ACC 304 Complete Quizzes and Exams – Strayer University NEW

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Week 2 Through 11 Quiz: Chapters 8 Through 16

CHAPTER 8

VALUATION OF INVENTORIES: A COST-BASIS APPROACH

IFRS questions are available at the end of this chapter.

TRUE FALSE—Conceptual

1. A manufacturing concern would report the cost of units only partially processed as inventory in the balance sheet.

2. Both merchandising and manufacturing companies normally have multiple inventory accounts.

3. When using a perpetual inventory system, freight charges on goods purchased are debited to Freight-In.

4. If a supplier ships goods f.o.b. destination, title passes to the buyer when the supplier delivers the goods to the common carrier.

5. If ending inventory is understated, then net income is understated.

6. If both purchases and ending inventory are overstated by the same amount, net income is not affected.

7. Freight charges on goods purchased are considered a period cost and therefore are not part of the cost of the inventory.

8. Purchase Discounts Lost is a financial expense and is reported in the “other expenses and losses” section of the income statement.

9. The cost flow assumption adopted must be consistent with the physical movement of the goods.

10. In all cases when FIFO is used, the cost of goods sold would be the same whether a perpetual or periodic system is used.

11. The change in the LIFO Reserve from one period to the next is recorded as an adjustment to Cost of Goods Sold.

12. Many companies use LIFO for both tax and internal reporting purposes.

13. LIFO liquidation often distorts net income, but usually leads to substantial tax savings.

14. LIFO liquidations can occur frequently when using a specific-goods approach.

15. Dollar-value LIFO techniques help protect LIFO layers from erosion.

16. The dollar-value LIFO method measures any increases and decreases in a pool in terms of total dollar value and physical quantity of the goods.

17. A disadvantage of LIFO is that it does not match more recent costs against current revenues as well as FIFO.

18. The LIFO conformity rule requires that if a company uses LIFO for tax purposes, it must also use LIFO for financial accounting purposes.

19. Use of LIFO provides a tax benefit in an industry where unit costs tend to decrease as production increases.

20. LIFO is inappropriate where unit costs tend to decrease as production increases.

True False Answers—Conceptual

MULTIPLE CHOICE—Conceptual

21. Which of the following inventories carried by a manufacturer is similar to the merchandise inventory of a retailer?
a. Raw materials.
b. Work-in-process.
c. Finished goods.
d. Supplies.

22. Where should raw materials be classified on the balance sheet?
a. Prepaid expenses.
b. Inventory.
c. Equipment.
d. Not on the balance sheet.

23. Which of the following accounts is not reported in inventory?
a. Raw materials.
b. Equipment.
c. Finished goods.
d. Supplies.

24. Why are inventories included in the computation of net income?
a. To determine cost of goods sold.
b. To determine sales revenue.
c. To determine merchandise returns.
d. Inventories are not included in the computation of net income.

25. Which of the following is a characteristic of a perpetual inventory system?
a. Inventory purchases are debited to a Purchases account.
b. Inventory records are not kept for every item.
c. Cost of goods sold is recorded with each sale.
d. Cost of goods sold is determined as the amount of purchases less the change in inventory.

26. How is a significant amount of consignment inventory reported in the balance sheet?
a. The inventory is reported separately on the consignor’s balance sheet.
b. The inventory is combined with other inventory on the consignor’s balance sheet.
c. The inventory is reported separately on the consignee’s balance sheet.
d. The inventory is combined with other inventory on the consignee’s balance sheet.

27. Where should goods in transit that were recently purchased f.o.b. destination be included on the balance sheet?
a. Accounts payable.
b. Inventory.
c. Equipment.
d. Not on the balance sheet.

28. If a company uses the periodic inventory system, what is the impact on net income of including goods in transit f.o.b. shipping point in purchases, but not ending inventory?
a. Overstate net income.
b. Understate net income.
c. No effect on net income.
d. Not sufficient information to determine effect on net income.

29. If a company uses the periodic inventory system, what is the impact on the current ratio of including goods in transit f.o.b. shipping point in purchases, but not ending inventory?
a. Overstate the current ratio.
b. Understate the current ratio.
c. No effect on the current ratio.
d. Not sufficient information to determine effect on the current ratio.

30. What is consigned inventory?
a. Goods that are shipped, but title transfers to the receiver.
b. Goods that are sold, but payment is not required until the goods are sold.
c. Goods that are shipped, but title remains with the shipper.
d. Goods that have been segregated for shipment to a customer.

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

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

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

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

Use the following information for questions 35 and 36.
During 2012 Carne Corporation transferred inventory to Nolan Corporation and agreed to repurchase the merchandise early in 2013. Nolan then used the inventory as collateral to borrow from Norwalk Bank, remitting the proceeds to Carne. In 2013 when Carne repurchased the inventory, Nolan used the proceeds to repay its bank loan.

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

36. On whose books should the cost of the inventory appear at the December 31, 2012 balance sheet date?
a. Carne Corporation
b. Nolan Corporation
c. Norwalk Bank
d. Nolan Corporation, with Carne making appropriate note disclosure of the transaction

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

S38. Valuation of inventories requires the determination of all of the following except
a. the costs to be included in inventory.
b. the physical goods to be included in inventory.
c. the cost of goods held on consign¬ment from other companies.
d. the cost flow assumption to be adopted.

P39. The accountant for the Pryor Sales Company is preparing the income statement for 2012 and the balance sheet at December 31, 2012. Pryor uses the periodic inventory system. 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.

P40. If the beginning inventory for 2012 is overstated, the effects of this error on cost of goods sold for 2012, net income for 2012, and assets at December 31, 2013, respectively, are
a. overstatement, understatement, overstatement.
b. overstatement, understatement, no effect.
c. understatement, overstatement, overstatement.
d. understatement, overstatement, no effect.

S41. The failure to record a purchase of mer¬chandise on account even though the goods are properly included in the physical inven¬tory results in
a. an overstatement of assets and net income.
b. an understatement of assets and net income.
c. an understatement of cost of goods sold and liabilities and an overstatement of assets.
d. an understatement of liabilities and an overstatement of owners’ equity.

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

43. Green Co. received merchandise on consignment. As of January 31, Green included the goods in inventory, but did not record the transaction. The effect of this on its financial statements for January 31 would be
a. net income, current assets, and retained earnings were overstated.
b. net income was correct and current assets were understated.
c. net income and current assets were overstated and current liabilities were understated.
d. net income, current assets, and retained earnings were understated.

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

45. On June 15, 2012, Wynne Corporation accepted delivery of merchandise which it pur-chased on account. As of June 30, Wynne had not recorded the transaction or included the merchandise in its inventory. The effect of this on its balance sheet for June 30, 2012 would be
a. assets and stockholders’ equity were overstated but liabilities were not affected.
b. stockholders’ equity was the only item affected by the omission.
c. assets, liabilities, and stockholders’ equity were understated.
d. none of these.

46. What is the effect of a $50,000 overstatement of last year’s inventory on current years ending retained earning balance?
a. Understated by $50,000.
b. No effect.
c. Overstated by $50,000.
d. Need more information to determine.

47. Which of the following is a product cost as it relates to inventory?
a. Selling costs.
b. Interest costs.
c. Raw materials.
d. Abnormal spoilage.

48. Which of the following is a period cost?
a. Labor costs.
b. Freight in.
c. Production costs.
d. Selling costs.

49. Which method may be used to record cash discounts a company receives for paying suppliers promptly?
a. Net method.
b. Gross method.
c. Average method.
d. a and b.

50. Which of the following is included in inventory costs?
a. Product costs.
b. Period costs.
c. Product and period costs.
d. Neither product or period costs.

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

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

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

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

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

Use the following information for questions 56 and 57.

During 2012, which was the first year of operations, Oswald Company had merchandise purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30. Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods available had been sold at year end.

56. Which of the following recording procedures would result in the highest cost of goods sold for 2012?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken shown under “other expenses” in the income statement
a. 1
b. 2
c. Either 1 or 2 will result in the same cost of goods sold.
d. Cannot be determined from the information provided.

57. Which of the following recording procedures would result in the highest net income for 2012?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken shown under “other expenses” in the income statement
a. 1
b. 2
c. Either 1 or 2 will result in the same net income.
d. Cannot be determined from the information provided.

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

S59. Costs which are inventoriable include all of the following except
a. costs that are directly connected with the bringing of goods to the place of business of the buyer.
b. costs that are directly connected with the converting of goods to a salable condition.
c. buying costs of a purchasing department.
d. selling costs of a sales department.

P60. Which inventory costing method most closely approximates current cost for each of the following:
Ending Inventory Cost of Goods Sold
a. FIFO FIFO
b. FIFO LIFO
c. LIFO FIFO
d. LIFO LIFO

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

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

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

64. Which method of inventory pricing best approximates specific identification of the actual flow of costs and units in most manufacturing situations?
a. Average cost
b. First-in, first-out
c. Last-in, first-out
d. Base stock

65. Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the LIFO method?
a. Prices decreased.
b. Prices remained unchanged.
c. Prices increased.
d. Price trend cannot be determined from information given.

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

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

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

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

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

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

72. Which of the following is a reason why the specific identification method may be considered ideal for assigning costs to inventory and cost of goods sold?
a. The potential for manipulation of net income is reduced.
b. There is no arbitrary allocation of costs.
c. The cost flow matches the physical flow.
d. Able to use on all types of inventory.

73. In a period of rising prices which inventory method generally provides the greatest amount of net income?
a. Average cost.
b. FIFO.
c. LIFO.
d. Specific identification.

74. In a period of falling prices, which inventory method generally provides the greatest amount of net income?
a. Average cost.
b. FIFO.
c. LIFO.
d. Specific identification.

75. What is a LIFO reserve?
a. The difference between the LIFO inventory and the amount used for internal reporting purposes.
b. The tax savings attributed to using the LIFO method.
c. The current effect of using LIFO on net income.
d. Change in the LIFO inventory during the year.

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

77. What happens when inventory in base year dollars decreases?
a. LIFO reserve increases.
b. LIFO layer is created.
c. LIFO layer is liquidated.
d. LIFO price index decreases.

78. How might a company obtain a price index in order to apply dollar-value LIFO?
a. Calculate an index based on recent inventory purchases.
b. Use a general price level index published by the government.
c. Use a price index prepared by an industry group.
d. All of the above.

79. In the context of dollar-value LIFO, what is a LIFO layer?
a. The difference between the LIFO inventory and the amount used for internal reporting purposes.
b. The LIFO value of the inventory for a given year.
c. The inventory in base year dollars.
d. The LIFO value of an increase in the inventory for a given year.

S80. Which of the following statements is not true as it relates to the dollar-value LIFO inven-tory method?
a. It is easier to erode LIFO layers using dollar-value LIFO techniques than it is with specific goods pooled LIFO.
b. Under the dollar-value LIFO method, it is possible to have the entire inventory in only one pool.
c. Several pools are commonly employed in using the dollar-value LIFO inventory method.
d. Under dollar-value LIFO, increases and decreases in a pool are determined and measured in terms of total dollar value, not physical quantity.

S81. Which of the following is not considered an advantage of LIFO when prices are rising?
a. The inventory will be overstated.
b. The more recent costs are matched against current revenues.
c. There will be a deferral of income tax.
d. A company’s future reported earnings will not be affected substantially by future price declines.

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

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

Multiple Choice Answers—Conceptual

MULTIPLE CHOICE—Computational

84. Morgan Manufacturing Company has the following account balances at year end:
Office supplies $ 4,000
Raw materials 27,000
Work-in-process 59,000
Finished goods 82,000
Prepaid insurance 6,000
What amount should Morgan report as inventories in its balance sheet?
a. $82,000.
b. $86,000.
c. $168,000.
d. $172,000.

85. Lawson Manufacturing Company has the following account balances at year end:
Office supplies $ 4,000
Raw materials 27,000
Work-in-process 59,000
Finished goods 97,000
Prepaid insurance 6,000
What amount should Lawson report as inventories in its balance sheet?
a. $97,000.
b. $101,000.
c. $183,000.
d. $187,000.

86. Elkins Corporation uses the perpetual inventory method. On March 1, it purchased $20,000 of inventory, terms 2/10, n/30. On March 3, Elkins returned goods that cost $2,000. On March 9, Elkins paid the supplier. On March 9, Elkins should credit
a. purchase discounts for $400.
b. inventory for $400.
c. purchase discounts for $360.
d. inventory for $360.

87. Malone Corporation uses the perpetual inventory method. On March 1, it purchased $50,000 of inventory, terms 2/10, n/30. On March 3, Malone returned goods that cost $5,000. On March 9, Malone paid the supplier. On March 9, Malone should credit
a. purchase discounts for $1,000.
b. inventory for $1,000.
c. purchase discounts for $900.
d. inventory for $900.

88. Bell Inc. took a physical inventory at the end of the year and determined that $780,000 of goods were on hand. In addition, Bell, Inc. determined that $60,000 of goods that were in transit that were shipped f.o.b. shipping point were actually received two days after the inventory count and that the company had $90,000 of goods out on consignment. What amount should Bell report as inventory at the end of the year?
a. $780,000.
b. $840,000.
c. $870,000.
d. $930,000.

89. Bell Inc. took a physical inventory at the end of the year and determined that $760,000 of goods were on hand. In addition, the following items were not included in the physical count. Bell, Inc. determined that $96,000 of goods were in transit that were shipped f.o.b. destination (goods were actually received by the company three days after the inventory count).The company sold $40,000 worth of inventory f.o.b. destination. What amount should Bell report as inventory at the end of the year?
a. $760,000.
b. $856,000.
c. $800,000.
d. $896,000.

90. Risers Inc. reported total assets of $1,800,000 and net income of $200,000 for the current year. Risers determined that inventory was overstated by $15,000 at the beginning of the year (this was not corrected). What is the corrected amount for total assets and net income for the year?
a. $1,800,000 and $200,000.
b. $1,800,000 and $215,000.
c. $1,785,000 and $185,000.
d. $1,815,000 and $215,000.

91. Risers Inc. reported total assets of $3,200,000 and net income of $170,000 for the current year. Risers determined that inventory was understated by $46,000 at the beginning of the year and $20,000 at the end of the year. What is the corrected amount for total assets and net income for the year?
a. $3,220,000 and $190,000.
b. $3,180,000 and $196,000.
c. $3,220,000 and $144,000.
d. $3,200,000 and $170,000.

Use the following information for questions 92 through 94.

Hudson, Inc. is a calendar-year corporation. Its financial statements for the years 2013 and 2012 contained errors as follows:
2013 2012
Ending inventory $4,500 overstated $12,000 overstated
Depreciation expense $3,000 understated $9,000 overstated

92. Assume that the proper correcting entries were made at December 31, 2012. By how much will 2013 income before taxes be overstated or understated?
a. $1,500 understated
b. $1,500 overstated
c. $3,000 overstated
d. $7,500 overstated

93. Assume that no correcting entries were made at December 31, 2012. Ignoring income taxes, by how much will retained earnings at December 31, 2013 be overstated or understated?
a. $1,500 understated
b. $7,500 overstated
c. $7,500 understated
d. $13,500 understated

94. Assume that no correcting entries were made at December 31, 2012, or December 31, 2013 and that no additional errors occurred in 2014. Ignoring income taxes, by how much will working capital at December 31, 2014 be overstated or understated?
a. $0
b. $3,000 overstated
c. $3,000 understated
d. $7,500 understated

95. The following information is available for Naab Company for 2012:
Freight-in $ 30,000
Purchase returns 75,000
Selling expenses 200,000
Ending inventory 260,000
The cost of goods sold is equal to 400% of selling expenses. What is the cost of goods available for sale?
a. $800,000.
b. $1,090,000.
c. $1,015,000.
d. $1,060,000.
Use the following information for questions 96 and 97.
Winsor Co. records purchases at net amounts. On May 5 Winsor purchased merchandise on account, $20,000, terms 2/10, n/30. Winsor returned $1,500 of the May 5 purchase and received credit on account. At May 31 the balance had not been paid.

96. The amount to be recorded as a purchase return is
a. $1,350.
b. $1,530
c. $1,500.
d. $1,470.

97. By how much should the account payable be adjusted on May 31?
a. $0.
b. $430.
c. $400.
d. $370.

Use the following information for questions 98 and 99.

The following information was available from the inventory records of Rich Company for January:
Units Unit Cost Total Cost
Balance at January 1 3,000 $9.77 $29,310
Purchases:
January 6 2,000 10.30 20,600
January 26 2,700 10.71 28,917

Sales:
January 7 (2,500)
January 31 (4,300)
Balance at January 31 900

98. Assuming that Rich does not maintain perpetual inventory records, what should be the inventory at January 31, using the weighted-average inventory method, rounded to the nearest dollar?
a. $9,454.
b. $9,213.
c. $9,234.
d. $9,324.

99. Assuming that Rich maintains perpetual inventory records, what should be the inventory at January 31, using the moving-average inventory method, rounded to the nearest dollar?
a. $9,454.
b. $9,213.
c. $9,234.
d. $9,324.

Use the following information for questions 100 and 101.

Niles Co. has the following data related to an item of inventory:
Inventory, March 1 100 units @ $2.10
Purchase, March 7 350 units @ $2.20
Purchase, March 16 70 units @ $2.25
Inventory, March 31 130 units

100. The value assigned to ending inventory if Niles uses LIFO is
a. $290.
b. $276.
c. $273.
d. $292.

101. The value assigned to cost of goods sold if Niles uses FIFO is
a. $290.
b. $276.
c. $862.
d. $848.

102. Emley Company has been using the LIFO method of inventory valuation for 10 years, since it began operations. Its 2012 ending inventory was $60,000, but it would have been $90,000 if FIFO had been used. Thus, if FIFO had been used, Emley’s income before income taxes would have been
a. $30,000 greater over the 10-year period.
b. $30,000 less over the 10-year period.
c. $30,000 greater in 2012.
d. $30,000 less in 2012.

Use the following information for questions 103 through 106.
Transactions for the month of June were:
Purchases Sales
June 1 (balance) 1,200 @ $3.20 June 2 900 @ $5.50
3 3,300 @ 3.10 6 2,400 @ 5.50
7 1,800 @ 3.30 9 1,500 @ 5.50
15 2,700 @ 3.40 10 600 @ 6.00
22 750 @ 3.50 18 2,100 @ 6.00
25 300 @ 6.00

103. Assuming that perpetual inventory records are kept in units only, the ending inventory on a LIFO basis is
a. $6,165.
b. $6,240.
c. $6,435.
d. $6,705.

104. Assuming that perpetual inventory records are kept in dollars, the ending inventory on a LIFO basis is
a. $6,165.
b. $6,240.
c. $6,435.
d. $6,705.
105. Assuming that perpetual inventory records are kept in dollars, the ending inventory on a FIFO basis is
a. $6,165.
b. $6,240.
c. $6,435.
d. $6,705.

106. Assuming that perpetual inventory records are kept in units only, the ending inventory on an average-cost basis, rounded to the nearest dollar, is
a. $6,144.
b. $6,357.
c. $6,435.
d. $6,483.

107. Milford Company had 500 units of “Tank” in its inventory at a cost of $4 each. It purchased, for $2,800, 300 more units of “Tank”. Milford then sold 400 units at a selling price of $10 each, resulting in a gross profit of $1,600. The cost flow assumption used by Johnson
a. is FIFO.
b. is LIFO.
c. is weighted average.
d. cannot be determined from the information given.

