ACC 303 Complete Quizzes and Exams – Strayer University NEW

ACC/303 Complete Quizzes and Exams – Strayer NEW

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Week 2 Through 11: Chapters 1 Through 7

Chapter 1
FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

1. Financial accounting is the process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, evaluate, and control a company’s operations.

2. Financial statements are the principal means through which a company communicates its financial information to those outside it.

3. Users of financial reports provided by a company use that information to make their capital allocation decisions.

4. An effective process of capital allocation promotes productivity and provides an efficient market for buying and selling securities and obtaining and granting credit.

5. The objective of financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, but not to users who are not investors.

6. Investors are interested in financial reporting because it provides information that is useful for making decisions (decision-usefulness approach).

7. Users of financial accounting statements have both coinciding and conflicting needs for information of various types.

8. The Securities and Exchange Commission appointed the Committee on Accounting Procedure.

9. The passage of a new FASB Standards Statement requires the support of five of the seven board members.

10. Financial Accounting Concepts set forth fundamental objectives and concepts that are used in developing future standards of financial accounting and reporting.

11. The AICPA created the Accounting Principles Board in 1959.

12. The FASB’s Codification integrates existing GAAP, and creates new GAAP.

13. The AICPA’s Code of Professional Conduct requires that members prepare financial statements in accordance with generally accepted accounting principles.

14. GAAP is a product of careful logic or empirical findings and are not influenced by political action.

15. The Public Company Accounting Oversight Board has oversight and enforcement authority and establishes auditing and independence standards and rules.

16. The expectations gap is caused by what the public thinks accountants should do and what accountants think they can do.

17. Financial reports in the early 21st century did not provide any information about a company’s soft assets (intangibles).

18. Accounting standards are now less likely to require the recording or disclosure of fair value information.

19. U.S. companies that list overseas are required to use International Financial Reporting Standards, issued by the International Accounting Standards Board.

20. Ethical issues in financial accounting are governed by the AICPA.

True-False Answers—Conceptual

MULTIPLE CHOICE—Conceptual

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.

25. All the following are differences between financial and managerial accounting in how accounting information is used except to
a. plan and control company’s operations.
b. decide whether to invest in the company.
c. evaluate borrowing capacity to determine the extent of a loan to grant.
d. All the above.

26. Which of the following represents a form of communication through financial reporting but not through financial statements?
a. Balance sheet.
b. President’s letter.
c. Income statement.
d. Notes to financial statements.

P27. 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.

28. How does accounting help the capital allocation process attract investment capital?
a. Provides timely, relevant information.
b. Encourages innovation.
c. Promotes productivity.
d. a and b above.

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

30. An effective capital allocation process
a. promotes productivity.
b. encourages innovation.
c. provides an efficient market for buying and selling securities.
d. all of these.

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

32. Which of the following is not a major challenge facing the accounting profession?
a. Nonfinancial measurements.
b. Timeliness.
c. Accounting for hard assets.
d. Forward-looking information.

33. What is the objective of financial reporting?
a. Provide information that is useful to management in making decisions.
b. Provide information that clearly portray nonfinancial transactions.
c. Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors.
d. Provide information that excludes claims to the resources.

34. Primary users for general-purpose financial statements include
a. creditors.
b. employees.
c. investors.
d. both creditors and investors.

35. When making decisions, investors are interested in assessing
a. the company’s ability to generate net cash inflows.
b. management’s ability to protect and enhance the capital providers’ investments.
c. Both a and b.
d. the company’s ability to generate net income.

36. 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.

37. Which perspective is adopted as part of the objective of general-purpose financial reporting?
a. Decision-usefulness perspective.
b. Proprietary perspective.
c. Entity perspective.
d. Financial reporting perspective.

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

39. 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.

40. Which of the following is a general limitation of “general purpose financial statements”?
a. General purpose financial statements may not be the most informative for a specific enterprise.
b. General purpose financial statements are comparable.
c. General purpose financial statements are assumed to present fairly the company’s financial operations.
d. None of the above.

41. What is the relationship between the Securities and Exchange Commission and accounting standard setting in the United States?
a. The SEC requires all companies listed on an exchange to submit their financial statements to the SEC.
b. The SEC coordinates with the AICPA in establishing accounting standards.
c. The SEC has a mandate to establish accounting standards for enterprises under its jurisdiction.
d. The SEC reviews financial statements for compliance.

42. What is due process in the context of standard setting at the FASB?
a. FASB operates in full view of the public.
b. Public hearings are held on proposed accounting standards.
c. Interested parties can make their views known.
d. All of the above.

43. Which of the following organizations has been responsible for setting U.S. accounting standards?
a. Accounting Principles Board.
b. Committee on Accounting Procedure.
c. Financial Accounting Standards Board.
d. All of the above.

44. Why did the AICPA create the Accounting Principles Board?
a. The SEC disbanded the previous standard setting organization.
b. The previous standard setting organization did not provide a structured set of accounting principles.
c. No such organization existed in the past.
d. None of the above.

45. Which organization was responsible for issuing Accounting Research Bulletins?
a. Accounting Principles Board.
b. Committee on Accounting Procedure.
c. The SEC.
d. AICPA.

46. A characteristic of generally accepted accounting principles include the following:
a. common set of standards and principles.
b. standards and principles are based federal statutes.
c. acceptance requires an affirmative vote of Certified Public Accountants.
d. practices that become accepted for at least a year by all industry members.

47. Characteristics of generally accepted accounting principles include all of the following except
a. authoritative accounting the rule-making body established a principle of reporting.
b. standards are considered useful by the profession.
c. each principle is approved by the SEC.
d. practice has become universally accepted over time.

48. Why was it believed that accounting standards that were issued by the Financial Accounting Standards Board would carry more weight?
a. Smaller membership.
b. FASB board members are well-paid.
c. FASB board members must be CPAs.
d. Due process.

49. The passage of a new FASB Standards Statement requires the support of
a. all Board members.
b. three Board members.
c. four Board members.
d. five Board members.

50. What is the purpose of Emerging Issues Task Force?
a. Provide interpretation of existing standards.
b. Provide a consensus on how to account for new and unusual financial transactions.
c. Provide interpretive guidance.
d. Provide timely guidance on select issues.

51. Which organization is responsible for issuing Emerging Issues Task Force Statements?
a. FASB
b. CAP
c. APB
d. SEC

52. 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.

53. 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.

54. 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.

55. 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).

56. 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.

57. 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.

58. 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.

59. 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.

60. 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

61. 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.

62. 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.

63. The American Institute of Certified Public Accountants (AICPA) continues to be involved in all of the following except
a. developing and enforcing professional ethics.
b. developing auditing standards.
c. providing professional education programs.
d. all of the above.

P64. Which of the following pronouncements were issued by the Accounting Principles Board?
a. Accounting Research Bulletins
b. Opinions
c. Statements of Position
d. Statements of Financial Accounting Concepts

65. 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

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

67. 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.

P68. 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.

P69. The following are part of the “due process” system used by the FASB in the evolution of a typical FASB Statement of Financial Accounting Standards:
1. Exposure Draft
2. Statement of Financial Accounting Standards
3. Preliminary Views
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.

70. 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.

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

72. 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.

73. 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

74. Rule 203 of the Code of Professional Conduct addresses:
a. ethical requirements.
b. financial statements should be based on generally accepted accounting principles.
c. advertising to obtained clients.
d. auditing financial statements.

75. What is the purpose of a FASB Staff Position?
a. Provide interpretation of existing standards.
b. Provide a consensus on how to account for new and unusual financial transactions.
c. Provide interpretive guidance.
d. Provide timely guidance on select issues.

76. Which of the following is not considered a component of generally accepted accounting principles?
a. FASB Implementation Guides.
b. Widely recognized industry practices.
c. Articles published in CPA journals.
d. AICPA Accounting Interpretations.

77. 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.

78. 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.

79. What is not a source of pressure that may influence the accounting standard setting process?
a. Congress.
b. Lobbyist.
c. CPA firms.
d. None of the above.

80. What is a possible danger if politics plays too big a role in accounting standard setting?
a. Accounting standards that are not truly generally accepted.
b. Individuals may influence the standards.
c. User groups become active.
d. The FASB delegates its authority to elected officials.

81. What is “expectation gap”?
a. The difference between what the public thinks the accountant is not doing and what the accountant knows they don’t do.
b. The difference between what the public thinks the accountant is doing and what Congress says the accountant is doing.
c. The difference between what the public thinks the accountant is doing and what the accountant thinks they can do.
d. The difference between what the accountant is doing and what the Courts say the accountant should be doing.

82. What is not a reason that accounting standards may differ across countries?
a. Governments.
b. Language.
c. Culture.
d. Past Practice.

83. What would be an advantage of having all countries adopt and follow the same accounting standards?
a. Consistency.
b. Comparability.
c. Lower preparation costs.
d. b and c

84. Which of the following is an ethical concern of accountants?
a. Earnings manipulation.
b. Conservative accounting.
c. Industry practices.
d. None of the above.

Multiple Choice Answers—Conceptual

IFRS QUESTIONS
True/False:
1. IFRS includes both International Financial Reporting Standards and International Accounting Standards.
2. International Financial Reporting Standards preceded International Accounting Standards
3. The standard-setting structure used by the International Accounting Standards Board is very similar to that used by the Financial Accounting Standards Board.
4. The rules-based standards of IFRS are more detailed than the simpler, principles-based standards of U.S. GAAP.
5. The International Accounting Standards Board issues International Financial Reporting Standards.
6. International Accounting Standards are no longer considered part of IFRS because they have been replaced by International Financial Reporting Standards.

Answers to True/False questions:

Multiple Choice:
1. Authoritative standards for IFRS include:
a. International Financial Reporting Standards only.
b. International Financial Reporting Standards and International Accounting Standards only.
c. International Financial Reporting Standards, International Accounting Standards and U.S. GAAP only.
d. International Financial Reporting Standards, International Accounting Standards and any GAAP standard recognized by an organized stock exchange.

2. Which of these statements regarding the IFRS and U.S. GAAP is correct?
a. U.S. GAAP is considered to be “principles-based” and more detailed than IFRS.
b. U.S. GAAP is considered to be “rules-based” and less detailed than IFRS.
c. IFRS is considered to be “principles-based” and less detailed than U.S. GAAP
d. Both U.S. GAAP and IFRS are considered to be “rules-based”, but U.S. GAAP tends to be more complex.

3. The IASB’s standard-setting structure includes all of the following except
a. Standing Interpretations Committee
b. Standards Advisory Council
c. Standards Comparison Committee
d. Trustees

Answers to Multiple Choice:

Short Answer:
1. Why would it be advantageous for U.S. GAAP and International GAAP to be the same?

2. What is the difference between principles-based and rules-based accounting rules? Is IFRS more principles-based than U.S. GAAP? Explain.

CHAPTER 2
CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL ACCOUNTING

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

1. A soundly developed conceptual framework enables the FASB to issue more useful and consistent pronouncements over time.

2. A conceptual framework is a coherent system of concepts that flow from an objective.

3. The first level of the conceptual framework identifies the recognition, measurement, and disclosure concepts used in establishing accounting standards.

4. The IASB has also issued a conceptual framework and the FASB and the IASB have agreed to develop a common conceptual framework.

5. Although the FASB has developed a conceptual framework, no Statements of Financial Accounting Concepts have been issued to date.

6. The objective of financial reporting is the foundation of the conceptual framework.

7. Users of financial statements are assumed to need no knowledge of business and financial accounting matters to understand information contained in financial statements.

8. Relevance and faithful representation are the two primary qualities that make accounting information useful for decision making.

9. The idea of consistency does not mean that companies cannot switch from one accounting method to another.

10. Timeliness and neutrality are two ingredients of relevance.

11. Verifiability and predictive value are two ingredients of faithful representation.

12. Revenues, gains, and distributions to owners all increase equity.

13. Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

14. The historical cost principle would be of limited usefulness if not for the going concern assumption.

15. The economic entity assumption means that economic activity can be identified with a particular legal entity.

16. The expense recognition principle states that debits must equal credits in each transaction.

17. Revenues are realizable when assets received or held are readily convertible into cash or claims to cash.

18. Supplementary information may include details or amounts that present a different perspective from that adopted in the financial statements.

19. In order to justify reguiring a particular measurement or disclosure, the benefits to be derived from it must equal the costs associated with it.

20. Prudence or conservatism means when in doubt, choose the solution that will be least likely to overstate liabilities or expenses.

True False Answers—Conceptual

MULTIPLE CHOICE—Conceptual

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 solved.
d. all of these.

23. Which of the following 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.

24. What is a purpose of having a conceptual framework?
a. To enable the profession to more quickly solve emerging practical problems.
b. To provide a foundation from which to build more useful standards.
c. Neither a nor b.
d. Both a and b.

S25. 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.

26. In the conceptual framework for financial reporting, what provides “the why”–the purpose of accounting?
a. Recognition, measurement, and disclosure concepts such as assumptions, principles, and constraints
b. Qualitative characteristics of accounting information
c. Elements of financial statements
d. Objective of financial reporting

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

28. 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.

P29. 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.

30. What is a primary objective of financial reporting as indicated in the conceptual framework?
a. provide information that is useful to those making investing and credit decisions.
b. provide information that is useful to management.
c. provide information about those investing in the entity.
d. All of the above.

31. What is a primary objective of financial reporting as indicated in the conceptual framework?
a. Provide information that is helpful to present and potential investors, creditors, and other users in assessing the amounts, timing, and uncertainty of future cash flows.
b. Provide information that is helpful to present investors, creditors, and other users in assessing the amounts, timing, and uncertainty of future cash flows.
c. Provide information that is helpful to potential investors, creditors, and other users in assessing the amounts, timing, and uncertainty of future cash flows.
d. None of the above.

32. Which of the following is a fundamental characteristic of useful accounting information?
a. Comparability.
b. Relevance.
c. Neutrality.
d. Materiality.

33. Which of the following is a primary characteristic of useful accounting information?
a. Conservatism.
b. Comparability.
c. Faithful representation.
d. Consistency.

34. What is meant by comparability when discussing financial accounting information?
a. Information has predictive or confirmatory value.
b. Information is reasonably free from error.
c. Information that is measured and reported in a similar fashion across companies.
d. Information is timely.

35. What is meant by consistency when discussing financial accounting information?
a. Information that is measured and reported in a similar fashion across points in time.
b. Information is timely.
c. Information is measured similarly across the industry.
d. Information is verifiable.

36. Which of the following is an ingredient of relevance?
a. Verifiability.
b. Neutrality.
c. Timeliness.
d. Materiality.

37. Which of the following is an ingredient of faithful representation?
a. Predictive value.
b. Materiality.
c. Neutrality.
d. Confirmatory value.

38. Changing the method of inventory valuation should be reported in the financial statements under what qualitative characteristic of accounting information?
a. Consistency.
b. Verifiability.
c. Timeliness.
d. Comparability.
39. Company A issuing its annual financial reports within one month of the end of the year is an example of which ingredient of fundamental quality of accounting information?
a. Neutrality.
b. Timeliness.
c. Predictive value.
d. Completeness.

40. What is the quality of information that enables users to better forecast future operations?
a. Faithful representation.
b. Materiality.
c. Timeliness.
d. Relevance.

41. Neutrality is an ingredient of which fundamental quality of information?
a. Faithful representation.
b. Comparability.
c. Relevance.
d. Understandability.

42. If the FIFO inventory method was used last period, it should be used for the current and following periods because of
a. relevance.
b. neutrality.
c. understandability.
d. consistency.

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

44. The two fundamental qualities that make accounting information useful for decision making are
a. comparability and timeliness.
b. materiality and neutrality.
c. relevance and faithful representation.
d. faithful representation and comparability.

45. 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.

46. The quality of information that means the numbers and descriptions match what really existed or happened is
a. relevance.
b. faithful representation.
c. completeness.
d. neutrality.

47. Which of the following does not relate to relevance?
a. Materiality
b. Predictive value
c. Confirmatory value
d. All of these

48. According to Statement of Financial Accounting Concepts No. 2, materiality is an ingredient of the fundamental quality of
Relevance Faithful Representation
a. Yes Yes
b. No Yes
c. Yes No
d. No No

49. According to Statement of Financial Accounting Concepts No. 2, completeness is an ingredient of the fundamental quality of
Relevance Faithful Representation
a. Yes No
b. Yes Yes
c. No No
d. No Yes

50. According to Statement of Financial Accounting Concepts No. 2, neutrality is an ingredient of the fundamental quality of
Relevance Faithful Representation
a. Yes Yes
b. No Yes
c. Yes No
d. No No

51. Neutrality means that information
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. cannot favor one set of interested parties over another.

52. 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. faithful representation.
c. verifiability.
d. neutrality.

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

54. Under Statement of Financial Accounting Concepts No. 2, free from error is an ingredient of the fundamental quality of
Faithful Representation Relevance
a. Yes Yes
b. No Yes
c. Yes No
d. No No

55. 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.

56. Financial information exhibits the characteristic of consistency when
a. expenses are reported as charges against revenue in the period in which they are paid.
b. companies apply the same accounting treatment to similar events, 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.

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

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

59. 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.

60. 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.
61. A decrease in net assets arising from peripheral or incidental transactions is called a(n)
a. capital expenditure.
b. cost.
c. loss.
d. expense.

62. 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.

63. 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

P64. 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.
d. It excludes prior period adjustments (transactions that relate to previous periods, such as corrections of errors).

S65. According to the FASB conceptual framework, which of the following elements describes transactions or events that affect a company during a period of time?
a. Assets.
b. Expenses.
c. Equity.
d. Liabilities.

S66. According to the FASB Conceptual Framework, the elements⎯assets, liabilities, and equity⎯describe amounts of resources and claims to resources at/during a
Moment in Time Period of Time
a. Yes No
b. Yes Yes
c. No Yes
d. No No

67. Which of the following is not a basic element of financial statements?
a. Assets.
b. Balance sheet.
c. Losses.
d. Revenue.

68. Which of the following basic elements of financial statements is more associated with the balance sheet than the income statement?
a. Equity.
b. Revenue.
c. Gains.
d. Expenses.

69. Issuance of common stock for cash affects which basic element of financial statements?
a. Revenues.
b. Losses.
c. Liabilities.
d. Equity.

70. Which basic element of financial statements arises from peripheral or incidental transactions?
a. Assets.
b. Liabilities.
c. Gains.
d. Expenses.

71. Which of the following is not a basic assumption underlying the financial accounting structure?
a. Economic entity assumption.
b. Going concern assumption.
c. Periodicity assumption.
d. Historical cost assumption.

72. Which basic assumption is illustrated when a firm reports financial results on an annual basis?
a. Economic entity assumption.
b. Going concern assumption.
c. Periodicity assumption.
d. Monetary unit assumption.

73. Which basic assumption may not be followed when a firm in bankruptcy reports financial results?
a. Economic entity assumption.
b. Going concern assumption.
c. Periodicity assumption.
d. Monetary unit assumption.

74. Which accounting assumption or principle is being violated if a company provides financial reports in connection with a new product introduction?
a. Economic entity.
b. Periodicity.
c. Revenue recognition.
d. Full disclosure.

S75. 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.

S76. During the lifetime of an entity accountants produce financial statements at artificial points in time in accordance with the concept of
Relevance Periodicity
a. No No
b. Yes No
c. No Yes
d. Yes Yes

77. 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.

78. 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.

79. 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.

80. During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept?
a. Cost constraint
b. Periodicity assumption
c. Conservatism constraint
d. Expense recognition principle

81. What accounting concept justifies the usage of depreciation and amortization policies?
a. Going concern assumption
b. Fair value principle
c. Full disclosure principle
d. Monetary unit assumption

82. The assumption that a company will not be sold or liquidated in the near future is known as the
a. economic entity assumption.
b. monetary unit assumption.
c. periodicity assumption.
d. none of these.

83. 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.

84. 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. faithfully representative.
b. relevant.
c. indicative of the entity’s purchasing power.
d. conservative.

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

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

87. 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.

88. 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.

89. 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.

90. Which of the following is the process of converting assets received or held into cash or claims to cash?
a. Recognition
b. Measurement
c. Realization
d. Allocation

91. “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.

92. 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. expense recognition principle.
c. materiality constraint.
d. revenue recognition principle.

93. The accounting principle of expense recognition 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.

94. 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

95. 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.

96. Which of the following is an argument against using historical cost in accounting?
a. Fair values are more relevant.
b. Historical costs are based on an exchange transaction.
c. Historical costs are reliable.
d. Fair values are subjective.

97. When is revenue generally recognized?
a. When cash is received.
b. When the warranty expires.
c. When production is completed.
d. When the sale occurs.

98. Which of the following are the two components of the revenue recognition principle?
a. Cash is received and the amount is material.
b. Recognition occurs when and earned realized or realizable.
c. Production is complete and there is an active market for the product.
d. Cash is realized or realizable and production is complete.

99. Which of the following practices may not be an acceptable deviation from recognizing revenue at the point of sale?
a. Upon receipt of cash.
b. During production.
c. Upon receipt of order.
d. End of production.

100. Which of the following is not a required component of financial statements prepared in accordance with generally accepted accounting principles?
a. President’s letter to shareholders.
b. Balance sheet.
c. Income statement.
d. Notes to financial statements.

101. What is the general approach as to when product costs are recognized as expenses?
a. In the period when the expenses are paid.
b. In the period when the expenses are incurred.
c. In the period when the vendor invoice is received.
d. In the period when the related revenue is recognized.

102. Not adjusting the amounts reported in the financial statements for inflation is an example of which basic principle of accounting?
a. Economic entity.
b. Going concern.
c. Historical cost.
d. Full disclosure.

103. Recognition of expense related to amortization of an intangible asset illustrates which principle of accounting?
a. Expense recognition.
b. Full disclosure.
c. Revenue recognition.
d. Historical cost.

104. When should an expenditure be recorded as an asset rather than an expense?
a. Never.
b. Always.
c. If the amount is material.
d. When future benefit exits.

105. Which accounting assumption or principle is being violated if a company reports its corporate headquarter building at its fair value on the balance sheet?
a. Going concern.
b. Monetary unit.
c. Historical cost.
d. Full disclosure.

106. Which accounting assumption or principle is being violated if a company is a party to major litigation that it may lose and decides not to include the information in the financial statements because it may have a negative impact on the company’s stock price?
a. Full disclosure.
b. Going concern.
c. Historical cost.
d. Expense recognition.

107. Which assumption or principle requires that all information significant enough to affect a decision of reasonably informed users should be reported in the financial statements?
a. Matching.
b. Going concern.
c. Historical cost.
d. Full disclosure.

108. A company has a factory building that originally cost the company $250,000. The current fair value of the factory building is $3 million. The president would like to report the difference as a gain. The write-up would represent a violation of which accounting assumption or principle?
a. Revenue recognition.
b. Going concern.
c. Historical cost.
d. Monetary unit.

109. Which of the following is a constraint in presenting financial information?
a. Industry practice.
b. Full disclosure.
c. Relevance.
d. Consistency.

110. All of the following represent costs of providing financial information except
a. preparing.
b. disseminating.
c. accessing capital.
d. auditing.

111. Which of the following are benefits of providing financial information?
a. Potential litigation.
b. Auditing.
c. Disclosure to competition.
d. Improved allocation of resources.

112. Where is materiality not used in providing financial information?
a. Applying the revenue recognition principle.
b. Determining what items to include in the financial statements.
c. Applying the going concern assumption.
d. Determining the level of disclosure.

113. What is prudence or conservatism?
a. Understating assets and net income.
b. When in doubt, recognizing the option that is least likely to overstate assets and income.
c. Recognizing the option that is least likely to overstate assets and income.
d. Recognizing revenue when earned and realized.

114. Expensing the cost of copy paper when the paper is acquired is an example of which constraint?
a. Materiality.
b. Cost.
c. Conservatism.
d. Industry practices.

115. 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.

116. Which of the following relates to both relevance and faithful representation?
a. Cost constraint
b. Predictive value
c. Verifiability
d. Neutrality

117. 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. expense recognition principle.
c. materiality characteristic.
d. historical cost principle.

118. 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.

119. Which of the following are considered pervasive constraints by Statement of Financial Accounting Concepts No. 2?
a. Cost-constraint relationship and conservatism
b. Timeliness and feedback value
c. Conservatism and verifiability
d. Materiality and cost-constraint relationship

120. 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
a. prudence or conservatism.
b. the materiality constraint.
c. the substance over form principle.
d. the industry practices constraint.

121. Following the peculiar nature of some business concerns, which sometimes requires departure from basic theory is known as
a. the economic entity assumption.
b. industry practices.
c. the cost constraint.
d. the going concern assumption.

122. 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 faithful representation.
b. faithful representation and periodicity.
c. timeliness and materiality.
d. understandability and timeliness.

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

P124. 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
a. the cost constraint.
b. the industry practices constraint.
c. prudence or conservatism.
d. the full disclosure principle.

Multiple Choice Answers—Conceptual

Solutions to those Multiple Choice questions for which the answer is “none of these.”
55. a company changes its inventory method every few years in order to maximize reported income (other answers are possible).
58. comparability.
62. change in equity of an entity during a period from transactions and other events and circumstances from nonowner sources.
82. going concern assumption.
87. an exchange has taken place and the earnings process is virtually complete.

