TOA CONSOLIDATED SAMPLE QUESTIONS

THEORY OF ACCOUNTS ACCOUNTING CONCEPTS 1. Which of the following statements is/are true? I. Accounting is a service activity intended to fulfill a useful function in society II. Accounting involves the art of recording, classifying and summarizing transaction and events, and interpreting the results thereof. III. Accounting is an art but not a science IV. Accounting provides quantitative financial information intended to be useful in making economic decisions a. I, II, III, IV b. I, II, III

c. I, II, IV d. II, III, IV

2. The branch of accounting concerned with the presentation of financial information primarily for use of third person outside of business enterprise. a. Financial Accounting b. Management Accounting

c. Government Accounting d. All of the above

3. Accounting is an art because a. of the existence of a body knowledge governing accounting practice b. of accounting theory c. the necessity of applying creative skill and ability d. None of the above 4. Financial accounting is the branch of accounting that focuses on a. special purpose reports of financial position and results of operations b. financial statements c. the various need of statement users d. general purpose reports of financial position and results of operations 5. General-purpose information is a. not intended to satisfy the specialized needs of individual users. b. intended to satisfy the specialized needs of individual users c. not intended to satisfy the common needs of individual users. d. Provided by managerial accounting. 6. Which of the following is not true? a. Accounting is concerned primarily with quantitative information used by persons who must make economic decisions among alternative actions. b. Governmental accounting is also known as municipal or fund accounting c. The branch of accounting concerned with the presentation of financial information to assist management in planning and controlling operations is called managerial accounting. d. Financial accounting emphasizes special purpose information based on presumption that significant numbers of users need similar information. 7. The body of rules and principles which govern accounting practices is referred to as a. Accounting practice c. Accounting concepts b. Accounting principles d. Accounting theory 8. The layers of the structure of accounting theory include the following except a. methods and procedures c. measurement and recognition b. principles d. postulates and convention 9. The basic assumption or premises on which accounting principles rest are called a. accounting postulates c. accounting principles b. accounting procedures d. accounting laws 10. The normative attitudes or ideas of the accounting profession as to what ought to represent good accounting practice and which modify the application of accounting principles are known as a. accounting postulates c. accounting procedures b. accounting conventions d. accounting principles

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11. The general guidelines used in accounting practice that are based on substantial authoritative support are called a. Accounting postulates c. accounting procedures b. accounting conventions d. accounting principles 12. The specific methods used by accountants in carrying out t5he general guidelines provided by GAAP, including the numerous rules specifying how financial data should be recorded, classified, summarized and reported are referred to as a. accounting postulates c. accounting procedures b. accounting conventions d. accounting principles 13. “The accounting entity is assumed to be separate and distinct from other entities and from the owners, managers and employees which constitute the firm”. This postulate is referred to as a. Matching c. Historical cost b. Going concern d. Specific-separate-entity 14. Unless there is specific evidence to the contrary, the firm will continue to be in existence in the foreseeable future. This postulate is referred to as a. Matching c. Historical cost b. Going concern d. Specific-separate-entity 15. “Money is the best measuring unit of a firm’s assets, liabilities and equity, as well as changes therein; its instability is immaterial”. This postulate is referred to as a. Historical cost c. Money-measuring unit b. Revenue recognition d. Fiscal period 16. “Cost is normally the proper money measurement of a firm’s assets, liabilities, and equity, and changes in them because it is objective, verifiable and convenient to obtain, approximating value at time of acquisition. “ This postulate is referred to as a. Historical cost c. Money measuring unit b. Revenue recognition d. Fiscal period 17. “The life of a business firm can be segmented into short run time periods in order to provide timely financial information to aid in financial decision making; hence, periodic reporting implies the use of accrual accounting and use of estimates ( approximations) and informed judgment by accountants.” This postulate is referred to as a. Historical cost c. Money measuring unit b. Revenue recognition d. Fiscal period 18. “The point of sale when goods are delivered or services are rendered, is the time at which revenue is to be recognized.” This postulate is referred to as a. Historical cost c. Money measuring unit b. Revenue recognition d. Fiscal period 19.“Goods and services used (“expenses”) during the fiscal period can be associated with the revenue earned during the same fiscal period”. This postulate referred to as a. Matching c. Historical Cost b. Going concern d. Specific-separate entity 20. “Exception to the application of accounting theory are permitted if the amount involve is not material; financial reporting is concerned only with information that is significant enough to affect evaluations or decisions.” This convention is called a. Conservatism c. Consistency b. Objectivity d. Materiality 21. “The same accounting procedures for a given entity should be used from one period to the next. Changes may however be made if it will result in more accurate or useful information for decision making provided it disclosed”. The convention is called a. Conservatism c. Consistency b. Objectivity d. Materiality 22. “Financial statements of different firms should be based on similar accounting principles and procedures in order to aid users of financial statements in finding similarities and differences among firms for purposed of financial decision making” This convention is called a. Consistency c. Objectivity

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b. Comparability

d. Conservatism

23. “Accounting measurement should be based on evidence that is verifiable by competent persons”. This convention is called a. Consistency c. Objectivity b. Comparability d. Conservatism 24. “The accountant should recognize all possible losses but anticipate no profit. Where alternative courses of action are available, he should choose the alternative least favorable to owners’ equity. a. Consistency c. Objectivity b. Comparability d. Conservatism MULTIPLE CHOICE—Financial Accounting Standards 21.

General-purpose financial statements are the product of a. financial accounting. b. managerial accounting. c. both financial and managerial accounting. d. neither financial nor managerial accounting.

22.

Users of financial reports include all of the following except a. creditors. b. government agencies. c. unions. d. All of these are users.

23.

The financial statements most frequently provided include all of the following except the a. balance sheet. b. income statement. c. statement of cash flows. d. statement of retained earnings.

24.

The information provided by financial reporting pertains to a. individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers. b. business industries, rather than to individual enterprises or an economy as a whole or to members of society as consumers. c. individual business enterprises, industries, and an economy as a whole, rather than to members of society as consumers. d. an economy as a whole and to members of society as consumers, rather than to individual enterprises or industries.

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25.

The process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, evaluate, and control an organization’s operations is called a. financial accounting. b. managerial accounting. c. tax accounting. d. auditing.

26.

Whether a business is successful and thrives is determined by a. markets. b. free enterprise. c. competition. d. all of these.

27.

An a. b. c. d.

28.

Financial statements in the early 2000s provide information related to a. non-financial measurements. b. forward-looking data. c. hard assets (inventory and plant assets). d. none of these.

effective capital allocation process promotes productivity. encourages innovation. provides an efficient market for buying and selling securities. all of these.

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29.

Which of the following statements is not an objective of financial reporting? a. Provide information that is useful in investment and credit decisions. b. Provide information about enterprise resources, claims to those resources, and changes to them. c. Provide information on the liquidation value of an enterprise. d. Provide information that is useful in assessing cash flow prospects.

30.

Accrual accounting is used because a. cash flows are considered less important. b. it provides a better indication of ability to generate cash flows than the cash basis. c. it recognizes revenues when cash is received and expenses when cash is paid. d. none of the above.

31.

One objective of financial reporting is to provide a. information about the investors in the business entity. b. information about the liquidation values of the resources held by the enterprise. c. information that is useful in assessing cash flow prospects. d. information that will attract new investors.

32.

Accounting principles are "generally accepted" only when a. an authoritative accounting rule-making body has established it in an official pronouncement. b. it has been accepted as appropriate because of its universal application. c. both a and b. d. neither a nor b.

33.

A common set of accounting standards and procedures are called a. financial accounting standards. b. generally accepted accounting principles. c. objectives of financial reporting. d. statements of financial accounting concepts.

34.

The role of the Securities and Exchange Commission in the formulation of accounting principles can be best described as a. consistently primary. b. consistently secondary. c. sometimes primary and sometimes secondary. d. non-existent.

35.

The body that has the power to prescribe the accounting practices and standards to be employed by companies that fall under its jurisdiction is the a. FASB. b. AICPA. c. SEC. d. APB.

36.

Companies that are listed on a stock exchange are required to submit their financial statements to the a. AICPA. b. APB c. FASB. d. SEC.

37.

The Financial Accounting Standards Board (FASB) was proposed by the a. American Institute of Certified Public Accountants. b. Accounting Principles Board. c. Study Group on the Objectives of Financial Statements. d. Special Study Group on establishment of Accounting Principles (Wheat Committee).

38.

The Financial Accounting Standards Board a. has issued a series of pronouncements entitled Statements on Auditing Standards. b. was the forerunner of the current Accounting Principles Board. c. is the arm of the Securities and Exchange Commission responsible for setting financial accounting standards. d. is appointed by the Financial Accounting Foundation.

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39.

40.

The Financial Accounting Foundation a. oversees the operations of the FASB. b. oversees the operations of the AICPA. c. provides information to interested parties on financial reporting issues. d. works with the Financial Accounting Standards Advisory Council to provide informa-tion to interested parties on financial reporting issues. The major distinction between the Financial Accounting Standards Board (FASB) and its predecessor, the Accounting Principles Board (APB), is a. the FASB issues exposure drafts of proposed standards. b. all members of the FASB are fully remunerated, serve full time, and are independent of any companies or institutions. c. all members of the FASB possess extensive experience in financial reporting. d. a majority of the members of the FASB are CPAs drawn from public practice.

41.

The Financial Accounting Standards Board employs a "due process" system which a. is an efficient system for collecting dues from members. b. enables interested parties to express their views on issues under consideration. c. identifies the accounting issues that are the most important. d. requires that all accountants must receive a copy of financial standards.

42.

Which of the following is not a publication of the FASB? a. Statements of Financial Accounting Concepts b. Accounting Research Bulletins c. Interpretations d. Technical Bulletins

43.

FASB Technical Bulletins a. are similar to FASB Interpretations in that they establish enforceable standards under the AICPA's Code of Professional Ethics. b. are issued monthly by the FASB to deal with current topics. c. are not expected to have a significant impact on financial reporting in general and provide guidance when it does not conflict with any broad fundamental accounting principle. d. were recently discontinued by the FASB because they dealt with specialized topics having little impact on financial reporting in general.

44.

The purpose of the Emerging Issues Task Force is to a. develop a conceptual framework as a frame of reference for the solution of future problems. b. lobby the FASB on issues that affect a particular industry. c. do research on issues that relate to long-term accounting problems. d. issue statements which reflect a consensus on how to account for new and unusual financial transactions that need to be resolved quickly.

45.

The Governmental Accounting Standards Board a. oversees the activities of the SEC. b. is a private-sector body, which addresses state and local governmental reporting issues. c. is a division of the Securities and Exchange Commission, which oversees the corpo-rate accounting in annual reports. d. was terminated when the Financial Accounting Standards Board was created.

46.

The Governmental Accounting Standards Board's main purpose is to develop standards for a. the General Accounting Office. b. the Federal government. c. state and local government. d. the Internal Revenue Service.

47.

Which of the following organizations has not been instrumental in the development of financial accounting standards in the United States? a. AICPA b. FASB c. IASB d. SEC

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48.

An a. b. c. d.

organization that has not published accounting standards is the American Institute of Certified Public Accountants. Securities and Exchange Commission. Financial Accounting Standards Board. All of these have published accounting standards.

49.

The purpose of Statements of Financial Accounting Concepts is to a. establish GAAP. b. modify or extend the existing FASB Standards Statement. c. form a conceptual framework for solving existing and emerging problems. d. determine the need for FASB involvement in an emerging issue.

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Members of the Financial Accounting Standards Board are a. employed by the American Institute of Certified Public Accountants (AICPA). b. part-time employees. c. required to hold a CPA certificate. d. independent of any other organization.

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The following published documents are part of the "due process" system used by the FASB in the evolution of a typical FASB Statement of Financial Accounting Standards:

50.

51.

1. Exposure Draft 2. Statement of Financial Accounting Standards 3. Discussion Memorandum The chronological order in which these items are released is as follows: a. 1, 2, 3. b. 1, 3, 2. c. 2, 3, 1. d. 3, 1, 2. P

52.

In the House of GAAP, is the following on the highest level of authoritative status (meaning among the most authoritative)?

a. b. c. d.

FASB Technical Bulletin Yes Yes No No

FASB Statement of Financial Accounting Standards Yes Yes Yes Yes

FASB Interpretation Yes Yes No Yes

FASB Statement of Financial Accounting Concepts Yes No No No

53.

Generally Accepted Accounting Principles include: 1) FASB Technical Bulletins, 2) APB Opinions, and 3) Widely-accepted industry practices. These three items rank from most authoritative to least authoritative as follows: a. 1, 2, 3. b. 1, 3, 2. c. 2, 1, 3. d. 2, 3, 1.

54.

Generally accepted accounting principles a. include detailed practices and procedures as well as broad guidelines of general application. b. are influenced by pronouncements of the SEC and IRS. c. change over time as the nature of the business environment changes. d. all of these.

55.

The most significant current source of generally accepted accounting principles is the a. AICPA. b. SEC. c. APB. d. FASB.

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56.

The most authoritative category of generally accepted accounting principles includes all of the following except a. Accounting Research Bulletins. b. APB Opinions. c. FASB Standards. d. FASB Technical Bulletins.

57.

Which of the following is not a part of generally accepted accounting principles? a. FASB Interpretations b. CAP Accounting Research Bulletins c. APB Opinions d. All of these are part of generally accepted accounting principles.

58.

Which of the following publications does not qualify as a statement of generally accepted accounting principles? a. Statements of financial standards issued by the FASB b. Accounting interpretations issued by the FASB c. APB Opinions d. Accounting research studies issued by the AICPA

59.

Financial accounting standard-setting in the United States a. can be described as a social process which reflects political actions of various interested user groups as well as a product of research and logic. b. is based solely on research and empirical findings. c. is a legalistic process based on rules promulgated by governmental agencies. d. is democratic in the sense that a majority of accountants must agree with a standard before it becomes enforceable.

60.

The purpose of the International Accounting Standards Board is to a. issue enforceable standards which regulate the financial accounting and reporting of multinational corporations. b. develop a uniform currency in which the financial transactions of companies through-out the world would be measured. c. promote uniform accounting standards among countries of the world. d. arbitrate accounting disputes between auditors and international companies. MULTIPLE CHOICE—Current Liabilities/ Contengencies

21.

Liabilities are a. any accounts having credit balances after closing entries are made. b. deferred credits that are recognized and measured in conformity with generally accepted accounting principles. c. obligations to transfer ownership shares to other entities in the future. d. obligations arising from past transactions and payable in assets or services in the future.

22.

Which of the following is a current liability? a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund b. A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue c. A long-term debt maturing currently, which is to be converted into common stock d. None of these

23.

Which of the following is true about accounts payable? 1. Accounts payable should not be reported at their present value. 2. When accounts payable are recorded at the net amount, a Purchase Discounts account will be used. 3. When accounts payable are recorded at the gross amount, a Purchase Discounts Lost account will be used. a. b. c. d.

24.

1 2 3 Both 2 and 3 are true.

Among the short-term obligations of Lance Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Madison National Bank. These are 90-day notes,

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renewable for another 90-day period. These notes should be classified on the balance sheet of Lance Company as a. current liabilities. b. deferred charges. c. long-term liabilities. d. intermediate debt. 25.

Which of the following is not true about the discount on short-term notes payable? a. The Discount on Notes Payable account has a debit balance. b. The Discount on Notes Payable account should be reported as an asset on the balance sheet. c. When there is a discount on a note payable, the effective interest rate is higher than the stated discount rate. d. All of these are true.