108. Nichols Company had 500 units of “Dink” in its inventory at a cost of $5 each. It purchased, for $2,400, 300 more units of “Dink”. Nichols then sold 600 units at a selling price of $10 each, resulting in a gross profit of $2,100. The cost flow assumption used by Nichols.
a. is FIFO.
b. is LIFO.
c. is weighted average.
d. cannot be determined from the information given.

109. June Corp. sells one product and uses a perpetual inventory system. The beginning inventory consisted of 20 units that cost $20 per unit. During the current month, the company purchased 120 units at $20 each. Sales during the month totaled 90 units for $43 each. What is the number of units in the ending inventory?
a. 20 units.
b. 30 units.
c. 50 units.
d. 140 units.

110. June Corp. sells one product and uses a perpetual inventory system. The beginning inventory consisted of 20 units that cost $20 per unit. During the current month, the company purchased 120 units at $20 each. Sales during the month totaled 90 units for $43 each. What is the cost of goods sold using the LIFO method?
a. $400.
b. $1,800.
c. $2,400.
d. $3,870.

111. Checkers uses the periodic inventory system. For the current month, the beginning inventory consisted of 2,400 units that cost $12 each. During the month, the company made two purchases: 1,000 units at $13 each and 4,000 units at $13.50 each. Checkers also sold 4,300 units during the month. Using the average cost method, what is the amount of cost of goods sold for the month?
a. $55,685.
b. $57,900.
c. $53,950.
d. $55,900.

112. Chess Top uses the periodic inventory system. For the current month, the beginning inventory consisted of 300 units that cost $65 each. During the month, the company made two purchases: 450 units at $68 each and 225 units at $70 each. Chess Top also sold 750 units during the month. Using the average cost method, what is the amount of ending inventory?
a. $15,750.
b. $50,655.
c. $50,100.
d. $15,197.

113. Checkers uses the periodic inventory system. For the current month, the beginning inventory consisted of 2,400 units that cost $12 each. During the month, the company made two purchases: 1,000 units at $13 each and 4,000 units at $13.50 each. Checkers also sold 4,300 units during the month. Using the FIFO method, what is the ending inventory?
a. $40,146.
b. $37,200.
c. $41,850.
d. $37,900.

114. Chess Top uses the periodic inventory system. For the current month, the beginning inventory consisted of 300 units that cost $65 each. During the month, the company made two purchases: 450 units at $68 each and 225 units at $70 each. Chess Top also sold 750 units during the month. Using the FIFO method, what is the amount of cost of goods sold for the month?
a. $50,655.
b. $48,750.
c. $51,225.
d. $50,100.

115. Checkers uses the periodic inventory system. For the current month, the beginning inventory consisted of 2,400 units that cost $12 each. During the month, the company made two purchases: 1,000 units at $13 each and 4,000 units at $13.50 each. Checkers also sold 4,300 units during the month. Using the LIFO method, what is the ending inventory?
a. $40,146.
b. $37,200.
c. $41,850.
d. $37,900.

116. Chess Top uses the periodic inventory system. For the current month, the beginning inventory consisted of 300 units that cost $65 each. During the month, the company made two purchases: 450 units at $68 each and 225 units at $70 each. Chess Top also sold 750 units during the month. Using the LIFO method, what is the amount of cost of goods sold for the month?
a. $50,655.
b. $48,750.
c. $51,225.
d. $50,100.

117. Black Corporation uses the FIFO method for internal reporting purposes and LIFO for external reporting purposes. The balance in the LIFO Reserve account at the end of 2012 was $100,000. The balance in the same account at the end of 2013 is $150,000. Black’s Cost of Goods Sold account has a balance of $750,000 from sales transactions recorded during the year. What amount should Black report as Cost of Goods Sold in the 2013 income statement?
a. $700,000.
b. $750,000.
c. $800,000.
d. $900,000.

118. White Corporation uses the FIFO method for internal reporting purposes and LIFO for external reporting purposes. The balance in the LIFO Reserve account at the end of 2012 was $120,000. The balance in the same account at the end of 2013 is $180,000. White’s Cost of Goods Sold account has a balance of $900,000 from sales transactions recorded during the year. What amount should White report as Cost of Goods Sold in the 2013 income statement?
a. $840,000.
b. $900,000.
c. $960,000.
d. $1,080,000.

119. Milford Company had 400 units of “Tank” in its inventory at a cost of $8 each. It purchased 600 more units of “Tank” at a cost of $12 each. Milford then sold 700 units at a selling price of $20 each. The LIFO liquidation overstated normal gross profit by
a. $ -0-
b. $400.
c. $800.
d. $1,200.

120. Nichols Company had 400 units of “Dink” in its inventory at a cost of $10 each. It purchased 600 more units of “Dink” at a cost of $15 each. Nichols then sold 700 units at a selling price of $25 each. The LIFO liquidation overstated normal gross profit by
a. $ -0-
b. $500.
c. $1,000.
d. $1,500.

Use the following information for 121 and 122

RF Company had January 1 inventory of $150,000 when it adopted dollar-value LIFO. During the year, purchases were $900,000 and sales were $1,500,000. December 31 inventory at year-end prices was $215,040, and the price index was 112.

121. What is RF Company’s ending inventory?
a. $150,000.
b. $192,000.
c. $197,040.
d. $215,040.

122. What is RF Company’s gross profit?
a. $642,000.
b. $647,040.
c. $665,190.
d. $1,302,960.

Use the following information for 123 and 124

Hay Company had January 1 inventory of $120,000 when it adopted dollar-value LIFO. During the year, purchases were $720,000 and sales were $1,200,000. December 31 inventory at year-end prices was $151,800, and the price index was 110.

123. What is Hay Company’s ending inventory?
a. $132,000.
b. $138,000.
c. $139,800.
d. $151,800.

124. What is Hay Company’s gross profit?
a. $498,000.
b. $499,800.
c. $511,800.
d. $1,060,200.

Use the following information for questions 125 through 127.
Gross Corporation adopted the dollar-value LIFO method of inventory valuation on December 31, 2011. Its inventory at that date was $440,000 and the relevant price index was 100. Information regarding inventory for subsequent years is as follows:
Inventory at Current
Date Current Prices Price Index
December 31, 2012 $513,600 107
December 31, 2013 580,000 125
December 31, 2014 650,000 130

125. What is the cost of the ending inventory at December 31, 2012 under dollar-value LIFO?
a. $480,000.
b. $513,600.
c. $482,800.
d. $470,800.
126. What is the cost of the ending inventory at December 31, 2013 under dollar-value LIFO?
a. $464,000.
b. $462,800.
c. $465,680.
d. $480,000.

127. What is the cost of the ending inventory at December 31, 2014 under dollar-value LIFO?
a. $512,480.
b. $509,600.
c. $500,000.
d. $526,800.

128. Wise Company adopted the dollar-value LIFO method on January 1, 2012, at which time its inventory consisted of 6,000 units of Item A @ $5.00 each and 3,000 units of Item B @ $16.00 each. The inventory at December 31, 2012 consisted of 12,000 units of Item A and 7,000 units of Item B. The most recent actual purchases related to these items were as follows:
Quantity
Items Purchase Date Purchased Cost Per Unit
A 12/7/12 2,000 $ 6.00
A 12/11/12 10,000 5.75
B 12/15/12 7,000 17.00
Using the double-extension method, what is the price index for 2012 that should be computed by Wise Company?
a. 108.33%
b. 109.59%
c. 111.05%
d. 220.51%

129. Web World began using dollar-value LIFO for costing its inventory last year. The base year layer consists of $350,000. Assuming the current inventory at end of year prices equals $483,000 and the index for the current year is 1.10, what is the ending inventory using dollar-value LIFO?
a. $483,000.
b. $448,000.
c. $439,091.
d. $531,300.

130. Willy World began using dollar-value LIFO for costing its inventory two years ago. The ending inventory for the past two years in end-of-year dollars was $120,000 and $180,000 and the year-end price indices were 1.0 and 1.2, respectively. Assuming the current inventory at end of year prices equals $258,000 and the index for the current year is 1.25, what is the ending inventory using dollar-value LIFO?
a. $213,000.
b. $223,680.
c. $228,000.
d. $226,500.

131. Opera Corp. uses the dollar-value LIFO method of computing its inventory cost. Data for the past four years is as follows:

Year ended Inventory at Price
December 31. End-of-year Prices Index
2011 $130,000 1.00
2012 252,000 1.05
2013 270,000 1.10
What is the 2011 inventory balance using dollar-value LIFO?
a. $130,000.
b. $123,808.
c. $245,454.
d. $270,000.

132. Opera Corp. uses dollar-value LIFO method of computing its inventory cost. Data for the past four years is as follows:

Year ended Inventory at Price
December 31. End-of-year Prices Index
2011 $ 130,000 1.00
2012 252,000 1.05
2013 270,000 1.10
What is the 2012 inventory balance using dollar-value LIFO?
a. $252,000.
b. $257,000.
c. $245,500.
d. $251,500.

133. Opera Corp. uses dollar-value LIFO method of computing its inventory cost. Data for the past four years is as follows:

Year ended Inventory at Price
December 31. End-of-year Prices Index
2011 $ 130,000 1.00
2012 252,000 1.05
2013 270,000 1.10
What is the 2013 inventory balance using dollar-value LIFO?
a. $270,000.
b. $257,000.
c. $245,500.
d. $251,500.

Multiple Choice Answers—Computational

MULTIPLE CHOICE—CPA Adapted

134. How should the following costs affect a retailer’s inventory valuation?
Freight-in Interest on Inventory Loan
a. Increase No effect
b. Increase Increase
c. No effect Increase
d. No effect No effect

135. The following information applied to Howe, Inc. for 2012:
Merchandise purchased for resale $350,000
Freight-in 8,000
Freight-out 5,000
Purchase returns 2,000
Howe’s 2012 inventoriable cost was
a. $350,000.
b. $353,000.
c. $356,000.
d. $361,000.

136. The following information was derived from the 2012 accounting records of Perez Co.:
Perez ‘s Goods
Perez ‘s Central Warehouse Held by Consignees
Beginning inventory $130,000 $ 14,000
Purchases 475,000 70,000
Freight-in 10,000
Transportation to consignees 5,000
Freight-out 30,000 8,000
Ending inventory 145,000 20,000

Perez’s 2012 cost of sales was
a. $470,000.
b. $500,000.
c. $534,000.
d. $539,000.

137. Dole Corp.’s accounts payable at December 31, 2012, totaled $650,000 before any necessary year-end adjustments relating to the following transactions:
• On December 27, 2012, Dole wrote and recorded checks to creditors totaling $350,000 causing an overdraft of $100,000 in Dole’s bank account at December 31, 2012. The checks were mailed out on January 10, 2013.
• On December 28, 2012, Dole purchased and received goods for $150,000, terms 2/10, n/30. Dole records purchases and accounts payable at net amounts. The invoice was recorded and paid January 3, 2013.
• Goods shipped f.o.b. destination on December 20, 2012 from a vendor to Dole were received January 2, 2013. The invoice cost was $65,000.
At December 31, 2012, what amount should Dole report as total accounts payable?
a. $1,212,000.
b. $1,147,000.
c. $900,000.
d. $800,000.

138. The balance in Moon Co.’s accounts payable account at December 31, 2012 was $900,000 before any necessary year-end adjustments relating to the following:
• Goods were in transit to Moon from a vendor on December 31, 2012. The invoice cost was $40,000. The goods were shipped f.o.b. shipping point on December 29, 2012 and were received on January 4, 2013.
• Goods shipped f.o.b. destination on December 21, 2012 from a vendor to Moon were received on January 6, 2013. The invoice cost was $25,000.
• On December 27, 2012, Moon wrote and recorded checks to creditors totaling $30,000 that were mailed on January 10, 2013.
In Moon’s December 31, 2012 balance sheet, the accounts payable should be
a. $930,000.
b. $940,000.
c. $965,000.
d. $970,000.

139. Kerr Co.’s accounts payable balance at December 31, 2012 was $1,300,000 before considering the following transactions:
• Goods were in transit from a vendor to Kerr on December 31, 2012. The invoice price was $70,000, and the goods were shipped f.o.b. shipping point on December 29, 2012. The goods were received on January 4, 2013.
• Goods shipped to Kerr, f.o.b. shipping point on December 20, 2012, from a vendor were lost in transit. The invoice price was $50,000. On January 5, 2013, Kerr filed a $50,000 claim against the common carrier.

In its December 31, 2012 balance sheet, Kerr should report accounts payable of
a. $1,420,000.
b. $1,370,000.
c. $1,350,000.
d. $1,300,000.

140. Walsh Retailers purchased merchandise with a list price of $75,000, subject to trade discounts of 20% and 10%, with no cash discounts allowable. Walsh should record the cost of this merchandise as
a. $52,500.
b. $54,000.
c. $58,500.
d. $75,000.

141. On June 1, 2012, Penny Corp. sold merchandise with a list price of $40,000 to Linn on account. Penny allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and the sale was made f.o.b. shipping point. Penny prepaid $800 of delivery costs for Ison as an accommodation. On June 12, 2012, Penny received from Linn a remittance in full payment amounting to
a. $21,952.
b. $22,736.
c. $22,752.
d. $22,392.

142. Groh Co. recorded the following data pertaining to raw material X during January 2012:
Units
Date Received Cost Issued On Hand
1/1/12 Inventory $4.00 3,200
1/11/12 Issue 1,600 1,600
1/22/12 Purchase 4,000 $4.70 5,600
The moving-average unit cost of X inventory at January 31, 2012 is
a. $4.35.
b. $4.42.
c. $4.50.
d. $4.70.

143. During periods of rising prices, a perpetual inventory system would result in the same dollar amount of ending inventory as a periodic inventory system under which of the following inventory cost flow methods?
FIFO LIFO
a. Yes No
b. Yes Yes
c. No Yes
d. No No

144. Hite Co. was formed on January 2, 2012, to sell a single product. Over a two-year period, Hite’s acquisition costs have increased steadily. Physical quantities held in inventory were equal to three months’ sales at December 31, 2012, and zero at December 31, 2013. Assuming the periodic inventory system, the inventory cost method which reports the highest amount of each of the following is
Inventory Cost of Sales
December 31, 2012 2013
a. LIFO FIFO
b. LIFO LIFO
c. FIFO FIFO
d. FIFO LIFO

145. Keck Co. had 450 units of product A on hand at January 1, 2012, costing $21 each. Purchases of product A during January were as follows:
Date Units Unit Cost
Jan. 10 600 $22
18 750 23
28 300 24
A physical count on January 31, 2012 shows 600 units of product A on hand. The cost of the inventory at January 31, 2012 under the LIFO method is
a. $14,100.
b. $13,350.
c. $12,750.
d. $12,300.

146. When the double extension approach to the dollar-value LIFO inventory cost flow method is used, the inventory layer added in the current year is multiplied by an index number. How would the following be used in the calculation of this index number?
Ending inventory Ending inventory
at current year cost at base year cost
a. Numerator Denominator
b. Numerator Not used
c. Denominator Numerator
d. Not used Denominator

147. Farr Co. adopted the dollar-value LIFO inventory method on December 31, 2012. Farr’s entire inventory constitutes a single pool. On December 31, 2012, the inventory was $480,000 under the dollar-value LIFO method. Inventory data for 2013 are as follows:
12/31/13 inventory at year-end prices $660,000
Relevant price index at year end (base year 2012) 110
Using dollar value LIFO, Farr’s inventory at December 31, 2013 is
a. $528,000.
b. $612,000.
c. $600,000.
d. $660,000.

Multiple Choice Answers—CPA Adapted

CHAPTER 9

INVENTORIES: ADDITIONAL VALUATION ISSUES

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

1. A company should abandon the historical cost principle when the future utility of the inventory item falls below its original cost.

2. The lower-of-cost-or-market method is used for inventory despite being less conservative than valuing inventory at market value.

3. The purpose of the “floor” in lower-of-cost-or-market considerations is to avoid overstating inventory.

4. Application of the lower-of-cost-or-market rule results in inconsistency because a company may value inventory at cost in one year and at market in the next year.

5. GAAP requires reporting inventory at net realizable value, even if above cost, whenever there is a controlled market with a quoted price applicable to all quantities.

6. A reason for valuing inventory at net realizable value is that sometimes it is too difficult to obtain the cost figures.

7. In a basket purchase, the cost of the individual assets acquired is determined on the basis of their relative sales value.

8. A basket purchase occurs when a company agrees to buy inventory weeks or months in advance.

9. Most purchase commitments must be recorded as a liability.

10. If the contract price on a noncancelable purchase commitment exceeds the market price, the buyer should record any expected losses on the commitment in the period in which the market decline takes place.

11. When a buyer enters into a formal, noncancelable purchase contract, an asset and a liability are recorded at the inception of the contract.

12. The gross profit method can be used to approximate the dollar amount of inventory on hand.

13. In most situations, the gross profit percentage is stated as a percentage of cost.

14. A disadvantage of the gross profit method is that it uses past percentages in determining the markup.

15. When the conventional retail method includes both net markups and net markdowns in the cost-to-retail ratio, it approximates a lower-of-cost-or-market valuation.

16. In the retail inventory method, the term markup means a markup on the original cost of an inventory item.

17. In the retail inventory method, abnormal shortages are deducted from both the cost and retail amounts and reported as a loss.
18. The inventory turnover ratio is computed by dividing the cost of goods sold by the ending inventory on hand.

19. The average days to sell inventory represents the average number of days’ sales for which a company has inventory on hand.

*20. The LIFO retail method assumes that markups and markdowns apply only to the goods purchased during the period.

True False Answers—Conceptual

MULTIPLE CHOICE—Conceptual

21. Which of the following is true about lower-of-cost-or-market?
a. It is inconsistent because losses are recognized but not gains.
b. It usually understates assets.
c. It can increase future income.
d. All of these.

22. The primary basis of accounting for inventories is cost. A departure from the cost basis of pricing the inventory is required where there is evidence that when the goods are sold in the ordinary course of business their
a. selling price will be less than their replacement cost.
b. replacement cost will be more than their net realizable value.
c. cost will be less than their replacement cost.
d. future utility will be less than their cost.

23. When valuing raw materials inventory at lower-of-cost-or-market, what is the meaning of the term “market”?
a. Net realizable value
b. Net realizable value less a normal profit margin
c. Current replacement cost
d. Discounted present value

24. In no case can “market” in the lower-of-cost-or-market rule be more than
a. estimated selling price in the ordinary course of business.
b. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.
c. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal and an allowance for an approximately normal profit margin.
d. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal, an allowance for an approximately normal profit margin, and an adequate reserve for possible future losses.
25. Designated market value
a. is always the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin.
b. should always be equal to net realizable value.
c. may sometimes exceed net realizable value.
d. should always be equal to net realizable value less a normal profit margin.

26. Lower-of-cost-or-market
a. is most conservative if applied to the total inventory.
b. is most conservative if applied to major categories of inventory.
c. is most conservative if applied to individual items of inventory.
d. must be applied to major categories for taxes.

27. An item of inventory purchased this period for $15.00 has been incorrectly written down to its current replacement cost of $10.00. It sells during the following period for $30.00, its normal selling price, with disposal costs of $3.00 and normal profit of $12.00. Which of the following statements is not true?
a. The cost of sales of the following year will be understated.
b. The current year’s income is understated.
c. The closing inventory of the current year is understated.
d. Income of the following year will be understated.