MULTIPLE CHOICE—CPA Adapted

125. According to the FASB’s conceptual framework, predictive value is an ingredient of
Relevance Faithful Representation
a. Yes No
b. Yes Yes
c. No Yes
d. No No

126. According to the FASB’s conceptual framework, which of the following relates to both relevance and faithful representation?
Comparability Neutrality
a. Yes Yes
b. Yes No
c. No Yes
d. No No

127. The FASB’s conceptual framework classifies gains and losses based on whether they are related to an entity’s major ongoing or central operations. These gains or losses may be classified as
Nonoperating Operating
a. Yes No
b. Yes Yes
c. No Yes
d. No No

128. According to the FASB’s conceptual framework, earnings
a. is the same as comprehensive income.
b. excludes certain gains and losses that are included in comprehensive income.
c. includes certain gains and losses that are excluded from comprehensive income.
d. includes certain losses that are excluded from comprehensive income.

129. According to the FASB’s conceptual framework, comprehensive income includes which of the following?
Operating Income Investments by Owners
a. Yes No
b. Yes Yes
c. No Yes
d. No No

130. According to the FASB’s conceptual framework, the calculation of comprehensive income includes which of the following?
Income from Distributions
Continuing Operations to Owners
a. No No
b. Yes No
c. Yes Yes
d. No Yes

131. According to the FASB’s conceptual framework, comprehensive income includes which of the following?
Gross Margin Operating Income
a. No Yes
b. No No
c. Yes No
d. Yes Yes

132. Under Statements of Financial Accounting Concepts, comprehensive income includes which of the following?
Gains Gross Margin
a. No No
b. No Yes
c. Yes No
d. Yes Yes

133. According to the FASB’s conceptual framework, the process of reporting an item in the financial statements of an entity is
a. recognition.
b. realization.
c. allocation.
d. matching.

Multiple Choice Answers—CPA Adapted

IFRS QUESTIONS

True / False

1. The conceptual framework underlying U.S. GAAP is similar to that underlying IFRS.

2. The FASB conceptual framework specifically identifies accrual basis accounting as one of its fundamental assumptions.

3. One of two assumptions made by the IASB conceptual framework is that the reporting entity is a going concern.

4. One of the challenges in developing a common conceptual framework will be to agree on how the framework should be organized since the FASB and IASB conceptual frameworks are organized in very different ways.

5. One issue that the IASB and FASB must resolve in developing a common conceptual framework is how control should be defined with regard to the definition of an asset.
Answers to True / False questions:

Multiple Choice Questions:

1. Which of the following statements regarding the IASB and FASB conceptual frameworks is not correct?
a. The existing IASB and FASB conceptual frameworks are organized in similar ways.
b. The two assumptions of the IASB framework are that the financial statements are prepared on an accrual basis and that the reporting entity is a going concern.
c. The FASB and IASB agree that the sole objective of financial reporting is to provide users with information that is useful for decision-making.
d. The FASB conceptual framework discusses the concept of accrual basis accounting in detail, but does not specifically identity it as an assumption.

2. The issues which the FASB and IASB must address in developing a common conceptual framework include all of the following except:
a. Should the common framework lead to standards that are principles-based or rules-based?
b. Should the role of financial reporting focus on stewardship as well as providing information to assist users in decision making?
c. Should the characteristic of reliability be traded-off in favor of information that is verifiable?
d. Should a single measurement method such as historical cost be used?
Answers to Multiple Choice:

Short Answer:
1. What two assumptions are central to the IFRS conceptual framework?
2. Do the IFRS and U.S. GAAP conceptual frameworks differ in terms of the role of financial reporting? Explain.

CHAPTER 3
THE ACCOUNTING INFORMATION SYSTEM

IFRS questions are available at the end of this chapter.

TRUE/FALSE

1. A ledger is where the company initially records transactions and selected other events.

2. Nominal (temporary) accounts are revenue, expense, and dividend accounts and are periodically closed.

3. Real (permanent) accounts are revenue, expense, and dividend accounts and are periodically closed.

4. An example of an internal event would be a flood that destroyed a portion of a company’s inventory.

5. All liability and stockholders’ equity accounts are increased on the credit side and decreased on the debit side.

6. In general, debits refer to increases in account balances, and credits refer to decreases.

7. The first step in the accounting cycle is the journalizing of transactions and selected other events.

8. One purpose of a trial balance is to prove that debits and credits of an equal amount are in the general ledger.

9. A general journal chronologically lists transactions and other events, expressed in terms of debits and credits to accounts.

10. If a company fails to post one of its journal entries to its general ledger, the trial balance will not show an equal amount of debit and credit balance accounts.

11. Adjusting entries for prepayments record the portion of the prepayment that represents the expense incurred or the revenue earned in the current accounting period.

12. An adjustment for wages expense, earned but unpaid at year end, is an example of an accrued expense.

13. The book value of any depreciable asset is the difference between its cost and its salvage value.

14. The ending retained earnings balance is reported on both the retained earnings statement and the balance sheet.

15. The post-closing trial balance consists of asset, liability, owners’ equity, revenue and expense accounts.

16. All revenues, expenses, and the dividends account are closed through the Income Summary account.

17. It is not necessary to post the closing entries to the ledger accounts because new revenue and expense accounts will be opened in the subsequent accounting period.

*18. The accrual basis recognizes revenue when earned and expenses in the period when cash is paid.

*19. Reversing entries are made at the end of the accounting cycle to correct errors in the original recording of transactions.

*20. An adjusted trial balance that shows equal debit and credit columnar totals proves the accuracy of the adjusting entries.

True / False Answers — Conceptual

MULTIPLE CHOICE—Conceptual

21. Factors that shape an accounting information system include the
a. nature of the business.
b. size of the firm.
c. volume of data to be handled.
d. all of these.

22. Maintaining a set of accounting records is
a. optional.
b. required by the Internal Revenue Service.
c. required by the Foreign Corrupt Practices Act.
d. required by the Internal Revenue Service and the Foreign Corrupt Practices Act.

23. Debit always means
a. right side of an account.
b. increase.
c. decrease.
d. none of these.

24. An accounting record into which the essential facts and figures in connection with all transactions are initially recorded is called the
a. ledger.
b. account.
c. trial balance.
d. none of these.

25. A trial balance
a. proves that debits and credits are equal in the ledger.
b. supplies a listing of open accounts and their balances that are used in preparing financial statements.
c. is normally prepared three times in the accounting cycle.
d. all of these.

26. Which of the following is a real (permanent) account?
a. Goodwill
b. Sales
c. Accounts Receivable
d. Both Goodwill and Accounts Receivable

27. Which of the following is a nominal (temporary) account?
a. Unearned Revenue
b. Salary Expense
c. Inventory
d. Retained Earnings

28. Nominal accounts are also called
a. temporary accounts.
b. permanent accounts.
c. real accounts.
d. none of these.

29. The double-entry accounting system means
a. Each transaction is recorded with two journal entries.
b. Each item is recorded in a journal entry, then in a general ledger account.
c. The dual effect of each transaction is recorded with a debit and a credit.
d. More than one of the above.

30. When a corporation pays a note payable and interest,
a. the account notes payable will be increased.
b. the account interest expense will be decreased.
c. they will debit notes payable and interest expense.
d. they will debit cash.

31. Stockholders’ equity is not affected by all
a. cash receipts.
b. dividends.
c. revenues.
d. expenses.

32. The debit and credit analysis of a transaction normally takes place
a. before an entry is recorded in a journal.
b. when the entry is posted to the ledger.
c. when the trial balance is prepared.
d. at some other point in the accounting cycle.

33. The accounting equation must remain in balance
a. throughout each step in the accounting cycle.
b. only when journal entries are recorded.
c. only at the time the trial balance is prepared.
d. only when formal financial statements are prepared.

34. The difference between the accounting process and the accounting cycle is
a. the accounting process results in the preparation of financial statements, whereas the accounting cycle is concerned with recording business transactions.
b. the accounting cycle represents the steps taken to accomplish the accounting process.
c. the accounting process represents the steps taken to accomplish the accounting cycle.
d. merely semantic, because both concepts refer to the same thing.

35. An optional step in the accounting cycle is the preparation of
a. adjusting entries.
b. closing entries.
c. a statement of cash flows.
d. a post-closing trial balance.

36. Which of the following criteria must be met before an event or item should be recorded for accounting purposes?
a. The event or item can be measured objectively in financial terms.
b. The event or item is relevant and reliable.
c. The event or item is an element.
d. All of these must be met.

37. Which of the following is a recordable event or item?
a. Changes in managerial policy
b. The value of human resources
c. Changes in personnel
d. None of these

38. Which of the following is not an internal event?
a. Depreciation
b. Using raw materials in the production process
c. Dividend declaration and subsequent payment
d. All of these are internal transactions.

39. External events do not include
a. interaction between an entity and its environment.
b. a change in the price of a good or service that an entity buys or sells, a flood or earthquake.
c. improvement in technology by a competitor.
d. using buildings and machinery in operations.

40. A trial balance may prove that debits and credits are equal, but
a. an amount could be entered in the wrong account.
b. a transaction could have been entered twice.
c. a transaction could have been omitted.
d. all of these.

41. A general journal
a. chronologically lists transactions and other events, expressed in terms of debits and credits.
b. contains one record for each of the asset, liability, stockholders’ equity, revenue, and expense accounts.
c. lists all the increases and decreases in each account in one place.
d. contains only adjusting entries.

42. A journal entry to record the sale of inventory on account will include a
a. debit to inventory.
b. debit to accounts receivable.
c. debit to sales.
d. credit to cost of goods sold.

43. A journal entry to record a payment on account will include a
a. debit to accounts receivable.
b. credit to accounts receivable.
c. debit to accounts payable.
d. credit to accounts payable.

44. A journal entry to record a receipt of rent revenue in advance will include a
a. debit to rent revenue.
b. credit to rent revenue.
c. credit to cash.
d. credit to unearned rent.

45. Which of the following errors will cause an imbalance in the trial balance?
a. Omission of a transaction in the journal.
b. Posting an entire journal entry twice to the ledger.
c. Posting a credit of $720 to Accounts Payable as a credit of $720 to Accounts Receivable.
d. Listing the balance of an account with a debit balance in the credit column of the trial balance.

S46. Which of the following is not a principal purpose of an unadjusted trial balance?
a. It proves that debits and credits of equal amounts are in the ledger.
b. It is the basis for any adjustments to the account balances.
c. It supplies a listing of open accounts and their balances.
d. It proves that debits and credits were properly entered in the ledger accounts.

S47. An adjusting entry should never include
a. a debit to an expense account and a credit to a liability account.
b. a debit to an expense account and a credit to a revenue account.
c. a debit to a liability account and a credit to revenue account.
d. a debit to a revenue account and a credit to a liability account.

48. Which of the following is an example of an accrued expense?
a. Office supplies purchased at the beginning of the year and debited to an expense account.
b. Property taxes incurred during the year, to be paid in the first quarter of the subsequent year.
c. Depreciation expense
d. Rent earned during the period, to be received at the end of the year
P49. Which of the following statements is associated with the accrual basis of accounting?
a. The timing of cash receipts and disbursements is emphasized.
b. A minimum amount of record keeping is required.
c. This method is used less frequently by businesses than the cash method of accounting.
d. Revenues are recognized in the period they are earned, regardless of the time period the cash is received.

P50. An adjusting entry to record an accrued expense involves a debit to a(an):
a. expense account and a credit to a prepaid account.
b. expense account and a credit to Cash.
c. expense account and a credit to a liability account.
d. liability account and a credit to an expense account.

P51. The failure to properly record an adjusting entry to accrue an expense will result in an:
a. understatement of expenses and an understatement of liabilities.
b. understatement of expenses and an overstatement of liabilities.
c. understatement of expenses and an overstatement of assets.
d. overstatement of expenses and an understatement of assets.

P52. Which of the following properly describes a deferral?
a. Cash is received after revenue is earned.
b. Cash is received before revenue is earned.
c. Cash is paid after expense is incurred.
d. Cash is paid in the same time period that an expense is incurred.

P53. The failure to properly record an adjusting entry to accrue a revenue item will result in an:
a. understatement of revenues and an understatement of liabilities.
b. overstatement of revenues and an overstatement of liabilities.
c. overstatement of revenues and an overstatement of assets.
d. understatement of revenues and an understatement of assets.

P54. The omission of the adjusting entry to record depreciation expense will result in an:
a. overstatement of assets and an overstatement of owners’ equity.
b. understatement of assets and an understatement of owner’s equity.
c. overstatement of assets and an overstatement of liabilities.
d. overstatement of liabilities and an understatement of owners’ equity.

55. Adjustments are often prepared
a. after the balance sheet date, but dated as of the balance sheet date.
b. after the balance sheet date, and dated after the balance sheet date.
c. before the balance sheet date, but dated as of the balance sheet date.
d. before the balance sheet date, and dated after the balance sheet date.

56. At the time a company prepays a cost
a. it debits an asset account to show the service or benefit it will receive in the future.
b. it debits an expense account to match the expense against revenues earned.
c. its credits a liability account to show the obligation to pay for the service in the future.
d. more than one of the above.

57. How do these prepaid expenses expire?
Rent Supplies
a. With the passage of time Through use and consumption
b. With the passage of time With the passage of time
c. Through use and consumption Through use and consumption
d. Through use and consumption With the passage of time

58. Recording the adjusting entry for depreciation has the same effect as recording the adjusting entry for
a. an unearned revenue.
b. a prepaid expense.
c. an accrued revenue.
d. an accrued expense.

59. Unearned revenue on the books of one company is likely to be
a. a prepaid expense on the books of the company that made the advance payment.
b. an unearned revenue on the books of the company that made the advance payment.
c. an accrued expense on the books of the company that made the advance payment.
d. an accrued revenue on the books of the company that made the advance payment.

60. To compute interest expense for an adjusting entry, the formula is (principal X annual rate X a fraction). The numerator and denominator of the fraction are:
Numerator Denominator
a. Length of time note has been outstanding 12 months
b. Length of note 12 months
c. Length of time until note matures Length of note
d. Length of time note has been outstanding Length of note

61. Adjusting entries are necessary to
1. obtain a proper matching of revenue and expense.
2. achieve an accurate statement of assets and equities.
3. adjust assets and liabilities to their fair market value.
a. 1
b. 2
c. 3
d. 1 and 2

62. Why are certain costs of doing business capitalized when incurred and then depreciated or amortized over subsequent accounting cycles?
a. To reduce the federal income tax liability
b. To aid management in cash-flow analysis
c. To match the costs of production with revenues as earned
d. To adhere to the accounting constraint of conservatism

63. When an item of expense is paid and recorded in advance, it is normally called a(n)
a. prepaid expense.
b. accrued expense.
c. estimated expense.
d. cash expense.

64. When an item of revenue or expense has been earned or incurred but not yet collected or paid, it is normally called a(n) ____________ revenue or expense.
a. prepaid
b. adjusted
c. estimated
d. none of these

65. When an item of revenue is collected and recorded in advance, it is normally called a(n) ___________ revenue.
a. accrued
b. prepaid
c. unearned
d. cash

66. An accrued expense can best be described as an amount
a. paid and currently matched with earnings.
b. paid and not currently matched with earnings.
c. not paid and not currently matched with earnings.
d. not paid and currently matched with earnings.

67. If, during an accounting period, an expense item has been incurred and consumed but not yet paid for or recorded, then the end-of-period adjusting entry would involve
a. a liability account and an asset account.
b. an asset or contra asset account and an expense account.
c. a liability account and an expense account.
d. a receivable account and a revenue account.

68. Which of the following must be considered in estimating depreciation on an asset for an accounting period?
a. The original cost of the asset
b. Its useful life
c. The decline of its fair market value
d. Both the original cost of the asset and its useful life.

69. Which of the following would not be a correct form for an adjusting entry?
a. A debit to a revenue and a credit to a liability
b. A debit to an expense and a credit to a liability
c. A debit to a liability and a credit to a revenue
d. A debit to an asset and a credit to a liability

70. Year-end net assets would be overstated and current expenses would be understated as a result of failure to record which of the following adjusting entries?
a. Expiration of prepaid insurance
b. Depreciation of fixed assets
c. Accrued wages payable
d. All of these

71. A prepaid expense can best be described as an amount
a. paid and currently matched with revenues.
b. paid and not currently matched with revenues.
c. not paid and currently matched with revenues.
d. not paid and not currently matched with revenues.
72. An accrued revenue can best be described as an amount
a. collected and currently matched with expenses.
b. collected and not currently matched with expenses.
c. not collected and currently matched with expenses.
d. not collected and not currently matched with expenses.

73. An unearned revenue can best be described as an amount
a. collected and currently matched with expenses.
b. collected and not currently matched with expenses.
c. not collected and currently matched with expenses.
d. not collected and not currently matched with expenses.

74. An adjusted trial balance
a. is prepared after the financial statements are completed.
b. proves the equality of the total debit balances and total credit balances of ledger accounts after all adjustments have been made.
c. is a required financial statement under generally accepted accounting principles.
d. cannot be used to prepare financial statements.

75. Which type of account is always debited during the closing process?
a. Dividends.
b. Expense.
c. Revenue.
d. Retained earnings.

S76. Which of the following statements best describes the purpose of closing entries?
a. To faciliate posting and taking a trial balance.
b. To determine the amount of net income or net loss for the period.
c. To reduce the balances of revenue and expense accounts to zero so that they may be used to accumulate the revenues and expenses of the next period.
d. To complete the record of various transactions that were started in a prior period.

P77. If ending accounts receivable exceeds the beginning accounts receivable:
a. cash collections during the period exceed the amount of revenue earned.
b. net income for the period is less than the amount of cash basis income.
c. no cash was collected during the period.
d. cash collections during the year are less than the amount of revenue earned.

*78. Under the cash basis of accounting, revenues are recorded
a. when they are earned and realized.
b. when they are earned and realizable.
c. when they are earned.
d. when they are realized.

*79. When converting from cash basis to accrual-basis accounting, which of the following adjustments should be made to cash receipts from customers to determine accrual basis service revenue?
a. Subtract ending accounts receivable.
b. Subtract beginning unearned service revenue.
c. Add ending accounts receivable.
d. Add cash sales.

*80. When converting from cash basis to accrual basis accounting, which of the following adjustments should be made to cash paid for operating expenses to determine accrual basis operating expenses?
a. Add beginning accrued liabilities.
b. Add beginning prepaid expense.
c. Subtract ending prepaid expense.
d. Subtract interest expense.

*81. Reversing entries are
1. normally prepared for prepaid, accrued, and estimated items.
2. necessary to achieve a proper matching of revenue and expense.
3. desirable to exercise consistency and establish standardized procedures.
a. 1
b. 2
c. 3
d. 1 and 2

*82. Adjusting entries that should be reversed include those for prepaid or unearned items that
a. create an asset or a liability account.
b. were originally entered in a revenue or expense account.
c. were originally entered in an asset or liability account.
d. create an asset or a liability account and were originally entered in a revenue or expense account.

*83. Adjusting entries that should be reversed include
a. all accrued revenues.
b. all accrued expenses.
c. those that debit an asset or credit a liability.
d. all of these.

S*84. A reversing entry should never be made for an adjusting entry that
a. accrues unrecorded revenue.
b. adjusts expired costs from an asset account to an expense account.
c. accrues unrecorded expenses.
d. adjusts unexpired costs from an expense account to an asset account.

S*85. The worksheet for Sharko Co. consisted of five pairs of debit and credit columns. The dollar amount of one item appeared in both the credit column of the income statement section and the debit column of the balance sheet section. That item is
a. net income for the period.
b. beginning inventory.
c. cost of goods sold.
d. Net loss for the period.

MULTIPLE CHOICE—Computational

86. Maso Company recorded journal entries for the issuance of common stock for $80,000, the payment of $26,000 on accounts payable, and the payment of salaries expense of $42,000. What net effect do these entries have on owners’ equity?
a. Increase of $80,000.
b. Increase of $54,000.
c. Increase of $38,000.
d. Increase of $12,000.

87. Mune Company recorded journal entries for the declaration of $100,000 of dividends, the $64,000 increase in accounts receivable for services rendered, and the purchase of equipment for $42,000. What net effect do these entries have on owners’ equity?
a. Decrease of $142,000.
b. Decrease of $78,000.
c. Decrease of $36,000.
d. Increase of $22,000.

88. Pappy Corporation received cash of $18,000 on September 1, 2012 for one year’s rent in advance and recorded the transaction with a credit to Unearned Rent Revenue. The December 31, 2012 adjusting entry is
a. debit Rent Revenue and credit Unearned Rent Revenue, $6,000.
b. debit Rent Revenue and credit Unearned Rent Revenue, $12,000.
c. debit Unearned Rent Revenue and credit Rent Revenue, $6,000.
d. debit Cash and credit Unearned Rent Revenue, $12,000.

89. Panda Corporation paid cash of $30,000 on June 1, 2012 for one year’s rent in advance and recorded the transaction with a debit to Prepaid Rent. The December 31, 2012 adjusting entry is
a. debit Prepaid Rent and credit Rent Expense, $12,500.
b. debit Prepaid Rent and credit Rent Expense, $17,500.
c. debit Rent Expense and credit Prepaid Rent, $17,500.
d. debit Prepaid Rent and credit Cash, $12,500.

90. Tate Company purchased equipment on November 1, 2012 and gave a 3-month, 9% note with a face value of $40,000. The December 31, 2012 adjusting entry is
a. debit Interest Expense and credit Interest Payable, $3,600.
b. debit Interest Expense and credit Interest Payable, $900.
c. debit Interest Expense and credit Cash, $600.
d. debit Interest Expense and credit Interest Payable, $600.

91. Brown Company’s account balances at December 31, 2012 for Accounts Receivable and the related Allowance for Doubtful Accounts are $920,000 debit and $1,400 credit, respectively. From an aging of accounts receivable, it is estimated that $25,000 of the December 31 receivables will be uncollectible. The necessary adjusting entry would include a credit to the allowance account for
a. $25,000.
b. $26,400.
c. $23,600.
d. $1,400.

92. Chen Company’s account balances at December 31, 2012 for Accounts Receivable and the Allowance for Doubtful Accounts are $480,000 debit and $900 credit. Sales during 2012 were $1,350,000. It is estimated that 1% of sales will be uncollectible. The adjusting entry would include a credit to the allowance account for
a. $14,400.
b. $13,500.
c. $12,600.
d. $4,800.

93. Starr Corporation loaned $150,000 to another corporation on December 1, 2012 and received a 3-month, 8% interest-bearing note with a face value of $150,000. What adjusting entry should Starr make on December 31, 2012?
a. Debit Interest Receivable and credit Interest Revenue, $3,000.
b. Debit Cash and credit Interest Revenue, $1,000.
c. Debit Interest Receivable and credit Interest Revenue, $1,000.
d. Debit Cash and credit Interest Receivable, $3,000.

94. A company receives interest on a $40,000, 8%, 5-year note receivable each April 1. At December 31, 2012, the following adjusting entry was made to accrue interest receivable:
Interest Receivable 2,400
Interest Revenue 2,400

Assuming that the company does not use reversing entries, what entry should be made on April 1, 2013 when the annual interest payment is received?
a. Cash 800
Interest Revenue 800
b. Cash 2,400
Interest Receivable 2,400
c. Cash 3,200
Interest Receivable 2,400
Interest Revenue 800
d. Cash 3,200
Interest Revenue 3,200

*95. A company receives interest on a $40,000, 8%, 5-year note receivable each April 1. At December 31, 2012, the following adjusting entry was made to accrue interest receivable:
Interest Receivable 2,400
Interest Revenue 2,400

Assuming that the company does use reversing entries, what entry should be made on April 1, 2013 when the annual interest payment is received?
a. Cash 800
Interest Revenue 800
b. Cash 2,400
Interest Receivable 2,400
c. Cash 3,200
Interest Receivable 2,400
Interest Revenue 800
d. Cash 3,200
Interest Revenue 3,200

96. Murphy Company sublet a portion of its warehouse for five years at an annual rental of $30,000, beginning on May 1, 2012. The tenant, Sheri Charter, paid one year’s rent in advance, which Murphy recorded as a credit to Unearned Rent Revenue. Murphy reports on a calendar-year basis. The adjustment on December 31, 2012 for Murphy should be
a. No entry
b. Unearned Rent Revenue 10,000
Rent Revenue 10,000
c. Rent Revenue 10,000
Unearned Rent Revenue 10,000
d. Unearned Rent Revenue 20,000
Revenue Revenue 20,000

97. During the first year of Wilkinson Co.’s operations, all purchases were recorded as assets. Supplies in the amount of $25,800 were purchased. Actual year-end supplies amounted to $8,600. The adjusting entry for store supplies will
a. increase net income by $17,200.
b. increase expenses by $17,200.
c. decrease supplies by $8,600.
d. debit Accounts Payable for $8,600.

98. Big-Mouth Frog Corporation had revenues of $300,000, expenses of $180,000, and dividends of $45,000. When Income Summary is closed to Retained Earnings, the amount of the debit or credit to Retained Earnings is a
a. debit of $75,000.
b. debit of $120,000.
c. credit of $75,000.
d. credit of $120,000.