26.

Which of the following may be a current liability? a. Withheld Income Taxes b. Deposits Received from Customers c. Deferred Revenue d. All of these

27.

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 (for which there is an adequate appropriation of retained earnings) due in eleven months. d. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.

28.

Which of the following should not be included in the current liabilities section of the balance sheet? a. Trade notes payable b. Short-term zero-interest-bearing notes payable c. The discount on short-term notes payable d. All of these are included

29.

Which of the following is a current liability? a. Preferred dividends in arrears b. A dividend payable in the form of additional shares of stock c. A cash dividend payable to preferred stockholders d. All of these

30.

Stock dividends distributable should be classified on the a. income statement as an expense. b. balance sheet as an asset. c. balance sheet as a liability. d. balance sheet as an item of stockholders' equity.

31.

Of a. b. c. d.

32.

An a. b. c.

33.

Which of the following statements is correct? a. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis. b. A company may exclude a short-term obligation from current liabilities if the firm can demonstrate an ability to consummate a refinancing.

the following items, the only one which should not be classified as a current liability is current maturities of long-term debt. sales taxes payable. short-term obligations expected to be refinanced. unearned revenues.

account which would be classified as a current liability is dividends payable in the company's stock. accounts payable—debit balances. losses expected to be incurred within the next twelve months in excess of the company's insurance coverage. d. none of these.

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c. A company may exclude a short-term obligation from current liabilities if it is paid off after the balance sheet date and subsequently replaced by long-term debt before the balance sheet is issued. d. None of these. 34.

The ability to consummate the refinancing of a short-term obligation may be demonstrated by a. actually refinancing the obligation by issuing a long-term obligation after the date of the balance sheet but before it is issued. b. entering into a financing agreement that permits the enterprise to refinance the debt on a long-term basis. c. actually refinancing the obligation by issuing equity securities after the date of the balance sheet but before it is issued. d. all of these.

35.

Which of the following statements is false? a. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing. b. Cash dividends should be recorded as a liability when they are declared by the board of directors. c. Under the cash basis method, warranty costs are charged to expense as they are paid. d. FICA taxes withheld from employees' payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority.

36.

Which of the following is not a correct statement about sales taxes? a. Sales taxes are an expense of the seller. b. Many companies record sales taxes in the sales account. c. If sales taxes are included in the sales account, the first step to find the amount of sales taxes is to divide sales by 1 plus the sales tax rate. d. All of these are true.

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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 terms of any equity security issued or to be issued. d. the number of financing institutions that refused to refinance the debt, if any.

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38.

In accounting for compensated absences, the difference between vested rights and accumulated rights is a. vested rights are normally for a longer period of employment than are accumulated rights. b. vested rights are not contingent upon an employee's future service. c. vested rights are a legal and binding obligation on the company, whereas accumulated rights expire at the end of the accounting period in which they arose. d. vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do not represent monetary compensation.

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39.

An employee's net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employee's a. portion of FICA taxes, and unemployment taxes. b. and employer's portion of FICA taxes, and unemployment taxes. c. portion of FICA taxes, unemployment taxes, and any voluntary deductions. d. portion of FICA taxes, and any voluntary deductions.

40.

Which of these is not included in an employer's payroll tax expense? a. F.I.C.A. (social security) taxes b. Federal unemployment taxes c. State unemployment taxes d. Federal income taxes

41.

Which of the following is a condition for accruing a liability for the cost of compensation for future absences? a. The obligation relates to the rights that vest or accumulate. b. Payment of the compensation is probable.

37.

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c. The obligation is attributable to employee services already performed. d. All of these are conditions for the accrual. 42.

A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should a. be accrued during the period when the compensated time is expected to be used by employees. b. be accrued during the period following vesting. c. be accrued during the period when earned. d. not be accrued unless a written contractual obligation exists.

43.

The amount of the liability for compensated absences should be based on 1. the current rates of pay in effect when employees earn the right to compensated absences. 2. the future rates of pay expected to be paid when employees use compensated time. 3. the present value of the amount expected to be paid in future periods. a. b. c. d.

1. 2. 3. Either 1 or 2 is acceptable.

44.

Which of the following is the proper way to report a gain contingency? a. As an accrued amount. b. As deferred revenue. c. As an account receivable with additional disclosure explaining the nature of the contingency. d. As a disclosure only.

45.

Which of the following contingencies need not be disclosed in the financial statements or the notes thereto? a. Probable losses not reasonably estimable b. Environmental liabilities that cannot be reasonably estimated c. Guarantees of indebtedness of others d. All of these must be disclosed.

46.

Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles? a. Amount of loss is reasonably estimable and event occurs infrequently. b. Amount of loss is reasonably estimable and occurrence of event is probable. c. Event is unusual in nature and occurrence of event is probable. d. Event is unusual in nature and event occurs infrequently.

47.

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. recognition of a loss only. c. creation of a liability only. d. disclosure in note form only.

48.

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. the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred. d. it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated. A contingent liability a. definitely exists as a liability but its amount and due date are indeterminable. b. is accrued even though not reasonably estimated. c. is not disclosed in the financial statements. d. is the result of a loss contingency.

49.

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50.

To a. b. c. d.

51.

A company is legally obligated for the costs associated with the retirement of a long-lived asset a. only when it hires another party to perform the retirement activities. b. only if it performs the activities with its own workforce and equipment. c. whether it hires another party to perform the retirement activities or performs the activities itself. d. when it is probable the asset will be retired.

52.

Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs. Any liability for the warranty a. should be reported as long-term. b. should be reported as current. c. should be reported as part current and part long-term. d. need not be disclosed.

53.

Lopez Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2007. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Lopez recall all cans of this paint sold in the last six months. The management of Lopez estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation? a. No recognition b. Note disclosure only c. Operating expense of $800,000 and liability of $800,000 d. Appropriation of retained earnings of $800,000

54.

Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss contingency should be a. accrued. b. disclosed but not accrued. c. neither accrued nor disclosed. d. classified as an appropriation of retained earnings.

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55.

record an asset retirement obligation (ARO), the cost associated with the ARO is expensed. included in the carrying amount of the related long-lived asset. included in a separate account. none of these.

Mayberry Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be a. zero. b. the minimum of the range. c. the mean of the range. d. the maximum of the range.

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Marx Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, and a. the Marx Company admits guilt. b. the court will decide the case within one year. c. the damages appear to be material. d. the cause for action occurred during the accounting period covered by the financial statements.

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Use of the accrual method in accounting for product warranty costs a. is required for federal income tax purposes. b. is frequently justified on the basis of expediency when warranty costs are immaterial. c. finds the expense account being charged when the seller performs in compliance with the warranty. d. represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.

56.

57.

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58.

Which of the following is not acceptable treatment for the presentation of current liabilities? a. Listing current liabilities in order of maturity b. Listing current liabilities according to amount c. Offsetting current liabilities against assets that are to be applied to their liquidation d. Showing current liabilities immediately below current assets to obtain a presentation of working capital

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59.

The ratio of current assets to current liabilities is called the a. current ratio. b. acid-test ratio. c. current asset turnover ratio. d. current liability turnover ratio.

60.

Accrued liabilities are disclosed in financial statements by a. a footnote to the statements. b. showing the amount among the liabilities but not extending it to the liability total. c. an appropriation of retained earnings. d. appropriately classifying them as regular liabilities in the balance sheet.

61.

The numerator of the acid-test ratio consists of a. total current assets. b. cash and marketable securities. c. cash and net receivables. d. cash, marketable securities, and net receivables.

*62.

Which of the following is not a permissible method of calculating a bonus to an employee? a. The bonus is based on income before deductions for the bonus and income taxes. b. The bonus is based on income after deduction of the bonus but before deduction of income taxes. c. The bonus is based on income after deductions for the bonus and income taxes. d. All of these are permissible. MULTIPLE CHOICE—Conceptual Framework

21.

Generally accepted accounting principles a. are fundamental truths or axioms that can be derived from laws of nature. b. derive their authority from legal court proceedings. c. derive their credibility and authority from general recognition and acceptance by the accounting profession. d. have been specified in detail in the FASB conceptual framework.

22.

A soundly developed conceptual framework of concepts and objectives should a. increase financial statement users' understanding of and confidence in financial reporting. b. enhance comparability among companies' financial statements. c. allow new and emerging practical problems to be more quickly soluble. d. all of these.

23.

Which of the following (a-c) are not true concerning a conceptual framework in account-ing? a. It should be a basis for standard-setting. b. It should allow practical problems to be solved more quickly by reference to it. c. It should be based on fundamental truths that are derived from the laws of nature. d. All of the above (a-c) are true.

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24.

Which of the following is not a benefit associated with the FASB Conceptual Framework Project? a. A conceptual framework should increase financial statement users' understanding of and confidence in financial reporting. b. Practical problems should be more quickly solvable by reference to an existing conceptual framework. c. A coherent set of accounting standards and rules should result. d. Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply.

25.In the conceptual framework for financial reporting, what provides "the why"--the goals and purposes of accounting? a. Measurement and recognition concepts such as assumptions, principles, and constraints

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b. Qualitative characteristics of accounting information c. Elements of financial statements d. Objectives of financial reporting 26.

The underlying theme of the conceptual framework is a. decision usefulness. b. understandability. c. reliability. d. comparability.

27.

Which of the following is not an objective of financial reporting? a. To provide information about economic resources, the claims to those resources, and the changes in them. b. To provide information that is helpful to investors and creditors and other users in assessing the amounts, timing, and uncertainty of future cash flows. c. To provide information that is useful to those making investment and credit decisions. d. All of these are objectives of financial reporting.

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28.

The objectives of financial reporting include all of the following except to provide information that a. is useful to the Internal Revenue Service in allocating the tax burden to the business community. b. is useful to those making investment and credit decisions. c. is helpful in assessing future cash flows. d. identifies the economic resources (assets), the claims to those resources (liabilities), and the changes in those resources and claims.

29.

Decision makers vary widely in the types of decisions they make, the methods of decision making they employ, the information they already possess or can obtain from other sources, and their ability to process information. Consequently, for information to be useful there must be a linkage between these users and the decisions they make. This link is a. relevance. b. reliability. c. understandability. d. materiality.

30.

The overriding criterion by which accounting information can be judged is that of a. usefulness for decision making. b. freedom from bias. c. timeliness. d. comparability.

31.

The two primary qualities that make accounting information useful for decision making are a. comparability and consistency. b. materiality and timeliness. c. relevance and reliability. d. reliability and comparability. Accounting information is considered to be relevant when it a. can be depended on to represent the economic conditions and events that it is intended to represent. b. is capable of making a difference in a decision. c. is understandable by reasonably informed users of accounting information. d. is verifiable and neutral.

32.

33.

The quality of information that gives assurance that it is reasonably free of error and bias and is a faithful representation is a. relevance. b. reliability. c. verifiability. d. neutrality.

34.

According to Statement of Financial Accounting Concepts No. 2, which of the following relates to both relevance and reliability? a. Materiality b. Understandability c. Usefulness d. All of these

13

35.

According to Statement of Financial Accounting Concepts No. 2, timeliness is an ingredient of the primary quality of Relevance Reliability a. Yes Yes b. No Yes c. Yes No d. No No

36.

According to Statement of Financial Accounting Concepts No. 2, verifiability is an ingredient of the primary quality of Relevance Reliability a. Yes No b. Yes Yes c. No No d. No Yes

37.

According to Statement of Financial Accounting Concepts No. 2, neutrality is an ingredient of the primary quality of Relevance Reliability a. Yes Yes b. No Yes c. Yes No d. No No

38.

Information is neutral if it a. provides benefits which are at least equal to the costs of its preparation. b. can be compared with similar information about an enterprise at other points in time. c. would have no impact on a decision maker. d. is free from bias toward a predetermined result.

39.

The characteristic that is demonstrated when a high degree of consensus can be secured among independent measurers using the same measurement methods is a. relevance. b. reliability. c. verifiability. d. neutrality.

40.

According to Statement of Financial Accounting Concepts No. 2, predictive value is an ingredient of the primary quality of Relevance Reliability a. Yes No b. Yes Yes c. No No d. No Yes

41.

Under Statement of Financial Accounting Concepts No. 2, representational faithfulness is an ingredient of the primary quality of Reliability Relevance a. Yes Yes b. No Yes c. Yes No d. No No

42.

Financial information does not demonstrate consistency when a. firms in the same industry use different accounting methods to account for the same type of transaction. b. a company changes its estimate of the salvage value of a fixed asset. c. a company fails to adjust its financial statements for changes in the value of the measuring unit. d. none of these.

43.

Financial information exhibits the characteristic of consistency when a. expenses are reported as charges against revenue in the period in which they are paid.

14

b. accounting entities give accountable events the same accounting treatment from period to period. c. extraordinary gains and losses are not included on the income statement. d. accounting procedures are adopted which give a consistent rate of net income. 44.

Information about different entities and about different periods of the same entity can be prepared and presented in a similar manner. Comparability and consistency are related to which of these objectives? Comparability Consistency a. Entities Entities b. Entities Periods c. Periods Entities d. Periods Periods

45.When information about two different enterprises has been prepared and presented in a similar manner, the information exhibits the characteristic of a. relevance. b. reliability. c. consistency. d. none of these. 46.

The elements of financial statements include investments by owners. These are increases in an entity's net assets resulting from owners' a. transfers of assets to the entity. b. rendering services to the entity. c. satisfaction of liabilities of the entity. d. all of these.

47.

In classifying the elements of financial statements, the primary distinction between revenues and gains is a. the materiality of the amounts involved. b. the likelihood that the transactions involved will recur in the future. c. the nature of the activities that gave rise to the transactions involved. d. the costs versus the benefits of the alternative methods of disclosing the transactions involved.

48.

A decrease in net assets arising from peripheral or incidental transactions is called a(n) a. capital expenditure. b. cost. c. loss. d. expense.

49.

One of the elements of financial statements is comprehensive income. As described in Statement of Financial Accounting Concepts No. 6, "Elements of Financial Statements," comprehensive income is equal to a. revenues minus expenses plus gains minus losses. b. revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners. c. revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners plus assets minus liabilities. d. none of these.

50.

Which of the following elements of financial statements is not a component of compre-hensive income? a. Revenues b. Distributions to owners c. Losses d. Expenses

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51.

Which of the following is false with regard to the element "comprehensive income"? a. It is more inclusive than the traditional notion of net income. b. It includes net income and all other changes in equity exclusive of owners' invest-ments and distributions to owners. c. This concept is not yet being applied in practice.

15

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52.

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53.

d. It excludes prior period adjustments (transactions that relate to previous periods, such as corrections of errors). According to the FASB conceptual framework, earnings a. are the same as comprehensive income. b. exclude certain gains and losses that are included in comprehensive income. c. include certain gains and losses that are excluded from comprehensive income. d. include certain losses that are excluded from comprehensive income. According to the FASB Conceptual Framework, the elements assets, equity describe amounts of resources and claims to resources at/during a Moment in Time a. Yes b. Yes c. No d. No

liabilities,

and

Period of Time No Yes Yes No

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Which of the following basic accounting assumptions is threatened by the existence of severe inflation in the economy? a. Monetary unit assumption. b. Periodicity assumption. c. Going-concern assumption. d. Economic entity assumption.

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During the lifetime of an entity accountants produce financial statements at artificial points in time in accordance with the concept of

54.

55.

a. b. c. d.

Objectivity No Yes No Yes

Periodicity No No Yes Yes

56.