S28. When the cost-of-goods-sold method is used to record inventory at market
a. there is a direct reduction in the selling price of the product that results in a loss being recorded on the income statement prior to the sale.
b. a loss is recorded directly in the inventory account by crediting inventory and debiting loss on inventory decline.
c. only the portion of the loss attributable to inventory sold during the period is recorded in the financial statements.
d. the market value figure for ending inventory is substituted for cost and the loss is buried in cost of goods sold.

29. Lower-of-cost-or-market as it applies to inventory is best described as the
a. drop of future utility below its original cost.
b. method of determining cost of goods sold.
c. assumption to determine inventory flow.
d. change in inventory value to market value.

30. The floor to be used in applying the lower-of-cost-or-market method to inventory is determined as the
a. net realizable value.
b. net realizable value less normal profit margin.
c. replacement cost.
d. selling price less costs of completion and disposal.

31. What is the rationale behind the ceiling when applying the lower-of-cost-or-market method to inventory?
a. Prevents understatement of the inventory value.
b. Allows for a normal profit to be earned.
c. Allows for items to be valued at replacement cost.
d. Prevents overstatement of the value of obsolete or damaged inventories.

32. Why are inventories stated at lower-of-cost-or-market?
a. To report a loss when there is a decrease in the future utility.
b. To be conservative.
c. To report a loss when there is a decrease in the future utility below the original cost.
d. To permit future profits to be recognized.

33. Which of the following is not an acceptable approach in applying the lower-of-cost-or-market method to inventory?
a. Inventory location.
b. Categories of inventory items.
c. Individual item.
d. Total of the inventory.

34. Which method(s) may be used to record a loss due to a price decline in the value of inventory?
a. Cost-of-goods-sold.
b. Sales method.
c. Loss method
d. Both a and c.

35. Why might inventory be reported at sales prices (net realizable value or market price) rather than cost?
a. When there is a controlled market with a quoted price applicable to all quantities and when there are no significant costs of disposal.
b. When there are no significant costs of disposal.
c. When a non-cancellable contract exists to sell the inventory.
d. When there is a controlled market with a quoted price applicable to all quantities.

S36. Recording inventory at net realizable value is permitted, even if it is above cost, when there are no significant costs of disposal involved and
a. the ending inventory is determined by a physical inventory count.
b. a normal profit is not anticipated.
c. there is a controlled market with a quoted price applicable to all quantities.
d. the internal revenue service is assured that the practice is not used only to distort reported net income.

37. When inventory declines in value below original (historical) cost, and this decline is considered other than temporary, what is the maximum amount that the inventory can be valued at?
a. Sales price
b. Net realizable value
c. Historical cost
d. Net realizable value reduced by a normal profit margin

38. Net realizable value is
a. acquisition cost plus costs to complete and sell.
b. selling price.
c. selling price plus costs to complete and sell.
d. selling price less costs to complete and sell.

39. If a unit of inventory has declined in value below original cost, but the market value exceeds net realizable value, the amount to be used for purposes of inventory valuation is
a. net realizable value.
b. original cost.
c. market value.
d. net realizable value less a normal profit margin.

40. Inventory may be recorded at net realizable value if
a. there is a controlled market with a quoted price.
b. there are no significant costs of disposal.
c. the inventory consists of precious metals or agricultural products.
d. all of these.

41. If a material amount of inventory has been ordered through a formal purchase contract at the balance sheet date for future delivery at firm prices,
a. this fact must be disclosed.
b. disclosure is required only if prices have declined since the date of the order.
c. disclosure is required only if prices have since risen substantially.
d. an appropriation of retained earnings is necessary.

42. The credit balance that arises when a net loss on a purchase commitment is recognized should be
a. presented as a current liability.
b. subtracted from ending inventory.
c. presented as an appropriation of retained earnings.
d. presented in the income statement.

P43. In 2012, Orear Manufacturing signed a contract with a supplier to purchase raw materials in 2013 for $700,000. Before the December 31, 2012 balance sheet date, the market price for these materials dropped to $510,000. The journal entry to record this situation at December 31, 2012 will result in a credit that should be reported
a. as a valuation account to Inventory on the balance sheet.
b. as a current liability.
c. as an appropriation of retained earnings.
d. on the income statement.

44. At the end of the fiscal year, Apha Airlines has an outstanding non-cancellable purchase commitment for the purchase of 1 million gallons of jet fuel at a price of $4.10 per gallon for delivery during the coming summer. The company prices its inventory at the lower of cost or market. If the market price for jet fuel at the end of the year is $4.50, how would this situation be reflected in the annual financial statements?
a. Record unrealized gains of $400,000 and disclose the existence of the purchase commitment.
b. No impact.
c. Record unrealized losses of $400,000 and disclose the existence of the purchase commitment.
d. Disclose the existence of the purchase commitment.

45. At the end of the fiscal year, Apha Airlines has an outstanding purchase commitment for the purchase of 1 million gallons of jet fuel at a price of $4.60 per gallon for delivery during the coming summer. The company prices its inventory at the lower of cost or market. If the market price for jet fuel at the end of the year is $4.25, how would this situation be reflected in the annual financial statements?
a. Record unrealized gains of $350,000 and disclose the existence of the purchase commitment.
b. No impact.
c. Record unrealized losses of $350,000 and disclose the existence of the purchase commitment.
d. Disclose the existence of the purchase commitment.

46. How is the gross profit method used as it relates to inventory valuation?
a. Verify the accuracy of the perpetual inventory records.
b. Verity the accuracy of the physical inventory.
c. To estimate cost of goods sold.
d. To provide an inventory value of LIFO inventories.

S47. Which of the following is not a basic assumption of the gross profit method?
a. The beginning inventory plus the purchases equal total goods to be accounted for.
b. Goods not sold must be on hand.
c. If the sales, reduced to the cost basis, are deducted from the sum of the opening inventory plus purchases, the result is the amount of inventory on hand.
d. The total amount of purchases and the total amount of sales remain relatively unchanged from the comparable previous period.

48. The gross profit method of inventory valuation is invalid when
a. a portion of the inventory is destroyed.
b. there is a substantial increase in inventory during the year.
c. there is no beginning inventory because it is the first year of operation.
d. none of these.

49. Which statement is not true about the gross profit method of inventory valuation?
a. It may be used to estimate inventories for interim statements.
b. It may be used to estimate inventories for annual statements.
c. It may be used by auditors.
d. None of these.

50. A major advantage of the retail inventory method is that it
a. provides reliable results in cases where the distribution of items in the inventory is different from that of items sold during the period.
b. hides costs from competitors and customers.
c. gives a more accurate statement of inventory costs than other methods.
d. provides a method for inventory control and facilitates determination of the periodic inventory for certain types of companies.

51. An inventory method which is designed to approximate inventory valuation at the lower of cost or market is
a. last-in, first-out.
b. first-in, first-out.
c. conventional retail method.
d. specific identification.

52. The retail inventory method is based on the assumption that the
a. final inventory and the total of goods available for sale contain the same proportion of high-cost and low-cost ratio goods.
b. ratio of gross margin to sales is approximately the same each period.
c. ratio of cost to retail changes at a constant rate.
d. proportions of markups and markdowns to selling price are the same.

53. Which statement is true about the retail inventory method?
a. It may not be used to estimate inventories for interim statements.
b. It may not be used to estimate inventories for annual statements.
c. It may not be used by auditors.
d. None of these.

54. When the conventional retail inventory method is used, markdowns are commonly ignored in the computation of the cost to retail ratio because
a. there may be no markdowns in a given year.
b. this tends to give a better approximation of the lower of cost or market.
c. markups are also ignored.
d. this tends to result in the showing of a normal profit margin in a period when no markdown goods have been sold.

55. To produce an inventory valuation which approximates the lower of cost or market using the conventional retail inventory method, the computation of the ratio of cost to retail should
a. include markups but not markdowns.
b. include markups and markdowns.
c. ignore both markups and markdowns.
d. include markdowns but not markups.

*56. When calculating the cost ratio for the retail inventory method,
a. if it is the conventional method, the beginning inventory is included and markdowns are deducted.
b. if it is the LIFO method, the beginning inventory is excluded and markdowns are deducted.
c. if it is the LIFO method, the beginning inventory is included and markdowns are not deducted.
d. if it is the conventional method, the beginning inventory is excluded and markdowns are not deducted.

S57. Which of the following is not required when using the retail inventory method?
a. All inventory items must be categorized according to the retail markup percentage which reflects the item’s selling price.
b. A record of the total cost and retail value of goods purchased.
c. A record of the total cost and retail value of the goods available for sale.
d. Total sales for the period.

S58. Which of the following is not a reason the retail inventory method is used widely?
a. As a control measure in determining inventory shortages
b. For insurance information
c. To permit the computation of net income without a physical count of inventory
d. To defer income tax liability

59. What condition is not necessary in order to use the retail method to provide inventory results?
a. Retailer keeps a record of the total costs of products sold for the period.
b. Retailer keeps a record of the total costs and retail value of goods purchased.
c. Retailer keeps a record of the total costs and retail value of goods available for sale.
d. Retailer keeps a record of sales for the period.

60. What method yields results that are essentially the same as those of the conventional retail method?
a. FIFO.
b. Lower-of-average-cost-or-market.
c. Average cost.
d. LIFO.

61. What is the effect of net markups on the cost-retail ratio when using the conventional retail method?
a. Increases the cost-retail ratio.
b. No effect on the cost-retail ratio.
c. Depends on the amount of the net markdowns.
d. Decreases the cost-retail ratio.

62. What is the effect of freight-in on the cost-retail ratio when using the conventional retail method?
a. Increases the cost-retail ratio.
b. No effect on the cost-retail ratio.
c. Depends on the amount of the net markups.
d. Decreases the cost-retail ratio.

63. Which of the following is not a common disclosure for inventories?
a. Inventory composition.
b. Inventory location.
c. Inventory financing arrangements.
d. Inventory costing methods employed.

P64. Which of the following statements is false regarding an assumption of inventory cost flow?
a. The cost flow assumption need not correspond to the actual physical flow of goods.
b. The assumption selected may be changed each accounting period.
c. The FIFO assumption uses the earliest acquired prices to cost the items sold during a period.
d. The LIFO assumption uses the earliest acquired prices to cost the items on hand at the end of an accounting period.

P65. The average days to sell inventory is computed by dividing
a. 365 days by the inventory turnover ratio.
b. the inventory turnover ratio by 365 days.
c. net sales by the inventory turnover ratio.
d. 365 days by cost of goods sold.

66. The inventory turnover ratio is computed by dividing the cost of goods sold by
a. beginning inventory.
b. ending inventory.
c. average inventory.
d. number of days in the year.

*67. When using dollar-value LIFO, if the incremental layer was added last year, it should be multiplied by
a. last year’s cost ratio and this year’s index.
b. this year’s cost ratio and this year’s index.
c. last year’s cost ratio and last year’s index.
d. this year’s cost ratio and last year’s index.

Multiple Choice Answers—Conceptual
Solutions to those Multiple Choice questions for which the answer is “none of these.”
48. The gross profit percentage applicable to the goods in ending inventory is different from the percentage applicable to the goods sold during the period.
53. Many answers are possible.

MULTIPLE CHOICE—Computational

68. Oslo Corporation has two products in its ending inventory, each accounted for at the lower of cost or market. A profit margin of 30% on selling price is considered normal for each product. Specific data with respect to each product follows:
Product #1 Product #2
Historical cost $20.00 $ 35.00
Replacement cost 22.50 27.00
Estimated cost to dispose 5.00 13.00
Estimated selling price 40.00 65.00
In pricing its ending inventory using the lower-of-cost-or-market, what unit values should Oslo use for products #1 and #2, respectively?
a. $20.00 and $32.50.
b. $23.00 and $32.50.
c. $23.00 and $30.00.
d. $22.50 and $27.00.

69. Muckenthaler Company sells product 2005WSC for $30 per unit. The cost of one unit of 2005WSC is $27, and the replacement cost is $26. The estimated cost to dispose of a unit is $6, and the normal profit is 40%. At what amount per unit should product 2005WSC be reported, applying lower-of-cost-or-market?
a. $12.
b. $24.
c. $26.
d. $27.

70. Lexington Company sells product 1976NLC for $50 per unit. The cost of one unit of 1976NLC is $45, and the replacement cost is $43. The estimated cost to dispose of a unit is $10, and the normal profit is 40%. At what amount per unit should product 1976NLC be reported, applying lower-of-cost-or-market?
a. $20.
b. $40.
c. $43.
d. $45.

71. Given the acquisition cost of product Z is $64, the net realizable value for product Z is $58, the normal profit for product Z is $5, and the market value (replacement cost) for product Z is $60, what is the proper per unit inventory price for product Z?
a. $64.
b. $60.
c. $53.
d. $58.

72. Given the acquisition cost of product ALPHA is $17, the net realizable value for product ALPHA is $16.70, the normal profit for product ALPHA is $1.24, and the market value (replacement cost) for product ALPHA is $14.72, what is the proper per unit inventory price for product ALPHA?
a. $17.00.
b. $15.46
c. $14.72.
d. $16.70.

73. Given the acquisition cost of product Dominoe is $43.31, the net realizable value for product Dominoe is $38.49, the normal profit for product Dominoe is $4.32, and the market value (replacement cost) for product Dominoe is $40.68, what is the proper
per unit inventory price for product Dominoe?
a. $40.68.
b. $34.18.
c. $38.49.
d. $43.31

74. Given the historical cost of product Z is $80, the selling price of product Z is $95, costs to sell product Z are $11, the replacement cost for product Z is $83, and the normal profit margin is 40% of sales price, what is the market value that should be used in the lower-of-cost-or-market comparison?
a. $80.
b. $84.
c. $83.
d. $46.
75. Given the historical cost of product Z is $80, the selling price of product Z is $95, costs to sell product Z are $11, the replacement cost for product Z is $83, and the normal profit margin is 40% of sales price, what is the amount that should be used to value the inventory under the lower-of-cost-or-market method?
a. $46.
b. $80.
c. $84.
d. $83.

76. Given the historical cost of product Dominoe is $43, the selling price of product Dominoe is $60, costs to sell product Dominoe are $11, the replacement cost for product Dominoe is $40, and the normal profit margin is 20% of sales price, what is the cost amount that should be used in the lower-of-cost-or-market comparison?
a. $49.
b. $40.
c. $37.
d. $43.

77. Given the historical cost of product Dominoe is $43, the selling price of product Dominoe is $60, costs to sell product Dominoe are $11, the replacement cost for product Dominoe is $40, and the normal profit margin is 20% of sales price, what is the amount that should be used to value the inventory under the lower-of-cost-or-market method?
a. $43.
b. $37.
c. $40.
d. $49.

78. Robust Inc. has the following information related to an item in its ending inventory. Product 66 has a cost of $3,250, a replacement cost of $3,100, a net realizable value of $3,200, and a normal profit margin of $200. What is the final lower-of-cost-or-market inventory value for product 66?
a. $3,200.
b. $3,100.
c. $3,250.
d. $3,100.

79. Robust Inc. has the following information related to an item in its ending inventory. Packit (Product # 874) has a cost of $524, a replacement cost of $402, a net realizable value of $468, and a normal profit margin of $21. What is the final lower-of-cost-or-market inventory value for Packit?
a. $447.
b. $524.
c. $402.
d. $468.

80. Robust Inc. has the following information related to an item in its ending inventory. Acer Top has a cost of $251, a replacement cost of $234, a net realizable value of $266, and a normal profit margin of $34. What is the final lower-of-cost-or-market inventory value for Acer Top?
a. $232.
b. $251.
c. $234.
d. $266.

81. Mortenson Corporation sells its product, a rare metal, in a controlled market with a quoted price applicable to all quantities. The total cost of 5,000 pounds of the metal now held in inventory is $150,000. The total selling price is $360,000, and estimated costs of disposal are $10,000. At what amount should the inventory of 5,000 pounds be reported in the balance sheet?
a. $140,000.
b. $150,000.
c. $350,000.
d. $360,000.

82. Rodriguez Corporation sells its product, a rare metal, in a controlled market with a quoted price applicable to all quantities. The total cost of 5,000 pounds of the metal now held in inventory is $210,000. The total selling price is $490,000, and estimated costs of disposal are $5,000. At what amount should the inventory of 5,000 pounds be reported in the balance sheet?
a. $205,000.
b. $210,000.
c. $485,000.
d. $490,000.

83. Turner Corporation acquired two inventory items at a lump-sum cost of $80,000. The acquisition included 3,000 units of product LF, and 7,000 units of product 1B. LF normally sells for $24 per unit, and 1B for $8 per unit. If Turner sells 1,000 units of LF, what amount of gross profit should it recognize?
a. $3,000
b. $9,000.
c. $16,000.
d. $19,000.

84. Robertson Corporation acquired two inventory items at a lump-sum cost of $60,000. The acquisition included 3,000 units of product CF, and 7,000 units of product 3B. CF normally sells for $18 per unit, and 3B for $6 per unit. If Robertson sells 1,000 units of CF, what amount of gross profit should it recognize?
a. $2,250.
b. $6,750.
c. $12,000.
d. $14,250.

85. At a lump-sum cost of $72,000, Pratt Company recently purchased the following items for resale:
Item No. of Items Purchased Resale Price Per Unit
M 4,000 $3.75
N 2,000 12.00
O 6,000 6.00
The appropriate cost per unit of inventory is:
M N O
a. $3.75 $12.00 $6.00
b. $3.11 $19.86 $3.32
c. $3.60 $11.52 $5.76
d. $6.00 $6.00 $6.00

86. Confectioners, a chain of candy stores, purchases its candy in bulk from its suppliers. For a recent shipment, the company paid $1,800 and received 8,500 pieces of candy that are allocated among three groups. Group 1 consists of 2,500 pieces that are expected to sell for $0.15 each. Group 2 consists of 5,500 pieces that are expected to sell for $0.36 each. Group 3 consists of 500 pieces that are expected to sell for $0.72 each. Using the relative sales value method, what is the cost per item in Group 1?
a. $0.150.
b. $0.100.
c. $0.120.
d. $0.225.

87. Confectioners, a chain of candy stores, purchases its candy in bulk from its suppliers. For a recent shipment, the company paid $1,800 and received 8,500 pieces of candy that are allocated among three groups. Group 1 consists of 2,500 pieces that are expected to sell for $0.15 each. Group 2 consists of 5,500 pieces that are expected to sell for $0.36 each. Group 3 consists of 500 pieces that are expected to sell for $0.72 each. Using the relative sales value method, what is the cost per item in Group 2?
a. $0.225.
b. $0.360.
c. $0.210.
d. $0.239.

88. Confectioners, a chain of candy stores, purchases its candy in bulk from its suppliers. For a recent shipment, the company paid $1,800 and received 8,500 pieces of candy that are allocated among three groups. Group 1 consists of 2,500 pieces that are expected to sell for $0.15 each. Group 2 consists of 5,500 pieces that are expected to sell for $0.36 each. Group 3 consists of 500 pieces that are expected to sell for $0.72 each. Using the relative sales value method, what is the cost per item in Group 3?
a. $0.477.
b. $0.225.
c. $0.720.
d. $0.540.

