accumulated pension liability times the discount rate. B) beginning accrued pension liability times the discount rate.
C) beginning projected benefit obligation times the discount rate. D) ending accrued pension liability times the discount rate.
35.
Investments in debt securities made to generate trading gains are classified as:
A) trading securities.
B) held to maturity securities.
C) minority securities.
D) available-for-sale securities.
36.
A lender may be protected from deterioration of the borrower’s creditworthiness if the commercial lending agreement requires the borrower to maintain a:
A) fixed charge ratio below a certain level.
B) specified return on equity.
C) specified earnings per share (EPS).
D) fixed charge ratio above a certain level.
37.
Loan provisions that are specifically designed to restrict dividend payments to shareholders are called:
A) stock agreements.
B) debt obligations.
C) debt covenants.
D) stock covenants.
38.
Long-term incentive components of executive compensation plans should include stock options:
A) to enhance the short-term focus of executives.
B) to mitigate the long-term focus of executives.
C) to mitigate the short-term focus of executives.
D) to encourage better performance by low-level staff
39.
Many loan agreements have financial covenants that rely on:
A) flexible GAAP.
B) fixed GAAP.
C) regulatory accounting procedures (RAP).
D) floating GAAP.
40.
A minority active ownership is represented by:
A) less than 20% ownership.
B) more than 50% ownership.
C) more than 60% and less than 70% ownership.
D) 20% or more but less than 50% ownership.
41.
A minority ownership interest generally occurs when an investor owns less than which of the following percentages of the stock of an investee company?
A) 40% B) 50% C) 20% D) 30%
42.
Most executive compensation plans link bonus awards to one or more:
A) marketing-based performance measures.
B) non-accounting based performance measures.
C) accounting-based performance measures.
D) management-based performance measures.
43.
The net pension liability that must be shown on the balance sheet of the plan sponsor is the:
A) excess of the projected benefit obligation over the fair value of plan assets.
B) excess of the accumulated benefit obligation over the plan assets at fair value.
C) accumulated benefit obligation.
D) projected benefit obligation.
44.
Of the following items, which would not be a circumstance that may trigger goodwill impairment?
A) Loss of key personnel
B) Adverse action imposed by a regulator
C) Recognition of an inventory loss in the financial statements of the parent
D) Unanticipated competition
45.
One popular approach to estimating the equity cost of capital is:
A) the cost of equity pricing model (CEPM).
B) the equity costing model (ECM).
C) the capital asset pricing model (CAPM).
D) the asset pricing model (APM).
46.
Per U.S. GAAP, fair value for accounting purposes is:
A) an exit price.
B) always easily determinable.
C) an entry price.
D) the market price in a forced sale.
47.
Potential conflicts of interest permeate:
A) only relationships between investors and managers.
B) many business relationships.
C) few business relationships.
D) only relationships between borrowers and lenders.
48.
The prevalence of stock options in executive pay packages:
A) has been widely cited as the main cause of the financial system meltdown that occurred in 2008.
B) may actually contribute to, rather than moderate, managers’ short-term focus.
C) eliminates managers’ incentives to engage in short-term earnings management.
D) is frowned upon by the SEC.
49.
A qualitative assessment of the business, its customers and suppliers, and management’s character and capability is known as:
A) indenture evaluation.
B) due diligence.
C) covenant waivers.
D) a debenture.
50.
The ratio that captures information about property, plant, and equipment utilization is:
A) long-term asset turnover.
B) current asset turnover.
C) property turnover.
D) asset turnover.
51.
The reciprocal of the risk-adjusted equity cost of capital used to discount future earnings is the:
A) profit margin on sales.
B) return on assets.
C) price/earnings ratio.
D) return on common equity.
52.
Regulatory accounting principles are important to those outside the regulatory agencies because:
A) regulatory accounting principles are not compatible with GAAP. B) GAAP may allow reporting for assets and liabilities consistent with the way in which regulators establish rates.
C) the SEC requires them.
D) GAAP does not allow reporting for assets and liabilities consistent with the way in which regulators establish rates.
53.
Reported earnings numbers often contain three distinctly different components possibly subject to different earnings capitalization rates. Which of the following is not one of these components?
A) A value-irrelevant earnings component.
B) A transitory earnings component.
C) A permanent earnings component.
D) A restructured earnings component.
54.
Return on Assets (ROA) can be broken down into these two components: profit margin and:
A) asset turnover.
B) financial structure leverage.
C) common earnings leverage.
D) asset utilization margin
55.
Return on Assets (ROA) measures a firm’s:
A) profitability of sales.
B) cost effectiveness of its operating activities.
C) profitable use of its assets.
D) return on shareholders’ investment
56.
The return on plan assets component of pension expense for a defined benefit pension
plan is:
A) not a factor in the determination of pension expense.
B) the change in the plan asset value resulting from the actual return on plan assets.
C) the reduction in pension expense created by expected earnings of the plan.
D) the reduction in pension expense created by actual earnings of the plan.
57.
Risky firms have a higher risk-adjusted cost of capital. Which one of the following factors would contribute to a risky firm also having a relatively high price/earnings ratio?
A) The firm has strong growth opportunities.
B) The firm has a significant amount of long-term debt.
C) The firm has a high earnings per share.
D) The firm has a low earnings per share.
58.
The service cost component of a defined benefit pension plan is computed as the:
A) undiscounted change in pension liability from additional employee service.
B) present value of the change in the accrued pension liability.
C) actual value of the change in the accrued pension liability.
D) present value of the change in pension liability from additional employee service.
59.
Short-term notes sold directly to investors by large, highly rated companies are called:
A) bonds.
B) debentures.
C) commercial paper.
D) secured notes
60.
A simplified version of the discounted free cash flow valuation model assumes a zero-growth perpetuity for future cash flows. This assumption is best applied to:
A) start-up firms with stable cash flow patterns.
B) mature firms with stable cash flow patterns.
C) growth firms with stable cash flow patterns.
D) growth firms with increasing cash flow patterns.
61.
The smoothing of pension expense is:
A) illegal and prohibited by SEC.
B) allowed through amortization and deferral to prevent volatility in earnings.
C) unethical and not allowed by GAAP.
D) not allowed by GAAP if the sole purpose is to prevent earnings volatility
63.
Temporary differences that will cause taxable income in future periods to be higher than pre-tax book income in future periods give rise to:
A) deferred tax liabilities.
B) deferred tax assets.
C) permanent differences.
D) tax refund receivable.
64.
Temporary differences that will cause taxable income in future periods to be lower than pre-tax book income in future periods give rise to:
A) deferred tax liabilities.
B) permanent differences.
C) expense.
D) deferred tax assets
65.
Time-series analysis helps identify financial trends:
A) over time for a single company or business unit.
B) among the companies that comprise an industry group.
C) across business units at a single point in time.
D) across companies at a single point in time.
66.
To apply the discounted free cash flow model, the analyst needs to estimate:
A) net cash flows from operations for approximately ten years as the present value of cash flows occurring beyond that point are insignificant.
B) free cash flows for each future period, starting one period from now.
C) free cash flows for approximately ten years as the present value of cash flows occurring beyond that point are insignificant.
D) net cash flows from operations for each future period, starting one period from now.
67.
To compute the amortization on the cumulative net actuarial gains and losses in AOCI for a pension plan, the corridor is computed as 10% of the:
A) higher of the beginning market-related value of the plan assets or the projected benefit obligation.
B) higher of the beginning balances of the plan assets or the accumulated benefit obligation.
C) average of the beginning balances of the plan assets and the projected benefit obligation.
D) lower of the beginning market-related value of the plan assets or the projected benefit obligation.
68.
To obtain a better current price, the net present value of future growth opportunities (NPVGO) can be calculated and:
A) multiplied by the price per share calculated from the P/E ratio.
B) subtracted from the price per share calculated from the P/E ratio. C) divided into the price per share calculated from the P/E ratio.
D) added to the price per share calculated from the P/E ratio.
69.
Trend statements help the user:
A) spot relationships among financial statement items.
B) determine the reason(s) for changes over time in each financial statement line item.
C) spot changes over time in each financial statement line item.
D) identify variations between companies in financial statement line items
70.
A type of analysis that helps identify similarities and differences across companies or business units at a single moment in time is:
A) common-size statements analysis.
B) cross-sectional analysis.
C) trend analysis.
D) time-series analysis.
71.
A typical rate formula for a public utility includes:
A) operating costs, bad debt provisions, and depreciation.
B) advertising, depreciation, and taxes.
C) operating costs, depreciation, and taxes.
D) revenue, operating costs, and taxes.
72.
Under the balance sheet approach, the full change in the amount of future liability is recognized as an increase or decrease in income tax expense in the year the:
A) tax law is proposed.
B) tax rate change is debated.
C) tax law becomes effective.
D) tax law is enacted.
73.
Valuing an entire company, an operating division of that company or its ownership shares involves three basic steps. These steps include all of the following except:
A) Forecasting future amounts of a value-relevant attribute.
B) Determining the discounted present value of the expected future amounts using an appropriate discount rate.
C) Determining the dividends the company will pay in the future based on the company’s dividend policy and expected future earnings.
D) Determining the risk or uncertainty associated with the forecasted future amounts.
74.
What purpose is served by including covenants that place strict limits on new borrowing, prohibit stock repurchases and dividends without prior lender approval, or ensure that cash generated both from ongoing operations and from asset sales will not be diverted away from servicing debt?
A) Protection against credit-damaging events
B) Preservation of repayment capital
C) Trigger
D) Signal
75.
When a firm has noncontrolling interests, analysts may compute and review all except which of the following return on equity ratios?
A) Return on total equity where total equity includes common equity, preferred stock, & noncontrolling interests.
B) Return on parent company equity where parent company equity includes both common equity and preferred stock.
C) Return on total equity net of non-controlling interests where total equity includes common equity and preferred stock, less noncontrolling interests.
D) Return on common equity defined as net income attributable to the parent
company minus preferred dividends divided by average common equity.
76.
When agents do not act in the best interest of their principals, the cost is borne by which of the following?
A) Both the principal and agent.
B) There is no cost of an agent not acting on behalf of their principal.
C) Only the principal.
D) Only the agent.
77.
When an investor is capable of influencing the investee company’s dividend policy, the investor is able to augment its own reported income when using:
A) minority passive accounting treatment.
B) the equity method.
C) minority active accounting treatment.
D) majority active accounting treatment.
78.
When an investor owns less than 20 percent of the investee company, the investor may still be able to exert influence over the investee company if the other stock is:
A) widely distributed across a large number of individual investors. B) widely distributed across a few investors.
C) closely held by a few investors.
D) controlled a small group of investors.
79.
When calculating forecasted cash flows available to common stockholders (CF) under the flows to equity model,:
A) cash interest payments, debt repayments, and preferred dividends are subtracted.
B) cash interest payments and preferred dividends are added.
C) preferred dividends are added.
D) cash interest payments, debt repayments, and preferred dividends are not included.
80.
When conflicts of interest exist, lenders generally take all of the following actions at the creation of a contract except:
A) ensure that affirmative covenants are in the contract.
B) accept the risk and set up a reserve for potential future issues.
C) ensure that negative covenants are in the contract.
D) impose higher interest rates to reflect greater default risk.
81.
When determining the fair value of an asset using an exit price approach,
A) transaction costs do not reduce the asset’s fair value.
B) management may choose to reduce the fair value of the asset by the approximate amount of expected transaction costs (i.e., costs to dispose of the asset) if such costs are deemed to be material.
C) transaction costs reduce the asset’s fair value.
D) fair value is determined by how the company uses the asset.
82.
When income tax expense equals current income tax payable to the government plus (minus) the increase (decrease) in deferred tax liabilities, income tax expense is
properly matched for the:
A) current period.
B) future period.
C) tax return.
D) previous period.
83.
When one party to a business relationship can make decisions that benefit him or her but harm another other party in the relationship:
A) a conflict of interest arises.
B) a lawsuit is automatically filed.
C) a contract arises.
D) a contingent liability arises.
84.
When two companies form a joint venture and each company owns exactly 50% of the joint venture:
A) the equity method is used and line-by-line consolidation is required.
B) the company that has more net assets is deemed the parent.
C) the equity method is used and line-by-line consolidation is not required.
D) the cost method is used
85.
When using the discounted flows to equity valuation model, the market value of common shares depends upon investors’:
A) current expectations about the future economic prospects of cash flows after payments to debtholders and preferred shareholders.
B) current expectations about the current economic prospects of cash flows to both debtholders and preferred shareholders.
C) future expectations about the current economic prospects of cash flows to both debtholders and preferred shareholders.
D) future expectations about the future economic prospects of cash flows before payments to debtholders and preferred shareholders.
86.
Which accounting choice would not be used to reduce the likelihood of a technical default?
A) Management compensation plans
B) Bad debt provisions
C) Inventory valuation method
D) When to sell assets
87.
Which of the following correctly describes the accounting for assets and liabilities that
were created from foreign currency transactions?
A) Foreign currency monetary assets and liabilities are measured using the current rate of exchange as of the balance sheet date.
B) Foreign currency monetary assets and liabilities are measured using the current rate of exchange as of the date of the initial transaction.
C) Foreign currency nonmonetary assets and liabilities are measured using the
average annual rate of exchange during the year.
D) Foreign currency nonmonetary assets and liabilities are measured using the current rate of exchange as of the balance sheet date.
88.
Which of the following does not accurately inform about a variable interest entity
(VIE)? 172) A)
There are 2 criteria for determining if a company has a controlling financial
interest in a variable interest entity. B)
The power to direct the activities of the VIE that most significantly impact the
VIE’s economic performance is the definition of a controlling financial interest. C)
A variable interest entity may take many forms including corporations and
partnerships. D)
In pre-codification literature, a variable interest entity was referred to as a Special
Purpose Entity.
89.
Which of the following does not reflect disclosures in financial statements?
A) Management may disclose more than GAAP requires.
B) GAAP limits how much a company can disclose in their financial statements.
C) Related party transactions must be disclosed.
D) GAAP disclosure by segment is required only for some companies
90.
Which of the following is not a factor in the determination of pension expense when the employer sponsors a defined benefit pension plan?
A) The amount of funding during a particular period.
B) The rate of return on the pension fund investment.
C) The amount of retirement benefits that will vest.
D) The rate that salaries will increase until retirement.
91.
Which of the following is not an accurate statement regarding the compensation committee?
A) It selects the performance metrics used.
B) It may adjust a calculated award up or down at its discretion.
C) It selects the annual or multiyear performance goals.
D) It is comprised of both internal and external directors.
92.
Which of the following is not a purpose served by debt covenants? A) Protection against credit damaging events
B) Triggers and signals
C) Guarantee of no default by the creditor
D) Preservation of repayment capacity
93.
Which of the following is not a use of a variable interest entity (VIE)? 171) A) To set up take-or- pay contracts B) To sell receivables. C) For any purpose needed by the beneficiary of the VIE D) To securitize loans or mortgages
94.
Which of the following is not a valid statement?
A) Competitive ceiling is the rate of return that would be earned in the economist’s "perfectly competitive" industry.
B) Rates of return that are higher than the industry floor stimulate more competition as existing companies innovate and expand their market reach or as new companies enter the industry.
C) Competition in an industry continually works to drive down the rate of return on assets toward the competitive floor.
D) Companies that consistently earn rates of return above the floor are said to have a competitive advantage.
95.
Which of the following is not correct regarding prior service costs? A) Unlike the minimum amortization method for actuarial gains or losses, there is no corridor concept for prior service cost amortization.
B) They result from retroactive changes to a pension plan.
C) A corridor concept similar to that for actuarial gains and losses is used for prior service.
D) They can result in either an increase or decrease in the pension benefit obligation.
96.
Which of the following is not correct with regard to the translation of a self-contained
foreign subsidiary?
A) The balance sheet ratios are not impacted by the translation to the parent
company’s currency.
B) For a material transaction, the rate used for translation is the exchange rate in
effect on the date the transaction occurred.
C) The effect of changes in exchange rates on future dollar cash flows is uncertain.
D) The exchange rate used for translating the balance sheet is the weighted average rate over the statement period.
97.
Which of the following is not correct with respect to an analyst’s use of financial information?
A) Analysts use financial statement information to assess the economic activities of a company and its condition.
B) Analysts must always be vigilant about the possibility that accounting distortions are present and complicate the interpretation of financial ratios, percentage relations, and trend indices.
C) The first step to informed financial statement analysis is a careful examination of the auditor’s opinion.
D) Analysts need to understand what accounting data do and do not reveal about a company’s economic activities and condition.
98.
Which of the following items will not cause the company’s ROA to increase?
A) Reducing company assets without impacting sales.
B) Reducing costs.
C) Increasing company assets.
D) Increasing the selling price per unit
99.
Which of the following situations does not lead to default of a loan contract?
A) Impairment of capital
B) Failure to abide by a covenant
C) Failure to pay other debts when due
D) Paying interest and principal when due
100.
Which of the following statements does not properly describe accounting for OPEB plans?
A) OPEB plans are deemed to be riskier than other debt instruments.
B) OPEB plans are mandatorily funded under the same ERISA rules as pension plans.
C) Losses related to OPEB arise from an increase in the life expectancy assumptions.
D) Losses related to OPEB arise from a decrease in the discount rate assumptions.
101.
Which of the following statements does not properly describe a defined benefit pension
plan?
A) A pension plan asset is not recorded on the employer’s balance sheet.
B) Many assumptions are made in the determination of pension expense.
C) The employer bears little risk with respect to estimating the amount of the annual
contributions to the plan.
D) The employee bears little risk with respect to estimating the amount of the annual contributions to the plan
102.
Which of the following statements does not properly describe the accounting for
business combinations?
A) Under the acquisition method, the subsidiary’s assets and liabilities are valued at their full fair values on the consolidated balance sheet when noncontrolling
interests are present.
B) Under the purchase method, the subsidiary’s assets and liabilities are not valued at their full fair values on the consolidated balance sheet when noncontrolling interests are present.
C) The parent company has the option of choosing either the purchase method or the acquisition method to account for the business combination.
D) The noncontrolling interest is reported as a component of stockholders’ equity when using the acquisition method.
103.
Which of the following statements does not properly reflect the new rules for accounting for minority equity investment securities, if fair value is not readily determinable?
A) Firms may opt to report at fair value or report at cost.
B) If there are changes in carrying value, they are not to be reported in net income.
C) If reported at cost, the reported value is to be updated when there is an observable transaction.
D) If reported at cost, the reported value is updated when circumstances indicate the
asset’s value is impaired.
104.
Which of the following statements is correct?
A) The funded status of a pension plan does not throw light on cash flow problems.
B) Firms with less stringent capital constraints tend to have higher funding ratios.
C) The short-term pension risk ratio is calculated by dividing the projected benefit obligation by the market value of common stock. D) Firms with high marginal tax rates tend to have lower funding ratios.
105.
Which of the following statements is correct with respect to a defined contribution plan?
A) The payments made by the employer to fund a defined contribution pension plan create a pension fund asset on the balance sheet of the employer.
B) The anticipated life span of the employees after retirement must be taken into consideration in determination of pension expense for a defined contribution pension plan.
C) The employer receives a tax deduction for amounts contributed to the pension plan trust, and subsequent investment returns do not generate tax for the employer.
D) The return on the pension fund impacts the employer’s periodic pension expense for defined contribution pension plans.
106.
Which of the following statements pertaining to defined benefit pension plans is not
correct?
A) Pension expense may be allocated to different categories of expenses within an income statement.
B) A company may have multiple pension plans of which some may be overfunded & some may be underfunded and they are netted together to report the overall pension asset (liability).
C) A curtailment loss may occur because a division of a company is sold.
D) A small change in the pension discount rate can shift the funded status of the pension from year to year.
107.
Which of the following statements regarding minority passive investments in equity securities is not correct for 2018 and thereafter?
A) Companies will book a cumulative adjustment at the beginning of the year of transition.
B) In the balance sheet (or in the notes), financial assets will be broken out by measurement category (fair value vs. cost) and by form of asset (securities vs. loans and receivables).
C) The key effect of this adjustment will be a reclassification between accumulated other comprehensive income and retained earnings.
D) Net income will be less volatile under the new methods.
108.
Which of the following transactions would create a deferred tax liability on foreign income?
A) A U.S. company earns income in a different country and pays the foreign government an income tax less than the U.S. corporate tax rate.
B) A foreign-based company sells its products to customers in the U.S.
C) A U.S. company earns income in a foreign country that it does not expect to repatriate back to the U.S.
D) A U.S. company sells its products in a foreign country.
109.
Which one of the following helps the analyst remove the effects of an information filter?
A) Note disclosures in financial statements.
B) Trend analysis.
C) SEC Form 10-K.
D) Financial statements.
110.
Which statement below is not correct with respect to a company’s strategy?
A) Developing customer loyalty while controlling costs are conflicting strategies.
B) Strategy is never dependent upon the company’s industry.
C) There are numerous strategies for achieving superior performance in any business.
D) Low-cost leadership along with product and service differentiation create strategic advantage for companies.
111.
The widespread use of accounting-based incentives for executive compensation is controversial for which one of the following reasons?
A) executives cannot use their discretion over the accounting policies.
B) earnings growth does not automatically increase shareholder value.
C) accounting-based incentive plans can encourage managers to adopt a long-term business focus.
D) managers do not have accounting flexibility.
112.
With respect to executive compensation, which statement is not valid?
A) Use of accounting earnings should not be used due to its reliance on valuations that involve subjectivity and judgments.
B) Executive compensation components are generally linked to stock returns and/or
financial performance measures.
C) Compensation packages are designed to minimize conflicts of interest.
D) Stock returns are the best way to align managers’ and owners’ interests sincemanagement’s actions control the share price in both the short and long term.
113.
With respect to executive pay, which of the following is not correct? A) Top executive bonus opportunities have a maximum payout of 200%.
B) The proportion of pay "at risk" falls off steeply for executives on lower rungs of the corporate ladder.
C) Long-term incentives are designed to counterbalance the inherently short-term orientation of other incentives.
D) Most executive compensation packages involve a base salary, an annual incentive, and a long-term incentive.
1.
According to the 2012 AICPA survey of 2011 annual reports, the most favored method of depreciation for financial reporting purposes is:
A. declining-balance.
B. sum-of-the-years’ digits.
C. straight-line.
D. units-of-production.
4.
The allocation of the cost of a wasting asset to future periods of benefit is termed as:
A. depletion.
B. amortization.
C. depreciation.
D. allocation.
5.
The allocation of the cost of equipment to future periods of benefit is termed as:
A. depletion.
B. amortization.
C.depreciation.
D. allocation.
6.
Amortizable intangible assets include all of the following except:
A. goodwill.
B. patents.
C.copyrights.
D. employment contracts.
7.
Deuce Company purchased a truck for $50,000 on January 2, 2018. The asset has an expected salvage value of $5,000 at the end of its five-year useful life.
How much is the depreciation expense in 2019 if double-declining balance depreciation is used?
Multiple Choice
A. $6,000
B. $9,000
C.$12,000
D. $15,000
8.
Deuce Company purchased a truck for $50,000 on January 2, 2018. The asset has an expected salvage value of $5,000 at the end of its five-year useful life.
How much is the depreciation expense in 2022 if double-declining balance depreciation is used for 2018-2019 and there is a switch to straight-line in year 2020?
Multiple Choice
A. $4,333.33
B. $3,000
C. $9,000
D. $12,000
9.
Deuce Company purchased a truck for $50,000 on January 2, 2018. The asset has an expected salvage value of $5,000 at the end of its five-year useful life.
What depreciation method is used if depreciation expense is $6,000 in 2021?
A. Straight-line.
B. Sum of years’ digits.
C. Double-declining balance.
D. Composite.
10.
Devine Company sold a machine for $6,000 that originally cost $34,000 and had accumulated depreciation of $27,000. Devine had a/an:
A. gain of $1,000.
B. sales revenue of $6,000.
C. loss of $1,000.
D. cost of goods sold of $1,000.
11.
Doggy Co. began construction of a new cutter for the U.S. Coast Guard on January 1, 2018 and completed construction of the ship on October 31, 2019. To finance construction, Doggy took out an $8,000,000, 2-year, 6% construction loan on February 1, 2018. Interest on the loan was to be paid annually on the anniversary date of the loan. Doggy has no other outstanding interest-bearing debt. Doggy made the following expenditures in conjunction with this construction project:
Date Amount
2/1/2018 $ 1,050,000
3/31/2018 900,000
6/1/2018 750,000
10/1/2018 1,000,000
12/31/2018 600,000
3/1/2019 900,000
9/1/2019 250,000
How much interest should Doggy capitalize in 2018 related to the cutter project?
Multiple Choice
A. $129,000
B. $139,500
C. $440,000
D. $480,000
12.
The dominant method under GAAP for measuring long-lived assets is the:
A. expected benefit approach.
B. discounted present value approach.
C. historical cost approach.
D. replacement cost approach.
13.
Expected benefit approaches for valuing long-lived assets are not used in current U.S. GAAP because the numbers generated under these methods are inaccurate and:
A. fictitious.
B. objective.
C. not verifiable.
D. neutral.
14.
Expenditures included in the initial balance sheet carrying amount of a long-lived asset are:
A. charge-off costs.
B. expensed costs.
C. intangible costs.
D. capitalized costs.
15.
An expenditure that increases a long-lived asset’s useful life should be:
A. capitalized.
B. expensed.
C. ignored.
D. written off immediately.
17.
The method of measuring long-lived assets at their estimated value in an input market is the:
A. expected benefit approach.
B. economic sacrifice approach.
C. discounted present value approach.
D. net realizable value approach
18.
The Reid Co. acquired a piece of land for a new factory paying $100,000. Reid demolished the old building at a cost of $20,000, and sold scrapped material salvaged from the old building for $5,000. The architect’s fees were $25,000, and the title insurance upon acquisition of the land was $1,000. The construction period interest was $8,000, and the contractor received $300,000 for the building. A pavement assessment made by the city cost Reid $2,000 at the purchase date.
The cost of the building recorded by Reid Co. is:
A. $300,000
B. $326,000
C. $333,000
D. $335,000
19.
The Reid Co. acquired a piece of land for a new factory paying $100,000. Reid demolished the old building at a cost of $20,000, and sold scrapped material salvaged from the old building for $5,000. The architect’s fees were $25,000, and the title insurance upon acquisition of the land was $1,000. The construction period interest was $8,000, and the contractor received $300,000 for the building. A pavement assessment made by the city cost Reid $2,000 at the purchase date.
The cost of the land recorded by Reid Co. is:
A. $100,000
B. $115,000
C. $116,000
D. $118,000
20.
Staley Enterprises purchased a machine for $260,000. The seller paid $900 freight to deliver the machine. Staley used $4,600 of staff mechanics’ time to install the machine and employee training cost $7,000. The state charged a 5% sales tax on the invoice price. What is the capitalized cost of the machine?
Multiple Choice
A. $260,000
B. $264,600
C. $271,600
D. $284,600
21.
Under U. S. GAAP, software development costs are capitalized as intangible assets:
A. from the beginning of development.
B. after a copyright is obtained.
C. once the product is introduced into the marketplace.
D. once the technological feasibility of the product is established.
22.
U.S. GAAP capitalizes expenditures to upgrade long-lived assets when the expenditure causes any of the following conditions except:
A. The useful life of the asset is extended.
B. The capacity of the asset is increased.
C. The efficiency of the asset is increased.
D. There is an increase in the non-economic benefits associated with owning the asset (such as an increase in the appearance of the company’s offices).
23.
U.S. GAAP requires that virtually all costs incurred for research and development of an internally generated patent be:
A. capitalized.
B. expensed.
C. amortized over 40 years.
D. ignored.
24.
When certain kinds of assets are built that require public welfare and safety expenditures at the end of the asset’s life,
A. these estimated future expenditures are subtracted from the carrying value of the asset.
B. these "asset retirement" costs are expensed when asset retirement occurs.
C. this fact is only reported in the notes to the financial statements.
D. a liability simultaneously arises for those future expenditures.
25.
Which of the following is not an accurate statement regarding asset retirement obligations (AROs)?
A. A liability is recorded at its present value and the liability increases over time.
B. A liability is computed using a credit-adjusted risk-free rate.
C. A liability is recorded with a credit entry in a contra-asset account.
D. An annual expense is recorded as accretion expense.
26.
Which one of the following is an example of the expected benefit approach for valuing long-lived assets?
A. Historical cost.
B. Current replacement value.
C. Current cost.
D. Discounted present value
28.
Which one of the following items would be charged to the cost of land rather than the cost of a building?
A. Demolition of an existing structure.
B. Capitalization of interest.
C. Architectural fees.
D. Cost of the foundation.
1.
Ambiguity can arise as to whether receivables have been sold or instead are being used as collateral for a loan whenever certain obligations, duties, or rights regarding the transferred receivables are retained by the transferor. In distinguishing between sales and collateralized borrowings using receivables, the critical issue:
2.
An analyst notes that ABC Inc.’s allowance for uncollectible accounts as a percentage of year-end accounts receivable has changed. Which of the following would not be a plausible explanation for the change?
3.
Analysts must be aware that with the use of absorption costing, as inventory absorbs more fixed costs, reported net income tends to:
4.
The carrying cost of inventory should include all the following costs except:
A)purchase costs.
B)sales taxes and transportation costs paid by the purchaser.
C)general administrative costs associated with the purchase of inventory.
D)insurance and storage costs.
5.
Edsel Inc. has the following unadjusted year end trial balance information available for 2018:
Credit Sales: $600,000
Ending A/R Balance: $180,000
Ending Allowance for Uncollectibles: $1,500
Est. uncollectibles: 2%
If Edsel uses the sales revenue approach for estimating the bad debt provision, the income statement should show an expense of:
6.
Expected benefit approaches for valuing long-lived assets are not used in current U.S. GAAP because the numbers generated under these methods are inaccurate and:
7.
Financial analysts can make comparisons between the long-lived assets of two companies, both of which use straight-line depreciation, by computing the average useful life of assets with which one of the following formulas?
8.
Financial analysts recognize that the deficiency of the FIFO cost flow assumption is the failure to:
9.
Goods held on consignment are included in the inventory valuation of:
10.
Henry Co. manufactures DVD players. At the end of Year 1, Henry’s management believes the growing popularity of streaming video content will reduce the demand for Henry’s DVD players. The DVD players are manufactured using specialized equipment with a historical cost of $3,000,000 and accumulated depreciation of $1,520,000. The managers estimate the equipment has a remaining useful life of 4 years and will generate the following undiscounted cash flows:
Year 2: $540,000
Year 3: $420,000
Year 4: $190,000
Year 5: $125,000
Salvage Value: $50,000
If the equipment were sold today, the sales price would be $1,600,000. Is the equipment considered impaired? Why, or why not?
11.
If a bank sells a mortgage portfolio at a price that yields the purchasers a return that is lower than the average yield on the mortgages in the portfolio, the selling price:
12.
If sales terms, customer creditworthiness, and accounting methods remain constant, the percentage change in sales and the percentage change in accounts receivable:
13.
In comparing firms in the same industry, which of the following does not present a challenge for analysts?
A) Differences in estimates of useful lives.
B) The age of the companies being compared.
C) The use of different depreciation methods.
D) Each of these answer choices presents a challenge for analysts.
14.
Inventory turnover distortion under LIFO inventory costing may be adjusted by:
15.
The LIFO reserve disclosure is required because LIFO inventory costs are:
16.
Long-lived assets are:
17.
Net realizable value of receivables is gross receivables minus:
18.
On January 2, 2018, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no stated interest rate, but requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided to let Jensen hold the note.
What amount will Jensen recognize as interest income during 2018?
19.
The Reid Co. acquired a piece of land for a new factory paying $100,000. Reid demolished the old building at a cost of $20,000, and sold scrapped material salvaged from the old building for $5,000. The architect’s fees were $25,000, and the title insurance upon acquisition of the land was $1,000. The construction period interest was $8,000, and the contractor received $300,000 for the building. A pavement assessment made by the city cost Reid $2,000 at the purchase date.
The cost of the building recorded by Reid Co. is:
20.
The sale of receivables to a third party is called:
21.
The Skone Corporation reported a LIFO reserve of $25,000 at the end of the year. The beginning LIFO reserve was $20,000. The cost of goods sold was $197,500 under LIFO. The cost of goods sold under FIFO should be:
22.
U.S. GAAP requires that virtually all costs incurred for research and development of an internally generated patent be:
23.
When a specific account receivable is written off, the entry:
24.
Which of the following does not present a challenge to analysts using financial statements?
A) The return-on-asset ratio increases if a firm does not modernize and innovate.
B) U.S. GAAP allows upward adjustments to long-lived assets.
C) The use of historical cost makes comparisons of new and old firms in the same industry difficult.
D) The expected benefit of a long-lived asset may increase over time.
26.
Which of the following statements regarding inventory accounting is false?
A) Firms that use LIFO must disclose the dollar magnitude of the difference between LIFO and FIFO cost.
B) The LIFO reserve disclosure requirement is intended to help investors compare LIFO versus FIFO firms in a meaningful manner.
C) The formula to convert the cost of goods sold under LIFO to an estimate of the cost of goods sold under FIFO is: LIFO cost of goods sold minus increase in LIFO reserve equals FIFO cost of goods sold.
D) U.S. GAAP prescribes a standardized format for disclosing the LIFO reserve.
27.
Which of the following statements regarding inventory accounting is false?
A) The tax advantage of LIFO is that it provides a lower net income than FIFO during periods of rising prices and decreasing inventory quantities.
B) Managers can avoid the negative tax implications of LIFO liquidations by purchasing enough inventory before year-end to bring inventory up to the level at the start of the year.
C) The size of the difference between cost of goods sold under FIFO and cost of goods sold under replacement cost depends on the amount of change in input cost as well as the inventory turnover.
D) To avoid providing an incentive for managers to engage in intentional LIFO liquidations, bonus contracts should subtract out any profits from LIFO liquidations.
28.
Which of the following statements regarding inventory accounting is false?