Under current GAAP, inflation is ignored in accounting due to the a. economic entity assumption. b. going concern assumption. c. monetary unit assumption. d. periodicity assumption.

57.

The economic entity assumption a. is inapplicable to unincorporated businesses. b. recognizes the legal aspects of business organizations. c. requires periodic income measurement. d. is applicable to all forms of business organizations.

58.

Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the a. economic entity assumption. b. relevance characteristic. c. comparability characteristic. d. neutrality characteristic. 59. During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept? a. Cost/benefit constraint b. Periodicity assumption c. Conservatism constraint d. Matching principle 60.

What accounting concept justifies the usage of accruals and deferrals? a. Going concern assumption b. Materiality constraint c. Consistency characteristic d. Monetary unit assumption

61.

The assumption that a business enterprise will not be sold or liquidated in the near future is known as the a. economic entity assumption.

16

b. monetary unit assumption. c. conservatism assumption. d. none of these. 62.

Which of the following is an implication of the going concern assumption? a. The historical cost principle is credible. b. Depreciation and amortization policies are justifiable and appropriate. c. The current-noncurrent classification of assets and liabilities is justifiable and signify-cant. d. All of these.

63.

Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general purpose financial reporting, statements prepared using historical costs are more a. reliable. b. relevant. c. indicative of the entity's purchasing power. d. conservative.

64.

Valuing assets at their liquidation values rather than their cost is inconsistent with the a. periodicity assumption. b. matching principle. c. materiality constraint. d. historical cost principle.

65.

Revenue is generally recognized when realized or realizable and earned. describes the a. consistency characteristic. b. matching principle. c. revenue recognition principle. d. relevance characteristic.

66.

Generally, revenue from sales should be recognized at a point when a. management decides it is appropriate to do so. b. the product is available for sale to the ultimate consumer. c. the entire amount receivable has been collected from the customer and there remains no further warranty liability. d. none of these.

67.

Revenue generally should be recognized a. at the end of production. b. at the time of cash collection. c. when realized. d. when realized or realizable and earned.

68.

Which of the following is not a time when revenue may be recognized? a. At time of sale b. At receipt of cash c. During production d. All of these are possible times of revenue recognition.

69.

Under Statement of Financial Accounting Concepts No. 5, which of the following, in the most precise sense, means the process of converting noncash resources and rights into cash or claims to cash? a. Recognition b. Measurement c. Realization d. Allocation

70.

"When products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash" is a definition of a. allocated. b. realized. c. realizable. d. earned.

17

This statement

71.

The allowance for doubtful accounts, which appears as a deduction from accounts receivable on a balance sheet and which is based on an estimate of bad debts, is an application of the a. consistency characteristic. b. matching principle. c. materiality constraint. d. revenue recognition principle.

72.

The accounting principle of matching is best demonstrated by a. not recognizing any expense unless some revenue is realized. b. associating effort (expense) with accomplishment (revenue). c. recognizing prepaid rent received as revenue. d. establishing an Appropriation for Contingencies account.

73. Which of the following serves as the justification for the periodic recording of depreciation expense? a. Association of efforts (expense) with accomplishments (revenue) b. Systematic and rational allocation of cost over the periods benefited c. Immediate recognition of an expense d. Minimization of income tax liability 74.

Application of the full disclosure principle a. is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits. b. is violated when important financial information is buried in the notes to the financial statements. c. is demonstrated by the use of supplementary information presenting the effects of changing prices. d. requires that the financial statements be consistent and comparable.

75.

Which of the following statements concerning the cost-benefit relationship is not true? a. Business reporting should exclude information outside of management's expertise. b. Management should not be required to report information that would significantly harm the company's competitive position. c. Management should not be required to provide forecasted financial information. d. If needed by financial statement users, management should gather information not included in the financial statements that would not otherwise be gathered for internal use.

76.

Under Statement of Financial Accounting Concepts No. 2, which of the following relates to both relevance and reliability? a. Cost-benefit constraint c. Verifiability b. Predictive value d. Representational faithfulness Charging off the cost of a wastebasket with an estimated useful life of 10 years as an expense of the period when purchased is an example of the application of the a. consistency characteristic. b. matching principle. c. materiality constraint. d. historical cost principle.

77.

78.

Which of the following statements about materiality is not correct? a. An item must make a difference or it need not be disclosed. b. Materiality is a matter of relative size or importance. c. An item is material if its inclusion or omission would influence or change the judgment of a reasonable person. d. All of these are correct statements about materiality.

79.

Which of the following are considered pervasive constraints by Statement of Financial Accounting Concepts No. 2? a. Cost-benefit relationship and conservatism b. Timeliness and feedback value c. Conservatism and verifiability d. Materiality and cost-benefit relationship The basic accounting concept that refers to the tendency of accountants to resolve uncertainty in favor of understating assets and revenues and overstating liabilities and expenses is known as the a. conservatism constraint. b. materiality constraint.

80.

18

c. substance over form principle. d. industry practices constraint. 81.

Which of the following best illustrates the accounting concept of conservatism? a. Use of the allowance method to recognize bad debt losses from credit sales b. Use of the lower of cost or market approach in valuing inventories. c. Use of the same accounting method from one period to the next in computing depreciation expense d. Utilization of a policy of deliberate understatement of asset values in order to present a conservative net income figure

82.

Trade-offs between the characteristics that make information useful may be necessary or beneficial. Issuance of interim financial statements is an example of a trade-off between a. relevance and reliability. b. reliability and periodicity. c. timeliness and materiality. d. understandability and timeliness.

83.

Allowing firms to estimate rather than physically count inventory at interim (quarterly) periods is an example of a trade-off between a. verifiability and reliability. b. reliability and comparability. c. timeliness and verifiability. d. neutrality and consistency.

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84.

In matters of doubt and great uncertainty, accounting issues should be resolved by choosing the alternative that has the least favorable effect on net income, assets, and owners' equity. This guidance comes from the a. materiality constraint. b. industry practices constraint. c. conservatism constraint. d. full disclosure principle. MULTIPLE CHOICE—Cash and Receivables

21.

Which of the following is not considered cash for financial reporting purposes? a. Petty cash funds and change funds b. Money orders, certified checks, and personal checks c. Coin, currency, and available funds d. Postdated checks and I.O.U.'s

22.

Which of the following is considered cash? a. Certificates of deposit (CDs) b. Money market checking accounts c. Money market savings certificates d. Postdated checks

23.

Travel advances should be reported as a. supplies. b. cash because they represent the equivalent of money. c. investments. d. none of these.

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24.

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25.

Which of the following items should not be included in the Cash caption on the balance sheet? a. Coins and currency in the cash register b. Checks from other parties presently in the cash register c. Amounts on deposit in checking account at the bank d. Postage stamps on hand A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amounts of cash and a. is acceptable as a means to pay current liabilities. b. has a current market value that is greater than its original cost

19

c. bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation. d. is so near its maturity that it presents insignificant risk of changes in interest rates. 26.Bank overdrafts, if material, should be a. reported as a deduction from the current asset section. b. reported as a deduction from cash. c. netted against cash and a net cash amount reported. d. reported as a current liability. 27.

Deposits held as compensating balances a. usually do not earn interest. b. if legally restricted and held against short-term credit may be included as cash. c. if legally restricted and held against long-term credit may be included among current assets. d. none of these.

28.

The category "trade receivables" includes a. advances to officers and employees. b. income tax refunds receivable. c. claims against insurance companies for casualties sustained. d. none of these.

29.

Which of the following should be recorded in Accounts Receivable? a. Receivables from officers b. Receivables from subsidiaries c. Dividends receivable d. None of these

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What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies on a balance sheet? a. As offsets to capital. b. By means of footnotes only. c. As assets but separately from other receivables. d. As trade notes and accounts receivable if they otherwise qualify as current assets.

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31.

When a customer purchases merchandise inventory from a business organization, she may be given a discount which is designed to induce prompt payment. Such a discount is called a(n) a. trade discount. b. nominal discount. c. enhancement discount. d. cash discount.

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32.

Trade discounts are a. not recorded in the accounts; rather they are a means of computing a price. b. used to avoid frequent changes in catalogues. c. used to quote different prices for different quantities purchased. d. all of the above.

33.

If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as a. a deduction from sales in the income statement. b. an item of "other expense" in the income statement. c. a deduction from accounts receivable in determining the net realizable value of accounts receivable. d. sales discounts forfeited in the cost of goods sold section of the income statement. Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future, failure to follow this practice usually does not make the balance sheet misleading because a. most short-term receivables are not interest-bearing. b. the allowance for uncollectible accounts includes a discount element. c. the amount of the discount is not material. d. most receivables can be sold to a bank or factor.

30.

34.

35.

Which of the following methods of determining bad debt expense does not properly match expense and revenue?

20

a. Charging bad debts with a percentage of sales under the allowance method. b. Charging bad debts with an amount derived from a percentage of accounts receivable under the allowance method. c. Charging bad debts with an amount derived from aging accounts receivable under the allowance method. d. Charging bad debts as accounts are written off as uncollectible. 36.

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

37.

Which of the following is a generally accepted method of determining the amount of the adjustment to bad debt expense? a. A percentage of sales adjusted for the balance in the allowance b. A percentage of sales not adjusted for the balance in the allowance c. A percentage of accounts receivable not adjusted for the balance in the allowance d. An amount derived from aging accounts receivable and not adjusted for the balance in the allowance

38.

The advantage of relating a company's bad debt expense to its outstanding accounts receivable is that this approach a. gives a reasonably correct statement of receivables in the balance sheet. b. best relates bad debt expense to the period of sale. c. is the only generally accepted method for valuing accounts receivable. d. makes estimates of uncollectible accounts unnecessary.

39.

At the beginning of 2006, Finney Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Finney reported this note as a $1,000 trade note receivable on its 2006 year-end statement of financial position and $1,000 as sales revenue for 2006. What effect did this accounting for the note have on Finney's net earnings for 2006, 2007, 2008, and its retained earnings at the end of 2008, respectively? a. Overstate, overstate, understate, zero b. Overstate, understate, understate, understate c. Overstate, overstate, overstate, overstate d. None of these

40.

Which of the following is true when accounts receivable are factored without recourse? a. The transaction may be accounted for either as a secured borrowing or as a sale, depending upon the substance of the transaction. b. The receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables. c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting the receivables. d. The financing cost (interest expense) should be recognized ratably over the collection period of the receivables.

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Which of the following statements is incorrect regarding the classification of accounts and notes receivable? a. Segregation of the different types of receivables is required if they are material. b. Disclose any loss contingencies that exist on the receivables. c. Any discount or premium resulting from the determination of present value in notes receivable transactions is an asset or liability respectively. d. Valuation accounts should be appropriately offset against the proper receivable accounts.

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42.

Of the following conditions, which is the only one that is not required if the transfer of receivables with recourse is to be accounted for as a sale? a. The transferor is obligated to make a genuine effort to identify those receivables that are uncollectible. b. The transferor surrenders control of the future economic benefits of the receivables. c. The transferee cannot require the transferor to repurchase the receivables. d. The transferor's obligation under the recourse provisions can be reasonably estimated.

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43.

The accounts receivable turnover ratio measures the

41.

21

a. b. c. d. 44.

number of times the average balance of accounts receivable is collected during the period. percentage of accounts receivable turned over to a collection agency during the period. percentage of accounts receivable arising during certain seasons. number of times the average balance of inventory is sold during the period.

The accounts receivable turnover ratio is computed by dividing a. gross sales by ending net receivables. b. gross sales by average net receivables. c. net sales by ending net receivables. d. net sales by average net receivables.

*45.

Which of the following is not true? a. The imprest petty cash system in effect adheres to the rule of disbursement by check. b. Entries are made to the Petty Cash account only to increase or decrease the size of the fund or to adjust the balance if not replenished at year-end. c. The Petty Cash account is debited when the fund is replenished. d. All of these are not true.

*46.

A Cash Over and Short account a. is not generally accepted. b. is debited when the petty cash fund proves out over. c. is debited when the petty cash fund proves out short. d. is a contra account to Cash.

*47.

The journal entries for a bank reconciliation a. are taken from the "balance per bank" section only. b. may include a debit to Office Expense for bank service charges. c. may include a credit to Accounts Receivable for an NSF check. d. may include a debit to Accounts Payable for an NSF check.

*48.

When preparing a bank reconciliation, bank credits are a. added to the bank statement balance. b. deducted from the bank statement balance. c. added to the balance per books. d. deducted from the balance per books. MULTIPLE CHOICE—Valuation of Inventories

21.

When using a perpetual inventory system, a. no Purchases account is used. b. a Cost of Goods Sold account is used. c. two entries are required to record a sale. d. all of these.

22.

Goods in transit which are shipped f.o.b. shipping point should be a. included in the inventory of the seller. b. included in the inventory of the buyer. c. included in the inventory of the shipping company. d. none of these.

23.

Goods in transit which are shipped f.o.b. destination should be a. included in the inventory of the seller. b. included in the inventory of the buyer. c. included in the inventory of the shipping company. d. none of these.

24.

Which of the following items should be included in a company's inventory at the balance sheet date? a. Goods in transit which were purchased f.o.b. destination. b. Goods received from another company for sale on consignment. c. Goods sold to a customer which are being held for the customer to call for at his or her convenience. d. None of these.

Use the following information for questions 25 and 26.

22

During 2007 Foley Corporation transferred inventory to Kline Corporation and agreed to repurchase the merchandise early in 2008. Kline then used the inventory as collateral to borrow from Norwalk Bank, remitting the proceeds to Foley. In 2008 when Foley repurchased the inventory, Kline used the proceeds to repay its bank loan. 25.

This transaction is known as a(n) a. consignment. b. installment sale. c. assignment for the benefit of creditors. d. product financing arrangement.

26.

On whose books should the cost of the inventory appear at the December 31, 2007 balance sheet date? a. Foley Corporation b. Kline Corporation c. Norwalk Bank d. Kline Corporation, with Foley making appropriate note disclosure of the transaction

27.

Goods on consignment are a. included in the consignee's inventory. b. recorded in a Consignment Out account which is an inventory account. c. recorded in a Consignment In account which is an inventory account. d. all of these

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28.

Valuation of inventories requires the determination of all of the following except a. the costs to be included in inventory. b. the physical goods to be included in inventory. c. the cost of goods held on consignment from other companies. d. the cost flow assumption to be adopted.

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29.

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 the cost of goods sold section of the income statement. c. as a deduction in the cost of goods sold section of the income statement and as a current asset on the balance sheet. d. as an addition in the cost of goods sold section of the income statement and as a current asset on the balance sheet.

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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, overstatement. b. overstatement, understatement, no effect. c. understatement, overstatement, overstatement. d. understatement, overstatement, no effect.

30.

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31.

The failure to record a purchase of merchandise on account even though the goods are properly included in the physical inventory results in a. an overstatement of assets and net income. b. an understatement of assets and net income. c. an understatement of cost of goods sold and liabilities and an overstatement of assets. d. an understatement of liabilities and an overstatement of owners' equity.

32.

Belle Co. received merchandise on consignment. As of March 31, Belle had recorded the transaction as a purchase and included the goods in inventory. The effect of this on its financial statements for March 31 would be a. no effect. b. net income was correct and current assets and current liabilities were overstated. c. net income, current assets, and current liabilities were overstated. d. net income and current liabilities were overstated.

33.

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, current assets, and retained earnings were overstated.

23

b. net income was correct and current assets were understated. c. net income and current assets were overstated and current liabilities were understated. d. net income, current assets, and retained earnings were understated. 34.

