PART I Questions
1) Which of the following is NOT considered cash for financial reporting purposes?
A. Money orders, certified checks, and personal checks
B. Coin, currency, and available funds
C. Petty cash funds and change funds
D. Postdated checks and I.O.U.’s
2) What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies on a balance sheet?
As offsets to capital.
By means of footnotes only.
As assets but separately from other receivables.
As trade notes and accounts receivable if they otherwise qualify as current assets.
3) Which of the following is considered cash?
a.Certificates of deposit (CDs)
b.Money market checking accounts
c.Money market savings certificates
4) If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as
A. an item of “other expense” in the income statement.
B. a deduction from accounts receivable in determining the net realizable value of accounts receivable.
C. a deduction from sales in the income statement.
D. sales discounts forfeited in the cost of goods sold section of the income statement.
5) Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future, failure to follow this practice usually does NOT make the balance sheet misleading because
A. the amount of the discount is NOT material.
B. the allowance for uncollectible accounts includes a discount element.
C. most short-term receivables are NOT interest-bearing.
D. most receivables can be sold to a bank or factor.
6) Which of the following methods of determining annual bad debt expense best achieves the matching concept?
a. Percentage of sales
b. Percentage of ending accounts receivable
c. Percentage of average accounts receivable
d. Direct write-off
7) The accountant for the Orion Sales Company is preparing the income statement for 2007 and the balance sheet at December 31, 2007. Orion uses the periodic inventory system. The January 1, 2007 merchandise inventory balance will appear
A. only as an asset on the balance sheet
B. only in teh cost of goods sold section of the income statement
C. as a deductino int eh cost of goods sold section in the income statement as a current asset on the balance sheet.
D. as an addition in teh cost of goods sold section of the income statement and as a current asset on the balance sheet.
8) Eller Co. received merchandise on consignment. As of January 31, Eller included the goods in inventory, but did NOT record the transaction. The effect of this on its financial statements for January 31 would be
A. net income and current assets were overstated and current liabilities were understated.
B. net income, current assets, and retained earnings were overstated.
C. net income, current assets, and retained earnings were understated.
D. net income was correct and current assets were understated.
9. If the beginning inventory for 2006 is overstated, the effects of this error on cost of goods sold for 2006, net income for 2006, and assets at December 31, 2007, respectively, are
A. overstatement, understatement, no effect.
B. overstatement, understatement, overstatement.
C. understatement, overstatement, no effect.
D. understatement, overstatement, overstatement.
10) Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the LIFO method?
A. Prices increased.
B. Prices decreased.
C. Price trend cannot be determined from information given.
D. Prices remained unchanged.
11) Which method of inventory pricing best approximates specific identification of the actual flow of costs and units in most manufacturing situations?
A. First-in, first-out
B. Base stock
C. Average cost
D. Last-in, first-out
12) All of the following costs should be charged against revenue in the period in which costs are incurred EXCEPT for
A. costs which will NOT benefit any future period.
B. costs of normal shrinkage and scrap incurred for the manufacture of a product in ending inventory.
C. manufacturing overhead costs for a product manufactured and sold in the same accounting period.
D. costs from idle manufacturing capacity resulting from an unexpected plant shutdown.
13) In no case can “market” in the lower-of-cost-or-market rule be more than
A. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.
B. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal, an allowance for an approximately normal profit margin, and an adequate reserve for possible future losses.
C. estimated selling price in the ordinary course of business.
D. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal and an allowance for an approximately normal profit margin.
14) When the direct method is used to record inventory at market
A. a loss is recorded directly in the inventory account by crediting inventory and debiting loss on inventory decline.
B. the market value figure for ending inventory is substituted for cost and the loss is buried in cost of goods sold
C. only the portion of the loss attributable to inventory sold during the period is recorded in the financial statements.
D. there is a direct reduction in the selling price of the product that results in a loss being recorded on the income statement prior to the sale.
15) An item of inventory purchased this period for $15.00 has been incorrectly written down to its current replacement cost of $10.00. It sells during the following period for $30.00, its normal selling price, with disposal costs of $3.00 and normal profit of $12.00. Which of the following statements is NOT true?
A. The current year’s income is understated.
B. Income of the following year will be understated.
C. The cost of sales of the following year will be understated.
D. The closing inventory of the current year is understated.
16) The retail inventory method is based on the assumption that the
A. ratio of gross margin to sales is approximately the same each period.
B. ratio of cost to retail changes at a constant rate.
C. final inventory and the total of goods available for sale contain the same proportion of high-cost and low-cost ratio goods.