89. During the current fiscal year, Jeremiah Corp. signed a long-term noncancellable purchase commitment with its primary supplier. Jeremiah agreed to purchase $2.5 million of raw materials during the next fiscal year under this contract. At the end of the current fiscal year, the raw material to be purchased under this contract had a market value of $2.3 million. What is the journal entry at the end of the current fiscal year?
a. Debit Unrealized Holding Gain or Loss for $200,000 and credit Estimated Liability on Purchase Commitment for $200,000.
b. Debit Estimated liability on Purchase Commitments for $200,000 and credit Unrealized Holding Gain or Loss for $200,000.
c. Debit Unrealized Holding Gain or Loss for $2,300,000 and credit Estimated Liability on Purchase Commitments for $2,300,000.
d. No journal entry is required.

90. During the prior fiscal year, Jeremiah Corp. signed a long-term noncancellable purchase commitment with its primary supplier to purchase $2.5 million of raw materials. Jeremiah paid the $2.5 million to acquire the raw materials when the raw materials were only worth $2.3 million. Assume that the purchase commitment was properly recorded. What is the journal entry to record the purchase?
a. Debit Inventory for $2,300,000, and credit Cash for $2,300,000.
b. Debit Inventory for $2,300,000, debit Unrealized Holding Gain or Loss for $200,000, and credit Cash for $2,500,000.
c. Debit Inventory for $2,300,000, debit Estimated Liability on Purchase Commitments for $200,000 and credit Cash for $2,500,000.
d. Debit Inventory for $2,500,000, and credit Cash for $2,500,000.

91. During 2012, Larue Co., a manufacturer of chocolate candies, contracted to purchase 200,000 pounds of cocoa beans at $4.00 per pound, delivery to be made in the spring of 2013. Because a record harvest is predicted for 2013, the price per pound for cocoa beans had fallen to $3.30 by December 31, 2012.
Of the following journal entries, the one which would properly reflect in 2012 the effect of the commitment of Larue Co. to purchase the 100,000 pounds of cocoa is
a. Cocoa Inventory 400,000
Accounts Payable 400,000
b. Cocoa Inventory 330,000
Loss on Purchase Commitments 70,000
Accounts Payable 400,000
c. Unrealized Holding Gain or Loss-Income 70,000
Estimated Liability on Purchase Commitments 70,000
d. No entry would be necessary in 2012

92. RS Corporation, a manufacturer of ethnic foods, contracted in 2012 to purchase 500 pounds of a spice mixture at $5.00 per pound, delivery to be made in spring of 2013. By 12/31/12, the price per pound of the spice mixture had risen to $5.40 per pound. In 2012, AJ should recognize
a. a loss of $2,500.
b. a loss of $200.
c. no gain or loss.
d. a gain of $200.

93. LF Corporation, a manufacturer of Mexican foods, contracted in 2012 to purchase 1,000 pounds of a spice mixture at $5.00 per pound, delivery to be made in spring of 2013. By 12/31/12, the price per pound of the spice mixture had dropped to $4.70 per pound. In 2012, LF should recognize
a a loss of $5,000.
b. a loss of $300.
c. no gain or loss.
d. a gain of $300.

94. The following information is available for October for Barton Company.
Beginning inventory $150,000
Net purchases 450,000
Net sales 900,000
Percentage markup on cost 66.67%
A fire destroyed Barton’s October 31 inventory, leaving undamaged inventory with a cost of $9,000. Using the gross profit method, the estimated ending inventory destroyed by fire is
a. $51,000.
b. $231,000.
c. $240,000.
d. $300,000.

95. The following information is available for October for Norton Company.
Beginning inventory $200,000
Net purchases 600,000
Net sales 1,200,000
Percentage markup on cost 66.67%
A fire destroyed Norton’s October 31 inventory, leaving undamaged inventory with a cost of $12,000. Using the gross profit method, the estimated ending inventory destroyed by fire is
a. $68,000.
b. $308,000.
c. $320,000.
d. $400,000.

Use the following information for questions 96 and 97.
Miles Company, a wholesaler, budgeted the following sales for the indicated months:
June July August
Sales on account $2,700,000 $2,760,000 $2,850,000
Cash sales 270,000 300,000 390,000
Total sales $2,970,000 $3,060,000 $3,240,000

All merchandise is marked up to sell at its invoice cost plus 20%. Merchandise inventories at the beginning of each month are at 30% of that month’s projected cost of goods sold.

96. The cost of goods sold for the month of June is anticipated to be
a. $2,160,000.
b. $2,250,000.
c. $2,280,000.
d. $2,475,000.

97. Merchandise purchases for July are anticipated to be
a. $2,448,000.
b. $3,114,000.
c. $2,550,000.
d. $2,595,000.

98. Reyes Company had a gross profit of $480,000, total purchases of $560,000, and an ending inventory of $320,000 in its first year of operations as a retailer. Reyes’s sales in its first year must have been
a. $720,000.
b. $880,000.
c. $240,000.
d. $800,000.

99. A markup of 30% on cost is equivalent to what markup on selling price?
a. 23%
b. 30%
c. 70%
d. 77%

100. Kesler, Inc. estimates the cost of its physical inventory at March 31 for use in an interim financial statement. The rate of markup on cost is 25%. The following account balances are available:
Inventory, March 1 $385,000
Purchases 301,000
Purchase returns 14,000
Sales during March 525,000
The estimate of the cost of inventory at March 31 would be
a. $147,000.
b. $252,000.
c. $278,250.
d. $196,000.

101. On January 1, 2012, the merchandise inventory of Glaus, Inc. was $1,000,000. During 2012 Glaus purchased $2,000,000 of merchandise and recorded sales of $2,500,000. The gross profit rate on these sales was 25%. What is the merchandise inventory of Glaus at December 31, 2012?
a. $500,000.
b. $625,000.
c. $1,125,000.
d. $1,875,000.

102. For 2012, cost of goods available for sale for Tate Corporation was $1,800,000. The gross profit rate was 20%. Sales for the year were $1,600,000. What was the amount of the ending inventory?
a. $0.
b. $520,000.
c. $360,000.
d. $320,000.

103. On April 15 of the current year, a fire destroyed the entire uninsured inventory of a retail store. The following data are available:
Sales, January 1 through April 15 $360,000
Inventory, January 1 60,000
Purchases, January 1 through April 15 300,000
Markup on cost 25%
The amount of the inventory loss is estimated to be
a. $72,000.
b. $36,000.
c. $90,000.
d. $60,000.

104. The inventory account of Irick Company at December 31, 2012, included the following items:
Inventory Amount
Merchandise out on consignment at sales price
(including markup of 40% on selling price) $30,000
Goods purchased, in transit (shipped f.o.b. shipping point) 24,000
Goods held on consignment by Irick 26,000
Goods out on approval (sales price $15,200, cost $12,800) 15,200
Based on the above information, the inventory account at December 31, 2012, should be reduced by
a. $40,400.
b. $45,200.
c. $64,400.
d. $64,000.

105. The sales price for a product provides a gross profit of 20% of sales price. What is the gross profit as a percentage of cost?
a. 20%.
b. 17%.
c. 25%.
d. Not enough information is provided to determine.

106. Gamma Ray Corp. has annual sales totaling $975,000 and an average gross profit of 20% of cost. What is the dollar amount of the gross profit?
a. $195,000.
b. $146,250.
c. $162,500.
d. $243,750.

107. On August 31, a hurricane destroyed a retail location of Vinny’s Clothier including the entire inventory on hand at the location. The inventory on hand as of June 30 totaled $640,000. Since June 30 until the time of the hurricane, the company made purchases of $170,000 and had sales of $500,000. Assuming the rate of gross profit to selling price is 40%, what is the approximate value of the inventory that was destroyed?
a. $640,000.
b. $363,000.
c. $410,000.
d. $510,000.

108. On October 31, a fire destroyed PH Inc.’s entire retail inventory. The inventory on hand as of January 1 totaled $1,360,000. From January 1 through the time of the fire, the company made purchases of $330,000 and had sales of $720,000. Assuming the rate of gross profit to selling price is 40%, what is the approximate value of the inventory that was destroyed?
a. $1,360,000.
b. $1,346,000.
c. $970,000.
d. $1,258,000.

109. On March 15, a fire destroyed Interlock Company’s entire retail inventory. The inventory on hand as of January 1 totaled $3,300,000. From January 1 through the time of the fire, the company made purchases of $1,366,000, incurred freight-in of $156,000, and had sales of $2,420,000. Assuming the rate of gross profit to selling price is 30%, what is the approximate value of the inventory that was destroyed?
a. $4,096,000.
b. $2,972,000.
c. $3,128,000.
d. $4,822,000.

110. Dicer uses the conventional retail method to determine its ending inventory at cost. Assume the beginning inventory at cost (retail) were $260,000 ($396,000), purchases during the current year at cost (retail) were $1,370,000 ($2,200,000), freight-in on these purchases totaled $86,000, sales during the current year totaled $2,100,000, and net markups (markdowns) were $48,000 ($72,000). What is the ending inventory value at cost?
a. $306,328.
b. $312,330.
c. $314,824.
d. $472,000.

111. Boxer Inc. uses the conventional retail method to determine its ending inventory at cost. Assume the beginning inventory at cost (retail) were $196,500 ($297,000), purchases during the current year at cost (retail) were $1,704,000 ($2,596,800), freight-in on these purchases totaled $79,500, sales during the current year totaled $2,433,000, and net markups were $207,000. What is the ending inventory value at cost?
a. $667,800.
b. $523,098.
c. $426,723.
d. $456,924.

112. Barker Pet supply uses the conventional retail method to determine its ending inventory at cost. Assume the beginning inventory at cost (retail) were $531,200 ($653,800), purchases during the current year at cost (retail) were $2,137,200 ($2,772,200), freight-in on these purchases totaled $127,800, sales during the current year totaled $2,604,000, and net markups (markdowns) were $4,000 ($192,600). What is the ending inventory value at cost?
a. $633,400.
b. $516,222.
c. $822,000.
d. $493,334.

113. Crane Sales Company uses the retail inventory method to value its merchandise inventory. The following information is available for the current year:
Cost Retail
Beginning inventory $ 30,000 $ 50,000
Purchases 175,000 240,000
Freight-in 2,500 —
Net markups — 8,500
Net markdowns — 10,000
Employee discounts — 1,000
Sales — 205,000
If the ending inventory is to be valued at the lower-of-cost-or-market, what is the cost to retail ratio?
a. $207,500 ÷ $290,000
b. $207,500 ÷ $298,500
c. $205,000 ÷ $300,000
d. $207,500 ÷ $288,500

Use the following information for questions 114 through 118.

The following data concerning the retail inventory method are taken from the financial records of Welch Company.
Cost Retail
Beginning inventory $ 98,000 $ 140,000
Purchases 448,000 640,000
Freight-in 12,000 —
Net markups — 40,000
Net markdowns — 28,000
Sales — 672,000

114. The ending inventory at retail should be
a. $148,000.
b. $120,000.
c. $128,000.
d. $84,000.

115. If the ending inventory is to be valued at approximately the lower of cost or market, the calculation of the cost to retail ratio should be based on goods available for sale at (1) cost and (2) retail, respectively of
a. $558,000 and $820,000.
b. $558,000 and $792,000.
c. $558,000 and $780,000.
d. $546,000 and $780,000.

116. If the foregoing figures are verified and a count of the ending inventory reveals that merchandise actually on hand amounts to $108,000 at retail, the business has
a. realized a windfall gain.
b. sustained a loss.
c. no gain or loss as there is close coincidence of the inventories.
d. none of these.

*117. Assuming no change in the price level if the LIFO inventory method were used in conjunction with the data, the ending inventory at cost would be
a. $85,200.
b. $84,000.
c. $81,600.
d. $86,400.

*118. Assuming that the LIFO inventory method were used in conjunction with the data and that the inventory at retail had increased during the period, then the computation of retail in the cost to retail ratio would
a. exclude both markups and markdowns and include beginning inventory.
b. include markups and exclude both markdowns and beginning inventory.
c. include both markups and markdowns and exclude beginning inventory.
d. exclude markups and include both markdowns and beginning inventory.

119. Drake Corporation had the following amounts, all at retail:
Beginning inventory $ 3,600 Purchases $140,000
Purchase returns 6,000 Net markups 18,000
Abnormal shortage 4,000 Net markdowns 2,800
Sales 72,000 Sales returns 1,800
Employee discounts 1,600 Normal shortage 2,600
What is Drake’s ending inventory at retail?
a. $74,400.
b. $76,000.
c. $77,600.
d. $78,400

120. Goren Corporation had the following amounts, all at retail:
Beginning inventory $ 3,600 Purchases $110,000
Purchase returns 6,000 Net markups 18,000
Abnormal shortage 4,000 Net markdowns 2,800
Sales 72,000 Sales returns 1,800
Employee discounts 1,600 Normal shortage 2,600
What is Goren’s ending inventory at retail?
a. $44,400.
b. $46,000.
c. $47,600.
d. $48,400

121. Fry Corporation’s computation of cost of goods sold is:
Beginning inventory $ 60,000
Add: Cost of goods purchased 530,000
Cost of goods available for sale 590,000
Ending inventory 90,000
Cost of goods sold $500,000
The average days to sell inventory for Fry are
a. 43.5 days.
b. 50.3 days.
c. 54.5 days.
d. 65.2 days.

122. East Corporation’s computation of cost of goods sold is:
Beginning inventory $ 60,000
Add: Cost of goods purchased 482,000
Cost of goods available for sale 542,000
Ending inventory 80,000
Cost of goods sold $462,000
The average days to sell inventory for East are
a. 68.3 days.
b. 75.7 days.
c. 55.3 days.
d. 90.9 days.

123. The 2012 financial statements of Sito Company reported a beginning inventory of $80,000, an ending inventory of $120,000, and cost of goods sold of $800,000 for the year. Sito’s inventory turnover ratio for 2012 is
a. 10.0 times.
b. 8.0 times.
c. 6.7 times.
d. 5.7 times.

124. Boxer Inc. reported inventory at the beginning of the current year of $360,000 and at the end of the current year of $411,000. If net sales for the current year are $3,321,900 and the corresponding cost of sales totaled $2,819,100, what is the inventory turnover ratio for the current year?
a. 8.61.
b. 6.86.
c. 7.83.
d. 7.31.

Use the following information for questions 125 through 129.

Plank Co. uses the retail inventory method. The following information is available for the current year.
Cost Retail
Beginning inventory $ 156,000 $244,000
Purchases 590,000 830,000
Freight-in 10,000 —
Employee discounts — 4,000
Net markups — 30,000
Net Markdowns — 40,000
Sales — 780,000

125. If the ending inventory is to be valued at approximately lower of average cost or market, the calculation of the cost ratio should be based on cost and retail of
a. $600,000 and $860,000.
b. $600,000 and $856,000.
c. $746,000 and $1,100,000.
d. $756,000 and $1,104,000.

126. The ending inventory at retail should be
a. $320,000.
b. $300,000.
c. $288,000.
d. $280,000.

127. The approximate cost of the ending inventory by the conventional retail method is
a. $191,800.
b. $189,840.
c. $196,000.
d. $204,960.

*128. If the ending inventory is to be valued at approximately LIFO cost, the calculation of the cost ratio should be based on cost and retail of
a. $756,000 and $1,104,000.
b. $756,000 and $1,064,000.
c. $600,000 and $820,000.
d. $600,000 and $860,000.

*129. Assuming that the LIFO inventory method is used, that the beginning inventory is the base inventory when the index was 100, and that the index at year end is 112, the ending inventory at dollar-value LIFO retail cost is
a. $160,920.
b. $185,514.
c. $191,800.
d. $204,960.

Use the following information for questions 130 and 131.

Eaton Company, which uses the retail LIFO method to determine inventory cost, has provided the following information for 2012:
Cost Retail
Inventory, 1/1/12 $ 141,000 $210,000
Net purchases 567,000 843,000
Net markups 102,000
Net markdowns 45,000
Net sales 795,000

*130. Assuming stable prices (no change in the price index during 2012), what is the cost of Eaton’s inventory at December 31, 2012?
a. $192,150.
b. $207,150.
c. $204,000.
d. $198,450.

*131. Assuming that the price index was 105 at December 31, 2012 and 100 at January 1, 2012, what is the cost of Eaton’s inventory at December 31, 2012 under the dollar-value-LIFO retail method?
a. $200,535.
b. $208,372.
c. $210,458.
d. $197,700.

Multiple Choice Answers—Computational

MULTIPLE CHOICE—CPA Adapted

132. Ryan Distribution Co. has determined its December 31, 2012 inventory on a FIFO basis at $500,000. Information pertaining to that inventory follows:
Estimated selling price $510,000
Estimated cost of disposal 20,000
Normal profit margin 60,000
Current replacement cost 450,000
Ryan records losses that result from applying the lower-of-cost-or-market rule. At December 31, 2012, the loss that Ryan should recognize is
a. $0.
b. $10,000.
c. $40,000.
d. $50,000.

133. Under the lower-of-cost-or-market method, the replacement cost of an inventory item would be used as the designated market value
a. when it is below the net realizable value less the normal profit margin.
b. when it is below the net realizable value and above the net realizable value less the normal profit margin.
c. when it is above the net realizable value.
d. regardless of net realizable value.

134. The original cost of an inventory item is above the replacement cost and the net realizable value. The replacement cost is below the net realizable value less the normal profit margin. As a result, under the lower-of-cost-or-market method, the inventory item should be reported at the
a. net realizable value.
b. net realizable value less the normal profit margin.
c. replacement cost.
d. original cost.

135. Keen Company’s accounting records indicated the following information:
Inventory, 1/1/12 $ 900,000
Purchases during 2012 4,500,000
Sales during 2012 5,700,000
A physical inventory taken on December 31, 2012, resulted in an ending inventory of $1,050,000. Keen’s gross profit on sales has remained constant at 25% in recent years. Keen suspects some inventory may have been taken by a new employee. At December 31, 2012, what is the estimated cost of missing inventory?
a. $75,000.
b. $225,000.
c. $300,000.
d. $375,000.

136. Henke Co. uses the retail inventory method to estimate its inventory for interim statement purposes. Data relating to the computation of the inventory at July 31, 2012, are as follows:
Cost Retail
Inventory, 2/1/12 $ 200,000 $ 250,000
Purchases 1,000,000 1,575,000
Markups, net 175,000
Sales 1,650,000
Estimated normal shoplifting losses 20,000
Markdowns, net 110,000
Under the lower-of-cost-or-market method, Henke’s estimated inventory at July 31, 2012 is
a. $132,000.
b. $144,000.
c. $156,000.
d. $220,000.

137. At December 31, 2012, the following information was available from Kohl Co.’s accounting records:
Cost Retail
Inventory, 1/1/12 $147,000 $ 203,000
Purchases 833,000 1,155,000
Additional markups 42,000
Available for sale $980,000 $1,400,000
Sales for the year totaled $1,150,000. Markdowns amounted to $10,000. Under the lower-of-cost-or-market method, Kohl’s inventory at December 31, 2012 was
a. $294,000.
b. $175,000.
c. $182,000.
d. $168,000.

*138. On December 31, 2012, Pacer Co. adopted the dollar-value LIFO retail inventory method. Inventory data for 2013 are as follows:
LIFO Cost Retail
Inventory, 12/31/12 $450,000 $630,000
Inventory, 12/31/13 ? 825,000
Increase in price level for 2013 10%
Cost to retail ratio for 2013 70%
Under the LIFO retail method, Pacer’s inventory at December 31, 2013, should be
a. $542,400.
b. $577,500.
c. $586,500.
d $600,150.