A) Under U.S. GAAP, the cost flow assumption does not need to conform to the actual flow of the goods.
B) Under U.S. GAAP, current cost (replacement cost) accounting may be used at the discretion of management with proper disclosure.
C) The FIFO method of inventory valuation assumes that the first unit purchased is the first unit sold.
D) The weighted average cost flow assumption generates numbers that are between the LIFO and FIFO assumptions.
29.
Which one of the following explanations for the growth of accounts receivable outstripping the growth of sales represents a red flag?
A)The firm adopts new credit terms that lengthen the payment terms to the industry average.
B)The firm adopts an aggressive revenue recognition policy.
C)The firm develops an attractive credit policy for first time buyers.
D)The firm changes its timing of revenue recognition to a more conservative approach.
30.
Which one of the following is an example of the expected benefit approach for valuing long-lived assets?
A) Historical cost.
B) Current replacement value.
C) Current cost.
D) Discounted present value.
2.
The allocation of the cost of a wasting asset to future periods of benefit is termed as:
3.
The allocation of the cost of equipment to future periods of benefit is termed as:
4.
Amortizable intangible assets include all of the following except:
5.
Amortization of discount on bonds payable (bond discount) results in which of the following?
6.
As a firm liquidate sold LIFO layers of inventory, the lower costs of the LIFO layers are matched against current sales dollars resulting in a profit margin that is:
7.
The carrying cost of inventory should include all the following costs except:
8.
Current ratio distortion under LIFO inventory costing may be adjusted by:
9.
The dominant method under GAAP for measuring long-lived assets is the:
10.
Evaluation and testing for impairment assessments of indefinite-lived intangible assets:
11.
Expenditures included in the initial balance sheet carrying amount of a long-lived asset are:
12.
An expenditure that increases a long-lived asset’s useful life should be:
13.
The FASB has been able to guard against management manipulation of earnings as a result of asset impairments by:
14.
Financial analysts can make comparisons between the long-lived assets of two companies, both of which use straight-line depreciation, by computing the average useful life of assets with which one of the following formulas?
15.
Financial analysts recognize that the deficiency of the FIFO cost flow assumption is the failure to:
16.
For a firm using LIFO, the numerator of the inventory turnover ratio is predominantly current period costs:
17.
Generally accepted accounting principles require that when bonds are sold at a discount, the discount must be allocated to interest expense using the:
18.
Goods held on consignment are included in the inventory valuation of:
19.
Goodwill represents:
20.
If a long-lived amortizable intangible asset’s future undiscounted net cash flows fall below the asset’s net book value, the asset is considered to be a/an:
21.
An impairment loss is reported on the income statement as:
23.
In an actual business, which of the following is an inventory accounting issue that frequently arises?
24.
In comparing firms in the same industry, which of the following does not present a challenge for analysts?
25.
The LIFO reserve disclosure is required because LIFO inventory costs are:
26.
LIFO’s tax advantage is that:
27.
Long-lived assets are:
28.
The major issues in inventory accounting is:
29.
A major problem facing financial analysts who compare long-lived assets on balance sheets of various companies is that different companies often use different:
30.
The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on the rapidity of the inventory turnover and the:
31.
Temporary differences that will cause taxable income in future periods to be higher than pre-tax book income in future periods give rise to:
32.
Temporary differences that will cause taxable income in future periods to be lower than pre-tax book income in future periods give rise to:
33.
Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 5%. These bonds will sell in the market at:
34.
Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 8%. These bonds will sell in the market at:
35.
The two broad categories of differences that result from determining the pre-tax book income and the taxable income are:
36.
Under U. S. GAAP, software development costs are capitalized as intangible assets:
37.
U.S. GAAP capitalizes expenditures to upgrade long-lived assets when the expenditure causes any of the following conditions except:
38.
U.S. GAAP for long-lived assets significantly impedes rate-of-return comparisons across companies unless the firms:
39.
U.S. GAAP requires that virtually all costs incurred for research and development of an internally generated patent be:
40.
When a bond is sold at a discount the effective interest rate is:
41.
When certain kinds of assets are built that require public welfare and safety expenditures at the end of the asset’s life,
42.
When firms dispose of a long-lived asset by selling it before the end of its useful life, the difference between the net book value of the asset and the disposition proceeds is a/an:
43.
When interest rates have increased and bonds are retired before maturity, market value is:
44.
When the effective yield of a bond is the same as the stated rate on the bond, the bond is sold at:
45.
When the market rate of interest is below the stated rate of interest, a bond sells at:
46.
Which of the following does not present a challenge to analysts using financial statements?
47.
Which of the following is an accurate statement regarding testing for impairments of tangible assets and amortizable intangible assets?
48.
Which of the following is not a difference between U.S. GAAP and IFRS treatment of impaired assets?
49.
Which of the following is not part of the IFRS revaluation rules for tangible long-lived assets?
50.
Which of the following is used to measure the amount of the write-down that must be recognized on an impaired asset such as depreciable equipment?
51.
Which of the following items does not create a temporary difference?
52.
Which of the following statements is correct?
53.
Which of the following statements regarding inventory accounting is false?
54.
Which of the following statements regarding inventory accounting is false?
55.
Which of the following statements regarding inventory accounting is false?
56.
Which of the following transactions would not create a temporary difference?
57.
Which of the following would not create a temporary difference?
59.
Which of the statements is not true when applying both IFRS and U.S. GAAP accounting for long-term debt?
60.
Which one of the following is a permanent difference between book and taxable income?
1.
ABC Company has elected to adopt the dollar-value LIFO inventory method when the inventory is valued at $125,000. The adoption takes place as of January 1, 2011 when the entire inventory represents a single pool. ABC Company determined that the inventory at December 31, 2011 was $144,375 at current year cost and $131,250 at base year cost using a relevant price index of 1.10. The inventory at December 31, 2011 under dollar value LIFO is
A. $139,438.
B. $131,875.
C. $138,125.
D. $144,375.
2.
According to the 2009 AICPA survey of 2008 annual reports, the most widely-used method of depreciation for financial reporting purposes is
A. declining-balance.
B. sum-of-the-years’ digits.
C. straight-line.
D. units-of-production.
3.
The accounting model IFRS permits for long-lived tangible assets is
A. the cost method.
B. the revaluation method.
C. either the cost method or the revaluation method under certain circumstances.
D. the same method prescribed by U.S. GAAP.
4.
All of the following are true of constructive capitalization except
A. It’s a method for making balance sheet data historically correct.
B. It treats all leases as if they were capital leases.
C. The liability is the discounted present value of the stream of minimum operating lease payments.
D. The method makes use of a discount rate that is the weighted average rate implicit in all leases, or the weighted average rate on interest-bearing long-term debt.
5.
All of the statements below are true of futures contracts except that futures contracts
A. result in predictable cash flows.
B. eliminate downside risk and upside potential.
C. eliminate downside risk while allowing for upside potential.
D. result in predictable gross profits.
6.
All the following statements about residual value guarantees are correct except
residual value guarantees
A. protect lessors against lessees who abuse leased assets.
B. protect lessees against lessors who abuse leased assets.
C. protects lessors against technological changes.
D. protects lessors against marketplace changes.
7.
Amortizable intangible assets include all of the following except
A. goodwill.
B. patents.
C. copyrights.
D. employment contracts.
8.
Amortization of discount on bonds payable (bond discount) results in which of the following?
A. A decrease in bond interest expense
B. An increase in net income
C. An increase in the carrying value of the bond
D. An increase in stockholders’ equity due to the decrease in bond interest expense
9.
Analysts must be aware that with the use of absorption costing, as inventory absorbs more fixed costs, reported net income tends to
A. increase.
B. decrease.
C. remain the same.
D. become highly volatile.
10.
Analysts must recognize that the use of the specific identification method to value inventory has a serious deficiency because it
A. allows manipulation of net income.
B. allows manipulation of period costs.
C. allows manipulation of selling expenses.
D. allows manipulation of administrative expenses.
11.
Analysts try to remove holding gains from reported FIFO income because
A. the FEI’s code of professional ethics requires that they do so if possible.
B. holding gains understate management’s true performance.
C. they are potentially unsustainable.
D. None of the above are appropriate reasons for removing holding gains from reported FIFO income.
12.
The apportionment of the cost of a copyright to future periods under the matching principle is
A. depletion.
B. amortization.
C. depreciation.
D. allocation.
13.
The apportionment of the cost of a wasting asset to future periods under the matching principle is
A. depletion.
B. amortization.
C. depreciation.
D. allocation.
14.
The apportionment of the cost of equipment to future periods under the matching principle is
A. depletion.
B. amortization.
C. depreciation.
D. allocation.
15.
As a firm liquidates old LIFO layers of inventory, the lower costs of the LIFO layers are matched against current sales dollars resulting in a profit margin that is
A. inflated.
B. deflated.
C. lower than normal.
D. always the same as under FIFO.
16.
Assuming Goff’s long-term debt rate is 10%, what amount would you constructively capitalize in order to effectively analyze Goff’s financial position?
A. $ - 0 - since the company has no capital leases.
B. $6,680.
C. $11,504.
D. $3,223.
17.
Assuming that the lease is a capital lease for Ray, which one of the following interest rates will Ray use to record this lease?
A. Use 8.5% because it is the lessor’s incremental borrowing rate.
B. Use 9.0% because it is the lessee’s incremental borrowing rate.
C. Use 10.0% because it is the implicit lease rate of return to the lessor.
D. Use 8.5% because it is the lesser of the implicit rate and Ray’s incremental borrowing rate.
18.
Blue Manufacturing treats a lathe lease as a/an
A. operating lease.
B. ordinary capital lease.
C. sales-type lease.
D. direct-financing lease.
19.
A bond with a $500,000 maturity value is immediately retired for $515,000 plus accrued interest. The premium on bonds payable (bond premium) at the retirement date is $17,500. Which of the following statements is correct?
A. The loss on the debt extinguishment is $32,500.
B. The gain on the debt extinguishment is $2,500.
C. The gain on the debt extinguishment is $32,500.
D. The gain or loss on the debt extinguishment can’t be determined without knowing the dollar amount of the accrued interest.
20.
A bond with a $750,000 maturity value is immediately retired for $745,000 plus accrued interest. The discount on bonds payable (bond discount) at the retirement date is $25,500. Which of the following statements is correct?
A. The gain on the debt extinguishment is $5,000.
B. The loss on the debt extinguishment is $20,500.
C. The gain on the debt extinguishment is $30,500.
D. The gain or loss on the debt extinguishment can’t be determined without knowing the dollar amount of the accrued interest.
21.
A bond with a maturity value of $700,000 was initially issued for $715,000. The bond has a ten-year life and a stated interest rate of 10%. The total interest expense over the life of the bond is
A. $700,000
B. $715,000
C. $685,000
D. not determinable without knowing the bond’s effective yield.
22.
Capitalization of interest for the construction of long-lived assets is limited to interest arising from actual borrowings from
A. owners.
B. stockholders.
C. outsiders.
D. the board of directors.
23.
The carrying cost of inventory should include all of the following costs except
A. purchase costs.
B. sales taxes and transportation costs paid by the purchaser.
C. general administrative costs associated with the purchase of inventory.
D. insurance and storage costs.
24.
Compared to a firm with a capital lease, operating leases help the lessee firm earn
A. higher asset turnover ratio.
B. lower return on assets.
C. higher debt-to-equity ratio.
D. lower NOPAT.
25.
A contingent liability that is probable and can be reasonably estimated will immediately result in
A. an increase in both liabilities and stockholders’ equity.
B. an increase in liabilities and a decrease in net income.
C. an increase in liabilities without any need for financial statement disclosure.
D. an increase in liabilities and a decrease in assets.
26.
The conversion of a LIFO inventory to approximate the inventory at FIFO is accomplished through application of which one of the following formulas?
A. FIFO inventory = LIFO inventory x LIFO reserve
B. FIFO inventory = LIFO inventory / LIFO reserve
C. FIFO inventory = LIFO inventory - LIFO reserve
D. FIFO inventory = LIFO inventory + LIFO reserve
27.
The cost of the building recorded by Reid Co. is
A. $300,000
B. $326,000
C. $333,000
D. $335,000
28.
The cost of the land recorded by Reid Co. is
A. $100,000
B. $115,000
C. $116,000
D. $118,000
29.
Current ratio distortion under LIFO inventory costing may be adjusted by
A. adding the LIFO reserve to current assets.
B. subtracting the LIFO reserve from current assets.
C. adding the LIFO reserve to current liabilities.
D. subtracting the LIFO reserve from current liabilities.
30.
A derivative instrument that gives the holder the right but not the obligation to do something is a/an
A. future contract.
B. swap contract.
C. performance contract.
D. options contract.
31.
Devine Company sold a machine that originally cost $34,000, in a transaction that had commercial substance. The machine had accumulated depreciation of $27,000 and sold for $6,000. Devine had a/an
A. gain of $1,000.
B. extraordinary gain of $1,000.
C. loss of $1,000.
D. extraordinary loss of $1,000.
32.
The difference between the expense charged with a capital lease and an operating lease is
A. the amount of total expense, with a capital lease higher than an operating lease.
B. the amount of total expense, with an operating lease higher than a capital lease.
C. the number of years that recognize expense.
D. the timing of the expense recognition.
33.
The difference in the lessor’s income recognition over the life of the lease, between an operating lease and a capital lease is
A. zero.
B. the amount of the interest revenue.
C. the financing revenue minus the depreciation.
D. the depreciation expense.
34.
The dominant method under GAAP for measuring long-lived assets is the
A. expected benefit approach.
B. discounted present value approach.
C. historical cost approach.
D. replacement cost approach.
35.
Dot Company issued $200,000 of bonds on January 1, 2011 with interest payable each year. The bonds had a stated rate of 8%. The bonds were set up as floating-rate debt with the rated pegged to LIBOR plus 3%. Interestexpense for year one if LIBOR is 7% will be which one of the following?
A. $6,000
B. $14,000
C. $16,000
D. $20,000
36.
Dot Company issued $200,000 of bonds on January 1, 2011 with interest payable each year. The bonds had a stated rate of 8%. The bonds were set up as floating-rate debt with the rated pegged to LIBOR plus 3%. Which of the following will be the interest expense for year 1 if LIBOR is 5%?
A. $6,000
B. $10,000
C. $16,000
D. $18,000
37.
Examples of variable costs include all of the following except
A. raw materials costs.
B. the plant manager’s salary.
C. direct labor costs.
D. electricity used in running production machinery.
38.
Executory costs of a lease are treated by the lessee as
A. capitalized costs of the lease.
B. additional interest expense.
C. operating expenses.
D. deferred revenue.
39.
Expected benefit approaches for valuing long-lived assets were discarded because the numbers generated under these methods were unreliable and
A. fictitious.
B. objective.
C. unverifiable.
D. estimates
40.
Expenditures included in the cost of a long-lived asset are
A. charged off.
B. expensed.
C. intangible.
D. capitalized.
41.
An expenditure that increases a long-lived asset’s useful life should be
A. capitalized.
B. expensed.
C. ignored.
D. written off immediately.
42.
Fans Company:
In a periodic inventory system, the ending FIFO inventory is
A. $1,624.
B. $1,655.
C. $1,678.
D. $1,733.
43.
Fans Company:
In a periodic inventory system, the ending LIFO inventory is
A. $1,624.
B. $1,655.
C. $1,678.
D. $1,733.
44.
Fans Company:
In a periodic inventory system, the FIFO cost of goods sold is
A. $4,952.
B. $4,967.
C. $4,993.
D. $5,006.
45.
Fans Company:
In a periodic inventory system, the LIFO cost of goods sold is
A. $4,952.
B. $4,967.
C. $4,993.
D. $5,006.
46.
The FASB has been able to guard against management manipulation of earnings as a result of asset impairments by
A. fining any managers found guilty of such manipulation.
B. requiring restoration of previously recognized impairment losses.
C. prohibiting restoration of previously recognized impairment losses.
D. relying on State Boards of Public Accountancy to police the transactions.
47.
The FASB justified expensing research and development costs for all of the following reasons except
A. The future benefits accruing from these expenditures are highly uncertain.
B. Expensing R&D conforms to the conservatism principle.
C. A causal relationship between current R&D and future revenue has not been demonstrated.
D. Whatever benefits may arise cannot be objectively measured.
48.
Financial analysts can make comparisons between the long-lived assets of two companies, both of which use straight-line depreciation, by computing the average useful life of assets with which one of the following formulas?
A. Net property, plant, and equipment/average useful life.
B. Gross property, plant, and equipment/average useful life.
C. Gross property, plant, and equipment minus salvage value/straight-line depreciation expense.
D. Straight-line depreciation expense/net property, plant, and equipment.
49.
Financial analysts recognize that the deficiency of the FIFO cost flow assumption is the failure to
A. match current costs with current revenues.
B. match current costs with oldest revenues.
C. match oldest costs with current revenues.
D. match oldest costs with oldest revenues.
50.
Financial reporting controversies are typified by all of the following except
A. When one accounting option for a controversial reporting situation results in higher net income than the other available options, that option will be preferred by management of the reporting entity and the securities market.
B. The debate regarding the two alternative accounting treatments is endless—there is no "right" or "wrong" answer.
C. The reporting options have the potential to influence managerial behavior.
D. The securities market appears to recognize that the differing managerial incentives have implications for valuing firms.
51.
Firms that use FIFO inventory cost assumptions always include some realized holding gains in reported income in periods of
A. level prices.
B. deflation.
C. falling prices.
D. rising prices.
52.
Floating-rate debt is the most common method for lenders to protect themselves from losses that arise as a result of
A. increases in the market interest rate.
B. decreases in the market interest rate.
C. increases in the stated interest rate on bonds.
D. decreases in the stated rate on bonds.
53.
For a firm using LIFO, the numerator of the inventory turnover ratio is predominantly current period costs
A. and the denominator consists of old LIFO costs.
B. thus it must be adjusted to conform to the old LIFO costs in the denominator.
C. thus the denominator must be adjusted by adding the LIFO reserve to ending inventory.
D. thus the denominator must be adjusted by subtracting the LIFO reserve from both beginning and ending inventory.
54.
Ford uses which one of the following interest rates to record this lease?
A. Use 9.0% because it is the lessee’s incremental borrowing rate.
B. Use 10.0% because it is the implicit lease rate of return to the lessor.
C. Use 8.5% because it is the lesser of the implicit rate and Ray’s incremental borrowing rate.
D. Use 9.0% because it is the lesser of the implicit rate and Ford’s incremental borrowing rate.
55.
For Equity Leasing, this is treated as a/an
A. operating lease.
B. ordinary capital lease.
C. direct financing capital lease.
D. sales-type capital lease.
56.
For Morey, this lease is treated as a/an
A. operating lease.
B. capital lease.
C. direct financing capital lease.
D. sales-type capital lease.
57.
The formula to convert the cost of goods sold LIFO to an estimate of the cost of goods sold FIFO is
A. cost of goods sold LIFO + increase in LIFO reserve = cost of goods sold FIFO
B. cost of goods sold LIFO - increase in LIFO reserve = cost of goods sold FIFO
C. cost of goods sold LIFO - decrease in LIFO reserve = cost of goods sold FIFO
D. cost of goods sold LIFO + beginning LIFO reserve = cost of goods sold FIFO
58.
For U. S. GAAP, softwaredevelopment costs are capitalized as intangible assets
A. from the beginning of development.
B. after a copyright is obtained.
C. once the product is introduced into the marketplace.
D. once the technological feasibility of the product is established.
59.
GAAP capitalizes expenditures to upgrade long-lived assets when the expenditure causes any of the following conditions except
A. The useful life of the asset is extended.
B. The capacity of the asset is increased.
C. The efficiency of the asset is increased.
D. There is an increase in the non-economic benefits associated with owning the asset (such as an increase in the appearance of the company’s offices).
60.
GAAP defines lessors’ treatment of leases according to Type I and Type II characteristics. Type I characteristics are linked to
A. the critical event criteria for expense recognition.
B. the critical event criteria for revenue recognition.
C. measurement of collectibility for revenue recognition.
D. measurement of historical cost.
61.
GAAP defines lessors’ treatment of leases according to Type I and Type II characteristics. Type II characteristics are linked to
A. the critical event criteria for expense recognition.
B. the critical event criteria for revenue recognition.
C. measurement of collectibility for revenue recognition.
D. measurement of historical cost.
62.
GAAP establishes specific criteria for the treatment of leases. If any of the criteria are met, the lessee
A. must treat the lease as an operating lease.
B. must treat the lease as a capital lease.
C. may choose the treatment if two or less criteria are met.
D. may elect to treat the lease as an operating lease if only one criterion is met.
63.
GAAP establishes specific criteria for the treatment of leases. Which of the following does not accurately describe the criteria applicable to a lessee?
A. The lease agreement contains a bargain purchase option.
B. The lease term is equal to or exceeds 75% of the leased asset’s useful life.
C. The lease agreement transfers title of the leased asset to the lessee at the end of the lease term.
D. The present value of the minimum lease payments is equal to or greater than 75% of the leased asset’s fair value.
64.
Generally accepted accounting principles require that when bonds are sold at a discount, the discount must be allocated to interest expense using the
A. cash interest method.
B. effective interest method.
C. bond yield method.
D. cumulative interest method.
65.
Goods available for sale is determined by
A. adding the cost of any beginning inventory and the cost of purchases during the period.
B. subtracting the cost of any ending inventory from the cost of any beginning inventory.
C. subtracting the cost of any beginning inventory from the cost of any ending inventory.
D. subtracting the cost of any beginning inventory from the cost of purchases during the period.
66.
Goods available for sale needs to be allocated between
A. beginning inventory and inventory purchases.
B. beginning inventory and ending inventory.
C. ending inventory and cost of goods sold.
D. inventory purchases and cost of goods sold.
67.
Goods held on consignment are included in the inventory valuation of
A. the consignor.
B. the consignee.
C. both the consignor and the consignee.
D. neither the consignor nor the consignee.
68.
Goodwill represents
A. management’s estimate of the value of the firm’s "unidentified" intangible assets.
B. the difference between the acquisition value of an acquired business and the fair value of its identifiable net assets.
C. the difference between the acquisition value of an acquired business and the book value of its identifiable net assets.
D. the sum of the acquisition value of an acquired business and the fair value of its identifiable net assets.
70.
A hedge of the exposure to changes in the fair market value of an existing asset or liability or a firm commitment is a/an
A. fair value hedge.
B. cash flow hedge.
C. foreign currency exposure hedge.
D. marked-to-market hedge.
71.
Hooker Company sells $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2011. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578. The amount of bond discount amortization for 2012 is
A. $1,696.
B. $2,458.
C. $3,080.
D. $4,000.
72.
Hooker Company sells $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2011. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578. The amount of bond interest expense for 2012 is
A. $16,000.
B. $17,696.
C. $18,458.
D. $19,280.
73.
Hooker Company sells $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2011. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578. The amount of cash interest paid in 2011 on the bonds is
A. $14,458.
B. $16,000.
C. $17,542.
D. $20,000.
74.
Hooker Company sells $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2011. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578. The amount of cash interest paid in 2012 is
A. $16,000.
B. $18,000.
C. $19,080.
D. $20,000.
75.
Hooker Company sells $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2011. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578. The bond carrying amount at the end of 2011 is
A. $175,422.
B. $176,964.
C. $200,000.
D. $201,542.
76.
Hooker Company sells $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2011. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578. The bond carrying value at the end of 2012 is
A. $175,422.
B. $178,660.
C. $200,000.
D. $203,238.
77.
Hooker Company sells $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2011. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578. The bond interest expense for 2011 is
A. $16,000.
B. $17,542.
C. $20,000.
D. $21,542.
78.
How much interest should Doggy capitalize in 2011 related to the cutter project?
A. $129,000
B. $139,500
C. $440,000
D. $480,000
79.
How much interest should Doggy expense in 2011?
A. $220,000
B. $300,500
C. $340,500
D. $440,000
80.
How much is the depreciation expense in 2012 if double-declining balance depreciation is used?
A. $6,000
B. $9,000
C. $12,000
D. $15,000
81.
How much is the depreciation expense in 2012 if sum-of-years digits depreciation is used?
A. $6,000
B. $9,000
C. $12,000
D. $15,000
82.
How much is the depreciation expense in 2015 if double-declining balance depreciation is used and there is a switch to straight-line in year 2013?
A. $4,333.33
B. $3,000
C. $9,000
D. $12,000
83.
How much straight-line depreciation expense will Pepper record for Year 1?
A. $14,747
B. $15,362
C. $15,747
D. $17,500
84.
If a car dealership leases cars for four years with guaranteed purchase options, guaranteed residual values, and insured financing agreements, these leases are treated as
A. operating leases.
B. capital leases.
C. sales-type leases.
D. direct-financing leases.
85.
If a company sells an asset for a profit of $175,000 and immediately leases it back with a capital lease, the gain is recognized
A. immediately as an ordinary gain.
B. immediately as an extraordinary gain.
C. over the life of the lease in proportion to the rental payment.
D. over the life of the lease using the same rate and life used to amortize the leased asset.
86.
If a corporation signs a ten-year lease for a building and the present value of the lease payments is $250,000, the lease is a capital lease if the
A. fair value of the building is $1,000,000.
B. remaining useful life of the building is 20 years.
C. lessor can purchase the building for $5,000 at the end of the lease when the fair value is estimated to be $25,000.
D. building reverts back to the lessor at the end of the lease.
87.
If a lease contains a residual value guarantee, the lessee must
A. add the guaranteed amount to the present value of the minimum lease payments.
B. add the present value of the guaranteed amount to the present value of the minimum lease payments.
C. include the guaranteed amount in the minimum lease payments only if the lessee intends to keep the asset at the end of the lease.
D. ignore the guaranteed amount if the lessee intends to keep the asset at the end of the lease.
88.
If a long-lived asset’s remaining expected future value falls below its net book value, the asset is considered to be a/an
A. extraordinary item.
B. discontinued operation.
C. valuable asset.
D. impaired asset.
89.
If Eagle uses the double-declining balance depreciation method, the depreciation expense in 2012 is
A. $16,000
B. $24,000
C. $31,500
D. $40,000
90.
If Eagle uses the double-declining balance depreciation method, the depreciation expense in 2013 is
A. $12,750
B. $15,000
C. $25,500
D. $30,000
91.
If Eagle uses the straight-line depreciation method, the depreciation expense in 2014 is
A. $16,000
B. $24,000
C. $30,000
D. $40,000
92.
If Eagle uses the sum-of-years’ digits depreciation method, the depreciation expense in 2013 is
A. $16,000
B. $24,000
C. $32,000
D. $40,000
93.
If Hatfield’s incremental borrowing rate is 11% and the implicit rate is not known to the lessee, what interest rate will Hatfield use to account for this lease?
A. 9%
B. 10%
C. 11%
D. Cannot be determined from information given.
94.
If no correcting entries were made at the end of 2010, by how much will retained earnings be overstated or understated at the end of 2011? Ignore tax consequences.
A. $2,000 understated
B. $2,000 overstated
C. $10,000 understated
D. $10,000 overstated
95.
If the proper correcting entries were made at the end of 2010, how much will 2011 income before taxes be overstated or understated?
A. $2,000 understated
B. $2,000 overstated
C. $10,000 understated
D. $10,000 overstated
96.
An impairment loss is reported on the income statement as a/an
A. continuing operations item.
B. extraordinary item.
C. discontinued operations item.
D. accounting change.
97.
An impairment loss is the difference between the carrying value of the asset and the
A. historical cost of the asset.
B. fair value of an asset.
C. future value of the asset.
D. price-level adjusted value of the asset.
98.
In an actual business, which of the following inventory accounting issues frequently arise?
A. How should physical quantities in inventory be determined?
B. What items should be included in ending inventory?
C. What costs should be included in inventory purchases?
D. All of the above are inventory accounting issues that frequently arise.
99.
In a periodic inventory system the ending inventory and cost of goods sold must be determined by
A. external auditors.
B. physical count.
C. a certification of inventory.
D. reference to a running inventory balance.
100.
In August 2010, the FASB and the IASB issued a jointly developed leasing exposure draft which
A. Takes a property rights approach and would require lessees to record a "right-of-use" asset and the associated liability.
B. Takes a performance obligation approach for lessees and removes the asset from the balance sheet rather than establishing a lease liability.
C. Takes a derecognition approach for lessees and establishes a lease asset and a lease liability for the present value of the expected rental payments.
D. All of the choices are correct.
101.
The input cost changes that occur after the purchase of inventory items in a current cost accounting system are recognized as
A. realized gains and losses.
B. unrealized holding gains and losses.
C. extraordinary gains and losses.
D. costs of goods sold.
102.
International Accounting Standard 2 does not permit which of the following cost flow assumptions?
A. LIFO.
B. FIFO.
C. Weighted average.
D. Specific identification.
103.
The inventory accounts of a manufacturer would include all of the following accounts except
A. raw materials inventory.
B. work-in-process inventory.
C. finished goods inventory.
D. sold goods awaiting shipment inventory.
104.
The inventory at the end of Year 2 under dollar-value LIFO is
A. $238,095.
B. $240,000.
C. $250,000.
D. $262,500.
105.
Inventory turnover distortion under LIFO inventory costing may be adjusted by
A. adding the LIFO reserve amounts to cost of goods sold and adjusting beginning and ending inventory for LIFO liquidation profits whenever LIFO liquidation occurs.
B. subtracting the LIFO reserve amounts from cost of goods sold and adjusting beginning and ending inventory for LIFO liquidation profits whenever LIFO liquidation occurs.
C. adding the LIFO reserve amounts to beginning and ending inventory and adjusting cost of goods sold for LIFO liquidation profits whenever LIFO liquidation occurs.
D. subtracting the LIFO reserve amounts from beginning and ending inventory and adjusting cost of goods sold for LIFO liquidation profits whenever LIFO liquidation occurs.
106.
The inventory under dollar-value LIFO at the end of Year 3 is
A. $274,075.
B. $276,800.
C. $278,857.
D. $300,000.
107.
The inventory under dollar-value LIFO at the end of Year 4 is
A. $240,000.
B. $263,657.
C. $274,074.
D. $286,000.
108.
Investors need to review transactions involving swaps carefully to ensure that there is an underlying
A. loss.
B. gain.
C. rationale.
D. economic benefit.
109.
The Johnson Corporation reported at the end of the year a LIFO reserve of $45,000. The beginning LIFO reserve was $60,000. The cost of goods sold was $260,000 under LIFO. The cost of goods sold under FIFO should be
A. $245,000.
B. $260,000.
C. $275,000.
D. $305,000.
110.
The Key Company sold a machine. The machine had accumulated depreciation of $50,000 and a salvage value of $6,000. If the machine sold for $16,000 and a gain of $4,000 is recognized, the original cost of the asset is
A. $54,000
B. $62,000
C. $66,000
D. $70,000
111.
Kitty’s cumulative weighted average expenditures on this project would be
A. $287,500
B. $500,000
C. $508,333
D. $595,833
113.
The lease liability will be valued on Pepper’s balance sheet at
A. $144,475.
B. $157,469.
C. $175,000.
D. $250,000.
114.
Lessee Corporation should initially capitalize the lease at what amount?
A. $0, the lease should not be capitalized
B. $983,040
C. $1,081,440
D. $904,000
115.
A lessee must use which one of the following discount rates to value a capital lease?
A. Prime rate
B. Implicit lease rate
C. Lessee’s incremental borrowing rate
D. Lower of implicit lease rate or lessee’s incremental borrowing rate
116.
The lessor of a building with an operating lease will present on its balance sheet an asset equal to
A. zero.
B. the present value of future lease receipts.
C. the depreciated historical cost of the asset.
D. the fair value of the leased asset.
117.
The LIFO conformity rule states that
A. if LIFO is used for tax purposes, the external financial statements must also use LIFO.
B. if FIFO is used for tax purposes, the external financial statements must also use FIFO.
C. if LIFO is used for tax purposes, the external financial statements must also use FIFO.
D. if FIFO is used for tax purposes, the external financial statements must also use LIFO.
118.
LIFO layers are more likely to be liquidated when inventory records are kept on
A. an inventory group basis.
B. a total inventory basis.
C. an item-by-item basis.
D. a specific identification basis.
119.
The LIFO reserve disclosure is required because LIFO inventory costs are
A. higher than FIFO inventory costs.
B. lower than FIFO inventory costs.
C. equal to FIFO inventory costs.
D. usually of no consequence.
120.
LIFO’s tax advantage is that
A. it provides a higher net income than FIFO during periods of rising prices and nondecreasing inventory quantities.
B. it provides a lower net income than FIFO during periods of rising prices and nondecreasing inventory quantities.
C. it provides a lower net income than FIFO during periods of falling prices and nondecreasing inventory quantities.
D. it provides a lower net income than FIFO during periods of rising prices and decreasing inventory quantities.
121.
Long-lived assets are
A. non-operating assets expected to yield their economic benefits (or service potential) over a period longer than one year.
B. operating assets expected to yield their economic benefits (or service potential) over a period longer than one year.
C. non-operating assets expected to yield their economic benefits (or service potential) over a period longer than five years.
D. operating assets expected to yield their economic benefits (or service potential) over a period longer than two years.
122.
Losses must be accrued if they are
A. remote and estimable.
B. reasonably possible and estimable.
C. probable and reasonably estimable.
D. probable and not estimable.
123.
Losses must be disclosed if they are
A. remote and estimable.
B. reasonably possible and estimable.
C. probable and reasonably estimable.
D. reasonably possible but not estimable.
124.
The lower of cost or market for item M-23 is
A. $40.
B. $42.
C. $46.
D. $52.
125.
The lower of cost or market for product N-05 is
A. $20.
B. $22.
C. $24.
D. $28.
126.
The major issue in inventory accounting is
A. determining whether to take inventory using cycle counts as opposed to counting all inventory only at the end of the year.
B. deciding whether to maintain records on a periodic or perpetual basis.
C. determining what goods to include in inventory.
D. choosing the method for allocating goods available for sale to ending inventory and cost of goods sold.
127.