*99. The income statement of Dolan Corporation for 2012 included the following items:
Interest revenue $131,000
Salaries and wages expense 170,000
Insurance expense 15,200
The following balances have been excerpted from Dolan Corporation’s balance sheets:
December 31, 2012 December 31, 2011
Interest receivable $18,200 $15,000
Salaries and wages payable 17,800 8,400
Prepaid insurance 2,200 3,000

The cash received for interest during 2012 was
a. $112,800.
b. $127,800.
c. $131,000.
d. $134,200.

*100. The income statement of Dolan Corporation for 2012 included the following items:
Interest revenue $131,000
Salaries and wages expense 170,000
Insurance expense 15,200
The following balances have been excerpted from Dolan Corporation’s balance sheets:
December 31, 2012 December 31, 2011
Interest receivable $18,200 $15,000
Salaries and wages payable 17,800 8,400
Prepaid insurance 2,200 3,000

The cash paid for salaries during 2012 was
a. $179,400.
b. $160,600.
c. $161,600.
d. $187,800.

*101. The income statement of Dolan Corporation for 2012 included the following items:
Interest revenue $131,000
Salaries and wages expense 170,000
Insurance expense 15,200

The following balances have been excerpted from Dolan Corporation’s balance sheets:
December 31, 2012 December 31, 2011
Interest receivable $18,200 $15,000
Salaries and wages payable 17,800 8,400
Prepaid insurance 2,200 3,000

The cash paid for insurance premiums during 2012 was
a. $13,000.
b. $12,200.
c. $16,000.
d. $14,400.

*102. Olsen Company paid or collected during 2012 the following items:
Insurance premiums paid $ 20,800
Interest collected 67,800
Salaries paid 240,400

The following balances have been excerpted from Olsen’s balance sheets:
December 31, 2012 December 31, 2011
Prepaid insurance $ 2,400 $ 3,000
Interest receivable 7,400 5,800
Salaries and wages payable 24,600 21,200

The insurance expense on the income statement for 2012 was
a. $15,400.
b. $20,200.
c. $21,400.
d. $26,200.

*103. Olsen Company paid or collected during 2012 the following items:
Insurance premiums paid $ 20,800
Interest collected 67,800
Salaries paid 240,400

The following balances have been excerpted from Olsen’s balance sheets:
December 31, 2012 December 31, 2011
Prepaid insurance $ 2,400 $ 3,000
Interest receivable 7,400 5,800
Salaries and wages payable 24,600 21,200

The interest revenue on the income statement for 2012 was
a. $54,600.
b. $66,200.
c. $69,400.
d. $81,000.

*104. Olsen Company paid or collected during 2012 the following items:
Insurance premiums paid $ 20,800
Interest collected 67,800
Salaries paid 240,400

The following balances have been excerpted from Olsen’s balance sheets:
December 31, 2012 December 31, 2011
Prepaid insurance $ 2,400 $ 3,000
Interest receivable 7,400 5,800
Salaries and wages payable 24,600 21,200

Salaries expense on the income statement for 2012 was
a. $194,600.
b. $237,000.
c. $243,800.
d. $286,200.

*105. The Supplies account had a balance at the beginning of year 3 of $8,000 (before the reversing entry). Payments for purchases of supplies during year 3 amounted to $50,000 and were recorded as expense. A physical count at the end of year 3 revealed supplies costing $9,500 were on hand. Reversing entries are used by this company. The required adjusting entry at the end of year 3 will include a debit to:
a. Supplies Expense for $1,500.
b. Supplies for $1,500.
c. Supplies Expense for $48,500.
d. Supplies for $9,500.

*106. At the end of 2012, Drew Company made four adjusting entries for the following items:
1. Depreciation expense, $25,000.
2. Expired insurance, $2,200 (originally recorded as prepaid insurance.)
3. Interest payable, $6,000.
4. Rent receivable, $10,000.
In the normal situation, to facilitate subsequent entries, the adjusting entry or entries that may be reversed is (are)
a. Entry No. 3.
b. Entry No. 4.
c. Entry No. 3 and No. 4.
d. Entry No. 2, No. 3 and No. 4.

*107. Garcia Corporation received cash of $24,000 on August 1, 2012 for one year’s rent in advance and recorded the transaction with a credit to Rent Revenue. The December 31, 2012 adjusting entry is
a. debit Rent Revenue and credit Unearned Rent Revenue, $10,000.
b. debit Rent Revenue and credit Unearned Rent Revenue, $14,000.
c. debit Unearned Rent Revenue and credit Rent Revenue, $10,000.
d. debit Cash and credit Unearned Rent Revenue, $14,000.

*108. Lopez Company received $9,600 on April 1, 2012 for one year’s rent in advance and recorded the transaction with a credit to a nominal account. The December 31, 2012 adjusting entry is
a. debit Rent Revenue and credit Unearned Rent Revenue, $2,400.
b. debit Rent Revenue and credit Unearned Rent Revenue, $7,200.
c. debit Unearned Rent Revenue and credit Rent Revenue, $2,400.
d. debit Unearned Rent Revenue and credit Rent Revenue, $7,200.

*109. Gibson Company paid $6,000 on June 1, 2012 for a two-year insurance policy and recorded the entire amount as Insurance Expense. The December 31, 2012 adjusting entry is
a. debit Insurance Expense and credit Prepaid Insurance, $1,750.
b. debit Insurance Expense and credit Prepaid Insurance, $4,250.
c. debit Prepaid Insurance and credit Insurance Expense, $1,750
d. debit Prepaid Insurance and credit Insurance Expense, $4,250.

Multiple Choice Answers—Computational

MULTIPLE CHOICE—CPA Adapted

110. On September 1, 2012, Lowe Co. issued a note payable to National Bank in the amount of $900,000, bearing interest at 12%, and payable in three equal annual principal payments of $300,000. On this date, the bank’s prime rate was 11%. The first payment for interest and principal was made on September 1, 2013. At December 31, 2013, Lowe should record accrued interest payable of
a. $36,000.
b. $33,000.
c. $24,000.
d. $22,000.

111. Eaton Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to Unearned Service Revenue. This account had a balance of $3,600,000 at December 31, 2012 before year-end adjustment. Service contract costs are charged as incurred to the Service Contract Expense account, which had a balance of $900,000 at December 31, 2012.
Service contracts still outstanding at December 31, 2012 expire as follows:
During 2013 $760,000
During 2014 1,140,000
During 2015 700,000
What amount should be reported as Unearned Service Revenue in Eaton’s December 31, 2012 balance sheet?
a. $2,700,000.
b. $2,600,000.
c. $1,700,000.
d. $1,000,000.

112. In November and December 2012, Lane Co., a newly organized magazine publisher, received $75,000 for 1,000 three-year subscriptions at $25 per year, starting with the January 2013 issue. Lane included the entire $75,000 in its 2012 income tax return. What amount should Lane report in its 2012 income statement for subscriptions revenue?
a. $0.
b. $4,167.
c. $25,000.
d. $75,000.

113. On June 1, 2012, Nott Corp. loaned Horn $600,000 on a 12% note, payable in five annual installments of $120,000 beginning January 2, 2013. In connection with this loan, Horn was required to deposit $5,000 in a noninterest-bearing escrow account. The amount held in escrow is to be returned to Horn after all principal and interest payments have been made. Interest on the note is payable on the first day of each month beginning July 1, 2012. Horn made timely payments through November 1, 2012. On January 2, 2013, Nott received payment of the first principal installment plus all interest due. At December 31, 2012, Nott’s interest receivable on the loan to Horn should be
a. $0.
b. $6,000.
c. $12,000.
d. $18,000.

114. Allen Corp.’s liability account balances at June 30, 2013 included a 10% note payable in the amount of $3,000,000. The note is dated October 1, 2011 and is payable in three equal annual payments of $1,000,000 plus interest. The first interest and principal payment was made on October 1, 2012. In Allen’s June 30, 2013 balance sheet, what amount should be reported as accrued interest payable for this note?
a. $225,000.
b. $150,000.
c. $75,000.
d. $50,000.

115. Colaw Co. pays all salaried employees on a biweekly basis. Overtime pay, however, is paid in the next biweekly period. Colaw accrues salaries expense only at its December 31 year end. Data relating to salaries earned in December 2012 are as follows:
Last payroll was paid on 12/26/12, for the 2-week period ended 12/26/12.
Overtime pay earned in the 2-week period ended 12/26/12 was $15,000.
Remaining work days in 2012 were December 29, 30, 31, on which days there was no overtime.
The recurring biweekly salaries total $270,000.

Assuming a five-day work week, Colaw should record a liability at December 31, 2012 for accrued salaries of
a. $81,000.
b. $96,000.
c. $162,000.
d. $177,000.

116. Tolan Corp.’s trademark was licensed to Eddy Co. for royalties of 15% of sales of the trademarked items. Royalties are payable semiannually on March 15 for sales in July through December of the prior year, and on September 15 for sales in January through June of the same year. Tolan received the following royalties from Eddy:
March 15 September 15
2011 $5,000 $7,500
2012 6,000 8,500
Eddy estimated that sales of the trademarked items would total $30,000 for July through December 2012. In Tolan’s 2012 income statement, the royalty revenue should be
a. $13,000.
b. $14,500.
c. $19,000.
d. $20,500.

117. At December 31, 2012, Sue’s Boutique had 1,000 gift certificates outstanding, which had been sold to customers during 2012 for $75 each. Sue’s operates on a gross profit of 60% of its sales. What amount of revenue pertaining to the 1,000 outstanding gift certificates should be deferred at December 31, 2012?
a. $0.
b. $30,000.
c. $45,000.
d. $75,000.

*118. Compared to the accrual basis of accounting, the cash basis of accounting overstates income by the net increase during the accounting period of the
Accounts Receivable Accrued Expenses Payable
a. No No
b. No Yes
c. Yes No
d. Yes Yes

*119. Gregg Corp. reported revenue of $1,250,000 in its accrual basis income statement for the year ended June 30, 2013. Additional information was as follows:
Accounts receivable June 30, 2012 $400,000
Accounts receivable June 30, 2013 530,000
Uncollectible accounts written off during the fiscal year 15,000
Under the cash basis, Gregg should report revenue of
a. $835,000.
b. $850,000.
c. $1,105,000.
d. $1,135,000.

*120. Jim Yount, M.D., keeps his accounting records on the cash basis. During 2013, Dr. Yount collected $300,000 from his patients. At December 31, 2012, Dr. Yount had accounts receivable of $40,000. At December 31, 2013, Dr. Yount had accounts receivable of $70,000 and unearned revenue of $10,000. On the accrual basis, how much was Dr. Yount’s patient service revenue for 2013?
a. $260,000.
b. $320,000.
c. $330,000.
d. $340,000.

*121. The following information is available for Ace Company for 2012:
Disbursements for purchases $1,160,000
Increase in trade accounts payable 100,000
Decrease in merchandise inventory 40,000
Cost of goods sold for 2012 was
a. $1,300,000.
b. $1,220,000.
c. $1,100,000.
d. $1,020,000.

Multiple Choice Answers—CPA Adapted

IFRS QUESTIONS

Short Answer:

1. Are all international companies subject to the same internal control standards? Explain.

2. What are some of the consequences of international differences in internal control standards?

CHAPTER 4
INCOME STATEMENT AND RELATED INFORMATION

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

1. The income statement is useful for helping to assess the risk or uncertainty of achieving future cash flows.

2. A strength of the income statement as compared to the balance sheet is that items that cannot be measured reliably can be reported in the income statement.

3. Earnings management generally makes income statement information more useful for predicting future earnings and cash flows.

4. The transaction approach of income measurement focuses on the income-related activities that have occurred during the period.

5. Companies frequently report income tax expense as the last item before net income on a single-step income statement.

6. Both revenues and gains increase both net income and owners’ equity.

7. Use of a multiple-step income statement will result in the company reporting a higher net income than if they used a single-step income statement.

8. The primary advantage of the multiple-step format lies in the simplicity of presentation and the absence of any implication that one type of revenue or expense item has priority over another.

9. Gross profit and income from operations are reported on a multiple-step but not a single-step income statement.

10. The accounting profession has adopted a current operating performance approach to income reporting.

11. Companies report the results of operations of a component of a business that will be disposed of separately from continuing operations.

12. Gains or losses from exchange or translation of foreign currencies are reported as extraordinary items.

13. Discontinued operations, extraordinary items, and unusual gains and losses are all reported net of tax in the income statement.

14. Intraperiod tax allocation relates the income tax expense of the period to the specific items that give rise to the amount of the tax provision.

15. A company that reports a discontinued operation or an extraordinary item has the option of reporting per share amounts for these items.

16. Dividends declared on common and preferred stock are subtracted from net income in the computation of earnings per share.

17. Prior period adjustments can either be added or subtracted in the Retained Earnings Statement.

18. Companies only restrict retained earnings to comply with contractual requirements or current necessity.

19. Comprehensive income includes all changes in equity during a period except those resulting from distributions to owners.

20. The components of other comprehensive income can be reported in a statement of stockholders’ equity.

True False Answers—Conceptual

MULTIPLE CHOICE—Conceptual

21. The major elements of the income statement are
a. revenue, cost of goods sold, selling expenses, and general expense.
b. operating section, nonoperating section, discontinued operations, extraordinary items, and cumulative effect.
c. revenues, expenses, gains, and losses.
d. all of these.

22. Information in the income statement helps users to
a. evaluate the past performance of the enterprise.
b. provide a basis for predicting future performance.
c. help assess the risk or uncertainty of achieving future cash flows.
d. all of these.

23. Limitations of the income statement include all of the following except
a. items that cannot be measured reliably are not reported.
b. only actual amounts are reported in determining net income.
c. income measurement involves judgment.
d. income numbers are affected by the accounting methods employed.

S24. Which of the following would represent the least likely use of an income statement prepared for a business enterprise?
a. Use by customers to determine a company’s ability to provide needed goods and services.
b. Use by labor unions to examine earnings closely as a basis for salary discussions.
c. Use by government agencies to formulate tax and economic policy.
d. Use by investors interested in the financial position of the entity.
S25. The income statement reveals
a. resources and equities of a firm at a point in time.
b. resources and equities of a firm for a period of time.
c. net earnings (net income) of a firm at a point in time.
d. net earnings (net income) of a firm for a period of time.

26. The income statement information would help in which of the following tasks?
a. Evaluate the liquidity of a company.
b. Evaluate the solvency of a company
c. Estimate future cash flows
d. Estimate future financial flexibility

27. Which of the following is an example of managing earnings down?
a. Changing estimated bad debts from 3 percent to 2.5 percent of sales.
b. Revising the estimated life of equipment from 10 years to 8 years.
c. Not writing off obsolete inventory.
d. Reducing research and development expenditures.

28. Which of the following is an example of managing earnings up?
a. Decreasing estimated salvage value of equipment.
b. Writing off obsolete inventory.
c. Underestimating warranty claims.
d. Accruing a contingent liability for an ongoing lawsuit.

29. What might a manager do during the last quarter of a fiscal year if she wanted to improve current annual net income?
a. Increase research and development activities.
b. Relax credit policies for customers.
c. Delay shipments to customers until after the end of the fiscal year.
d. Delay purchases from suppliers until after the end of the fiscal year.

30. What might a manager do during the last quarter of a fiscal year if she wanted to decrease current annual net income?
a. Delay shipments to customers until after the end of the fiscal year.
b. Relax credit policies for customers.
c. Pay suppliers all amounts owed.
d. Delay purchases from suppliers until after the end of the fiscal year.

31. Which of the following is an advantage of the single-step income statement over the multiple-step income statement?
a. It reports gross profit for the year.
b. Expenses are classified by function.
c. It matches costs and expenses with related revenues.
d. It does not imply that one type of revenue or expense has priority over another.

32. The single-step income statement emphasizes
a. the gross profit figure.
b. total revenues and total expenses.
c. extraordinary items and accounting changes more than these are emphasized in the multiple-step income statement.
d. the various components of income from continuing operations.

33. Which of the following is an acceptable method of presenting the income statement?
a. A single-step income statement
b. A multiple-step income statement
c. A consolidated statement of income
d. All of these

34. Which of the following is not a generally practiced method of presenting the income statement?
a. Including prior period adjustments in determining net income
b. The single-step income statement
c. The consolidated statement of income
d. Including gains and losses from discontinued operations of a component of a business in determining net income

35. The occurrence which most likely would have no effect on 2012 net income (assuming that all amounts involved are material) is the
a. sale in 2012 of an office building contributed by a stockholder in 1983.
b. collection in 2012 of a receivable from a customer whose account was written off in 2011 by a charge to the allowance account.
c. settlement based on litigation in 2012 of previously unrecognized damages from a serious accident which occurred in 2010.
d. worthlessness determined in 2012 of stock purchased on a speculative basis in 2008.

S36. The occurrence that most likely would have no effect on 2012 net income is the
a. sale in 2012 of an office building contributed by a stockholder in 1961.
b. collection in 2012 of a dividend from an investment.
c. correction of an error in the financial statements of a prior period discovered subsequent to their issuance.
d. stock purchased in 1996 deemed worthless in 2012.

P37. Which of the following is not a selling expense?
a. Advertising expense
b. Office salaries expense
c. Freight-out
d. Store supplies consumed

P38. The accountant for the Lintz Sales Company is preparing the income statement for 2012 and the balance sheet at December 31, 2012. The January 1, 2012 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.

39. In order to be classified as an extraordinary item in the income statement, an event or transaction should be
a. unusual in nature, infrequent, and material in amount.
b. unusual in nature and infrequent, but it need not be material.
c. infrequent and material in amount, but it need not be unusual in nature.
d. unusual in nature and material, but it need not be infrequent.
40. Classification as an extraordinary item on the income statement would be appropriate for the
a. gain or loss on disposal of a component of the business.
b. substantial write-off of obsolete inventories.
c. loss from a strike.
d. none of these.

41. Which of these is generally an example of an extraordinary item?
a. Loss incurred because of a strike by employees.
b. Write-off of deferred marketing costs believed to have no future benefit.
c. Gain resulting from the devaluation of the U.S. dollar.
d. Gain resulting from the state exercising its right of eminent domain on a piece of land used as a parking lot.

42. Under which of the following conditions would material flood damage be considered an extraordinary item for financial reporting purposes?
a. Only if floods in the geographical area are unusual in nature and occur infrequently.
b. Only if the flood damage is material in amount and could have been reduced by prudent management.
c. Under any circumstances as an extraordinary item.
d. Flood damage should never be classified as an extraordinary item.

43. An item that should be classified as an extraordinary item is
a. write-off of goodwill.
b. gains from transactions involving foreign currencies.
c. losses from moving a plant to another city.
d. gains from a company selling the only investment it has ever owned.

44. How should an unusual event not meeting the criteria for an extraordinary item be disclosed in the financial statements?
a. Shown as a separate item in operating revenues or expenses if material and supple-mented by a footnote if deemed appropriate.
b. Shown in operating revenues or expenses if material but not shown as a separate item.
c. Shown net of income tax after ordinary net earnings but before extraordinary items.
d. Shown net of income tax after extraordinary items but before net earnings.

45. Which of the following is a change in accounting principle?
a. A change in the estimated service life of machinery
b. A change from FIFO to LIFO
c. A change from straight-line to double-declining-balance
d. A change from FIFO to LIFO and a change from straight-line to double-declining- balance

46. Which of the following is never classified as an extraordinary item?
a. Losses from a major casualty.
b. Losses from an expropriation of assets.
c. Gain on a sale of the only security investment a company has ever owned.
d. Losses from exchange or translation of foreign currencies.

47. Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business?
a. The gain or loss on disposal should be reported as an extraordinary item.
b. Results of operations of a discontinued component should be disclosed immediately below extraordinary items.
c. Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement.
d. The gain or loss on disposal should not be segregated, but should be reported together with the results of continuing operations.

48. When a company discontinues an operation and disposes of the discontinued operation (component), the transaction should be included in the income statement as a gain or loss on disposal reported as
a. a prior period adjustment.
b. an extraordinary item.
c. an amount after continuing operations and before extraordinary items.
d. a bulk sale of plant assets included in income from continuing operations.

S49. A material item which is unusual in nature or infrequent in occurrence, but not both should be shown in the income statement
Net of Tax Disclosed Separately
a. No No
b. Yes Yes
c. No Yes
d. Yes No

50. Income taxes are allocated to
a. extraordinary items.
b. discontinued operations.
c. prior period adjustments.
d. all of these.

51. Which of the following is true about intraperiod tax allocation?
a. It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return.
b. It is required for extraordinary items and cumulative effect of accounting changes but not for prior period adjustments.
c. Its purpose is to allocate income tax expense evenly over a number of accounting periods.
d. Its purpose is to relate the income tax expense to the items which affect the amount of tax.

52. Companies use intraperiod tax allocation for all of the following items except
a. Discontinued operations.
b. Extraordinary items.
c. Changes in accounting estimates.
d. Income from continuing operations.

53. Which of the following items would be reported net of tax on the face of the income statement?
a. Prior period adjustment
b. Unusual gain
c. Cumulative effect of a change in an accounting principle
d. Discontinued operations

54. Which of the following items would be reported at its gross amount on the face of the income statement?
a. Extraordinary loss
b. Prior period adjustment
c. Cumulative effect of a change in an accounting principle
d. Unusual gain

55. Where must earnings per share be disclosed in the financial statements to satisfy generally accepted accounting principles?
a. On the face of the statement of retained earnings (or, statement of stockholders’ equity.)
b. In the footnotes to the financial statements.
c. On the face of the income statement.
d. Either (a) or (c).

56. Which of the following earnings per share figures must be disclosed on the face of the income statement?
a. EPS on income from continuing operations.
b. The effect on EPS from operations of a discontinued division, net of taxes.
c. The effect on EPS from an extraordinary item, net of taxes.
d. All of the above.

57. Which of the following earnings per share figures must be disclosed on the face of the income statement?
a. EPS for income before taxes.
b. The effect on EPS from unusual items.
c. EPS for gross profit.
d. EPS for income from continuing operations.

S58. Earnings per share should always be shown separately for
a. net income and gross margin.
b. net income and pretax income.
c. income before extraordinary items.
d. extraordinary items and prior period adjustments.

P59. A correction of an error in prior periods’ income will be reported
In the income statement Net of tax
a. Yes Yes
b. No No
c. Yes No
d. No Yes

60. Which of the following items will not appear in the retained earnings statement?
a. Net loss
b. Prior period adjustment
c. Discontinued operations
d. Dividends

61. Which one of the following types of losses is excluded from the determination of net income in income statements?
a. Material losses resulting from transactions in the company’s investments account.
b. Material losses resulting from unusual sales of assets not acquired for resale.
c. Material losses resulting from the write-off of intangibles.
d. Material losses resulting from correction of errors related to prior periods.

62. Watts Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of depreciation. The error caused the net income to be reported at almost double the proper amount. Correction of the error when discovered in the next year should be treated as
a. an increase in depreciation expense for the year in which the error is discovered.
b. a component of income for the year in which the error is discovered, but separately listed on the income statement and fully explained in a note to the financial statements.
c. an extraordinary item for the year in which the error was made.
d. a prior period adjustment.

63. A company is not required to report a per share amount on the face of the income statement for which of the following items?
a. Net income
b. Prior period adjustment
c. Extraordinary item
d. Discontinued operations

64. Earnings per share data are required on the face of which of the following financial statements?
a. Statement of retained earnings
b. Statement of stockholders’ equity
c. Income statement
d. Balance sheet

65. Which of the following is included in comprehensive income?
a. Investments by owners.
b. Unrealized gains on available-for-sale securities.
c. Distributions to owners.
d. Changes in accounting principles.

66. Which of the following is not an acceptable way of displaying the components of other comprehensive income?
a. Combined statement of retained earnings
b. Second income statement
c. Combined statement of comprehensive income
d. As part of the statement of stockholders’ equity

67. Which disclosure method do most companies use to display the components of other comprehensive income?
a. Combined statement of retained earnings
b. Second income statement
c. Combined statement of comprehensive income
d. As part of the statement of stockholders’ equity

68. Comprehensive income includes all of the following except
a. dividend revenue.
b. losses on disposal of assets.
c. investments by owners.
d. unrealized holding gains.

69. The approach most companies use to provide information related to the components of other comprehensive income is a
a. second separate income statement.
b. combined income statement of comprehensive income.
c. separate column in the statement of changes in stockholders’ equity.
d. footnote disclosure.

Multiple Choice Answers—Conceptual

Solution to Multiple Choice question for which the answer is “none of these.”
40. Many answers are possible.

MULTIPLE CHOICE—Computational

70. Ortiz Co. had the following account balances:
Sales revenue $ 180,000
Cost of goods sold 90,000
Salaries and wages expense 15,000
Depreciation expense 30,000
Dividend revenue 6,000
Utilities expense 12,000
Rent revenue 30,000
Interest expense 18,000
Sales returns and allow. 16,500
Advertising expense 19,500
What would Ortiz report as total revenues in a single-step income statement?
a. $199,500
b. $ 15,000
c. $216,000
d. $180,000

71. Ortiz Co. had the following account balances:
Sales revenue $ 180,000
Cost of goods sold 90,000
Salaries and wages expense 15,000
Depreciation expense 30,000
Dividend revenue 6,000
Utilities expense 12,000
Rent revenue 30,000
Interest expense 18,000
Sales returns and allow. 16,500
Advertising expense 19,500
What would Ortiz report as total expenses in a single-step income statement?
a. $190,500
b. $201,000
c. $184,500
d. $ 94,500

72. For Mortenson Company, the following information is available:
Cost of goods sold $120,000
Dividend revenue 5,000
Income tax expense 12,000
Operating expenses 46,000
Sales revenue 200,000
In Mortenson’s single-step income statement, gross profit
a. should not be reported.
b. should be reported at $27,000.
c. should be reported at $80,000.
d. should be reported at $85,000.