Multiple Choice Answers—CPA Adapted

IFRS QUESTIONS

True / False
1. IFRS permits an entity to reverse inventory write-downs in certain situations, whereas U.S. GAAP does not.

2. IFRS defines market as replacement cost subject to certain constraints.

3. IFRS uses a ceiling to determine market.

4. Similar to U.S. GAAP, certain agricultural products and mineral products can be reported at net realizable value using IFRS.

5. IFRS records market in the lower-of-cost-or-market differently than U.S. GAAP.

Answers to True/False

Multiple Choice Questions

1. Where is the authoritative IFRS guidance related to accounting and reporting for inventories found?
a. IAS 2
b. IAS 18
c. IAS 41
d. All of these standards deal with inventory.

2. All of the following are key similarities between U.S. GAAP and IFRS with respect to accounting for inventories except
a. guidelines on ownership of goods are similar.
b. costs to include in inventories are similar.
c. LIFO cost flow assumption where appropriate is used by both sets of standards.
d. fair value valuation of inventories is prohibited by both sets of standards.

3. All of the following are key differences between U.S. GAAP and IFRS with respect to accounting for inventories except the
a. definition of the lower-of-cost-or-market test for inventory valuation differs between U.S. GAAP and IFRS.
b. inventory basis determination for writedowns differs between U.S. GAAP and IFRS.
c. guidelines are more principles based under IFRS than they are under U.S. GAAP.
d. average costing method is prohibited under IFRS.

4. Alonzo Company in Italy prepares its financial statements in accordance with IFRS. In 2012, it reported cost of goods sold of €600 million and average inventory of €150 million. What is Alonzo’s inventory turnover ratio?
a. 4 days
b. 25 days
c. 91.25 days
d. 100 days

5. Starfish Company (a company using U.S. GAAP and LIFO inventory method) is considering changing to IFRS and the FIFO inventory method. How would a comparison of these methods affect Starfish’s financials?
a. During a period of inflation, the current ratio would decrease when IFRS and the FIFO inventory method are used as compared to U.S. GAAP and LIFO.
b. During a period of inflation, the taxes will decrease when IFRS and the FIFO inventory method are used as compared to U.S. GAAP and LIFO.
c. During a period of inflation, net income would be greater if IFRS and the FIFO inventory method are used as compared to U.S.GAAP and LIFO.
d. During a period of inflation, working capital would decrease when IFRS and the FIFO inventory method are used as compared to U.S. GAAP and LIFO.

6. Which of the following statements is true regarding IFRS and inventories?
a. In order to determine market valuation of inventories, IFRS uses a ceiling and a floor.
b. IFRS permits the option of valuing inventories at fair value.
c. With respect to inventories, IFRS defines market as net realizable value.
d. IFRS allows inventory to be written up above its original cost.

7. State Company manufactured a forklift machine at a cost of $60,000. The product is sold for $66,000 at a 5% discount. The delivery costs are estimated to be $6,000. Under IFRS, how much should be the carrying amount of this inventory?
a. $60,000
b. $66,000
c. $54,000
d. $56,700

8. The following information relates to Moore Company’s inventory:
Cost of inventory = $860
Selling price of inventory = $1,000
Normal profit margin = 10% of selling price
Current replacement cost = $740
Cost of completion and disposal = $100
Under IFRS, which of the following would be the correct measurement value for the inventory?
a. $860
b. $740
c. $1,000
d. $900

9. Assume that Darcy Industries had the following inventory values:
Inventory cost (on December 31, 2011) = $1,500
Inventory market (on December 31, 2011) = $1,350
Inventory net realizable value (on December 31, 2011) = $1,320
Inventory market (on June 30, 2012) = $1,560
Inventory net realizable value (on June 30, 2012) = $1,570
Under IFRS, what is the inventory carrying value on December 31, 2011?
a. $1,500
b. $1,350
c. $1,320
d. $1,390

10. Assume that Darcy Industries had the following inventory values:
Inventory cost (on December 31, 2011) = $1,500
Inventory market (on December 31, 2011) = $1,350
Inventory net realizable value (on December 31, 2011) = $1,320
Inventory market (on June 30, 2012) = $1,560
Inventory net realizable value (on June 30, 2012) = $1,570
Under IFRS, what is the inventory carrying value on June 30, 2012?
a. $1,500
b. $1,560
c. $1,570
d. $1,320

Answers to Multiple Choice

Short Answer

1. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with respect to the accounting for inventories.

2. Explain the main obstacle to achieving convergence in the area of inventory accounting.

CHAPTER 10

ACQUISITION AND DISPOSITION OF PROPERTY, PLANT, AND EQUIPMENT

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

1. Assets classified as Property, Plant, and Equipment can be either acquired for use in operations, or acquired for resale.

2. Assets classified as Property, Plant, and Equipment must be both long-term in nature and possess physical substance.

3. When land with an old building is purchased as a future building site, the cost of removing the old building is part of the cost of the new building.

4. Insurance on equipment purchased, while the equipment is in transit, is part of the cost of the equipment.

5. Special assessments for local improvements such as street lights and sewers should be accounted for as land improvements.

6. Variable overhead costs incurred to self-construct an asset should be included in the cost of the asset.

7. Companies should assign no portion of fixed overhead to self-constructed assets.

8. When capitalizing interest during construction of an asset, an imputed interest cost on stock financing must be included.

9. Assets under construction for a company’s own use do not qualify for interest cost capitalization.

10. Avoidable interest is the amount of interest cost that a company could theoretically avoid if it had not made expenditures for the asset.

11. When a company purchases land with the intention of developing it for a particular use, interest costs associated with those expenditures qualify for interest capitalization.

12. Assets purchased on long-term credit contracts should be recorded at the present value of the consideration exchanged.

13. Companies account for the exchange of nonmonetary assets on the basis of the fair value of the asset given up or the fair value of the asset received.

14. If a nonmonetary exchange lacks commercial substance, and cash is received, a partial gain or loss is recognized.

15. When a company exchanges nonmonetary assets and a loss results, the company recognizes the loss only if the exchange has commercial substance.

16. Costs incurred subsequent to the acquisition of an asset are capitalized if they provide future benefits.

17. Improvements are often referred to as betterments and involve the substitution of a better asset for the one currently used.
18. When an ordinary repair occurs, several periods will usually benefit.

19. Companies always treat gains or losses from an involuntary conversion as extraordinary items.

20. If a company scraps an asset without any cash recovery, it recognizes a loss equal to the asset’s book value.

True False Answers—Conceptual

MULTIPLE CHOICE—Conceptual

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

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

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

24. Cotton Hotel Corporation recently purchased Emporia Hotel and the land on which it is located with the plan to tear down the Emporia Hotel and build a new luxury hotel on the site. The cost of the Emporia Hotel should be
a. depreciated over the period from acquisition to the date the hotel is scheduled to be torn down.
b. written off as an extraordinary loss in the year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new hotel.

25. The cost of land does not include
a. costs of grading, filling, draining, and clearing.
b. costs of removing old buildings.
c. costs of improvements with limited lives.
d. special assessments.

26. The cost of land typically includes the purchase price and all of the following costs except
a. grading, filling, draining, and clearing costs.
b. street lights, sewers, and drainage systems cost.
c. private driveways and parking lots.
d. assumption of any liens or mortgages on the property.

27. If a corporation purchases a lot and building and subsequently tears down the building and uses the property as a parking lot, the proper accounting treatment of the cost of the building would depend on
a. the significance of the cost allocated to the building in relation to the combined cost of the lot and building.
b. the length of time for which the building was held prior to its demolition.
c. the contemplated future use of the parking lot.
d. the intention of management for the property when the building was acquired.

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

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

S30. Historical cost is the basis advocated for recording the acquisition of property, plant, and equipment for all of the following reasons except
a. at the date of acquisition, cost reflects fair market value.
b. property, plant, and equipment items are always acquired at their original historical cost.
c. historical cost involves actual trans¬actions and, as such, is the most reliable basis.
d. gains and losses should not be anticipated but should be recognized when the asset is sold.

S31. To be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing its own building should be
a. allocated on the basis of lost production.
b. eliminated completely from the cost of the asset.
c. allocated on an opportunity cost basis.
d. allocated on a pro rata basis between the asset and normal operations.

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

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

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

35. When computing the amount of interest cost to be capitalized, the concept of “avoidable interest” refers to
a. the total interest cost actually incurred.
b. a cost of capital charge for stockholders’ equity.
c. that portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made.
d. that portion of average accumulated expenditures on which no interest cost was incurred.

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

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

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

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

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

S41. Which of the following is not a condition that must be satisfied before interest capitalization can begin on a qualifying asset?
a. Interest cost is being incurred.
b. Expenditures for the assets have been made.
c. The interest rate is equal to or greater than the company’s cost of capital.
d. Activities that are necessary to get the asset ready for its intended use are in progress.

S42. Which of the following is the recommended approach to handling interest incurred in financing the construction of property, plant and equipment?
a. Capitalize only the actual interest costs incurred during construction.
b. Charge construction with all costs of funds employed, whether identifiable or not.
c. Capitalize no interest during construction.
d. Capitalize interest costs equal to the prime interest rate times the estimated cost of the asset being constructed.

S43. Which of the following nonmonetary exchange transactions represents a culmination of the earning process?
a. Exchange of assets with no difference in future cash flows.
b. Exchange of products by companies in the same line of business with no difference in future cash flows.
c. Exchange of assets with a difference in future cash flows.
d. Exchange of an equivalent interest in similar productive assets that causes the companies involved to remain in essentially the same economic position.

S44. When boot is involved in an exchange having commercial substance.
a. gains or losses are recognized in their entirely.
b. a gain or loss is computed by comparing the fair value of the asset received with the fair value of the asset given up.
c. only gains should be recognized.
d. only losses should be recognized.

S45. The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset and the exchange has commercial substance is usually recorded at
a. the fair value of the asset given up, and a gain or loss is recognized.
b. the fair value of the asset given up, and a gain but not a loss may be recognized.
c. the fair value of the asset received if it is equally reliable as the fair value of the asset given up.
d. either the fair value of the asset given up or the asset received, whichever one results in the largest gain (smallest loss) to the company.

P46. Ringler Corporation exchanges one plant asset for a similar plant asset and gives cash in the exchange. The exchange is not expected to cause a material change in the future cash flows for either entity. If a gain on the disposal of the old asset is indicated, the gain will
a. be reported in the Other Revenues and Gains section of the income statement.
b. effectively reduce the amount to be recorded as the cost of the new asset.
c. effectively increase the amount to be recorded as the cost of the new asset.
d. be credited directly to the owner’s capital account.

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

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

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

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

51. For a nonmonetary exchange of plant assets, accounting recognition should not be given to
a. a loss when the exchange has no commercial substance.
b. a gain when the exchange has commercial substance.
c. part of a gain when the exchange has no commercial substance and cash is paid (cash paid/received is less than 25% of the fair value of the exchange).
d. part of a gain when the exchange has no commercial substance and cash is received (cash paid or received is less than 25% of the fair value of the exchange).

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

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

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

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

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

57. Which of the following is not a capital expenditure?
a. Repairs that maintain an asset in operating condition
b. An addition
c. A betterment
d. A replacement

P58. In accounting for plant assets, which of the following outlays made subsequent to acquisition should be fully expensed in the period the expenditure is made?
a. Expenditure made to increase the efficiency or effectiveness of an existing asset
b. Expenditure made to extend the useful life of an existing asset beyond the time frame originally anticipated
c. Expenditure made to maintain an existing asset so that it can function in the manner intended
d. Expenditure made to add new asset services

S59. An expenditure made in connection with a machine being used by an enterprise should be
a. expensed immediately if it merely extends the useful life but does not improve the quality.
b. expensed immediately if it merely improves the quality but does not extend the useful life.
c. capitalized if it maintains the machine in normal operating condition.
d. capitalized if it increases the quantity of units produced by the machine.

S60. When a plant asset is disposed of, a gain or loss may result. The gain or loss would be classified as an extraordinary item on the income statement if it resulted from
a. an involuntary conversion and the conditions of the disposition are unusual and infrequent in nature.
b. a sale prior to the completion of the estimated useful life of the asset.
c. the sale of a fully depreciated asset.
d. an abandonment of the asset.

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

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

Multiple Choice Answers—Conceptual
Solutions to those Multiple Choice questions for which the answer is “none of these.”
21. Long-lived tangible assets used in the enterprise’s operations.
40. Capitalized interest is depreciated over the related asset’s useful life.
56. Capital expenditures include additions, betterments, improvements, and extraordinary repairs.

MULTIPLE CHOICE—Computational

Use the following information for questions 63 and 64.

Wilson Co. purchased land as a factory site for $800,000. Wilson paid $80,000 to tear down two buildings on the land. Salvage was sold for $5,400. Legal fees of $3,480 were paid for title investigation and making the purchase. Architect’s fees were $31,200. Title insurance cost $2,400, and liability insurance during construction cost $2,600. Excavation cost $10,440. The contractor was paid $2,500,000. An assessment made by the city for pavement was $6,400. Interest costs during construction were $170,000.

63. The cost of the land that should be recorded by Wilson Co. is
a. $880,480.
b. $886,880.
c. $889,880.
d. $896,280.

64. The cost of the building that should be recorded by Wilson Co. is
a. $2,503,800.
b. $2,504,840.
c. $2,513,200.
d. $2,514,240.

65. On February 1, 2012, Nelson Corporation purchased a parcel of land as a factory site for $250,000. An old building on the property was demolished, and construction began on a new building which was completed on November 1, 2012. Costs incurred during this period are listed below:
Demolition of old building $ 20,000
Architect’s fees 35,000
Legal fees for title investigation and purchase contract 5,000
Construction costs 1,290,000
(Salvaged materials resulting from demolition were sold for $10,000.)
Nelson should record the cost of the land and new building, respectively, as
a. $275,000 and $1,315,000.
b. $260,000 and $1,330,000.
c. $260,000 and $1,325,000.
d. $265,000 and $1,325,000.

66. Worthington Chandler Company purchased equipment for $12,000. Sales tax on the purchase was $800. Other costs incurred were freight charges of $200, repairs of $350 for damage during installation, and installation costs of $225. What is the cost of the equipment?
a. $12,000
b. $12,800
c. $13,225
d. $13,575

67. Fogelberg Company purchased equipment for $15,000. Sales tax on the purchase was $900. Other costs incurred were freight charges of $240, repairs of $420 for damage during installation, and installation costs of $270. What is the cost of the equipment?
a. $15,000.
b. $15,900.
c. $16,410.
d. $16,830.

68. During self-construction of an asset by Samuelson Company, the following were among the costs incurred:
Fixed overhead for the year $1,000,000
Portion of $1,000,000 fixed overhead that would
be allocated to asset if it were normal production 50,000
Variable overhead attributable to self-construction 35,000
What amount of overhead should be included in the cost of the self-constructed asset?
a. $ -0-
b. $35,000
c. $50,000
d. $85,000

69. During self-construction of an asset by Richardson Company, the following were among the costs incurred:
Fixed overhead for the year $1,000,000
Portion of $1,000,000 fixed overhead that would
be allocated to asset if it were normal production 60,000
Variable overhead attributable to self-construction 75,000
What amount of overhead should be included in the cost of the self-constructed asset?
a. $ -0-
b. $ 60,000
c. $ 75,000
d. $135,000

70. Mendenhall Corporation constructed a building at a cost of $10,000,000. Average accumulated expenditures were $4,000,000, actual interest was $600,000, and avoidable interest was $400,000. If the salvage value is $800,000, and the useful life is 40 years, depreciation expense for the first full year using the straight-line method is
a. $240,000.
b. $245,000.
c. $260,000.
d. $340,000.

71. Messersmith Company is constructing a building. Construction began in 2012 and the building was completed 12/31/12. Messersmith made payments to the construction company of $1,500,000 on 7/1, $3,150,000 on 9/1, and $3,000,000 on 12/31. Average accumulated expenditures were
a. $1,537,500.
b. $1,800,000.
c. $4,650,000.
d. $7,650,000.

72. Huffman Corporation constructed a building at a cost of $20,000,000. Average accumulated expenditures were $8,000,000, actual interest was $1,200,000, and avoidable interest was $800,000. If the salvage value is $1,600,000, and the useful life is 40 years, depreciation expense for the first full year using the straight-line method is
a. $480,000.
b. $490,000.
c. $520,000.
d. $680,000.

73. Gutierrez Company is constructing a building. Construction began in 2012 and the building was completed 12/31/12. Gutierrez made payments to the construction company of $2,000,000 on 7/1, $4,400,000 on 9/1, and $4,000,000 on 12/31. Average accumulated expenditures were
a. $2,100,000.
b. $2,466,667.
c. $6,400,000.
d. $10,400,000.

74. On May 1, 2012, Goodman Company began construction of a building. Expenditures of $240,000 were incurred monthly for 5 months beginning on May 1. The building was completed and ready for occupancy on September 1, 2012. For the purpose of determining the amount of interest cost to be capitalized, the average accumulated expenditures on the building during 2012 were
a. $200,000.
b. $240,000.
c. $960,000.
d. $1,200,000.

75. During 2012, Kimmel Co. incurred average accumulated expenditures of $600,000 during construction of assets that qualified for capitalization of interest. The only debt outstanding during 2012 was a $750,000, 10%, 5-year note payable dated January 1, 2010. What is the amount of interest that should be capitalized by Kimmel during 2012?
a. $0.
b. $15,000.
c. $60,000.
d. $75,000.

76. On March 1, Felt Co. began construction of a small building. Payments of $160,000 were made monthly for three months beginning March 1. The building was completed and ready for occupancy on June 1. In determining the amount of interest cost to be capitalized, the weighted-average accumulated expenditures are
a. $40,000.
b. $80,000.
c. $160,000.
d. $320,000.

77. On March 1, Imhoff Co. began construction of a small building. Payments of $240,000 were made monthly for four months beginning March 1. The building was completed and ready for occupancy on June 1. In determining the amount of interest cost to be capitalized, the weighted-average accumulated expenditures are
a. $120,000.
b. $240,000.
c. $480,000.
d. $960,000.

Use the following information for questions 78 through 80.

On March 1, 2012, Newton Company purchased land for an office site by paying $900,000 cash. Newton began construction on the office building on March 1. The following expenditures were incurred for construction:
Date Expenditures
March 1, 2012 $ 600,000
April 1, 2012 840,000
May 1, 2012 1,500,000
June 1, 2012 2,400,000

The office was completed and ready for occupancy on July 1. To help pay for construction, $1,200,000 was borrowed on March 1, 2012 on a 9%, 3-year note payable. Other than the construction note, the only debt outstanding during 2012 was a $500,000, 12%, 6-year note payable dated January 1, 2012.

78. The weighted-average accumulated expenditures on the construction project during 2012 were
a. $640,000.
b. $4,890,000.
c. $520,000.
d. $1,160,000.

79. The actual interest cost incurred during 2012 was
a. $150,000.
b. $168,000.
c. $84,000.
d. $140,000.

80. Assume the weighted-average accumulated expenditures for the construction project are $870,000. The amount of interest cost to be capitalized during 2012 is
a. $130,500.
b. $138,000.
c. $150,000.
d. $168,000.