A major problem facing financial analysts who compare long-lived assets on balance sheets of various companies is that different companies often use different
A. formats of balance sheet.
B. estimated lives.
C. salvage values.
D. tax methods of depreciation.
128.
Manufacturing costs NOT considered to be closely associated with production are called
A. period costs.
B. product costs.
C. absorption costs.
D. variable costs.
129.
The "market" value for item N-05 is
A. $20.
B. $24.
C. $28.
D. $30.
130.
The market value of floating-rate debt of $200,000 will
A. rise by $2,000 with a 1% rise in interest rates.
B. fall by $2,000 with a 1% fall in interest rates.
C. remain unchanged with a change in interest rates.
D. will rise in the short run and fall in the long run with a change in interest rates.
131.
The maximum limit for market value of product L-19 is
A. $37.
B. $38.
C. $48.
D. $50.
132.
The mechanics of absorption costing can lead to year-to-year income changes
A. whenever inventory levels remain fairly constant.
B. if the productivity of factory workers improves.
C. whenever production and sales are not parallel.
D. when raw material prices are increasing.
133.
The method of measuring long-lived assets at their estimated value in an input market is the
A. expected benefit approach.
B. economic sacrifice approach.
C. discounted present value approach.
D. net realizable value approach.
134.
The Mick Company reported a LIFO cost of goods sold for the year of $100,000. The LIFO reserve decreased by $30,000 for the year. An estimate of the cost of goods sold under FIFO is
A. $70,000.
B. $130,000.
C. $160,000.
D. $200,000.
135.
The minimum limit for market value of product M-23 is
A. $42.
B. $46.
C. $56.
D. $60.
136.
The most straightforward method for making lessees’ balance sheet data comparable is to treat all leases as if they were
A. operating leases.
B. capital leases.
C. direct financing capital leases.
D. sales-type capital leases.
137.
The most widely-used depreciation method for U.S. income tax purposes is
A. sum-of-the-years’ digits.
B. MACRS.
C. straight-line.
D. units-of-production.
138.
The Ness Company sells $5,000,000 of five-year, 10% bonds at the start of the year. The bonds have an effective yield of 9%. Present value factors are below:
The amount of bond interest expense for Year 2 is
A. $450,000.
B. $464,578.
C. $500,000.
D. $535,422.
139.
The Ness Company sells $5,000,000 of five-year, 10% bonds at the start of the year. The bonds have an effective yield of 9%. Present value factors are below:
The amount of bond premium amortization for Year 2 is
A. $32,497.
B. $35,422.
C. $38,895.
D. $50,000.
140.
The Ness Company sells $5,000,000 of five-year, 10% bonds at the start of the year. The bonds have an effective yield of 9%. Present value factors are below:
The amount of cash interest paid in Year 1 on the bonds is
A. $450,000.
B. $467,503.
C. $500,000.
D. $538,895.
141.
The Ness Company sells $5,000,000 of five-year, 10% bonds at the start of the year. The bonds have an effective yield of 9%. Present value factors are below:
The bond carrying value at the end of Year 1 is
A. $4,500,000.
B. $5,000,000.
C. $5,126,556.
D. $5,161,978.
142.
The Ness Company sells $5,000,000 of five-year, 10% bonds at the start of the year. The bonds have an effective yield of 9%. Present value factors are below:
The bond carrying value at the end of Year 2 is
A. $4,805,525.
B. $5,000,000.
C. $5,126,556.
D. $5,194,475.
143.
The Ness Company sells $5,000,000 of five-year, 10% bonds at the start of the year. The bonds have an effective yield of 9%. Present value factors are below:
The bond interest expense for Year 1 is
A. $467,503.
B. $500,000.
C. $532,497.
D. $538,895.
144.
The Ness Company sells $5,000,000 of five-year, 10% bonds at the start of the year. The bonds have an effective yield of 9%. Present value factors are below:
The bonds will sell for
A. $4,805,525.
B. $5,000,000.
C. $5,050,000.
D. $5,194,475.
145.
Non-current monetary liabilities are initially recorded at their
A. future value.
B. historical value.
C. present value when incurred.
D. undiscounted amount due.
146.
On December 1, 2011 a company bought a call option costing $100,000 as a speculative investment. The call option gave the company the right to purchase 100,000 barrels of oil for $110 per barrel during April 2012. As of December 31, 2011 the call option had a value of $125,000. The company liquidated the call option on April 15, 2012 in exchange for $175,000. Which of the following accurately describes GAAP accounting for this call option?
A. The realized gain applicable to the year ending December 31, 2011 is $25,000.
B. The realized gain recognized on April 15, 2012 is $75,000.
C. The unrealized gain recognized on April 15, 2012 is $50,000.
D. The call option will be reported on the December 31, 2011 balance sheet at $125,000 and a $25,000 unrealized gain will be reported as a component of income from continuing operations for the year ending December 31, 2011.
147.
On February 1, 2012, Hills Company had 10,000 pounds of inventory costing $1.50 per pound; the market value per pound was $1.95 on this date. Hills entered into a futures contract to sell the 10,000 pounds of inventory during May 2012 at $2.25 per pound. Which of the following statements does not accurately describe the impact of this futures contract?
A. Hills has foregone the benefit of additional profits (the upside potential) if the price per pound exceeds $2.25 during the month of May.
B. Hills has eliminated the risk of reduced profits (the downside potential) if the price per pound is less than $1.95 during the month of May.
C. Hills’ gross profit in May will be $3,000 regardless of the actual price per pound in May.
D. The value of the futures contract decreases as the market price per pound of inventory increases.
148.
On Ford’s books, this lease is treated as a/an
A. operating lease.
B. capital lease.
C. direct financing capital lease.
D. sales-type capital lease.
149.
On January 1, 2011 Lessee Company entered into a five-year lease which required annual payments of $60,000. The first payment was due at the inception of the lease. The present value of the minimum lease payments to record the lease was $250,192; the applicable discount rate was 10%. Lessee Company treated the lease as a capital lease. What is the balance of Lessee Company’s lease liability as of December 31, 2011?
A. $209,211
B. $275,211
C. $190,192
D. $149,211
150.
On January 1, 2011, Lessee Company entered into a five-year lease which required annual payments of $120,000. The first payment was due at the inception of the lease. The present value of the minimum lease payments to initially record the lease was $500,384; the applicable discount rate was 10%. Lessee Company treated the lease as a capital lease. What is the balance of Lessee Company’s lease liability immediately after the January 1, 2012 payment was made?
A. $430,422
B. $260,384
C. $298,422
D. $380,384
151.
On January 1, 2011, Ross Corporation issued bonds with a maturity value of $200,000; the bond’s stated rate of interest equaled the market interest rate on the issue date. On December 31, 2011, the market value of the bonds was $188,926; on December 31, 2012, the market value of the bonds was $191,325. Which of the following correctly describes Ross Corporation’s financial reporting if Ross elects to measure the bond liability using the fair value option?
A. For the year ending December 31, 2011, Ross will report an unrealized holding loss of $11,074 in its income statement.
B. For the year ending December 31, 2012, Ross will report an unrealized holding gain of $8,675 in its income statement.
C. For the year ending December 31, 2012, Ross will report an unrealized holding loss of $8,675 in its income statement.
D. For the year ending December 31, 2012, Ross will report an unrealized holding loss of $2,399 in its income statement.
152.
On January 1, 2011 when the effective interest rate was 14%, a company issued bonds with a maturity value of $1,000,000. The stated rate of interest is 12%, the bonds pay interest semi-annually and sold for $893,640. The amount of bond discount amortized on July 1, 2011 is approximately
A. $1,000
B. $2,555
C. $2,000
D. $5,110
153.
On January 1, 2018, Lessor Corporation entered into a lease which was treated as a sales-type lease by Lessor Corporation. Lessor follows ASC 840 guidance for lease accounting. The leased asset’s book value within Lessor Corporation’s financial statements was $350,000 as of January 1, 2018. The lease required the lessee to make ten annual payments of $50,000; the first payment was due at the beginning of the lease term and each January 1 thereafter. The present value of the minimum lease payments was $362,345. The implicit rate of interest, known to the lessee, was 8%, while the lessee’s incremental borrowing rate was 10%. The increase in Lessor Corporation’s net income for the year ended December 31, 2018 was approximately:
A. $12,345.
B. $37,333.
C. $41,333.
D. $24,988.
154.
On January 1, 2012 when the effective interest rate was 12%, Philips Co. issued bonds with a maturity value of $200,000. The stated rate of interest is 12% and the bonds pay interest semi-annually. Philips Co. paid $2,000 in bond issue costs on this date. If Philips Co. uses IFRS, the effective interest rate will be
A. slightly lower than 12%.
B. slightly higher than 12%.
C. 12%.
D. Cannot be determined based on the information provided.
156.
On Ray’s books, this lease is treated as a/an
A. operating lease.
B. ordinary capital lease.
C. direct financing capital lease.
D. sales-type capital lease.
157.
Over the life of a lease, the amount charged to expense is
A. greater for an operating lease.
B. greater for a capital lease.
C. the same for a capital or operating lease.
D. less for a capital lease.
158.
The Pepper lease is a/an
A. operating lease because the lease value is less than 90% of the fair value of the asset.
B. capital lease because the lease value is 90% of the fair value of the asset.
C. operating lease because the asset reverts to Blue at the end of the lease.
D. capital lease because the lease term is more than 75% of the life of the asset.
159.
A periodic system of inventory
A. reduces record keeping.
B. increases record keeping.
C. increases the cost of maintaining inventory.
D. eliminates the need for a physical count.
160.
A perpetual inventory system
A. usually maintains inventory records only in terms of physical units on hand.
B. uses a purchases account to record additions to inventory.
C. eliminates the need to periodically take a physical inventory count.
D. keeps a running record of the amount of inventory on hand.
161.
Presume that an asset exchange transaction does not culminate an earning process and that the transaction does not involve cash. In such a case
A. a gain will be recognized only when the fair value of the acquired assets exceeds the book value of the relinquished assets.
B. a loss will be recognized only when the fair value of the acquired assets exceeds the book value of the relinquished assets.
C. the assets acquired are recorded at the book value of the assets relinquished.
D. a gain will be recognized only when the fair value of the acquired assets exceeds the fair value of the relinquished assets.
162.
A probable future sacrifice of an economic benefit arising from a present obligation to transfer assets or provide services to other entities in the future as a result of a past transaction is a/an
A. asset.
B. liability.
C. equity.
D. expense.
163.
Reported income for FIFO firms _________ includes some realized holding gains during periods of rising inventory costs. Which of the following terms (when inserted in the blank) makes the previous a true statement?
A. always.
B. sometimes.
C. usually.
D. never.
164.
Research findings almost uniformly indicate that existing GAAP for both R&D and software development is
A. satisfactory as written.
B. objective.
C. conservative.
D. liberal.
165.
Similarities between U.S. GAAP and IFRS include which of the following?
A. Both U.S. GAAP and IFRS permit the same cost flow assumptions.
B. Inventory is carried at the lower of cost or net realizable value under both U.S. GAAP and IFRS.
C. Direct costing is required under both U.S. GAAP and IFRS.
D. The definition of inventory is similar in both U.S. GAAP and IFRS.
166.
The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on
A. the severity of input cost changes.
B. the rapidity of physical inventory turnover.
C. both a. and b.
D. a multitude of factors including a. and b. above.
167.
The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on the rapidity of the inventory turnover and the
A. change in accounts receivable turnover.
B. divergence of total asset turnover from previous periods.
C. severity of input cost change.
D. rapidity of fixed asset turnover.
168.
The Skone Corporation reported at the end of the year a LIFO reserve of $25,000. The beginning LIFO reserve was $20,000. The cost of goods sold was $197,500 under LIFO. The cost of goods sold under FIFO should be
A. $192,500.
B. $197,500.
C. $202,500.
D. $222,500.
169.
Some financial analysts contend that reporting debt at amortized historical cost rather than current market value
A. makes it more difficult to manipulate accounting numbers.
B. makes it easier to manipulate accounting numbers.
C. has no impact on the accounting numbers.
D. makes it impossible to manipulate the accounting numbers.
170.
Some managers of acquiring companies believe that large income statement charges arising from acquisitions are treated as transitory events by analysts because their impact on firm valuation is presumed to be
A. totally ignored.
B. significant.
C. minimal.
D. positive.
171.
Staley Enterprises purchased a machine for $260,000. The seller paid $900 freight to deliver the machine. Staley used $4,600 of staff mechanics’ time to install the machine and employee training cost $7,000. The state charged a 5% sales tax on the invoice price. What is the capitalized cost of the machine?
A. $260,000
B. $264,600
C. $271,600
D. $284,600
172.
TAD, Inc. uses the lower of cost or market method to value inventory. If the inventory value is replacement cost, which one of the following statements is true?
A. Historical cost is less than replacement cost.
B. Replacement cost is greater than net realizable value less a normal profit margin.
C. Replacement cost is greater than historical cost.
D. Net realizable value is greater than historical cost.
173.
Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 5%. These bonds will sell in the market at
A. par.
B. a discount.
C. a premium.
D. stated value.
174.
Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 8%. These bonds will sell in the market at
A. par.
B. a discount.
C. a premium.
D. stated value.
175.
To adjust for distortions that arise from off-balance sheet leases when comparing among firms, analysts rely on
A. the balance sheet.
B. the income statement.
C. the statement of stockholders’ equity.
D. required note disclosures.
176.
To preclude firms from generating artificial gains on exchange transactions booked at fair value, GAAP requires that the transaction
A. must possess commercial substance.
B. have future cash flows that remain substantially the same.
C. be reviewed and approved by the SEC.
D. All of the above criteria must be met to book an exchange transaction at the fair value of the exchanged assets.
177.
To remain in accordance with GAAP, operating leases require note disclosure of the
A. amount of annual rental payments.
B. discounted present value of future lease payments.
C. undiscounted present value of future lease payments.
D. future cash outflows arising from operating leases.
178.
To value the lease asset, Pepper should use a discount rate of
A. 10%.
B. 11%.
C. 12%.
D. prime rate.
179.
Under IFRS
A. Disclosure of lessee future minimum lease payments for the periods within one year, within years two through five, and after five years are required.
B. Lessees can classify some assets held under leases as investment property.
C. The two additional lessor criteria provided under U.S. GAAP for lease revenue recognition are absent.
D. All of the choices are correct.
180.
Under IFRS, a lessee may classify some assets held under leases as investment property which allows the lessee to
A. Avoid recording depreciation expense for the assets.
B. Account for the assets using either historical cost or fair value.
C. Use the higher of the implicit or the incremental borrowing rate when computing the present value of the minimum lease payments.
D. All of the choices are correct.
181.
Under IFRS, research must be expensed but some development expenditures may be capitalized. To capitalize development expenditures, firms must demonstrate several factors that include all of the following except:
A. technical feasibility.
B. length of time the intangible asset is expected to provide benefits.
C. ability to use or sell the asset.
D. how the intangible asset will generate probable future economic benefits.
182.
Under IFRS, when an asset is revalued upward, subsequent depreciation is based on
A. the asset’s original cost.
B. the method used for determining depreciation on the company’s tax returns.
C. the asset’s fair value.
D. the amount of future cash flows the asset is expected to generate.
183.
Under IFRS, which of the following is an indicator of a situation (individually or in combination) that could lead to a lease being classified as a finance lease?
A. If the lessor can cancel the lease, the lessee’s losses associated with the cancellation are borne by the lessor.
B. The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.
C. Gains or losses from the fluctuation in the fair value of the residual accrue to the lessor.
D. All of the choices are indicators.
184.
Upon acquisition, the leased equipment will be valued on Pepper’s balance sheet at
A. $144,475.
B. $157,469.
C. $175,000.
D. $250,000.
185.
The use of perpetual inventory systems is preferred where a
A. large number of expensive inventory units exist.
B. small number of expensive inventory units exist.
C. large number of inexpensive inventory units exist.
D. small number of inexpensive inventory units exist.
186.
The use of the lower of cost or market method to value inventory for reporting purposes employs the accounting principle of
A. cost-benefit.
B. matching.
C. historical cost.
D. conservatism.
187.
The use of the lower of cost or market method to value inventory for reporting purposes is a departure from the accounting principle of
A. going concern.
B. conservatism.
C. matching.
D. historical cost.
188.
The use of the lower of cost or market method to value inventory indicates a probable loss sustained. This is an application of the accounting principle of
A. matching.
B. going concern.
C. conservatism.
D. consistency.
189.
U.S. GAAP requires that virtually all costs incurred for research and development of an internally generated patent be
A. capitalized.
B. expensed.
C. amortized over 40 years.
D. ignored.
190.
Variable costing is also referred to as
A. direct costing.
B. full costing.
C. variable costing.
D. fixed costing.
192.
What amount would appear in Doggy’s construction in progress account at December 31, 2011?
A. $2,325,000
B. $4,300,000
C. $4,439,500
D. $4,740,000
193.
What depreciation method is used if depreciation expense is $6,000 in 2014?
A. Straight-line.
B. Sum of years’ digits.
C. Double-declining balance.
D. Composite.
194.
What is the financing profit of Blue Manufacturing on a leased lathe?
A. $7,000
B. $8,500
C. $10,500
D. $17,500
195.
What is the manufacturing profit of Blue Manufacturing on a leased lathe?
A. $7,000
B. $8,500
C. $10,500
D. $17,500
196.
What would be the amount of Doggy’s cumulative weighted average expenditure during 2011 related to the cutter project?
A. $2,150,000
B. $2,325,000
C. $2,536,364
D. $4,300,000
197.
What would be the amount of Doggy’s cumulative weighted average expenditure during 2012 related to the cutter project?
A. $2,966,667
B. $4,341,250
C. $4,941,667
D. $5,450,000
198.
The Wheat Company has used the LIFO method for inventory valuation since the start of business 15 years ago. The current year ending inventory is $375,000. If the FIFO method of inventory had been used, the inventory would be $450,000. If Wheat Company had used the FIFO inventory method, income before income taxes would have been
A. $75,000 higher over the 15 year period.
B. $75,000 lower over the 15 year period.
C. $75,000 higher in the current year.
D. $75,000 lower in the current year.
199.
When a bond is sold at a discount the effective interest rate is
A. equal to the stated rate.
B. above the stated rate.
C. below the stated rate.
D. equal to the stated rate for a period of time and then above the stated rate for a period of time.
200.
When a bond is sold at a premium the
A. effective interest rate is less than the stated rate.
B. effective interest rate is greater than the stated rate.
C. effective interest rate relative to the stated rate is not known.
D. interest expense during the life of the bond exceeds the amount of cash interest payments during the life of the bond.
201.
When accounting for a capital lease, depreciation expense is equal to the
A. lease payments.
B. principal portion of the lease payments.
C. normal depreciation computed on the depreciable base of the asset.
D. straight-line depreciation only on the full amount of the leased asset.
202.
When accounting for an operating lease, which one of the following accounts are charged with the expense on the lessee’s income statement?
A. Depreciation Expense
B. Amortization Expense
C. Rent Expense
D. Lease Operating Expense
203.
When a company uses absorption costing
A. only fixed costs are inventoried.
B. only variable costs are inventoried.
C. all production costs are inventoried.
D. fixed costs are expensed as incurred.
204.
When a financial analyst adjusts a company’s reported depreciation expense to improve comparisons of profitability with another firm that uses the same depreciation method, the analyst assumes all of the following to be true except that
A. the useful lives differences are "real".
B. the dollar breakdown within asset categories is similar for both firms (i.e., both have similar amounts of buildings vs. machinery, etc.).
C. salvage value proportions are roughly equivalent for both firms.
D. the useful life differences are artificial.
205.
When a lessee has a capital lease for its primary premises it would initially record a leased asset on the balance sheet equal to
A. zero.
B. the present value of future lease payments.
C. the sum of future lease payments.
D. the lesser of the fair value of the asset or the present value of the future lease payments
207.
When applying lower of cost or market under IFRS, market is defined as
A. net realizable value less normal markup.
B. replacement cost.
C. net realizable value.
D. the middle value among the above three alternatives.
208.
When applying the lower of cost or market method, market value cannot exceed the
A. floor.
B. net realizable value.
C. net realizable value less a normal profit margin.
D. replacement cost.
209.
When certain kinds of assets are built that require public welfare and safety expenditures at the end of the asset’s life,
A. these estimated future expenditures are subtracted from the carrying value of the asset.
B. these "asset retirement" costs are expensed when asset retirement occurs.
C. this fact is only reported in the notes to the financial statements.
D. a liability simultaneously arises.
210.
When computing the issue price of a bond that has a stated rate of 8% payable semiannually and a market rate of 10%, the discount rate used would be
A. 8%.
B. 10%.
C. 4%.
D. 5%.
211.
When firms dispose of a long-lived asset before the end of its useful life, in a transaction that has commercial substance, the difference between the net book value of the asset and the sale proceeds is a/an
A. extraordinary gain or loss.
B. gain or loss from continuing operations.
C. gain or loss from a discontinued item.
D. gain or loss from a prior period.
212.
When interest rates have increased and bonds are retired before maturity, market value is
A. below book value generating an accounting gain.
B. below book value generating an accounting loss.
C. above book value generating an accounting gain.
D. above book value generating an accounting loss.
213.
When market rates of interest decrease, the use of floating-rate debt benefits
A. investors.
B. issuing companies.
C. all parties.
D. no one.
214.
When the differences in useful lives of long-lived assets reflect real economic differences, the attempt on the part of financial analysts to undo these differences may
A. impede profit and loss comparisons.
B. enhance profit comparisons.
C. enhance profit comparisons, but impede loss comparisons.
D. enhance profit and loss comparisons.
215.
When the effective yield of a bond is the same as the stated rate on the bond, the bond is sold at
A. a discount.
B. a premium.
C. par.
D. a price above par.
216.
When the income effect of a LIFO liquidation is material, the SEC requires that the 10-K report disclose
A. the dollar impact of LIFO liquidation on both a before- and after-tax basis.
B. the dollar impact of LIFO liquidation on the year-end inventory balance.
C. this fact following a prescribed format.
D. the dollar impact of LIFO liquidation on net income.
217.
When the market rate of interest is below the nominal rate, a bond sells at
A. par.
B. a premium.
C. a discount.
D. stated value.
218.
When two parties agree to the sale of some asset or commodity on some specified future date at a price specified today it is a/an
A. forward contract.
B. swap contract.
C. performance contract.
D. options contract.
219.
Which of the following is a reason why lease accounting under GAAP should be reconsidered?
A. It is too easy for firms to circumvent lease capitalization criteria.
B. The SEC has stated that the FASB should reexamine lease accounting.
C. Operating leases are a popular means of off-balance sheet financing.
D. Each of the above are substantiated reasons.
220.
Which of the following is not an accurate description of the controversies surrounding the fair value option?
A. Advocates argue that accounting-induced volatility is eliminated and financial statement transparency is improved.
B. Proponents argue that opportunities are enhanced for companies to manipulate their earnings and balance sheet.
C. Proponents argue that companies that can use the fair value option in situations where there is not necessarily a relationship between the financial assets and liabilities which promotes the opportunity to manage earnings.
D. Advocates argue that financial reporting is more accurate and transparent for those companies in financial distress.
221.
Which of the following statements does not accurately describe the accounting for derivatives?
A. The holding gain resulting from a fair value hedge that qualifies for hedge accounting is recognized in net income along with the offsetting loss on the hedged item.
B. The holding loss resulting from a cash flow hedge that qualifies for hedge accounting is recognized in net income during the year of the loss.
C. Management must be able to describe its hedging strategy in order to meet the GAAP criteria to qualify for hedge accounting.
D. Derivatives that fail to meet the GAAP criteria for hedge accounting are accounted for as speculative investments.
222.
Which of the following statements does not properly describe GAAP accounting for derivatives?
A. Derivatives are reported within the balance sheet at fair value.
B. Speculative investments in derivative contracts can increase earnings volatility.
C. Changes in the fair value of a derivative must be included in net income when they occur.
D. A derivative’s unrealized holding gain or loss for a particular year is not a component of that year’s income from operations.
223.
Which of the following statements is correct?
A. Amortization of discount on bonds payable (bond discount) results in an increase in a bond’s carrying value.
B. Amortization of discount on bonds payable (bond discount) results in a decrease in bond interest expense.
C. Amortization of premium on bonds payable (bond premium) results in an increase in a bond’s carrying value.
D. Amortization of premium on bonds payable (bond premium) results in an increase in bond interest expense.
224.
Which of the following statements is not accurate with respect to the reporting requirements regarding the fair value option?
A. Firms may elect the fair value option for a single eligible instrument without electing it for other identical instruments.
B. Once the choice is made to adopt the fair value option, the decision is irrevocable.
C. Financial statement disclosures must include management’s rationale for electing the fair value option.
D. The fair value option is not available for security investments that are accounted for using the equity method.
225.
Which of the following statements is not correct regarding amortization when using the effective interest method (basis)?
A. Amortization of discount on bonds payable (bond discount) increases in later years relative to earlier years of a bond’s life.
B. Amortization of premium on bonds payable (bond premium) increases in later years relative to earlier years of a bond’s life.
C. Amortization of both premium on bonds payable (bond premium) and discount on bonds payable (bond discount) decreases in later years relative to earlier years of a bonds life.
D. Amortization of discount on bonds payable (bond discount) results in an increase in interest expense and in an increase in the bond’s carrying value.
226.
Which of the following statements pertaining to lease accounting is not correct?
A. For a particular lease agreement, the amount of interest expense recorded by the lessee can be different than the amount of interest revenue recorded by the lessor during the same time period.
B. The current ratio will be decreased over the lease term if a lessor treats a lease as a capital lease rather than an operating lease.
C. It is very challenging for different firms to treat virtually identical leases dissimilarly due to the fact that the required lease capitalization criteria are difficult to circumvent.
D. The required disclosures pertaining to operating leases require the lessee to disclose what the impact on the financial statements would have been if the lease would have been treated as a capital lease.
227.
Which of the following statements pertaining to lease accounting is not correct?
A. The lessee will depreciate a leased asset either over the lease term or the leased asset’s useful life dependent upon which of the required lease capitalization criteria is (are) met.
B. The lessee ignores a guaranteed salvage value when calculating depreciation expense associated with a capital lease.
C. The lessor’s annual income will decrease over time regardless of whether the lease is a sales-type lease or a direct financing lease.
D. The gross profit recorded by the lessor is the same whether or not the residual value is guaranteed by the lessee.
229.
Which one of the following contingencies must be accrued on the balance sheet?
A. The likely loss on a lawsuit that the firm’s attorneys believe will be dropped.
B. The probable loss on a lawsuit that the firm’s attorneys believe will be settled for $50,000.
C. The reasonably possible loss on a lawsuit that the firm’s attorneys believe will be dropped.
D. The reasonably possible loss on a lawsuit that the firm’s attorneys believe will be settled for $50,000.
230.
Which one of the following contingencies requires financial statement disclosure?
A. A lawsuit that the firm’s attorneys believe will be dropped.
B. A lawsuit that the firm’s attorneys believe will probably be settled for $75,000.
C. A reasonably possible loss on a lawsuit that the firm’s attorneys cannot estimate the loss.
D. A reasonably possible loss on a lawsuit that the firm’s attorneys believe will be settled for $100,000.
231.
Which one of the following factors makes it difficult for financial analysts to use trend analysis?
A. Decreasing costs and prices.
B. Deflation.
C. An aging asset base.
D. A relatively new asset base.
232.
Which one of the following is an example of the expected benefit approach for valuing long-lived assets?
A. Historical cost.
B. Current replacement value.
C. Current cost.
D. Discounted present value.
233.
Which one of the following items would be charged to the cost of a building rather than the cost of the land?
A. Architectural fees.
B. Grading of land.
C. Demolition of existing an structure.
D. Cost of hauling material from a demolished structure.
234.
Which one of the following items would be charged to the cost of land rather than the cost of the building?
A. Demolition of an existing structure.
B. Capitalization of interest.
C. Architectural fees.
D. Cost of the foundation.
235.
Which one of the following ratios deteriorates with the lessee’s capitalization of a lease?
A. Current ratio
B. Return on equity
C. Inventory turnover
D. Common earnings leverage
236.
With a leveraged lease, the lessor must treat the lease as a/n
A. operating lease.
B. ordinary capital lease.
C. direct financing capital lease.
D. sales-type capital lease.
237.
The Xano Company reported merchandise inventory at LIFO of $450,000 on the year-end financial statements. The company also reported a LIFO reserve of $34,000. An estimate of the inventory balance if the inventory had been reported using the FIFO assumption is
A. $382,000.
B. $416,000.
C. $461,000.
D. $484,000.
When a lessee has a capital lease under ASC 840, the amount shown for the asset and the amount shown for the related liability are equal:
A) only at the lease inception.
B) throughout the life of the lease.
C) only at the termination of the lease.
D) throughout the life of the lease, but only when there is an unguaranteed residual value.
Which of the following statements is correct?
A) Amortization of discount on bonds payable (bond discount) results in an increase in a bond’s carrying value.
B) Amortization of discount on bonds payable (bond discount) results in a decrease in bond interest expense.
C) Amortization of premium on bonds payable (bond premium) results in an increase in a bond’s carrying value.
D) Amortization of premium on bonds payable (bond premium) results in an increase in bond interest expense.
When interest rates have increased and bonds are retired before maturity, market value is:
A) below book value generating an accounting gain.
B) below book value generating an accounting loss.
C) above book value generating an accounting gain.
D) above book value generating an accounting loss.
Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor’s implicit lease rate, known to the lessee, is 10%. The lessor and the lessee use ASC 840 guidelines for lease accounting.
Present value interest factors are:
10% 12%
PV factor of $1 0.38554 0.32197
PV factor for ord. ann 6.14457 5.65022
To value the lease asset, Pepper should use a discount rate of:
A) 10%.
B) 11%.
C) 12%.
D) prime rate.
Temporary differences that will cause taxable income in future periods to be lower than pre-tax book income in future periods give rise to:
A) deferred tax assets.
B) deferred tax liabilities.
C) permanent differences.
D) expense.
Which one of the following is a permanent difference between book and taxable income?
A) Interest received on municipal bonds
B) Installment sales
C) Bad debts expense
D) Warranty expense
Floating-rate debt is the most common method for lenders to protect themselves from losses that may arise as a result of:
A) increases in the market interest rate.
B) decreases in the market interest rate.
C) increases in the stated interest rate on bonds.
D) decreases in the stated rate on bonds.
When a bond is sold at a premium the:
A) effective interest rate is less than the stated rate.
B) effective interest rate is greater than the stated rate.
C) effective interest rate relative to the stated rate is not known.
D) interest expense during the life of the bond exceeds the amount of cash interest payments during the life of the bond.
Which of the following is correct with respect to ASU 842 for lease accounting?
A) It retained the distinction between operating and finance leases for lessees.
B) It is mandatory for fiscal years beginning after December 15, 2018 and may not be adopted early.
C) It requires the lessee to record a prepaid asset and a lease liability.
D) It allows the lessee to decide what borrowing rate to use to value the lease obligation.
A temporary difference created this year causes book income to be greater than taxable income; in future years, book income will be less than taxable income. The temporary difference in the future years’ incomes is referred to as:
A) reversing temporary difference.
B) originating temporary difference.
C) permanent difference.
D) minor difference.
Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor’s implicit lease rate, known to the lessee, is 10%. The lessor and the lessee use ASC 840 guidelines for lease accounting.
Present value interest factors are:
10% 12%
PV factor of $1 0.38554 0.32197
PV factor for ord. ann 6.14457 5.65022
How much straight-line depreciation expense will Pepper record for Year 1?
A) $14,747
B) $15,362
C) $15,747
D) $17,500
Hooker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2018. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.
The amount of cash interest paid in 2019 is:
A) $16,000.
B) $18,000.
C) $19,080.
D) $20,000.
Hooker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2018. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.
The amount of bond discount amortization for 2019 is:
A) $1,696.
B) $2,458.
C) $3,080.
D) $4,000.
Taylor Company began manufacturing operations on January 2, 2018. During 2018 Taylor reported pre-tax book income of $150,000 and had taxable income of $200,000. Taylor had a temporary difference relating to accrued product warranty costs which are expected to be paid as follows:
2018 0 (.3)
2019 $ 30,000 (.3)
2020$ 15,000 (.4) = 17,000 def. asset
2021 $ 5,000 (.4)
Income tax expense for 2018 is:
A) $43,000.
B) $45,000.
C) $65,000.
D) $67,000.
During 2018, its first year of operations, a company recorded depreciation expense of $50,000 for book purposes. For tax purposes during 2018, $100,000 of depreciation expense was deducted. The temporary difference created during 2018 will reverse equally during 2019 and 2020. Book income from operations during the first year was $570,000. The income tax rate is 40%. The income tax expense to be reported in the income statement for the first year of operations is:
A) $228,000.
B) $208,000.
C) $248,000.
D) $188,000.
During its first year of operations a company recorded accrued warranty expense totaling $75,000 for book purposes. For tax purposes, $25,000 of the expenses are deductible during the first year of operations and $50,000 are deductible during the second year of operations. Book income from operations during the first year was $750,000. The enacted income tax rate was 40% during the first year of operations and 45% during the second year of operations. The income tax expense to be reported in the income statement for the first year of operations is:
A) $297,500.
B) $300,000.
C) $277,500.
D) $280,000.
On January 1, 2018, Lessee Corporation entered into a ten-year lease. Lessee follows ASC 840 guidance for lease accounting. The lease terms required annual year-end payments of $160,000. The lease agreement does not contain either a bargain purchase option or a transfer of title. The fair value of the equipment at the inception of the lease was $1,100,000; estimated life of the leased assets was fourteen years. Lessee Corporation’s incremental borrowing rate was 10%; the implicit rate of interest, known to the lessee, was 12%. Applicable time value of money values are as follows:
Ten-year, 10% ordinary annuity 6.144
Ten-year, 12% ordinary annuity 5.650
Ten-year, 10% annuity due 6.759
Ten-year, 12% annuity due 6.328
Lessee Corporation should initially capitalize the lease at what amount?