Cross Co. accepted delivery of merchandise which it purchased on account. As of December 31, Cross had recorded the transaction, but did not include the merchandise in its inventory. The effect of this on its financial statements for December 31 would be a. net income, current assets, and retained earnings were understated. b. net income was correct and current assets were understated. c. net income was understated and current liabilities were overstated. d. net income was overstated and current assets were understated.

35.

On June 15, 2007, Tolon Corporation accepted delivery of merchandise which it pur-chased on account. As of June 30, Tolon had not recorded the transaction or included the merchandise in its inventory. The effect of this on its balance sheet for June 30, 2007 would be a. assets and stockholders' equity were overstated but liabilities were not affected. b. stockholders' equity was the only item affected by the omission. c. assets, liabilities, and stockholders' equity were understated. d. none of these.

36.

Which of the following is correct? a. Selling costs are product costs. b. Manufacturing overhead costs are product costs. c. Interest costs for routine inventories are product costs. d. All of these.

37.

All of the following costs should be charged against revenue in the period in which costs are incurred except for a. manufacturing overhead costs for a product manufactured and sold in the same accounting period. b. costs which will not benefit any future period. c. costs from idle manufacturing capacity resulting from an unexpected plant shutdown. d. costs of normal shrinkage and scrap incurred for the manufacture of a product in ending inventory.

38.

Which of the following types of interest cost incurred in connection with the purchase or manufacture of inventory should be capitalized as a product cost? a. Purchase discounts lost b. Interest incurred during the production of discrete projects such as ships or real estate projects c. Interest incurred on notes payable to vendors for routine purchases made on a repetitive basis d. All of these should be capitalized.

39.

The use of a Discounts Lost account implies that the recorded cost of a purchased inventory item is its a. invoice price. b. invoice price plus the purchase discount lost. c. invoice price less the purchase discount taken. d. invoice price less the purchase discount allowable whether taken or not.

40.

The use of a Purchase Discounts account implies that the recorded cost of a purchased inventory item is its a. invoice price. b. invoice price plus any purchase discount lost. c. invoice price less the purchase discount taken. d. invoice price less the purchase discount allowable whether taken or not.

Use the following information for questions 41 and 42. During 2007, which was the first year of operations, Luther Company had merchandise purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30. Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods available had been sold at year end.

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41.

Which of the following recording procedures would result in the highest cost of goods sold for 2007? 1. Recording purchases at gross amounts 2. Recording purchases at net amounts, with the amount of discounts not taken shown under "other expenses" in the income statement a. 1 b. 2 c. Either 1 or 2 will result in the same cost of goods sold. d. Cannot be determined from the information provided.

42.

Which of the following recording procedures would result in the highest net income for 2007? 1. Recording purchases at gross amounts 2. Recording purchases at net amounts, with the amount of discounts not taken shown under "other expenses" in the income statement a. 1 b. 2 c. Either 1 or 2 will result in the same net income. d. Cannot be determined from the information provided.

43.

When using the periodic inventory system, which of the following generally would not be separately accounted for in the computation of cost of goods sold? a. Trade discounts applicable to purchases during the period b. Cash (purchase) discounts taken during the period c. Purchase returns and allowances of merchandise during the period d. Cost of transportation-in for merchandise purchased during the period

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44.

Costs which are inventoriable include all of the following except a. costs that are directly connected with the bringing of goods to the place of business of the buyer. b. costs that are directly connected with the converting of goods to a salable condition. c. buying costs of a purchasing department. d. selling costs of a sales department.

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45.

Which inventory costing method most closely approximates current cost for each of the following: Ending Inventory Cost of Goods Sold a. FIFO FIFO b. FIFO LIFO c. LIFO FIFO d. LIFO LIFO

46.

In situations where there is a rapid turnover, an inventory method which produces a balance sheet valuation similar to the first-in, first-out method is a. average cost. b. base stock. c. joint cost. d. prime cost.

47.

The pricing of issues from inventory must be deferred until the end of the accounting period under the following method of inventory valuation: a. moving average. b. weighted-average. c. LIFO perpetual. d. FIFO.

48.

An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is a. FIFO. b. LIFO. c. base stock. d. weighted-average.

49.

Which method of inventory pricing best approximates specific identification of the actual flow of costs and units in most manufacturing situations? a. Average cost

25

b. First-in, first-out c. Last-in, first-out d. Base stock 50.

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 decreased. b. Prices remained unchanged. c. Prices increased. d. Price trend cannot be determined from information given.

51.

In a period of rising prices, the inventory method which tends to give the highest reported net income is a. base stock. b. first-in, first-out. c. last-in, first-out. d. weighted-average.

52.

In a period of rising prices, the inventory method which tends to give the highest reported inventory is a. FIFO. b. moving average. c. LIFO. d. weighted-average.

53.

Quayle Corporation's inventory cost on its balance sheet was lower using first-in, first-out than it would have been using last-in, first-out. Assuming no beginning inventory, in what direction did the cost of purchases move during the period? a. Up b. Down c. Steady d. Cannot be determined

54.

In a period of rising prices, the inventory method which tends to give the highest reported cost of goods sold is a. FIFO. b. average cost. c. LIFO. d. none of these.

55.

Which of the following statements is not valid as it applies to inventory costing methods? a. If inventory quantities are to be maintained, part of the earnings must be invested (plowed back) in inventories when FIFO is used during a period of rising prices. b. LIFO tends to smooth out the net income pattern by matching current cost of goods sold with current revenue, when inventories remain at constant quantities. c. When a firm using the LIFO method fails to maintain its usual inventory position (reduces stock on hand below customary levels), there may be a matching of old costs with current revenue. d. The use of FIFO permits some control by management over the amount of net income for a period through controlled purchases, which is not true with LIFO.

56.

The acquisition cost of a certain raw material changes frequently. The book value of the inventory of this material at year end will be the same if perpetual records are kept as it would be under a periodic inventory method only if the book value is computed under the a. weighted-average method. b. moving average method. c. LIFO method. d. FIFO method.

57.

When a company uses LIFO for external reporting purposes and FIFO for internal reporting purposes, an Allowance to Reduce Inventory to LIFO account is used. This account should be reported a. on the income statement in the Other Revenues and Gains section. b. on the income statement in the Cost of Goods Sold section. c. on the income statement in the Other Expenses and Losses section.

26

d. on the balance sheet in the Current Assets section. S

Which of the following statements is not true as it relates to the dollar-value LIFO inventory method? a. It is easier to erode LIFO layers using dollar-value LIFO techniques than it is with specific goods pooled LIFO. b. Under the dollar-value LIFO method, it is possible to have the entire inventory in only one pool. c. Several pools are commonly employed in using the dollar-value LIFO inventory method. d. Under dollar-value LIFO, increases and decreases in a pool are determined and measured in terms of total dollar value, not physical quantity.

S

59.

Which of the following is not considered an advantage of LIFO when prices are rising? a. The inventory will be overstated. b. The more recent costs are matched against current revenues. c. There will be a deferral of income tax. d. A company's future reported earnings will not be affected substantially by future price declines.

60.

Which of the following is true regarding the use of LIFO for inventory valuation? a. If LIFO is used for external financial reporting, then it must also be used for internal reports. b. For purposes of external financial reporting, LIFO may not be used with the lower of cost or market approach. c. If LIFO is used for external financial reporting, then it cannot be used for tax purposes. d. None of these.

61.

If inventory levels are stable or increasing, an argument which is not an advantage of the LIFO method as compared to FIFO is a. income taxes tend to be reduced in periods of rising prices. b. cost of goods sold tends to be stated at approximately current cost on the income statement. c. cost assignments typically parallel the physical flow of goods. d. income tends to be smoothed as prices change over time.

58.

MULTIPLE CHOICE— PPE 21.

Plant assets may properly include a. deposits on machinery not yet received. b. idle equipment awaiting sale. c. land held for possible use as a future plant site. d. none of these.

22.

Which of the following is not a major characteristic of a plant asset? a. Possesses physical substance b. Acquired for resale c. Acquired for use d. Yields services over a number of years

23.

Which of these is not a major characteristic of a plant asset? a. Possesses physical substance b. Acquired for use in operations c. Yields services over a number of years d. All of these are major characteristics of a plant asset.

24.

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.

25.

The cost a. costs b. costs c. costs

of of of of

land does not include grading, filling, draining, and clearing. removing old buildings. improvements with limited lives.

27

d. special assessments. 26.

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 cost. c. private driveways and parking lots. d. assumption of any liens or mortgages on the property.

27.

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 significance of the cost allocated to the building in relation to the combined cost of the lot and building. b. the length of time for which the building was held prior to its demolition. c. the contemplated future use of the parking lot. d. the intention of management for the property when the building was acquired.

28.

The debit for a sales tax properly levied and paid on the purchase of machinery preferably would be a charge to a. the machinery account. b. a separate deferred charge account. c. miscellaneous tax expense (which includes all taxes other than those on income). d. accumulated depreciation--machinery.

29.

Fences and parking lots are reported on the balance sheet as a. current assets. b. land improvements. c. land. d. property and equipment.

S

Historical cost is the basis advocated for recording the acquisition of property, plant, and equipment for all of the following reasons except a. at the date of acquisition, cost reflects fair market value. b. property, plant, and equipment items are always acquired at their original historical cost. c. historical cost involves actual transactions and, as such, is the most reliable basis. d. gains and losses should not be anticipated but should be recognized when the asset is sold.

S

To be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing its own building should be a. allocated on the basis of lost production. b. eliminated completely from the cost of the asset. c. allocated on an opportunity cost basis. d. allocated on a pro rata basis between the asset and normal operations.

32.

Which of the following costs are capitalized for self-constructed assets? a. Materials and labor only b. Labor and overhead only c. Materials and overhead only d. Materials, labor, and overhead

30.

31.

33.

Which of the following assets do not qualify for capitalization of interest costs incurred during construction of the assets? a. Assets under construction for an enterprise's own use. b. Assets intended for sale or lease that are produced as discrete projects. c. Assets financed through the issuance of long-term debt. d. Assets not currently undergoing the activities necessary to prepare them for their intended use.

34.

Assets that qualify for interest cost capitalization include a. assets under construction for a company's own use. b. assets that are ready for their intended use in the earnings of the company. c. assets that are not currently being used because of excess capacity. d. All of these assets qualify for interest cost capitalization.

35.

When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to

28

a. the total interest cost actually incurred. b. a cost of capital charge for stockholders' equity. c. that portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made. d. that portion of average accumulated expenditures on which no interest cost was incurred. 36.

The period of time during which interest must be capitalized ends when a. the asset is substantially complete and ready for its intended use. b. no further interest cost is being incurred. c. the asset is abandoned, sold, or fully depreciated. d. the activities that are necessary to get the asset ready for its intended use have begun.

37.

Which of the following statements is true regarding capitalization of interest? a. Interest cost capitalized in connection with the purchase of land to be used as a building site should be debited to the land account and not to the building account. b. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred. c. When excess borrowed funds not immediately needed for construction are temporarily invested, any interest earned should be offset against interest cost incurred when determining the amount of interest cost to be capitalized. d. The minimum amount of interest to be capitalized is determined by multiplying a weighted average interest rate by the amount of average accumulated expenditures on qualifying assets during the period.

38.

Construction of a qualifying asset is started on April 1 and finished on December 1. The fraction used to multiply an expenditure made on April 1 to find weighted-average accumulated expenditures is a. 8/8. b. 8/12. c. 9/12. d. 11/12.

39.

When funds are borrowed to pay for construction of assets that qualify for capitalization of interest, the excess funds not needed to pay for construction may be temporarily invested in interest-bearing securities. Interest earned on these temporary investments should be a. offset against interest cost incurred during construction. b. used to reduce the cost of assets being constructed. c. multiplied by an appropriate interest rate to determine the amount of interest to be capitalized. d. recognized as revenue of the period.

40.

Interest cost that is capitalized should a. be written off over the remaining term of the debt. b. be accumulated in a separate deferred charge account and written off equally over a 40-year period. c. not be written off until the related asset is fully depreciated or disposed of. d. none of these.

S

Which of the following is not a condition that must be satisfied before interest capitalization can begin on a qualifying asset? a. Interest cost is being incurred. b. Expenditures for the assets have been made. c. The interest rate is equal to or greater than the company's cost of capital. d. Activities that are necessary to get the asset ready for its intended use are in progress.

S

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 given up, and a gain or loss is recognized. b. the fair value of the asset given up, and a gain but not a loss may be recognized. c. the fair value of the asset received if it is equally reliable as the fair value of the asset given up. d. 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.

41.

42.

29

P

43.

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. be reported in the Other Revenues and Gains section of the income statement. b. effectively reduce the amount to be recorded as the cost of the new asset. c. effectively increase the amount to be recorded as the cost of the new asset. d. be credited directly to the owner's capital account.

44.

Plant assets purchased on long-term credit contracts should be accounted for at a. the total value of the future payments. b. the future amount of the future payments. c. the present value of the future payments. d. none of these.

45.

When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly measured by the a. par value of the stock. b. stated value of the stock. c. book value of the stock. d. market value of the stock.

46.

When a closely held corporation issues preferred stock for land, the land should be recorded at the a. total par value of the stock issued. b. total book value of the stock issued. c. total liquidating value of the stock issued. d. fair market value of the land.

47.

Accounting recognition should be given to some or all of the gain realized on a nonmonetary exchange of plant assets except when the exchange has a. no commercial substance and additional cash is paid. b. no commercial substance and additional cash is received. c. commercial substance and additional cash is paid. d. commercial substance and additional cash is received.

48.

For a nonmonetary exchange of plant assets, accounting recognition should not be given to a. a loss when the exchange has no commercial substance. b. a gain when the exchange has commercial substance. c. part of a gain when the exchange has no commercial substance and cash is paid. d. part of a gain when the exchange has no commercial substance and cash is received.

49.

When an enterprise is the recipient of a donated asset, the account credited may be a a. paid-in capital account. b. revenue account. c. deferred revenue account. d. all of these.

50.

A plant site donated by a township to a manufacturer that plans to open a new factory should be recorded on the manufacturer's books at a. the nominal cost of taking title to it. b. its market value. c. one dollar (since the site cost nothing but should be included in the balance sheet). d. the value assigned to it by the company's directors.

51.

In order for a cost to be capitalized (capital expenditure), the following must be present: a. The useful life of an asset must be increased. b. The quantity of assets must be increased. c. The quality of assets must be increased. d. Any one of these.

52.

An improvement made to a machine increased its fair market value and its production capacity by 25% without extending the machine's useful life. The cost of the improvement should be a. expensed. b. debited to accumulated depreciation. c. capitalized in the machine account. d. allocated between accumulated depreciation and the machine account.

30

53.

Which of the following is a capital expenditure? a. Payment of an account payable b. Retirement of bonds payable c. Payment of Federal income taxes d. None of these

54.

Which of the following is not a capital expenditure? a. Repairs that maintain an asset in operating condition c. A betterment b. An addition d. A replacement In accounting for plant assets, which of the following outlays made subsequent to acquisition should be fully expensed in the period the expenditure is made? a. Expenditure made to increase the efficiency or effectiveness of an existing asset b. Expenditure made to extend the useful life of an existing asset beyond the time frame originally anticipated c. Expenditure made to maintain an existing asset so that it can function in the manner intended d. Expenditure made to add new asset services

P

55.

S

An a. b. c. d.

S

57.