81. During 2012, Bass Corporation constructed assets costing $2,000,000. The weighted-average accumulated expenditures on these assets during 2012 was $600,000. To help pay for construction, $880,000 was borrowed at 10% on January 1, 2012, and funds not needed for construction were temporarily invested in short-term securities, yielding $18,000 in interest revenue. Other than the construction funds borrowed, the only other debt outstanding during the year was a $1,000,000, 10-year, 9% note payable dated January 1, 2006. What is the amount of interest that should be capitalized by Bass during 2012?
a. $120,000.
b. $60,000.
c. $116,800.
d. $188,800.

Use the following information for questions 82 through 85.

On January 2, 2012, Indian River Groves began construction of a new citrus processing plant. The automated plant was finished and ready for use on September 30, 2013. Expenditures for the construction were as follows:

January 2, 2012 $300,000
September 1, 2012 900,000
December 31, 2012 900,000
March 31, 2013 900,000
September 30, 2013 600,000

Indian River Groves borrowed $1,650,000 on a construction loan at 12% interest on January 2, 2012. This loan was outstanding during the construction period. The company also had $6,000,000 in 9% bonds outstanding in 2012 and 2013.

82. What were the weighted-average accumulated expenditures for 2012?
a. $800,000
b. $750,000
c. $600,000
d. $1,500,000

83. The interest capitalized for 2012 was:
a. $270,000
b. $72,000
c. $228,000
d. $90,000

84. What were the weighted-average accumulated expenditures for 2013 by the end of the construction period?
a. $585,000
b. $2,452,500
c. $2,979,000
d. $2,079,000

85. The interest capitalized for 2013 was:
a. $187,110
b. $177,458
c. $ 38,610
d. $ 148,500

Use the following information to answer questions 86 – 90.

Arlington Company is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were $4,000,000 on March 1, $3,300,000 on June 1, and $5,000,000 on December 31. Arlington Company borrowed $2,000,000 on January 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 3-year, $4,000,000 note payable and an 11%, 4-year, $7,500,000 note payable.

86. What are the weighted-average accumulated expenditures?
a. $7,300,000
b. $5,258,333
c. $12,300,000
d. $6,150,000

87. What is the weighted-average interest rate used for interest capitalization purposes?
a. 11%
b. 10.85%
c. 10.5%
d. 10.65%

88. What is the avoidable interest for Arlington Company?
a. $240,000
b. $773,013
c. $273,802
d. $587,012

89. What is the actual interest for Arlington Company?
a. $1,465,000
b. $1,485,000
c. $1,225,000
d. $587,012

90. What amount of interest should be charged to expense?
a. $637,987
b. $1,225
c. $877,987
d. $691,987

91. Dodson Company traded in a manual pressing machine for an automated pressing machine and gave $16,000 cash. The old machine cost $186,000 and had a net book value of $142,000. The old machine had a fair value of $120,000.

Which of the following is the correct journal entry to record the exchange?
a. Equipment 136,000
Loss on Disposal 22,000
Accumulated Depreciation 44,000
Equipment 186,000
Cash 16,000
b. Equipment 136,000
Equipment 120,000
Cash 16,000
c. Cash 16,000
Equipment 120,000
Loss on Disposal 22,000
Accumulated Depreciation 44,000
Equipment 202,000
d. Equipment 246,000
Accumulated Depreciation 44,000
Equipment 186,000
Cash 16,000

Use the following information to answer questions 92 & 93.
Below is the information relative to an exchange of assets by Stanton Company. The exchange lacks commercial substance.

Old Equipment
Book Value Fair Value Cash Paid
Case I $225,000 $225,000 $45,000
Case II $150,000 $135,000 $21,000

92. Which of the following would be correct for Stanton to record in Case I?

Record Equipment at: Record a gain of (loss) of:
a. $270,000 $0
b. $300,000 $30,000
c. $225,000 $(15,000)
d. $270,000 $30,000

93. Which of the following would be correct for Stanton to record in Case II?

Record Equipment at: Record a gain of (loss) of:
a. $171,000 $15,000
b. $150,000 $6,000
c. $156,000 $(15,000)
d. $150,000 $(6,000)

Use the following information for questions 94 and 95.
Glen Inc. and Armstrong Co. have an exchange with no commercial substance. The asset given up by Glen Inc. has a book value of $48,000 and a fair value of $60,000. The asset given up by Armstrong Co. has a book value of $80,000 and a fair value of $76,000. Boot of $16,000 is received by Armstrong Co.
94. What amount should Glen Inc. record for the asset received?
a. $60,000
b. $64,000
c. $76,000
d. $80,000

95. What amount should Armstrong Co. record for the asset received?
a. $60,000
b. $64,000
c. $76,000
d. $80,000

96. Hardin Company received $60,000 in cash and a used computer with a fair value of $180,000 from Page Corporation for Hardin Company’s existing computer having a fair value of $240,000 and an undepreciated cost of $225,000 recorded on its books. The transaction has no commercial substance. How much gain should Hardin recognize on this exchange, and at what amount should the acquired computer be recorded, respectively?
a. $0 and $165,000
b. $1,153 and $166,153
c. $15,000 and $180,000
d. $60,000 and $225,000

Use the following information to answer questions 97 & 98.

Jamison Company purchased the assets of Booker Company at an auction for $2,800,000. An independent appraisal of the fair value of the assets is listed below:
Land $950,000
Building 1,400,000
Equipment 1,050,000
Trucks 1,700,000

97. Assuming that specific identification costs are impracticable and that Jamison allocates the purchase price on the basis of the relative fair values, what amount would be allocated to the Trucks?
a. $933,333
b. $1,400,000
c. $1,680,000
d. $1,700,000

98. Assuming that specific identification costs are impracticable and that Jamison allocates the purchase price on the basis of the relative fair values, what amount would be allocated to the Building?
a. $1,059,460
b. $1,400,000
c. $2,550,000
d. $768,627

99. On December 1, Miser Corporation exchanged 3,000 shares of its $25 par value common stock held in treasury for a parcel of land to be held for a future plant site. The treasury shares were acquired by Miser at a cost of $40 per share, and on the exchange date the common shares of Miser had a fair value of $50 per share. Miser received $9,000 for selling scrap when an existing building on the property was removed from the site. Based on these facts, the land should be capitalized at
a. $111,000.
b. $120,000.
c. $141,000.
d. $150,000.

100. Storm Corporation purchased a new machine on October 31, 2012. A $3,600 down payment was made and three monthly installments of $10,800 each are to be made beginning on November 30, 2012. The cash price would have been $34,800. Storm paid no installation charges under the monthly payment plan but a $600 installation charge would have been incurred with a cash purchase. The amount to be capitalized as the cost of the machine on October 31, 2012 would be
a. $36,600.
b. $36,000.
c. $35,400.
d. $34,800.

101. Horner Company buys a delivery van with a list price of $45,000. The dealer grants a 15% reduction in list price and an additional 2% cash discount on the net price if payment is made in 30 days. Sales taxes amount to $600 and the company paid an extra $450 to have a special device installed. What should be the recorded cost of the van?
a. $37,485.
b. $38,468.
c. $38,535.
d. $38,085.

102. On August 1, 2012, Hayes Corporation purchased a new machine on a deferred payment basis. A down payment of $9,000 was made and 4 monthly installments of $7,500 each are to be made beginning on September 1, 2012. The cash equivalent price of the machine was $36,000. Hayes incurred and paid installation costs amounting to $1,500. The amount to be capitalized as the cost of the machine is
a. $36,000.
b. $37,500.
c. $39,000.
d. $40,500.

103. On April 1, Mooney Corporation purchased for $1,710,000 a tract of land on which was located a warehouse and office building. The following data were collected concerning the property:
Current Assessed Valuation Vendor’s Original Cost
Land $600,000 $560,000
Warehouse 400,000 360,000
Office building 800,000 680,000
$1,800,000 $1,600,000
What are the appropriate amounts that Mooney should record for the land, warehouse, and office building, respectively?
a. Land, $560,000; warehouse, $360,000; office building, $680,000.
b. Land, $600,000; warehouse, $400,000; office building, $800,000.
c. Land, $598,500; warehouse, $384,750; office building, $363,375.
d. Land, $570,000; warehouse, $380,000; office building, $760,000.

104. On August 1, 2012, Mendez Corporation purchased a new machine on a deferred payment basis. A down payment of $2,000 was made and 4 annual installments of $18,000 each are to be made beginning on September 1, 2012. The cash equivalent price of the machine was $69,000. Due to an employee strike, Mendez could not install the machine immediately, and thus incurred $900 of storage costs. Costs of installation (excluding the storage costs) amounted to $2,400. The amount to be capitalized as the cost of the machine is
a. $69,000.
b. $71,400.
c. $72,300.
d. $78,000.

105. Siegle Company exchanged 600 shares of Guinn Company common stock, which Siegle was holding as an investment, for equipment from Mayo Company. The Guinn Company common stock, which had been purchased by Siegle for $50 per share, had a quoted market value of $58 per share at the date of exchange. The equipment had a recorded amount on Mayo’s books of $31,500. What journal entry should Siegle make to record this exchange?
a. Equipment 30,000
Investment in Guinn Co. Common Stock 30,000
b. Equipment 31,500
Investment in Guinn Co. Common Stock 30,000
Gain on Disposal of Investment 1,500
c. Equipment 31,500
Loss on Disposal of Investment 3,300
Investment in Guinn Co. Common Stock 34,800
d. Equipment 34,800
Investment in Guinn Co. Common Stock 30,000
Gain on Disposal of Investment 4,800

106. On January 2, 2012, Rapid Delivery Company traded in an old delivery truck for a newer model. The exchange lacked commercial substance. Data relative to the old and new trucks follow:
Old Truck
Original cost $36,000
Accumulated depreciation as of January 2, 2012 24,000
Average published retail value 11,000
New Truck
List price $60,000
Cash price without trade-in 54,000
Cash paid with trade-in 45,000
What should be the cost of the new truck for financial accounting purposes?
a. $45,000.
b. $54,000.
c. $57,000.
d. $60,000.

107. On December 1, 2012, Kelso Company acquired new equipment in exchange for old equipment that it had acquired in 2009. The old equipment was purchased for $70,000 and had a book value of $26,600. On the date of the exchange, the old equipment had a fair value of $28,000. In addition, Kelso paid $91,000 cash for the new equipment, which had a list price of $126,000. The exchange lacked commercial substance. At what amount should Kelso record the new equipment for financial accounting purposes?
a. $91,000.
b. $117,600.
c. $119,000.
d. $126,000.

Use the following information for questions 108 and 109.
A machine cost $360,000, has annual depreciation of $60,000, and has accumulated depreciation of $270,000 on December 31, 2012. On April 1, 2013, when the machine has a fair value of $82,500, it is exchanged for a machine with a fair value of $405,000 and the proper amount of cash is paid. The exchange lacked commercial substance.
108. The gain to be recorded on the exchange is
a. $0.
b. $7,500 loss.
c. $15,000 gain.
d. $45,000 gain.
109. The new machine should be recorded at
a. $322,500.
b. $367,500.
c. $397,500.
d. $405,000.

Use the following information for questions 110 and 111.

Equipment that cost $88,000 and has accumulated depreciation of $40,000 is exchanged for equipment with a fair value of $64,000 and $16,000 cash is received. The exchange lacked commercial substance.

110. The gain to be recognized from the exchange is
a. $6,400 gain.
b. $8,000 gain.
c. $24,000 gain.
d. $32,000 gain.

111. The new equipment should be recorded at
a. $64,000.
b. $48,000.
c. $40,000.
d. $38,400.

Use the following information for questions 112 through 114.

Two independent companies, Hager Co. and Shaw Co., are in the home building business. Each owns a tract of land held for development, but each would prefer to build on the other’s land. They agree to exchange their land. An appraiser was hired, and from her report and the companies’ records, the following information was obtained:
Hager’s Land Shaw’s Land
Cost and book value $576,000 $360,000
Fair value based upon appraisal 720,000 630,000

The exchange was made, and based on the difference in appraised fair values, Shaw paid $90,000 to Hager. The exchange lacked commercial substance.

112. For financial reporting purposes, Hager should recognize a pre-tax gain on this exchange of
a. $0.
b. $18,000.
c. $90,000.
d. $144,000.

113. The new land should be recorded on Hager’s books at
a. $504,000.
b. $576,000.
c. $630,000.
d. $720,000.

114. The new land should be recorded on Shaw’s books at
a. $360,000.
b. $450,000.
c. $630,000.
d. $720,000.

115. Timmons Company traded machinery with a book value of $240,000 and a fair value of $400,000. It received in exchange from Lewis Company a machine with a fair value of $360,000 and cash of $40,000. Lewis’s machine has a book value of $380,000. What amount of gain should Timmons recognize on the exchange?
a. $ -0-
b. $16,000
c. $40,000
d. $160,000

116. Lewis Company traded machinery with a book value of $570,000 and a fair value of $540,000. It received in exchange from Timmons Company a machine with a fair value of $600,000. Lewis also paid cash of $60,000 in the exchange. Timmons’s machine has a book value of $570,000. What amount of gain or loss should Lewis recognize on the exchange?
a. $60,000 gain
b. $ -0-.
c. $3,000 loss
d. $30,000 loss

117. Durler Company traded machinery with a book value of $540,000 and a fair value of $900,000. It received in exchange from Hoyle Company a machine with a fair value of $810,000 and cash of $90,000. Hoyle’s machine has a book value of $855,000. What amount of gain should Durler recognize on the exchange?
a. $ -0-
b. $36,000
c. $90,000
d. $360,000

118. Hoyle Company traded machinery with a book value of $570,000 and a fair value of $540,000. It received in exchange from Durler Company a machine with a fair value of $600,000. Hoyle also paid cash of $60,000 in the exchange. Durler’s machine has a book value of $570,000. What amount of gain or loss should Hoyle recognize on the exchange?
a. $60,000 gain
b. $ -0-
c. $3,000 loss
d. $30,000 loss

119. Peterson Company purchased machinery for $480,000 on January 1, 2009. Straight-line depreciation has been recorded based on a $30,000 salvage value and a 5-year useful life. The machinery was sold on May 1, 2013 at a gain of $9,000. How much cash did Peterson receive from the sale of the machinery?
a. $69,000
b. $81,000
c. $99,000
d. $129,000

120. Sutherland Company purchased machinery for $640,000 on January 1, 2009. Straight-line depreciation has been recorded based on a $40,000 salvage value and a 5-year useful life. The machinery was sold on May 1, 2013 at a gain of $12,000. How much cash did Sutherland receive from the sale of the machinery?
a. $92,000.
b. $108,000.
c. $132,000.
d. $172,000.

121. Ecker Company purchased a new machine on May 1, 2004 for $264,000. At the time of acquisition, the machine was estimated to have a useful life of ten years and an estimated salvage value of $12,000. The company has recorded monthly depreciation using the straight-line method. On March 1, 2013, the machine was sold for $36,000. What should be the loss recognized from the sale of the machine?
a. $0.
b. $5,400.
c. $12,000.
d. $17,400.

122. On January 1, 2004, Mill Corporation purchased for $304,000, equipment having a useful life of ten years and an estimated salvage value of $16,000. Mill has recorded monthly depreciation of the equipment on the straight-line method. On December 31, 2012, the equipment was sold for $56,000. As a result of this sale, Mill should recognize a gain of
a. $0.
b. $11,200.
c. $27,200.
d. $56,000.

Multiple Choice Answers—Computational

MULTIPLE CHOICE—CPA Adapted

123. On December 1, 2012, Hogan Co. purchased a tract of land as a factory site for $900,000. The old building on the property was razed, and salvaged materials resulting from demolition were sold. Additional costs incurred and salvage proceeds realized during December 2012 were as follows:
Cost to raze old building $70,000
Legal fees for purchase contract and to record ownership 10,000
Title guarantee insurance 16,000
Proceeds from sale of salvaged materials 8,000
In Hogan ‘s December 31, 2012 balance sheet, what amount should be reported as land?
a. $926,000.
b. $962,000.
c. $988,000.
d. $996,000.

124. Land was purchased to be used as the site for the construction of a plant. A building on the property was sold and removed by the buyer so that construction on the plant could begin. The proceeds from the sale of the building should be
a. classified as other income.
b. deducted from the cost of the land.
c. netted against the costs to clear the land and expensed as incurred.
d. netted against the costs to clear the land and amortized over the life of the plant.

125. A company is constructing an asset for its own use. Construction began in 2012. The asset is being financed entirely with a specific new borrowing. Construction expenditures were made in 2012 and 2013 at the end of each quarter. The total amount of interest cost capitalized in 2013 should be determined by applying the interest rate on the specific new borrowing to the
a. total accumulated expenditures for the asset in 2012 and 2013.
b. average accumulated expenditures for the asset in 2012 and 2013.
c. average expenditures for the asset in 2013.
d. total expenditures for the asset in 2013.

126. Colt Football Co. had a player contract with Watts that is recorded in its books at $4,800,000 on July 1, 2012. Day Football Co. had a player contract with Kurtz that is recorded in its books at $6,000,000 on July 1, 2012. On this date, Colt traded Watts to Day for Kurtz and paid a cash difference of $600,000. The fair value of the Kurtz contract was $7,200,000 on the exchange date. The exchange had no commercial substance. After the exchange, the Kurtz contract should be recorded in Colt’s books at
a. $5,400,000.
b. $6,000,000.
c. $6,600,000.
d. $7,200,000.

127. Huff Co. exchanged nonmonetary assets with Sayler Co. No cash was exchanged and the exchange had no commercial substance. The carrying amount of the asset surrendered by Huff exceeded both the fair value of the asset received and Sayler’s carrying amount of that asset. Huff should recognize the difference between the carrying amount of the asset it surrendered and
a. the fair value of the asset it received as a loss.
b. the fair value of the asset it received as a gain.
c. Sayler’s carrying amount of the asset it received as a loss.
d. Sayler’s carrying amount of the asset it received as a gain.

128. Chase County owned an idle parcel of real estate consisting of land and a factory building. Chase gave title to this realty to Patton Co. as an incentive for Patton to establish manufacturing operations in the County. Patton paid nothing for this realty, which had a fair market value of $250,000 at the date of the grant. Patton should record this nonmonetary transaction as a
a. memo entry only.
b. credit to Contribution Revenue for $250,000.
c. credit to Extraordinary Income for $250,000.
d. credit to Donated Capital for $250,000.

129. On September 10, 2012, Jenks Co. incurred the following costs for one of its printing presses:
Purchase of attachment $65,000
Installation of attachment 5,000
Replacement parts for renovation of press 18,000
Labor and overhead in connection with renovation of press 7,000
Neither the attachment nor the renovation increased the estimated useful life of the press. However, the renovation resulted in significantly increased productivity. What amount of the costs should be capitalized?
a. $0.
b. $77,000.
c. $88,000.
d. $95,000.

130. On January 2, 2012, York Corp. replaced its boiler with a more efficient one. The following information was available on that date:
Purchase price of new boiler $170,000
Carrying amount of old boiler 10,000
Fair value of old boiler 4,000
Installation cost of new boiler 20,000
The old boiler was sold for $4,000. What amount should York capitalize as the cost of the new boiler?
a. $190,000.
b. $186,000.
c. $180,000.
d. $170,000.

Multiple Choice Answers—CPA Adapted

IFRS QUESTIONS

True/False
1. Under international accounting standards, historical cost is the preferred treatment for property, plant, and equipment.