A) $0, the lease should not be capitalized
B) $983,040
C) $1,081,440
D) $904,000
GAAP establishes specific criteria for the treatment of leases under ASC 840 and ASC 842. If any of the criteria are met, the lessee:
A) must treat the lease as an operating lease under ASC 840.
B) must treat the lease as a capital lease under ASC 840 or a finance lease under ASC 842.
C) may choose the treatment if two or less criteria are met.
D) may elect to treat the lease as an operating lease under ASC 840 and ASC 842 if only one criterion is met.
Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 8%. These bonds will sell in the market at:
A) par.
B) a discount.
C) a premium.
D) stated value.
When the market rate of interest is below the stated rate of interest, a bond sells at:
A) par.
B) a premium.
C) a discount.
D) stated value.
The most straightforward method for making lessees’ balance sheet data comparable is to treat all leases as if they were:
A) operating leases.
B) capital leases.
C) direct financing capital leases.
D) sales-type capital leases.
When a bond is sold at a discount the effective interest rate is:
A) equal to the stated rate.
B) above the stated rate.
C) below the stated rate.
D) equal to the stated rate for a period of time and then above the stated rate for a period of time.
Morey Corporation leases a tractor from Equity Leasing with a five-year non-cancelable lease on January 1, 2018 under the following terms:
Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year.
The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor.
The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term.
The tractor has a six-year economic life.
Morey has an excellent credit rating.
Equity offers no warranty on the tractor other than the manufacturer’s two-year warranty that is handled directly with the manufacturer.
Both Morey and Equity use ASC 840 guidance for lease accounting.
For Morey, this lease is treated as a/an:
A) operating lease.
B) capital lease.
C) direct financing capital lease.
D) sales-type capital lease.
When market rates of interest decrease, the use of floating-rate debt benefits:
A) investors.
B) issuing companies.
C) all parties.
D) no one.
If a lease contains a residual value guarantee, the lessee must:
A) add the guaranteed amount to the present value of the minimum lease payments.
B) add the present value of the guaranteed amount to the present value of the minimum lease payments
C) include the guaranteed amount in the minimum lease payments only if the lessee intends to keep the asset at the end of the lease.
D) ignore the guaranteed amount if the lessee intends to keep the asset at the end of the lease.
Some financial analysts contend that reporting debt at amortized historical cost rather than at fair value:
A) makes it more difficult to manipulate accounting numbers.
B) makes it easier to manipulate accounting numbers.
C) has no impact on the accounting numbers.
D) makes it impossible to manipulate the accounting numbers.
A temporary difference that causes book income to be greater than or less than taxable income when it is initially recorded is a/an:
A) reversing temporary difference.
B) originating temporary difference.
C) permanent difference.
D) minor difference.
Temporary differences that will cause taxable income in future periods to be higher than pre-tax book income in future periods give rise to:
A) deferred tax assets.
B) deferred tax liabilities.
C) permanent differences.
D) tax refund receivable.
Hooker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2018. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.
The amount of cash interest paid in 2018 on the bonds is:
A) $14,458.
B) $16,000.
C) $17,542.
D) $20,000.
Hooker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2018. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.
The amount of bond interest expense for 2019 is:
A) $16,000.
B) $17,696.
C) $18,458.
D) $19,280.
Hooker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2018. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.
The bond carrying value at the end of 2019 is:
A) $175,422.
B) $178,660.
C) $200,000.
D) $203,238.
Hooker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2018. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.
The bond interest expense for 2018 is:
A) $16,000.
B) $17,542.
C) $20,000.
D) $21,542.
On January 1, 2018 when the effective interest rate was 14%, a company issued bonds with a maturity value of $1,000,000. The stated rate of interest is 12%, the bonds pay interest semi-annually and sold for $893,640. The amount of bond discount amortized on July 1, 2018 is approximately:
A) $1,000
B) $2,555
C) $2,000
D) $5,110
Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor’s implicit lease rate, known to the lessee, is 10%. The lessor and the lessee use ASC 840 guidelines for lease accounting.
Present value interest factors are:
10% 12%
PV factor of $1 0.38554 0.32197
PV factor for ord. ann 6.14457 5.65022
Upon acquisition, the leased equipment will be valued on Pepper’s balance sheet at:
A) $144,475.
B) $157,469.
C) $175,000.
D) $250,000.
Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor’s implicit lease rate, known to the lessee, is 10%. The lessor and the lessee use ASC 840 guidelines for lease accounting.
Present value interest factors are:
10% 12%
PV factor of $1 0.38554 0.32197
PV factor for ord. ann 6.14457 5.65022
The lease liability will be valued on Pepper’s balance sheet at:
A) $144,475.
B) $157,469.
C) $175,000.
D) $250,000.
Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 5%. These bonds will sell in the market at:
A) par.
B) a discount.
C) a premium.
D) stated value.
Which of the following is not a proper description with respect to the financial accounting and reporting of income taxes?
A) A permanent difference does not create a deferred tax asset or liability.
B) An originating temporary difference will eventually create a reversing temporary difference.
C) A net operating loss carryforward does not have any impact on income tax expense for the year the loss occurs.
D) Income tax expense changes during the year that future tax rate increases are enacted.
Smith Company reported $350,000 in book income before income tax during 2018, its first year of operation. The tax depreciation exceeded its book depreciation by $30,000. The tax rate for 2018 and all future years was 40%.
If Smith PAID NO ESTIMATED TAXES, what amount of income tax payable should Smith report in its December 31, 2018, balance sheet?
A) $100,000
B) $120,000
C) $128,000
D) $140,000
Amortization of discount on bonds payable (bond discount) results in which of the following?
A) A decrease in bond interest expense.
B) An increase in net income.
C) An increase in the carrying value of the bond.
D) An increase in stockholders’ equity due to the decrease in bond interest expense.
Noncurrent monetary liabilities are initially recorded at their:
A) future value.
B) historical value.
C) present value when incurred.
D) undiscounted amount due.
When the effective yield of a bond is the same as the stated rate on the bond, the bond is sold at:
A) a discount.
B) a premium.
C) par.
D) a price above par.
The market value of floating-rate debt of $200,000 will:
A) rise by $2,000 with a 1% rise in interest rates.
B) fall by $2,000 with a 1% fall in interest rates.
C) remain unchanged with a change in interest rates.
D) will rise in the short run and fall in the long run with a change in interest rates.
When accounting for a capital lease under ASC 840, depreciation expense is equal to the:
A) lease payments.
B) principal portion of the lease payments.
C) normal depreciation computed on the depreciable base of the asset.
D) straight-line depreciation only on the full amount of the leased asset.
The two broad categories of differences that result from determining the pre-tax book income and the taxable income are:
A) temporary differences and originating differences.
B) temporary differences and reversing differences.
C) temporary differences and permanent differences.
D) permanent differences and deferred differences.
Which of the following would NOT create a temporary difference?
A) A revenue included in the determination of book income this year but not included in taxable income until next year
B) An expense included in the determination of taxable income this year but not included in book income until next year
C) A revenue included in the determination of book income this year but never included in taxable income
D) A revenue item that causes book income to be more (less) than taxable income when it is initially recorded
Taylor Company began manufacturing operations on January 2, 2018. During 2018 Taylor reported pre-tax book income of $150,000 and had taxable income of $200,000. Taylor had a temporary difference relating to accrued product warranty costs which are expected to be paid as follows:
2019 $ 30,000 (.3)
2020$ 15,000 (.4)
2021 $ 5,000 (.4)
The enacted tax rates are 30% for 2018 and 2019; and 40% for 2020 and 2021. The deferred tax asset at the end of 2018 is:
A) $ 9,000.
B) $ 12,000.
C) $ 17,000.
D) $ 20,000.
Dot Company issued $200,000 of bonds on January 1, 2018 with interest payable each year. The bonds had a stated rate of 8%. The bonds were set up as floating-rate debt with the rated pegged to LIBOR plus 3%.
Which of the following will be the interest expense for year 1 if LIBOR is 5%?
A) $6,000
B) $10,000
C) $16,000
D) $18,000
Stone Company reported pre-tax book income of $350,000 in 2018, the first year of operation. The tax depreciation exceeded the book depreciation by $30,000. The tax rate for 2018 and all future years was 40%.
If Stone PAID NO ESTIMATED TAXES, what amount of income tax payable should Stone report in its December 31, 2018, balance sheet?
A) $100,000
B) $120,000
C) $128,000
D) $140,000
Stone Company reported pre-tax book income of $700,000 in 2018, the first year of operation. The tax depreciation exceeded the book depreciation by $90,000. The tax rate for 2018 and all future years was 30%.
If Stone paid no estimated taxes, what amount of income tax payable should Stone report in its December 31, 2018, balance sheet?
A) $150,000
B) $160,000
C) $183,000
D) $210,000
When computing the issue price of a bond that has a stated rate of 8% payable semiannually and a market rate of 10%, the discount rate used would be:
A) 8%.
B) 10%.
C) 4%.
D) 5%.
Which of the following transactions would NOT create a temporary difference?
A) The cash payment to acquire a three-year insurance policy.
B) The accrual of warranty expense.
C) The accrual of bad debt expense.
D) The cash collection of interest earned on a municipal bond.
Which of the following items does NOT create a temporary difference?
A) The accrual of pension and OPEB expenses
B) Installment sales
C) Revenues received in advance
D) he payment of life insurance premiums on company executives
Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor’s implicit lease rate, known to the lessee, is 10%. The lessor and the lessee use ASC 840 guidelines for lease accounting.
Present value interest factors are:
10% 12%
PV factor of $1 0.38554 0.32197
PV factor for ord. ann 6.14457 5.65022
The Pepper lease is a/an:
A) operating lease because the lease value is less than 90% of the fair value of the asset.
B) capital lease because the lease value is 90% of the fair value of the asset.
C) operating lease because the asset reverts to Blue at the end of the lease.
D) capital lease because the lease term is more than 75% of the life of the asset.
GAAP establishes specific criteria for the treatment of leases under ASC 840. Which of the following does not accurately describe the criteria applicable to a lessee?
A) The lease agreement contains a bargain purchase option.
B) The lease term is equal to or exceeds 75% of the leased asset’s useful life.
C) The lease agreement transfers title of the leased asset to the lessee at the end of the lease term.
D) The present value of the minimum lease payments is equal to or greater than 75% of the leased asset’s fair value.
Dot Company issued $200,000 of bonds on January 1, 2018 with interest payable each year. The bonds had a stated rate of 8%. The bonds were set up as floating-rate debt with the rated pegged to LIBOR plus 3%.
Which of the following will be the interest expense for year 1 if LIBOR is 7%?
A) $6,000
B) $14,000
C) $16,000
D) $20,000
Stone Company reported pre-tax book income of $350,000 in 2018, the first year of operation. The tax depreciation exceeded the book depreciation by $30,000. The tax rate for 2018 and all future years was 40%.
Income tax expense reported in the income statement for the year ending December 31, 2018 would be:
A) $100,000.
B) $120,000.
C) $128,000.
D) $140,000.
Stone Company reported pre-tax book income of $700,000 in 2018, the first year of operation. The tax depreciation exceeded the book depreciation by $90,000. The tax rate for 2018 and all future years was 30%.
Income tax expense reported in the income statement for the year ending December 31, 2018 would be:
A) $100,000.
B) $120,000.
C) $183,000.
D) $210,000.
Smith Company reported $350,000 in book income before income tax during 2018, its first year of operation. The tax depreciation exceeded its book depreciation by $30,000. The tax rate for 2018 and all future years was 40%.
What amount of deferred tax liability should Smith report in its December 31, 2018, balance sheet?
A) $ 8,000
B) $ 9,000
C) $ 10,000
D) $ 12,000
Stone Company reported pre-tax book income of $700,000 in 2018, the first year of operation. The tax depreciation exceeded the book depreciation by $90,000. The tax rate for 2018 and all future years was 30%.
What amount of deferred tax liability should Stone report in its December 31, 2018, balance sheet?
A) $5,000
B) $9,000
C) $20,000
D) $27,000
When market rates of interest increase, the use of floating-rate debt benefits the issuing company.
A rise in the market rate of interest will cause the value of a financial instrument such as a bond to rise.
A corporation that incurs a net operating loss must carry the loss back to earlier years before it can carry the loss forward.
Under ASC 840, when accounting for an operating lease, a liability is recognized when the lease is signed by the lessee.
Bonds are required by GAAP to be reported on the balance sheet at market value.
The income tax benefit associated with a loss carryback or carryforward is recorded as an adjustment to income tax expense in the year of the loss.
The annual interest expense associated with a capital lease (ASC 840) decreases over the term of the lease.
A lessee’s minimum lease payments includes the present value of a residual value guarantee.
The gain or loss on the early retirement of a bond is the difference between the amount paid to retire the bond and the bond’s carrying value at the date of retirement.
The retirement of a bond that has a $250,000 maturity value and a $10,000 balance in premium on bonds payable (bond premium) creates a $15,000 gain if the bond is retired at a cost of $245,000.
A product warranty provided with the sale of an item of merchandise gives rise to a nonmonetary liability.
A current monetary liability is shown on the financial statements at the undiscounted amount due.
Under ASC 842, when accounting for a long-term operating lease, a liability is recognized when the lease is signed by the lessee.
Under ASC 840, operating leases are financial statement examples of off -balance sheet financing.
For a lessor using the operating lease method of recording a lease under ASC 840, the net effect on income is recognized evenly throughout the term of the lease, if the lessor uses straight-line depreciation.
Taxable income is governed by the doctrine of constructive receipt or ability to pay.
1.
All of the statements below are true of futures contracts except that futures contracts:
A. result in predictable cash flows.
B. eliminate downside risk and upside potential.
C. eliminate downside risk while allowing for upside potential.
D. result in predictable gross profits.
2.
Amortization of discount on bonds payable (bond discount) results in which of the following?
A. A decrease in bond interest expense.
B. An increase in net income.
C. An increase in the carrying value of the bond.
D. An increase in stockholders’ equity due to the decrease in bond interest expense.
3.
Assuming 100% hedge effectiveness, if the fair value of a hedged item increases by $1, the derivative fair value will:
A. increase by $1.
B. decrease by $1
C. increase by $2
D. decrease by $2
5.
A derivative instrument that gives the holder the right but not the obligation to do something is a/an:
A. future contract.
B. swap contract.
C. performance contract.
D. options contract.
6.
Generally accepted accounting principles require that when bonds are sold at a discount, the discount must be allocated to interest expense using the:
A. cash interest method.
B. effective interest method.
C. bond yield method.
D. cumulative interest method.
8.
Hooker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2018. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.
The bond carrying amount at the end of 2018 is:
A. $175,422.
B. $176,964.
C. $200,000.
D. $201,542.
9.
an increase in liabilities and a decrease in net income.
A. A lawsuit that the firm’s attorneys believe will be dropped.
B. A lawsuit that the firm’s attorneys believe will probably be settled for $75,000.
C. A reasonably possible loss on a lawsuit that the firm’s attorneys cannot estimate the loss.
D. A reasonably possible loss on a lawsuit that the firm’s attorneys believe will be settled for $100,000.
10.
In order to use hedge accounting, management must do all of the following except:
A. designate the derivative as a hedging instrument.
B. describe the hedging strategy.
C. get external auditor approval to use hedge accounting.
D. document its effectiveness in eliminating a specific market risk for a specific hedged item.
12.
Noncurrent monetary liabilities are initially recorded at their:
A. future value.
B. historical value.
C. present value when incurred.
D. undiscounted amount due.
13.
A probable future sacrifice of an economic benefit arising from a present obligation to transfer assets or provide services to other entities in the future as a result of a past transaction is a/an:
A. Asset.
B. Liability.
C. Equity.
D. Expense.
14.
A reasonably possible loss on a lawsuit that the firm’s attorneys believe will be settled for $100,000.
A. remote and estimable.
B. reasonably possible and estimable.
C. probable and reasonably estimable.
D. probable and not estimable.
15.
Strauss Company sold $100,000 of long-term bonds in the open market for $100,000. The entry to record the transaction would be:
A. DR Cash 100,000; CR Bonds payable 100,000
B. DR Bonds Payable 100,000; CR Cash 100,000
C.DR Accounts Payable 100,000; CR Bonds payable 100,000
D. DR Cash 100,000; CR Interest payable 100,000
16.
Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 5%. These bonds will sell in the market at:
A. par.
B. a discount.
C. a premium.
D. stated value.
17.
Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 8%. These bonds will sell in the market at:
A. par.
B. a discount.
C. a premium.
D. stated value.
18.
When computing the issue price of a bond that has a stated rate of 8% payable semiannually and a market rate of 10%, the discount rate used would be:
A. 8%.
B. 10%.
C. 4%.
D. 5%.
19.
When the effective yield of a bond is the same as the stated rate on the bond, the bond is sold at:
A. a discount.
B. a premium.
C. par.
D. a price above par.
20.
When the market rate of interest is below the stated rate of interest, a bond sells at:
A. par.
B. a premium.
C. a discount.
D. stated value.
21.
When two parties agree to the sale of some asset or commodity on some specified future date at a price specified today it is a/an:
A. forward contract.
B. swap contract.
C. performance contract.
D. options contract.
22.
Which of the following regarding the recognition of contingencies is not correct?
A.IFRS guidance is built around a balance sheet perspective.
B. Both IFRS and U.S. GAAP require recognition of a contingent liability when it is both probable and can be reasonably estimated.
C. U.S. GAAP relies on an income statement perspective.
D. Only U.S. GAAP requires recognition of a contingent liability, called a provision under IFRS—and the associated contingent loss—when it is both probable and can be reasonably estimated.
23.
Which of the following risks may not be accounted for using hedge accounting?
A. Foreign currency exchange rates.
B. Labor strikes.
C. Commodity prices.
D. Changes in benchmark interest rates.
24.
Which of the following statements does not properly describe GAAP accounting for derivatives?
A. Derivatives are reported in the balance sheet at fair value.
B. Speculative investments in derivative contracts can increase earnings volatility.
C. Changes in the fair value of a derivative must be included in net income when they occur.
D. A derivative’s unrealized holding gain or loss for a particular year is not a component of that year’s income from operations.
25.
Which of the following statements is correct?
A. Amortization of discount on bonds payable (bond discount) results in an increase in a bond’s carrying value.
B. Amortization of discount on bonds payable (bond discount) results in a decrease in bond interest expense.
C. Amortization of premium on bonds payable (bond premium) results in an increase in a bond’s carrying value.
D. Amortization of premium on bonds payable (bond premium) results in an increase in bond interest expense.
26.
Which of the following would only be found in current liabilities on the balance sheet?
A. Derivative contracts.
B. Accrued compensation for services already rendered by employees.
C. Income tax liabilities.
D. Deferred revenue.
27.
Which one of the following contingencies must be accrued on the balance sheet?
A. The likely loss on a lawsuit that the firm’s attorneys believe will be dropped.
B. The probable loss on a lawsuit that the firm’s attorneys believe will be settled for $50,000.
C. The reasonably possible loss on a lawsuit that the firm’s attorneys believe will be dropped.
D. The reasonably possible loss on a lawsuit that the firm’s attorneys believe will be settled for $50,000.
1.
Amortization of discount on bonds payable (bond discount) results in which of the
following?
2.
As transitory components become a more important part of a firm’s reported earnings,
the reported earnings:
3.
As transitory or value-irrelevant components become a larger part of a firm’s reported
earnings, which of the following effects would you not expect to witness?
4.
Beginning in 2017 for calendar-year public firms, all deferred tax assets and liabilities
are classified as:
5.
A company instituted an IRS-approved plan to contribute monies to a plan that would
pay each employee a percentage of his or her highest year of salary for each year of
service upon termination of services. This plan is a:
6.
A company instituted an IRS-approved plan to fund a percentage of each employee’s
salary to a plan that would pay benefits to the employee after termination of services.
This plan is a:
7.
Credit analysts are likely to consider which of the following in making a rating
recommendation?
8.
Differences between IFRS and U.S. GAAP in accounting for pensions include all of the
following except:
9.
Earnings management can occur through a variety of manipulations including:
10.
A firm’s financial statements contain trends that give users insight into the firm’s:
11.
Floating-rate debt is the most common method for lenders to protect themselves from
losses that may arise as a result of:
12.
Generally accepted accounting principles require that when bonds are sold at a discount,
the discount must be allocated to interest expense using the:
13.
One concern when screening for stocks with low price-to-earnings ratios is that
companies with low P/Es may be fnancially weak. What criterion might an analyst
include to avoid inadvertently selecting weak companies?
14.
Projecting profit margins into the future on the basis of past results would be most
reliable when the company:
15.
Temporary differences that will cause taxable income in future periods to be higher than
pre-tax book income in future periods give rise to
16.
Temporary differences that will cause taxable income in future periods to be lower than
pre-tax book income in future periods give rise to:
17.
The two broad categories of differences that result from determining the pre-tax book
income and the taxable income are:
19.
What type of trends and relationships can be gleaned from a company’s financial
statements?
20.
When a bond is sold at a premium the:
21.
When accounting for a capital lease under US GAAP, depreciation expense is equal to
the:
22.
When interest rates have increased and bonds are retired before maturity, market value
is:
23.
When the market rate of interest is below the stated rate of interest, a bond sells at:
24.
Which of the following does not cause an increase in the pension expense for a defined
benefit plan?
25.
Which of the following is not a factor in the determination of pension expense when the
employer sponsors a defined benefit pension plan?
26.
Which of the following statements does not properly describe a defined benefit pension
plan?
27.
Which of the following statements is not correct?
28.
Which of the following transactions would create a deferred tax liability on foreign
income?
29.
Which of the following transactions would not create a temporary difference?
30.
Which of the following would not be considered a revenue recognition abuse?
31.
Which of the following would not create a temporary difference?
32.
Which of the following would only be found in current liabilities on the balance sheet?
33.
Which of the statements is not true when applying both IFRS and U.S. GAAP
accounting for long-term debt?
34.
Which one of the following is an example of sustainable earnings?
35.
Which one of the following is a permanent difference between book and taxable
income?
1.
1)Net realizable value of receivables is gross receivables minus:
A) bad debt provision and sales returns.
B) estimated uncollectible accounts and estimated returns and allowances.
C) proven uncollectible accounts and estimated returns and allowances.
D) bad debt provision and estimated returns and allowances.
2.
9) Research evidence suggests that:
A) companies reduce their provision for doubtful accounts when earnings are otherwise high and then increase the provision when earnings are low.
B) companies increase their provision for doubtful accounts when earnings are otherwise low and then decrease the provision when earnings are high.
C) companies increase their provision for doubtful accounts when earnings are otherwise high and then decrease the provision when earnings are low.
D) companies reduce their provision for doubtful accounts when earnings are otherwise low and then increase the provision when earnings are high.
3.
10) XYZ Co.’s 2018 ratio of allowance for uncollectibles to gross receivables has declined from the ratio at the end of 2017. To help evaluate whether the reduction in XYZ’s ratio is reasonable, an analyst should do all of the following except:
A) look for additional discussion in XYZ’s annual report.
B) listen to the company’s earnings briefing for the analysts.
C) contact the SEC for more information.
D) compare the ratio to other firms in XYZ’s industry.
4.
11) Which one of the following is an example of an aggressive revenue recognition policy?
A) A firm with a liberal sales return policy recognizes revenue at shipment.
B) A firm recognizes revenue at time of collection.
C) A firm with a liberal sales return policy recognizes revenue at shipment with a corresponding allowance for returns and allowances.
D) A firm recognizes revenue at the expiration of the sales returns period.
5.
16) On January 2, 2018, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no stated interest rate, but requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided to let Jensen hold the note.
What amount will Jensen recognize as interest income during 2019?
A) $0 B) $4,704 C) $4,356 D) $5,111
6.
17) On January 2, 2018, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no stated interest rate, but requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided to let Jensen hold the note.
What will be the balance in the Notes Receivable — Lewisburg Fabricators account at the end of 2018?
A) $54,447
B) $63,507
C) $80,000
D) $58,802
7.
19) The Fair value adjustment—accounts receivable account is an asset valuation account:
A) that would be adjusted upward or downward as fair values change and as the receivables are collected.
B) that is unaffected by the subsequent collection of receivables.
C) that can only be adjusted downward.
D) that is created when fair value accounting is adopted but is not subsequently adjusted.
8.
23) Harry Jones accepted a six-month, 8%, $40,000 note receivable from a customer on July 1, 2018. Jones has an arrangement with the National Bank to discount selected customer notes at 10% without recourse.
On August 1, 2018, Jones discounted the note under the arrangement with National Bank. What was the amount of proceeds Jones received from the discounted note?
A) $39,867 B) $41,600 C) $38,267 D) $40,000
9.
25) If a note receivable from a customer is discounted at a bank with recourse and the customer defaults on final payment, the seller:
A) must refund the proceeds of the discounting to the bank.
B) must repay the principal only to the bank.
C) must repay the full amount of the note plus interest to the bank.
D) has no obligation to the bank.
10.
26) Per authoritative accounting literature, the determination of whether a transfer of receivables is a sale or collateralized, borrowing hinges on whether the:
A) transferor collects payments directly from the customer.
B) customer ultimately defaults.
C) transfer was with or without recourse.
D) transferor surrenders control over the receivable.
11.
27) Under current U.S. GAAP, the transferor of receivables to a securitization entity (SE) that it has formed should treat the transfer as a collateralized borrowing instead of a sale if the transferor has:
A) the power to direct the activities of the SE and the right to participate in the SE’s gains and losses.
B) limited control over the sale of the securities.
C) the power to direct the activities of the SE but not the right to participate in the SE’s gains and losses.
D) None of these answer choices are correct
12.
28) Ambiguity can arise as to whether receivables have been sold or instead are being used as collateral for a loan whenever certain obligations, duties, or rights regarding the transferred receivables are retained by the transferor. In distinguishing between sales and collateralized borrowings using receivables, the critical issue:
A) is whether the transferor surrenders control over the receivables.
B) is whether any gain or loss related to the transfer is recognized in earnings.
C) comes down to how clearly the rights, etc. being retained are specified in the transfer agreement.
D) is whether the terms regarding the transfer were initiated by the transferor or transferee.
13.
30) Corona Industries purchased a stamping machine on January 2, 2018, for $100,000. It made an initial payment of $20,000 and financed the balance over 5 years at State Bank. The loan terms were for annual payments of $16,000 plus 10% interest, payable on December 31 each year. The year 2021 proves to be a difficult year and on December 1, 2021 Corona negotiates a debt restructuring with State Bank. The settlement calls for cash payment of accrued interest plus $4,000 on December 1 and the transfer of 200 acres of land held by Corona that cost $15,000. The land has a current fair value of
$22,000.
On December 1, 2021, how much interest is accrued on this loan?
A) $6,933
B) $18,933
C) $3,200
D) $2,933
14.
31) The major issue in inventory accounting is:
A) determining whether to take inventory using cycle counts instead of counting all inventory only at the end of the year.
B) deciding whether to maintain records on a periodic or perpetual basis.
C) determining what goods to include in inventory.
D) choosing the method for allocating goods available for sale to ending inventory and cost of goods sold.
15.
32) Goods available for sale is determined by:
A) subtracting the cost of any ending inventory from the cost of any beginning inventory.
B) adding the cost of any beginning inventory and the cost of purchases during the period.
C) subtracting the cost of any beginning inventory from the cost of any ending inventory.
D) subtracting the cost of any beginning inventory from the cost of purchases during the period.
16.
33) Goods held on consignment are included in the inventory valuation of:
A) the consignee.
B) both the consignor and the consignee.
C) neither the consignor nor the consignee.
D) the consignor.
17.
34) The carrying cost of inventory should include all the following costs except:
A) purchase costs.
B) general administrative costs associated with the purchase of inventory.
C) sales taxes and transportation costs paid by the purchaser.
D) insurance and storage costs.
18.
35) Analysts must be aware that with the use of absorption costing, as inventory absorbs more fixed costs, reported net income tends to:
A) decrease.
B) remain the same.
C) increase.
D) become highly volatile.
19.
36) Examples of variable costs include all the following except:
A) direct labor costs.
B) electricity used in running production machinery.
C) the plant manager’s salary.
D) raw materials costs.
20.
37) The mechanics of absorption costing can lead to year-to-year income changes:
A) if the productivity of factory workers improves.
B) if production and sales levels are not the same.
C) whenever inventory levels remain fairly constant.
D) when raw material prices are increasing.
21.
38) The input cost changes that occur after the purchase of inventory items in a current cost accounting system are recognized as:
A) extraordinary gains and losses.
B) costs of goods sold.
C) realized gains and losses.
D) unrealized holding gains and losses.
22.
42) The LIFO reserve disclosure is required because LIFO inventory costs are:
A) higher than FIFO inventory costs.
B) equal to FIFO inventory costs.
C) usually of no consequence.
D) lower than FIFO inventory costs.
23.
43) The conversion of a LIFO inventory to approximate the inventory at FIFO is accomplished through application of which one of the following formulas?
A) FIFO inventory = LIFO inventory ÷ LIFO reserve
B) FIFO inventory = LIFO inventory + LIFO reserve
C) FIFO inventory = LIFO inventory × LIFO reserve
D) FIFO inventory = LIFO inventory - LIFO reserve
24.
44) The formula to convert the cost of goods sold LIFO to an estimate of the cost of goods sold FIFO is:
A) cost of goods sold LIFO − decrease in LIFO reserve = cost of goods sold FIFO
B) cost of goods sold LIFO + increase in LIFO reserve = cost of goods sold FIFO
C) cost of goods sold LIFO + beginning LIFO reserve = cost of goods sold FIFO
D) cost of goods sold LIFO − increase in LIFO reserve = cost of goods sold FIFO
25.
48) Inventory turnover distortion under LIFO inventory costing may be adjusted by:
A) subtracting the LIFO reserve amounts from beginning and ending inventory and adjusting cost of goods sold for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs.
B) adding the LIFO reserve amounts to beginning and ending inventory and adjusting cost of goods sold for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs.
C) subtracting the LIFO reserve amounts from cost of goods sold and adjusting beginning and ending inventory for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs.
D) adding the LIFO reserve amounts to cost of goods sold and adjusting beginning and ending inventory for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs.
26.
49) As a firm liquidate sold LIFO layers of inventory, the lower costs of the LIFO layers are matched against current sales dollars resulting in a profit margin that is:
A) deflated.
B) lower than normal.
C) always the same as under FIFO.
D) inflated.
27.
50) Current ratio distortion under LIFO inventory costing may be adjusted by:
A) subtracting the LIFO reserve from current liabilities.
B) adding the LIFO reserve to current assets.
C) adding the LIFO reserve to current liabilities.
D) subtracting the LIFO reserve from current assets.
28.
51) For a firm using LIFO, the numerator of the inventory turnover ratio is predominantly current period costs:
A) and the denominator consists of old LIFO costs.
B) and the denominator must be adjusted by subtracting the LIFO reserve from both beginning and ending inventory.
C) and it must be adjusted to conform to the old LIFO costs in the denominator.
D) and the denominator must be adjusted by adding the LIFO reserve to ending inventory.
29.
52) LIFO’s tax advantage is that:
A) it provides a lower net income than FIFO during periods of rising prices and level inventory quantities.
B) it provides a lower net income than FIFO during periods of falling prices and level inventory quantities.
C) it provides a higher net income than FIFO during periods of rising prices and level inventory quantities.
D) it provides a lower net income than FIFO during periods of rising prices and decreasing inventory quantities.
30.
53) Firms that use FIFO inventory cost assumptions always include some realized holding gains in reported income in periods of:
A) deflation.
B) level prices.
C) rising prices.
D) falling prices.
31.
54) The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on the rapidity of the inventory turnover and the:
A) severity of input cost change.
B) rapidity of fixed asset turnover.
C) divergence of total asset turnover from previous periods.
D) change in accounts receivable turnover.
32.
57) TAD, Inc. uses the lower of cost or market method ("Old -LCM") to value inventory. If the inventory value is replacement cost, which one of the following statements is true?
A) Replacement cost is greater than net realizable value less a normal profit margin.
B) Net realizable value is greater than historical cost.
C) Replacement cost is greater than historical cost.
D) Historical cost is less than replacement cost.
33.
58) When applying the lower of cost or net realizable value (LCNRV) method, inventory value reported cannot exceed the:
A) replacement cost.
B) selling price less the expected cost of completion and disposal.
C) selling price less a normal profit margin.
D) market floor.
34.
59) The use of the lower of cost or net realizable value (LCNRV) method to value inventory for reporting purposes employs the accounting principle of:
A) matching.
B) historical cost.
C) conservatism.
D) cost-benefit.
35.
62) IFRS accounting for inventory (IAS 2) does not permit which of the following cost flow assumptions?
A) FIFO.
B) Specific identification.
C) Weighted average.
D) LIFO.
36.
63) When applying lower of cost or market under IFRS, market is defined as:
A) net realizable value.
B) net realizable value less normal markup.
C) replacement cost.
D) the middle value among the above three alternatives.
37.
64) Long-lived assets are:
A) non-operating assets expected to yield their economic benefits (or service potential) over a period longer than five years.
B) non-operating assets expected to yield their economic benefits (or service potential) over a period longer than one year.
C) operating assets expected to yield their economic benefits (or service potential) over a period longer than two years.
D) operating assets expected to yield their economic benefits (or service potential) over a period longer than one year.
38.
65) Which one of the following is an example of the expected benefit approach for valuing long-lived assets?
A) Current replacement value.
B) Discounted present value.
C) Historical cost.
D) Current cost.
39.
66) The method of measuring long-lived assets at their estimated value in an input market is the:
A) net realizable value approach.
B) discounted present value approach.
C) economic sacrifice approach.
D) expected benefit approach.
40.
67) The dominant method under GAAP for measuring long-lived assets is the:
A) replacement cost approach.