When a plant asset is disposed of, a gain or loss may result. The gain or loss would be classified as an extraordinary item on the income statement if it resulted from a. an involuntary conversion and the conditions of the disposition are unusual and infrequent in nature. b. a sale prior to the completion of the estimated useful life of the asset. c. the sale of a fully depreciated asset. d. an abandonment of the asset.

58.

The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were a. less than current market value. b. greater than cost. c. greater than book value. d. less than book value.

59.

Which of the following statements about involuntary conversions is false? a. An involuntary conversion may result from condemnation or fire. b. The gain or loss from an involuntary conversion may be reported as an extraordinary item. c. The gain or loss from an involuntary conversion should not be recognized when the enterprise reinvests in replacement assets. d. All of these. MULTIPLE CHOICE—Depreciation, Impairment, Depletion

21.

The following is true of depreciation accounting. a. It is not a matter of valuation. b. It is part of the matching of revenues and expenses. c. It retains funds by reducing income taxes and dividends. d. All of these.

22.

Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues? a. Associating cause and effect b. Systematic and rational allocation c. Immediate recognition d. Partial recognition

23.

Depreciation accounting a. provides funds. b. funds replacements. c. retains funds. d. all of these.

56.

expenditure made in connection with a machine being used by an enterprise should be expensed immediately if it merely extends the useful life but does not improve the quality. expensed immediately if it merely improves the quality but does not extend the useful life. capitalized if it maintains the machine in normal operating condition. capitalized if it increases the quantity of units produced by the machine.

31

S

Which of the following most accurately reflects the concept of depreciation as used in accounting? a. The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred. b. 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. c. A method of allocating asset cost to an expense account in a manner which closely matches the physical deterioration of the tangible asset involved. d. 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.

S

25.

The major difference between the service life of an asset and its physical life is that a. service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last. b. physical life is the life of an asset without consideration of salvage value and service life requires the use of salvage value. c. physical life is always longer than service life. d. service life refers to the length of time an asset is of use to its original owner, while physical life refers to how long the asset will be used by all owners.

P

26.

The term "depreciable cost," or "depreciable base," as it is used in accounting, refers to a. the total amount to be charged (debited) to expense over an asset's useful life. b. the cost of the asset less the related depreciation recorded to date. c. the estimated market value of the asset at the end of its useful life. d. the acquisition cost of the asset.

27.

Economic factors that shorten the service life of an asset include a. obsolescence. b. supersession. c. inadequacy. d. all of these.

28.

The activity method of depreciation a. is a variable charge approach. b. assumes that depreciation is a function of the passage of time. c. conceptually associates cost in terms of input measures. d. all of these.

29.

For income statement purposes, depreciation is a variable expense if the depreciation method used is a. units-of-production. b. straight-line. c. sum-of-the-years'-digits. d. declining-balance.

30.

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.

31.

Use of the double-declining balance method a. results in a decreasing charge to depreciation expense. b. means salvage value is not deducted in computing the depreciation base. c. means the book value should not be reduced below salvage value. d. all of these.

32.

Use of the sum-of-the-years'-digits method a. results in salvage value being ignored. b. means the denominator is the years remaining at the beginning of the year. c. means the book value should not be reduced below salvage value. d. all of these.

24.

32

33.

A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on the horizontal axis. Assuming linear relationships, how would the graphs for straight-line and sum-ofthe-years'-digits depreciation, respectively, be drawn? a. Vertically and sloping down to the right b. Vertically and sloping up to the right c. Horizontally and sloping down to the right d. Horizontally and sloping up to the right

34.

A principal objection to the straight-line method of depreciation is that it a. provides for the declining productivity of an aging asset. b. ignores variations in the rate of asset use. c. tends to result in a constant rate of return on a diminishing investment base. d. gives smaller periodic write-offs than decreasing charge methods.

35.

Each year a company has been investing an increasingly greater amount in machinery. Since there is a large number of small items with relatively similar useful lives, the company has been applying straight-line depreciation at a uniform rate to the machinery as a group. The ratio of this group's total accumulated depreciation to the total cost of the machinery has been steadily increasing and now stands at .75 to 1.00. The most likely explanation for this increasing ratio is the a. company should have been using one of the accelerated methods of depreciation. b. estimated average life of the machinery is less than the actual average useful life. c. estimated average life of the machinery is greater than the actual average useful life. d. company has been retiring fully depreciated machinery that should have remained in service.

36.

For the composite method, the composite a. rate is the total cost divided by the total annual depreciation. b. rate is the total annual depreciation divided by the total depreciable cost. c. life is the total cost divided by the total annual depreciation. d. life is the total depreciable cost divided by the total annual depreciation.

P

37.

S

Roberts Truck Rental uses the group depreciation method for its fleet of trucks. When it retires one of its trucks and receives cash from a salvage company, the carrying value of property, plant, and equipment will be decreased by the a. original cost of the truck. b. original cost of the truck less the cash proceeds. c. cash proceeds received. d. cash proceeds received and original cost of the truck.

38.

Composite or group depreciation is a depreciation system whereby a. the years of useful life of the various assets in the group are added together and the total divided by the number of items. b. the cost of individual units within an asset group is charged to expense in the year a unit is retired from service. c. a straight-line rate is computed by dividing the total of the annual depreciation expense for all assets in the group by the total cost of the assets. d. the original cost of all items in a given group or class of assets is retained in the asset account and the cost of replacements is charged to expense when they are acquired.

39.

Depreciation is normally computed on the basis of the nearest a. full month and to the nearest cent. b. full month and to the nearest dollar. c. day and to the nearest cent. d. day and to the nearest dollar.

40.

Quayle Company acquired machinery on January 1, 2002 which it depreciated under the straightline method with an estimated life of fifteen years and no salvage value. On January 1, 2007, Quayle estimated that the remaining life of this machinery was six years with no salvage value. How should this change be accounted for by Quayle? a. As a prior period adjustment b. As the cumulative effect of a change in accounting principle in 2007 c. By setting future annual depreciation equal to one-sixth of the book value on January 1, 2007 d. By continuing to depreciate the machinery over the original fifteen year life

41.

A change in estimate should a. result in restatement of prior period statements.

33

b. be handled in current and future periods. c. be handled in future periods only. d. be handled retroactively. 42.

White Printing Company determines that a printing press used in its operations has suffered a permanent impairment in value because of technological changes. An entry to record the impairment should a. recognize an extraordinary loss for the period. b. include a credit to the equipment accumulated depreciation account. c. include a credit to the equipment account. d. not be made if the equipment is still being used.

43.

Dividends representing a return of capital to stockholders are not uncommon among companies which a. use accelerated depreciation methods. b. use straight-line depreciation methods. c. recognize both functional and physical factors in depreciation. d. none of these.

44.

Depletion expense a. is usually part of cost of goods sold. b. includes tangible equipment costs in the depletion base. c. excludes intangible development costs from the depletion base. d. excludes restoration costs from the depletion base.

45.

The most common method of recording depletion for accounting purposes is the a. percentage depletion method. b. decreasing charge method. c. straight-line method. d. units-of-production method.

46.Reserve recognition accounting a. is presently the generally accepted accounting method for financial reporting of oil and gas reserves. b. is a historical cost method similar to the full cost approach and the successful efforts approach. c. is used for reporting of oil and gas reserves for federal income tax purposes. d. requires estimates of future production costs, the appropriate discount rate, and the expected selling price of oil and gas reserves. S

Of the following costs related to the development of natural resources, which one is not a part of depletion cost? a. Acquisition cost of the natural resource deposit b. Exploration costs c. Tangible equipment costs associated with machinery used to extract the natural resource d. Intangible development costs such as drilling costs, tunnels, and shafts

S

48.

Which of the following disclosures is not required in the financial statements regarding depreciation? a. Accumulated depreciation, either by major classes of depreciable assets or in total. b. Details demonstrating how depreciation was calculated. c. Depreciation expense for the period. d. Balances of major classes of depreciable assets, by nature and function.

P

49.

The book value of a plant asset is a. the fair market value of the asset at a balance sheet date. b. the asset's acquisition cost less the total related depreciation recorded to date. c. equal to the balance of the related accumulated depreciation account. d. the assessed value of the asset for property tax purposes.

50.

A general description of the depreciation methods applicable to major classes of depreciable assets a. is not a current practice in financial reporting. b. is not essential to a fair presentation of financial position. c. is needed in financial reporting when company policy differs from income tax policy. d. should be included in corporate financial statements or notes thereto.

47.

34

51.

*52.

The asset turnover ratio is computed by dividing a. net income by ending total assets. b. net income by average total assets. c. net sales by ending total assets. d. net sales by average total assets. A major objective of MACRS for tax depreciation is to a. reduce the amount of depreciation deduction on business firms' tax returns. b. assure that the amount of depreciation for tax and book purposes will be the same. c. help companies achieve a faster write-off of their capital assets. d. require companies to use the actual economic lives of assets in calculating tax depreciation.

53.Under MACRS, which one of the following is not considered in determining depreciation for tax purposes? a. Cost of asset b. Property recovery class c. Half-year convention d. Salvage value *54.

If income tax effects are ignored, accelerated depreciation methods a. provide funds for the earlier replacement of fixed assets. b. increase funds provided by operations. c. tend to offset the effect of steadily increasing repair and maintenance costs on the income statement. d. tend to decrease the fixed asset turnover ratio. MULTIPLE CHOICE—Intangible Asset

21.

Costs incurred internally to create intangibles are a. capitalized. b. capitalized if they have an indefinite life. c. expensed as incurred. d. expensed only if they have a limited life.

22.

Which of the following methods of amortization is normally used for intangible assets? a. Sum-of-the-years'-digits b. Straight-line c. Units of production d. Double-declining-balance

23.

The cost of an intangible asset includes all of the following except a. purchase price. b. legal fees. c. other incidental expenses. d. all of these are included.

24.

Factors considered in determining an intangible asset’s useful life include all of the following except a. the expected use of the asset. b. any legal or contractual provisions that may limit the useful life. c. any provisions for renewal or extension of the asset’s legal life d. the amortization method used.

25.

Under current accounting practice, intangible assets are classified as a. amortizable or unamortizable. b. limited-life or indefinite-life. c. specifically identifiable or goodwill-type. d. legally restricted or goodwill-type.

26.

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 legal life of the purchased patent.

35

c. added to factory overhead and allocated to production of the purchaser's product. d. 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. 27.

Riser Corporation was granted a patent on a product on January 1, 1998. To protect its patent, the corporation purchased on January 1, 2007 a patent on a competing product which was originally issued on January 10, 2003. Because of its unique plant, Riser Corporation does not feel the competing patent can be used in producing a product. The cost of the competing patent should be a. amortized over a maximum period of 20 years. b. amortized over a maximum period of 16 years. c. amortized over a maximum period of 11 years. d. expensed in 2007.

28.

Wriglee, Inc. went to court this year and successfully defended its patent from infringe-ment by a competitor. The cost of this defense should be charged to a. patents and amortized over the legal life of the patent. b. legal fees and amortized over 5 years or less. c. expenses of the period. d. patents and amortized over the remaining useful life of the patent.

29.

Which of the following is not an intangible asset? a. Trade name b. Research and development costs c. Franchise d. Copyrights

30.

Which of the following intangible assets should not be amortized? a. Copyrights b. Customer lists c. Perpetual franchises d. All of these intangible assets should be amortized.

31.

When a patent is amortized, the credit is usually made to a. the Patent account. b. an Accumulated Amortization account. c. a Deferred Credit account. d. an expense account.

32.

Goodwill 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. represents a unique asset in that its value can be identified only with the business as a whole. d. exists in any company that has earnings that differ from those of a competitor. 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. the value of a business is computed without consideration of goodwill and then goodwill is added to arrive at a master valuation. d. 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.

33.

34.

Easton Company and Lofton Company were combined in a purchase transaction. Easton was able to acquire Lofton at a bargain price. The sum of the market or appraised values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Easton. After revaluing noncurrent assets to zero, there was still some "negative goodwill." Proper accounting treatment by Easton is to report the amount as a. an extraordinary gain. b. part of current income in the year of combination. c. a deferred credit and amortize it. d. paid-in capital.

35.

Purchased goodwill should

36

a. be written off as soon as possible against retained earnings. b. be written off as soon as possible as an extraordinary item. c. be written off by systematic charges as a regular operating expense over the period benefited. d. not be amortized. 36.

The intangible asset goodwill may be a. capitalized only when purchased. b. capitalized either when purchased or created internally. c. capitalized only when created internally. d. written off directly to retained earnings.

37.

A loss on impairment of an intangible asset is the difference between the asset’s a. carrying amount and the expected future net cash flows. b. carrying amount and its fair value. c. fair value and the expected future net cash flows. d. book value and its fair value.

38.

Weaver Boxing Company needs to determine if its indefinite-life intangibles other than goodwill have been impaired and should be reduced or written off on its balance sheet. The impairment test(s) to be used is (are) a. b. c d.

39.

40.

Recoverability Test Fair Value Test Yes Yes Yes No No Yes No No

The carrying amount of an intangible is a. the fair market value of the asset at a balance sheet date. b. the asset's acquisition cost less the total related amortization recorded to date. c. equal to the balance of the related accumulated amortization account. d. the assessed value of the asset for intangible tax purposes. Which of the following research and development related costs should be capitalized and amortized over current and future periods? a. Research and development general laboratory building which can be put to alternative uses in the future b. Inventory used for a specific research project c. Administrative salaries allocated to research and development d. Research findings purchased from another company to aid a particular research project currently in process

41.

Which of the following principles best describes the current method of accounting for research and development costs? a. Associating cause and effect b. Systematic and rational allocation c. Income tax minimization d. Immediate recognition as an expense

42.

How should research and development costs be accounted for, according to a Financial Accounting Standards Board Statement? a. Must be capitalized when incurred and then amortized over their estimated useful lives. b. Must be expensed in the period incurred. c. May be either capitalized or expensed when incurred, depending upon the materiality of the amounts involved. d. Must be expensed in the period incurred unless it can be clearly demonstrated that the expenditure will have alternative future uses or unless contractually reimbursable.

43.

Which of the following costs should be excluded from research and development expense? a. Modification of the design of a product b. Acquisition of R & D equipment for use on a current project only c. Cost of marketing research for a new product d. Engineering activity required to advance the design of a product to the manufacturing stage

37

44.

If a company constructs a laboratory building to be used as a research and development facility, the cost of the laboratory building is matched against earnings as a. research and development expense in the period(s) of construction. b. depreciation deducted as part of research and development costs. c. depreciation or immediate write-off depending on company policy. d. an expense at such time as productive research and development has been obtained from the facility.

45.

Operating losses incurred during the start-up years of a new business should be a. accounted for and reported like the operating losses of any other business. b. written off directly against retained earnings. c. capitalized as a deferred charge and amortized over five years. d. capitalized as an intangible asset and amortized over a period not to exceed 20 years.

46. The costs of organizing a corporation include legal fees, fees paid to the state of incorporation, fees paid to promoters, and the costs of meetings for organizing the promoters. These costs are said to benefit the corporation for the entity's entire life. These costs should be a. capitalized and never amortized. b. capitalized and amortized over 40 years. c. capitalized and amortized over 5 years. d. expensed as incurred.

47. Which of the following would not be considered an R & D activity? a. Adaptation of an existing capability to a particular requirement or customer's need. b. Searching for applications of new research findings. c. Laboratory research aimed at discovery of new knowledge. d. Conceptual formulation and design of possible product or process alternatives. 48. The total amount of patent cost amortized to date is usually a. shown in a separate Accumulated Patent Amortization account which is shown contra to the Patent account. b. shown in the current income statement. c. reflected as credits in the Patent account. d. reflected as a contra property, plant and equipment item. MULTIPLE CHOICE—Long Term Liabilities 21.