2. Recently changes to IFRS require companies to capitalize borrowing costs related to qualifying assets.

3. Under IFRS, interest costs incurred during construction of a plant asset cannot be capitalized.

4. Under IFRS, if a company uses the revaluation model for fixed assets, companies must revalue the class of assets regularly.

5. Under IFRS, assets that qualify for interest capitalization are assets that are in use or ready for their intended use.

Answers to True/False:

Multiple Choice

1. Under IFRS, Sampson Company, who has a non-current asset which has been classified as held-for-sale, should
a. test the asset’s value monthly for impairment.
b. value the asset at its depreciated historical cost.
c. depreciate the asset over its remaining life.
d. not depreciate the asset.

2. Miller Company, a company who uses IFRS reporting standards, sells a non-current asset classified as held-for-sale. Which of the following statements is true regarding the treatment of a gain on a subsequent increase in the fair value less cost?
a. The gain should not be recognized.
b. The gain should be recognized in full in the income statement.
c. The gain should be recognized but only in retained earnings.
d. The gain should be recognized to the extent that it is not in excess of the cumulative impairment loss that has been recognized.

3. Danson Company, a company who uses IFRS reporting standards, has a non-current asset that has been classified as held-for-sale. When the asset no longer meets this definition, Danson should
a. remove the asset from the statement of financial position.
b. remeasure the asset at fair value.
c. measure the asset at the lower of its carrying value before it was classified as held-for-sale and its recoverable amount at the date when the company decided not to sell it.
d. leave the non-current asset on the financial statements at the current carrying value.

4. Elton Industries, a company who uses IFRS reporting standards, has assets and liabilities of a disposal group classified as held-for-sale shown on its statement of financial position. Which of the following presents the best treatment for these?
a. These assets and liabilities should be netted and presented as a single amount – either a current asset or a current liability on the statement of financial position.
b. On the balance sheet, the disposal group assets should be shown separately from other assets, while the disposal group liabilities should be shown separately from other liabilities.
c. The assets and liabilities should be netted and presented as a deduction from equity on the statement of financial position.
d. There should be no separate disclosure of these assets and liabilities on the statement of financial position.

5. Woodson Company, a company who uses IFRS reporting standards, has identified a group of plant assets for disposal. On January 1, 2012, the carrying value of these assets was
$17.5 million. The assets were revalued to $16.5 million on January 5, 2012, when they were identified as property for the disposal group. In addition, Woodson thinks that it will cost
$1.5 million to sell these assets. What carrying amount should these assets reflect for
year-end financial statements to be prepared on January 10, 2012?
a. $17.5 million
b. $16.5 million
c. $16.0 million
d. $15.0 million

6. Thomas Company, a company who uses IFRS reporting standards, is disposing of a plant asset. The amount of gain or loss from this disposal is
a. reported as the difference between the sales proceeds and the carrying amount of the asset.
b. not reported.
c. reported as the fair value less the recoverable amount.
d. reported as the difference between the net cash flows of the productive years of the asset and its carrying value.

7. On January 1, 2012, Jackson Company has a building with a carrying value of $50,000 and a remaining useful life 5 years that was recently valued at $150,000. Assuming that the company uses straight-line depreciation, IFRS would show the depreciation as
a. $10,000
b. $30,000
c. $20,000
d. More than one of these answers could be correct.

8. Tram Industries, a company who uses IFRS reporting standards, is installing a new plant. The company has incurred the following costs
1. Operating losses before commercial production $ 200,000
2. Cost of the plant 1,500,000
3. Initial delivery and handling charges 300,000
4. Cost of site preparation 175,000

Which of these costs can Tram capitalize in accordance with IFRS?
a. 1, 2, 3, & 4
b. 2 & 4
c. 2, 3, & 4
d. 1, 2, & 4

9. Icon Industries, a company who uses IFRS reporting standards, is installing a new plant. The company has incurred the following costs
1. Consultants used for advice on the acquisition of the plant $245,000
2. Interest charges paid to the supplier of plant for deferred credit $275,000
3. Estimated dismantling cost to be incurred after 8 years $400,000
4. Cost of the plant $2,300,000

Which of these costs can Tram capitalize in accordance with IFRS?
a. 1, 2, 3, & 4
b. 4 only
c. 1 & 4
d. 1, 3, & 4

10. All of the following are true regarding the revaluation model allowed under IFRS except
a. once selected, the revaluation policy applies to an entire class of property, plant and equipment.
b. revaluations must be made regularly to ensure that the carrying value is not materially different from fair value.
c. after initial recognition, the revalued amount is fair value less subsequent depreciation and impairment losses.
d. when an asset is revalued, any increase in carrying amount is reported as miscellaneous revenue.

Answers to Multiple Choice:

CHAPTER 11

DEPRECIATION, IMPAIRMENTS, AND DEPLETION

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

1. Depreciation is a means of cost allocation, not a matter of valuation.

2. Depreciation is based on the decline in the fair market value of the asset.

3. Depreciation, depletion, and amortization all involve the allocation of the cost of a long-lived asset to expense.

4. The cost of an asset less its salvage value is its depreciation base.

5. The three factors involved in the depreciation process are the depreciation base, the useful life, and the risk of obsolescence.

6. Inadequacy is the replacement of one asset with another more efficient and economical asset.

7. The major objection to the straight-line method is that it assumes the asset’s economic usefulness and repair expense are the same each year.

8. The units-of-production approach to depreciation is appropriate when depreciation is a function of time instead of activity.

9. An accelerated depreciation method is appropriate when the asset’s economic usefulness is the same each year.

10. The declining-balance method does not deduct the salvage value in computing the depreciation base.

11. Gains or losses on disposals of assets do not distort periodic income when the group or composite method is used to compute depreciation.

12. Companies frequently use the composite approach when the assets are similar in nature and have approximately the same useful lives.

13. Changes in estimates are handled prospectively by dividing the asset’s book value less any salvage value by the remaining estimated life.

14. An impairment loss is the amount by which the carrying amount of the asset exceeds the sum of the expected future net cash flows from the use of that asset.

15. The first step in determining whether an impairment has occurred is to estimate the future net cash flows expected from the use of that asset and its eventual disposition.

16. Impaired assets held for disposal should be reported at the lower of cost or net realizable value.

17. Normally, companies compute depletion on a straight-line basis.

18. Intangible development costs and restoration costs are part of the depletion base.

19. The asset turnover ratio is computed by dividing net sales by ending total assets.

20. The profit margin on sales ratio is a measure for analyzing the use of property, plant, and equipment.

True False Answers—Conceptual

MULTIPLE CHOICE—Conceptual

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

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

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

S24. Which of the following most accurately reflects the concept of depreciation as used in accounting?
a. The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred.
b. The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.
c. A method of allocating asset cost to an expense account in a manner which closely matches the physical deterioration of the tangible asset involved.
d. An accounting concept that allocates the portion of an asset used up during the year to the contra asset account for the purpose of properly recording the fair market value of tangible assets.

S25. The major difference between the service life of an asset and its physical life is that
a. service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last.
b. physical life is the life of an asset without consideration of salvage value and service life requires the use of salvage value.
c. physical life is always longer than service life.
d. service life refers to the length of time an asset is of use to its original owner, while physical life refers to how long the asset will be used by all owners.

P26. The term “depreciable base,” or “depreciation base,” as it is used in accounting, refers to
a. the total amount to be charged (debited) to expense over an asset’s useful life.
b. the cost of the asset less the related depreciation recorded to date.
c. the estimated market value of the asset at the end of its useful life.
d. the acquisition cost of the asset.

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

28. Which of the following is not one of the basic questions that must be answered before the amount of depreciation charge can be computed?
a. What is the depreciation base to use for the asset?
b. What is the asset’s useful life?
c. What method of cost apportionment is best for this asset?
d. What product or service is the asset related to?

S29. Which of the following is a realistic assumption of the straight-line method of depreciation?
a. The asset’s economic usefulness is the same each year.
b. The repair and maintenance expense is essentially the same each period.
c. The rate of return analysis is enhanced using the straight-line method.
d. Depreciation is a function of time rather than a function of usage.

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

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

32. If an industrial firm uses the units-of-production method for computing depreciation on its only plant asset, factory machinery, the credit to accumulated depreciation from period to period during the life of the firm will
a. be constant.
b. vary with unit sales.
c. vary with sales revenue.
d. vary with production.

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

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

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

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

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

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

P39. Watkins Truck Rental uses the group depreciation method for its fleet of trucks. When it retires one of its trucks and receives cash from a salvage company, the carrying value of property, plant, and equipment will be decreased by the
a. original cost of the truck.
b. original cost of the truck less the cash proceeds.
c. cash proceeds received.
d. cash proceeds received and original cost of the truck.

S40. Composite or group depreciation is a depreciation system whereby
a. the years of useful life of the various assets in the group are added together and the total divided by the number of items.
b. the cost of individual units within an asset group is charged to expense in the year a unit is retired from service.
c. a straight-line rate is computed by dividing the total of the annual depreciation expense for all assets in the group by the total cost of the assets.
d. the original cost of all items in a given group or class of assets is retained in the asset account and the cost of replace¬ments is charged to expense when they are acquired.

S41. When depreciation is computed for partial periods under a decreasing charge depreciation method, it is necessary to
a. charge a full year’s depreciation to the year of acquisition.
b. determine depreciation expense for the full year and then prorate the expense between the two periods involved.
c. use the straight-line method for the year in which the asset is sold or otherwise disposed of.
d. use a salvage value equal to the first year’s partial depreciation charge.

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

43. Myers Company acquired machinery on January 1, 2007 which it depreciated under the straight-line method with an estimated life of fifteen years and no salvage value. On January 1, 2012, Myers estimated that the remaining life of this machinery was six years with no salvage value. How should this change be accounted for by Myers?
a. As a prior period adjustment
b. As the cumulative effect of a change in accounting principle in 2012
c. By setting future annual depreciation equal to one-sixth of the book value on January 1, 2012
d. By continuing to depreciate the machinery over the original fifteen year life

44. A change in estimate should
a. result in restatement of prior period statements.
b. be handled in current and future periods.
c. be handled in future periods only.
d. be handled retroactively.

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

46. Which of following is not a similarity in the accounting treatment for depreciation and cost depletion?
a. The estimated life is based on economic or productive life.
b. Assets subject to either are reported in the same classification on the balance sheet.
c. The rates may be changed upon revision of the estimated productive life used in the original rate computations.
d. Both depreciation and depletion are based on time.

47. Which of the following is not a difference between the accounting treatment for depreciation and cost depletion?
a. Depletion applies to natural resources while depreciation applies to plant and equipment.
b. Depletion refers to the physical exhaustion or consumption of the asset while depreciation refers to the wear, tear, and obsolescence of the asset.
c. Many formulas are used in computing depreciation but only one is used to any extent in computing depletion.
d. The cost of the asset is the starting point from which computation of the amount of the periodic charge is made to operations for depreciation, but the fair value reassessed each year as the starting point for the periodic charge for depletion.

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

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

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

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

S52. Of the following costs related to the develop¬ment of natural resources, which one is not a part of depletion cost?
a. Acquisition cost of the natural resource deposit
b. Exploration costs
c. Tangible equipment costs associated with machinery used to extract the natural resource
d. Intangible development costs such as drilling costs, tunnels, and shafts

S53. Which of the following disclosures is not required in the financial statements regarding depreciation?
a. Accumulated depreciation, either by major classes of depreciable assets or in total.
b. Details demonstrating how depreciation was calculated.
c. Depreciation expense for the period.
d. Balances of major classes of depreciable assets, by nature and function.

P54. The book value of a plant asset is
a. the fair market value of the asset at a balance sheet date.
b. the asset’s acquisition cost less the total related depreciation recorded to date.
c. equal to the balance of the related accumulated depreciation account.
d. the assessed value of the asset for property tax purposes.

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

56. The asset turnover ratio is computed by dividing
a. net income by ending total assets.
b. net income by average total assets.
c. net sales by ending total assets.
d. net sales by average total assets.

57. The rate of return on total assets is computed by dividing
a. Net income by ending total assets.
b. Net sales by average total assets.
c. Net sales by ending total assets.
d. Net income by average total assets.

*58. A major objective of MACRS for tax depreciation is to
a. reduce the amount of depreciation deduction on business firms’ tax returns.
b. assure that the amount of depreciation for tax and book purposes will be the same.
c. help companies achieve a faster write-off of their capital assets.
d. require companies to use the actual economic lives of assets in calculating tax depreciation.

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

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

Multiple Choice Answers—Conceptual
Solutions to those Multiple Choice questions for which the answer is “none of these.”
48. do not expect to purchase additional property after depleting existing property.

MULTIPLE CHOICE—Computational

61. Ferguson Company purchased a depreciable asset for $120,000. The estimated salvage value is $10,000, and the estimated useful life is 10 years. The straight-line method will be used for depreciation. What is the depreciation base of this asset?
a. $11,000
b. $12,000
c. $110,000
d. $120,000

62. Hamilton Company purchased a depreciable asset for $240,000. The estimated salvage value is $20,000, and the estimated useful life is 10 years. The straight-line method will be used for depreciation. What is the depreciation base of this asset?
a. $22,000
b. $24,000
c. $220,000
d. $240,000

63. Solar Products purchased a machine for $39,000 on July 1, 2012. The company intends to depreciate it over 4 years using the double-declining balance method. Salvage value is $3,000. Depreciation for 2012 is
a. $19,500
b. $9,750
c. $14,625
d. $9,000

64. Solar Products purchased a machine for $39,000 on July 1, 2012. The company intends to depreciate it over 4 years using the double-declining balance method. Salvage value is $3,000. Depreciation for 2013 is
a. $19,500
b. $9,750
c. $14,625
d. $9,000

65. Gardner Corporation purchased a truck at the beginning of 2012 for $90,000. The truck is estimated to have a salvage value of $3,600 and a useful life of 120,000 miles. It was driven 18,000 miles in 2012 and 32,000 miles in 2013. What is the depreciation expense for 2012?
a. $13,500
b. $12,960
c. $21,600
d. $36,000

66. Gardner Corporation purchased a truck at the beginning of 2012 for $90,000. The truck is estimated to have a salvage value of $3,600 and a useful life of 120,000 miles. It was driven 18,000 miles in 2012 and 32,000 miles in 2013. What is the depreciation expense for 2013?
a. $24,000
b. $36,000
c. $23,040
d. $38,400

67. Kinder Company purchased a depreciable asset for $280,000. The estimated salvage value is $14,000, and the estimated useful life is 10,000 hours. Kinder used the asset for 1,100 hours in the current year. The activity method will be used for depreciation. What is the depreciation expense on this asset?
a. $26,600
b. $29,260
c. $30,800
d. $266,000

68. Jamar Company purchased a depreciable asset for $225,000. The estimated salvage value is $15,000, and the estimated useful life is 8 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset?
a. $26,250
b. $39,375
c. $42,188
d. $56,250

69. Engels Company purchased a depreciable asset for $800,000. The estimated salvage value is $40,000, and the estimated useful life is 10,000 hours. Engels used the asset for 1,100 hours in the current year. The activity method will be used for depreciation. What is the depreciation expense on this asset?
a. $76,000
b. $83,600
c. $88,000
d. $760,000

70. Hart Company purchased a depreciable asset for $450,000. The estimated salvage value is $30,000, and the estimated useful life is 8 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset?
a. $52,500
b. $78,750
c. $84,375
d. $112,500

71. On July 1, 2012, Gonzalez Corporation purchased factory equipment for $225,000. Salvage value was estimated to be $6,000. The equipment will be depreciated over ten years using the double-declining balance method. Counting the year of acquisition as one-half year, Gonzalez should record depreciation expense for 2013 on this equipment of
a. $45,000.
b. $40,500.
c. $39,420.
d. $36,000.

72. Krause Corporation purchased factory equipment that was installed and put into service January 2, 2012, at a total cost of $120,000. Salvage value was estimated at $8,000. The equipment is being depreciated over four years using the double-declining balance method. For the year 2013, Krause should record depreciation expense on this equipment of
a. $28,000.
b. $30,000.
c. $56,000.
d. $60,000.

73. On April 13, 2012, Neill Co. purchased machinery for $168,000. Salvage value was estimated to be $7,000. The machinery will be depreciated over ten years using the double-declining balance method. If depreciation is computed on the basis of the nearest full month, Neill should record depreciation expense for 2013 on this machinery of
a. $29,120.
b. $28,560.
c. $28,770.
d. $29,306.
74. Matile Co. purchased machinery that was installed and ready for use on January 3, 2012, at a total cost of $115,000. Salvage value was estimated at $15,000. The machinery will be depreciated over five years using the double-declining balance method. For the year 2013, Matile should record depreciation expense on this machinery of
a. $24,000.
b. $27,600.
c. $30,000.
d. $46,000.

75. A plant asset has a cost of $32,000 and a salvage value of $8,000. The asset has a three-year life. If depreciation in the third year amounted to $4,000, which depreciation method was used?
a. Straight-line
b. Declining-balance
c. Sum-of-the-years’-digits
d. Cannot tell from information given

76. On January 1, 2012, Graham Company purchased a new machine for $2,800,000. The new machine has an estimated useful life of nine years and the salvage value was estimated to be $100,000. Depreciation was computed on the sum-of-the-years’-digits method. What amount should be shown in Graham’s balance sheet at December 31, 2013, net of accumulated depreciation, for this machine?
a. $2,260,000
b. $1,780,000
c. $1,742,221
d. $1,659,000

77. On January 1, 2006, Forbes Company purchased equipment at a cost of $100,000. The equipment was estimated to have a salvage value of $10,000 and it is being depreciated over eight years under the sum-of-the-years’-digits method. What should be the charge for depreciation of this equipment for the year ended December 31, 2013?
a. $2,500
b. $2,778
c. $5,000
d. $11,250

78. On September 19, 2012, McCoy Co. purchased machinery for $285,000. Salvage value was estimated to be $15,000. The machinery will be depreciated over eight years using the sum-of-the-years’-digits method. If depreciation is computed on the basis of the nearest full month, McCoy should record depreciation expense for 2013 on this machinery of
a. $61,354.
b. $58,267.
c. $58,125.
d. $52,500.

79. On January 3, 2011, Munoz Co. purchased machinery. The machinery has an estimated useful life of eight years and an estimated salvage value of $60,000. The depreciation applicable to this machinery was $130,000 for 2013, computed by the sum-of-the-years’-digits method. The acquisition cost of the machinery was
a. $720,000.
b. $780,000.
c. $840,000.
d. $936,000.

80. On January 2, 2010, Stacy Company acquired equipment to be used in its manufacturing operations. The equipment has an estimated useful life of 10 years and an estimated salvage value of $30,000. The depreciation applicable to this equipment was $140,000 for 2013, computed under the sum-of-the-years’-digits method. What was the acquisition cost of the equipment?
a. $1,070,000
b. $1,130,000
c. $1,100,000
d. $1,083,333

81. Orton Corporation, which has a calendar year accounting period, purchased a new machine for $60,000 on April 1, 2008. At that time Orton expected to use the machine for nine years and then sell it for $6,000. The machine was sold for $33,000 on Sept. 30, 2013. Assuming straight-line depreciation, no depreciation in the year of acquisition, and a full year of depreciation in the year of retirement, the gain to be recognized at the time of sale would be
a. $6,000.
b. $4,500.
c. $3,000.
d. $0.