B) discounted present value approach.
C) expected benefit approach.
D) historical cost approach.
41.
68) Expected benefit approaches for valuing long-lived assets are not used in current U.S. GAAP because the numbers generated under these methods are inaccurate and:
A) neutral.
B) objective.
C) not verifiable.
D) fictitious.
42.
69) Expenditures included in the initial balance sheet carrying amount of a long-lived asset are:
A) capitalized costs.
B) expensed costs.
C) intangible costs.
D) charge-off costs.
43.
70) Which one of the following items would be charged to the cost of a building rather than the cost of land?
A) Architectural fees.
B) Demolition of an existing structure.
C) Grading of land.
D) Cost of hauling material from a demolished structure.
44.
71) In comparing firms in the same industry, which of the following does not present a challenge for analysts?
A) The use of different depreciation methods.
B) Differences in estimates of useful lives.
C) The age of the companies being compared.
D) Each of these answer choices presents a challenge for analysts.
45.
80) U.S. GAAP capitalizes expenditures to upgrade long-lived assets when the expenditure causes any of the following conditions except:
A) The efficiency of the asset is increased.
B) The useful life of the asset is extended.
C) The capacity of the asset is increased.
D) There is an increase in the non-economic benefits associated with owning the asset (such as an increase in the appearance of the company’s offices).
46.
81) Which one of the following factors makes it difficult for financial analysts to use trend analysis?
A) Decreasing costs and prices.
B) Deflation.
C) A relatively new asset base.
D) An aging asset base.
47.
82) Which of the following statements about research and development costs is not valid?
A) Asset utilization ratios of R&D-intensive firms will be lower than those of non-R&D -intensive firms.
B) As long as a firm continues to invest in R&D, total assets and total shareholders’ equity will be understated.
C) Decreases in R&D expenditures can be used to boost current period income.
D) Asset utilization ratios of R&D-intensive firms will be higher than those of non-R&D- intensive firms.
48.
83) Research findings almost uniformly indicate that existing U.S. GAAP for both R&D and software development is:
A) conservative.
B) liberal.
C) satisfactory as written.
D) objective.
49.
84) Amortizable intangible assets include all of the following except:
A) employment contracts.
B) goodwill.
C) copyrights.
D) patents.
50.
85) Which of the following is not true with regard to the relationship between R&D expenses and the value of the company’s stock shares, as perceived by investors and analysts?
A) There is no evidence that R&D expenses represent value-relevant information to investors.
B) A $1 increase in R&D expenditures leads to a $5 increase in the market value of the company’s stock shares.
C) There is a causal relationship between R&D expenditures and future financial benefits.
D) Analysts adjust estimates of unrecorded R&D assets which are then used to adjust reported earnings and book values.
51.
86) Which of the following is an accurate statement regarding testing for impairments of tangible assets and amortizable intangible assets?
A) Assets need not to be tested for impairment annually.
B) Assets may be tested as a group if they are used in combination with other assets in the group.
C) Assets may be tested as a group only if they were purchased as a group.
D) Assets are to be tested only as individual assets.
52.
87) Which of the following is used to measure the amount of the write-down that must be recognized on an impaired asset such as depreciable equipment?
A) Discounted total future cash inflows minus future outflows.
B) Fair value of the asset minus the current carrying value of the asset.
C) Undiscounted total future cash inflows minus future outflows.
D) Undiscounted total future cash inflows minus the current carrying value of the
53.
89) If a long-lived amortizable intangible asset’s future undiscounted net cash flows fall below the asset’s net book value, the asset is considered to be a/an:
A) impaired asset.
B) valuable asset.
C) discontinued asset.
D) discontinued operation.
54.
90) An impairment loss is the difference between the carrying value of the asset and the:
A) future value of the asset.
B) historical cost of the asset.
C) fair value of an asset.
D) price-level adjusted value of the asset.
55.
91) An impairment loss is reported on the income statement as:
A) an extraordinary item.
B) part of income from continuing operations.
C) part of income from discontinued operations.
D) an accounting change.
56.
92) Evaluation of indefinite-lived intangible assets for impairment occurs under all of the following scenarios except:
A) when there is a deterioration in the business climate.
B) when there is a significant decrease in the asset’s fair value.
C) annually.
D) no less than every three years.
57.
93) Which of the following is not an accurate statement regarding asset retirement obligations (AROs)?
A) An annual expense is recorded as accretion expense.
B) A liability is recorded at its present value and the liability increases over time.
C) A liability is recorded with a credit entry in a contra-asset account.
D) A liability is computed using a credit-adjusted risk-free rate.
58.
94) The allocation of the cost of a wasting asset to future periods of benefit is termed as:
A) depletion.
B) allocation.
C) depreciation.
D) amortization.
59.
97) The most widely-used depreciation method for U.S. income tax purposes is:
A) units-of-production.
B) MACRS.
C) sum-of-the-years’ digits.
D) straight-line.
60.
98) When a financial analyst adjusts a company’s reported depreciation expense to improve comparisons of profitability with another firm that uses the same depreciation method, the analyst assumes all of the following to be true except that:
A) the dollar breakdown within asset categories is similar for both firms (i.e., both have similar amounts of buildings vs. leasehold improvements, etc.).
B) the useful life differences are artificial.
C) the useful lives differences are "real".
D) salvage value proportions are roughly equivalent for both firms.
61.
99) Devine Company sold a machine for $6,000 that originally cost $34,000 and had accumulated depreciation of $27,000. Devine had a/an:
A) sales revenue of $6,000.
B) gain of $1,000.
C) cost of goods sold of $1,000.
D) loss of $1,000.
62.
100) A probable future sacrifice of an economic benefit arising from a present obligation to transfer assets or provide services to other entities in the future as a result of a past transaction is a/an:
A) equity.
B) expense.
C) liability.
D) asset.
63.
101) Which of the following is a correct statement about preparing a balance sheet?
A) All current liabilities must be due within the current calendar year.
B) Bonds payable are reported in long-term liabilities with the current year portion shown separately in that section of the balance sheet.
C) A financial instrument’s legal form will define how it is classified on the balance sheet.
D) Some financial instruments possess the characteristics of both debt and equity
64.
102) Which of the following would only be found in current liabilities on the balance sheet?
A) Accrued compensation for services already rendered by employees.
B) Deferred revenue.
C) Derivative contracts.
D) Income tax liabilities.
65.
103) Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 8%. These bonds will sell in the market at:
A) a premium.
B) stated value.
C) a discount.
D) par.
66.
104) Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 5%. These bonds will sell in the market at:
A) a discount.
B) par.
C) a premium.
D) stated value.
67.
105) When computing the issue price of a bond that has a stated rate of 8% payable semiannually and a market rate of 10%, the discount rate used would be:
A) 10%.
B) 5%.
C) 8%.
D) 4%.
68.
106) Amortization of discount on bonds payable (bond discount) results in which of the following?
A) A decrease in bond interest expense.
B) An increase in stockholders’ equity due to the decrease in bond interest expense.
C) An increase in net income.
D) An increase in the carrying value of the bond.
69.
108) Hooker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2018. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.
The bond carrying amount at the end of 2018 is:
A) $200,000.
B) $201,542.
C) $176,964.
D) $175,422.
70.
109) Hooker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2018. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.
The amount of cash interest paid in 2018 on the bonds is:
A) $16,000.
B) $20,000.
C) $17,542.
D) $14,458.
71.
110) Hooker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2018. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.
The bond carrying value at the end of 2019 is:
A) $200,000.
B) $203,238.
C) $178,660.
D) $175,422.
72.
111) Hooker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2018. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.
The amount of bond discount amortization for 2019 is:
A) $2,458
B) $1,696
C) $3,080
D) $4,000
73.
112) Hooker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2018. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.
The amount of bond interest expense for 2019 is:
A) $18,458.
B) $19,280.
C) $16,000.
D) $17,696.
74.
113) The Ness Company sells $5,000,000 of five-year, 10% bonds at the start of the year. The bonds have an effective yield of 9%. Present value factors are below:
10% 9%
PV $1 factor 1 year 0.90909 0.91743
PV $1 factor 2 years 0.82645 0.84168
PV $1 factor 3 years 0.75131 0.77218
PV $1 factor 4 years 0.68301 0.70843
PV $1 factor 5 years 0.62092 0.64993
The bonds will sell for:
A) $5,194,475.
B) $5,050,000.
C) $4,805,525.
D) $5,000,000.
75.
114) The Ness Company sells $5,000,000 of five-year, 10% bonds at the start of the year. The bonds have an effective yield of 9%. Present value factors are below:
10% 9%
PV $1 factor 1 year 0.90909 0.91743
PV $1 factor 2 years 0.82645 0.84168
PV $1 factor 3 years 0.75131 0.77218
PV $1 factor 4 years 0.68301 0.70843
PV $1 factor 5 years 0.62092 0.64993
The bond interest expense for Year 1 is:
A) $500,000.
B) $467,503.
C) $532,497.
D) $538,895.
76.
115) The Ness Company sells $5,000,000 of five-year, 10% bonds at the start of the year. The bonds have an effective yield of 9%. Present value factors are below:
10% 9%
PV $1 factor 1 year 0.90909 0.91743
PV $1 factor 2 years 0.82645 0.84168
PV $1 factor 3 years 0.75131 0.77218
PV $1 factor 4 years 0.68301 0.70843
PV $1 factor 5 years 0.62092 0.64993
The amount of cash interest paid in Year 1 on the bonds is:
A) $467,503.
B) $450,000.
C) $500,000.
D) $538,895.
78.
117) The Ness Company sells $5,000,000 of five-year, 10% bonds at the start of the year. The bonds have an effective yield of 9%. Present value factors are below:
10% 9%
PV $1 factor 1 year 0.90909 0.91743
PV $1 factor 2 years 0.82645 0.84168
PV $1 factor 3 years 0.75131 0.77218
PV $1 factor 4 years 0.68301 0.70843
PV $1 factor 5 years 0.62092 0.64993
The bond carrying value at the end of Year 2 is:
A) $5,194,475.
B) $4,805,525.
C) $5,000,000.
D) $5,126,556.
79.
118) A bond with a maturity value of $700,000 was initially issued for $715,000. The bond has a ten-year life and a stated interest rate of 10%. The total interest expense over the life of the bond is:
A) $715,000
B) $685,000
C) $700,000
D) not determinable without knowing the bond’s effective yield.
80.
119) Which of the following statements is correct?
A) Amortization of premium on bonds payable (bond premium) results in an increase in bond interest expense.
B) Amortization of discount on bonds payable (bond discount) results in an increase in a bond’s carrying value.
C) Amortization of premium on bonds payable (bond premium) results in an increase in a bond’s carrying value.
D) Amortization of discount on bonds payable (bond discount) results in a decrease in bond interest expense.
81.
120) When a bond is sold at a discount the effective interest rate is:
A) above the stated rate.
B) equal to the stated rate for a period of time and then above the stated rate for a period of time.
C) equal to the stated rate.
D) below the stated rate.
82.
121) Which of the following statements is not correct regarding amortization when using the effective interest method (basis)?
A) Amortization of both premium on bonds payable (bond premium) and discount on bonds payable (bond discount) decreases in later years relative to earlier years of a bonds life.
B) Amortization of discount on bonds payable (bond discount) increases in later years relative to earlier years of a bond’s life.
C) Amortization of premium on bonds payable (bond premium) increases in later years relative to earlier years of a bond’s life.
D) Amortization of discount on bonds payable (bond discount) results in an increase in interest expense and in an increase in the bond’s carrying value.
83.
122) When a bond is sold at a premium the:
A) effective interest rate is less than the stated rate.
B) effective interest rate is greater than the stated rate.
C) interest expense during the life of the bond exceeds the amount of cash interest payments during the life of the bond.
D) effective interest rate relative to the stated rate is not known.
84.
123) The market value of floating-rate debt of $200,000 will:
A) fall by $2,000 with a 1% fall in interest rates.
B) will rise in the short run and fall in the long run with a change in interest rates.
C) remain unchanged with a change in interest rates.
D) rise by $2,000 with a 1% rise in interest rates.
85.
124) Which of the following statements with respect to floating-rate debt is incorrect?
A) If the market rate of interest decreases, the cash interest payment required by the issuing company would decrease.
B) If the market rate of interest decreases, both the issuing company and the investors benefit.
C) If the market rate of interest increases, the market value of the floating-rate debt will remain the same.
D) If the market rate of interest increases, the investors benefit while the issuing corporation does not benefit.
86.
125) When market rates of interest decrease, the use of floating-rate debt benefits:
A) issuing companies.
B) investors.
C) no one.
D) all parties.
87.
126) Dot Company issued $200,000 of bonds on January 1, 2018 with interest payable each year. The bonds had a stated rate of 8%. The bonds were set up as floating-rate debt with the rated pegged to LIBOR plus 3%.
Which of the following will be the interest expense for year 1 if LIBOR is 5%?
A) $10,000
B) $16,000
C) $18,000
D) $6,000
88.
127) Dot Company issued $200,000 of bonds on January 1, 2018 with interest payable each year. The bonds had a stated rate of 8%. The bonds were set up as floating-rate debt with the rated pegged to LIBOR plus 3%.
Which of the following will be the interest expense for year 1 if LIBOR is 7%?
A) $6,000
B) $20,000
C) $16,000
D) $14,000
89.
128) Which of the following is not a valid statement regarding floating-rate debt?
A) The accounting entries are more complex due to the risk-sharing characteristics of floating rate debt.
B) Floating-rate debt can protect the investor if market rates increase.
C) Floating-rate debt is used to lower the company’s overall borrowing cost.
D) Floating-rate debt may benefit the issuing company if market rates fall.
90.
129) On January 1, 2018, Ross Corporation issued bonds with a maturity value of $200,000; the bond’s stated rate of interest equaled the market interest rate on the issue date. On December 31, 2018, the market value of the bonds was $188,926; on December 31, 2019, the market value of the bonds was $191,325. Which of the following correctly describes Ross Corporation’s financial reporting if Ross elects to measure the bond liability using the fair value accounting option?
A) For the year ending December 31, 2019, Ross will report an unrealized holding loss of $8,675 in its income statement.
B) For the year ending December 31, 2018, Ross will report an unrealized holding loss of $11,074 in its income statement.
C) For the year ending December 31, 2019, Ross will report an unrealized holding loss of $2,399 in its income statement.
D) For the year ending December 31, 2019, Ross will report an unrealized holding gain of $8,675 in its income statement.
91.
130) When a company retires debt, which of the following is not an accurate statement?
A) If the debt is retired at maturity, there is no opportunity for a gain or loss.
B) If a company finances the early retirement of debt by issuing new debt, GAAP prohibits recording a gain on the early retirement.
C) If the debt was recorded using the fair value accounting option, there is no opportunity for a gain or loss.
D) If a company retires debt early by issuing new debt at a lower market rate of interest, a gain on the extinguishment of debt will be recorded if the company did not elect to use the fair value accounting option.
92.
131) A bond with a $500,000 maturity value is immediately retired for $515,000 plus accrued interest. The premium on bonds payable (bond premium) at the retirement date is $17,500. Which of the following statements is correct?
A) The gain or loss on the debt extinguishment can’t be determined without knowing the dollar amount of the accrued interest.
B) The gain on the debt extinguishment is $32,500.
C) The gain on the debt extinguishment is $2,500.
D) The loss on the debt extinguishment is $32,500.
93.
132) A bond with a $750,000 maturity value is immediately retired for $745,000 plus accrued interest. The discount on bonds payable (bond discount) at the retirement date is $25,500. Which of the following statements is correct?
A) The gain on the debt extinguishment is $30,500.
B) The gain or loss on the debt extinguishment can’t be determined without knowing the dollar amount of the accrued interest.
C) The gain on the debt extinguishment is $5,000.
D) The loss on the debt extinguishment is $20,500.
94.
133) Which of the statements is not true when applying both IFRS and U.S. GAAP accounting for long-term debt?
A) Periodic interest expense is computed using the contractual interest rate.
B) The balance sheet carrying value is amortized cost determined using the effective interest rate at the issue date.
C) Fixed-rate bonds are recorded at the amount of the net proceeds.
D) Changes in interest rates after the issue date do not alter the carrying value unless fair value accounting is used.
95.
134) Some financial analysts contend that reporting debt at amortized historical cost rather than at fair value:
A) makes it easier to manipulate accounting numbers.
B) has no impact on the accounting numbers.
C) makes it more difficult to manipulate accounting numbers.
D) makes it impossible to manipulate the accounting numbers.
96.
135) On February 1, 2018, Hills Company had 10,000 pounds of inventory costing $1.50 per pound; the market value per pound was $1.95 on this date. Hills entered into a futures contract to sell the 10,000 pounds of inventory during May 2018 at $2.25 per pound. Which of the following statements does not accurately describe the impact of this futures contract?
A) Hills has foregone the benefit of additional profits (the upside potential) if the price per pound exceeds $2.25 during the month of May.
B) Hills’ gross profit in May will be $3,000 regardless of the actual price per pound in May.
C) Hills has eliminated the risk of reduced profits (the downside potential) if the price per pound is less than $2.25 during the month of May.
D) The value of the futures contract decreases as the market price per pound of inventory increases.
97.
136) A variation of a forward contract that is traded daily in a market with many buyers and sellers and does not have a predetermined settlement date is a/an:
A) swap contract.
B) options contract.
C) futures contract.
D) performance contract.
98.
137) In order to use hedge accounting, management must do all of the following except:
A) get external auditor approval to use hedge accounting.
B) document its effectiveness in eliminating a specific market risk for a specific hedged item.
C) describe the hedging strategy.
D) designate the derivative as a hedging instrument.
99.
138) On December 1, 2018 a company bought a call option costing $100,000 as a speculative investment. The call option gave the company the right to purchase 100,000 barrels of oil for $110 per barrel during April 2019. As of December 31, 2018 the call option had a value of $125,000. The company liquidated the call option on April 15, 2019 in exchange for $175,000. Which of the following accurately describes GAAP accounting for this call option?
A) The unrealized gain recognized on April 15, 2019 is $50,000.
B) The call option will be reported on the December 31, 2018 balance sheet at
$125,000 and a $25,000 unrealized gain will be reported as a component of income from continuing operations for the year ending December 31, 2018.
C) The realized gain recognized on April 15, 2019 is $75,000.
D) The realized gain applicable to the year ending December 31, 2018 is $25,000
100.
139) Which of the following statements does not properly describe GAAP accounting for derivatives?
A) Derivatives are reported in the balance sheet at fair value.
B) Changes in the fair value of a derivative must be included in net income when they occur.
C) A derivative’s unrealized holding gain or loss for a particular year is not a component of that year’s income from operations.
D) Speculative investments in derivative contracts can increase earnings volatility.
101.
140) Which of the following risks may not be accounted for using hedge accounting?
A) Labor strikes.
B) Commodity prices.
C) Foreign currency exchange rates.
D) Changes in benchmark interest rates.
102.
141) A hedge of the exposure to changes in the fair value of an existing asset or liability or a firm commitment is a/an:
A) foreign currency exposure hedge.
B) marked-to-market hedge.
C) fair value hedge.
D) cash flow hedge.
103.
142) A contingent liability that is probable and can be reasonably estimated will immediately result in:
A) an increase in liabilities and a decrease in net income.
B) an increase in liabilities and a decrease in assets.
C) an increase in liabilities without any need for financial statement disclosure.
D) an increase in both liabilities and stockholders’ equity.
104.
143) Which one of the following contingencies requires financial statement disclosure?
A) A reasonably possible loss on a lawsuit that the firm’s attorneys believe will be settled for $100,000.
B) A lawsuit that the firm’s attorneys believe will be dropped.
C) A lawsuit that the firm’s attorneys believe will probably be settled for $75,000.
D) A reasonably possible loss on a lawsuit that the firm’s attorneys cannot estimate the loss.
105.
144) Which of the following statements is not correct with respect to accounting for Guarantees?
A) Both the "stand ready obligation" and the contingent future obligation are recorded at fair value.
B) The Guarantee liability account represents deferred revenue associated with the stand ready fee.
C) The Guarantee liability account decreases over the life of the loan as revenue is earned.
D) When one company guarantees the debt of another company, that contingency must be disclosed even if the contingency is only remotely possible.
106.
145) Which of the following regarding the recognition of contingencies is not correct?
A) IFRS guidance is built around a balance sheet perspective.
B) U.S. GAAP relies on an income statement perspective.
C) Only U.S. GAAP requires recognition of a contingent liability, called a provision under IFRS—and the associated contingent loss—when it is both probable and can be reasonably estimated.
D) Both IFRS and U.S. GAAP require recognition of a contingent liability when it is both probable and can be reasonably estimated.
107.
146) A lease is legally a/an contract.
A) executed
B) unilateral
C) mutually performed
D) executory
108.
147) When accounting for an operating lease under ASC 840, which one of the following accounts are charged with the expense on the lessee’s income statement?
A) Rent Expense
B) Depreciation Expense
C) Lease Operating Expense
D) Amortization Expense
109.
148) Under ASC 840, the lessor of a building with an operating lease will present on its balance sheet an asset equal to:
A) the present value of future lease receipts.
B) the fair value of the leased asset.
C) the depreciated historical cost of the asset.
D) zero.
110.
149) Compared to a firm with a capital lease, operating leases under ASC 840 help the lessee firm earn:
A) a higher asset turnover ratio.
B) a lower NOPAT.
C) a higher debt-to-equity ratio.
D) a lower return on assets.
111.
150) If a corporation signs a ten-year lease for a building and the present value of the lease payments is $250,000, the lease is a capital lease under ASC 840 if the:
A) building reverts back to the lessor at the end of the lease.
B) remaining useful life of the building is 20 years.
C) lessor can purchase the building for $5,000 at the end of the lease when the fair value is estimated to be $25,000.
D) fair value of the building is $1,000,000.
112.
151) If a corporation signs a ten-year lease for a building and the present value of the lease payments is $250,000, the lease is a finance lease under ASC 842 if the:
A) building reverts back to the lessor at the end of the lease.
B) fair value of the building is $1,000,000.
C) lessor can purchase the building for $5,000 at the end of the lease when the fair value is estimated to be $25,000.
D) remaining useful life of the building is 20 years.
113.
152) GAAP establishes specific criteria for the treatment of leases under ASC 840 and ASC 842. If any of the criteria are met, the lessee:
A) may elect to treat the lease as an operating lease under ASC 840 and ASC 842 if only one criterion is met.
B) may choose the treatment if two or less criteria are met.
C) must treat the lease as a capital lease under ASC 840 or a finance lease under ASC 842.
D) must treat the lease as an operating lease under ASC 840.
114.
153) GAAP establishes specific criteria for the treatment of leases under ASC 840. Which of the following does not accurately describe the criteria applicable to a lessee?
A) The lease agreement transfers title of the leased asset to the lessee at the end of the lease term.
B) The present value of the minimum lease payments is equal to or greater than 75% of the leased asset’s fair value.
C) The lease agreement contains a bargain purchase option.
D) The lease term is equal to or exceeds 75% of the leased asset’s useful life.
115.
154) When a lessee has a capital lease under ASC 840, the amount shown for the asset and the amount shown for the related liability are equal:
A) only at the termination of the lease.
B) throughout the life of the lease.
C) throughout the life of the lease, but only when there is an unguaranteed residual value.
D) only at the lease inception.
116.
158) When accounting for a capital lease under ASC 840, depreciation expense is equal to the:
A) normal depreciation computed on the depreciable base of the asset.
B) straight-line depreciation only on the full amount of the leased asset.
C) lease payments.
D) principal portion of the lease payments.
117.
159) Executory costs of a lease are treated by the lessee as:
A) deferred revenue.
B) operating expenses.
C) capitalized costs of the lease.
D) additional interest expense.
118.
160) If a lease contains a residual value guarantee, the lessee must:
A) add the guaranteed amount to the present value of the minimum lease payments.
B) include the guaranteed amount in the minimum lease payments only if the lessee intends to keep the asset at the end of the lease.
C) ignore the guaranteed amount if the lessee intends to keep the asset at the end of the lease.
D) add the present value of the guaranteed amount to the present value of the minimum lease payments.
119.
161) All the following statements about residual value guarantees are correct about residual value guarantees, except that they:
A) protects lessors against technological changes.
B) protects lessors against marketplace changes.
C) protect lessors against lessees who abuse leased assets.
D) protect lessees against lessors who abuse leased assets.
120.
170) To adjust for distortions that arise from off-balance sheet leases when comparing among firms, analysts rely on
A) required note disclosures
b) the balance sheet
C) the statement of stockholders’ equity
D) the income statement
121.
171) Which one of the following ratios deteriorates with the lessee’s capitalization of a lease under ASC 840?
A) Inventory turnover
B) Return on equity
C) Common earnings leverage
D) Current ratio
122.
172) Which of the following does not describe a difference between ASC 842 and IFRS16?
A) IFRS allows some right-of-use assets to be carried at fair value.
B) ASC 842 limits the recognized gain to that of the residual interest retained by the buyer-lessor.
C) IFRS permits early adoption only if firms have adopted IFRS 15, the new revenue recognition standard.
D) IFRS does not provide for operating leases.
123.
173) If a car dealership leases cars for four years with guaranteed purchase options, guaranteed residual values, and insured financing agreements, these leases are treated under ASC 840 as:
A) sales-type leases.
B) direct-financing leases.
C) operating leases.
D) capital leases.
124.
174) Blue Manufacturing produces lathes at an inventory cost of $25,000 each that sell for $32,000 each. For credit-approved customers, Blue leases the lathes for $8,500 per year for five years. The lathes are guaranteed to last four years and generally have a six-year life. Collection is predictable and reasonably assured. Additionally, the lessor is aware of all costs to be incurred under the lease that will not be reimbursed by the lessor.
Blue Manufacturing treats a lathe lease as a/an:
A) sales-type lease.
B) operating lease.
C) direct-financing lease.
D) ordinary capital lease.
125.
175) Blue Manufacturing produces lathes at an inventory cost of $25,000 each that sell for
$32,000 each. For credit-approved customers, Blue leases the lathes for $8,500 per year for five years. The lathes are guaranteed to last four years and generally have a six-year life. Collection is predictable and reasonably assured. Additionally, the lessor is aware of all costs to be incurred under the lease that will not be reimbursed by the lessor.
What is the manufacturing profit of Blue Manufacturing on a leased lathe?
A) $8,500
B) $7,000
C) $10,500
D) $17,500
127.
177) Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray’s incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray believes that the equipment has a 10-year service life but has reason to suspect that a major overhaul might be required in the fifth to seventh year. Since this is the first year of the equipment’s production, Ray warrants equipment for eight full years anyway. The lessor and the lessee use ASC 840 guidance for lease accounting.
On Ray’s books, this lease is treated as a/an:
A) direct financing capital lease.
B) ordinary capital lease.
C) operating lease.
D) sales-type capital lease.
128.
178) Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray’s incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray believes that the equipment has a 10-year service life but has reason to suspect that a major overhaul might be required in the fifth to seventh year. Since this is the first year of the equipment’s production, Ray warrants equipment for eight full years anyway. The lessor and the lessee use ASC 840 guidance for lease accounting.
On Ford’s books, this lease is treated as a/an:
A) sales-type capital lease.
B) capital lease.
C) direct financing capital lease.
D) operating lease.
129.
181) Morey Corporation leases a tractor from Equity Leasing with a five-year non-cancelable lease on January 1, 2018 under the following terms:
Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year.
The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor.
The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term.
The tractor has a six-year economic life. Morey has an excellent credit rating.
Equity offers no warranty on the tractor other than the manufacturer’s two-year warranty that is handled directly with the manufacturer.
Both Morey and Equity use ASC 840 guidance for lease accounting. For Equity Leasing, this is treated as a/an:
A) sales-type capital lease.
B) operating lease.
C) ordinary capital lease.
D) direct financing capital lease.
130.
186) Hatfield Corporation leases a tractor from Star Leasing with a five-year non-cancelable lease on January 1, 2018 under the following terms. Hatfield accounts for leases under ASC 840 guidance.
Five payments of $26,379.74 (a 9% implicit rate) due at the end each year. The fair value of the tractor is $100,000.
The lease is nonrenewable and the tractor reverts to Star at the end of the lease term.
The tractor has a six-year economic life. Hatfield has an excellent credit rating.
Star offers no warranty on the tractor other than the manufacturer’s two-year warranty that is handled directly with the manufacturer.
If Hatfield’s incremental borrowing rate is 11% and the implicit rate is not known to the lessee, what interest rate will Hatfield use to account for this lease?
A) 10%
B) 9%
C) 11%
D) Cannot be determined from information given.
131.
188) On January 1, 2018 Lessee Company entered into a five-year lease which required annual payments of $60,000. The first payment was due at the inception of the lease. The present value of the minimum lease payments to record the lease was $250,192; the applicable discount rate was 10%. Lessee Company treated the lease as a capital lease under ASC 840. What is the balance of Lessee Company’s lease liability as of December 31, 2018?
A) $209,211
B) $149,211
C) $275,211
D) $190,192
132.
189) On January 1, 2019, Lessee Company entered into a five-year lease which required annual payments of $120,000. The first payment was due at the inception of the lease. The present value of the minimum lease payments to initially record the lease was
$500,384; the applicable discount rate was 10%. Lessee Company treated the lease as a finance lease under ASC 842. What is the balance of Lessee Company’s lease liability immediately after the January 1, 2020 payment was made?
A) $260,384
B) $298,422
C) $430,422
D) $380,384
133.
191) The difference in the lessor’s income recognition over the life of the lease, between an operating lease and a capital lease is:
A) the amount of the interest revenue.
B) zero.
C) the depreciation expense.
D) the financing revenue minus the depreciation.
134.
192) Which of the following is not a qualifier for a lease to be considered a finance lease under ASC 842?
A) The asset is not a specialized asset and will have alternative use to the lessor.
B) The lease term is for the major part of the remaining economic life of the asset.
C) The lease transfers ownership at the end of the lease.
D) The lease grants an option to purchase that is reasonably certain to occur.
135.
193) Under ASC 842 for lease accounting, which statement below is not accurate?
A) Lease expense is shown in the operating section of the statement of cash flows.
B) Operating leases show total lease expenses as a single line item.
C) Lease expense is shown in the financing section of the statement of cash flows.
D) Finance leases show separate amounts for amortization and interest expense.
136.
194) Under ASC 842 for lease accounting, the operating lease right-of-use asset equals:
A) the operating lease liability + prepaid rent under ASC 840 − accrued rent under ASC 840.
B) the operating lease liability.
C) the same as a capital lease liability under ASC 840.
D) the operating lease liability + prepaid rent under ASC 840.
137.
195) Which of the following is correct with respect to ASU 842 for lease accounting?
A) It is mandatory for fiscal years beginning after December 15, 2018 and may not be adopted early.
B) It allows the lessee to decide what borrowing rate to use to value the lease obligation.
C) It retained the distinction between operating and finance leases for lessees.
D) It requires the lessee to record a prepaid asset and a lease liability.
138.
196) Which of the following statement is not correct with respect to accounting for operating leases under ASC 842?
A) The new standard is similar to an ASC 840 operating lease on the statement of cash flows.
B) The new standard is not similar to an ASC 840 operating lease on the income statement.
C) The new standard is similar to an ASC 840 operating lease on the income statement.
D) The new standard is similar to an ASC 840 capital lease on the balance sheet.
139.
197) Which of the following statements is not correct for sale-and-leaseback transactions under the new ASC 842 accounting guidance for leases?
A) The changes in ASC 842 give seller-lessees less incentive to enter into sale-and-leaseback transactions.
B) If the seller-lessee has the option to repurchase the asset at less than fair value of the asset at time of exercise, the transaction is not treated as a sale.
C) Seller-lessees have higher motivation to enter into a finance lease under ASC 842 than they did under ASC 840.
D) If control of the asset has not been given up, the transaction is not a sale.
140.
198) Which of the following is not defined as qualitative information under ASC 842?
A) Residual value guarantees.
B) Maturity information.
C) Lease covenants and restrictions.
D) Renewal and purchase options.
141.
199) Which of the following statements pertaining to lease accounting under ASC 840 is not correct?
A) The lessor’s annual income will decrease over time regardless of whether the lease is a sales-type lease or a direct financing lease.
B) The lessee will depreciate a leased asset either over the lease term or the leased asset’s useful life dependent upon which of the required lease capitalization criteria is (are) met.
C) The lessee ignores a guaranteed salvage value when calculating depreciation expense associated with a capital lease.
D) The manufacturer’s or dealer’s profit recorded by the lessor is the same whether or not the residual value is guaranteed by the lessee.
142.
200) All of the following are true of constructive capitalization except:
A) it treats all leases as if they were capital leases.
B) the method makes use of a discount rate that is the weighted average rate implicit in all leases, or the weighted average rate on interest-bearing long-term debt.
C) the liability is the discounted present value of the stream of minimum operating lease payments.
D) it’s a method for making balance sheet data historically correct.
143.
Echo Company’s 2018 beginning and ending accounts receivable balances were $72,500 and $41,250 respectively. During 2018, the company’s credit sales amounted to $857,250. Per Echo’s 2018 cash flow statement, $873,500 was collected from customers while $18,750 related to uncollectible accounts was listed among the "non-cash expenses." If Echo’s beginning balance in the allowance for uncollectibles was $17,600, the ending balance in this account must be:
A) $15,000
B) $36,350
C) $21,350
D) The required "allowance for uncollectibles" balance cannot be determined from the data given
144.
Management must periodically assess the reasonableness of the allowance for uncollectibles if it uses the:
A) direct write-off method.
B) percent of gross receivables method only.
C) percent of sales method only.
D) percent of sales or the percent of gross receivables method.
145.
When a specific account receivable is written off, the entry:
A) decreases net income.
B) can either decrease or increase net income.
C) has no effect on net income.
D) increases net income.
2.
A corporation that incurs a net operating loss must carry the loss back to earlier years before it can carry the loss forward.
3.