D. proportions of markups and markdowns to selling price are the same.
17) A major advantage of the retail inventory method is that it
A. hides costs from competitors and customers.
B. provides a method for inventory control and facilitates determination of the periodic inventory for certain types of companies.
C. provides reliable results in cases where the distribution of items in the inventory is different from that of items sold during the period.
D. gives a more accurate statement of inventory costs than other methods.
18) In 2006, Lucas Manufacturing signed a contract with a supplier to purchase raw materials in 2007 for $700,000. Before the December 31, 2006 balance sheet date, the market price for these materials dropped to $510,000. The journal entry to record this situation at December 31, 2006 will result in a credit that should be reported
A. as a current liability.
B. as an appropriation of retained earnings.
C. as a valuation account to Inventory on the balance sheet.
D. on the income statement.
19) The cost of land typically includes the purchase price and all of the following costs EXCEPT
A. grading, filling, draining, and clearing costs.
B. street lights, sewers, and drainage systems costs.
C. private driveways and parking lots.
D. assumption of any liens or mortgages on the property.
20) Cotton Hotel Corporation recently purchased Holiday Hotel and the land on which it is located with the plan to tear down the Holiday Hotel and build a new luxury hotel on the site. The cost of the Holiday Hotel should be
A. depreciated over the period from acquisition to the date the hotel is scheduled to be torn down.
B. written off as an extraordinary loss in the year the hotel is torn down.
C. capitalized as part of the cost of the land.
D. capitalized as part of the cost of the new hotel.
21) If a corporation purchases a lot and building and subsequently tears down the building and uses the property as a parking lot, the proper accounting treatment of the cost of the building would depend on
A. the length of time for which the building was held prior to its demolition.
B. the contemplated future use of the parking lot.
C. the significance of the cost allocated to the building in relation to the combined cost of the lot and building.
D. the intention of management for the property when the building was acquired.
22) The period of time during which interest must be capitalized ends when
A. no further interest cost is being incurred.
B. the asset is abandoned, sold, or fully depreciated.
C. the asset is substantially complete and ready for its intended use.
D. the activities that are necessary to get the asset ready for its intended use have begun.
23) Which of the following assets do NOT qualify for capitalization of interest costs incurred during construction of the assets?
A. Assets financed through the issuance of long-term debt.
B. Assets intended for sale or lease that are produced as discrete projects.
C. Assets NOT currently undergoing the activities necessary to prepare them for their intended use.
D. Assets under construction for an enterprise’s own use.
24) When computing the amount of interest cost to be capitalized, the concept of “avoidable interest” refers to
a cost of capital charge for stockholders’ equity.
B. that portion of total interest cost which would NOT have been incurred if expenditures for asset construction had NOT been made.
C. the total interest cost actually incurred.
D. that portion of average accumulated expenditures on which no interest cost was incurred.
25) The King-Kong Corporation exchanges one plant asset for a similar plant asset and gives cash in the exchange. The exchange is NOT expected to cause a material change in the future cash flows for either entity. If a gain on the disposal of the old asset is indicated, the gain will
A. effectively increase the amount to be recorded as the cost of the new asset.
B. effectively reduce the amount to be recorded as the cost of the new asset.
C. be credited directly to the owner’s capital account.
D. be reported in the Other Revenues and Gains section of the income statement.
26) When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly measured by the
A. stated value of the stock.
B. par value of the stock.
C. market value of the stock.
D. book value of the stock.
27) The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset and the exchange has commercial substance is usually recorded at
A. the fair value of the asset received if it is equally reliable as the fair value of the asset given up.
B. the fair value of the asset given up, and a gain but NOT a loss may be recognized.
C. either the fair value of the asset given up or the asset received, whichever one results in the largest gain (smallest loss) to the company.
D. the fair value of the asset given up, and a gain or loss is recognized.
28) Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues?
A. Systematic and rational allocation
B. Associating cause and effect
C. Partial recognition
D. Immediate recognition
29) If an industrial firm uses the units-of-production method for computing depreciation on its only plant asset, factory machinery, the credit to accumulated depreciation from period to period during the life of the firm will
A. be constant.
B. vary with unit sales.
C. vary with sales revenue.
D. vary with production.
30) Which of the following most accurately reflects the concept of depreciation as used in accounting?