An a. b. c. d.

22.

The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the a. bond indenture. b. bond debenture. c. registered bond. d. bond coupon.

23.

The term used for bonds that are unsecured as to principal is a. junk bonds. b. debenture bonds. c. indebenture bonds. d. callable bonds.

P

24.

S

25.

example of an item which is not a liability is dividends payable in stock. advances from customers on contracts. accrued estimated warranty costs. the portion of long-term debt due within one year.

Bonds for which the owners' names are not registered with the issuing corporation are called a. bearer bonds. b. term bonds. c. debenture bonds. d. secured bonds. Bonds that pay no interest unless the issuing company is profitable are called a. collateral trust bonds.

38

b. debenture bonds. c. revenue bonds. d. income bonds. S

26.

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. greater than the amount of the interest payments. c the same as if the straight-line method were used. d. less than if the straight-line method were used.

27.

The interest rate written in the terms of the bond indenture is known as the a. coupon rate. b. nominal rate. c. stated rate. d. coupon rate, nominal rate, or stated rate.

28.

The rate of interest actually earned by bondholders is called the a. stated rate. b. yield rate. c. effective rate. d. effective, yield, or market rate.

Use the following information for questions 29 and 30: Cox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. 29.

One step in calculating the issue price of the bonds is to multiply the principal by the table value for a. 10 periods and 10% from the present value of 1 table. b. 20 periods and 5% from the present value of 1 table. c. 10 periods and 8% from the present value of 1 table. d. 20 periods and 4% from the present value of 1 table.

30.

Another step in calculating the issue price of the bonds is to a. multiply $10,000 by the table value for 10 periods and 10% from the present value of an annuity table. b. multiply $10,000 by the table value for 20 periods and 5% from the present value of an annuity table. c. multiply $10,000 by the table value for 20 periods and 4% from the present value of an annuity table. d. none of these.

31.

Stone, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that a. the effective yield or market rate of interest exceeded the stated (nominal) rate. b. the nominal rate of interest exceeded the market rate. c. the market and nominal rates coincided. d. no necessary relationship exists between the two rates.

32.

33.

If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will a. exceed what it would have been had the effective-interest method of amortization been used. b. be less than what it would have been had the effective-interest method of amortization been used. c. be the same as what it would have been had the effective-interest method of amortiza-tion been used. d. be less than the stated (nominal) rate of interest. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to a. the stated (nominal) rate of interest multiplied by the face value of the bonds. b. the market rate of interest multiplied by the face value of the bonds. c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds. d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.

39

34.

When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will a. increase if the bonds were issued at a discount. b. decrease if the bonds were issued at a premium. c. increase if the bonds were issued at a premium. d. increase if the bonds were issued at either a discount or a premium.

35.

If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a a. debit to Interest Payable. b. credit to Interest Receivable. c. credit to Interest Expense. d. credit to Unearned Interest.

36.

When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be a. decreased by accrued interest from June 1 to November 1. b. decreased by accrued interest from May 1 to June 1. c. increased by accrued interest from June 1 to November 1. d. increased by accrued interest from May 1 to June 1.

37.

Theoretically, the costs of issuing bonds could be a. expensed when incurred. b. reported as a reduction of the bond liability. c. debited to a deferred charge account and amortized over the life of the bonds. d. any of these.

38.

The printing costs and legal fees associated with the issuance of bonds should a. be expensed when incurred. b. be reported as a deduction from the face amount of bonds payable. c. be accumulated in a deferred charge account and amortized over the life of the bonds. d. not be reported as an expense until the period the bonds mature or are retired.

39.

Treasury bonds should be shown on the balance sheet as a. an asset. b. a deduction from bonds payable issued to arrive at net bonds payable and outstanding. c. a reduction of stockholders' equity. d. both an asset and a liability.

40.

An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition a. any costs of issuing the bonds must be amortized up to the purchase date. b. the premium must be amortized up to the purchase date. c. interest must be accrued from the last interest date to the purchase date. d. all of these.

41.

The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as a. an adjustment to the cost basis of the asset obtained by the debt issue. b. an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument. c. an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt. d. a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption.

P

"In-substance defeasance" is a term used to refer to an arrangement whereby a. a company gets another company to cover its payments due on long-term debt. b. a governmental unit issues debt instruments to corporations. c. a company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust. d. a company legally extinguishes debt before its due date.

P

A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan.

42.

43.

40

The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation? a. The balance of mortgage payable at a given balance sheet date will be reported as a longterm liability. b. The balance of mortgage payable will remain a constant amount over the 10-year period. c. The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period. d. The amount of interest expense will remain constant over the 10-year period. S

44.

45.

A debt instrument with no ready market is exchanged for property whose fair market value is currently indeterminable. When such a transaction takes place a. the present value of the debt instrument must be approximated using an imputed interest rate. b. it should not be recorded on the books of either party until the fair market value of the property becomes evident. c. the board of directors of the entity receiving the property should estimate a value for the property that will serve as a basis for the transaction. d. the directors of both entities involved in the transaction should negotiate a value to be assigned to the property. When a note payable is issued for property, goods, or services, the present value of the note is measured by a. the fair value of the property, goods, or services. b. the market value of the note. c. using an imputed interest rate to discount all future payments on the note. d. any of these.

46.

When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless a. no interest rate is stated. b. the stated interest rate is unreasonable. c. the stated face amount of the note is materially different from the current cash sales price for similar items or from current market value of the note. d. any of these.

47.

Discount on Notes Payable is charged to interest expense a. equally over the life of the note. b. only in the year the note is issued. c. using the effective-interest method. d. only in the year the note matures.

48.

Which of the following is an example of "off-balance-sheet financing"? 1. Non-consolidated subsidiary. 2. Special purpose entity. 3. Operating leases. a. 1 b. 2 c. 3 d. All of these are examples of "off-balance-sheet financing."

S

When a business enterprise enters into what is referred to as off-balance-sheet financing, the company a. is attempting to conceal the debt from shareholders by having no information about the debt included in the balance sheet. b. wishes to confine all information related to the debt to the income statement and the statement of cash flow. c. can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost. d. is in violation of generally accepted accounting principles.

S

Long-term debt that matures within one year and is to be converted into stock should be reported a. as a current liability. b. in a special section between liabilities and stockholders’ equity. c. as noncurrent.

49.

50.

41

d. as noncurrent and accompanied with a note explaining the method to be used in its liquidation. 51.

Which of the following must be disclosed relative to long-term debt maturities and sinking fund requirements? a. The present value of future payments for sinking fund requirements and long-term debt maturities during each of the next five years. b. The present value of scheduled interest payments on long-term debt during each of the next five years. c. The amount of scheduled interest payments on long-term debt during each of the next five years. d. The amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.

52.

Note disclosures for long-term debt generally include all of the following except a. assets pledged as security. b. call provisions and conversion privileges. c. restrictions imposed by the creditor. d. names of specific creditors.

53.

The times interest earned ratio is computed by dividing a. net income by interest expense. b. income before taxes by interest expense. c. income before income taxes and interest expense by interest expense. d. net income and interest expense by interest expense.

54.

The debt to total assets ratio is computed by dividing a. current liabilities by total assets. b. long-term liabilities by total assets. c. total liabilities by total assets. d. total assets by total liabilities.

*55.

In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, a. a loss should be recognized by the debtor. b. a gain should be recognized by the debtor. c. a new effective-interest rate must be computed. d. no interest expense or revenue should be recognized in the future.

*56.

A troubled debt restructuring will generally result in a a. loss by the debtor and a gain by the creditor. b. loss by both the debtor and the creditor. c. gain by both the debtor and the creditor. d. gain by the debtor and a loss by the creditor.

*57.

In a troubled debt restructuring in which the debt is settled by a transfer of assets with a fair market value less than the carrying amount of the debt, the debtor would recognize a. no gain or loss on the settlement. b. a gain on the settlement. c. a loss on the settlement. d. none of these.

58.

In a troubled debt restructuring in which the debt is continued with modified terms, a gain should be recognized at the date of restructure, but no interest expense should be recognized over the remaining life of the debt, whenever the a. carrying amount of the pre-restructure debt is less than the total future cash flows. b. carrying amount of the pre-restructure debt is greater than the total future cash flows. c. present value of the pre-restructure debt is less than the present value of the future cash flows. d. present value of the pre-restructure debt is greater than the present value of the future cash flows.

*59.

In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, the creditor should a. compute a new effective-interest rate.

42

b. not recognize a loss. c. calculate its loss using the historical effective rate of the loan. d. calculate its loss using the current effective rate of the loan. MULTIPLE CHOICE—SHE 21.

The residual interest in a corporation belongs to the a. management. b. creditors. c. common stockholders. d. preferred stockholders.

22.

The pre-emptive right of a common stockholder is the right to a. share proportionately in corporate assets upon liquidation. b. share proportionately in any new issues of stock of the same class. c. receive cash dividends before they are distributed to preferred stockholders. d. exclude preferred stockholders from voting rights.

23.

The pre-emptive right enables a stockholder to a. share proportionately in any new issues of stock of the same class. b. receive cash dividends before other classes of stock without the pre-emptive right. c. sell capital stock back to the corporation at the option of the stockholder. d. receive the same amount of dividends on a percentage basis as the preferred stockholders.

S

In a corporate form of business organization, legal capital is best defined as a. the amount of capital the state of incorporation allows the company to accumulate over its existence. b. the par value of all capital stock issued. c. the amount of capital the federal government allows a corporation to generate. d. the total capital raised by a corporation within the limits set by the Securities and Exchange Commission.

S

25.

Stockholders of a business enterprise are said to be the residual owners. The term residual owner means that shareholders a. are entitled to a dividend every year in which the business earns a profit. b. have the rights to specific assets of the business. c. bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership. d. can negotiate individual contracts on behalf of the enterprise.

26.

Total stockholders' equity represents a. a claim to specific assets contributed by the owners. b. the maximum amount that can be borrowed by the enterprise. c. a claim against a portion of the total assets of an enterprise. d. only the amount of earnings that have been retained in the business.

27.

A primary source of stockholders' equity is a. income retained by the corporation. b. appropriated retained earnings. c. contributions by stockholders. d. both income retained by the corporation and contributions by stockholders.

28.

Stockholders' equity is generally classified into two major categories: a. contributed capital and appropriated capital. b. appropriated capital and retained earnings. c. retained earnings and unappropriated capital. d. earned capital and contributed capital.

29.

The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. An acceptable method of allocation is the a. pro forma method. b. proportional method. c. incremental method. d. either the proportional method or the incremental method.

30.

When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the a. market value of the services received.

24.

43

b. par value of the shares issued. c. market value of the shares issued. d. Any of these provides an appropriate basis for recording the transaction. 31.

Direct costs incurred to sell stock such as underwriting costs should be accounted for as 1. a reduction of additional paid-in capital. 2. an expense of the period in which the stock is issued. 3. an intangible asset. a. b. c. d.

32.

P

33.

1 2 3 1 or 3

A "secret reserve" will be created if a. inadequate depreciation is charged to income. b. a capital expenditure is charged to expense. c. liabilities are understated. d. stockholders' equity is overstated. Which of the following represents the total number of shares that a corporation may issue under the terms of its charter? a. authorized shares b. issued shares c. unissued shares d. outstanding shares

S

Stock that has a fixed per-share amount printed on each stock certificate is called a. stated value stock. b. fixed value stock. c. uniform value stock. d. par value stock.

S

Which of the following is not a legal restriction related to profit distributions by a corporation? a. The amount distributed to owners must be in compliance with the state laws governing corporations. b. The amount distributed in any one year can never exceed the net income reported for that year. c. Profit distributions must be formally approved by the board of directors. d. Dividends must be in full agreement with the capital stock contracts as to preferences and participation.

S

36.

In January 2007, Castro Corporation, a newly formed company, issued 10,000 shares of its $10 par common stock for $15 per share. On July 1, 2007, Castro Corporation reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of these treasury shares a. decreased total stockholders' equity. b. increased total stockholders' equity. c. did not change total stockholders' equity. d. decreased the number of issued shares.

P

37.

Treasury shares are a. shares held as an investment by the treasurer of the corporation. b. shares held as an investment of the corporation. c. issued and outstanding shares. d. issued but not outstanding shares.

38.

When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited? a. Treasury stock for the par value and paid-in capital in excess of par for the excess of the purchase price over the par value. b. Paid-in capital in excess of par for the purchase price. c. Treasury stock for the purchase price. d. Treasury stock for the par value and retained earnings for the excess of the purchase price over the par value. “Gains" on sales of treasury stock (using the cost method) should be credited to a. paid-in capital from treasury stock. b. capital stock.

34.

35.

39.

44

c. retained earnings. d. other income. 40.

Wilson Corp. purchased its own par value stock on January 1, 2007 for $20,000 and debited the treasury stock account for the purchase price. The stock was subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a deduction from a. additional paid-in capital to the extent that previous net "gains" from sales of the same class of stock are included therein; otherwise, from retained earnings. b. additional paid-in capital without regard as to whether or not there have been previous net "gains" from sales of the same class of stock included therein. c. retained earnings. d. net income.

41.

How should a "gain" from the sale of treasury stock be reflected when using the cost method of recording treasury stock transactions? a. As ordinary earnings shown on the income statement. b. As paid-in capital from treasury stock transactions. c. As an increase in the amount shown for common stock. d. As an extraordinary item shown on the income statement.

42.

Which of the following best describes a possible result of treasury stock transactions by a corporation? a. May increase but not decrease retained earnings. b. May increase net income if the cost method is used. c. May decrease but not increase retained earnings. d. May decrease but not increase net income.

43.

Which of the following features of preferred stock makes the security more like debt than an equity instrument? a. Participating b. Voting c. Redeemable d. Noncumulative

44.

The cumulative feature of preferred stock a. limits the amount of cumulative dividends to the par value of the preferred stock. b. requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders. c. means that the shareholder can accumulate preferred stock until it is equal to the par value of common stock at which time it can be converted into common stock. d. enables a preferred stockholder to accumulate dividends until they equal the par value of the stock and receive the stock in place of the cash dividends.

P

45.

S

46.

According to the FASB, redeemable preferred stock should be a. included with common stock. b. included as a liability. c. excluded from the stockholders’ equity heading. d. included as a contra item in stockholders' equity. Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as a. an increase in current liabilities. b. an increase in stockholders' equity. c. a footnote. d. an increase in current liabilities for the current portion and long-term liabilities for the longterm portion.

47.

At the date of the financial statements, common stock shares issued would exceed common stock shares outstanding as a result of the a. declaration of a stock split. b. declaration of a stock dividend. c. purchase of treasury stock. d. payment in full of subscribed stock.

48.

An a. b. c.

entry is not made on the date of declaration. date of record. date of payment.

45

d. An entry is made on all of these dates. 49.

Cash dividends are paid on the basis of the number of shares a. authorized. b. issued. c. outstanding. d. outstanding less the number of treasury shares.

50.

Which of the following statements about property dividends is not true? a. A property dividend is usually in the form of securities of other companies. b. A property dividend is also called a dividend in kind. c. The accounting for a property dividend should be based on the carrying value (book value) of the nonmonetary assets transferred. d. All of these statements are true.

51.