73. For Mortenson Company, the following information is available:
Cost of goods sold $120,000
Dividend revenue 5,000
Income tax expense 12,000
Operating expenses 46,000
Sales revenue 200,000
In Mortenson’s multiple-step income statement, gross profit
a. should not be reported
b. should be reported at $27,000.
c. should be reported at $80,000.
d. should be reported at $85,000.

74. For Rondelli Company, the following information is available:
Cost of goods sold $270,000
Dividend revenue 12,000
Income tax expense 27,000
Operating expenses 105,000
Sales revenue 450,000
In Rondelli’s multiple-step income statement, gross profit
a. should not be reported
b. should be reported at $60,000.
c. should be reported at $180,000.
d. should be reported at $192,000.

75. Gross billings for merchandise sold by Lang Company to its customers last year amounted to $12,720,000; sales returns and allowances were $370,000, sales discounts were $175,000, and freight-out was $140,000. Net sales last year for Lang Company were
a. $12,720,000.
b. $12,350,000.
c. $12,175,000.
d. $12,035,000.

76. If plant assets of a manufacturing company are sold at a gain of $1,640,000 less related taxes of $500,000, and the gain is not considered unusual or infrequent, the income statement for the period would disclose these effects as
a. a gain of $1,640,000 and an increase in income tax expense of $500,000.
b. operating income net of applicable taxes, $1,140,000.
c. a prior period adjustment net of applicable taxes, $1,140,000.
d. an extraordinary item net of applicable taxes, $1,140,000.

77. Manning Company has the following items: write-down of inventories, $360,000; loss on disposal of Sports Division, $555,000; and loss due to strike, $339,000. Ignoring income taxes, what total amount should Manning Company report as extraordinary losses?
a. $ -0-.
b. $555,000.
c. $699,000.
d. $894,000.

78. Garwood Company has the following items: write-down of inventories, $360,000; loss on disposal of Sports Division, $555,000; and loss due to an expropriation, $339,000. Ignoring income taxes, what total amount should Garwood Company report as extraordinary losses?
a. $339,000
b. $555,000.
c. $699,000.
d. $894,000.

79. An income statement shows “income before income taxes and extraordinary items” in the amount of $2,740,000. The income taxes payable for the year are $1,440,000, including $480,000 that is applicable to an extraordinary gain. Thus, the “income before extraordinary items” is
a. $1,780,000.
b. $820,000.
c. $1,860,000.
d. $900,000.

80. Dole Company, with an applicable income tax rate of 30%, reported net income of $350,000. Included in income for the period was an extraordinary loss from flood damage of $50,000 before deducting the related tax effect. The company’s income before income taxes and extraordinary items was
a. $400,000.
b. $500,000.
c. $550,000.
d. $385,000.

81. A review of the December 31, 2012, financial statements of Somer Corporation revealed that under the caption “extraordinary losses,” Somer reported a total of $1,030,000. Further analysis revealed that the $1,030,000 in losses was comprised of the following items:
(1) Somer recorded a loss of $300,000 incurred in the abandonment of equipment formerly used in the business.
(2) In an unusual and infrequent occurrence, a loss of $500,000 was sustained as a result of hurricane damage to a warehouse.
(3) During 2012, several factories were shut down during a major strike by employees, resulting in a loss of $170,000.
(4) Uncollectible accounts receivable of $60,000 were written off as uncollectible.
Ignoring income taxes, what amount of loss should Somer report as extraordinary on its 2012 income statement?
a. $300,000.
b. $500,000.
c. $800,000.
d. $1,030,000.

82. At Ruth Company, events and transactions during 2012 included the following. The tax rate for all items is 30%.
(1) Depreciation for 2010 was found to be understated by $60,000.
(2) A strike by the employees of a supplier resulted in a loss of $50,000.
(3) The inventory at December 31, 2010 was overstated by $80,000.
(4) A flood destroyed a building that had a book value of $1,000,000. Floods are very uncommon in that area.

The effect of these events and transactions on 2012 income from continuing operations net of tax would be
a. ($35,000).
b. ($77,000).
c. ($133,000).
d. ($833,000).

83. At Ruth Company, events and transactions during 2012 included the following. The tax rate for all items is 30%.
(1) Depreciation for 2010 was found to be understated by $60,000.
(2) A strike by the employees of a supplier resulted in a loss of $50,000.
(3) The inventory at December 31, 2010 was overstated by $80,000.
(4) A flood destroyed a building that had a book value of $1,000,000. Floods are very uncommon in that area.

The effect of these events and transactions on 2012 net income net of tax would be
a. ($35,000).
b. ($735,000).
c. ($777,000).
d. ($833,000).

84. During 2012, Lopez Corporation disposed of Pine Division, a major component of its business. Lopez realized a gain of $1,800,000, net of taxes, on the sale of Pine’s assets. Pine’s operating losses, net of taxes, were $2,100,000 in 2012. How should these facts be reported in Lopez’s income statement for 2012?
Total Amount to be Included in
Income from Results of
Continuing Operations Discontinued Operations
a. $2,100,000 loss $1,800,000 gain
b. 300,000 loss 0
c. 0 300,000 loss
d. 1,800,000 gain 2,100,000 loss

85. Sandstrom Corporation has an extraordinary loss of $150,000, an unusual gain of $105,000, and a tax rate of 40%. At what amount should Sandstrom report each item?
Extraordinary loss Unusual gain
a. $(150,000) $105,000
b. (150,000) 63,000
c. (90,000) 105,000
d. (90,000) 63,000

86. Prophet Corporation has an extraordinary loss of $600,000, an unusual gain of $420,000, and a tax rate of 40%. At what amount should Prophet report each item?
Extraordinary loss Unusual gain
a. $(600,000) $420,000
b. (600,000) 252,000
c. (360,000) 420,000
d. (360,000) 252,000

87. Arreaga Corp. has a tax rate of 40 percent and income before non-operating items of $464,000. It also has the following items (gross amounts).
Unusual loss $ 74,000
Extraordinary loss 202,000
Gain on disposal of equipment 16,000
Change in accounting principle
increasing prior year’s income 106,000
What is the amount of income tax expense Arreaga would report on its income statement?
a. $185,600
b. $162,400
c. $198,400
d. $124,000

88. Palomo Corp has a tax rate of 30 percent and income before non-operating items of $714,000. It also has the following items (gross amounts).
Unusual gain $ 46,000
Loss from discontinued operations 366,000
Dividend revenue 12,000
Income increasing prior
period adjustment 148,000
What is the amount of income tax expense Palomo would report on its income statement?
a. $231,600
b. $121,800
c. $166,200
d. $217,800

89. Lantos Company had a 40 percent tax rate. Given the following pre-tax amounts, what would be the income tax expense reported on the face of the income statement?
Sales revenue $ 300,000
Cost of goods sold 180,000
Salaries and wages expense 24,000
Depreciation expense 33,000
Dividend revenue 27,000
Utilities expense 3,000
Extraordinary loss 30,000
Interest expense 6,000
a. $32,400
b. $20,400
c. $21,600
d. $ 9,600

90. In 2012, Esther Corporation reported net income of $600,000. It declared and paid preferred stock dividends of $150,000 and common stock dividends of $60,000. During 2012, Esther had a weighted average of 200,000 common shares outstanding. Compute Esther’s 2012 earnings per share.
a. $1.95
b. $2.25
c. $3.00
d. $3.75

91. In 2012, Linz Corporation reported an extraordinary loss of $1,000,000, net of tax. It declared and paid preferred stock dividends of $100,000 and common stock dividends of $300,000. During 2012, Linz had a weighted average of 400,000 common shares outstanding. Compute the effect of the extraordinary loss, net of tax, on earnings per share.
a. $1.50
b. $1.75
c. $2.25
d. $2.50

92. In 2012, Benfer Corporation reported net income of $280,000. It declared and paid common stock dividends of $32,000 and had a weighted average of 70,000 common shares outstanding. Compute the earnings per share to the nearest cent.
a. $3.54
b. $2.80
c. $3.60
d. $4.00

93. Benedict Corporation reports the following information:
Net income $750,000
Dividends on common stock 210,000
Dividends on preferred stock 90,000
Weighted average common shares outstanding 100,000
Benedict should report earnings per share of
a. $4.50.
b. $5.40
c. $6.60.
d. $7.50.

94. Norling Corporation reports the following information:
Net income $750,000
Dividends on common stock 210,000
Dividends on preferred stock 90,000
Weighted average common shares outstanding 200,000
Norling should report earnings per share of
a. $2.25.
b. $2.70
c. $3.30.
d. $3.75.

95. Moorman Corporation reports the following information:
Correction of understatement of depreciation expense
in prior years, net of tax $ 645,000
Dividends declared 480,000
Net income 1,500,000
Retained earnings, 1/1/12, as reported 3,000,000
Moorman should report retained earnings, 1/1/12, as adjusted at
a. $2,355,000.
b. $3,000,000.
c. $3,645,000.
d. $4,665,000.

96. Moorman Corporation reports the following information:
Correction of understatement of depreciation expense
in prior years, net of tax $ 645,000
Dividends declared 480,000
Net income 1,500,000
Retained earnings, 1/1/12, as reported 3,000,000
Moorman should report retained earnings, 12/31/12, as adjusted at
a. $2,355,000.
b. $3,375,000.
c. $4,020,000.
d. $4,665,000.

97. Leonard Corporation reports the following information:
Correction of overstatement of depreciation expense
in prior years, net of tax $ 215,000
Dividends declared 160,000
Net income 500,000
Retained earnings, 1/1/12, as reported 2,000,000
Leonard should report retained earnings, 1/1/12, as adjusted at
a. $1,785,000.
b. $2,000,000.
c. $2,215,000.
d. $2,555,000.

98. Leonard Corporation reports the following information:
Correction of overstatement of depreciation expense
in prior years, net of tax $ 215,000
Dividends declared 160,000
Net income 500,000
Retained earnings, 1/1/12, as reported 2,000,000
Leonard should report retained earnings, 12/31/12, at
a. $1,785,000.
b. $2,125,000.
c. $2,340,000.
d. $2,555,000.
99. The following information was extracted from the accounts of Essex Corporation at December 31, 2012:
CR(DR)
Total reported income since incorporation $3,400,000
Total cash dividends paid (1,600,000)
Unrealized holding loss (240,000)
Total stock dividends distributed (400,000)
Prior period adjustment, recorded January 1, 2012 150,000
What should be the balance of retained earnings at December 31, 2012?
a. $1,310,000.
b. $1,400,000.
c. $1,160,000.
d. $1,550,000.

100. Madsen Company reported the following information for 2012:
Sales revenue $1,530,000
Cost of goods sold 1,050,000
Operating expenses 165,000
Unrealized holding gain on available-for-sale securities 120,000
Cash dividends received on the securities 6,000
For 2012, Madsen would report other comprehensive income of
a. $411,000.
b. $405,000.
c. $126,000.
d. $120,000.

101. Korte Company reported the following information for 2012:
Sales revenue $1,500,000
Cost of goods sold 1,050,000
Operating expenses 165,000
Unrealized holding gain on available-for-sale securities 60,000
Cash dividends received on the securities 6,000
For 2012, Korte would report comprehensive income of
a. $351,000.
b. $345,000.
c. $291,000.
d. $60,000.

102. For the year ended December 31, 2012, Transformers Inc. reported the following:
Net income $120,000
Preferred dividends declared 20,000
Common dividend declared 4,000
Unrealized holding loss, net of tax 2,000
Retained earnings 160,000
Common stock 80,000
Accumulated Other Comprehensive Income,
Beginning Balance 10,000
What would Transformers report as its ending balance of Accumulated Other
Comprehensive Income?
a. $12,000
b. $10,000
c. $8,000
d. $2,000

103. For the year ended December 31, 2012, Transformers Inc. reported the following:
Net income $120,000
Preferred dividends declared 20,000
Common dividend declared 4,000
Unrealized holding loss, net of tax 2,000
Retained earnings, beginning balance 160,000
Common stock 80,000
Accumulated Other Comprehensive Income,
Beginning Balance 10,000
What would Transformers report as the ending balance of Retained Earnings?
a. $278,000
b. $266,000
c. $256,000
d. $254,000

104. For the year ended December 31, 2012, Transformers Inc. reported the following:
Net income $120,000
Preferred dividends declared 20,000
Common dividend declared 4,000
Unrealized holding loss, net of tax 2,000
Retained earnings, beginning balance 160,000
Common stock 80,000
Accumulated Other Comprehensive Income,
Beginning Balance 10,000
What would Transformers report as total stockholders’ equity?
a. $344,000
b. $336,000
c. $256,000
d. $240,000

Multiple Choice Answers—Computational

MULTIPLE CHOICE—CPA Adapted

105. Perry Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 2012, included the following expense accounts:
Accounting and legal fees $280,000
Advertising 240,000
Freight-out 150,000
Interest 120,000
Loss on sale of long-term investments 60,000
Officers’ salaries 360,000
Rent for office space 360,000
Sales salaries and commissions 220,000
One-half of the rented premises is occupied by the sales department.

How much of the expenses listed above should be included in Perry’s selling expenses for 2012?
a. $460,000.
b. $610,000.
c. $640,000.
d. $790,000.

106. Perry Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 2012, included the following expense accounts:
Accounting and legal fees $280,000
Advertising 240,000
Freight-out 150,000
Interest 120,000
Loss on sale of long-term investments 60,000
Officers’ salaries 360,000
Rent for office space 360,000
Sales salaries and commissions 220,000
One-half of the rented premises is occupied by the sales department.

How much of the expenses listed above should be included in Perry’s general and administrative expenses for 2012?
a. $820,000.
b. $880,000.
c. $940,000.
d. $1,000,000.

107. Didde Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 2012 included the following expense and loss accounts:
Accounting and legal fees $210,000
Advertising 270,000
Freight-out 120,000
Interest 105,000
Loss on sale of long-term investment 45,000
Officers’ salaries 335,000
Rent for office space 330,000
Sales salaries and commissions 255,000
One-half of the rented premises is occupied by the sales department. Didde’s total selling expenses for 2012 are
a. $810,000.
b. $690,000.
c. $645,000.
d. $555,000.

108. The following items were among those that were reported on Dye Co.’s income statement for the year ended December 31, 2012:
Legal and audit fees $390,000
Rent for office space 540,000
Interest on inventory floor plan 630,000
Loss on abandoned equipment used in operations 105,000
The office space is used equally by Dye’s sales and accounting departments. What amount of the above-listed items should be classified as general and administrative expenses in Dye’s multiple-step income statement?
a. $660,000.
b. $765,000.
c. $930,000.
d. $1,290,000.

109. Logan Corp.’s trial balance of income statement accounts for the year ended December 31, 2012 included the following:
Debit Credit
Sales revenue $280,000
Cost of goods sold $100,000
Administrative expenses 50,000
Loss on disposal of equipment 18,000
Sales commission expense 16,000
Interest revenue 10,000
Freight-out 6,000
Loss due to earthquake damage 24,000
Bad debt expense 6,000
Totals $220,000 $290,000

Other information:
Logan’s income tax rate is 30%. Finished goods inventory:
January 1, 2012 $160,000
December 31, 2012 140,000
On Logan’s multiple-step income statement for 2012,

Cost of goods manufactured is
a. $126,000.
b. $120,000.
c. $86,000.
d. $80,000.

110. Logan Corp.’s trial balance of income statement accounts for the year ended December 31, 2012 included the following:
Debit Credit
Sales revenue $280,000
Cost of good sold $100,000
Administrative expenses 50,000
Loss on disposal of equipment 18,000
Sales commission expense 16,000
Interest revenue 10,000
Freight-out 6,000
Loss due to earthquake damage 24,000
Bad debt expense 6,000
Totals $220,000 $290,000

Other information:
Logan’s income tax rate is 30%. Finished goods inventory:
January 1, 2012 $160,000
December 31, 2012 140,000
On Logan’s multiple-step income statement for 2012,

Income before extraordinary item is
a. $128,000.
b. $94,000.
c. $65,800.
d. $49,000.

111. Logan Corp.’s trial balance of income statement accounts for the year ended December 31, 2012 included the following:
Debit Credit
Sales $280,000
Cost of sales $100,000
Administrative expenses 50,000
Loss on sale of equipment 18,000
Commissions to salespersons 16,000
Interest revenue 10,000
Freight-out 6,000
Loss due to earthquake damage 24,000
Bad debt expense 6,000
Totals $220,000 $290,000

Other information:
Logan’s income tax rate is 30%. Finished goods inventory:
January 1, 2012 $160,000
December 31, 2012 140,000
On Logan’s multiple-step income statement for 2012,

Extraordinary loss is
a. $16,800.
b. $24,000.
c. $29,400.
d. $42,000.

112. Chase Corp. had the following infrequent transactions during 2012:
A $225,000 gain from selling the only investment Chase has ever owned.
A $315,000 gain on the sale of equipment.
A $105,000 loss on the write-down of inventories.
In its 2012 income statement, what amount should Chase report as total infrequent net gains that are not considered extraordinary?
a. $120,000.
b. $210,000.
c. $435,000.
d. $540,000.

113. James, Inc. incurred the following infrequent losses during 2012:
A $140,000 write-down of equipment leased to others.
A $80,000 adjustment of accruals on long-term contracts.
A $120,000 write-off of obsolete inventory.
In its 2012 income statement, what amount should James report as total infrequent losses that are not considered extraordinary?
a. $340,000.
b. $260,000.
c. $220,000.
d. $200,000.

114. Which of the following should be reported as a prior period adjustment?
Change in Estimated Lives Change from Unaccepted
of Depreciable Assets Principle to Accepted Principle
a. Yes Yes
b. No Yes
c. Yes No
d. No No

Multiple Choice Answers—CPA Adapted

IFRS QUESTIONS
True/False
1. Both U.S. GAAP and IFRS discuss income statement presentation using either a
single-step or multi-step approach.
2. IFRS does not allow gains or losses to be classified as extraordinary items.
3. IFRS allows for revaluation of long-term tangible and intangible assets with the differences
impacting equity but not net income.
4. Both IFRS and U.S. GAAP allow for comprehensive income to be reported in either a
Statement of Stockholders’ Equity or a Statement of Recognized Income and Expense.
5. Under IFRS, a company may classify expenses by function, but must also disclose the
classification of expenses by nature.

Answers to True/False:

Multiple Choice:
1. The IFRS income statement classification of expenses by nature results in descriptions
which include all of the following except
a. salaries
b. depreciation
c. distribution
d. utilities

2. U.S. GAAP allows all of the following statement formats to be used for reporting comprehensive income except
a. Statement of Recognized Income and Expense
b. Single Income Statement
c. Combined Income Statement of Comprehensive Income
d. Statement of Stockholders’ Equity

3. An IFRS SoRIE statement might include all of the following except
a. net income or loss
b. unrealized gains or losses on the revaluation of long-term assets
c. cumulative effect of a change in accounting principle
d. extraordinary gain or loss

Answers to Multiple Choice:

Short Answer:

1. What are the IFRS requirements with respect to expense classification?

2. Bradshaw Company experienced a loss that was deemed to be both unusual in nature and infrequent in occurrence. How should Bradshaw report this item in accordance with IFRS?

CHAPTER 5
BALANCE SHEET AND STATEMENT OF CASH FLOWS

IFRS questions are available at the end of this chapter.

TRUE FALSE—Conceptual

1. Liquidity refers to the ability of an enterprise to pay its debts as they mature.

2. The balance sheet omits many items that are of financial value to the business but cannot be recorded objectively.

3. Financial flexibility measures the ability of an enterprise to take effective actions to alter the amounts and timing of cash flows.

4. Companies frequently describe the terms of all long-term liability agreements in notes to the financial statements.

5. An asset which is expected to be converted into cash, sold, or consumed within one year of the balance sheet date is always reported as a current asset.

6. Land held for speculation is reported in the property, plant, and equipment section of the balance sheet.

7. The account form and the report form of the balance sheet are both acceptable under GAAP.

8. The primary purpose of a statement of cash flows is to report the cash effects of operations during a period.

9. The statement of cash flows reports only the cash effects of operations during a period and financing transactions.

10. Financial flexibility is a company’s ability to respond and adapt to financial adversity and unexpected needs and opportunities.

11. Collection of a loan is reported as an investing activity in the statement of cash flows.

12. Companies determine cash provided by operating activities by converting net income on an accrual basis to a cash basis.

13. Significant financing and investing activities that do not affect cash are not reported in the statement of cash flows or any other place.

14. Financial statement readers often assess liquidity by using the current cash debt coverage ratio.

15. Free cash flow is net income less capital expenditures and dividends.

16. Because of the historical cost principle, fair values may not be disclosed in the balance sheet.

17. Companies have the option of disclosing information about the nature of their operations and the use of estimates in preparing financial statements.

18. Companies may use parenthetical explanations, notes, cross references, and supporting schedules to disclose pertinent information.

19. The accounting profession has recommended that companies use the word reserve only to describe amounts deducted from assets.

20. On the balance sheet, an adjunct account reduces either an asset, a liability, or an owners’ equity account.

True False Answers—Conceptual

MULTIPLE CHOICE—Conceptual

21. Which of the following is a limitation of the balance sheet?
a. Many items that are of financial value are omitted.
b. Judgments and estimates are used.
c. Current fair value is not reported.
d. All of these

22. The balance sheet is useful for analyzing all of the following except
a. liquidity.
b. solvency.
c. profitability.
d. financial flexibility.

23. Balance sheet information is useful for all of the following except to
a. compute rates of return
b. analyze cash inflows and outflows for the period
c. evaluate capital structure
d. assess future cash flows

24. Balance sheet information is useful for all of the following except
a. assessing a company’s risk
b. evaluating a company’s liquidity
c. evaluating a company’s financial flexibility
d. determining free cash flows.

25. A limitation of the balance sheet that is not also a limitation of the income statement is
a. the use of judgments and estimates
b. omitted items
c. the numbers are affected by the accounting methods employed
d. valuation of items at historical cost

S26. The balance sheet contributes to financial reporting by providing a basis for all of the following except
a. computing rates of return.
b. evaluating the capital structure of the enterprise.
c. determining the increase in cash due to operations.
d. assessing the liquidity and financial flexibility of the enterprise.

S27. One criticism not normally aimed at a balance sheet prepared using current accounting and reporting standards is
a. failure to reflect current value information.
b. the extensive use of separate classifications.
c. an extensive use of estimates.
d. failure to include items of financial value that cannot be recorded objectively.

P28. The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash is referred to as
a. solvency.
b. financial flexibility.
c. liquidity.
d. exchangeability.

29. The net assets of a business are equal to
a. current assets minus current liabilities.
b. total assets plus total liabilities.
c. total assets minus total stockholders’ equity.
d. none of these.

30. The correct order to present current assets is
a. cash, accounts receivable, prepaid items, inventories.
b. cash, accounts receivable, inventories, prepaid items.
c. cash, inventories, accounts receivable, prepaid items.
d. cash, inventories, prepaid items, accounts receivable.

31. The basis for classifying assets as current or noncurrent is conversion to cash within
a. the accounting cycle or one year, whichever is shorter.
b. the operating cycle or one year, whichever is longer.
c. the accounting cycle or one year, whichever is longer.
d. the operating cycle or one year, whichever is shorter.

32. The basis for classifying assets as current or noncurrent is the period of time normally required by the accounting entity to convert cash invested in
a. inventory back into cash, or 12 months, whichever is shorter.
b. receivables back into cash, or 12 months, whichever is longer.
c. tangible fixed assets back into cash, or 12 months, whichever is longer.
d. inventory back into cash, or 12 months, whichever is longer.

33. The current assets section of the balance sheet should include
a. machinery.
b. patents.
c. goodwill.
d. inventory.

34. Which of the following is a current asset?
a. Cash surrender value of a life insurance policy of which the company is the bene-ficiary.
b. Investment in equity securities for the purpose of controlling the issuing company.
c. Cash designated for the purchase of tangible fixed assets.
d. Trade installment receivables normally collectible in 18 months.

35. Which of the following should not be considered as a current asset in the balance sheet?
a. Installment notes receivable due over 18 months in accordance with normal trade practice.
b. Prepaid taxes which cover assessments of the following operating cycle of the business.
c. Equity or debt securities purchased with cash available for current operations.
d. The cash surrender value of a life insurance policy carried by a corporation, the beneficiary, on its president.

36. Equity or debt securities held to finance future construction of additional plants should be classified on a balance sheet as
a. current assets.
b. property, plant, and equipment.
c. intangible assets.
d. long-term investments.

37. When a portion of inventories has been pledged as security on a loan,
a. the value of the portion pledged should be subtracted from the debt.
b. an equal amount of retained earnings should be appropriated.
c. the fact should be disclosed but the amount of current assets should not be affected.
d. the cost of the pledged inventories should be transferred from current assets to noncurrent assets.