A. The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.
B. The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred.
C. An accounting concept that allocates the portion of an asset used up during the year to the contra asset account for the purpose of properly recording the fair market value of tangible assets.
D. A method of allocating asset cost to an expense account in a manner which closely matches the physical deterioration of the tangible asset involved.
31) Prentice Company purchased a depreciable asset for $200,000. The estimated salvage value is $20,000, and the estimated useful life is 10 years. The straight-line method will be used for depreciation. What is the depreciation base of this asset?
32) Harrison Company purchased a depreciable asset for $100,000. The estimated salvage value is $10,000, and the estimated useful life is 10 years. The straight-line method will be used for depreciation. What is the depreciation base of this asset?
33) Starr Company purchased a depreciable asset for $150,000. The estimated salvage value is $10,000, and the estimated useful life is 8 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset?
34) Costs incurred internally to create intangibles are
A. expensed as incurred.
C. expensed only if they have a limited life.
D. capitalized if they have an indefinite life.
35) Factors considered in determining an intangible asset’s useful life include all of the following EXCEPT
A. any legal or contractual provisions that may limit the useful life.
B. any provisions for renewal or extension of the asset’s legal life
C. the amortization method used.
D. the expected use of the asset.
36) The cost of purchasing patent rights for a product that might otherwise have seriously competed with one of the purchaser’s patented products should be
A. charged off in the current period.
B. amortized over the remaining estimated life of the original patent covering the product whose market would have been impaired by competition from the newly patented product.
C. amortized over the legal life of the purchased patent.
D. added to factory overhead and allocated to production of the purchaser’s product.
37) Malrom Manufacturing Company acquired a patent on a manufacturing process on January 1, 2006 for $10,000,000. It was expected to have a 10 year life and no residual value. Malrom uses straight-line amortization for patents. On December 31, 2007, the expected future cash flows expected from the patent were expected to be $800,000 per year for the next eight years. The present value of these cash flows, discounted at Malrom’s market interest rate, is $4,800,000. At what amount should the patent be carried on the December 31, 2007 balance sheet?
38) Mining Company acquired a patent on an oil extraction technique on January 1, 2006 for $5,000,000. It was expected to have a 10 year life and no residual value. Mining uses straight-line amortization for patents. On December 31, 2007, the expected future cash flows expected from the patent were expected to be $600,000 per year for the next eight years. The present value of these cash flows, discounted at Mining’s market interest rate, is $2,800,000. At what amount should the patent be carried on the December 31, 2007 balance sheet?
39) General Products Company bought Special Products Division in 2006 and appropriately booked $250,000 of goodwill related to the purchase. On December 31, 2007, the fair value of Special Products Division is $2,000,000 and it is carried on General Product’s books for a total of $1,700,000, including the goodwill. An analysis of Special Products Division’s assets indicates that goodwill of $200,000 exists on December 31, 2007. What goodwill impairment should be recognized by General Products in 2007?
40) The intangible asset goodwill may be
A. capitalized only when purchased.
B. capitalized only when created internally.
C. capitalized either when purchased or created internally.
D. written off directly to retained earnings.
41) The reason goodwill is sometimes referred to as a master valuation account is because
A. it represents the purchase price of a business that is about to be sold.
B. it is the difference between the fair market value of the net tangible and identifiable intangible assets as compared with the purchase price of the acquired business.
C. it is the only account in the financial statements that is based on value, all other accounts are recorded at an amount other than their value.
D. the value of a business is computed without consideration of goodwill and then goodwill is added to arrive at a master valuation.
A. generated internally should NOT be capitalized unless it is measured by an individual independent of the enterprise involved.
B. is easily computed by assigning a value to the individual attributes that comprise its existence.
C. exists in any company that has earnings that differ from those of a competitor.
D. represents a unique asset in that its value can be identified only with the business as a whole.
43) If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information EXCEPT
A. a general description of the financing arrangement.
B. the terms of the new obligation incurred or to be incurred.
C. the number of financing institutions that refused to refinance the debt, if any.
D. the terms of any equity security issued or to be issued.
44) Stock dividends distributable should be classified on the
A. income statement as an expense.
B. balance sheet as an asset.
C. balance sheet as an item of stockholders’ equity.
D. balance sheet as a liability.
45) Which of the following items is a current liability?
A. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months.