Farmer Corporation owns 4,000,000 shares of stock in Baha Corporation. On December 31, 2007, Farmer distributed these shares of stock as a dividend to its stockholders. This is an example of a a. property dividend. b. stock dividend. c. liquidating dividend. d. cash dividend.

52.

A dividend which is a return to stockholders of a portion of their original investments is a a. liquidating dividend. b. property dividend. c. liability dividend. d. participating dividend.

53.

A mining company declared a liquidating dividend. The journal entry to record the declaration must include a debit to a. Retained Earnings. b. a paid-in capital account. c. Accumulated Depletion. d. Accumulated Depreciation.

54.

If management wishes to "capitalize" part of the earnings, it may issue a a. cash dividend. c. property dividend. b. stock dividend. d. liquidating dividend.

55.

Which dividends do not reduce stockholders' equity? a. Cash dividends b. Stock dividends c. Property dividends d. Liquidating dividends

56.

The declaration and issuance of a stock dividend larger than 25% of the shares previously outstanding a. increases common stock outstanding and increases total stockholders' equity. b. decreases retained earnings but does not change total stockholders' equity. c. may increase or decrease paid-in capital in excess of par but does not change total stockholders' equity. d. increases retained earnings and increases total stockholders' equity.

57.

Pryor Corporation issued a 100% stock dividend of its common stock which had a par value of $10 before and after the dividend. At what amount should retained earnings be capitalized for the additional shares issued? a. There should be no capitalization of retained earnings. b. Par value c. Market value on the declaration date d. Market value on the payment date

58.

The issuer of a 5% common stock dividend to common stockholders preferably should transfer from retained earnings to contributed capital an amount equal to the a. market value of the shares issued.

46

b. book value of the shares issued. c. minimum legal requirements. d. par or stated value of the shares issued. 59.

At a. b. c. d.

60.

The balance in Common Stock Dividend Distributable should be reported as a(n) a. deduction from common stock issued. b. addition to capital stock. c. current liability. d. contra current asset.

61.

A feature common to both stock splits and stock dividends is a. a transfer to earned capital of a corporation. b. that there is no effect on total stockholders' equity. c. an increase in total liabilities of a corporation. d. a reduction in the contributed capital of a corporation.

62.

What effect does the issuance of a 2-for-1 stock split have on each of the following? a. b. c. d.

the date of declaration of a small common stock dividend, the entry should not include a credit to Common Stock Dividend Payable. a credit to Paid-in Capital in Excess of Par. a debit to Retained Earnings. All of these are acceptable.

Par Value per Share No effect Increase Decrease Decrease

Retained Earnings No effect No effect No effect Decrease

63.

Which one of the following disclosures should be made in the equity section of the balance sheet, rather than in the notes to the financial statements? a. Dividend preferences b. Liquidation preferences c. Call prices d. Conversion or exercise prices

64.

The rate of return on common stock equity is calculated by dividing a. net income less preferred dividends by average common stockholders’ equity. b. net income by average common stockholders’ equity. c. net income less preferred dividends by ending common stockholders’ equity. d. net income by ending common stockholders’ equity.

65.

The payout ratio can be calculated by dividing a. dividends per share by earnings per share. b. cash dividends by net income less preferred dividends. c. cash dividends by market price per share. d. dividends per share by earnings per share and dividing cash dividends by net income less preferred dividends.

66.

Windsor Company has outstanding both common stock and nonparticipating, non-cumulative preferred stock. The liquidation value of the preferred is equal to its par value. The book value per share of the common stock is unaffected by a. the declaration of a stock dividend on preferred payable in preferred stock when the market price of the preferred is equal to its par value. b. the declaration of a stock dividend on common stock payable in common stock when the market price of the common is equal to its par value. c. the payment of a previously declared cash dividend on the common stock. d. a 2-for-1 split of the common stock.

P

67.

Assume common stock is the only class of stock outstanding in the B-Bar-B Corporation. Total stockholders' equity divided by the number of common stock shares outstanding is called a. book value per share. b. par value per share. c. stated value per share. d. market value per share.

47

*68.

Dividends are not paid on a. noncumulative preferred stock. b. nonparticipating preferred stock. c. treasury common stock. d. Dividends are paid on all of these.

*69.

Noncumulative preferred dividends in arrears a. are not paid or disclosed. b. must be paid before any other cash dividends can be distributed. c. are disclosed as a liability until paid. d. are paid to preferred stockholders if sufficient funds remain after payment of the current preferred dividend.

*70.

How should cumulative preferred dividends in arrears be shown in a corporation's statement of financial position? a. Note disclosure b. Increase in stockholders' equity c. Increase in current liabilities d. Increase in current liabilities for the amount expected to be declared within the year or operating cycle, and increase in long-term liabilities for the balance MULTIPLE CHOICE—Investments

21.

Which of the following is not a debt security? a. Convertible bonds b. Commercial paper c. Loans receivable d. All of these are debt securities.

22.

A correct valuation is a. available-for-sale at amortized cost. b. held-to-maturity at amortized cost. c. held-to-maturity at fair value. d. none of these.

23.

Securities which could be classified as held-to-maturity are a. redeemable preferred stock. b. warrants. c. municipal bonds. d. treasury stock.

24.

Unrealized holding gains or losses which are recognized in income are from securities classified as a. held-to-maturity. b. available-for-sale. c. trading. d. none of these.

25.

When an investor's accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment, the investor must a. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date. b. notify the issuer and request that a special payment be made for the appropriate portion of the interest period. c. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of interest to be received at the next interest receipt date. d. do nothing special and ignore the fact that the accounting period does not coincide with the bond's interest period.

S

26. Debt securities that are accounted for at amortized cost, not fair value, are a. held-to-maturity debt securities. b. trading debt securities. c. available-for-sale debt securities. d. never-sell debt securities.

48

S

27. Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses and are included as other comprehensive income and as a separate component of stockholders' equity are a. held-to-maturity debt securities. b. trading debt securities. c. available-for-sale debt securities. d. never-sell debt securities.

S

28. Use of the effective-interest method in amortizing bond premiums and discounts results in a. a greater amount of interest income over the life of the bond issue than would result from use of the straight-line method. b. a varying amount being recorded as interest income from period to period. c. a variable rate of return on the book value of the investment. d. a smaller amount of interest income over the life of the bond issue than would result from use of the straight-line method.

S

29. Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders' equity are a. available-for-sale securities where a company has holdings of less than 20%. b. trading securities where a company has holdings of less than 20%. c securities where a company has holdings of between 20% and 50%. d. securities where a company has holdings of more than 50%.

30.

A requirement for a security to be classified as held-to-maturity is a. ability to hold the security to maturity. b. positive intent. c. the security must be a debt security. d. All of these are required.

31.

Held-to-maturity securities are reported at a. acquisition cost. b. acquisition cost plus amortization of a discount. c. acquisition cost plus amortization of a premium. d. fair value. Solo Co. purchased $300,000 of bonds for $315,000. If Solo intends to hold the securities to maturity, the entry to record the investment includes a. a debit to Held-to-Maturity Securities at $300,000. b. a credit to Premium on Investments of $15,000. c. a debit to Held-to-Maturity Securities at $315,000. d. none of these.

32.

33.

Which of the following is not correct in regard to trading securities? a. They are held with the intention of selling them in a short period of time. b. Unrealized holding gains and losses are reported as part of net income. c. Any discount or premium is not amortized. d. All of these are correct.

34.

In accounting for investments in debt securities that are classified as trading securities, a. a discount is reported separately. b. a premium is reported separately. c. any discount or premium is not amortized. d. none of these.

35.

Investments in debt securities are generally recorded at a. cost including accrued interest. b. maturity value. c. cost including brokerage and other fees. d. maturity value with a separate discount or premium account.

36.

Pippen Co. purchased ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for a. 10 periods and 10% from the present value of 1 table.

49

b. 10 periods and 8% from the present value of 1 table. c. 20 periods and 5% from the present value of 1 table. d. 20 periods and 4% from the present value of 1 table. 37.

Investments in debt securities should be recorded on the date of acquisition at a. lower of cost or market. b. market value. c. market value plus brokerage fees and other costs incident to the purchase. d. face value plus brokerage fees and other costs incident to the purchase.

38.

An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a a. debit to Available-for-Sale Securities. b. debit to the discount account. c. debit to Interest Revenue. d. none of these.

39.

APB Opinion No. 21 specifies that, regarding the amortization of a premium or discount on a debt security, the a. effective-interest method of allocation must be used. b. straight-line method of allocation must be used. c. effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained. d. par value method must be used and therefore no allocation is necessary. Which of the following is correct about the effective-interest method of amortization? a. The effective interest method applied to investments in debt securities is different from that applied to bonds payable. b. Amortization of a discount decreases from period to period. c. Amortization of a premium decreases from period to period. d. The effective-interest method produces a constant rate of return on the book value of the investment from period to period.

40.

41.

When investments in debt securities are purchased between interest payment dates, preferably the a. securities account should include accrued interest. b. accrued interest is debited to Interest Expense. c. accrued interest is debited to Interest Revenue. d. accrued interest is debited to Interest Receivable.

42. Which of the following is not generally correct about recording a sale of a debt security before maturity date? a. Accrued interest will be received by the seller even though it is not an interest payment date. b. An entry must be made to amortize a discount to the date of sale. c. The entry to amortize a premium to the date of sale includes a credit to the Premium on Investments in Debt Securities. d. A gain or loss on the sale is not extraordinary. S

43. When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment a. by using the equity method. b. by using the fair value method. c. by using the effective interest method. d. by consolidation.

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44. Bista Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods? a. b. c. d.

Fair Value Method No Effect Increase No Effect Decrease

Equity Method Decrease Decrease No Effect No Effect

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45. An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as

50

Fair Value Method Equity Method a. Income Income b. A reduction of the investmentA reduction of the investment c. Income A reduction of the investment d. A reduction of the investment Income 46.

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies? a. The investor should always use the equity method to account for its investment. b. The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee. c. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee. d. The investor should always use the fair value method to account for its investment.

47.

If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the a. cost method. b. fair value method. c. divesture method. d. equity method.

48.

Byner Corporation accounts for its investment in the common stock of Yount Company under the equity method. Byner Corporation should ordinarily record a cash dividend received from Yount as a. a reduction of the carrying value of the investment. b. additional paid-in capital. c. an addition to the carrying value of the investment. d. dividend income.

49.

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the a. investor sells the investment. b. investee declares a dividend. c. investee pays a dividend. d. earnings are reported by the investee in its financial statements.

50.

Dane, Inc., owns 35% of Marin Corporation. During the calendar year 2007, Marin had net earnings of $300,000 and paid dividends of $30,000. Dane mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively? a. Understate, overstate, overstate b. Overstate, understate, understate c. Overstate, overstate, overstate d. Understate, understate, understate

51.

An unrealized holding loss on a company's available-for-sale securities should be reflected in the current financial statements as a. an extraordinary item shown as a direct reduction from retained earnings. b. a current loss resulting from holding securities. c. a note or parenthetical disclosure only. d. other comprehensive income and deducted in the equity section of the balance sheet.

52.

An unrealized holding gain on a company's available-for-sale securities should be reflected in the current financial statements as a. an extraordinary item shown as a direct increase to retained earnings. b. a current gain resulting from holding securities. c. a note or parenthetical disclosure only. d. other comprehensive income and included in the equity section of the balance sheet.

53.

A reclassification adjustment is reported in the a. income statement as an Other Revenue or Expense. b. stockholders’ equity section of the balance sheet. c. statement of comprehensive income as other comprehensive income. d. statement of stockholders’ equity.

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54.

When an investment in a held-to-maturity security is transferred to an available-for-sale security, the carrying value assigned to the available-for-sale security should be a. its original cost. b. its fair value at the date of the transfer. c. the lower of its original cost or its fair value at the date of the transfer. d. the higher of its original cost or its fair value at the date of the transfer.

55.

When an investment in an available-for-sale security is transferred to trading because the company anticipates selling the stock in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be a. its original cost. b. its fair value at the date of the transfer. c. the higher of its original cost or its fair value at the date of the transfer. d. the lower of its original cost or its fair value at the date of the transfer.

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56. A debt security is transferred from one category to another. Generally acceptable accounting principles require that for this particular reclassification (1) the security be transferred at fair value at the date of transfer, and (2) the unrealized gain or loss at the date of transfer currently carried as a separate component of stockholders' equity be amortized over the remaining life of the security. What type of transfer is being described? a. Transfer from trading to available-for-sale b. Transfer from available-for-sale to trading c. Transfer from held-to-maturity to available-for-sale d. Transfer from available-for-sale to held-to-maturity

*57.

Companies that attempt to exploit inefficiencies in various derivative markets by attempting to lock in profits by simultaneously entering into transactions in two or more markets are called a. arbitrageurs. b. gamblers. c. hedgers. d. speculators.

*58.

All a. b. c. d.

*59.

All a. b. c. d.

*60.

The accounting for fair value hedges records the derivative at its a. amortized cost. b. carrying value. c. fair value. d. historical cost.

*61.

Gains or losses on cash flow hedges are a. ignored completely. b. recorded in equity, as part of other comprehensive income. c. reported directly in net income. d. reported directly in retained earnings.

*62.

An a. b. c. d.

*63.

All of the following are requirements for disclosures related to financial instruments except a. disclosing the fair value and related carrying value of the instruments.

of the following statements regarding accounting for derivatives are correct except that they should be recognized in the financial statements as assets and liabilities. they should be reported at fair value. gains and losses resulting from speculation should be deferred. gains and losses resulting from hedge transactions are reported in different ways, depending upon the type of hedge. of the following are characteristics of a derivative financial instrument except the instrument has one or more underlyings and an identified payment provision. requires a large investment at the inception of the contract. requires or permits net settlement. All of these are characteristics.

option to convert a convertible bond into shares of common stock is a(n) embedded derivative. host security. hybrid security. fair value hedge.

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b. distinguishing between financial instruments held or issued for purposes other than trading. c. combining or netting the fair value of separate financial instruments. d. displaying as a separate classification of other comprehensive income the net gain/loss on derivative instruments designated in cash flow hedges. MULTIPLE CHOICE—Revenue Recognition 21.

The revenue recognition principle provides that revenue is recognized when a. it is realized. b. it is realizable. c. it is realized or realizable and it is earned. d. none of these.

22.

When goods or services are exchanged for cash or claims to cash (receivables), revenues are a. earned. b. realized. c. recognized. d. all of these.

23.

When the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, revenues are a. earned. b. realized. c. recognized. d. all of these.

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24.

Which of the following is not an accurate representation concerning revenue recognition? a. Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers. b. Revenue from services rendered is recognized when cash is received or when services have been performed. c. Revenue from permitting others to use enterprise assets is recognized as time passes or as the assets are used. d. Revenue from disposing of assets other than products is recognized at the date of sale.

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25.

The process of formally recording or incorporating an item in the financial statements of an entity is a. allocation. b. articulation. c. realization. d. recognition.

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26.

Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts are cash sales at the time of purchase by the buyer. Collections received for service contracts should be recorded as a. service revenue. b. deferred service revenue. c. a reduction in installment accounts receivable. d. a direct addition to retained earnings.

27.

Which of the following is not a reason why revenue is recognized at time of sale? a. Realization has occurred. b. The sale is the critical event. c. Title legally passes from seller to buyer. d. All of these are reasons to recognize revenue at time of sale.

28.

An alternative available when the seller is exposed to continued risks of ownership through return of the product is a. recording the sale, and accounting for returns as they occur in future periods. b. not recording a sale until all return privileges have expired. c. recording the sale, but reducing sales by an estimate of future returns. d. all of these.