38. Which of the following is not a long-term investment?
a. Cash surrender value of life insurance
b. Franchise
c. Land held for speculation
d. A sinking fund

39. A generally accepted method of valuation is
1. trading securities at market value.
2. accounts receivable at net realizable value.
3. inventories at current cost.
a. 1
b. 2
c. 3
d. 1 and 2

40. Which item below is not a current liability?
a. Unearned revenue
b. Stock dividends distributable
c. The currently maturing portion of long-term debt
d. Trade accounts payable

41. Working capital is
a. capital which has been reinvested in the business.
b. unappropriated retained earnings.
c. cash and receivables less current liabilities.
d. none of these.

42. An example of an item which is not an element of working capital is
a. accrued interest on notes receivable.
b. goodwill.
c. goods in process.
d. temporary investments.

43. Long-term liabilities include
a. obligations not expected to be liquidated within the operating cycle.
b. obligations payable at some date beyond the operating cycle.
c. deferred income taxes and most lease obligations.
d. all of these.

44. Which of the following should be excluded from long-term liabilities?
a. Obligations payable at some date beyond the operating cycle
b. Most pension obligations
c. Long-term liabilities that mature within the operating cycle and will be paid from a sinking fund
d. None of these

45. Treasury stock should be reported as a(n)
a. current asset.
b. investment.
c. other asset.
d. reduction of stockholders’ equity.

46. Which of the following should be reported for capital stock?
a. The shares authorized
b. The shares issued
c. The shares outstanding
d. All of these

47. Which of the following would be classified in a different major section of a balance sheet from the others?
a. Capital stock
b. Common stock subscribed
c. Stock dividend distributable
d. Stock investment in affiliate

48. The stockholders’ equity section is usually divided into what three parts?
a. Preferred stock, common stock, treasury stock
b. Preferred stock, common stock, retained earnings
c. Capital stock, additional paid-in capital, retained earnings
d. Capital stock, appropriated retained earnings, unappropriated retained earnings

49. Which of the following is not an acceptable major asset classification?
a. Current assets
b. Long-term investments
c. Property, plant, and equipment
d. Deferred charges

P50. Which of the following is a contra account?
a. Premium on bonds payable
b. Unearned revenue
c. Patents
d. Accumulated depreciation

51. The financial statement which summarizes operating, investing, and financing activities of an entity for a period of time is the
a. retained earnings statement.
b. income statement.
c. statement of cash flows.
d. statement of financial position.

S52. The statement of cash flows provides answers to all of the following questions except
a. where did the cash come from during the period?
b. what was the cash used for during the period?
c. what is the impact of inflation on the cash balance at the end of the year?
d. what was the change in the cash balance during the period?

53. The statement of cash flows reports all of the following except
a. the net change in cash for the period.
b. the cash effects of operations during the period.
c. the free cash flows generated during the period.
d. investing transactions.

54. The statement of cash flows helps meet the objective of financial reporting, which is to assess all of the following except the
a. amount of future cash flows.
b. source of future cash flows.
c. timing of future cash flows.
d. uncertainty of future cash flows.

55. If common stock was issued to acquire an $8,000 machine, how would the transaction appear on the statement of cash flows?
a. It would depend on whether you are using the direct or the indirect method.
b. It would be a positive $8,000 in the financing section and a negative $8,000 in the investing section.
c. It would be a negative $8,000 in the financing section and a positive $8,000 in the investing section.
d. It would not appear on the statement of cash flows but rather on a schedule of noncash investing and financing activities.

56. Which of the following events will appear in the cash flows from financing activities section of the statement of cash flows?
a. Cash purchases of equipment.
b. Cash purchases of bonds issued by another company.
c. Cash received as repayment for funds loaned.
d. Cash purchase of treasury stock.

57. Making and collecting loans and disposing of property, plant, and equipment are
a. operating activities.
b. investing activities.
c. financing activities.
d. liquidity activities.

58. In preparing a statement of cash flows, sale of treasury stock at an amount greater than cost would be classified as a(n)
a. operating activity.
b. financing activity.
c. extraordinary activity.
d. investing activity.

59. In preparing a statement of cash flows, cash flows from operating activities
a. are always equal to accrual accounting income.
b. are calculated as the difference between revenues and expenses.
c. can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash.
d. can be calculated by appropriately adding to or deducting from net income those items in the income statement that do affect cash.

60. In preparing a statement of cash flows, which of the following transactions would be considered an investing activity?
a. Sale of equipment at book value
b. Sale of merchandise on credit
c. Declaration of a cash dividend
d. Issuance of bonds payable at a discount

61. Preparing the statement of cash flows involves all of the following except determining the
a. cash provided by operations.
b. cash provided by or used in investing and financing activities.
c. change in cash during the period.
d. cash collections from customers during the period.

62. The cash debt coverage ratio is computed by dividing net cash provided by operating activities by
a. average long-term liabilities.
b. average total liabilities.
c. ending long-term liabilities.
d. ending total liabilities.

63. The current cash debt coverage ratio is often used to assess
a. financial flexibility.
b. liquidity.
c. profitability.
d. solvency.

64. A measure of a company’s financial flexibility is the
a. cash debt coverage ratio.
b. current cash debt coverage ratio.
c. free cash flow.
d. cash debt coverage ratio and free cash flow.

65. Free cash flow is calculated as net cash provided by operating activities less
a. capital expenditures.
b. dividends.
c. capital expenditures and dividends.
d. capital expenditures and depreciation.

S66. One of the benefits of the statement of cash flows is that it helps users evaluate financial flexibility. Which of the following explanations is a description of financial flexibility?
a. The nearness to cash of assets and liabilities.
b. The firm’s ability to respond and adapt to financial adversity and unexpected needs and opportunities.
c. The firm’s ability to pay its debts as they mature.
d. The firm’s ability to invest in a number of projects with different objectives and costs.

P67. Net cash provided by operating activities divided by average total liabilities equals the
a. current cash debt coverage ratio.
b. cash debt coverage ratio.
c. free cash flow.
d. current ratio.

S68. Which of the following balance sheet classifications would normally require the greatest amount of supplementary disclosure?
a. Current assets
b. Current liabilities
c. Plant assets
d. Long-term liabilities

69. The presentation of long-term liabilities in the balance sheet should disclose
a. maturity dates.
b. interest rates.
c. conversion rights.
d. All of the above.

70. Which of the following is not a required supplemental disclosure for the balance sheet?
a. Contingencies
b. Financial forecasts
c. Accounting policies
d. Contractual situations

71. Typical contractual situations that are disclosed in the notes to the balance sheet include all of the following except
a. debt covenants
b. lease obligations
c. advertising contracts
d. pension obligations

72. Accounting policies disclosed in the notes to the financial statements typically include all of the following except
a. the cost flow assumption used
b. the depreciation methods used
c. significant estimates made
d. significant inventory purchasing policies

73. Which of the following best exemplifies a contingency that is reported in the notes to the financial statements?
a. Losses from potential future lawsuits
b. Loss from a lawsuit settled out of court prior to the end of the fiscal year
c. Warranty claims on future sales
d. Estimated loss from an ongoing lawsuit

74. Which of the following is not a method of disclosing pertinent information?
a. Supporting schedules
b. Parenthetical explanations
c. Cross reference and contra items
d. All of these are methods of disclosing pertinent information.

75. Significant accounting policies may not be
a. selected on the basis of judgment.
b. selected from existing acceptable alternatives.
c. unusual or innovative in application.
d. omitted from financial-statement disclosure.

76. A general description of the depreciation methods applicable to major classes of depreci-able 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.

77. It is mandatory that the essential provisions of which of the following be clearly stated in the notes to the financial statements?
a. Stock option plans
b. Pension obligations
c. Lease contracts
d. All of these
78. A generally accepted account title is
a. Prepaid Revenue.
b. Appropriation for Contingencies.
c Earned Surplus.
d. Reserve for Doubtful Accounts.

Multiple Choice Answers—Conceptual
Solutions to those Multiple Choice questions for which the answer is “none of these.”
29. Total assets minus total liabilities.
41. Current assets less current liabilities.
44. Many answers are possible.

MULTIPLE CHOICE—Computational

79. Fulton Company owns the following investments:
Trading securities (fair value) $120,000
Available-for-sale securities (fair value) 70,000
Held-to-maturity securities (amortized cost) 94,000
Fulton will report investments in its current assets section of
a. $0.
b. exactly $120,000.
c. $120,000 or an amount greater than $120,000, depending on the circumstances.
d. exactly $190,000.

80. For Grimmett Company, the following information is available:
Capitalized leases $600,000
Trademarks 195,000
Long-term receivables 225,000
In Grimmett’s balance sheet, intangible assets should be reported at
a. $195,000.
b. $225,000.
c. $795,000.
d. $825,000.

81. Houghton Company has the following items: common stock, $900,000; treasury stock, $105,000; deferred taxes, $125,000 and retained earnings, $390,000. What total amount should Houghton Company report as stockholders’ equity?
a. $1,060,000.
b. $1,185,000.
c. $1,310,000.
d. $1,395,000.

82. Kohler Company owns the following investments:
Trading securities (fair value) $120,000
Available-for-sale securities (fair value) 70,000
Held-to-maturity securities (amortized cost) 94,000
Kohler will report securities in its long-term investments section of
a. exactly $190,000.
b. exactly $214,000.
c. exactly $284,000.
d. $164,000 or an amount less than $164,000, depending on the circumstances.

83. For Randolph Company, the following information is available:
Capitalized leases $560,000
Trademarks 180,000
Long-term receivables 210,000
In Randolph’s balance sheet, intangible assets should be reported at
a. $180,000.
b. $210,000.
c. $740,000.
d. $770,000.

84. Olmsted Company has the following items: common stock, $900,000; treasury stock, $105,000; deferred taxes, $125,000 and retained earnings, $454,000. What total amount should Olmsted Company report as stockholders’ equity?
a. $1,124,000.
b. $1,249,000.
c. $1,374,000.
d. $1,499,000.

85. Presented below are data for Antwerp Corp.
2012 2013
Assets, January 1 $2,600 $3,360
Liabilities, January 1 1,680 ?
Stockholders’ Equity, Jan. 1 ? ?
Dividends 560 420
Common Stock 504 448
Stockholders’ Equity, Dec. 31 ? ?
Net Income 560 448
Stockholders’ Equity at January 1, 2012 is
a. $ 504.
b. $ 560.
c. $ 920.
d. $1,424.

86. Presented below are data for Bandkok Corp.
2012 2013
Assets, January 1 $5,400 $6,480
Liabilities, January 1 3,240 ?
Stockholders’ Equity, Jan. 1 ? ?
Dividends 1,080 810
Common Stock 972 864
Stockholders’ Equity, Dec. 31 ? ?
Net Income 1,280 864
Stockholders’ Equity at January 1, 2013 is
a. $3,332.
b. $2,160.
c. $2,360.
d. $3,440.

87. Presented below are data for Caracas Corp.
2013 2014
Assets, January 1 $4,560 ?
Liabilities, January 1 ? $2,736
Stockholders’ Equity, Jan. 1 ? 2,750
Dividends 570 646
Common Stock 608 650
Stockholders’ Equity, Dec. 31 ? 2,166
Net Income 684 ?
Net income for 2014 is
a. $584 income.
b. $584 loss.
c. $62 loss.
d. $62 income.

88. Lohmeyer Corporation reports:
Cash provided by operating activities $220,000
Cash used by investing activities 110,000
Cash provided by financing activities 140,000
Beginning cash balance 70,000
What is Lohmeyer’s ending cash balance?
a. $250,000.
b. $320,000.
c. $470,000.
d. $540,000.

89. Keisler Corporation reports:
Cash provided by operating activities $240,000
Cash used by investing activities 110,000
Cash provided by financing activities 140,000
Beginning cash balance 70,000
What is Keisler’s ending cash balance?
a. $270,000.
b. $340,000.
c. $490,000.
d. $560,000.

90. During 2012 the DLD Company had a net income of $55,000. In addition, selected accounts showed the following changes:
Accounts Receivable $3,000 increase
Accounts Payable 1,000 increase
Building 4,000 decrease
Depreciation Expense 1,500 increase
Bonds Payable 8,000 increase
What was the amount of cash provided by operating activities?
a. $54,500
b. $55,000
c. $56,500
d. $64,500

91. Harding Corporation reports the following information:
Net income $450,000
Depreciation expense 140,000
Increase in accounts receivable 60,000
Harding should report cash provided by operating activities of
a. $250,000.
b. $370,000.
c. $530,000.
d. $650,000.

92. Sauder Corporation reports the following information:
Net income $300,000
Depreciation expense 70,000
Increase in accounts receivable 30,000
Sauder should report cash provided by operating activities of
a. $200,000.
b. $260,000.
c. $340,000.
d. $400,000.

93. Packard Corporation reports the following information:
Net cash provided by operating activities $235,000
Average current liabilities 150,000
Average long-term liabilities 100,000
Dividends declared 60,000
Capital expenditures 110,000
Payments of debt 35,000
Packard’s cash debt coverage ratio is
a. 0.94.
b. 1.59.
c. 2.35.
d. 3.92.

94. Packard Corporation reports the following information:
Net cash provided by operating activities $235,000
Average current liabilities 150,000
Average long-term liabilities 100,000
Dividends paid 60,000
Capital expenditures 110,000
Payments of debt 35,000
Packard’s free cash flow is
a. $50,000.
b. $65,000.
c. $125,000.
d. $175,000.

95. Pedigo Corporation reports the following information:
Net cash provided by operating activities $275,000
Average current liabilities 150,000
Average long-term liabilities 100,000
Dividends paid 60,000
Capital expenditures 110,000
Payments of debt 35,000
Pedigo’s cash debt coverage ratio is
a. 1.10.
b. 1.83.
c. 2.75.
d. 2.50.

96. Pedigo Corporation reports the following information:
Net cash provided by operating activities $275,000
Average current liabilities 150,000
Average long-term liabilities 100,000
Dividends paid 60,000
Capital expenditures 110,000
Payments of debt 35,000
Pedigo free cash flow is
a. $50,000.
b. $105,000.
c. $165,000.
d. $215,000.

Multiple Choice Answers—Computational

MULTIPLE CHOICE—CPA Adapted

97. Stine Corp.’s trial balance reflected the following account balances at December 31, 2012:
Accounts receivable (net) $24,000
Trading securities 6,000
Accumulated depreciation on equipment and furniture 15,000
Cash 16,000
Inventory 30,000
Equipment 25,000
Patent 4,000
Prepaid expenses 2,000
Land held for future business site 18,000
In Stine’s December 31, 2012 balance sheet, the current assets total is
a. $95,000.
b. $87,000.
c. $82,000.
d. $78,000.

Use the following information for questions 98 through 100.

The following trial balance of Reese Corp. at December 31, 2012 has been properly adjusted except for the income tax expense adjustment.
Reese Corp.
Trial Balance
December 31, 2012
Dr. Cr.
Cash $ 975,000
Accounts receivable (net) 2,695,000
Inventory 2,085,000
Property, plant, and equipment (net) 7,366,000
Accounts payable and accrued liabilities $ 1,801,000
Income taxes payable 654,000
Deferred income tax liability 85,000
Common stock 2,350,000
Additional paid-in capital 3,680,000
Retained earnings, 1/1/12 3,450,000
Net sales and other revenues 13,460,000
Costs and expenses 11,180,000
Income tax expenses 1,179,000
$25,480,000 $25,480,000

Other financial data for the year ended December 31, 2012:
• Included in accounts receivable is $1,200,000 due from a customer and payable in quarterly installments of $150,000. The last payment is due December 29, 2014.
• The balance in the Deferred Income Tax Liability account pertains to a temporary difference that arose in a prior year, of which $20,000 is classified as a current liability.
• During the year, estimated tax payments of $525,000 were charged to income tax expense. The current and future tax rate on all types of income is 30%.

In Reese’s December 31, 2012 balance sheet,

98. The current assets total is
a. $6,280,000.
b. $5,755,000.
c. $5,605,000.
d. $5,155,000.

99. The current liabilities total is
a. $1,950,000.
b. $2,015,000.
c. $2,475,000.
d. $2,540,000.

100. The final retained earnings balance is
a. $4,551,000.
b. $4,636,000.
c. $5,076,000.
d. $5,005,000.
101. On January 4, 2012, Kiley Co. leased a building to Dodd Corp. for a ten-year term at an annual rental of $100,000. At inception of the lease, Dodd received $400,000 covering the first two years’ rent of $200,000 and a security deposit of $200,000. This deposit will not be returned to Dodd upon expiration of the lease but will be applied to payment of rent for the last two years of the lease. What portion of the $400,000 should be shown as a current and long-term liability in Kiley’s December 31, 2012 balance sheet?
Current Liability Long-term Liability
a. $0 $400,000
b. $100,000 $200,000
c. $200,000 $200,000
d. $200,000 $100,000

102. In a statement of cash flows, receipts from sales of property, plant, and equipment and other productive assets should generally be classified as cash inflows from
a. operating activities.
b. financing activities.
c. investing activities.
d. selling activities.

103. In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash outflows for
a. operating activities.
b. borrowing activities.
c. lending activities.
d. financing activities.

104. In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows from
a. lending activities.
b. operating activities.
c. investing activities.
d. financing activities.

105. In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash equivalents) should be classified as cash outflows for
a. operating activities.
b. investing activities.
c. financing activities.
d. lending activities.

106. Which of the following facts concerning fixed assets should be included in the summary of significant accounting policies?
Depreciation Method Composition
a. No Yes
b. Yes Yes
c. Yes No
d. No No

Multiple Choice Answers—CPA Adapted
IFRS QUESTIONS

True/False:
1. Although the presentation formats for the balance sheet and statement of cash flows are similar under IFRS and U.S. GAAP, IFRS requires far more extensive disclosure.
2. One significant difference between a balance sheet prepared using IFRS rather than U.S. GAAP is that long-term tangible assets will be reported at fair value rather than historical cost.
3. Both IFRS and U.S. GAAP require that specific items be reported on the balance sheet.
4. Both IFRS and U.S. GAAP require current assets to be listed first on the balance sheet.

Answers to True/False:

Multiple Choice Questions:

1. Which of the following statements about IFRS and U.S. GAAP accounting and reporting requirements for the balance sheet is not correct?
a. The presentation formats required by IFRS and U.S. GAAP for the balance sheet are similar.
b. One difference between the reporting requirements under IFRS and those of
U.S. GAAP balance sheet is that an IFRS balance sheet may list long-term assets first.
c. Both IFRS and U.S. GAAP require that property, plant and equipment be reported at historical cost on the balance sheet.
d. Both IFRS and U.S. GAAP require that comparative information be reported.

Use the following information to answer the next two questions.

Franco Company uses IFRS and owns property, plant and equipment with a historical cost of 5,000,000 euros. At December 31, 2011, the company reported a valuation reserve of
8,365,000 euros. At December 31, 2012, the property, plant and equipment was appraised at
5,325,000 euros.

2. The property, plant and equipment will be reported on the December 31, 2012 balance sheet at
a. 5,000,000 euros.
b. 5,325,000 euros.
c. 8,365,000 euros.
d. 8,690,000 euros.

3. The valuation reserve at December 31, 2012 will be reported at
a. 8,040,000 euros on the Statement of Stockholders’ Equity.
b. 8,365,000 euros in the Assets section of the Balance Sheet
c. 8,690,000 euros in the stockholders’ equity section of the Balance Sheet.
d. 325,000 euros on the Income Statement.

4. Similarities between IFRS and U.S. GAAP requirements for balance sheet presentation include all of the following except:
a. Both require that changes to the valuation reserve be disclosed in the notes to the financial statements.
b. Both require disclosure of significant accounting policies.
c. Both require the preparation of financial statements annually.
d. Both generally require the use of the current/ non-current classification for both assets and liabilities.

Answers to Multiple Choice:
IFRS Short Answer:

1. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with respect to balance sheet reporting.

2. Briefly describe the convergence efforts related to financial statement presentation.

CHAPTER 6
ACCOUNTING AND THE TIME VALUE OF MONEY

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

1. The time value of money refers to the fact that a dollar received today is worth less than a dollar promised at some time in the future.

2. Interest is the excess cash received or repaid over and above the amount lent or borrowed.

3. Simple interest is computed on principal and on any interest earned that has not been withdrawn.

4. Compound interest, rather than simple interest, must be used to properly evaluate long- term investment proposals.

5. Compound interest uses the accumulated balance at each year end to compute interest in the succeeding year.

6. The future value of an ordinary annuity table is used when payments are invested at the beginning of each period.

7. The present value of an annuity due table is used when payments are made at the end of each period.

8. If the compounding period is less than one year, the annual interest rate must be converted to the compounding period interest rate by dividing the annual rate by the number of compounding periods per year.

9. Present value is the value now of a future sum or sums discounted assuming compound interest.

10. The future value of a single sum is determined by multiplying the future value factor by its present value.

11. In determining present value, a company moves backward in time using a process of accumulation.

12. The unknown present value is always a larger amount than the known future value because dollars received currently are worth more than dollars to be received in the future.

13. The rents that comprise an annuity due earn no interest during the period in which they are originally deposited.

14. If two annuities have the same number of rents with the same dollar amount, but one is an annuity due and one is an ordinary annuity, the future value of the annuity due will be greater than the future value of the ordinary annuity.

15. If two annuities have the same number of rents with the same dollar amount, but one is an annuity due and one is an ordinary annuity, the present value of the annuity due will be greater than the present value of the ordinary annuity.

16. The number of compounding periods will always be one less than the number of rents when computing the future value of an ordinary annuity.
17. The future value of an annuity due factor is found by multiplying the future value of an ordinary annuity factor by 1 minus the interest rate.

18. The present value of an ordinary annuity is the present value of a series of equal rents withdrawn at equal intervals.

19. The future value of a deferred annuity is less than the future value of an annuity not deferred.

20. At the date of issue, bond buyers determine the present value of the bonds’ cash flows using the market interest rate.

True False Answers—Conceptual

MULTIPLE CHOICE—Conceptual

21. Which of the following transactions would require the use of the present value of an annuity due concept in order to calculate the present value of the asset obtained or liability owed at the date of incurrence?
a. A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement.
b. A capital lease is entered into with the initial lease payment due one month subse-quent to the signing of the lease agreement.
c. A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 7%.
d. A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 9%.

22. What best describes the time value of money?
a. The interest rate charged on a loan.
b. Accounts receivable that are determined uncollectible.
c. An investment in a checking account.
d. The relationship between time and money.

23. Which of the following situations does not base an accounting measure on present values?
a. Pensions.
b. Prepaid insurance.
c. Leases.
d. Sinking funds.

24. What is interest?
a. Payment for the use of money.
b. An equity investment.
c. Return on capital.
d. Loan.

25. What is NOT a variable that is considered in interest computations?
a. Principal.
b. Interest rate.
c. Assets.
d. Time.

26. If you invest $50,000 to earn 8% interest, which of the following compounding approaches would return the lowest amount after one year?
a. Daily.
b. Monthly.
c. Quarterly.
d. Annually.

27. Which factor would be greater — the present value of $1 for 10 periods at 8% per period or the future value of $1 for 10 periods at 8% per period?
a. Present value of $1 for 10 periods at 8% per period.
b. Future value of $1 for 10 periods at 8% per period.
c. The factors are the same.
d. Need more information.

28. Which of the following tables would show the smallest value for an interest rate of 5% for six periods?
a. Future value of 1
b. Present value of 1
c. Future value of an ordinary annuity of 1
d. Present value of an ordinary annuity of 1

29. Which table would you use to determine how much you would need to have deposited three years ago at 10% compounded annually in order to have $1,000 today?
a. Future value of 1 or present value of 1
b. Future value of an annuity due of 1
c. Future value of an ordinary annuity of 1
d. Present value of an ordinary annuity of 1

30. Which table would you use to determine how much must be deposited now in order to provide for 5 annual withdrawals at the beginning of each year, starting one year hence?
a. Future value of an ordinary annuity of 1
b. Future value of an annuity due of 1
c. Present value of an annuity due of 1
d. None of these

31. Which table has a factor of 1.00000 for 1 period at every interest rate?
a. Future value of 1
b. Present value of 1
c. Future value of an ordinary annuity of 1
d. Present value of an ordinary annuity of 1
32. Which table would show the largest factor for an interest rate of 8% for five periods?
a. Future value of an ordinary annuity of 1
b. Present value of an ordinary annuity of 1
c. Future value of an annuity due of 1
d. Present value of an annuity due of 1

33. Which of the following tables would show the smallest factor for an interest rate of 10% for six periods?
a. Future value of an ordinary annuity of 1
b. Present value of an ordinary annuity of 1
c. Future value of an annuity due of 1
d. Present value of an annuity due of 1

34. The figure .94232 is taken from the column marked 2% and the row marked three periods in a certain interest table. From what interest table is this figure taken?
a. Future value of 1
b. Future value of annuity of 1
c. Present value of 1
d. Present value of annuity of 1

S35. Which of the following tables would show the largest value for an interest rate of 10% for 8 periods?
a. Future amount of 1 table.
b. Present value of 1 table.
c. Future amount of an ordinary annuity of 1 table.
d. Present value of an ordinary annuity of 1 table.