Financial statement disclosures concerning income taxes provides financial analysts with information regarding the transactions that had an impact on the year-end deferred income taxes balance.
4.
GAAP requires a disclosure that reconciles a company’s effective income tax rate and the U.S. statutory income tax rate.
5.
The income tax benefit associated with a loss carryback or carryforward is recorded as an adjustment to income tax expense in the year of the loss.
6.
Income tax expense when interperiod tax allocation is used creates a more stable effective tax rate over time relative to using tax payments as income tax expense.
7.
Once a deferred tax asset valuation allowance is established, it can be either increased or decreased in future years.
8.
A significant decrease in the deferred tax asset account is relevant with respect to assessing earnings quality.
9.
Smith Company reported $350,000 in book income before income tax during 2018, its first year of operation. The tax depreciation exceeded its book depreciation by $30,000. The tax rate for 2018 and all future years was 40%. If Smith paid no estimated taxes, what amount of income tax payable should Smith report in its December 31, 2018, balance sheet?
If Smith paid no estimated taxes, what amount of income tax payable should Smith report in its December 31, 2018, balance sheet?
A. $140,000
B. $100,000
C. $128,000
D. $120,000
10.
Smith Company reported $350,000 in book income before income tax during 2018, its first year of operation. The tax depreciation exceeded its book depreciation by $30,000. The tax rate for 2018 and all future years was 40%.
Income tax expense reported in the income statement for the year ending December 31, 2018 would be:
A. $120,000.
B. $128,000.
C. $100,000.
D. $140,000.
11.
Smith Company reported $350,000 in book income before income tax during 2018, its first year of operation. The tax depreciation exceeded its book depreciation by $30,000. The tax rate for 2018 and all future years was 40%.
What amount of deferred tax liability should Smith report in its December 31, 2018, balance sheet?
A. $ 12,000
B. $ 9,000
C. $ 8,000
D. $ 10,000
12.
Statutory depletion in excess of cost depletion is an example of a permanent difference.
13.
Stone Company reported pre-tax book income of $700,000 in 2018, the first year of operation. The tax depreciation exceeded the book depreciation by $90,000. The tax rate for 2018 and all future years was 30%. If Stone paid no estimated taxes, what amount of income tax payable should Stone report in its December 31, 2018, balance sheet?
A. $183,000
B. $150,000
C. $160,000
D. $210,000
14.
Stone Company reported pre-tax book income of $700,000 in 2018, the first year of operation. The tax depreciation exceeded the book depreciation by $90,000. The tax rate for 2018 and all future years was 30%.
What amount of deferred tax liability should Stone report in its December 31, 2018, balance sheet?
A. $ 20,000
B. $ 9,000
C. $ 27,000
D. $ 5,000
15.
A temporary difference that causes book income to be greater than or less than taxable income when it is initially recorded is a/an:
A. permanent difference.
B. originating temporary difference.
C. minor difference.
D. reversing temporary difference.
16.
Treating the taxes paid each year as an expense in the income statement could result in an inappropriate matching between pre-tax book income and income tax expense.
17.
The two broad categories of differences that result from determining the pre-tax book income and the taxable income are:
A. permanent differences and deferred differences.
B. temporary differences and permanent differences.
C. temporary differences and reversing differences.
D. temporary differences and originating differences.
18.
When the income tax rate changes, the full change in the amount of future liability for income taxes is recognized as a change to income tax expense in the year that the change becomes effective.
19.
Which of the following transactions would create a deferred tax liability on foreign income?
A. A U.S. company earns income in a different country and pays the foreign government an income tax less than the U.S. corporate tax rate.
B. A U.S. company earns income in a foreign country that it does not expect to repatriate back to the U.S.
C. A foreign-based company sells its products to customers in the U.S.
D. A U.S. company sells its products in a foreign country.
20.
Which of the following would not create a temporary difference?
A. A revenue included in the determination of book income this year but never included in taxable income
B. An expense included in the determination of taxable income this year but not included in book income until next year
C. A revenue item that causes book income to be more (less) than taxable income when it is initially recorded
D. A revenue included in the determination of book income this year but not included in taxable income until next year
1.
Which of the following statements does not accurately describe the accounting for derivatives?
A The holding gain resulting from a fair value hedge that qualifies for hedge accounting is recognized in
. net income along with the offsetting loss on the hedged item.
B The holding loss resulting from a cash flow hedge that qualifies for hedge accounting is recognized in
. netincomeduringtheyearoftheloss.
C.Management must be able to describe its hedging strategy in order to meet the GAAP criteria to qualify
for hedge accounting.
D.Derivatives that fail to meet the GAAP criteria for hedge accounting are accounted for as speculative
investments.
2.
The accounting principle violated if temporary timing differences are not taken into account is the
A. historical cost principle.
B. matching principle.
C. conservatism principle.
D. cost/benefit principle.
3.
An accrued pension liability arises when
A. pension funding exceeds plan assets.
B. projected benefit obligation exceeds plan assets.
C. plan assets exceeds pension expense.
D. pension expense exceeds pension funding.
4.
.A contingent liability that is probable and can be reasonably estimated will immediately result in
A. an increase in both liabilities and stockholders’ equity.
B. an increase in liabilities and a decrease in net income.
C. an increase in liabilities without any need for financial statement disclosure.
D. an increase in liabilities and a decrease in assets.
5.
The allocation of income tax expense across periods when book and tax income differ is called
A. interperiod tax allocation.
B. intraperiod tax allocation.
C. current income tax allocation.
D. constructive receipt allocation
6.
The allocation of the tax cost (benefit) across various components of book income within a given period is called
A. interperiod tax allocation.
B. intraperiod tax allocation.
C. current income tax allocation. D. constructive receipt allocation.
7.
All of the statements below are true of futures contracts except that futures contracts
A. result in predictable cash flows.
B. eliminate downside risk and upside potential.
C. eliminate downside risk while allowing for upside potential.
D. result in predictable gross profits.
8.
All the following statements about residual value guarantees are correct except residual value guarantees
A. protect lessors against lessees who abuse leased assets.
B. protect lessees against lessors who abuse leased assets.
C. protects lessors against technological changes. D. protects lessors against marketplace changes.
9.
Amortization of discount on bonds payable (bond discount) results in which of the following?
A. A decrease in bond interest expense
B. An increase in net income
C. An increase in the carrying value of the bond
D. An increase in stockholders’ equity due to the decrease in bond interest expense
11.
A bond with a $500,000 maturity value is immediately retired for $515,000 plus accrued interest. The premium on bonds payable (bond premium) at the retirement date is $17,500. Which of the following statements is correct?
A. The loss on the debt extinguishment is $32,500.
B. The gain on the debt extinguishment is $2,500.
C. The gain on the debt extinguishment is $32,500.
D.The gain or loss on the debt extinguishment can’t be determined without knowing the dollar amount of
the accrued interest.
12.
A bond with a $750,000 maturity value is immediately retired for $745,000 plus accrued interest. The discount on bonds payable (bond discount) at the retirement date is $25,500. Which of the following statements is correct?
A. The gain on the debt extinguishment is $5,000.
B. The loss on the debt extinguishment is $20,500.
C. The gain on the debt extinguishment is $30,500.
D.The gain or loss on the debt extinguishment can’t be determined without knowing the dollar amount of
the accrued interest.
13.
Bronson
81. The trustee for the Bronson Corporation pension sent a report to the CEO with the following information
for the fiscal year:
81. The ending balance of plan assets is
A. $1,770,000.
B. $1,845,000.
C. $1,920,000.
D. $1,955,000.
14.
Bronson
82. The ending balance of the pension benefit obligation (PBO) is
A. $1,730,000.
B. $1,821,000.
C. $1,896,000.
D. $1,971,000.
15.
Bronson
83. At the beginning of the year, the pension plan is A. underfunded by $20,000.
B. overfunded by $20,000.
C. underfunded by $35,000.
D. overfunded by $35,000.
16.
Bronson
84. At the end of the year, the pension plan is
A. underfunded by $20,000.
B. overfunded by $20,000.
C. underfunded by $24,000.
D. overfunded by $24,000.
17.
Changes in the discount rate on pension plans cause material differences in
A. pension expense and pension obligations.
B. interest expense and pension expense.
C. pension expense and trust fund recorded on the sponsor’s balance sheet.
D. interest expense and the plan assets.
18.
A company instituted an IRS approved plan to contribute monies to a plan that would pay each employee a percentage of his or her highest year of salary for each year of service upon termination of services. Thisplanisa
A. defined benefit pension plan.
B. defined contribution pension plan. C. government sponsored pension plan. D. postretirement benefit plan.
19.
A company instituted an IRS approved plan to fund a percentage of each employee’s salary to a plan that would pay benefits to the employee after termination of services. This plan is a
A. defined benefit pension plan.
B. defined contribution pension plan.
C. government sponsored pension plan. D. postretirement benefit plan.
20.
Compared to a firm with a capital lease, operating leases help the lessee firm earn
A. higher asset turnover ratio.
B. lower return on assets.
C. higher debt-to-equity ratio.
D. lower NOPAT.
21.
The components of pension expense are
A. service cost, plus interest cost, plus net amortization.
B. service cost, plus interest cost, plus return on plan assets, plus net amortization.
C. service cost, plus interest cost, minus return on plan assets, plus (or minus) net amortization.
D. service cost, plus interest cost, minus return on plan assets, minus net amortization.
23.
A corporation which incurs a net operating loss may carry the loss back 2 years and forward A. 10 years.
B. 12 years. C. 20 years. D. 25 years.
24.
Current accounting standards require that the discount rate used for pension plans be A. current market rate for the year.
B. the average market rate since the beginning of the plan.
C. the rates at which the pension benefits could effectively be settled.
D. estimated future average market rates.
25.
The difference between the expense charged with a capital lease and an operating lease is
A. the amount of total expense, with a capital lease higher than an operating lease.
B. the amount of total expense, with an operating lease higher than a capital lease.
C. the number of years that recognize expense.
D. the timing of the expense recognition.
26.
The difference in the lessor’s income recognition over the life of the lease, between an operating lease and a capital lease is
A. zero.
B. the amount of the interest revenue.
C. the financing revenue minus the depreciation.
D. the depreciation expense.
27.
Differences between IFRS and U.S. GAAP in accounting for pensions include:
AUnder U. S. GAAP the balance sheet asset (liability) on the balance sheet differs from the plan’s actual . funded status, while under IFRS the balance sheet asset (liability) on the balance sheet equals the plan’s
actual funded status.
B. Under IFRS unamortized past service costs are off-balance-sheet.
C. Under U. S. GAAP there are two methods for recognizing actuarial gains and losses.
DU. S. GAAP requires that new prior service cost would be recognized immediately as part of service . cost, while IFRS accounts for these costs off-balance-sheet.
28.
The earnings conservatism ratio is computed as
A. Taxable income per the tax return/Pretax book income (adjusted for permanent differences).
B. Pretax book income (adjusted for permanent differences)/Taxable income per the tax return.
C. Taxable income per the tax return/Net income (adjusted for permanent differences).
D. (Net income/Pretax book income) x Statutory rate.
29.
Executory costs of a lease are treated by the lessee as
A. capitalized costs of the lease.
B. additional interest expense.
C. operating expenses.
D. deferred revenue.
31.
Floating-rate debt is the most common method for lenders to protect themselves from losses that arise as a result of
A. increases in the market interest rate.
B. decreases in the market interest rate.
C. increases in the stated interest rate on bonds.
D. decreases in the stated rate on bonds.
32.
The footnote disclosure containing the reconciliation of the statutory tax rate to the effective tax rate
A. provides information about the firm’s tax planning and policies.
B. is optional under GAAP rules.
C. may show a future increase in bottom line earnings when there is a large year-to-year increase in the effective tax rates.
D. All of the choices are correct.
33.
For income tax purposes, pension plan sponsors deduct the amount of the A. pension expense.
B. service cost.
C. plan contribution.
D. service cost plus net amortization and deferral.
34.
GAAP establishes specific criteria for the treatment of leases. If any of the criteria are met, the lessee A. must treat the lease as an operating lease.
B. must treat the lease as a capital lease.
C. may choose the treatment if two or less criteria are met.
D. may elect to treat the lease as an operating lease if only one criterion is met.
35.
GAAP establishes specific criteria for the treatment of leases. Which of the following does not accurately describe the criteria applicable to a lessee?
A. The lease agreement contains a bargain purchase option.
B. The lease term is equal to or exceeds 75% of the leased asset’s useful life.
C. The lease agreement transfers title of the leased asset to the lessee at the end of the lease term.
D. The present value of the minimum lease payments is equal to or greater than 75% of the leased asset’s
fair value.
36.
GAAP specifies that when the tax rates change, the
A. asset approach be adopted.
B. liability approach be adopted.
C. retained earnings approach be adopted.
D. income approach be adopted.
37.
Generally accepted accounting principles require that when bonds are sold at a discount, the discount must be allocated to interest expense using the
A. cash interest method.
B. effective interest method.
C. bond yield method.
D. cumulative interest method.
38.
A hedged item can be any of the following except:
A. an anticipated (forecasted) transaction.
B. an existing asset or liability on the company’s books.
C. a past transaction.
D. a firm commitment.
39.
A hedge of the exposure to changes in the fair market value of an existing asset or liability or a firm commitment is a/an
A. fair value hedge.
B. cash flow hedge.
C. foreign currency exposure hedge.
D. marked-to-market hedge.
40.
If a car dealership leases cars for four years with guaranteed purchase options, guaranteed residual values, and insured financing agreements, these leases are treated as
A. operating leases.
B. capital leases.
C. sales-type leases.
D. direct-financing leases.
41.
If a company sells an asset for a profit of $175,000 and immediately leases it back with a capital lease, the gain is recognized
A. immediately as an ordinary gain.
B. immediately as an extraordinary gain.
C. over the life of the lease in proportion to the rental payment.
D. over the life of the lease using the same rate and life used to amortize the leased asset.
42.
If a corporation signs a ten-year lease for a building and the present value of the lease payments is $250,000, the lease is a capital lease if the
A. fair value of the building is $1,000,000.
B. remaining useful life of the building is 20 years.
C. lessor can purchase the building for $5,000 at the end of the lease when the fair value is estimated to be $25,000.
D. building reverts back to the lessor at the end of the lease.
43.
If a lease contains a residual value guarantee, the lessee must
A. add the guaranteed amount to the present value of the minimum lease payments.
B. add the present value of the guaranteed amount to the present value of the minimum lease payments. C.include the guaranteed amount in the minimum lease payments only if the lessee intends to keep the
asset at the end of the lease.
D. ignore the guaranteed amount if the lessee intends to keep the asset at the end of the lease.
44.
If it is more likely than not that future benefits from a deferred tax asset will not be realized in its entirety, a/an
A. revenue is established.
B. valuation allowance is established.
C. expense allowance is established.
D. equity account is increased.
45.
.Increases in deferred income tax liability balances represent a potential
A. benefit.
B. deterioration of earnings quality.
C. source of cash flow.
D. source of capital.
46.
The interest cost component of a defined benefit pension plan is computed as the A. ending accrued pension liability times the discount rate.
B. beginning accrued pension liability times the discount rate.
C. beginning projected benefit obligation times the discount rate.
D. beginning accumulated pension liability times the discount rate.
47.
Investors need to review transactions involving swaps carefully to ensure that there is an underlying
A. loss.
B. gain.
C. rationale.
D. economic benefit.
48.
Key differences between U.S. GAAP and IFRS regarding deferred taxes include all of the following except
A. reporting of deferred taxes on the balance sheet.
B. uncertain tax positions.
C. reconciliation of statutory and effective tax rates.
D. use of the asset-liability approach.
49.
A lease is legally a/an ___________ contract.
A. mutually performed
B. executed
C. executory
D. unilateral
50.
A lessee must use which one of the following discount rates to value a capital lease?
A. Prime rate
B. Implicit lease rate
C. Lessee’s incremental borrowing rate
D. Lower of implicit lease rate or lessee’s incremental borrowing rate
51.
The lessor of a building with an operating lease will present on its balance sheet an asset equal to
A. zero.
B. the present value of future lease receipts.
C. the depreciated historical cost of the asset.
D. the fair value of the leased asset.
52.
.Losses must be accrued if they are
A. remote and estimable.
B. reasonably possible and estimable.
C. probable and reasonably estimable.
D. probable and not estimable.
53.
Losses must be disclosed if they are
A. remote and estimable.
B. reasonably possible and estimable.
C. probable and reasonably estimable.
D. reasonably possible but not estimable.
54.
The market value of floating-rate debt of $200,000 will A. rise by $2,000 with a 1% rise in interest rates.
B. fall by $2,000 with a 1% fall in interest rates.
C. remain unchanged with a change in interest rates.
D. will rise in the short run and fall in the long run with a change in interest rates.
55.
The market value of floating-rate debt of $200,000 will
A. rise by $2,000 with a 1% rise in interest rates.
B. fall by $2,000 with a 1% fall in interest rates.
C. remain unchanged with a change in interest rates.
D. will rise in the short run and fall in the long run with a change in interest rates.
56.
Moony
72. The amortization of accumulated unrecognized losses for 2011 is
A. $0.
B. $1,375.
C. $3,350.
D. $4,500.
57.
Moony
73. At the beginning of 2011, Moony, Inc. has a cumulative unrecognized loss of $50,000 in its pension plan. The estimated remaining service period of active employees is 12 years for both
years.
The corridor for amortization for 2012 is A. $0.
B. $25,000.
C. $35,000.
D. $38,500.
58.
The most straightforward method for making lessees’ balance sheet data comparable is to treat all leases as if they were
A. operating leases.
B. capital leases.
C. direct financing capital leases.
D. sales-type capital leases.
59.
Non-current monetary liabilities are initially recorded at their
A. future value.
B. historical value.
C. present value when incurred.
D. undiscounted amount due.
60.
On January 1, 2011, Ross Corporation issued bonds with a maturity value of $200,000; the bond’s stated rate of interest equaled the market interest rate on the issue date. On December 31, 2011, the market value of the bonds was $188,926; on December 31, 2012, the market value of the bonds was $191,325. Which of the following correctly describes Ross Corporation’s financial reporting if Ross elects to measure the bond liability using the fair value option?
A.For the year ending December 31, 2011, Ross will report an unrealized holding loss of $11,074 in its income statement.
B.For the year ending December 31, 2012, Ross will report an unrealized holding gain of $8,675 in its income statement.
C. For the year ending December 31, 2012, Ross will report an unrealized holding loss of $8,675 in its income statement.
D.For the year ending December 31, 2012, Ross will report an unrealized holding loss of $2,399 in its income statement.
61.
Over the life of a lease, the amount charged to expense is A. greater for an operating lease.
B. greater for a capital lease.
C. the same for a capital or operating lease.
D. less for a capital lease.
62.
The pension liability that must be shown on the balance sheet of the plan sponsor is the
A. accumulated benefit obligation.
B. projected benefit obligation.
C. excess of the accumulated benefit obligation over the plan assets at fair value.
D. excess of the projected benefit obligation over the plan assets at fair value.
63.
The present value of the expected pension benefits that will ultimately be paid is the A. accumulated benefit obligation.
B. projected benefit obligation.
C. minimum balance sheet liability.
D. accrued pension liability.
64.
.Pre-tax book income adjusted for permanent differences compared to taxable income per tax return is the
A. income ratio.
B. earnings conservatism ratio.
C. income tax ratio.
D. acid-test ratio.
65.
A probable future sacrifice of an economic benefit arising from a present obligation to transfer assets or provide services to other entities in the future as a result of a past transaction is a/an
A. asset.
B. liability.
C. equity.
D. expense.
66.
The return on plan assets component of pension expense for a defined benefit pension plan is
A. the reduction in pension expense created by expected earnings of the plan.
B. the reduction in pension expense created by actual earnings of the plan.
C. the change in the plan asset value resulting from the actual return on plan assets.
D. not a factor in the determination of pension expense.
67.
The service cost component of a defined benefit pension plan is computed as the
A. present value of the change in the accrued pension liability.
B. actual value of the change in the accrued pension liability.
C. present value of the change in pension liability from additional employee service.
D. undiscounted change in pension liability from additional employee service.
68.
The service cost of a defined benefit pension plan is the
A. annual fee charged by the plan administrator.
B. change in the pension liability caused by plan amendments.
C. change in the pension liability caused by one additional year of employee service.
D. the retirement benefit earned by the employees for services provided to date.
69.
Smith
65. Smith’s pension expense for 2011 is
A. $30,000.
B. $32,000.
C. $33,000.
D. $48,000.
70.
Smith
66. Smith’s pension expense for 2012 is
A. $32,400.
B. $34,000.
C. $34,800.
D. $54,000.
71.
Smith
67. The deferred gain or loss from the return on plan assets for 2011 is A. $0.
B. $1,000 deferred gain.
C. $1,000 deferred loss.
D. unknown from information provided.
72.
Smith
68. The deferred gain or loss from the return on plan assets for 2012 is A. $0.
B. $2,400 deferred gain.
C. $2,400 deferred loss.
D. unknown from information provided.
73.
Smith
69. If the beginning unrecognized gains are $30,000, the market value of the plan assets is $200,000 at the beginning of 2011, and the average remaining service period of active employees is 10 years, the amortization of accumulated unrecognized gains for 2011 is
A. $0.
B. $750.
C. $1,000.
D. $2,000.
74.
Smith
70. If the market value of the plan assets is $260,000 at the beginning of 2012, the beginning of the year projected benefit obligation is $250,000, the unrecognized gains are $30,000 at the beginning of 2011, and the average remaining service period of active employees is 10 years, then the amortization of accumulated unrecognized gains for 2012 is
A. $0.
B. $200.
C. $225.
D. $2,600.
75.
The smoothing of pension expense is
A. unethical and not allowed by GAAP.
B. allowed through amortization and deferral to prevent volatility in earnings.
C. not allowed by GAAP if the sole purpose is to prevent earnings volatility. D. illegal and prohibited by SEC.
76.
Some financial analysts contend that reporting debt at amortized historical cost rather than current market value
A. makes it more difficult to manipulate accounting numbers.
B. makes it easier to manipulate accounting numbers.
C. has no impact on the accounting numbers.
D. makes it impossible to manipulate the accounting numbers.
77.
Temporary differences that will cause taxable income in future periods to be higher than book income in future periods give rise to
A. deferred tax assets.
B. deferred tax liabilities.
C. permanent differences.
D. tax refund receivable.
78.
Temporary differences that will cause taxable income in future periods to be lower than book income in future periods give rise to
A. deferred tax assets.
B. deferred tax liabilities.
C. permanent differences.
D. expense.
79.
Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 5%. These bonds will sell in the market at
A. par.
B. a discount.
C. a premium.
D. stated value.
80.
Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 8%. These bonds will sell in the market at
A. par.
B. a discount.
C. a premium.
D. stated value.
81.
A timing difference created this year causes book income to be greater than taxable income; in future years book income will be less than taxable income. The timing difference in the future years’ incomes is referred to as
A. reversing timing difference.
B. originating timing difference. C. permanent difference.
D. minor difference.
82.
A timing difference that causes book income to be greater than or less than taxable income when it is initially recorded is a/an
A. reversing timing difference.
B. originating timing difference.
C. permanent difference. D. minor difference.
83.
TKE
75. The pension expense for 2011 is
A. $90,000.
B. $120,000.
C. $160,000.
D. $170,000.
84.
TKE
76. If the company contributes $160,000 cash to the pension plan trustee, which one of the following journal
entries properly records the payment?
A. Option a
B. Option b
C. Option c
D. Option d
85.
To compute the amortization on the cumulative unrecognized gains and losses for a pension plan, the corridor is computed as 10% of the
A. average of the beginning balances of the plan assets and the projected benefit obligation.
B. higher of the beginning balances of the plan assets or the projected benefit obligation.
C. higher of the beginning market-related value of the plan assets or the projected benefit obligation.
D. lower of the beginning market-related value of the plan assets or the projected benefit obligation.
86.
To remain in accordance with GAAP, operating leases require note disclosure of the
A. amount of annual rental payments.
B. discounted present value of future lease payments.
C. undiscounted present value of future lease payments.
D. future cash outflows arising from operating leases.
87.
The two broad categories of differences that result from determining financial income and taxable income are
A. temporary differences and originating differences.
B. temporary differences and reversing differences.
C. temporary differences and permanent differences.
D. permanent differences and deferred differences.
88.
Uncertain tax positions
A. are prohibited under GAAP.
B. are recognized if they might be sustained solely on technical merits.
C. require a two-step process to determine how much benefit should be recognized.
D. are measured as the smallest amount of benefit that is cumulatively greater than 50 percent likely of being realized.
89.
Under IFRS, deferred tax assets
A. are not recognized.
B. require a valuation allowance if it’s more likely than not that the deferred tax asset will not be realized.
C. are recognized only to the extent it is deemed probable that they will be realized.
D. are reported as current or noncurrent based on the expected date of the reversal of the timing difference.
90.
.Under IFRS, deferred taxes
A. are netted into one net current amount or one net noncurrent amount.
B. are always reported as noncurrent.
C. are reported as one net amount per taxable entity.
D. that will be realized are deemed current.
91.
Under the liability approach, the full change in the amount of future liability is recognized as an increase or decrease in income tax expense in the year the
A. tax rate change is debated.
B. tax law is proposed.
C. tax law becomes effective.
D. tax law becomes known.
92.
U. S. tax law limits the deductibility of contributions to pension plans for firms whose plans
A. are underfunded.
B. are overfunded.
C. have no current benefit recipients.
D. are part of a benefits package.
93.
When a bond is sold at a discount the effective interest rate is A. equal to the stated rate.
B. above the stated rate.
C. below the stated rate.
D. equal to the stated rate for a period of time and then above the stated rate for a period of time.
94.
When a bond is sold at a discount the effective interest rate is
A. equal to the stated rate.
B. above the stated rate.
C. below the stated rate.
D. equal to the stated rate for a period of time and then above the stated rate for a period of time.
95.
When a bond is sold at a premium the
A. effective interest rate is less than the stated rate.
B. effective interest rate is greater than the stated rate.
C. effective interest rate relative to the stated rate is not known.
D. interest expense during the life of the bond exceeds the amount of cash interest payments during the life of the bond.
96.
When accounting for a capital lease, depreciation expense is equal to the
A. lease payments.
B. principal portion of the lease payments.
C. normal depreciation computed on the depreciable base of the asset.
D. straight-line depreciation only on the full amount of the leased asset.
97.
When accounting for an operating lease, which one of the following accounts are charged with the expense on the lessee’s income statement?
A. Depreciation Expense
B. Amortization Expense
C. Rent Expense
D. Lease Operating Expense
98.
When a lessee has a capital lease for its primary premises it would initially record a leased asset on the balance sheet equal to
A. zero.
B. the present value of future lease payments.
C. the sum of future lease payments.
D. the lesser of the fair value of the asset or the present value of the future lease payments.
99.
When computing the issue price of a bond that has a stated rate of 8% payable semiannually and a market rate of 10%, the discount rate used would be
A. 8%.
B. 10%.
C. 4%.
D. 5%.
100.
When employers amend pension plans to increase benefits to participants, which one of the following is created?
A. Prior service cost
B. Cumulative obligation gain or loss C. Transition asset
D. Transition liability
101.
When interest rates have increased and bonds are retired before maturity, market value is
A. below book value generating an accounting gain.
B. below book value generating an accounting loss.
C. above book value generating an accounting gain.
D. above book value generating an accounting loss.
102.
When market rates of interest decrease, the use of floating-rate debt benefits
A. investors.
B. issuing companies.
C. all parties.
D. no one.
103.
When tax expense equals current taxes payable to the IRS plus (minus) the increase (decrease) in deferred tax liabilities, tax expense is properly matched for the
A. current period.
B. previous period.
C. future period.
D. tax return.
104.
When the effective yield of a bond is the same as the stated rate on the bond, the bond is sold at
A. a discount.
B. a premium.
C. par.
D. a price above par.
105.
When the market rate of interest is below the nominal rate, a bond sells at
A. par.
B. a premium.
C. a discount.
D. stated value.
106.
Which of the following can’t be assessed by analyzing a company’s deferred tax note to the financial statements?
A. Earnings quality.
B. The effective income tax rate.
C. The degree of conservatism with respect to accounting choices.
D. The impact of economic changes on deferred taxes.
107.
Which of the following does not properly describe the comparison of the effective income tax rate and the statutory income tax rate?
A. The rates could differ due to the tax jurisdiction that a firm operates in.
B . Permanent differences that cause book income to be higher than taxable income will cause the effective rate to be lower than the statutory rate.
C. The reconciliation between the rates can reflect information pertaining to a firm’s tax policy decisions.
D. A firm with aggressive tax policies will most likely have an effective tax rate that is much higher than the statutory rate.
108.
Which of the following is not a criticism of pension accounting and reporting?
A.Net income immediately includes fund asset gains and losses, as well as projected benefit obligation
actuarial gains and losses.
B. Management has the discretion with respect to choosing the expected rate of return on plan assets. C. Some argue that operating income is misstated due to the deduction of pension expense.
D.Some argue that both the projected benefit obligation as well as the pension fund asset should be
reported on the balance sheet.
109.
Which of the following is not a factor in the determination of pension expense when the employer sponsors a defined benefit pension plan?
A. The amount of retirement benefits that will vest.
B. The rate of return on the pension fund investment.
C. The rate that salaries will increase until retirement.
D. The amount of funding during a particular period.
110.
Which of the following is not an accurate description of the controversies surrounding the fair value option?
A. Advocates argue that accounting-induced volatility is eliminated and financial statement transparency is improved.
B. Proponents argue that opportunities are enhanced for companies to manipulate their earnings and balance sheet.
CProponents argue that companies that can use the fair value option in situations where there is not
. necessarily a relationship between the financial assets and liabilities which promotes the opportunity to
manage earnings.
D. Advocates argue that financial reporting is more accurate and transparent for those companies in
financial distress.
111.
Which of the following is not a proper description with respect to the financial accounting and reporting of income taxes?
A. A permanent difference does not create a deferred tax asset or liability.
B. An originating timing difference will eventually create a reversing timing difference.
C. A net operating loss carryforward does not have any impact on income tax expense for the year the loss occurs.
D. Income tax expense changes during the year that it is known that future tax rates will be increasing.
112.
Which of the following is not a required disclosure pertaining to defined benefit pension plans?
A. A reconciliation of the beginning and ending projected benefit obligation balances.
B. The retirement benefits that are expected to be paid in the next five years.
C. The amount of pension expense and its components.
D. The contributions to be made into the pension fund for each of the next five years.
113.
Which of the following is not a similarity between the accounting for a defined benefit pension plan and other postretirement benefits?
A. The financial statement disclosures.
B. Actuarial assumptions are extensively used.
C. The funding requirements.
D. The applicable GAAP standards.
114.
Which of the following results in an increase in income tax expense for a particular time period?
A. An increase in the deferred tax asset account during the period.
B . An increase in the income tax rate for future years that was enacted during the time period for a company reporting a deferred tax asset at the end of the period.
C. A decrease in the deferred liability account during the period.
D . An increase in the income tax rate for future years that was enacted during the time period for a company reporting a deferred tax liability at the end of the period.
115.
Which of the following statements does not accurately describe the accounting for net operating losses?
A. A firm must assess future profitability when determining the amount of a deferred income tax asset.
B. The net operating loss must be carried back two years.
C. The net operating loss can be both carried forward and backward.
D. The deferred income tax asset must be allocated between the current and noncurrent balance sheet classifications.
117.
Which of the following statements does not properly describe a defined benefit pension plan?
A. Many assumptions are made in the determination of pension expense.
B. The employee bears little risk with respect to estimating the amount of the annual contributions to the
plan.
C. The employer bears little risk with respect to estimating the amount of the annual contributions to the
plan.
D. A pension plan asset is not recorded on the employer’s balance sheet.
118.
Which of the following statements is correct?
A. Amortization of discount on bonds payable (bond discount) results in an increase in a bond’s carrying value.
B. Amortization of discount on bonds payable (bond discount) results in a decrease in bond interest expense.
C. Amortization of premium on bonds payable (bond premium) results in an increase in a bond’s carrying value.
D. Amortization of premium on bonds payable (bond premium) results in an increase in bond interest expense.
119.
Which of the following statements is correct?
A. Income smoothing did not have an impact on pension accounting.
B.The short-term pension risk ratio is calculated by dividing the projected benefit obligation by the
market value of common stock.
C. The funded status of a pension plan does not throw light on cash flow problems.
D. The projected benefit obligation includes the present value of other postretirement benefits.
120.
Which of the following statements is not accurate with respect to the reporting requirements regarding the fair value option?
A. Firms may elect the fair value option for a single eligible instrument without electing it for other identical instruments.
B. Once the choice is made to adopt the fair value option, the decision is irrevocable.
C. Financial statement disclosures must include management’s rationale for electing the fair value option.
D. The fair value option is not available for security investments that are accounted for using the equity method.
121.
Which of the following statements is not correct?
A Temporary differences causing taxable income in future periods to be higher than book income in
. future periods create deferred tax liabilities.
B Temporary differences causing taxable income in future periods to be lower than book income in future . periods create deferred tax assets.
C A permanent difference results when a revenue enters into the determination of book income in one
. period but affects taxable income in a different period.
D A temporary difference causing book income to be less than taxable income when initially recorded is
. described as an originating difference.
122.
Which of the following statements is not correct?
A. The U.S. income tax code influences pension fund contributions.
B. The U.S. income tax code creates incentives for firms to overfund their pension plans.
C. The earnings from pension fund investments are taxable to the pension plan sponsor.
D. Firms with larger union memberships tend to have higher pension funding ratios.
123.
Which of the following statements is not correct regarding amortization when using the effective interest method (basis)?
A. Amortization of discount on bonds payable (bond discount) increases in later years relative to earlier years of a bond’s life.
B. Amortization of premium on bonds payable (bond premium) increases in later years relative to earlier years of a bond’s life.