B. Bonds due in three years.
C. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.
D. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
46) A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2007. Historically, 10% of customers mail in the rebate form. During 2007, 4,000,000 packages of light bulbs are sold, and 140,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2007 financial statements dated December 31?
A. $400,000; $400,000
B. $400,000; $260,000
C. $140,000; $260,000
D. $260,000; $260,000
47) A company offers a cash rebate of $1 on each $4 package of batteries sold during 2007. Historically, 10% of customers mail in the rebate form. During 2007, 6,000,000 packages of batteries are sold, and 210,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2007 financial statements dated December 31?
A. $600,000; $600,000
B. $600,000; $390,000
C. $210,000; $390,000
D. $390,000; $390,000
48) A company buys an oil rig for $1,000,000 on January 1, 2007. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $200,000 (present value at 10% is $77,110). 10% is an appropriate interest rate for this company. What expense should be recorded for 2007 as a result of these events?
A. Depreciation expense of $100,000 and interest expense of $20,000
B. Depreciation expense of $100,000 and interest expense of $7,711
C. Depreciation expense of $120,000
D. Depreciation expense of $107,710 and interest expense of $7,711
49) A contingency can be accrued when
A. it is certain that funds are available to settle the disputed amount.
B. an asset may have been impaired.
C. it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated.
D. the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred.
50) Mark Ward is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2007, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Ward had had a dispute with the Railroad for several years concerning the ownership of a small parcel of land. The representative of the Railroad has offered to assign any rights which the Railroad may have in the land to Ward in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Ward appears inclined to accept the Railroad’s offer. The Railroad’s 2007 financial statements should include the following related to the incident:
A. recognition of a loss and creation of a liability for the value of the land.
B. disclosure in note form only.
C. recognition of a loss only.
D. creation of a liability only.
51) Which of the following contingencies need NOT be disclosed in the financial statements or the notes thereto?
A. Probable losses NOT reasonably estimable
B. All of these must be disclosed.
C. Environmental liabilities that cannot be reasonably estimated
D. Guarantees of indebtedness of others
52) The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the
A. registered bond.
B. bond indenture.
C. bond debenture.
D. bond coupon.
53) If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be
A. greater than if the straight-line method were used.
B. less than if the straight-line method were used.
C. greater than the amount of the interest payments.
D. the same as if the straight-line method were used.
54) Bonds that pay no interest unless the issuing company is profitable are called
A. collateral trust bonds.
B. debenture bonds.
C. revenue bonds.
D. income bonds.
55) Minimum lease payments may include a
A. penalty for failure to renew.
B. any of these.
C. bargain purchase option.
D. guaranteed residual value.
56) An essential element of a lease conveyance is that the
A. lessor conveys less than his or her total interest in the property.
B. lessee provides a sinking fund equal to one year’s lease payments.
C. term of the lease is substantially equal to the economic life of the leased property.
D. property that is the subject of the lease agreement must be held for sale by the lessor prior to the drafting of the lease agreement.
57) While only certain leases are currently accounted for as a sale or purchase, there is theoretic justification for considering all leases to be sales or purchases. The principal reason that supports this idea is that
A. all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal.
B. at the end of the lease the property usually can be purchased by the lessee.
C. a lease reflects the purchase or sale of a quantifiable right to the use of property.
D. during the life of the lease the lessee can effectively treat the property as if it were
owned by the lessee.
58) In the earlier years of a lease, from the lessee’s perspective, the use of the
A. capital method will enable the lessee to report higher income, compared to the operating method.
B. operating method will cause debt to increase, compared to the capital method.
C. operating method will cause income to decrease, compared to the capital method.
D. capital method will cause debt to increase, compared to the operating method.
59) In a lease that is appropriately recorded as a direct-financing lease by the lessor, unearned income
A. should be amortized over the period of the lease using the interest method.
B. does NOT arise.
C. should be amortized over the period of the lease using the straight-line method.
D. should be recognized at the lease’s expiration.
60) In order to properly record a direct-financing lease, the lessor needs to know how to calculate the lease receivable. The lease receivable in a direct-financing lease is best defined as
A. the amount of funds the lessor has tied up in the asset which is the subject of the direct-financing lease.
B. the present value of minimum lease payments.
C. the difference between the lease payments receivable and the fair market value of the leased property.
D. the total book value of the asset less any accumulated depreciation recorded by the lessor prior to the lease agreement.