S36. On June 1, 2012, Pitts Company sold some equipment to Gannon Company. The two companies entered into an installment sales contract at a rate of 8%. The contract required 8 equal annual payments with the first payment due on June 1, 2012. What type of compound interest table is appropriate for this situation?
a. Present value of an annuity due of 1 table.
b. Present value of an ordinary annuity of 1 table.
c. Future amount of an ordinary annuity of 1 table.
d. Future amount of 1 table.

S37. Which of the following transactions would best use the present value of an annuity due of 1 table?
a. Fernetti, Inc. rents a truck for 5 years with annual rental payments of $20,000 to be made at the beginning of each year.
b. Edmiston Co. rents a warehouse for 7 years with annual rental payments of $120,000 to be made at the end of each year.
c. Durant, Inc. borrows $20,000 and has agreed to pay back the principal plus interest in three years.
d. Babbitt, Inc. wants to deposit a lump sum to accumulate $50,000 for the construction of a new parking lot in 4 years.

P38. A series of equal receipts at equal intervals of time when each receipt is received at the beginning of each time period is called an
a. ordinary annuity.
b. annuity in arrears.
c. annuity due.
d. unearned receipt.

P39. In the time diagram below, which concept is being depicted?

0 1
$1 2
$1 3
$1 4
$1

a. Present value of an ordinary annuity
b. Present value of an annuity due
c. Future value of an ordinary annuity
d. Future value of an annuity due

P40. On December 1, 2012, Richards Company sold some machinery to Fleming Company. The two companies entered into an installment sales contract at a predetermined interest rate. The contract required four equal annual payments with the first payment due on December 1, 2012, the date of the sale. What present value concept is appropriate for this situation?
a. Future amount of an annuity of 1 for four periods
b. Future amount of 1 for four periods
c. Present value of an ordinary annuity of 1 for four periods
d. Present value of an annuity due of 1 for four periods.

41. An amount is deposited for eight years at 8%. If compounding occurs quarterly, then the table value is found at
a. 8% for eight periods.
b. 2% for eight periods.
c. 8% for 32 periods.
d. 2% for 32 periods.

42. If the number of periods is known, the interest rate is determined by
a. dividing the future value by the present value and looking for the quotient in the future value of 1 table.
b. dividing the future value by the present value and looking for the quotient in the present value of 1 table.
c. dividing the present value by the future value and looking for the quotient in the future value of 1 table.
d. multiplying the present value by the future value and looking for the product in the present value of 1 table.

43. Present value is
a. the value now of a future amount.
b. the amount that must be invested now to produce a known future value.
c. always smaller than the future value.
d. all of these.

P44. Which of the following statements is true?
a. The higher the discount rate, the higher the present value.
b. The process of accumulating interest on interest is referred to as discounting.
c. If money is worth 10% compounded annually, $1,100 due one year from today is equivalent to $1,000 today.
d. If a single sum is due on December 31, 2012, the present value of that sum decreases as the date draws closer to December 31, 2012.

45. What is the primary difference between an ordinary annuity and an annuity due?
a. The timing of the periodic payment.
b. The interest rate.
c. Annuity due only relates to present values.
d. Ordinary annuity only relates to present values.

46. What is the relationship between the future value of one and the present value of one?
a. The present value of one equals the future value of one plus one.
b. The present value of one equals one plus future value factor for n-1 periods.
c. The present value of one equals one divided by the future value of one.
d. The present value of one equals one plus the future value factor for n+1 value

47. Peter invests $100,000 in a 3-year certificate of deposit earning 3.5% at his local bank. Which time value concept would be used to determine the maturity value of the certificate?
a. Present value of one.
b. Future value of one.
c. Present value of an annuity due.
d. Future value of an ordinary annuity.

48. Jerry recently was offered a position with a major accounting firm. The firm offered Jerry either a signing bonus of $23,000 payable on the first day of work or a signing bonus of $26,000 payable after one year of employment. Assuming that the relevant interest rate is 10%, which option should Jerry choose?
a. The options are equivalent.
b. Insufficient information to determine.
c. The signing bonus of $23,000 payable on the first day of work.
d. The signing bonus of $26,000 payable after one year of employment.

49. If Jethro wanted to save a set amount each month in order to buy a new pick-up truck when the new models are next available, which time value concept would be used to determine the monthly payment?
a. Present value of one.
b. Future value of one.
c. Present value of an annuity due.
d. Future value of an ordinary annuity.

50. Betty wants to know how much she should begin saving each month to fund her retirement. What kind of problem is this?
a. Present value of one.
b. Future value of an ordinary annuity.
c. Present value of an ordinary.
d. Future value of one.

P51 If the interest rate is 10%, the factor for the future value of annuity due of 1 for n = 5, i = 10% is equal to the factor for the future value of an ordinary annuity of 1 for n = 5, i = 10%
a. plus 1.10.
b. minus 1.10.
c. multiplied by 1.10.
d. divided by 1.10.

52. Which of the following is true?
a. Rents occur at the beginning of each period of an ordinary annuity.
b. Rents occur at the end of each period of an annuity due.
c. Rents occur at the beginning of each period of an annuity due.
d. None of these.

53. Which statement is false?
a. The factor for the future value of an annuity due is found by multiplying the ordinary annuity table value by one plus the interest rate.
b. The factor for the present value of an annuity due is found by multiplying the ordinary annuity table value by one minus the interest rate.
c. The factor for the future value of an annuity due is found by subtracting 1.00000 from the ordinary annuity table value for one more period.
d. The factor for the present value of an annuity due is found by adding 1.00000 to the ordinary annuity table value for one less period.

54. Al Darby wants to withdraw $20,000 (including principal) from an investment fund at the end of each year for five years. How should he compute his required initial investment at the beginning of the first year if the fund earns 10% compounded annually?
a. $20,000 times the future value of a 5-year, 10% ordinary annuity of 1.
b. $20,000 divided by the future value of a 5-year, 10% ordinary annuity of 1.
c. $20,000 times the present value of a 5-year, 10% ordinary annuity of 1.
d. $20,000 divided by the present value of a 5-year, 10% ordinary annuity of 1.

55. Sue Gray wants to invest a certain sum of money at the end of each year for five years. The investment will earn 6% compounded annually. At the end of five years, she will need a total of $40,000 accumulated. How should she compute her required annual invest-ment?
a. $40,000 times the future value of a 5-year, 6% ordinary annuity of 1.
b. $40,000 divided by the future value of a 5-year, 6% ordinary annuity of 1.
c. $40,000 times the present value of a 5-year, 6% ordinary annuity of 1.
d. $40,000 divided by the present value of a 5-year, 6% ordinary annuity of 1.

56. An accountant wishes to find the present value of an annuity of $1 payable at the beginning of each period at 10% for eight periods. The accountant has only one present value table which shows the present value of an annuity of $1 payable at the end of each period. To compute the present value, the accountant would use the present value factor in the 10% column for
a. seven periods.
b. eight periods and multiply by (1 + .10).
c. eight periods.
d. nine periods and multiply by (1 – .10).

57. If an annuity due and an ordinary annuity have the same number of equal payments and the same interest rates, then
a. the present value of the annuity due is less than the present value of the ordinary annuity.
b. the present value of the annuity due is greater than the present value of the ordinary annuity.
c. the future value of the annuity due is equal to the future value of the ordinary annuity.
d. the future value of the annuity due is less than the future value of the ordinary annuity.

58. What is the relationship between the present value factor of an ordinary annuity and the present value factor of an annuity due for the same interest rate?
a. The ordinary annuity factor is not related to the annuity due factor.
b. The annuity due factor equals one plus the ordinary annuity factor for n−1 periods.
c. The ordinary annuity factor equals one plus the annuity due factor for n+1 periods.
d. The annuity due factor equals the ordinary annuity factor for n+1 periods minus one.

59. Paula purchased a house for $300,000. After providing a 20% down payment, she borrowed the balance from the local savings and loan under a 30-year 6% mortgage loan requiring equal monthly installments at the end of each month. Which time value concept would be used to determine the monthly payment?
a. Present value of one.
b. Future value of one.
c. Present value of an ordinary annuity.
d. Future value of an ordinary annuity.

60. Stemway requires a new manufacturing facility. Management found three locations; all of which would provide needed capacity, the only difference is the price. Location A may be purchased for $500,000. Location B may be acquired with a down payment of $100,000 and annual payments at the end of each of the next twenty years of $50,000. Location C requires $40,000 payments at the beginning of each of the next twenty-five years. Assuming Stemway’s borrowing costs are 8% per annum, which option is the least costly to the company?
a. Location A.
b. Location B.
c. Location C.
d. Location A and Location B.

61. Which of the following is false?
a. The future value of a deferred annuity is the same as the future value of an annuity not deferred.
b. A deferred annuity is an annuity in which the rents begin after a specified number of periods.
c. To compute the present value of a deferred annuity, we compute the present value of an ordinary annuity of 1 for the entire period and subtract the present value of the rents which were not received during the deferral period.
d. If the first rent is received at the end of the sixth period, it means the ordinary annuity is deferred for six periods.

Multiple Choice Answers—Conceptual
Solution to Multiple Choice question for which the answer is “none of these.”
30. Present value of an Ordinary Annuity of 1.

MULTIPLE CHOICE—Computational

62. Assume ABC Company deposits $50,000 with First National Bank in an account earning interest at 6% per annum, compounded semi-annually. How much will ABC have in the account after five years if interest is reinvested?
a. $67,196.
b. $50,000.
c. $65,000.
d. $66,912.

63. Charlie Corp. is purchasing new equipment with a cash cost of $150,000 for an assembly line. The manufacturer has offered to accept $34,440 payment at the end of each of the next six years. How much interest will Charlie Corp. pay over the term of the loan?
a. $34,440.
b. $150,000.
c. $184,440.
d. $56,640.

64. If a savings account pays interest at 4% compounded quarterly, then the amount of $1 left on deposit for 8 years would be found in a table using
a. 8 periods at 4%.
b. 8 periods at 1%.
c. 32 periods at 4%.
d. 32 periods at 1%.

Items 65 through 68 apply to the appropriate use of interest tables. Given below are the future value factors for 1 at 8% for one to five periods. Each of the items 65 to 68 is based on 8% interest compounded annually.
Periods Future Value of 1 at 8%
1 1.080
2 1.166
3 1.260
4 1.360
5 1.469

65. What amount should be deposited in a bank account today to grow to $10,000 three years from today?
a. $10,000 × 1.260
b. $10,000 × 1.260 × 3
c. $10,000 ÷ 1.260
d. $10,000 ÷ 1.080 × 3

66. If $3,000 is put in a savings account today, what amount will be available three years from today?
a. $3,000 ÷ 1.260
b. $3,000 × 1.260
c. $3,000 × 1.080 × 3
d. ($3,000 × 1.080) + ($3,000 × 1.166) + ($3,000 × 1.260)

67. What amount will be in a bank account three years from now if $6,000 is invested each year for four years with the first investment to be made today?
a. ($6,000 × 1.260) + ($6,000 × 1.166) + ($6,000 × 1.080) + $6,000
b. $6,000 × 1.360 × 4
c. ($6,000 × 1.080) + ($6,000 × 1.166) + ($6,000 × 1.260) + ($6,000 × 1.360)
d. $6,000 × 1.080 × 4

68. If $4,000 is put in a savings account today, what amount will be available six years from now?
a. $4,000 × 1.080 × 6
b. $4,000 × 1.080 × 1.469
c. $4,000 × 1.166 × 3
d. $4,000 × 1.260 × 2

Items 69 through 72 apply to the appropriate use of present value tables. Given below are the present value factors for $1.00 discounted at 10% for one to five periods. Each of the items 69 to 72 is based on 10% interest compounded annually.
Present Value of $1
Periods Discounted at 10% per Period
1 0.909
2 0.826
3 0.751
4 0.683
5 0.621

69. If an individual put $4,000 in a savings account today, what amount of cash would be available two years from today?
a. $4,000 × 0.826
b. $4,000 × 0.826 × 2
c. $4,000 ÷ 0.826
d. $4,000 ÷ 0.909 × 2

70. What is the present value today of $6,000 to be received six years from today?
a. $6,000 × 0.909 × 6
b. $6,000 × 0.751 × 2
c. $6,000 × 0.621 × 0.909
d. $6,000 × 0.683 × 3

71. What amount should be deposited in a bank today to grow to $3,000 three years from today?
a. $3,000 ÷ 0.751
b. $3,000 × 0.909 × 3
c. ($3,000 × 0.909) + ($3,000 × 0.826) + ($3,000 × 0.751)
d. $3,000 × 0.751

72. What amount should an individual have in a bank account today before withdrawal if $5,000 is needed each year for four years with the first withdrawal to be made today and each subsequent withdrawal at one-year intervals? (The balance in the bank account should be zero after the fourth withdrawal.)
a. $5,000 + ($5,000 × 0.909) + ($5,000 × 0.826) + ($5,000 × 0.751)
b. $5,000 ÷ 0.683 × 4
c. ($5,000 × 0.909) + ($5,000 × 0.826) + ($5,000 × 0.751) + ($5,000 × 0.683)
d. $5,000 ÷ 0.909 × 4

73. At the end of two years, what will be the balance in a savings account paying 6% annually if $10,000 is deposited today? The future value of one at 6% for one period is 1.06.
a. $10,000
b. $10,600
c. $11,200
d. $11,236

74. Mordica Company will receive $250,000 in 7 years. If the appropriate interest rate is 10%, the present value of the $250,000 receipt is
a. $127,500.
b. $128,290.
c. $377,500.
d. $487,180.

75. Dunston Company will receive $200,000 in a future year. If the future receipt is discounted at an interest rate of 10%, its present value is $102,632. In how many years is the $200,000 received?
a. 5 years
b. 6 years
c. 7 years
d. 8 years

76. Milner Company will invest $400,000 today. The investment will earn 6% for 5 years, with no funds withdrawn. In 5 years, the amount in the investment fund is
a. $400,000.
b. $520,000.
c. $535,292.
d. $536,116.

77. Barber Company will receive $800,000 in 7 years. If the appropriate interest rate is 10%, the present value of the $800,000 receipt is
a. $408,000.
b. $410,528.
c. $1,208,000.
d. $1,558,976.

78. Barkley Company will receive $300,000 in a future year. If the future receipt is discounted at an interest rate of 8%, its present value is $189,051. In how many years is the $300,000 received?
a. 5 years
b. 6 years
c. 7 years
d. 8 years

79. Altman Company will invest $500,000 today. The investment will earn 6% for 5 years, with no funds withdrawn. In 5 years, the amount in the investment fund is
a. $500,000.
b. $650,000.
c. $669,115.
d. $670,145.

80. John Jones won a lottery that will pay him $2,000,000 after twenty years. Assuming an appropriate interest rate is 5% compounded annually, what is the present value of this amount?
a. $2,000,000.
b. $5,306,600.
c. $24,924,420.
d. $753,780.

81. Angie invested $100,000 she received from her grandmother today in a fund that is expected to earn 10% per annum. To what amount should the investment grow in five years if interest is compounded semi-annually?
a. $155,134.
b. $161,050.
c. $162,890.
d. $177,156.

82. Bella requires $120,000 in four years to purchase a new home. What amount must be invested today in an investment that earns 6% interest, compounded annually?
a. $95,051.
b. $98,724.
c. $145,337.
d. $151,497.

83. What interest rate (the nearest percent) must Charlie earn on a $150,000 investment today so that he will have $380,000 after 12 years?
a. 6%.
b. 7%.
c. 8%.
d. 9%.

84. Ethan has $80,000 to invest today at an annual interest rate of 4%. Approximately how many years will it take before the investment grows to $162,000?
a. 18 years.
b. 20 years.
c. 16 years.
d. 11 years.

85. Jane wants to set aside funds to take an around the world cruise in four years. Assuming that Jane has $8,000 to invest today in an account expected to earn 6% per annum, how much will she have to spend on her vacation?
a. $6,336.
b. $10,100.
c. $34,997.
d. $10,706.

86. Jane wants to set aside funds to take an around the world cruise in four years. Jane expects that she will need $10,000 for her dream vacation. If she is able to earn 8% per annum on an investment, how much will she have to set aside today so that she will have sufficient funds available?
a. $2,219.
b. $13,604.
c. $7,350.
d. $6,806.

87. What would you pay for an investment that pays you $3,000,000 after forty years? Assume that the relevant interest rate for this type of investment is 6%.
a. $93,540.
b. $935,400.
c. $291,660.
d. $311,010.

88. What would you pay for an investment that pays you $20,000 at the end of each year for the next ten years and then returns a maturity value of $300,000 after ten years? Assume that the relevant interest rate for this type of investment is 8%.
a. $138,958.
b. $134,202.
c. $144,936.
d. $273,158.

89. Anna has $30,000 to invest. She requires $50,000 for a down payment for a house. If she is able to invest at 6%, how many years will it be before she will accumulate the desired balance?
a. 6 years.
b. 7 years.
c. 8 years.
d. 9 years.

90. Lucy and Fred want to begin saving for their baby’s college education. They estimate that they will need $200,000 in eighteen years. If they are able to earn 6% per annum, how much must be deposited at the beginning of each of the next eighteen years to fund the education?
a. $6,471.
b. $6,105.
c. $11,111.
d. $5,924.

91. Lucy and Fred want to begin saving for their baby’s college education. They estimate that they will need $300,000 in eighteen years. If they are able to earn 5% per annum, how much must be deposited at the end of each of the next eighteen years to fund the education?
a. $11,618.
b. $25,664.
c. $24,823.
d. $10,664.

92. Jane wants to set aside funds to take an around the world cruise in four years. Jane expects that she will need $10,000 for her dream vacation. If she is able to earn 8% per annum on an investment, how much will she need to set aside at the beginning of each year to accumulate sufficient funds?
a. $2,219.
b. $13,604.
c. $7,350.
d. $2,055.

93. Pearson Corporation makes an investment today (January 1, 2012). They will receive $6,000 every December 31st for the next six years (2012 – 2017). If Pearson wants to earn 12% on the investment, what is the most they should invest on January 1, 2012?
a. $24,668.
b. $27,629.
c. $48,691.
d. $54,534.

94. Garretson Corporation will receive $8,000 today (January 1, 2012), and also on each January 1st for the next five years (2013 – 2017). What is the present value of the six $8,000 receipts, assuming a 12% interest rate?
a. $32,891.
b. $36,838.
c. $64,922.
d. $72,712.

95. Spencer Corporation will invest $15,000 every December 31st for the next six years (2012 – 2017). If Spencer will earn 12% on the investment, what amount will be in the investment fund on December 31, 2017?
a. $61,671.
b. $69,072.
c. $121,728.
d. $136,335.

96. Tipson Corporation will invest $15,000 every January 1st for the next six years (2012 – 2017). If Linton will earn 12% on the investment, what amount will be in the investment fund on December 31, 2017?
a. $61,671
b. $69,072.
c. $121,728.
d. $136,335.

97. Hiller Corporation makes an investment today (January 1, 2012). They will receive $40,000 every December 31st for the next six years (2012 – 2017). If Hiller wants to earn 12% on the investment, what is the most they should invest on January 1, 2012?
a. $164,456.
b. $184,191.
c. $324,608.
d. $363,560.

98. Sonata Corporation will receive $20,000 today (January 1, 2012), and also on each January 1st for the next five years (2013 – 2017). What is the present value of the six $40,000 receipts, assuming a 12% interest rate?
a. $164,456.
b. $184,191.
c. $324,608.
d. $363,560.

99. Renfro Corporation will invest $50,000 every December 31st for the next six years (2012 – 2017). If Renfro will earn 12% on the investment, what amount will be in the investment fund on December 31, 2017?
a. $205,570
b. $230,240.
c. $405,760.
d. $454,450.

100. Vannoy Corporation will invest $30,000 every January 1st for the next six years (2012 – 2017). If Wagner will earn 12% on the investment, what amount will be in the investment fund on December 31, 2017?
a. $123,342.
b. $138,144.
c. $243,456.
d. $272,670.

101. On January 1, 2012, Kline Company decided to begin accumulating a fund for asset replacement five years later. The company plans to make five annual deposits of $40,000 at 9% each January 1 beginning in 2012. What will be the balance in the fund, within $10, on January 1, 2017 (one year after the last deposit)? The following 9% interest factors may be used.
Present Value of Future Value of
Ordinary Annuity Ordinary Annuity
4 periods 3.2397 4.5731
5 periods 3.8897 5.9847
6 periods 4.4859 7.5233
a. $260,932
b. $239,388
c. $218,000
d. $200,000

Use the following 8% interest factors for questions 102 through 105.
Present Value of Future Value of
Ordinary Annuity Ordinary Annuity
7 periods 5.2064 8.92280
8 periods 5.7466 10.63663
9 periods 6.2469 12.48756

102. What will be the balance on September 1, 2018 in a fund which is accumulated by making $10,000 annual deposits each September 1 beginning in 2011, with the last deposit being made on September 1, 2018? The fund pays interest at 8% compounded annually.
a. $106,366
b. $89,229
c. $75,600
d. $57,466

103. If $6,000 is deposited annually starting on January 1, 2012 and it earns 8%, what will the balance be on December 31, 2019?
a. $53,537
b. $57,820
c. $63,820
d. $68,925

104. Korman Company wishes to accumulate $400,000 by May 1, 2020 by making 8 equal annual deposits beginning May 1, 2012 to a fund paying 8% interest compounded annually. What is the required amount of each deposit?
a. $69,606
b. $37,606
c. $34,820
d. $40,312

105. What amount should be recorded as the cost of a machine purchased December 31, 2012, which is to be financed by making 8 annual payments of $8,000 each beginning December 31, 2013? The applicable interest rate is 8%.
a. $56,000
b. $49,975
c. $85,093
d. $45,973

106. How much must be deposited on January 1, 2012 in a savings account paying 6% annually in order to make annual withdrawals of $25,000 at the end of the years 2012 and 2013? The present value of one at 6% for one period is .9434.
a. $45,835
b. $47,175
c. $50,000
d. $22,250

107. How much must be invested now to receive $20,000 for 15 years if the first $20,000 is received today and the rate is 9%?
Present Value of
Periods Ordinary Annuity at 9%
14 7.78615
15 8.06069
16 8.31256
a. $161,214
b. $175,723
c. $300,000
d. $146,250

108. Jenks Company financed the purchase of a machine by making payments of $10,000 at the end of each of five years. The appropriate rate of interest was 8%. The future value of one for five periods at 8% is 1.46933. The future value of an ordinary annuity for five periods at 8% is 5.8666. The present value of an ordinary annuity for five periods at 8% is 3.99271. What was the cost of the machine to Jenks?
a. $14,794
b. $39,927
c. $50,000
d. $58,667

109. A machine is purchased by making payments of $6,000 at the beginning of each of the next five years. The interest rate was 10%. The future value of an ordinary annuity of 1 for five periods is 6.10510. The present value of an ordinary annuity of 1 for five periods is 3.79079. What was the cost of the machine?
a. $40,294
b. $36,631
c. $25,019
d. $22,745

110. Lane Co. has a machine that cost $300,000. It is to be leased for 20 years with rent received at the beginning of each year. Lane wants a return of 10%. Calculate the amount of the annual rent.
Present Value of
Period Ordinary Annuity
19 8.36492
20 8.51356
21 8.64869
a. $32,034
b. $35,864
c. $44,592
d. $35,238

111. Find the present value of an investment in plant and equipment if it is expected to provide annual earnings of $26,000 for 15 years and to have a resale value of $50,000 at the end of that period. Assume a 10% rate and earnings at year end. The present value of 1 at 10% for 15 periods is .23939. The present value of an ordinary annuity at 10% for 15 periods is 7.60608. The future value of 1 at 10% for 15 periods is 4.17725.
a. $197,758
b. $209,728
c. $247,758
d. $401,970

112. On January 2, 2012, Wine Corporation wishes to issue $3,000,000 (par value) of its 8%, 10-year bonds. The bonds pay interest annually on January 1. The current yield rate on such bonds is 10%. Using the interest factors below, compute the amount that Wine will realize from the sale (issuance) of the bonds.
Present value of 1 at 8% for 10 periods 0.4632
Present value of 1 at 10% for 10 periods 0.3855
Present value of an ordinary annuity at 8% for 10 periods 6.7101
Present value of an ordinary annuity at 10% for 10 periods 6.1446
a. $3,000,000
b. $2,631,204
c. $3,000,018
d. $3,318,078

113. The market price of a $500,000, ten-year, 12% (pays interest semiannually) bond issue sold to yield an effective rate of 10% is
a. $561,445.
b. $562,311.
c. $566,635.
d. $936,180.

114. John won a lottery that will pay him $150,000 at the end of each of the next twenty years. Assuming an appropriate interest rate is 8% compounded annually, what is the present value of this amount?
a. $1,590,540.
b. $32,183.
c. $1,472,723.
d. $6,864,294.

115. Jonas won a lottery that will pay him $200,000 at the end of each of the next twenty years. Zebra Finance has offered to purchase the payment stream for $2,718,000. What interest rate (to the nearest percent) was used to determine the amount of the payment?
a. 7%.
b. 6%.
c. 5%.
d. 4%.