C . Amortization of both premium on bonds payable (bond premium) and discount on bonds payable (bond discount) decreases in later years relative to earlier years of a bonds life.
D . Amortization of discount on bonds payable (bond discount) results in an increase in interest expense and in an increase in the bond’s carrying value.
124.
Which of the following statements pertaining to defined benefit pension plans is not correct?
A. The funded status of a pension plan is an indicator of potential cash flow problems.
B.Pension plan sponsors must make an annual contribution to the pension fund for an amount equal to the . service cost regardless of the funded status of the pension plan.
C. A small change in the pension discount rate can shift the funded status of the pension from year to
year.
D.Research provides evidence that firms with underfunded pension plans have lower current cash flows . and are likely to have lower future cash flows relative to firms with overfunded pension plans.
125.
Which of the following statements pertaining to lease accounting is not correct?
AFor a particular lease agreement, the amount of interest expense recorded by the lessee can be different . than the amount of interest revenue recorded by the lessor during the same time period.
B.The current ratio will be decreased over the lease term if a lessor treats a lease as a capital lease rather
than an operating lease.
CIt is very challenging for different firms to treat virtually identical leases dissimilarly due to the fact that . the required lease capitalization criteria are difficult to circumvent.
DThe required disclosures pertaining to operating leases require the lessee to disclose what the impact on . the financial statements would have been if the lease would have been treated as a capital lease.
126.
Which of the following statements pertaining to lease accounting is not correct?
A.The lessee will depreciate a leased asset either over the lease term or the leased asset’s useful life
. dependent upon which of the required lease capitalization criteria is (are) met.
B. The lessee ignores a guaranteed salvage value when calculating depreciation expense associated with a
capital lease.
C.The lessor’s annual income will decrease over time regardless of whether the lease is a sales-type lease
or a direct financing lease.
D. The gross profit recorded by the lessor is the same whether or not the residual value is guaranteed by
the lessee.
127.
Which of the following statements with respect to floating-rate debt is incorrect?
A. If the market rate of interest increases, the market value of the floating-rate debt will remain the same.
B. If the market rate of interest decreases, the cash interest payment required by the issuing company would decrease.
C. If the market rate of interest increases, the investors benefit while the issuing corporation does not benefit.
D. If the market rate of interest decreases, both the issuing company and the investors benefit.
128.
Which of the following transactions would not create a temporary difference?
A. A sale recorded using the installment method for book purposes.
B. The cash collection from a life insurance policy on a company executive.
C. A cash collection for services to be provided during the next period.
D. The use of the percentage-of-completion method for book purposes.
129.
Which of the following transactions would not create a temporary difference?
A. The cash payment to acquire a three-year insurance policy.
B. The accrual of warranty expense.
C. The accrual of bad debts expense.
D. The cash collection of interest earned on a municipal bond.
130.
Which one of the following contingencies must be accrued on the balance sheet?
A. The likely loss on a lawsuit that the firm’s attorneys believe will be dropped.
B. The probable loss on a lawsuit that the firm’s attorneys believe will be settled for $50,000.
C. The reasonably possible loss on a lawsuit that the firm’s attorneys believe will be dropped.
D. The reasonably possible loss on a lawsuit that the firm’s attorneys believe will be settled for $50,000.
131.
Which one of the following contingencies requires financial statement disclosure?
A. A lawsuit that the firm’s attorneys believe will be dropped.
B. A lawsuit that the firm’s attorneys believe will probably be settled for $75,000.
C. A reasonably possible loss on a lawsuit that the firm’s attorneys cannot estimate the loss.
D. A reasonably possible loss on a lawsuit that the firm’s attorneys believe will be settled for $100,000.
132.
Which one of the following is a permanent difference between book and taxable income?
A. Interest received on municipal bonds
B. Installment sales
C. Bad debts expense
D. Warranty expense
133.
Which one of the following is a primary limitation of the earnings conservatism (EC) ratio?
A. Earnings conservatism deterioration arising from LIFO dipping is not reliably captured in the EC ratio.
B. Earnings conservatism deterioration arising from LIFO dipping is reliably captured in the EC ratio.
C. Comparisons across companies in different industries are always reliable.
D. Earnings comparisons for a single company over time are always reliable.
134.
Which one of the following ratios deteriorates with the lessee’s capitalization of a lease?
A. Current ratio
B. Return on equity
C. Inventory turnover
D. Common earnings leverage
135.
.With a leveraged lease, the lessor must treat the lease as a/n
A. operating lease.
B. ordinary capital lease.
C. direct financing capital lease.
D. sales-type capital lease.
1.
A corporation that incurs a net operating loss must carry the loss back to earlier years before it can carry the loss forward.
2.
A corporation that incurs a pre-tax operating loss must:
3.
Creation of the deferred tax asset valuation allowance account is subjective and therefore provides management the opportunity to manage earnings.
4.
If it is more likely than not that future benefits from a deferred tax asset will not be realized
5.
Income tax expense when interperiod tax allocation is used creates a more stable effective tax rate over time relative to using tax payments as income tax expense.
6.
Smith Company reported $350,000 in book income before income tax during 2018, its first year of operation. The tax depreciation exceeded its book depreciation by $30,000. The tax rate for 2018 and all future years was 40%.
What amount of deferred tax liability should Smith report in its December 31, 2018, balance sheet?
7.
Temporary differences that will cause taxable income in future periods to be higher than pre-tax book income in future periods give rise to:
8.
Temporary differences that will cause taxable income in future periods to be lower than pre-tax book income in future periods give rise to:
9.
Under the balance sheet approach, the full change in the amount of future liability is recognized as an increase or decrease in income tax expense in the year the:
10.
When the income tax rate changes, the full change in the amount of future liability for income taxes is recognized as a change to income tax expense in the year that the change is enacted.
12.
Which of the following transactions would not create a temporary difference?
1.
Accrued liabilities represent
a. income that has not yet been recognized on the income statement.
b. expenses that have not yet been recognized on the income statement.
c. expenses that have been recognized on the income statement but not yet been paid.
d. income that has been recognized on the income statement but not yet collected.
2.
. A common-size balance sheet presents each item as a percentage of total assets.
True or false
3.
The Additional Paid-In Capital account is reported on the balance sheet at the
a. current market value of the stock minus par value.
b. original sales price of the stock minus the par value.
c. net realizable value of the stock minus par value.
d. discounted present value of the future dividends minus par value
4.
All the following disclosures would appear in the Summary of Significant Accounting Policies except
a. inventory method.
b. depreciation method.
c. revenue recognition method.
d. financing method.
5.
. A related party transaction occurs when a company enters a transaction with individuals or other companies that are connected in some way with it or its management.
True or false
6.
Balance sheet amounts would not be measured as
a. effective value.
b. fair value.
c. present value.
d. historical cost value.
7.
The balance sheet
a. provides a summary of a firm’s assets, liabilities, equity and cash flows as of a specific date.
b. classifies assets as current if they are expected to be converted into cash within 24 months.
c. is an expression of the accounting equation.
d. is comprised of items shown only at historical costs.
8.
A balance sheet prepared in accordance with U.S. GAAP typically
a. includes both "noncurrent liability" and "long-term obligation" sections.
b. reports inventory at historical costs.
c. reports cash at its current market value.
d. reports retained earnings comprised of the cumulative earnings less dividends since the inception of the entity.
9.
A balance sheet prepared in accordance with U.S. GAAP typically
a. reports common stock at the current market price of the stock.
b. provides critical information for understanding a firm’s capital structure.
c. helps to determine the proper mix of debt and equity financing.
d. provides critical information for understanding a firm’s profitability.
10.
A balance sheet prepared under U.S. GAAP can have amounts presented in the following measurement bases except
a. foreign currency
b. historical costs
c. discounted present values
d. current replacement costs
11.
A balance sheet prepared under U.S. GAAP includes the following elements except
a. an asset section
b. a liabilities section
c. an equity section
d. a cash flow section
12.
The balance sheet provides information on all of the following except
a. how management invested its money.
b. where the money came from.
c. assessing rates of return.
d. the market price of the company’s stock.
13.
Balance sheets developed under US GAAP
a. may, but are not required to, list assets from most liquid to least liquid.
b. must list assets from most liquid to least liquid.
c. must list assets from least liquid to most liquid.
d. must list assets in alphabetical order.
14.
Balance sheets prepared in compliance with U.S. GAAP reflect a mixture of
a. historical cost and future cash values.
b. current value and discounted future cash flows.
c. discounted cash flows and future values.
d. historical cost, fair value, net realizable value, and discounted present values.
15.
Balance sheets prepared in other countries using international accounting standards (IFRS) might use different account titles than are allowed for US. GAAP, such as
a. Capital reserve.
b. Share premium.
c. Hedging reserve.
d. all of these answer choices might be used in balance sheets prepared using IFRS.
16.
Balance sheets prepared under IFRS
a. may list assets and liabilities from least liquid to most liquid.
b. must list assets, but not liabilities in order of liquidity.
c. must list assets and liabilities from least liquid to most liquid.
d. must list liabilities, but not assets, from most to least liquid.
17.
Cash collected from customers can be derived
a. by analyzing changes in the Accounts Payable balance.
b. by appropriately adjusting revenue for changes in accounts receivable.
c. by appropriately adjusting revenue for changes in accounts payable.
d. by analyzing changes to the reserve for doubtful accounts.
18.
The cash flow from operating activities
a. is required to be presented using the direct method by U.S. GAAP and IFRS.
b. can be presented by using either the direct method or the indirect method.
c. comprises only the increase in cash arising from the firm’s profit-making activities.
d. can vary depending on whether the presentation is done under the direct method or the indirect method.
19.
Cash flows from operating activities include:
a. cash payments received from customers.
b. increases in Accumulated Depreciation.
c. deferred income taxes.
d. All of these would be included in cash flows from operating activities.
20.
The cash flow statement explains why a firm’s cash position has changed between successive balance sheet dates while simultaneously explaining the changes that have taken place in the firm’s noncash asset, liability, and stockholders’ equity accounts over the same period.
True or false
21.
Cash interest from investments is recorded as _______ in statements of cash flows for U.S. GAAP, but can be recorded as ________ when using IFRS.
a. cash flows from investing activities / cash flows from financing activities
b. cash flows from financing activities / cash flows from operating activities
c. cash flows from operating activities / cash flows from financing activities
d. cash flows from operating activities / cash flows from investing activities
22.
Cash is always measured for the balance sheet at
a. future transaction value.
b. current market value.
c. realizable future value.
d. net transaction value.
23.
The change in a firm’s cash position between successive balance sheet dates will not equal the reported net income for that period for all the following reasons except:
a. Reported net income usually will not equal cash flow from operating activities because noncash revenues and expenses are often recognized as part of accrual income.
b. Reported net income usually will not equal cash flow from operating activities because certain operating cash inflows and outflows are not recorded as revenues or expenses under accrual accounting in the same period the cash flows occur.
c. Changes in cash are also caused by nonoperating investing activities like the purchase of treasury stock.
d. Additional changes in cash are caused by financing activities like the repayment of a bank loan.
24.
Common-size balance sheets may be used for all the following except
a. gaining insights into the nature of a company’s operations.
b. analyzing a company’s asset and financial structure.
c. determining how management assesses the risks a company faces.
d. learning about the underlying economics of an industry.
25.
The Common Stock account is reported on the balance sheet at the
a. par value of the stock.
b. current market value of the stock.
c. net realizable value of the stock.
d. discounted present value of the future dividends.
26.
Companies having cash denominated in foreign currency units will not translate those units into U.S. dollars because cash has the same value in all currencies.
True or false
27.
A consolidated balance sheet
a. includes the net assets of the parent company and all of its subsidiaries.
b. reports separately the net assets of the parent company and its subsidiaries
c. includes the net assets of the parent company and all components in which it owns more than 75% of the outstanding voting stock.
d. includes the net assets of only the subsidiary companies.
28.
Contributed capital might be a negative dollar amount because
a. net losses exceeded net income over the years.
b. excess liabilities reduced contributed capital.
c. treasury stock was in excess of stock originally issued.
d. dividends paid were in excess of net income accumulated in retained earnings.
29.
Current assets are assets expected to
a. be converted to cash within twelve months.
b. be converted to cash within twelve months or one operating cycle if the operating cycle is longer than twelve months.
c. remain on the books for at least twelve months.
d. remain on the books for at least twelve months or one operating cycle if the operating cycle is longer than twelve months.
30.
Current liabilities are reported on the balance sheet at
a. current market value.
b. historical cost.
c. discounted present value.
d. future value.
31.
Deferred income taxes will be reported as either a noncurrent asset or noncurrent liability.
True or false
32.
Depreciation is added back to net income to determine cash from operating activities under the indirect method.
True or false
33.
Events that occur after the financial statements are issued are referred to as subsequent events.
True or false
34.
Financing activities include the cash effects of
a. producing and delivering goods and services.
b. purchasing and disposing of productive assets used in production of revenue.
c. purchasing and disposing of debt securities of other companies.
d. selling stocks and bonds to raise capital used to produce revenue.
35.
Goodwill
a. is a tangible asset recognized as part of a business combination.
b. is not subject to impairment.
c. is initially measured as the difference between the consideration given in an acquisition and the fair value of the separately identifiable net assets acquired on the acquisition date.
d. is classified on the balance sheet as a current asset.
36.
Goodwill arising from a business combination is reported on the balance sheet as a(n)
a. current asset.
b. fair value asset.
c. impaired asset.
d. intangible asset.
37.
In a common-size balance sheet, each balance sheet account is expressed as a percentage of total
a. liabilities.
b. assets.
c. shareholders’ equity.
d. assets plus shareholders’ equity.
38.
The indirect method of presenting cash flow from operating activities
a. is strongly recommended by both U.S. GAAP and IFRS.
b. focuses on how cash flows deviate from a natural benchmark - net income.
c. presents cash transactions related to the determination of net income.
d. is more difficult than the direct method to incorporate working capital changes into a financial model.
39.
Information found on a company’s balance sheet can tell a story about
a. the company and its strategies.
b. the company’s industry.
c. the company’s performance.
d. All of these can be derived from the information on the balance sheet
40.
Inventory and accounts receivable are both carried at net realizable value.
True or false
41.
Investing activities include the cash effects of
a. producing and delivering goods and services.
b. purchasing and disposing of productive assets used in production of revenue.
c. borrowing and repaying loans used to purchase equipment.
d. selling stocks and bonds to raise capital to purchase land.
42.
Investing activities include the cash effects of selling stocks and bonds to raise capital to purchase fixed assets.
True or false
43.
It is permissible for a firm that reports in accordance with IFRS to emphasize its liquidity by placing current assets and current liabilities in close proximity to one another on the balance sheet.
True or false
44.
Joe Carie, head accountant, is using the indirect method and the account balance from the balance sheet and income statement to prepare a statement of cash flows. A decrease in the balance of the Accounts Receivable account would
a. decrease cash flow from financing activities.
b. increase cash flow from investing activities.
c. decrease cash flow from operating activities.
d. increase cash flow from operating activities.
45.
Joe Carie, head accountant, is using the indirect method and the account balance from the balance sheet and income statement to prepare a statement of cash flows. An increase in the Computer Equipment account would
a. decrease cash flow from financing activities.
b. decrease cash flow from investing activities.
c. increase cash flow from operating activities.
d. decrease cash flow from investing activities.
46.
. Joe Carie, head accountant, is using the indirect method and the account balance from the balance sheet and income statement to prepare a statement of cash flows. He notices that the Retained Earnings account increased from the beginning of the year. This information is used to
a. increase cash flow from financing as it indicates receipt of payments from customers.
b. decrease cash flow from investing as it indicates payment of debt.
c. increase cash flow from operations as it signifies a net income.
d. decrease cash flow from operations as it indicates a net loss.
47.
Joe Carie, head accountant, is using the indirect method and the account balance from the balance sheet and income statement to prepare a statement of cash flows. Joe would use an increase in Accumulated Depreciation to
a. increase cash flow from operating activities.
b. increase cash flow from investing activities.
c. decrease cash flow from investing activities.
d. decrease cash flow from operating activities.
48.
Liabilities represent amounts that are
a. probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.
b. always classified as current on the balance sheet.
c. never shown on the balance sheet at historical cost.
d. netted against assets on the balance sheet.
49.
Liquidity refers to how quickly noncurrent assets will be converted into cash to pay liabilities.
True or false
50.
Long-term debt
a. consists of monetary obligations that fall due beyond two years from the balance sheet date.
b. when issued, is carried at an amount based on the proceeds received.
c. usually has an effective yield that is much different than the cost of borrowing.
d. never has any portion classified as a current liability.
51.
Long-term debt is reported on the balance sheet at
a. current market value.
b. net realizable value.
c. present value.
d. future value.
52.
Net property, plant and equipment are reported on the balance sheet at
a. current market value.
b. historical cost.
c. historical cost minus accumulated depreciation.
d. net realizable value.
53.
Notes to the financial statements typically contain all the following except
a. a summary of significant accounting policies.
b. disclosure of important subsequent events.
c. management’s discussion and analysis.
d. related-party transactions.
54.
On a balance sheet prepared under U.S. GAAP
a. accounts receivable is presented at net realizable value.
b. inventories are presented at current market price.
c. any cash denominated in a foreign currency is disclosed in a footnote.
d. most short-term investments are presented at historical cost.
55.
On balance sheets prepared in accordance with U.S. GAAP
a. assets are generally listed from least liquid to most liquid.
b. liabilities are generally netted against assets.
c. assets are generally listed from most liquid to least liquid.
d. both tangible and intangible long-lived assets can be revalued upward periodically.
56.
Operating activities result from the cash effects of
a. paying dividends to shareholders.
b. producing and delivering goods.
c. selling equipment.
d. issuing long-term debt.
57.
Operating activities result from the cash effects of
a. producing and delivering goods and services.
b. purchasing and disposing of fixed assets used in production of revenue.
c. borrowing and repaying loans used in the production of revenue.
d. selling stocks and bonds to raise capital for the generation of revenue.
58.
Other comprehensive income
a. consists of certain gains and losses included in comprehensive income but not yet recognized in the income statement.
b. is never adjusted for tax effects.
c. does not include foreign currency gains and losses.
d. is consistently defined in international balance sheet presentation.
59.
Paying dividends to stockholders
a. represents an investing activity.
b. does not impact the period cash flows.
c. represents an operating activity.
d. represents a financing activity.
60.
Probable future economic benefits obtained or controlled by an entity as a result of past transactions or events defines
a. assets.
b. liabilities.
c. equity.
d. retained earnings.
61.
Probable future sacrifices of economic benefits arising from an entity’s present obligations to transfer resources or provide services to other entities in the future as a result of past transactions or events defines
a. assets.
b. liabilities.
c. equity.
d. retained earnings
62.
Properly prepared statements of cash flows
a. include stock issued for cash as an investing activity.
b. present depreciation as a subtraction from net income to arrive at a firm’s cash flow from operations under the indirect method.
c. are frequently used by investment analysts to cash flows from operations across two or more companies.
d. will show the change in cash during a period to be equal to the net income for the period.
63.
A related-party transaction
a. is assumed to be an arms-length transaction.
b. can take place between subsidiaries of a common parent.
c. does not need to be disclosed in financial statements prepared under U.S. GAAP.
d. presents less risk than a similar transaction with a third party.
64.
The Retained Earnings account is comprised of
a. cash retained in the business.
b. cash reinvested in the business by shareholders.
c. the cumulative earnings less dividends since the inception of the corporation.
d. the earnings of the corporation for the current year.
65.
Retained earnings are reported on the balance sheet at
a. historical cost.
b. current market value.
c. net realizable value.
d. a mixture of different measurement bases.
66.
The rules used for determining taxable income in various countries
a. have the same objective as the rules used for determining income for financial reporting purposes.
b. have an objective designed to provide a basis for funding government operations.
c. are not the result of a political process.
d. measure changes in a firm’s underlying economic condition.
67.
The sale of productive assets
a. does not impact the period cash flows.
b. is always considered a related party transaction.
c. represents an investing activity.
d. represents an operating activity.
68.
The statement of cash flows shows the user why a firm’s investments and financial structure have changed between two balance sheets dates.
True or false
69.
Subsequent events
a. are those significant events that occur after the financial statements are issued.
b. are subject to optional disclosure based on a recommendation from top management.
c. are required to be disclosed if they are material and likely to influence investors’ appraisal of the risk and return prospects of the reporting entity.
d. are those significant events that occur in the last quarter of the reporting period.
70.
The Summary of Significant Accounting Policies
a. explains the important accounting choices the reporting entity uses to account for selected transactions and accounts.
b. does not contain an explanation of the company’s revenue recognition policies.
c. is generally a part of the equity section of the balance sheet.
d. is only required as part of a prospectus for the sale of new shares of stock.
71.
The summary of significant accounting policies does not help explain
a. the cost flow assumptions for valuing inventory.
b. management’s assessment of the financial condition of the firm.
c. the method used for determining depreciation expense.
d. whether certain investments are accounted for using the equity method.
72.
A temporary difference is the result of
a. a revenue or expense item reported in different periods for book purposes and tax purposes.
b. fluctuations in the exchange rate.
c. adjustments between the trial balance and general ledger.
d. delays between the sale of a product and the recording of the account receivable.
73.
The term "consolidated" is used in financial statements under U.S. GAAP to refer to the financial reporting for a parent and its subsidiaries. The equivalent term used on balance sheets in the United Kingdom is
a. cooperative.
b satellite.
c. consolidated.
d. group.
74.
. The residual interest in the resources of an entity that remains after deducting its debts to third parties defines
a. assets.
b. liabilities.
c. equity.
d. retained earnings.
75.
The U.K. Equity account "Hedging reserve" is reported on a U.S. GAAP balance sheet as
a. capital reserve.
b. revaluation reserve.
c. capital in excess of par.
d. an accumulated other comprehensive income account.
76.
The U.K. Equity account "Share premium" is reported on U.S. GAAP balance sheets as
a. capital reserve.
b. revaluation reserve.
c. capital in excess of par.
d. an accumulated other comprehensive income account.
77.
. Under the direct method for cash flow statement preparation, net cash flows from operating activities is calculated by adjusting net income for the differences between accrual-basis revenues and expenses and cash inflows and outflows during the period.
True or false
78.
Under U.S. GAAP, assets are presented in decreasing order of liquidity. Under IFRS,
a. tangible assets may be presented first followed by the current assets displayed in increasing order of liquidity.
b. the current assets are displayed in increasing order of liquidity.
c. investments are listed first in descending order of maturity.
d. a company may present its assets in alphabetical order if it so desires.
79.
Under U.S. GAAP, cash interest from investments is reported on the statement of cash flows as part of investing activities whereas under IFRS, cash interest from investments is reported as part of financing activities.
True or false
80.
What would Barden report as total stockholders’ equity on its balance sheet?
a. $300,000
b. $387,500
c. $637,500
d. $87,500
81.
When adjusting accrual earnings to obtain cash flows from operations,
a. an increase in Accounts Payable is added to determine cash flow from operations.
b. a decrease in Accounts Payable is added to determine cash flow from operations.
c. an increase in Accounts Payable is deducted to determine cash flows from operations.
d. it is not necessary to consider any changes to Accounts Payable.
82.
When adjusting accrual earnings to obtain cash flows from operations, an increase in Prepaid Rent Expense is subtracted to arrive at cash flow from operations.
Ture or false
83.
Which of the following is not true regarding the tax note to the financial statements?
a. The tax note is never required to include any information on foreign tax rate implications.
b. The tax note can describe how financial reporting differs from tax accounting.
c. The tax note can describe how tax disputes may affect future tax payments.
d. The tax note can explain how foreign tax rates affect income tax expense.
84.
Which of the following statements about retained earnings is not true?
a. Retained earnings reflect the net income of previous accounting periods only.
b. Retained earnings measures the cumulative earnings of the company since inception, minus dividends distributed.
c. Retained earnings represents cumulative earnings that have been reinvested in the business.
d. Retained earnings may represent a large portion of stockholders’ equity.
86.
Which of the following statements is not true regarding cash flow from operating activities?
a. Most firms use the indirect method for presentation.
b. Each line item in a direct method cash flow statement is actually a cash flow.
c. The direct method begins with net income and then shows the differences between operating cash flow and net income.
d. There are two methods for presenting cash flow from operating activities.
87.
Which of the following statements is not true regarding the cash flow statement?
a. The cash flow statement provides information about changes in all the balance sheet accounts.
b. The change in cash is classified into cash flow from three categories: operating activities, investing activities and financing activities.
c. The cash flow statement generally shows that cash flows and accrual earnings are substantially the same.
d. The cash flow statement explains the causes for year-to-year changes in cash and cash equivalents.
88.
Which one of the following equations explains why successive balance sheets can be used to prepare a firm’s cash flow statement?
a. Assets = Liabilities - Equity
b. Cash - Noncash assets = Liabilities - Equity
c. Cash = Liabilities - Noncash assets + Stockholders’ equity
d. Cash = Liabilities + Stockholders’ equity
1.
Accounting errors or irregularities can occur for which reasons?
a. simple oversight
b. misapplication of GAAP
c. management exploitation of the flexibility in GAAP
d. all of these answer choices are correct
3.
An analysts gathered the following information about a company whose fiscal year end is December 31, 2018
Net Income for the year was 23.7 million
Preferred stock dividends of $3 million were paid for the year
Common stock dividends of $6 million were paid for the year
There were 10 million shares of common stock outstanding on Jan 1 2018
The company issued 6 million new shares of common stock on July 1 2018
The capital structure does not include any potential dilutive securities
Calculate the company’s basic earnings per share for 2018
a. 1.80
b. 1.59
c. 2.06
d. 1.36
e. cannot tell from the information provided
4.
Any increase in an asset may be offset by:
a. a corresponding decrease in owners equity
b. an increase in another asset account
c. a corresponding decrease in a liability
d. a decrease in some other asset account
5.
The basic accounting equation may be expressed as:
a. assets = liabilities - owners’ equity
b. liabilities = assets + owners’ equity
c. owners’ equity = assets - liabilities
d. assets = owners’ equity - liabilities
6.
The Canon Corporation sells ten copiers to the Title Company on October 15 for $40,000. Canon delivers the copiers to Title on October 20 and Title pays $16,000, agreeing to pay the balance on November 10.
Under the accrual basis, how much revenue should Canon recognize in November?
a. $0
b. $16,000
c. $24,000
d. $40,000
7.
A company’s financial statements reflect information about:
a. future projections of sales, expenses, and other future economic events
b. economic events that affect a company that can be translated into accounting numbers
c. product information and competitive positions
d. the general economy of the industry in which the company operates
8.
Contracts must be:
a. communicated verbally
b. in writing
c. drafted by an attorney
d. legally enforceable
9.
The costs of providing financial information is ultimately borne by:
a. management
b. shareholders
c. auditors
d. professional analysts
10.
Earnings management can occur through a variety of manipulations including:
a. Manipulating accrual estimates to impact expenses.
b. Misapplications of GAAP deemed immaterial on an account by account basis.
c. Big bath restructuring charges.
d. All of these answer choices are correct.
11.
Examples of variable consideration include all of the following except:
a. bonuses for completing performance on a contract early
b. penalties for not completing performance on a contract on time
c. discounts on transaction prices
d. all of the answer choices are correct
12.
Financial information that is provided to decision makers before it loses its capacity to influence their decisions is:
a. timely
d. consistent
c. neutral
d. verifiable
13.
Financial information which does not favor one of interested parties over another is:
a. faithfully represented
b. relevant
c. verifiable
d. neutral
14.
For what reasons does management have incentive to meet analysts’ expectations?
a. To build credibility with capital markets.
b. To convey future earnings prospects to investors.
c. To increase stock price.
d. All of these answer choices are correct.
15.
The goal of generally accepted accounting principles is to ensure that a company’s financial statements:
a. do not contain any representation that could jeopardize management.
b. provide stockholders all of the information they need to assess management’s performance.
c. are accurate and free from fraud.
d. clearly represent its economic condition and performance of the company.
16.
Hargren Publishing offers its Accouting textbooks and e-texts through its online homework management system. Purchases of an access code provides the students with access to the e-text and online materials for 6 months. During that time, students have access to updates to the text and learning materials. Hargren should recognize revenue for purchases of access codes:
a. over the sex-month period during which the customer has access
b. at the beginning of the semester in which the student will use the access code
c. at the end of the six month access period
d. when they occur
17.
Hickory Furniture Company paid for the following costs during the month of May:
Inventory purchases $40,000
Advertising costs $8,000
Delivery costs $2,000
Hickory sold 32,000 of the inventory and has agreed to pay warranty expenses for its customers. There are expected to be $1600 and occur evenly over the next fours months (starting in June)
What is the amount of Hickory’s accrual-basis expenses for the month of May?
a. 43,600
b. 33,600
c. 50, 000
d. 42,400
18.
Hickory Furniture Company paid for the following costs during the month of May:
Inventory purchases $40,000
Advertising costs $8,000
Delivery costs $2,000
Hickory sold 32,000 of the inventory and has agreed to pay warranty expenses for its customers. There are expected to be $1600 and occur evenly over the next fours months (starting in June)
What is the amount of Hickory’s cash-basis expenses for the month of May"
a. 51,600
b. 33,600
c. 42,400
d. 50,000
19.
If consideration is received before a contract is identified and the consideration is nonrefundable, revenue may be recognized if:
a. there is no remaining obligation to transfer goods
b. goods have been delivered
c. the contract has been terminated
d. any of these answer choices is correct
20.
If the financial reporting environment were unregulated, disclosure would occur voluntarily:
a. as long as other companies in the reporting company’s industry voluntarily disclosed financial information.
b. only to analysts that the company believes will report favorably on the company’s prospects.
c. only when managers wanted to raise additional capital.
d. as long as the incremental benefits to the company from supplying financial information exceeded the incremental costs of providing the information.
21.
Income statements are classified into sections to:
a. separate revenue recognized from deferred revenue.
b. distinguish between sustainable and transitory income.
c. separate real income from book income.
d. distinguish between book income and taxable income.
22.
Investors and analysts must have certain capabilities regarding financial reporting which include:
a. an understanding of current financial reporting standards.
b. recognition that management selects the financial reporting standards used.
c. an ability to recognize that financial statement information reported is grounded in judgment as well as facts.
d. all of these answer choices are correct.
23.
The key accounting issue related to bundled products such as software licenses and technical support:
a. is the method of revenue recognition
b. concerns the amount of transaction price to allocate to each contract element
c. is the amount of revenue to recognize over the life of the contract
d. depends on whether the customer is able to pay for the contracted services
24.
A patient of Dr. Jones presents his Medicare card after his appointment. The total charge for the services was $100; however, Medicare will pay only $60 for this service and the patient is pay $20. Acceptance of the patient’s Medicare insurance creates a contract:
a. for payment of $100, regardless of what Medicare will pay
b. for $20 and an $80 discount discount or price concession
c. for payment of $80 and a $20 discount or price concession
d. for payment of $60 and a price concession of $40
25.
The rationale behind the rules for multiple-step income statements is to subdivide the income in a manner that facilitates:
a. cash flows
b. forecasting
c. tax return preparation
d. audits
26.
Relevant financial information:
a. is free from bias and error.
b. is measured in a similar manner among different companies
c. can be independently verified.
d. is capable of making a difference in a decision.
27.
A right to return exists when:
a. the customer is entitled to another product in exchange
b. the customer is entitled to a credit against amounts owed
c. the customer is entitled to a full or partial return
d. any one of these conditions is met
28.
To achieve faithful representation, the financial information must be:
a. consistent, unbiased, and relevant.
b. relevant, comparable, and timely.
c. relevant, consistent, and timely.
d. complete, neutral, and free from material error.
29.
Under ASC Topic 606 for revenue recognition, a performance obligation is considered satisfied when control over the goods and services is transferred to the customer. Which of the following is not an indicator that control has been transferred ?
a. the customer has accepted the goods and has physical possession
b. the customer is legally obligated to pay for the goods and services
c. the customer has legal title of the goods
d. all of these are indicators that control has transferred
30.
When financial statements are used by shareholders and investors to evaluate the performance of a company’s top executives it is referred to as the _____________ function of financial reports.
a. proxy
b. fundamental
c. technical
d. stewardship
31.
Which of the following are correct with respect to information contained in financial statements?
a. Information asymmetry occurs when management has access to more and better information than do people outside the company.
b. Financial statements cannot solve the issue of information asymmetry.
c. Financial statements help solve the issue of information asymmetry.
d. Financial statements help solve the issue of information asymmetry which is when management has access to more and better information than do people outside the company.
32.
Which of the following are primary qualitative characteristics of accounting information?
a. Relevance and Timeliness
b. Relevance and Faithful Representation
c. Comparability and Timeliness
d. Verifiability and Understandability
33.
Which of the following create a competitive disadvantage according to the full disclosure principle?
a. Details about the company’s strategies, plans and tactics
b. Information about the company’s technological and managerial innovations
c. Detailed information about the company’s operations
d. All of these answer choices are correct
34.
Which of the following is a true statement?
a. Revenue decreases owners’ equity and increases liabilities
b. revenue decreases owner’s equity and expenses increase owners’ equity
c. expenses increase owner’s equity and decrease liabilities
d. revenue increases owners’ equity and expenses decrease owners’ equity
35.
Which of the following parties are responsible for the detection of errors and accounting irregularities in a company’s financial statements?
a. external auditors
b. the SEC staff during their review process.
c. internal audit staff and audit committee of the board of directors.
d. all of these answer choices are correct.
36.
Which of the following statements best describes expenses?
a. They are recorded in the accounting period when they are "earned" and become "measurable."
b. They consist of amounts paid for consumable items and services rendered to the organization during the accounting period.
c. They are the expired costs or assets "used up" during the accounting period.
d. They consist of cash payments to employees during the period for services rendered.
37.