29.

A sale should not be recognized as revenue by the seller at the time of sale if a. payment was made by check.

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b. the selling price is less than the normal selling price. c. the buyer has a right to return the product and the amount of future returns cannot be reasonably estimated. d. none of these. 30.

The FASB concluded that if a company sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at the time of sale only if all of six conditions have been met. Which of the following is not one of these six conditions? a. The amount of future returns can be reasonably estimated. b. The seller's price is substantially fixed or determinable at time of sale. c. The buyer's obligation to the seller would not be changed in the event of theft or damage of the product. d. The buyer is obligated to pay the seller upon resale of the product.

31.

In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be a. the terms of payment in the contract. b. the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable. c. the method commonly used by the contractor to account for other long-term construc-tion contracts. d. the inherent nature of the contractor's technical facilities used in construction.

32.

The percentage-of-completion method must be used when certain conditions exist. Which of the following is not one of those necessary conditions? a. Estimates of progress toward completion, revenues, and costs are reasonably dependable. b. The contractor can be expected to perform the contractual obligation. c. The buyer can be expected to satisfy some of the obligations under the contract. d. The contract clearly specifies the enforceable rights of the parties, the consideration to be exchanged, and the manner and terms of settlement.

33.

When work to be done and costs to be incurred on a long-term contract can be estimated dependably, which of the following methods of revenue recognition is preferable? a. Installment-sales method b. Percentage-of-completion method c. Completed-contract method d. None of these

34.

How should the balances of progress billings and construction in process be shown at reporting dates prior to the completion of a long-term contract? a. Progress billings as deferred income, construction in progress as a deferred expense. b. Progress billings as income, construction in process as inventory. c. Net, as a current asset if debit balance, and current liability if credit balance. d. Net, as income from construction if credit balance, and loss from construction if debit balance.

35.

In accounting for a long-term construction-type contract using the percentage-of-completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the a. total costs incurred to date. b. total estimated cost. c. unbilled portion of the contract price. d. total contract price.

36.

How should earned but unbilled revenues at the balance sheet date on a long-term construction contract be disclosed if the percentage-of-completion method of revenue recognition is used? a. As construction in process in the current asset section of the balance sheet. b. As construction in process in the noncurrent asset section of the balance sheet. c. As a receivable in the noncurrent asset section of the balance sheet. d. In a note to the financial statements until the customer is formally billed for the portion of work completed.

37.

The principal disadvantage of using the percentage-of-completion method of recognizing revenue from long-term contracts is that it a. is unacceptable for income tax purposes. b. gives results based upon estimates which may be subject to considerable uncertainty.

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c. is likely to assign a small amount of revenue to a period during which much revenue was actually earned. d. none of these. S

One of the more popular input measures used to determine the progress toward completion in the percentage-of-completion method is a. revenue-percentage basis. b. cost-percentage basis. c. progress completion basis. d. cost-to-cost basis.

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39.

The principal advantage of the completed-contract method is that a. reported revenue is based on final results rather than estimates of unperformed work. b. it reflects current performance when the period of a contract extends into more than one accounting period. c. it is not necessary to recognize revenue at the point of sale. d. a greater amount of gross profit and net income is reported than is the case when the percentage-of-completion method is used.

40.

Under the completed-contract method a. revenue, cost, and gross profit are recognized during the production cycle. b. revenue and cost are recognized during the production cycle, but gross profit recognition is deferred until the contract is completed. c. revenue, cost, and gross profit are recognized at the time the contract is completed. d. none of these.

41.

Cost estimates on a long-term contract may indicate that a loss will result on completion of the entire contract. In this case, the entire expected loss should be a. recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed. b. recognized in the current period under the percentage-of-completion method, but the completed-contract method should defer recognition of the loss to the time when the contract is completed. c. recognized in the current period under the completed-contract method, but the percentageof-completion method should defer the loss until the contract is completed. d. deferred and recognized when the contract is completed, regardless of whether the percentage-of-completion or completed-contract method is employed.

42.

Cost estimates at the end of the second year indicate a loss will result on completion of the entire contract. Which of the following statements is correct? a. Under the completed-contract method, the loss is not recognized until the year the construction is completed. b. Under the percentage-of-completion method, the gross profit recognized in the first year must not be changed. c. Under the completed-contract method, when the billings exceed the accumulated costs, the amount of the estimated loss is reported as a current liability. d. Under the completed-contract method, when the Construction in Process balance exceeds the billings, the estimated loss is added to the accumulated costs.

43.

The criteria for recognition of revenue at the completion of production of precious metals and farm products include a. an established market with quoted prices. b. low additional costs of completion and selling. c. units are interchangeable. d. all of these.

44.

In certain cases, revenue is recognized at the completion of production even though no sale has been made. Which of the following statements is not true? a. Examples involve precious metals or farm equipment. b. The products possess immediate marketability at quoted prices. c. No significant costs are involved in selling the product. d. All of these statements are true.

38.

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45.

For which of the following products is it appropriate to recognize revenue at the completion of production even though no sale has been made? a. Automobiles

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b. Large appliances c. Single family residential units d. Precious metals S

46.

When there is a significant increase in the estimated total contract costs but the increase does not eliminate all profit on the contract, which of the following is correct? a. Under both the percentage-of-completion and the completed-contract methods, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods. b. Under the percentage-of-completion method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods. c. Under the completed-contract method only, the estimated cost increase requires a current period adjustment of excess gross profit recognized on the project in prior periods. d. No current period adjustment is required.

47.

Deferred gross profit on installment sales is generally treated as a(n) a. deduction from installment accounts receivable. b. deduction from installment sales. c. unearned revenue and classified as a current liability. d. deduction from gross profit on sales.

48.

The installment-sales method of recognizing profit for accounting purposes is acceptable if a. collections in the year of sale do not exceed 30% of the total sales price. b. an unrealized profit account is credited. c. collection of the sales price is not reasonably assured. d. the method is consistently used for all sales of similar merchandise.

49.

The method most commonly used to report defaults and repossessions is a. provide no basis for the repossessed asset thereby recognizing a loss. b. record the repossessed merchandise at fair value, recording a gain or loss if appropriate. c. record the repossessed merchandise at book value, recording no gain or loss. d. none of these.

50.

Under the installment-sales method, a. revenue, costs, and gross profit are recognized proportionate to the cash that is received from the sale of the product. b. gross profit is deferred proportionate to cash uncollected from sale of the product, but total revenues and costs are recognized at the point of sale. c. gross profit is not recognized until the amount of cash received exceeds the cost of the item sold. d. revenues and costs are recognized proportionate to the cash received from the sale of the product, but gross profit is deferred until all cash is received.

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51.

The realization of income on installment sales transactions involves a. recognition of the difference between the cash collected on installment sales and the cash expenses incurred. b. deferring the net income related to installment sales and recognizing the income as cash is collected. c. deferring gross profit while recognizing operating or financial expenses in the period incurred. d. deferring gross profit and all additional expenses related to installment sales until cash is ultimately collected.

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52.

A manufacturer of large equipment sells on an installment basis to customers with questionable credit ratings. Which of the following methods of revenue recognition is least likely to overstate the amount of gross profit reported? a. At the time of completion of the equipment (completion of production method) b. At the date of delivery (sales method) c. The installment-sales method d. The cost–recovery method

53.

A seller is properly using the cost-recovery method for a sale. Interest will be earned on the future payments. Which of the following statements is not correct? a. After all costs have been recovered, any additional cash collections are included in income. b. Interest revenue may be recognized before all costs have been recovered. c. The deferred gross profit is offset against the related receivable on the balance sheet.

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d. Subsequent income statements report the gross profit as a separate item of revenue when it is recognized as earned. 54.

Under the cost-recovery method of revenue recognition, a. income is recognized on a proportionate basis as the cash is received on the sale of the product. b. income is recognized when the cash received from the sale of the product is greater than the cost of the product. c. income is recognized immediately. d. none of these.

55.

Winser, Inc. is engaged in extensive exploration for water in Utah. If, upon discovery of water, Winser does not recognize any revenue from water sales until the sales exceed the costs of exploration, the basis of revenue recognition being employed is the a. production basis. b. cash (or collection) basis. c. sales (or accrual) basis. d. cost recovery basis.

*56.

Some of the initial franchise fee may be allocated to a. continuing franchise fees. b. interest revenue on the future installments. c. options to purchase the franchisee's business. d. All of these may reduce the amount of the initial franchise fee that is recognized as revenue.

*57.

Continuing franchise fees should be recorded by the franchisor a. as revenue when earned and receivable from the franchisee. b. as revenue when received. c. in accordance with the accounting procedures specified in the franchise agreement. d. as revenue only after the balance of the initial franchise fee has been collected.

*58.

Occasionally a franchise agreement grants the franchisee the right to make future bargain purchases of equipment or supplies. When recording the initial franchise fee, the franchisor should a. increase revenue recognized from the initial franchise fee by the amount of the expected future purchases. b. record a portion of the initial franchise fee as unearned revenue which will increase the selling price when the franchisee subsequently makes the bargain purchases. c. defer recognition of any revenue from the initial franchise fee until the bargain purchases are made. d. None of these.

*59.

A franchise agreement grants the franchisor an option to purchase the franchisee's business. It is probable that the option will be exercised. When recording the initial franchise fee, the franchisor should a. record the entire initial franchise fee as a deferred credit which will reduce the franchisor's investment in the purchased outlet when the option is exercised. b. record the entire initial franchise fee as unearned revenue which will reduce the amount of cash paid when the option is exercised. c. record the portion of the initial franchise fee which is attributable to the bargain purchase option as a reduction of the future amounts receivable from the franchisee. d. None of these.

*60.

Revenue is recognized by the consignor when the a. goods are shipped to the consignee. b. consignee receives the goods. c. consignor receives an advance from the consignee. d. consignor receives an account sales from the consignee.

MULTIPLE CHOICE—Leases 21.

Major reasons why a company may become involved in leasing to other companies is (are) a. interest revenue. b. high residual values.

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c. tax incentives. d. all of these. 22.

Which of the following is an advantage of leasing? a. Off-balance-sheet financing b. Less costly financing c. 100% financing at fixed rates d. All of these

23.

Which of the following best describes current practice in accounting for leases? a. Leases are not capitalized. b. Leases similar to installment purchases are capitalized. c. All long-term leases are capitalized. d. All leases are capitalized.

24.

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.

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An a. b. c.

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26.

What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee? a. No impact as the option does not enter into the transaction until the end of the lease term. b. The lessee must increase the present value of the minimum lease payments by the present value of the option price. c. The lessee must decrease the present value of the minimum lease payments by the present value of the option price. d. The minimum lease payments would be increased by the present value of the option price if, at the time of the lease agreement, it appeared certain that the lessee would exercise the option at the end of the lease and purchase the asset at the option price.

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27.

The amount to be recorded as the cost of an asset under capital lease is equal to the a. present value of the minimum lease payments. b. present value of the minimum lease payments or the fair value of the asset, whichever is lower. c. present value of the minimum lease payments plus the present value of any unguaranteed residual value. d. carrying value of the asset on the lessor's books.

28.

The methods of accounting for a lease by the lessee are a. operating and capital lease methods. b. operating, sales, and capital lease methods. c. operating and leveraged lease methods. d. none of these.

29.

Which of the following is a correct statement of one of the capitalization criteria? a. The lease transfers ownership of the property to the lessor. b. The lease contains a purchase option. c. The lease term is equal to or more than 75% of the estimated economic life of the leased property. d. The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property.

30.

Minimum lease payments may include a

25.

essential element of a lease conveyance is that the lessor conveys less than his or her total interest in the property. lessee provides a sinking fund equal to one year's lease payments. 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. d. term of the lease is substantially equal to the economic life of the leased property.

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a. b. c. d. 31.

32.

penalty for failure to renew. bargain purchase option. guaranteed residual value. any of these.

Executory costs include a. maintenance. b. property taxes. c. insurance. d. all of these. In computing the present value of the minimum lease payments, the lessee should a. use its incremental borrowing rate in all cases. b. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known to the lessee. c. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee. d. none of these.

33.

In computing depreciation of a leased asset, the lessee should subtract a. a guaranteed residual value and depreciate over the term of the lease. b. an unguaranteed residual value and depreciate over the term of the lease. c. a guaranteed residual value and depreciate over the life of the asset. d. an unguaranteed residual value and depreciate over the life of the asset.

34.

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. capital method will cause debt to increase, compared to the operating method. c. operating method will cause income to decrease, compared to the capital method. d. operating method will cause debt to increase, compared to the capital method.

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35.

A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the a. asset's remaining economic life. b. term of the lease. c. life of the asset or the term of the lease, whichever is shorter. d. life of the asset or the term of the lease, whichever is longer.

36.

Based solely upon the following sets of circumstances indicated below, which set gives rise to a sales-type or direct-financing lease of a lessor? Transfers Ownership Contains Bargain Collectibility of Lease Any Important By End Of Lease? Purchase Option? Payments Assured? Uncertainties? a. No Yes Yes No b. Yes No No No c. Yes No No Yes d. No Yes Yes Yes

37.

Which of the following would not be included in the Lease Receivable account? a. Guaranteed residual value b. Unguaranteed residual value c. A bargain purchase option d. All would be included

38.

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. should be amortized over the period of the lease using the straight-line method. c. does not arise. d. should be recognized at the lease's expiration.

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39.

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 directfinancing lease. b. the difference between the lease payments receivable and the fair market value of the leased property.

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c. the present value of minimum lease payments. d. the total book value of the asset less any accumulated depreciation recorded by the lessor prior to the lease agreement. S

If the residual value of a leased asset is guaranteed by a third party a. it is treated by the lessee as no residual value. b. the third party is also liable for any lease payments not paid by the lessee. c. the net investment to be recovered by the lessor is reduced. d. it is treated by the lessee as an additional payment and by the lessor as realized at the end of the lease term.

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41.

The primary difference between a direct-financing lease and a sales-type lease is the a. manner in which rental receipts are recorded as rental income. b. amount of the depreciation recorded each year by the lessor. c. recognition of the manufacturer's or dealer's profit at the inception of the lease. d. allocation of initial direct costs by the lessor to periods benefited by the lease arrangements.

P

42.

A lessor with a sales-type lease involving an unguaranteed residual value available to the lessor at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts? a. The minimum lease payments plus the unguaranteed residual value. b. The present value of the minimum lease payments. c. The cost of the asset to the lessor, less the present value of any unguaranteed residual value. d. The present value of the minimum lease payments plus the present value of the unguaranteed residual value.

43.

For a sales-type lease, a. the sales price includes the present value of the unguaranteed residual value. b. the present value of the guaranteed residual value is deducted to determine the cost of goods sold. c. the gross profit will be the same whether the residual value is guaranteed or unguaranteed. d. none of these.

44.

Which of the following statements is correct? a. In a direct-financing lease, initial direct costs are added to the net investment in the lease. b. In a sales-type lease, initial direct costs are expensed in the year of incurrence. c. For operating leases, initial direct costs are deferred and allocated over the lease term. d. All of these.

45.

The Lease Liability account should be disclosed as a. all current liabilities. b. all noncurrent liabilities. c. current portions in current liabilities and the remainder in noncurrent liabilities. d. deferred credits.

40.

*46.

When a company sells property and then leases it back, any gain on the sale should usually be a. recognized in the current year. b. recognized as a prior period adjustment. c. recognized at the end of the lease. d. deferred and recognized as income over the term of the lease.

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