116. James leases a ski chalet to his best friend, Janet. The lease term is five years with $16,000 annual payments due at the beginning of each year. What is the present value of the payments discounted at 8% per annum?
a. $68,994.
b. $63,884.
c. $61,077.
d. $57,990.

117. Jeremy is in the process of purchasing a car. The list price of the car is $36,000. If Jeremy pays cash for the car, the dealer will reduce the price by 10%. Otherwise, the dealer will provide financing where Jeremy must pay $7,706 at the end of each of the next five years. Compute the effective interest rate to the nearest percent that Jeremy would pay if he chooses to make the five annual payments?
a. 5%.
b. 6%.
c. 7%.
d. 8%.

118. What would you pay for an investment that pays you $15,000 at the end of each year for the next twenty years? Assume that the relevant interest rate for this type of investment is 12%.
a. $125,487.
b. $1,080,786.
c. $15,550.
d. $112,042.

119. What would you pay for an investment that pays you $20,000 at the beginning of each year for the next ten years? Assume that the relevant interest rate for this type of investment is 10%.
a. $122,890.
b. $135,180.
c. $129,902.
d. $142,892.

120. Ziggy is considering purchasing a new car. The cash purchase price for the car is $33,600. What is the annual interest rate if Ziggy is required to make annual payments of $7,800 at the end of the next five years?
a. 4%.
b. 5%.
c. 6%.
d. 7%.

121. Charlie Corp. is purchasing new equipment with a cash cost of $200,000 for the assembly line. The manufacturer has offered to accept $45,920 payments at the end of each of the next six years. What is the interest rate that Charlie Corp. will be paying?
a. 8%.
b. 9%.
c. 10%.
d. 11%.

122. Jeremy Leasing purchases and then leases small aircraft to interested parties. The company is currently determining the required rental for a small aircraft that cost them $600,000. If the lease is for twenty years and annual lease payments are required to be made at the end of each year, what will be the annual rental if Jeremy wants to earn a return of 10%?
a. $64,070.
b. $70,476.
c. $10,476.
d. $30,314.

123. Stech Co. is issuing $6.5 million 12% bonds in a private placement on July 1, 2012. Each $1,000 bond pays interest semi-annually on December 31 and June 30 of each year. The bonds mature in ten years. At the time of issuance, the market interest rate for similar types of bonds was 8%. What is the expected selling price of the bonds?
a. $8,266,764.
b. $13,566,992.
c. $8,244,598.
d. $8,310,962.

Multiple Choice Answers—Computational

MULTIPLE CHOICE—CPA Adapted

124. On January 1, 2012, Gore Co. sold to Cey Corp. $600,000 of its 10% bonds for $531,177 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Gore report as interest expense for the six months ended June 30, 2012?
a. $26,559
b. $30,000
c. $31,871
d. $36,000

125. On May 1, 2012, a company purchased a new machine which it does not have to pay for until May 1, 2014. The total payment on May 1, 2014 will include both principal and interest. Assuming interest at a 10% rate, the cost of the machine would be the total payment multiplied by what time value of money factor?
a. Future value of annuity of 1
b. Future value of 1
c. Present value of annuity of 1
d. Present value of 1

126. On January 1, 2012, Ball Co. exchanged equipment for a $200,000 zero-interest-bearing note due on January 1, 2015. The prevailing rate of interest for a note of this type at January 1, 2012 was 10%. The present value of $1 at 10% for three periods is 0.75. What amount of interest revenue should be included in Abel’s 2013 income statement?
a. $0
b. $15,000
c. $16,500
d. $20,000

127. For which of the following transactions would the use of the present value of an ordinary annuity concept be appropriate in calculating the present value of the asset obtained or the liability owed at the date of incurrence?
a. A capital lease is entered into with the initial lease payment due one month subsequent to the signing of the lease agreement.
b. A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement.
c. A ten-year 8% bond is issued on January 2 with interest payable semiannually on January 2 and July 1 yielding 7%.
d. A ten-year 8% bond is issued on January 2 with interest payable semiannually on January 2 and July 1 yielding 9%.

128. On January 15, 2012, Dolan Corp. adopted a plan to accumulate funds for environmental improvements beginning July 1, 2016, at an estimated cost of $5,000,000. Dolan plans to make four equal annual deposits in a fund that will earn interest at 10% compounded annually. The first deposit was made on July 1, 2012. Future value factors are as follows:
Future value of 1 at 10% for 5 periods 1.61
Future value of ordinary annuity of 1 at 10% for 4 periods 4.64
Future value of annuity due of 1 at 10% for 4 periods 5.11
Dolan should make four annual deposits of
a. $889,522.
b. $978,474.
c. $1,077,586.
d. $1,250,000.

129. On December 30, 2012, AGH, Inc. purchased a machine from Grant Corp. in exchange for a zero-interest-bearing note requiring eight payments of $70,000. The first payment was made on December 30, 2012, and the others are due annually on December 30. At date of issuance, the prevailing rate of interest for this type of note was 11%. Present value factors are as follows:
Present Value of Ordinary Present Value of
Period Annuity of 1 at 11% Annuity Due of 1 at 11%
7 4.712 5.231
8 5.146 5.712
On AGH’s December 31, 2012 balance sheet, the net note payable to Grant is
a. $329,840.
b. $360,220.
c. $366,485.
d. $399,840.

130. On January 1, 2012, Ott Co. sold goods to Flynn Company. Flynn signed a zero-interest-bearing note requiring payment of $90,000 annually for seven years. The first payment was made on January 1, 2012. The prevailing rate of interest for this type of note at date of issuance was 10%. Information on present value factors is as follows:
Present Value Present Value of Ordinary
Period of 1 at 10% Annuity of 1 at 10%
6 .5645 4.3553
7 .5132 4.8684
Ott should record sales revenue in January 2012 of
a. $481,972.
b. $438,156.
c. $391,977.
d. $321,300.

131. On January 1, 2012, Haley Co. issued ten-year bonds with a face amount of $3,000,000 and a stated interest rate of 8% payable annually on January 1. The bonds were priced to yield 10%. Present value factors are as follows:
At 8% At 10%
Present value of 1 for 10 periods 0.463 0.386
Present value of an ordinary annuity of 1 for 10 periods 6.710 6.145
The total issue price of the bonds was
a. $3,000,000.
b. $2,940,000.
c. $2,760,000.
d. $2,632,800.

132. On July 1, 2012, Ed Wynne signed an agreement to operate as a franchisee of Kwik Foods, Inc., for an initial franchise fee of $240,000. Of this amount, $80,000 was paid when the agreement was signed and the balance is payable in four equal annual payments of $40,000 beginning July 1, 2013. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. Wynne’s credit rating indicates that he can borrow money at 14% for a loan of this type. Information on present and future value factors is as follows:
Present value of 1 at 14% for 4 periods 0.59
Future value of 1 at 14% for 4 periods 1.69
Present value of an ordinary annuity of 1 at 14% for 4 periods 2.91
Wynne should record the acquisition cost of the franchise on July 1, 2012 at
a. $174,400.
b. $196,400.
c. $240,000.
d. $270,400.

Multiple Choice Answers—CPA Adapted

IFRS QUESTIONS

True / False

1. IFRS does not intend to issue detailed guidance on the selection of a discount rate when the time value of money is required to determine cash flows.

2. Under IAS 37 and the establishment of estimate provisions, discounting is required where the time value of money is material.

3. Under IFRS, the rate implicit in the lease is generally used to discount minimum lease payments.

4. Under IFRS, the discount rate should reflect risks for which future cash flow estimates have been adjusted.

5. Under IFRS, if an estimate is being developed for a large number of items with varied outcomes, then the expected value method is used.

Answers to True / False questions:

Multiple Choice Questions:

1. Underwood Company maintains its accounting records using IFRS. The company recently signed a lease for a new office building, for a lease period of 10 years. Under the lease agreement, a security deposit of $20,000 is made, with the deposit to be returned at the expiration of the lease, with interest compounded at 10% per year. What amount will the company receive at the time the lease expires?
a. $51,875.
b. $40,000.
c. $122,892.
d. $27,711.

Use the following information to answer questions 2 & 3.

Martin Industries maintains its accounting records using IFRS. The company purchases equipment with a price of $300,000. The manufacturer has offered a payment plan that would allow Martin to make 10 equal annual payments of $36,987, with the first payment due one year after the purchase.

2. How much total interest will Martin pay on this payment plan?
a. $69,870
b. $36,987
c. $120,000
d. $30,000

3. Martin could borrow $300,000 from its bank to finance the purchase at an annual rate of 6%. Should Martin borrow from the bank or use the manufacturer’s payment plan to pay for the equipment?
a. Borrow from the bank.
b. Use the manufacturer’s payment plan.
c. The rates for both the bank and manufacturer are the same, so Martin would be indifferent.
d. There is not enough information to answer this question.

4. Barton Company, a company who maintains its accounting records using IFRS, manufactures furniture. Barton sells a $75,000 order to Save-A Lot Furniture in exchange for a zero-interest-bearing note due from the customer in two years. Since there is no stated interest rate on the note, the controller uses the current market rate of 8% to derive the present value factor. Based on this information and the incorporation of the time value of money, which of the following would be recorded by Barton to recognize this sale?
a. A credit to Discount on Notes Receivable for $10,699.
b. A credit to Sales Revenue for $75,000.
c. A debit to Notes Receivable for $64,301.
d. A debit to Discount on Notes Receivable for $6,000.

Rationale:
Notes Receivable 75,000
Sales Revenue 64,301
Discount on Notes Receivable 10,699
$75,000 × PV (8%, 2) = $75,000 × .85734 = $64,301

5. Moore Industries manufactures exercise equipment. Recently the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company’s exercise equipment. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $2,000,000 of 11% bonds on March 1, 2012, due on March 1, 2027, with interest payable each March 1 and September 1. At the time of issuance, the market interest rate for similar financial instruments is 10%. What is the selling price of the bonds?
a. $2,220,000
b. $1,269,776
c. $2,153,730
d. $1,690,970

The selling price of the bonds = $1,690,970 + $462,760 = $2,153,730.

6. Reegan Company owns a trade name that was purchased in an acquisition of Hamilton Company. The trade name has a book value of $3,500,000, but according to GAAP, it is assessed for impairment on an annual basis. To perform this impairment test, Reegan must estimate the fair value of the trade name. It has developed the following cash flow estimates related to the trade name based on internal information. Each cash flow estimate reflects Reegan’s estimate of annual cash flows over the next 7 years. The trade name is assumed to have no residual value after the 7 years. (Assume the cash flows occur at the end of each year.)

Probability Assessment Cash Flow Estimate
30% $480,000
50% 730,000
20% 850,000

Reegan determines that the appropriate discount rate for this estimation is 6%. To the nearest dollar, what is the estimated fair value of the trade name?
a. $3,500,000
b. $ 679,000
c. $2,060,000
d. $3,790,436

7. Jamison Company uses IFRS for its financial reporting. It produces machines that sell globally. All sales are accompanied by a one-year warranty. At the end of the year, the company has the following data:
• 2,000 units were sold during the year.
• The trend over the past five years has been that 4% of the machines were defective in some way and had to be repaired. Of this 4%, half required a full replacement at a cost of $3,000 per unit and half were able to be repaired at an average cost of $300.

What is the expected value of the warranty cost provision?
a. $240,000
b. $132,000
c. $264,000
d. $120,000

8. Maxim Company leased an office under a five-year contract, which has been accounted for as an operating lease. Faced with the downturn in the economy, the viable company decided to sub-lease the office. However, they have had no luck with this effort and the landlord will not allow the lease to be cancelled. The payments are $6,000 per year and there are four years left on the lease. The company’s most recent interest rate for financing from a bank is 6%. The risk-free rate on government bonds is 4%. What is the provision for the lease under IFRS?
a. $21,780
b. $22,572
c. $24,000
d. $20,791

9. Dolphin Company leased an office under a six-year contract, which has been accounted for as an operating lease. Faced with the downturn in the economy, the viable company decided to sub-lease the office. However, they have had no luck with this effort and the landlord will not allow the lease to be cancelled. The payments are $10,000 per year and there are five years left on the lease. The company’s most recent interest rate for financing from a bank is 9%. The risk-free rate on government bonds is 5%. What is the provision for the lease under IFRS?
a. $50,000
b. $44,519
c. $38,897
d. $43,295

10 Techtronics, a technology company that uses IFRS for its financial reporting, has been found to have polluted the property surrounding its plant. The property is leaded for 12 years and Techtronics has agreed that when the lease expires, the pollution will be remediated before transfer back to its owner. The lease has a renewal option for another 8 years. If this option is exercised, the cleanup will be done at the end of the renewal period. There is a 70% chance that the lease will not be renewed and the cleanup will cost $180,000. There is 30% chance that the lease will be renewed and the cleanup costs will be $375,000 at the end of the 20 years. If you assume that these estimates are derived from best estimates of likely outcomes and the risk-free rate is 5%, the expected present value of the cleanup provision is:
a. $238,500
b. $112,562
c. $277,500
d. $226,575

Answers to Multiple Choice.

CHAPTER 7
CASH AND RECEIVABLES

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

1. Savings accounts are usually classified as cash on the balance sheet.

2. Certificates of deposit are usually classified as cash on the balance sheet.

3. Companies include postdated checks and petty cash funds as cash.

4. Cash equivalents are investments with original maturities of six months or less.

5. Bank overdrafts are always offset against the cash account in the balance sheet.

6. Short-term, highly liquid investments may be included with cash on the balance sheet.

7. All claims held against customers and others for money, goods, or services are reported as current assets.

8. Trade receivables include notes receivable and advances to officers and employees.

9. Trade discounts are used to avoid frequent changes in catalogs and to alter prices for different quantities purchased.

10. In the gross method, sales discounts are reported as a deduction from sales.

11. The net amount reported for short-term receivables is not affected when a specific account receivable is determined to be uncollectible.

12. The percentage-of-receivables approach of estimating uncollectible accounts emphasizes matching over valuation of accounts receivable.

13. The percentage-of-sales method results in a more accurate valuation of receivables on the balance sheet.

14. Companies record and report long-term notes receivable at the present value of the cash they expect to collect.

15. When the stated rate of interest exceeds the effective rate, the present value of the note receivable will be less than its face value.

16. Notes receivable are generally reported as noncurrent assets.

17. Recognition of a recourse liability will make a loss on sale of receivables larger than it would otherwise have been.

18. When buying receivables with recourse, the purchaser assumes the risk of collectibility and absorbs any credit loss.

19. For receivables sold with recourse, the seller guarantees payment to the purchaser if the debtor fails to pay.

20. The receivables turnover ratio is computed by dividing net sales by the ending net receivables.

True False Answers—Conceptual

MULTIPLE CHOICE—Conceptual

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.

P24. 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

25. All of the following may be included under the heading of “cash” except
a. currency.
b. money market funds.
c. checking account balance.
d. savings account balance.

26. In which account are post-dated checks received classified?
a. Receivables.
b. Prepaid expenses.
c. Cash.
d. Payables.

27. In which account are postage stamps classified?
a. Cash.
b. Office supplies.
c. Receivables.
d. Inventory.

28. What is a compensating balance?
a. Savings account balances.
b. Margin accounts held with brokers.
c. Temporary investments serving as collateral for outstanding loans.
d. Minimum deposits required to be maintained in connection with a borrowing arrangement.

29. Under which section of the balance sheet is “cash restricted for plant expansion” reported?
a. Current assets.
b. Non-current assets.
c. Current liabilities.
d. Stockholders’ equity.

S30. 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
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.

31. 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.

32. 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.

33. 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.
34. 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

S35. 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.

S36. 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.

P37. 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.

38. 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.

39. Why do companies provide trade discounts?
a. To avoid frequent changes in catalogs.
b. To induce prompt payment.
c. To easily alter prices for different customers.
d. Both a. and c.

40. The accounting for cash discounts and trade discounts are
a. the same.
b. always recorded net.
c. not the same.
d. tied to the timing of cash collections on the account.

41. Of the approaches to record cash discounts related to accounts receivable, which is more theoretically correct?
a. Net approach.
b. Gross approach.
c. Allowance approach.
d. All three approaches are theoretically correct.

42. All of the following are problems associated with the valuation of accounts receivable except for
a. uncollectible accounts.
b. returns.
c. cash discounts under the net method.
d. allowances granted.

43. Why is the allowance method preferred over the direct write-off method of accounting for bad debts?
a. Allowance method is used for tax purposes.
b. Estimates are used.
c. Determining worthless accounts under direct write-off method is difficult to do.
d. Improved matching of bad debt expense with revenue.

44. Which of the following concepts relates to using the allowance method in accounting for accounts receivable?
a. Bad debt expense is an estimate that is based on historical and prospective information.
b. Bad debt expense is based on the actual amounts determined to be uncollectible.
c. Bad debt expense is an estimate that is based only on an analysis of the receivables aging.
d. Bad debt expense is management’s determination of which accounts will be sent to the attorney for collection.

45. How can accounting for bad debts be used for earnings management?
a. Determining which accounts to write-off.
b. Changing the percentage of sales recorded as bad debt expense.
c. Using an aging of the accounts receivable balance to determine bad debt expense.
d. Reversing previous write-offs.

46. What is the normal journal entry for recording bad debt expense under the allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

47. What is the normal journal entry when writing-off an account as uncollectible under the allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

48. Which of the following is included in the normal journal entry to record the collection of accounts receivable previously written off when using the allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

49. 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.

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

51. 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

52. 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

53. 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.

54. At the beginning of 2011, Gannon Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon reported this note as a $1,000 trade note receivable on its 2011 year-end statement of financial position and $1,000 as sales revenue for 2011. What effect did this accounting for the note have on Gannon’s net earnings for 2011, 2012, 2013, and its retained earnings at the end of 2013, respectively?
a. Overstate, overstate, understate, zero
b. Overstate, understate, understate, understate
c. Overstate, overstate, overstate, overstate
d. None of these

55. What is imputed interest?
a. Interest based on the stated interest rate.
b. Interest based on the implicit interest rate.
c. Interest based on the average interest rate.
d. Interest based on the coupon rate.

56. Why would a company sell receivables to another company?
a. To improve the quality of its credit granting process.
b. To limit its legal liability.
c. To accelerate access to amounts collected.
d. To comply with customer agreements.

57. When should a transfer of receivables be recorded as a sale?
a. The transferred assets are isolated from the transferor.
b. The transferor does not maintain effective control over the transferred assets through an agreement to repurchase or redeem them prior to their maturity.
c. The transferee has the right to pledge or exchange the transferred assets.
d. All of the above.

58. What is “recourse” as it relates to selling receivables?
a. The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay.
b. The obligation of the purchaser of the receivables to pay the seller in case the debtor fails to pay
c. The obligation of the seller of the receivables to pay the purchaser in case the debtor returns the product related to the sale.
d. The obligation of the purchaser of the receivables to pay the seller if all of the receivables are collected.

59. 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.

S60. 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 ap¬propriately offset against the proper receivable accounts.

S61. 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 receiv¬ables 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.

P62. The accounts receivable turnover ratio measures the
a. number of times the average balance of accounts receivable is collected during the period.
b. percentage of accounts receivable turned over to a collection agency during the period.
c. percentage of accounts receivable arising during certain seasons.
d. number of times the average balance of inventory is sold during the period.

63. 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.

64. Which of the following items should be included in accounts receivable reported on the balance sheet?
a. Notes receivable.
b. Interest receivable.
c. Allowance for doubtful accounts.
d. Advances to related parties and officers.

65. How is days to collect accounts receivable determined?
a. 365 days divided by accounts receivable turnover.
b. Net sales divided by 365.
c. Net sales divided by average net trade receivables.
d. Accounts receivable turnover divided by 365 days.

66. What is a possible reason for accounts receivable turnover to increase from one year to the next year
a. Decreased credit sales during a recession.
b. Write-off uncollectible receivables.
c. Granting credit to customers with lower credit quality.
d. Improved collection process.

*67. Which of the following is an appropriate reconciling item to the balance per bank in a
bank reconciliation?
a. Bank service charge.
b. Deposit in transit.
c. Bank interest.
d. Chargeback for NSF check.

*68. 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.

*69. 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.

*70. 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.

*71. 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 Answers—Conceptual
Solutions to those Multiple Choice questions for which the answer is “none of these.”
23. As receivables.
32. Many answers are possible.
33. Open accounts resulting from short-term extensions of credit to customers.
34. Open accounts resulting from short-term extensions of credit to customers.
54. Overstate, understate, understate, zero.

MULTIPLE CHOICE—Computational

72. Consider the following: Cash in Bank – checking account of $18,500, Cash on hand of $500, Post-dated checks received totaling $3,500, and Certificates of deposit totaling $124,000. How much should be reported as cash in the balance sheet?
a. $ 18,500.
b. $ 19,000.
c. $ 22,500.
d. $136,500.

73. On January 1, 2012, Lynn Company borrows $2,000,000 from National Bank at 11% annual interest. In addition, Lynn is required to keep a compensatory balance of $200,000 on deposit at National Bank which will earn interest at 5%. The effective interest that Lynn pays on its $2,000,000 loan is
a. 10.0%.
b. 11.0%.
c. 11.5%.
d. 11.6%.

74. Kennison Company has cash in bank of $15,000, restricted cash in a separate account of $3,000, and a bank overdraft in an account at another bank of $1,000. Kennison should report cash of
a. $14,000.
b. $15,000.
c. $17,000.
d. $18,000.

75. Kaniper Company has the following items at year-end:
Cash in bank $30,000
Petty cash 300
Short-term paper with maturity of 2 months 5,500
Postdated checks 1,400
Kaniper should report cash and cash equivalents of
a. $30,000.
b. $30,300.
c. $35,800.
d. $37,200.

76. Lawrence Company has cash in bank of $22,000, restricted cash in a separate account of $4,000, and a bank overdraft in an account at another bank of $2,000. Lawrence should report cash of
a. $20,000.
b. $22,000.
c. $25,000.
d. $26,000.

77. Steinert Company has the following items at year-end:
Cash in bank $35,000
Petty cash 500
Short-term paper with maturity of 2 months 8,200
Postdated checks 2,100
Steinert should report cash and cash equivalents of
a. $35,000.
b. $35,500.
c. $43,700.
d. $45,800.

78. If a company purchases merchandise on terms of 1/10, n/30, the cash discount available is equivalent to what effective annual rate of interest (assuming a 360-day year)?
a. 1%
b. 12%
c. 18%
d. 30%

79. AG Inc. made a $15,000 sale on account with the following terms: 1/15, n/30. If the company uses the net method to record sales made on credit, how much should be recorded as revenue?
a. $14,700.
b. $14,850.
c. $15,000.
d. $15,150.

80. AG Inc. made a $15,000 sale on account with the following terms: 1/15, n/30. If the company uses the gross method to record sales made on credit, what is/are the debit(s) in the journal entry to record the sale?
a. Debit Accounts Receivable for $14,850.
b. Debit Accounts Receivable for $14,850 and Sales Discounts for $150.
c. Debit Accounts Receivable for $15,000.
d. Debit Accounts Receivable for $15,000 and Sales Discounts for $150.

81. AG Inc. made a $15,000 sale on account with the following terms: 2/10, n/30. If the company uses the net method to record sales made on credit, what is/are the debit(s) in the journal entry to record the sale?
a. Debit Accounts Receivable for $14,700.
b. Debit Accounts Receivable for $14,700 and Sales Discounts for $300.
c. Debit Accounts Receivable for $15,000.
d. Debit Accounts Receivable for $15,000 and Sales Discounts for $300.

82. Wellington Corp. has outstanding accounts receivable totaling $1.27 million as of December 31 and sales on credit during the year of $6.4 million. There is also a debit balance of $3,000 in the allowance for doubtful accounts. If the company estimates that 1% of its net credit sales will be uncollectible, what will be the balance in the allowance for doubtful accounts after the year-end adjustment to record bad debt expense?
a. $12,700.
b. $15,700.
c. $61,000.
d. $67,000.
83. Wellington Corp. has outstanding accounts receivable totaling $6.5 million as of December 31 and sales on credit during the year of $24 million. There is also a credit balance of $12,000 in the allowance for doubtful accounts. If the company estimates that 8% of its outstanding receivables will be uncollectible, what will be the amount of bad debt expense recognized for the year?
a. $ 532,000.
b. $ 520,000.
c. $1,920,000.
d. $ 508,000.

84. Wellington Corp. has outstanding accounts receivable totaling $5 million as of
December 31 and sales on credit during the year of $25 million. There is also a debit balance of $20,000 in the allowance for doubtful accounts. If the company estimates that 8% of its outstanding receivables will be uncollectible, what will be the balance in the allowance for doubtful accounts after the year-end adjustment to record bad debt expense?
a. $2,000,000.
b. $ 380,000.
c. $ 400,000.
d. $ 420,000.

85. At the close of its first year of operations, December 31, 2012, Ming Company had accounts receivable of $1,080,000, after deducting the related allowance for doubtful accounts. During 2012, the company had charges to bad debt expense of $180,000 and wrote off, as uncollectible, accounts receivable of $80,000. What should the company report on its balance sheet at December 31, 2012, as accounts receivable before the allowance for doubtful accounts?
a. $1,340,000
b. $1,180,000
c. $980,000
d. $880,000

86. Before year-end adjusting entries, Dunn Company’s account balances at December 31, 2012, for accounts receivable and the related allowance for uncollectible accounts were $1,200,000 and $90,000, respectively. An aging of accounts receivable indicated that $125,000 of the December 31 receivables are expected to be uncollectible. The net realizable value of accounts receivable after adjustment is
a. $1,165,000.
b. $1,075,000.
c. $985,000.
d. $1,110,000.