Which of the following statements is correct with respect to economic incentives to release financial information?
a. Because companies have an economic incentive to supply information investors want, regulatory groups have little influence over the amount and type of financial information that companies disclose.
b. Because financial disclosures are regulated, owners and managers have little economic incentive to supply the amount and type of financial information that will enable them to raise capital most cheaply.
c. Companies have an economic incentive to supply the information investors want in order to raise capital at the lowest possible cost.
d. Owners and managers do not have an economic incentive to supply the amount and type of financial information because it has no effect on the company’s ability to raise capital at the lowest cost.
38.
Which of the following statements is correct with respect to economic incentives to release financial information?
a. because companies have an economic incentive to supply information investors want, regulatory groups have little influence over the amount and type of financial information that companies disclose
b. owners and managers fo not have economic incentive to supply the amount and type of financial information because it has no effect on the company’s ability to raise capital at the lowest cost
c. companies have an economic incentive to supply the information investors want in order to raise capital at the lowest possible cost
d. because financial disclosures are regulated, owners and managers have little economic incentive to supply the amount and type of financial information that will enable them to raise capital most cheaply
39.
Which of the following statements is NOT correct regarding a company’s financial statements?
a. They may present a picture of the company as a moment in time
b. They may describe changes that took place over a period of time
c. They reflect economic events that affect the company
d. They are comparable to the statements of other companies as all publicly held companies follow the very precise science of accounting
40.
Which of the following statements is not true regarding the treatment of warranties under the new revenue recognition guidance in ASC Topic 606?
a. Warranties that provide services beyond assuring the product is defect-free at the time of sale are separate performance obligations
b. the length of the warranty period should be considered
c. a warranty that covers services that are normally considered routine maintenance is an assurance warranty
d. a warranty that assures the product is free of defects is not a distinct performance obligation
41.
Which one of the following types of disclosure costs is the cost of disclosing the company’s pricing strategies?
a. Political cost
b. Litigation cost
c. Competitive disadvantage cost
d. Information collection, processing, and dissemination costs
42.
Which statement below is not correct with respect to earnings management?
a. It is increasingly common because of the pressure to meet analysts’ expectations.
b. More firms just beat rather than just miss the analyst expectations.
c. More than 80% of CEOs surveyed indicated that reporting a profit is an important benchmark.
d. More than 70% of CEOs surveyed indicated that beating consensus EPS is an important benchmark.
43.
Working capital accounts include:
a. all assets
b. all assets and liabilities
c. current assets and all liabilities
d. current assets and current liabilities
1.
The allowance for uncollectibles account is:
2.
The allowance for uncollectibles account is classified as:
3.
Amortizable intangible assets include all of the following except:
4.
The amortization amount of a discount bond is calculated as follows
5.
Amortization of discount on bonds payable (bond discount) results in which of the following?
6.
The benefit of sale of receivable is
7.
The biggest reason causes 2008-2009 economic crisis ...
8.
Check my work Check My Work button is now disabledItem 4 Item 4 10 points
Hooker Company issues $200,000 of ten-year, 8% bonds to yield 10% on January 1, 2018. The bonds pay interest annually on December 31. The bonds were sold at a discount of $24,578.
The bond interest expense for 2018 is
9.
Deuce Company purchased a truck for $50,000 on January 2, 2018. The asset has an expected salvage value of $5,000 at the end of its five-year useful life.
How much is the depreciation expense in 2019 if double-declining balance depreciation is used?
10.
Deuce Company purchased a truck for $50,000 on January 2, 2018. The asset has an expected salvage value of $5,000 at the end of its five-year useful life.
How much is the depreciation expense in 2019 if sum-of-years digits depreciation is used?
11.
Devine Company sold a machine for $6,000 that originally cost $34,000 and had accumulated depreciation of $27,000. Devine had a/an:
12.
Dot Company issued $200,000 of bonds on January 1, 2018 with interest payable each year. The bonds had a stated rate of 8%. The bonds were set up as floating-rate debt with the rated pegged to LIBOR plus 3%.
Which of the following will be the interest expense for year 1 if LIBOR is 7%?
13.
FASB issued...
14.
The formula to convert the cost of goods sold LIFO to an estimate of the cost of goods sold FIFO is:
15.
(graph) In a periodic inventory system, the ending LIFO inventory is:
16.
(graph) In a periodic inventory system, the FIFO cost of goods sold is
17.
If Edsel uses the sales revenue approach for estimating the bad debt provision, the allowance for uncollectibles account, after the proper adjustments to the accounts are recorded, should show a balance of:
18.
IFRS accounting for inventory (IAS 2) does not permit which of the following cost flow assumptions?
19.
The LIFO conformity rule states that:
20.
The LIFO reserve disclosure is required because LIFO inventory costs are:
21.
Losses must be accrued if they are:
22.
The major issue in inventory accounting is:
23.
A major problem facing financial analysts who compare long-lived assets on balance sheets of various companies is that different companies often use different:
24.
The method of measuring long-lived assets at their estimated value in an input market is the:
25.
The Ness Company sells $5,000,000 of five-year, 10% bonds at the start of the year. The bonds have an effective yield of 9%. Present value factors are below:
The bond interest expense for Year 1 is:
26.
Non-interest bearing notes are initially recorded at:
27.
On January 2, 2018, Jensen Corporation sells equipment it manufactured to Lewisburg Fabricators in exchange for an $80,000 note due in five years. The note bears no stated interest rate, but requires the entire $80,000 to be repaid at the end of five years. Jensen recently sold the same equipment to another company for $54,447. When Lewisburg Fabricators sought bank financing for this purchase the company was offered the funds at 8%, but decided to let Jensen hold the note.
28.
Periodic inventory system has which of the following drawbacks?
29.
Reported income for FIFO firms _________ includes some realized holding gains during periods of rising inventory costs. Which of the following terms (when inserted in the blank) makes the previous sentence a true statement?
30.
The restructure loan can differ from original loan in several ways, except
31.
The sale of receivables to a third party is called:
32.
The Simon Company acquired equipment three years ago at a cost of $125,000. Two years later the equipment sustained impairment in value. At the time of the impairment, the fair value of the equipment was $25,000 and the carrying value was $50,000. The entry to record the impairment would be:
33.
Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 5%. These bonds will sell in the market at:
34.
To adjust the receivables carrying fair value, the difference between the fair value and the face value of the receivables is going to be
35.
U.S. GAAP capitalizes expenditures to upgrade long-lived assets when the expenditure causes any of the following conditions except:
36.
US GAAP uses which approach
37.
What is the biggest drawback of FIFO
38.
What one of the following is not the guidance to differentiate sale of receivables and collateralized borrowing?
39.
The Wheat Company has used the LIFO method for inventory valuation since the start of business 15 years ago. The current year ending inventory is $375,000. If the FIFO method of inventory had been used, the inventory would be $450,000. If Wheat Company had used the FIFO inventory method, pre-tax income would have been:
40.
When a bond is sold at a discount the effective interest rate is:
41.
When a note receivable has a stated interest rate that is lower than the prevailing rate for similar loans, it is recorded at:
42.
When a specific account receivable is written off, the entry:
43.
when firm writes off the bad debt, is there any effect on the income?
44.
When receivables are bundled and transferred to another organization that issues securities collateralized by the transferred receivables, the arrangement is defined as:
45.
When the bond is at premium, the relationship between premium amortization expense and the carrying value of the bond bond in:
46.
When the bond is issued at premium, it is because
47.
When the income effect of a LIFO liquidation is material, the SEC requires that the 10-K report disclose:
48.
When two parties agree to the sale of some asset or commodity on some specified future date at a price specified today it is a/an:
49.
When you and book store manager agree...
50.
When you buy a piece of land ...
51.
Where does GAAP require firms to disclose their inventory cost flow assumptions?
52.
Which following contract can clim
53.
Which following is recorded in other comprehensive income, except?
54.
Which of the following asset have indefinite lived life ?
55.
Which of the following criterias are NOT allowed to capitalize expenditures occur on fixed assets?
56.
Which of the following depreciation methods does not change
57.
Which of the following does not accurately describe floating rate debt?
58.
Which of the following is a correct statement about preparing a balance sheet?
59.
Which of the following is correct way to record R&D expense
60.
Which of the following is eligible risk that can be hedges, except?
62.
Which of the following is NOT considered as fixed production costs needed to be included in costs of goods sold if firm use absorption costing approach
63.
which of the following is NOT correct regarding the indefinite live intangible assets accounting recordings?
64.
Which of the following is not perpetual inventory system
65.
Which of the following is not the reason that firm avoids using LIFO method
66.
Which of the following is used to measure the amount of the write-down that must be recognized on an impaired asset such as depreciable equipment?
67.
Which of the following methods to manage accounting earnings, except?
68.
Which of the following statements is false regarding accounts receivable reporting?
69.
Which one is not the reason receivables grow faster than sales
70.
Which one of the following inventory recording methods has the highest tax benefits
71.
Which one of the following is an example of the expected benefit approach for valuing long-lived assets?
72.
The whole point of using inventory recording methods is because we need to allocate costs between
73.
Why managers like to use hedge accounting?
A probable future sacrifice of an economic benefit arising from a present obligation to transfer assets or provide services to other entities in the future as a result of a past transaction is a/an
Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 8%. These bonds will sell in the market at
Floating-rate debt is the most common method for lenders to protect themselves from losses that may arise as a result of
A bond with a $200,000 maturity value is immediately retired for $212,000 plus accrued interest. The premium on bonds payable (bond premium) at the retirement date is $15,500
When two parties agree to the sale of some asset or commodity on some specified future date at a price specified today it is a(n)
A hedge of the exposure to changes in the fair value of an existing asset or liability or a firm commitment is a(n)
A contingent liability that is probable and can be reasonably estimated will immediately result in
Which of the following statements is correct with respect to the use of fair value accounting for liabilities under IFRS?
The allocation of income tax expense across periods when book and tax income differ is called
Temporary differences that will cause future taxable income to be greater than future book income give rise to
Which one of the following is a permanent difference between book and taxable income?
At December 31, 2018, the Heather Corporation reported a $20,000 deferred tax liability pertaining to a $50,000 temporary difference that will reverse equally during the next four years. On December 31, 2018, after determining the deferred tax liability, Heather's management was informed that the income tax rate for years subsequent to 2018 had been changed to 44% ( was 40%). As a result of the tax rate change, Heather's 2018 income tax expense will
If it is more likely than not that future benefits from a deferred tax asset will not be realized in its entirety, a/an
A corporation that incurs a net operating loss may carry the loss back two years and forward
Which of the following statements does not correctly describe required income tax disclosures in the notes to the financial statements?
Cash dividends paid by a corporation
Sendee Company's retained earnings on December 31, 2018 was $2,150,000 and its shareholders' equity was $9,275,000. During 2019 the company reported the following:
• Net income $250,000
• A sale of treasury stock costing $65,000 for $69,750
• A treasury stock purchase costing $137,500
• A cash dividend declaration of $75,000
• A "small" common stock (5,000 shares of $1 par value) dividend was declared and distributed when the market value was $8.75 per share.
Interest will be _________________ at a discount
Interest will be ____________ at a premium
How do we find effective interest expense
At a discount the carrying amount should
What are the two types of difference from taxable income to pre-tax GAAP income?
Deferred tax assets can only be carried forward for
Investments in debt securities that the investor intends to hold for a short time that are purchased in an attempt to profit from near-term price changes are classified as
Peter Investments bought 10% (2,000 shares) of Parker, Inc. common stock on January 1, 2017, for $20,000 and 10 % (2,000 shares) of Spider, Inc. common stock on July 1, 2017 for $24,000. At the end of 2017, the fair value of the Parker stock was $18,000 and the fair value of the Spider stock was $28,000. The stocks were purchased for short-term speculation prior to the effective date of the change in accounting rules for equity investments. Peter should record the following year-end adjustment
Of the following items, which would not be a circumstance that may trigger goodwill impairment?
A1 Industries owns an available-for-sale investment that experienced a decline during 2019 that has been judged to be "other than temporary." It was purchased in March 2018 at a cost of $350,000. At the end of 2018, the fair value of the investment was $410,000. At the end of 2019, the fair value of the investment is $300,000. What amount of loss will A1 Industries report on its income statement for the year ending December 31, 2019 related to this investment?
When the investor has the ability to exert influence over an investee, generally when ownership percentage of stock exceeds 20 percent but is less than 50 percent, the investor should account for the investment by
If the parent company owns more than 50% of the subsidiary's voting stock, and effectively has control of the subsidiary, the SEC requires
Which of the following is not a legitimate use of a variable interest entity (VIE)?
A bond with a carrying value of $750,000 was converted into 100,000 shares of $5 per share par value common stock at a time when the market value per share was $9.00 per share. Which of the following statements does not accurately describe the financial accounting for the conversion?
1.
A call option contract requires the holder to buy a specific underlying asset at a set price during a specific time period.
2.
A derivative instrument that gives the holder the right but not the obligation to do something is a/an
a. future contract.
b. swap contract.
c. performance contract.
d. options contract.
3.
All of the statements below are true of futures contracts except that futures contracts
a. result in predictable cash flows.
b. eliminate downside risk and upside potential.
c. eliminate downside risk while allowing for upside potential.
result in predictable gross profits
4.
Amortization of discount on bonds payable (bond discount) results in which of the following?
a. A decrease in bond interest expense.
b. An increase in net income.
c. An increase in the carrying value of the bond.
d. An increase in stockholders' equity due to the decrease in bond interest expense.
5.
Assuming 100% hedge effectiveness, if the fair value of a hedged item increases by $1, the derivative fair value will
a. increase by $1.
b. decrease by $1
c. increase by $2
d. decrease by $2
6.
Bonds are required by GAAP to be reported on the balance sheet at market value.
true or false
7.
A bond with a $750,000 maturity value is immediately retired for $745,000 plus accrued interest. The discount on bonds payable (bond discount) at the retirement date is $25,500. Which of the following statements is correct?
a. The gain on the debt extinguishment is $5,000.
b. The loss on the debt extinguishment is $20,500.
c. The gain on the debt extinguishment is $30,500.
d. The gain or loss on the debt extinguishment can't be determined without knowing the dollar amount of the accrued interest.
8.
Changes in the fair value of all derivatives other than hedges must be recognized in income when they occur.
true or false
9.
A contingent liability that is probable and can be reasonably estimated will immediately result in
a. an increase in both liabilities and stockholders' equity.
b. an increase in liabilities and a decrease in net income.
c. an increase in liabilities without any need for financial statement disclosure.
d. an increase in liabilities and a decrease in assets.
10.
A current monetary liability is shown on the financial statements at the undiscounted amount due.
true or false
11.
A debt-for-debt swap of debts with equal maturity values that occurs when the market rate of interest is higher than the stated rate of the old debt will give rise to a gain on debt extinguishments.
true or false
12.
Floating-rate debt is the most common method for lenders to protect themselves from losses that may arise as a result of
a. increases in the market interest rate.
b. decreases in the market interest rate.
c. increases in the stated interest rate on bonds.
d. decreases in the stated rate on bonds.
13.
GAAP guidelines eliminate reporting income statement gains associated with many debt-for-debt and debt-for-equity swaps and instead require disclosure of the effects of the swaps.
true or false
14.
The gain or loss on the early retirement of a bond is the difference between the amount paid to retire the bond and the bond's carrying value at the date of retirement.
true or false
15.
Generally accepted accounting principles require that when bonds are sold at a discount, the discount must be allocated to interest expense using the
a. cash interest method.
b. effective interest method.
c. bond yield method.
d. cumulative interest method.
16.
A hedged item can be any of the following except:
a. an anticipated (forecasted) transaction.
b. an existing asset or liability on the company's books.
c. a past transaction.
d. a firm commitment.
17.
A hedge of the exposure to changes in the fair value of an existing asset or liability or a firm commitment is a/an
a. fair value hedge.
b. cash flow hedge.
c. foreign currency exposure hedge.
d. marked-to-market hedge.
18.
IFRS allows the fair value accounting option for liabilities only to eliminate or significantly reduce the "mismatch" that arises when different measurement bases are used for related financial instruments.
true or false q
19.
In order to use hedge accounting, management must do all of the following except
a. designate the derivative as a hedging instrument.
b. describe the hedging strategy.
c. get external auditor approval to use hedge accounting.
d. document its effectiveness in eliminating a specific market risk for a specific hedged item.
20.
Investors need to review transactions involving debt-for-debt swaps carefully to ensure that there is an underlying
a. loss.
b. gain.
c. rationale.
d. economic benefit.
21.
A lender can effectively convert a fixed-rate debt into a floating-rate debt by using an interest rate swap.
true or false
22.
A liability that is satisfied through the payment of cash is referred to as a denominational liability.
true or false
23.
Losses must be accrued if they are
a. remote and estimable.
b. reasonably possible and estimable.
c. probable and reasonably estimable.
probable and not estimable
24.
Losses must be disclosed if they are
a. remote and estimable.
b. reasonably possible and estimable.
c. probable and reasonably estimable.
d. reasonably possible but not estimable.
25.
The market value of floating-rate debt of $200,000 will
a. rise by $2,000 with a 1% rise in interest rates.
b. fall by $2,000 with a 1% fall in interest rates.
c. remain unchanged with a change in interest rates.
d. will rise in the short run and fall in the long run with a change in interest rates.
26.
Noncurrent monetary liabilities are initially recorded at their
a. future value.
b. historical value.
c. present value when incurred.
d. undiscounted amount due.
27.
On December 1, 2018 a company bought a call option costing $100,000 as a speculative investment. The call option gave the company the right to purchase 100,000 barrels of oil for $110 per barrel during April 2019. As of December 31, 2018 the call option had a value of $125,000. The company liquidated the call option on April 15, 2019 in exchange for $175,000. Which of the following accurately describes GAAP accounting for this call option?
a. The realized gain applicable to the year ending December 31, 2018 is $25,000.
b. The realized gain recognized on April 15, 2019 is $75,000.
c. The unrealized gain recognized on April 15, 2019 is $50,000.
d. The call option will be reported on the December 31, 2018 balance sheet at $125,000 and a $25,000 unrealized gain will be reported as a component of income from continuing operations for the year ending December 31, 2018.
28.
On February 1, 2018, Hills Company had 10,000 pounds of inventory costing $1.50 per pound; the market value per pound was $1.95 on this date. Hills entered into a futures contract to sell the 10,000 pounds of inventory during May 2018 at $2.25 per pound. Which of the following statements does not accurately describe the impact of this futures contract?
a. Hills has foregone the benefit of additional profits (the upside potential) if the price per pound exceeds $2.25 during the month of May.
b. Hills has eliminated the risk of reduced profits (the downside potential) if the price per pound is less than $2.25 during the month of May.
c. Hills' gross profit in May will be $3,000 regardless of the actual price per pound in May.
d. The value of the futures contract decreases as the market price per pound of inventory increases.
29.
On January 1, 2018, Ross Corporation issued bonds with a maturity value of $200,000; the bond's stated rate of interest equaled the market interest rate on the issue date. On December 31, 2018, the market value of the bonds was $188,926; on December 31, 2019, the market value of the bonds was $191,325. Which of the following correctly describes Ross Corporation's financial reporting if Ross elects to measure the bond liability using the fair value accounting option?
a. For the year ending December 31, 2018, Ross will report an unrealized holding loss of $11,074 in its income statement.
b. For the year ending December 31, 2019, Ross will report an unrealized holding gain of $8,675 in its income statement.
c. For the year ending December 31, 2019, Ross will report an unrealized holding loss of $8,675 in its income statement.
d. For the year ending December 31, 2019, Ross will report an unrealized holding loss of $2,399 in its income statement.
30.
On January 1, 2018 when the effective interest rate was 14%, a company issued bonds with a maturity value of $1,000,000. The stated rate of interest is 12%, the bonds pay interest semi-annually and sold for $893,640. The amount of bond discount amortized on July 1, 2018 is approximately
a. $1,000
b. $2,555
c. $2,000
d. $5,110
31.
A probable future sacrifice of an economic benefit arising from a present obligation to transfer assets or provide services to other entities in the future as a result of a past transaction is a/an
a. asset.
b. liability.
c. equity.
d. expense.
32.
A product warranty provided with the sale of an item of merchandise gives rise to a nonmonetary liability
true or false
33.
The retirement of a bond that has a $250,000 maturity value and a $10,000 balance in premium on bonds payable (bond premium) creates a $15,000 gain if the bond is retired at a cost of $245,000.
true or false
34.
A rise in the market rate of interest will cause the value of a financial instrument such as a bond to rise.
true or false
35.
Some financial analysts contend that reporting debt at amortized historical cost rather than at fair value
a. makes it more difficult to manipulate accounting numbers.
b. makes it easier to manipulate accounting numbers.
c. has no impact on the accounting numbers.
d. makes it impossible to manipulate the accounting numbers.
36.
Special financial statement disclosures are required so that investors and analysts
can understand all of the following except:
a. management's rationale for electing the fair value accounting option.
b. the impact of changes in fair values on earnings for the period.
c. management's rationale for not electing the fair value accounting option.
d. the difference between fair values and contractual cash flows for certain items.
37.
Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 5%. These bonds will sell in the market at
a. par.
b. a discount.
c. a premium.
d. stated value.
38.
Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 8%. These bonds will sell in the market at
a. par.
b. a discount.
c. a premium.
d. stated value.
39.
A variation of a forward contract that is traded daily in a market with many buyers and sellers and does not have a predetermined settlement date is a/an
a. futures contract.
b. swap contract.
c. performance contract.
D. options contract.
40.
When a bond is sold at a discount the effective interest rate is
a. equal to the stated rate.
b. above the stated rate.
c. below the stated rate.
d. equal to the stated rate for a period of time and then above the stated rate for a period of time.
41.
When a bond is sold at a premium the
a. effective interest rate is less than the stated rate.
b. effective interest rate is greater than the stated rate.
c. effective interest rate relative to the stated rate is not known.
d. interest expense during the life of the bond exceeds the amount of cash interest payments during the life of the bond.
42.
When a company retires debt, which of the following is not an accurate statement?
a. If the debt is retired at maturity, there is no opportunity for a gain or loss.
b. If the debt was recorded using the fair value accounting option, there is no opportunity for a gain or loss.
c. If a company retires debt early by issuing new debt at a lower market rate of interest, a gain on the extinguishment of debt will be recorded if the company did not elect to use the fair value accounting option.
d. If a company finances the early retirement of debt by issuing new debt, GAAP prohibits recording a gain on the early retirement.
43.
When a company retires debt, which of the following is not an accurate statement?
a. If the debt is retired at maturity, there is no opportunity for a gain or loss.
b. If the debt was recorded using the fair value accounting option, there is no opportunity for a gain or loss.
c. If a company retires debt early by issuing new debt at a lower market rate of interest, a gain on the extinguishment of debt will be recorded if the company did not elect to use the fair value accounting option.
d. If a company finances the early retirement of debt by issuing new debt, GAAP prohibits recording a gain on the early retirement.
44.
When computing the issue price of a bond that has a stated rate of 8% payable semiannually and a market rate of 10%, the discount rate used would be
a. 8%.
b. 10%.
c. 4%.
d. 5%.
45.
When hedging commodity price risk with a futures contract, the value of the contract increases as the selling price of the commodity increases.
true or false
46.
When interest rates have increased and bonds are retired before maturity, market value is
a. below book value generating an accounting gain.
b. below book value generating an accounting loss.
c. above book value generating an accounting gain.
d. above book value generating an accounting loss.
47.
When market rates of interest decrease, the use of floating-rate debt benefits
a. investors.
b. issuing companies.
c. all parties.
d. no one.
48.
When market rates of interest increase, the use of floating-rate debt benefits the issuing company.
true or false
49.
When the effective yield of a bond is the same as the stated rate on the bond, the bond is sold at
a. a discount.
b. a premium.
c. par.
d. a price above par.
50.
When the market rate of interest is below the stated rate of interest, a bond sells at
a. par.
b. a premium.
c. a discount.
d. stated value.
51.
When two parties agree to the sale of some asset or commodity on some specified future date at a price specified today it is a/an
a. forward contract.
b. swap contract.
c. performance contract.
d. options contract.
52.
Which of the following is a correct statement about preparing a balance sheet?
a. All current liabilities must be due within the current calendar year.
b. Bonds payable are reported in long-term liabilities with the current year portion shown separately in that section of the balance sheet.
c. Some financial instruments possess the characteristics of both debt and equity.
d. A financial instrument's legal form will define how it is classified on the balance sheet.
53.
Which of the following is not an accurate description of the controversies surrounding the fair value accounting option?
a. Advocates argue that accounting-induced volatility is eliminated and financial statement transparency is improved.
b. Critics argue that opportunities are enhanced for companies to manipulate their earnings and balance sheet.
c. Critics argue that companies that can use the fair value option in situations where there is not necessarily a relationship between the financial assets and liabilities which promotes the opportunity to manage earnings.
d. Advocates argue that financial reporting is more accurate and transparent for those companies in financial distress.
54.
Which of the following is not an accurate statement regarding the retirement of debt?
a. When debt is retired on the maturity date, the book value is always equal to the market value.
b. The gain or loss on the extinguishment of debt is categorized on the income statement as part of continuing operations.
c. When debt is retired before the maturity date, a loss occurs if the market rate of interest increased subsequent to the issue of the bond.
d. When debt is retired before the maturity date, a gain occurs if the market rate of interest increased subsequent to the issue of the bond.
55.
Which of the following is not a true statement regarding the fair value accounting option?
a. The fair value option mutes earnings volatility.
b. The fair value option reduces the need to comply with complex hedge accounting guidance.
c. The fair value option increases earning volatility.
d. The fair value option converges U.S. GAAP and IFRS by having an identical standard.
56.
Which of the following is not a valid statement regarding floating-rate debt?
a. The accounting entries are more complex due to the risk-sharing characteristics of floating rate debt.
b. Floating-rate debt may benefit the issuing company if market rates fall.
c. Floating-rate debt can protect the investor if market rates increase.
d. Floating-rate debt is used to lower the company's overall borrowing cost.
57.
Which of the following regarding the recognition of contingencies is a correct statement?
a. IFRS uses the term contingent liability to include possible but unrecognized contingent obligations.
b. U.S. GAAP discloses contingent liabilities in the notes to the financial statements only for recognized contingent loss obligations.
c. The threshold for recognition of a contingent obligation is the same under both GAAP and IFRS.
d. If the estimated liability is a range in which no value is deemed more reliable than another - both IFRS and GAAP will record the mid-point of the range as the value.
58.
Which of the following regarding the recognition of contingencies is not correct?
a. IFRS guidance is built around a balance sheet perspective.
b. Both IFRS and U.S. GAAP require recognition of a contingent liability when it is both probable and can be reasonably estimated.
c. U.S. GAAP relies on an income statement perspective.
d. Only U.S. GAAP requires recognition of a contingent liability, called a provision under IFRS—and the associated contingent loss—when it is both probable and can be reasonably estimated.
59.
Which of the following risks may not be accounted for using hedge accounting?
a. foreign currency exchange rates.
b. labor strikes.
c. commodity prices.
d. changes in benchmark interest rates.
60.
Which of the following statements does not accurately describe the accounting for derivatives?
a. The holding gain resulting from a fair value hedge that qualifies for hedge accounting is recognized in net income along with the offsetting loss on the hedged item.
b. The holding loss resulting from a cash flow hedge that qualifies for hedge accounting is recognized in net income during the year of the loss.
c. Management must be able to describe its hedging strategy in order to meet the GAAP criteria to qualify for hedge accounting.
d. Derivatives that fail to meet the GAAP criteria for hedge accounting are accounted for as speculative investments.
61.
Which of the following statements does not properly describe GAAP accounting for derivatives?
a. Derivatives are reported in the balance sheet at fair value.
b. Speculative investments in derivative contracts can increase earnings volatility.
c. Changes in the fair value of a derivative must be included in net income when they occur.
d. A derivative's unrealized holding gain or loss for a particular year is not a component of that year's income from operations.
62.
Which of the following statements is correct?
a. Amortization of discount on bonds payable (bond discount) results in an increase in a bond's carrying value.
b. Amortization of discount on bonds payable (bond discount) results in a decrease in bond interest expense.
c. Amortization of premium on bonds payable (bond premium) results in an increase in a bond's carrying value.
d. Amortization of premium on bonds payable (bond premium) results in an increase in bond interest expense.
63.
Which of the following statements is correct with respect to the use of fair value accounting for liabilities under IFRS?
a. Both IFRS and U.S. GAAP require changes in credit quality to be recorded in operating income.
b. The fair value option is permitted under IFRS only under two specific sets of circumstances.
c. U.S. GAAP is more restrictive than IFRS regarding the use of fair value accounting for liabilities.
Fair value accounting under IFRS is only permitted if the liabilities are actively managed on a fair value basis as part of the company's documented risk management or investment strategy
64.
Which of the following statements is not accurate with respect to the reporting requirements regarding the fair value accounting option?
a. Firms may elect the fair value option for a single eligible instrument without electing it for other identical instruments.
b. Once the choice is made to adopt the fair value option, the decision is irrevocable.
c. Financial statement disclosures must include management's rationale for electing the fair value option.
d. The fair value option is not available for security investments that are accounted for using the equity method.
65.
Which of the following statements is not correct regarding amortization when using the effective interest method (basis)?
a. Amortization of discount on bonds payable (bond discount) increases in later years relative to earlier years of a bond's life.
b. Amortization of premium on bonds payable (bond premium) increases in later years relative to earlier years of a bond's life.
c. Amortization of both premium on bonds payable (bond premium) and discount on bonds payable (bond discount) decreases in later years relative to earlier years of a bonds life.
d. Amortization of discount on bonds payable (bond discount) results in an increase in interest expense and in an increase in the bond's carrying value.
66.
Which of the following statements is not correct with respect to accounting for Guarantees?
a. When one company guarantees the debt of another company, that contingency must be disclosed even if the contingency is only remotely possible.
b. The Guarantee liability account represents deferred revenue associated with the stand ready fee.
c. Both the "stand ready obligation" and the contingent future obligation are recorded at fair value.
d. The Guarantee liability account decreases over the life of the loan as revenue is earned.
67.
Which of the following statements with respect to floating-rate debt is incorrect?
a. If the market rate of interest increases, the market value of the floating-rate debt will remain the same.
b. If the market rate of interest decreases, the cash interest payment required by the issuing company would decrease.
c. If the market rate of interest increases, the investors benefit while the issuing corporation does not benefit.
d. If the market rate of interest decreases, both the issuing company and the investors benefit.
68.
. Which of the following would only be found in current liabilities on the balance sheet?
a. Derivative contracts.
b. Accrued compensation for services already rendered by employees.
c. Income tax liabilities.
d. Deferred revenue.
69.
Which of the statements is not true when applying both IFRS and U.S. GAAP accounting for long-term debt?
a. Periodic interest expense is computed using the contractual interest rate.
b. Fixed-rate bonds are recorded at the amount of the net proceeds.
c. The balance sheet carrying value is amortized cost determined using the effective interest rate at the issue date.
d. Changes in interest rates after the issue date do not alter the carrying value unless fair value accounting is used.
70.
Which one of the following contingencies must be accrued on the balance sheet?
a. The likely loss on a lawsuit that the firm's attorneys believe will be dropped.
b. The probable loss on a lawsuit that the firm's attorneys believe will be settled for $50,000.
c. The reasonably possible loss on a lawsuit that the firm's attorneys believe will be dropped.
d. The reasonably possible loss on a lawsuit that the firm's attorneys believe will be settled for $50,000.
71.
Which one of the following contingencies requires financial statement disclosure?
a. A lawsuit that the firm's attorneys believe will be dropped.
b. A lawsuit that the firm's attorneys believe will probably be settled for $75,000.
c. A reasonably possible loss on a lawsuit that the firm's attorneys cannot estimate the loss.
d. A reasonably possible loss on a lawsuit that the firm's attorneys believe will be settled for $100,000.
1.
The accounting principle violated if temporary differences are not taken into account is the:
2.
The allocation of income tax expense across periods when book and tax income differ is called:
3.
Beginning in 2017 for calendar-year public firms, all deferred tax assets and liabilities are classified as
4.
A corporation that incurs a net operating loss may carry the loss forward for
5.
A corporation that incurs a pre-tax operating loss must:
6.
During its first year of operations a company recorded accrued expenses totaling $250,000 for book purposes. For tax purposes, $100,000 of the expenses are deductible during the first year of operations and $150,000 are deductible during the second year of operations. The income tax rate for both years is 21%. The balance sheet at the end of the first year of operations will report a deferred tax:
7.
Financial accounting and reporting for deferred taxes:
8.
The GAAP solution for avoiding distortions that would result from setting income tax expense equal to taxes owed is called
9.
GAAP specifies that when the tax rates change, the:
10.
If it is more likely than not that future benefits from a deferred tax asset will not be realized in its entirety, a(n):
11.
Smith Company reported $350,000 in book income before income tax during 20X1, its first year of operation. The tax depreciation exceeded its book depreciation by $30,000. The tax rate for 20X1 and all future years was 21%.
What amount of deferred tax liability should Smith report in its December 31, 20X1, balance sheet?
12.
A temporary difference created this year causes book income to be greater than taxable income; in future years, book income will be less than taxable income. The temporary difference in the future years' incomes is referred to as
13.
Temporary differences that will cause taxable income in future periods to be higher than pre-tax book income in future periods give rise to
14.
Temporary differences that will cause taxable income in future periods to be lower than pre-tax book income in future periods give rise to
15.
The two broad categories of differences that result from determining the pre-tax book income and the taxable income are:
16.
Uncertain tax positions:
17.
Under the balance sheet approach, the full change in the amount of future liability is recognized as an increase or decrease in income tax expense in the year the:
18.
Which of the following is included in the definition of a "tax position"?
19.
Which of the following is not a proper description with respect to the financial accounting and reporting of income taxes?
20.
Which of the following items does not create a temporary difference?
21.
Which of the following statements does not accurately describe disclosures of uncertain tax positions?
22.
Which of the following statements is not correct?
23.
Which of the following transactions would not create a temporary difference?
24.
Which of the following would not create a temporary difference?
25.
Which one of the following is a permanent difference between book and taxable income