87. During the year, Kiner Company made an entry to write off a $16,000 uncollectible account. Before this entry was made, the balance in accounts receivable was $200,000 and the balance in the allowance account was $18,000. The net realizable value of accounts receivable after the write-off entry was
a. $200,000.
b. $198,000.
c. $166,000.
d. $182,000.

88. The following information is available for Murphy Company:
Allowance for doubtful accounts at December 31, 2011 $ 16,000
Credit sales during 2012 800,000
Accounts receivable deemed worthless and written off during 2012 18,000
As a result of a review and aging of accounts receivable in early January 2013, however, it has been determined that an allowance for doubtful accounts of $11,000 is needed at December 31, 2012. What amount should Murphy record as “bad debt expense” for the year ended December 31, 2012?
a. $9,000
b. $11,000
c. $13,000
d. $27,000

Use the following information for questions 89 and 90.

A trial balance before adjustments included the following:
Debit Credit
Sales $850,000
Sales returns and allowance $28,000
Accounts receivable 86,000
Allowance for doubtful accounts 1,520

89. If the estimate of uncollectibles is made by taking 2% of net sales, the amount of the adjustment is
a. $13,400.
b. $16,440.
c. $17,000.
d. $19,480.

90. If the estimate of uncollectibles is made by taking 10% of gross account receivables, the amount of the adjustment is
a. $7,080.
b. $8,600.
c. $8,448.
d. $10,120.

91. Lankton Company has the following account balances at year-end:
Accounts receivable $80,000
Allowance for doubtful accounts 4,800
Sales discounts 3,200
Lankton should report accounts receivable at a net amount of
a. $72,000.
b. $75,200.
c. $76,800.
d. $80,000.

92. Smithson Corporation had a 1/1/12 balance in the Allowance for Doubtful Accounts of $20,000. During 2012, it wrote off $14,400 of accounts and collected $4,200 on accounts previously written off. The balance in Accounts Receivable was $400,000 at 1/1 and $480,000 at 12/31. At 12/31/12, Smithson estimates that 5% of accounts receivable will prove to be uncollectible. What is Bad Debt Expense for 2012?
a. $4,000.
b. $14,200.
c. $18,400.
d. $24,000.

93. Black Corporation had a 1/1/12 balance in the Allowance for Doubtful Accounts of $18,000. During 2012, it wrote off $12,960 of accounts and collected $3,780 on accounts previously written off. The balance in Accounts Receivable was $360,000 at 1/1 and $432,000 at 12/31. At 12/31/12, Black estimates that 5% of accounts receivable will prove to be uncollectible. What should Black report as its Allowance for Doubtful Accounts at 12/31/12?
a. $8,640.
b. $8,820.
c. $12,420.
d. $21,600.

94. Shelton Company has the following account balances at year-end:
Accounts receivable $120,000
Allowance for doubtful accounts 7,200
Sales discounts 4,800
Shelton should report accounts receivable at a net amount of
a. $108,000.
b. $112,800.
c. $115,200.
d. $120,000.

95. Vasguez Corporation had a 1/1/12 balance in the Allowance for Doubtful Accounts of $30,000. During 2012, it wrote off $21,600 of accounts and collected $6,300 on accounts previously written off. The balance in Accounts Receivable was $600,000 at 1/1 and $720,000 at 12/31. At 12/31/12, Vasguez estimates that 5% of accounts receivable will prove to be uncollectible. What is Bad Debt Expense for 2012?
a. $6,000.
b. $21,300.
c. $27,600.
d. $36,000.

96. McGlone Corporation had a 1/1/12 balance in the Allowance for Doubtful Accounts of $25,000. During 2012, it wrote off $18,000 of accounts and collected $5,250 on accounts previously written off. The balance in Accounts Receivable was $500,000 at 1/1 and $600,000 at 12/31. At 12/31/12, McGlone estimates that 5% of accounts receivable will prove to be uncollectible. What should McGlone report as its Allowance for Doubtful Accounts at 12/31/12?
a. $12,000.
b. $12,250.
c. $17,250.
d. $30,000.
97. Lester Company received a seven-year zero-interest-bearing note on February 22, 2012, in exchange for property it sold to Porter Company. There was no established exchange price for this property and the note has no ready market. The prevailing rate of interest for a note of this type was 7% on February 22, 2012, 7.5% on December 31, 2012, 7.7% on February 22, 2013, and 8% on December 31, 2013. What interest rate should be used to calculate the interest revenue from this transaction for the years ended December 31, 2012 and 2013, respectively?
a. 0% and 0%
b. 7% and 7%
c. 7% and 7.7%
d. 7.5% and 8%

98. On December 31, 2012, Flint Corporation sold for $100,000 an old machine having an original cost of $180,000 and a book value of $80,000. The terms of the sale were as follows:
$20,000 down payment
$40,000 payable on December 31 each of the next two years
The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type of transaction. What should be the amount of the notes receivable net of the unamortized discount on December 31, 2012 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.)
a. $70,364
b. $90,364.
c. $80,000.
d. $140,728.

99. Assume Royal Palm Corp., an equipment distributor, sells a piece of machinery with a list price of $600,000 to Arch Inc. Arch Inc. will pay $650,000 in one year. Royal Palm Corp. normally sells this type of equipment for 90% of list price. How much should be recorded as revenue?
a. $540,000.
b. $585,000.
c. $600,000.
d. $650,000.

100. Equestrain Roads sold $80,000 of goods and accepted the customer’s $80,000 10%
1-year note receivable in exchange. Assuming 10% approximates the market rate of return, what would be the debit in this journal entry to record the sale?
a. No journal entry until cash is collected.
b. Debit Notes Receivable for $80,000.
c. Debit Accounts Receivable for $80,000.
d. Debit Notes Receivable for $72,000.

101. Equestrain Roads sold $80,000 of goods and accepted the customer’s $80,000 10%
1-year note payable in exchange. Assuming 10% approximates the market rate of return, how much interest would be recorded for the year ending December 31 if the sale was made on June 30?
a. $0.
b. $2,000.
c. $4,000.
d. $8,000.
102. Equestrain Roads accepted a customer’s $50,000 zero-interest-bearing six-month note payable in a sales transaction. The product sold normally sells for $46,000. If the sale was made on June 30, how much interest revenue from this transaction would be recorded for the year ending December 31?
a. $0.
b. $2,000.
c. $4,000.
d. $5,000.

103. Assuming the market interest rate is 10% per annum, how much would Green Co. record as a note payable if the terms of the loan with a bank are that it would have to make one $80,000 payment in two years?
a. $80,000.
b. $72,563.
c. $72,727.
d. $66,116.

104. Sun Inc. factors $3,000,000 of its accounts receivables without recourse for a finance charge of 5%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. Sun estimates the fair value of the recourse liability at $115,000. What would be recorded as a gain (loss) on the transfer of receivables?
a. Loss of $150,000.
b. Gain of $265,000.
c. Loss of $565,000.
d. Loss of $115,000.

105. Sun Inc. factors $3,000,000 of its accounts receivables with recourse for a finance charge of 3%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. Sun estimates the fair value of the recourse liability at $150,000. What would be recorded as a gain (loss) on the transfer of receivables?
a. Gain of $90,000.
b. Loss of 240,000.
c. Gain of $540,000.
d. Loss of $150,000.

106. Sun Inc assigns $3,000,000 of its accounts receivables as collateral for a $1 million 8% loan with a bank. Sun Inc. also pays a finance fee of 1% on the transaction upfront. What would be recorded as a gain (loss) on the transfer of receivables?
a. Loss of $30,000.
b. Loss of $240,000.
c. Loss of $270,000.
d. $0.

107. Moon Inc. factors $2,000,000 of its accounts receivables with recourse for a finance charge of 4%. The finance company retains an amount equal to 8% of the accounts receivable for possible adjustments. Moon estimates the fair value of the recourse liability at $200,000. What would be the debit to Cash in the journal entry to record this transaction?
a. $2,000,000.
b. $1,920,000.
c. $1,760,000.
d. $1,560,000.
108. Moon Inc assigns $3,000,000 of its accounts receivables as collateral for a $2 million loan with a bank. The bank assesses a 3% finance fee and charges interest on the note at 6%. What would be the journal entry to record this transaction?
a. Debit Cash for $1,940,000, debit Finance Charge for $60,000, and credit Notes payable for $2,000,000.
b. Debit Cash for $1,940,000, debit Finance Charge for $60,000, and credit Accounts Receivable for $2,000,000.
c. Debit Cash for $1,940,000, debit Finance Charge for $60,000, debit Due from Bank for $1,000,000, and credit Accounts Receivable for $3,000,000.
d. Debit Cash for $1,820,000, debit Finance Charge for $180,000, and credit Notes Payable for $2,000,000.

109. Geary Co. assigned $800,000 of accounts receivable to Kwik Finance Co. as security for a loan of $670,000. Kwik charged a 2% commission on the amount of the loan; the interest rate on the note was 10%. During the first month, Geary collected $220,000 on assigned accounts after deducting $760 of discounts. Geary accepted returns worth $2,700 and wrote off assigned accounts totaling $5,960.

The amount of cash Geary received from Kwik at the time of the transfer was
a. $603,000.
b. $654,000.
c. $656,600.
d. $670,000.

110. Geary Co. assigned $800,000 of accounts receivable to Kwik Finance Co. as security for a loan of $670,000. Kwik charged a 2% commission on the amount of the loan; the interest rate on the note was 10%. During the first month, Geary collected $220,000 on assigned accounts after deducting $760 of discounts. Geary accepted returns worth $2,700 and wrote off assigned accounts totaling $5,960.

Entries during the first month would include a
a. debit to Cash of $220,760.
b. debit to Bad Debt Expense of $5,960.
c. debit to Allowance for Doubtful Accounts of $5,960.
d. debit to Accounts Receivable of $229,420.

111. On February 1, 2012, Henson Company factored receivables with a carrying amount of $500,000 to Agee Company. Agee Company assesses a finance charge of 3% of the receivables and retains 5% of the receivables. Relative to this transaction, you are to determine the amount of loss on sale to be reported in the income statement of Henson Company for February.

Assume that Henson factors the receivables on a without recourse basis. The loss to be reported is
a. $0.
b. $15,000.
c. $25,000.
d. $40,000.

112. On February 1, 2012, Henson Company factored receivables with a carrying amount of $500,000 to Agee Company. Agee Company assesses a finance charge of 3% of the receivables and retains 5% of the receivables. Relative to this transaction, you are to determine the amount of loss on sale to be reported in the income statement of Henson Company for February.

Assume that Henson factors the receivables on a with recourse basis. The recourse obligation has a fair value of $2,500. The loss to be reported is
a. $15,000.
b. $17,500.
c. $25,000.
d. $42,500.

113. Maxwell Corporation factored, with recourse, $100,000 of accounts receivable with Huskie Financing. The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and sales allowances. Maxwell estimates the recourse obligation at $2,400. What amount should Maxwell report as a loss on sale of receivables?
a. $ -0-.
b. $3,000.
c. $5,400.
d. $10,400.

114. Wilkinson Corporation factored, with recourse, $400,000 of accounts receivable with Huskie Financing. The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and sales allowances. Wilkinson estimates the recourse obligation at $9,600. What amount should Wilkinson report as a loss on sale of receivables?
a. $ -0-.
b. $12,000.
c. $21,600.
d. $41,600.

115. Remington Corporation had accounts receivable of $100,000 at 1/1. The only transactions affecting accounts receivable were sales of $750,000 and cash collections of $700,000. The accounts receivable turnover is
a. 5.0.
b. 5.5.
c. 6.0.
d. 7.5.

116. Laventhol Corporation had accounts receivable of $100,000 at 1/1. The only transactions affecting accounts receivable were sales of $1,200,000 and cash collections of $1,150,000. The accounts receivable turnover is
a. 8.0.
b. 8.8.
c. 9.6.
d. 12.0.

*117. If a petty cash fund is established in the amount of $250, and contains $150 in cash and $95 in receipts for disbursements when it is replenished, the journal entry to record replenishment should include credits to the following accounts
a. Petty Cash, $75.
b. Petty Cash, $100.
c. Cash, $95; Cash Over and Short, $5.
d. Cash, $100.

*118. If the month-end bank statement shows a balance of $72,000, outstanding checks are $24,000, a deposit of $8,000 was in transit at month end, and a check for $1,000 was erroneously charged by the bank against the account, the correct balance in the bank account at month end is
a. $55,000.
b. $57,000.
c. $41,000.
d. $87,000.

*119. In preparing its bank reconciliation for the month of April 2012, Henke, Inc. has available the following information.
Balance per bank statement, 4/30/12 $34,140
NSF check returned with 4/30/12 bank statement 450
Deposits in transit, 4/30/12 5,000
Outstanding checks, 4/30/12 5,200
Bank service charges for April 20
What should be the correct balance of cash at April 30, 2012?
a. $34,370
b. $33,940
c. $33,490
d. $33,470

*120. Finley, Inc.’s checkbook balance on December 31, 2012 was $42,400. In addition, Finley held the following items in its safe on December 31.
(1) A check for $900 from Peters, Inc. received December 30, 2012, which was not included in the checkbook balance.
(2) An NSF check from Garner Company in the amount of $1,800 that had been deposited at the bank, but was returned for lack of sufficient funds on December 29. The check was to be redeposited on January 3, 2013. The original deposit has been included in the December 31 checkbook balance.
(3) Coin and currency on hand amounted to $2,900.
The proper amount to be reported on Finley’s balance sheet for cash at December 31, 2012 is
a. $42,600.
b. $40,800.
c. $44,400.
d. $43,550.

*121. The cash account shows a balance of $90,000 before reconciliation. The bank statement does not include a deposit of $4,600 made on the last day of the month. The bank statement shows a collection by the bank of $1,880 and a customer’s check for $640 was returned because it was NSF. A customer’s check for $900 was recorded on the books as $1,080, and a check written for $158 was recorded as $194. The correct balance in the cash account was
a. $91,024.
b. $91,096.
c. $91,456.
d. $95,696.

*122. In preparing its May 31, 2012 bank reconciliation, Catt Co. has the following information available:
Balance per bank statement, 5/31/12 $35,000
Deposit in transit, 5/31/12 5,400
Outstanding checks, 5/31/12 4,900
Note collected by bank in May 1,250
The correct balance of cash at May 31, 2012 is
a. $40,400.
b. $34,250.
c. $35,500.
d. $36,750.

Multiple Choice Answers—Computational

MULTIPLE CHOICE—CPA Adapted

123. On the December 31, 2012 balance sheet of Vanoy Co., the current receivables consisted of the following:
Trade accounts receivable $ 60,000
Allowance for uncollectible accounts (2,000)
Claim against shipper for goods lost in transit (November 2012) 3,000
Selling price of unsold goods sent by Vanoy on consignment
at 130% of cost (not included in Vanoy ‘s ending inventory) 26,000
Security deposit on lease of warehouse used for storing
some inventories 30,000
Total $117,000
At December 31, 2012, the correct total of Vanoy’s current net receivables was
a. $61,000.
b. $87,000.
c. $91,000.
d. $117,000.

124. Ace Co. prepared an aging of its accounts receivable at December 31, 2012 and determined that the net realizable value of the receivables was $600,000. Additional information is available as follows:
Allowance for uncollectible accounts at 1/1/12—credit balance $ 68,000
Accounts written off as uncollectible during 2012 46,000
Accounts receivable at 12/31/12 650,000
Uncollectible accounts recovered during 2012 10,000
For the year ended December 31, 2012, Ace’s uncollectible accounts expense would be
a. $50,000.
b. $46,000.
c. $32,000.
d. $18,000.

125. For the year ended December 31, 2012, Dent Co. estimated its allowance for uncollectible accounts using the year-end aging of accounts receivable. The following data are available:
Allowance for uncollectible accounts, 1/1/12 $84,000
Provision for uncollectible accounts during 2012
(2% on credit sales of $3,000,000) 60,000
Uncollectible accounts written off, 11/30/12 69,000
Estimated uncollectible accounts per aging, 12/31/12 104,000
After year-end adjustment, the uncollectible accounts expense for 2012 should be
a. $69,000.
b. $60,000.
c. $104,000.
d. $89,000.

126. Nenn Co.’s allowance for uncollectible accounts was $190,000 at the end of 2012 and $180,000 at the end of 2011. For the year ended December 31, 2012, Nenn reported bad debt expense of $26,000 in its income statement. What amount did Nenn debit to the appropriate account in 2012 to write off actual bad debts?
a. $10,000
b. $16,000
c. $26,000
d. $36,000

127. Under the allowance method of recognizing uncollectible accounts, the entry to write off an uncollectible account
a. increases the allowance for uncollectible accounts.
b. has no effect on the allowance for uncollectible accounts.
c. has no effect on net income.
d. decreases net income.

128. The following accounts were abstracted from Starr Co.’s unadjusted trial balance at December 31, 2012:
Debit Credit
Accounts receivable $750,000
Allowance for uncollectible accounts 8,000
Net credit sales $3,000,000
Starr estimates that 4% of the gross accounts receivable will become uncollectible. After adjustment at December 31, 2012, the allowance for uncollectible accounts should have a credit balance of
a. $120,000.
b. $112,000.
c. $38,000.
d. $30,000.

129. On January 1, 2012, West Co. exchanged equipment for a $600,000 zero-interest-bearing note due on January 1, 2015. The prevailing rate of interest for a note of this type at January 1, 2012 was 10%. The present value of $1 at 10% for three periods is 0.75. What amount of interest revenue should be included in West’s 2013 income statement?
a. $0
b. $45,000
c. $49,500
d. $60,000

130. On June 1, 2012, Yang Corp. loaned Gant $400,000 on a 12% note, payable in five annual installments of $80,000 beginning January 2, 2013. In connection with this loan, Gant was required to deposit $4,000 in a zero-interest-bearing escrow account. The amount held in escrow is to be returned to Gant after all principal and interest payments have been made. Interest on the note is payable on the first day of each month beginning July 1, 2012. Gant made timely payments through November 1, 2012. On January 2, 2013, Yang received payment of the first principal installment plus all interest due. At
December 31, 2012, Yang’s interest receivable on the loan to Gant should be
a. $0.
b. $4,000.
c. $8,000.
d. $12,000.

131. Which of the following is a method to generate cash from accounts receivable?
Assignment Factoring
a. Yes No
b. Yes Yes
c. No Yes
d. No No

*132. In preparing its August 31, 2012 bank reconciliation, Bing Corp. has available the
following information:
Balance per bank statement, 8/31/12 $18,650
Deposit in transit, 8/31/12 3,900
Return of customer’s check for insufficient funds, 8/30/12 600
Outstanding checks, 8/31/12 2,750
Bank service charges for August 100
At August 31, 2012, Bing’s correct cash balance is
a. $19,800.
b. $19,200.
c. $19,100.
d. $17,500.

*133. Tresh, Inc. had the following bank reconciliation at March 31, 2012:
Balance per bank statement, 3/31/12 $37,200
Add: Deposit in transit 10,300
47,500
Less: Outstanding checks 12,600
Balance per books, 3/31/12 $34,900
Data per bank for the month of April 2012 follow:
Deposits $43,700
Disbursements 49,700
All reconciling items at March 31, 2012 cleared the bank in April. Outstanding checks at April 30, 2012 totaled $6,000. There were no deposits in transit at April 30, 2012. What is the cash balance per books at April 30, 2012?
a. $25,200
b. $28,900
c. $31,200
d. $35,500

Multiple Choice Answers—CPA Adapted

IFRS QUESTIONS
True/False:
1. iGAAP and U.S. GAAP are very similar in accounting for cash and receivables.
2. iGAAP does not permit the reversal of impairment losses, as does U.S. GAAP.
3. Under iGAAP, there is a specific standard that mandates segregation of receivables with different characteristics.
4. Under iGAAP, there is no specific standard related to pledging receivables.
5. Both the FASB and IASB have indicated that they believe all financial instruments should be recorded and reported at fair value.

Answers to True/False:

Multiple Choice

Use the following information to answer Question 1 and 2.
Harrison Company has a loan receivable with a carrying value of $15,000 at December 31, 2011. On January 3, 2012, the borrower, Thomas Clark Imports, declares bankruptcy, and Harrison estimates that it will collect only 60% of the loan balance.

1. Which of the following entries would Harrison make to record the impairment under iGAAP?
a. Loan Receivable 9,000
Impairment Loss 9,000
b. Loan Recovery Expense 6,000
Loan Receivable 6,000
c. Impairment Loss 9,000
Loan Receivable 9,000
d. Impairment Loss 6,000
Loan Receivable 6,000

2. Assume that on January 5, 2013, Harrison learns that Thomas Clark Imports has emerged from bankruptcy. As a result, Harrison now estimates that all but $1,500 will be repaid on the loan. Under iGAAP, which of the following entries would be made on January 5, 2013?
a. Loan Receivable 4,500
Recovery of Impairment Loss 4,500
b. Loan Receivable 1,500
Recovery of Impairment Loss 1,500
c. Bad Debt Expense 1,500
Impairment Loss 1,500
d. No journal entry is allowed under iGAAP.

3. The iGAAP approach for derecognizing a receivable focuses on which of the following?
a. Risks
b. Rewards
c. Loss of control
d. All of these

4. When comparing U.S. GAAP with iGAAP, which of the following is true regarding the reporting of securitizations?
a. Both U.S. GAAP and iGAAP show these as off-balance-sheet treatments.
b. Only iGAAP requires full or partial balance sheet recognition of securitizations.
c. Only U.S. GAAP requires full or partial balance sheet recognition of securitizations.
d. Both U.S. GAAP and iGAAP requires full or partial balance sheet recognition of securitizations.

5. Which of the following authoritative iGAAP guidance specifically addresses issues related to cash?
a. AIS No.1 (Presentation of Financial Statements)
b. IRFS No. 7 (Financial Instruments: Disclosures)
c. IAS No. 39 (Financial Instruments: Recognition and Measurement)
d. None of these standards specifically addresses cash issues.

6. Key similarities between U.S. GAAP and iGAAP include all of the following except
a. the definition used for cash equivalents.
b. accounting and reporting issues related to recognition and measurement of receivables, such as the use of allowance accounts.
c. working toward implementing fair value measurement for all financial instruments.
d. the same criteria is used to derecognize a receivable.

7. Genesis Company has seven loans receivable. The loans vary in size and have been extended to companies with different credit ratings. Given a downturn in the economy, it is expected that at least two of these loans will be impaired. Which of the following statements best describes the accounting for these loans under iGAAP?
a. iGAAP implies that the loans should be reported as an aggregated portfolio.
b. iGAAP uses an incurred loss model rather than an expected loss model, so no impairment on each of the two loans is recognized until an identifiable event occurs and is measurable.
c. Under iGAAP, when impairment is permitted, the balance on each of the impaired loans becomes the new basis for the loan.
d. iGAAP uses an expected loss model, so the entire diverse portfolio should be written down based on the anticipated impairment.
8. iGAAP requires an impairment loss for a loan receivable be recognized when
a. its carrying amount is less than its recoverable amount.
b. its recoverable amount is less than its carrying amount.
c. its present value of expected future cash flows is greater than its carrying amount.
d. its principal amount is less than its interest amount.
Use the following information to answer Questions 9 and 10.
Johnstone Company has a loan receivable with a carrying value of $125,000 at December 31, 2011. On January 1, 2012, the borrower, Ralph Young Industries, declares bankruptcy, and Johnstone estimates that it will collect only 45% of the loan balance.

9. Which of the following entries would Johnstone make to record the impairment under iGAAP?
a. Loan Receivable 56,250
Impairment Loss 56,250
b. Loan Recovery Expense 68,750
Loan Receivable 68,750
c. Impairment Loss 56,250
Loan Receivable 56,250
d. Impairment Loss 68,750
Loan Receivable 68,750

10. Assume that on January 4, 2013, Johnstone learns that Ralph Young Industries has emerged from bankruptcy. As a result, Johnstone now estimates that all but $11,500 will be paid on the loan. Under iGAAP, which of the following entries would be made on January 4, 2013?
a. Loan Receivable 57,250
Recovery of impairment Loss 57,250
b. Loan Receivable 11,500
Recovery of impairment Loss 11,500
c. Bad Debt Expense 11,500
Impairment Loss 11,500
d. No journal entry is allowed under iGAAP.

11. Under iGAAP, the characteristics that would imply segregation of receivables would include
a. past-due status.
b. industry.
c. collateral type.
d. All of these could be used to determine whether segregation of receivables is implied.

Answers to Multiple Choice
Short Answer:

1. Briefly describe some of the similarities and differences between U.S. GAAP and iGAAP with respect to the accounting for cash and receivables.

2. Walton Company, which uses iGAAP, has a note receivable with a carrying value of $30,000 at December 31, 2010. On January 2, 2011, the borrower declares bankruptcy, and Walton estimates that only $25,000 of the note will be collected. Briefly describe the accounting for the loan subsequent to the bankruptcy, assuming Walton estimates that more than $25,000 can be repaid.