82. On January 1, 2012, the Accumulated Depreciation—Machinery account of a particular company showed a balance of $740,000. At the end of 2012, after the adjusting entries were posted, it showed a balance of $790,000. During 2012, one of the machines which cost $250,000 was sold for $121,000 cash. This resulted in a loss of $8,000. Assuming that no other assets were disposed of during the year, how much was depreciation expense for 2012?
a. $171,000
b. $187,000
c. $50,000
d. $121,000

83. During 2012, Noller Co. sold equipment that had cost $294,000 for $176,400. This resulted in a gain of $12,900. The balance in Accumulated Depreciation—Equipment was $975,000 on January 1, 2012, and $930,000 on December 31. No other equipment was disposed of during 2012. Depreciation expense for 2012 was
a. $45,000.
b. $57,900.
c. $85,500.
d. $175,500.

Use the following information for questions 84 and 85:
A schedule of machinery owned by Mallon Co. is presented below:
Estimated Estimated
Total Cost Salvage Value Life in Years
Machine A $260,000 $20,000 12
Machine C 390,000 30,000 10
Machine M 195,000 15,000 6
Mallon computes depreciation by the composite method.

84. The composite rate of depreciation (in percent) for these assets is
a. 10.18.
b. 10.77.
c. 11.03.
d. 11.67.

85. The composite life (in years) for these assets is
a. 9.1.
b. 9.3.
c. 9.8.
d. 10.0.

86. Stevenson Company purchased a depreciable asset for $350,000 on April 1, 2010. The estimated salvage value is $35,000, and the estimated useful life is 5 years. The straight-line method is used for depreciation. What is the balance in accumulated depreciation on May 1, 2013 when the asset is sold?
a. $126,000
b. $147,000
c. $173,250
d. $194,250

87. Williamson Corporation purchased a depreciable asset for $400,000 on January 1, 2010. The estimated salvage value is $40,000, and the estimated useful life is 9 years. The straight-line method is used for depreciation. In 2013, Williamson changed its estimates to a total useful life of 5 years with a salvage value of $60,000. What is 2013 depreciation expense?
a. $40,000
b. $60,000
c. $110,000
d. $120,000

88. Rollins Company purchased a depreciable asset for $500,000 on April 1, 2010. The estimated salvage value is $50,000, and the estimated total useful life is 5 years. The straight-line method is used for depreciation. What is the balance in accumulated depreciation on May 1, 2013 when the asset is sold?
a. $196,667
b. $210,000
c. $247,500
d. $277,500

89. Fanestil Corporation purchased a depreciable asset for $630,000 on January 1, 2010. The estimated salvage value is $63,000, and the estimated total useful life is 9 years. The straight-line method is used for depreciation. In 2013, Fanestill changed its estimates to a useful life of 5 years with a salvage value of $105,000. What is 2013 depreciation expense?
a. $63,000
b. $105,000
c. $168,000
d. $189,000

90. If Lawson, Inc. uses the composite method and its composite rate is 7.5% per year, what entry should it make when plant assets that originally cost $80,000 and have been used for 10 years are sold for $24,000?
a. Cash 24,000
Accumulated Depreciation – Plant Assets 56,000
Plant Assets 80,000
b. Cash 24,000
Loss on Sale of Plant Assets 56,000
Plant Assets 80,000
c. Cash 24,000
Accumulated Depreciation – Plant Assets 60,000
Plant Assets 80,000
Gain on Sale of Plant Assets 4,000
d. Cash 24,000
Plant Assets 24,000

91. Archer Company purchased equipment in January of 2002 for $150,000. The equipment was being depreciated on the straight-line method over an estimated useful life of 20 years, with no salvage value. At the beginning of 2012, when the equipment had been in use for 10 years, the company paid $25,000 to overhaul the equipment. As a result of this improvement, the company estimated that the useful life of the equipment would be extended an additional 5 years. What should be the depreciation expense recorded for this equipment in 2012.
a. $5,000
b. $6,667
c. $7,500
d. $9,167

Use the following information to answer questions 92 and 93.

Ebert Inc. owns the following assets:
Asset Cost Salvage Estimated Useful Life
A $140,000 $14,000 10 years
B 75,000 7,500 5 years
C 164,000 8,000 12 years

92. What is the composite depreciation rate of Ebert’s assets?
a. 14.0%
b. 10.3%
c. 12.9%
d. 11.1%
93. What is the composite life of Ebert’s assets?
a. 14.0 years
b. 9.7 years
c. 8.9 years
d. 10.3 years

94. Technique Co. has equipment with a carrying amount of $1,600,000. The expected future net cash flows from the equipment are $1,630,000, and its fair value is $1,360,000. The equipment is expected to be used in operations in the future. What amount (if any) should Technique report as an impairment to its equipment?
a. No impairment should be reported.
b. $240,000
c. $30,000
d. $270,000

95. Robertson Inc. bought a machine on January 1, 2002 for $400,000. The machine had an expected life of 20 years and was expected to have a salvage value of $40,000. On July 1, 2012, the company reviewed the potential of the machine and determined that its undiscounted future net cash flows totaled $200,000 and its discounted future net cash flows totaled $140,000. If no active market exists for the machine and the company does not plan to dispose of it, what should Robertson record as an impairment loss on July 1, 2012?
a. $ 0
b. $11,000
c. $20,000
d. $71,000

96. Holcomb Corpsssoration owns machinery with a book value of $285,000. It is estimated that the machinery will generate future cash flows of $300,000. The machinery has a fair value of $210,000. Holcomb should recognize a loss on impairment of
a. $ -0-.
b. $15,000.
c. $75,000.
d. $90,000.

97. Kohlman Corporation owns machinery with a book value of $380,000. It is estimated that the machinery will generate future cash flows of $350,000. The machinery has a fair value of $280,000. Kohlman should recognize a loss on impairment of
a. $ -0-.
b. $ 30,000.
c. $100,000.
d. $ 70,000.

98. Marsh Corporation purchased a machine on July 1, 2010, for $1,250,000. The machine was estimated to have a useful life of 10 years with an estimated salvage value of $70,000. During 2013, it became apparent that the machine would become uneconomical after December 31, 2017, and that the machine would have no scrap value. Accumulated depreciation on this machine as of December 31, 2012, was $295,000. What should be the charge for depreciation in 2013 under generally accepted accounting principles?
a. $177,000
b. $191,000
c. $205,000
d. $238,750
99. Rivera Company purchased a tooling machine on January 3, 2006 for $700,000. The machine was being depreciated on the straight-line method over an estimated useful life of 10 years, with no salvage value. At the beginning of 2013, the company paid $175,000 to overhaul the machine. As a result of this improvement, the company estimated that the useful life of the machine would be extended an additional 5 years (15 years total). What should be the depreciation expense recorded for the machine in 2013?
a. $48,125
b. $58,333
c. $70,000
d. $77,000

100. Gates Co. purchased machinery on January 2, 2007, for $660,000. The straight-line method is used and useful life is estimated to be 10 years, with a $60,000 salvage value. At the beginning of 2013 Gates spent $144,000 to overhaul the machinery. After the overhaul, Gates estimated that the useful life would be extended 4 years (14 years total), and the salvage value would be $30,000. The depreciation expense for 2013 should be
a. $42,375.
b. $51,750.
c. $60,000.
d. $55,500.

101. Newell, Inc. purchased equipment in 2011 at a cost of $800,000. Two years later it became apparent to Newell, Inc. that this equipment had suffered an impairment of value. In early 2013, the book value of the asset is $480,000 and it is estimated that the fair value is now only $320,000. The entry to record the impairment is
a. No entry is necessary as a write-off violates the historical cost principle.
b. Retained Earnings 160,000
Accumulated Depreciation—Equipment 160,000
c. Loss on Impairment of Equipment 160,000
Accumulated Depreciation—Equipment 160,000
d. Retained Earnings 160,000
Reserve for Loss on Impairment of Equipment 160,000

102. Percy Resources Company acquired a tract of land containing an extractable natural resource. Percy is required by its purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be 2,000,000 tons, and that the land will have a value of $1,000,000 after restoration. Relevant cost information follows:
Land $7,500,000
Estimated restoration costs 1,500,000
If Percy maintains no inventories of extracted material, what should be the charge to depletion expense per ton of extracted material?
a. $3.25
b. $3.75
c. $4.00
d. $4.50

103. In January, 2012, Yoder Corporation purchased a mineral mine for $5,100,000 with removable ore estimated by geological surveys at 2,000,000 tons. The property has an estimated value of $300,000 after the ore has been extracted. The company incurred $1,500,000 of development costs preparing the mine for production. During 2012, 500,000 tons were removed and 400,000 tons were sold. What is the amount of depletion that Yoder should expense for 2012?
a. $960,000
b. $1,200,000
c. $1,260,000
d. $1,680,000

104. During 2012, Eldred Corporation acquired a mineral mine for $3,000,000 of which $400,000 was ascribed to land value after the mineral has been removed. Geological surveys have indicated that 10 million units of the mineral could be extracted. During 2012, 1,500,000 units were extracted and 1,200,000 units were sold. What is the amount of depletion expensed for 2012?
a. $260,000.
b. $312,000.
c. $360,000.
d. $390,000.

105. In March, 2012, Maley Mines Co. purchased a coal mine for $8,000,000. Removable coal is estimated at 1,500,000 tons. Maley is required to restore the land at an estimated cost of $960,000, and the land should have a value of $840,000. The company incurred $2,000,000 of development costs preparing the mine for production. During 2012, 450,000 tons were removed and 300,000 tons were sold. The total amount of depletion that Maley should record for 2012 is
a. $1,832,000.
b. $2,024,000.
c. $2,748,000.
d. $3,036,000.

106. In 2004, Horton Company purchased a tract of land as a possible future plant site. In January, 2012, valuable sulphur deposits were discovered on adjoining property and Horton Company immediately began explorations on its property. In December, 2012, after incurring $800,000 in exploration costs, which were accumulated in an expense account, Horton discovered sulphur deposits appraised at $4,500,000 more than the value of the land. To record the discovery of the deposits, Horton should
a. make no entry.
b. debit $800,000 to an asset account.
c. debit $4,500,000 to an asset account.
d. debit $5,300,000 to an asset account.

107. Balcom Corporation acquires a coal mine at a cost of $1,500,000. Intangible development costs total $360,000. After extraction has occurred, Balcom must restore the property (estimated fair value of the obligation is $180,000), after which it can be sold for $510,000. Balcom estimates that 5,000 tons of coal can be extracted. What is the amount of depletion per ton?
a. $306
b. $510
c. $300
d. $372
108. Balcom Corporation acquires a coal mine at a cost of $1,500,000. Intangible development costs total $360,000. After extraction has occurred, Balcom must restore the property (estimated fair value of the obligation is $180,000), after which it can be sold for $510,000. Balcom estimates that 5,000 tons of coal can be extracted. If 900 tons are extracted the first year, which of the following would be included in the journal entry to record depletion?
a. Debit to Accumulated Depletion for $275,400
b. Debit to Inventory for $275,400
c. Credit to Inventory for $270,000
d. Credit to Accumulated Depletion for $459,000

109. In 2012, MegaStores reported net income of $5.7 billion, net sales of $164.7 billion, and average total assets of $61.0 billion. What is MegaStores’ asset turnover ratio?
a. 0.37 times
b. 0.09 times.
c. 2.7 times.
d. 10.7 times.

110. In 2012, MegaStores reported net income of $5.7 billion, net sales of $164.7 billion, and average total assets of $61.0 billion. What is MegaStores’ return on total assets?
a. 9.3%
b. 10.7%
c. 37.0%
d. 270%

Use the following information for questions 111 and 112:

For 2012, Hoyle Company reports beginning of the year total assets of $900,000, end of the year total assets of $1,100,000, net sales of $750,000, and net income of $150,000.

111. Hoyle’s 2012 asset turnover ratio is
a. 0.14 times.
b. 0.15 times.
c. 0.68 times.
d. 0.75 times.

112. The rate of return on assets for Hoyle in 2012 is
a. 12.0%.
b. 13.6%.
c. 15.0%.
d. 16.7%.

113. Markowitz Company reported the following data:
2012 2013
Sales $3,000,000 $3,900,000
Net Income 300,000 400,000
Assets at year end 1,800,000 2,500,000
Liabilities at year end 1,100,000 1,500,000
What is Markowitz’s asset turnover for 2013?
a. 1.56
b. 1.61
c. 1.81
d. 2.17
114. Froelich Company reported the following data:
2012 2013
Sales $3,000,000 $4,200,000
Net Income 300,000 400,000
Assets at year end 1,800,000 2,500,000
Liabilities at year end 1,100,000 1,500,000
What is Froelich’s asset turnover for 2013?
a. 1.68
b. 1.72
c. 1.95
d. 2.33

Use the following information for questions 115 and 116:

On January 1, 2012, Guzman Company purchased a machine costing $250,000. The machine is in the MACRS 5-year recovery class for tax purposes and has an estimated $50,000 salvage value at the end of its economic life.

*115. Assuming the company uses the general MACRS approach, the amount of MACRS deduction for tax purposes for the year 2012 is
a. $50,000.
b. $100,000.
c. $80,000.
d. $40,000.

*116. Assuming the company uses the optional straight-line method, the amount of MACRS deduction for tax purposes for the year 2012 is
a. $40,000.
b. $50,000.
c. $20,000.
d. $25,000.

Multiple Choice Answers—Computational

MULTIPLE CHOICE—CPA Adapted

117. Pike Co. purchased a machine on July 1, 2012, for $800,000. The machine has an estimated useful life of five years and a salvage value of $160,000. The machine is being depreciated from the date of acquisition by the 150% declining-balance method. For the year ended December 31, 2012, Pike should record depreciation expense on this machine of
a. $240,000.
b. $160,000.
c. $120,000.
d. $96,000.

118. A machine with a five-year estimated useful life and an estimated 10% salvage value was acquired on January 1, 2011. The depreciation expense for 2013 using the double-declining balance method would be original cost multiplied by
a. 90% × 40% × 40%.
b. 60% × 60% × 40%.
c. 90% × 60% × 40%.
d. 40% × 40%.

119. On April 1, 2011, Verlin Co. purchased new machinery for $300,000. The machinery has an estimated useful life of five years, and depreciation is computed by the sum-of-the-years’-digits method. The accumulated depreciation on this machinery at March 31, 2013, should be
a. $200,000.
b. $180,000.
c. $120,000.
d. $100,000.

120. Hahn Co. takes a full year’s depreciation expense in the year of an asset’s acquisition and no depreciation expense in the year of disposition. Data relating to one of Hahn’s depreciable assets at December 31, 2013 are as follows:
Acquisition year 2011
Cost $210,000
Residual value 30,000
Accumulated depreciation 144,000
Estimated useful life 5 years
Using the same depreciation method as used in 2011, 2012, and 2013, how much depreciation expense should Hahn record in 2014 for this asset?
a. $24,000
b. $36,000
c. $42,000
d. $48,000

121. A depreciable asset has an estimated 15% salvage value. At the end of its estimated useful life, the accumulated depreciation would equal the original cost of the asset under which of the following depreciation methods?
Straight-line Productive Output
a. Yes No
b. Yes Yes
c. No Yes
d. No No

122. Net income is understated if, in the first year, estimated salvage value is excluded from the depreciation computation when using the
Straight-line Production or
Method Use Method
a. Yes No
b. Yes Yes
c. No No
d. No Yes

123. A plant asset with a five-year estimated useful life and no residual value is sold at the end of the second year of its useful life. How would using the sum-of-the-years’-digits method of depreciation instead of the double-declining balance method of depreciation affect a gain or loss on the sale of the plant asset?
Gain Loss
a. Decrease Decrease
b. Decrease Increase
c. Increase Decrease
d. Increase Increase

124. Giger Company acquired a tract of land containing an extractable natural resource. Giger is required by the purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be 5,000,000 tons, and that the land will have a value of $800,000 after restoration. Relevant cost information follows:
Land $5,600,000
Estimated restoration costs 1,200,000
If Giger maintains no inventories of extracted material, what should be the charge to depletion expense per ton of extracted material?
a. $1.36
b. $1.20
c. $1.12
d. $0.96

125. In January 2012, Fehr Mining Corporation purchased a mineral mine for $6,300,000 with removable ore estimated by geological surveys at 2,500,000 tons. The property has an estimated value of $600,000 after the ore has been extracted. Fehr incurred $1,725,000 of development costs preparing the property for the extraction of ore. During 2012, 340,000 tons were removed and 300,000 tons were sold. For the year ended December 31, 2012, Fehr should include what amount of depletion in its cost of goods sold?
a. $775,200
b. $684,000
c. $891,000
d. $1,009,800

Multiple Choice Answers—CPA Adapted

IFRS QUESTIONS

True / False

1. Under both IFRS and U.S. GAAP, interest costs incurred during construction must be capitalized.

2. As with U.S. GAAP, IFRS requires that both direct and indirect costs in self-constructed assets be capitalized.

3. IFRS, like U.S. GAAP, capitalizes all direct costs in self-constructed assets.

4. Even though IFRS does not employ the first-stage recoverability test used under U.S. GAAP − comparing the undiscounted cash flows to the carrying amount, the fact that IFRS uses a fair value test to measure impairment loss makes IFRS stricter than U.S. GAAP

5. U.S. GAAP, like IFRS permits write-up for subsequent recoveries of impairment, back up to the original amount before the impairment in all circumstances.

6. Unlike U.S. GAAP, interest costs incurred during construction are not capitalized under IFRS.

7. Asset revaluations are permitted under IFRS and U.S. GAAP.

8. In general, IFRS adheres to very different principles than U.S. GAAP.

9. U.S. GAAP, per SFAS No. 153, now requires that gains on exchanges of nonmonetary assets be recognized if the exchange lacks commercial substance.

10. IFRS permits the same depreciation methods as U.S GAAP, with the exception of the units-of-production method, which is not allowed under IFRS.

Answers to True / False questions

Multiple-Choice Questions

1. IFRS uses a fair value test to measure impairment loss. However, IFRS does not use the first-stage recoverability test under U.S. GAAP − comparing the undiscounted cash flow to the carrying amount. As a result, the IFRS test is
a. not as strict as U.S. GAAP.
b. more strict than U.S. GAAP.
c. essentially the same strictness as U.S. GAAP.
d. None of the above.

2. Acceptable depreciation methods under IFRS include
a. Straight-line.
b. Accelerated.
c. Units-of-production.
d. All of the above.

3. The primary IFRS related to property, plant and equipment is found in
a. IAS 1 and IAS 34.
b. IAS 11 and IAS 17.
c. IAS 16 and IAS 23.
d. IAS 27 and IAS 39.

4. The accounting exchanges of nonmonetary assets has recently converged between IFRS and U.S. GAAP, per SFAS No. 153, now requires
a. that gains on exchanges of nonmonetary assets be recognized if the exchange has commercial substance.
b. that gains on exchanges of nonmonetary assets be recognized if the exchange does not have commercial substance.
c. that gains on exchanges of nonmonetary assets be recognized if the exchange does not have commercial substance, and has never been impaired.
d. All of the above.

5. In measuring an impairment loss, IFRS uses
a. undiscounted cash flows.
b. discounted cash flows.
c. a fair value test.
d. a replacement value test.

6. IFRS permits companies to carry assets at historical cost or use a revaluation model for fixed assets. According to IAS 16, if revaluation is used:
1. it must be applied to all assets in a class of assets.
2. assets must be revalued on an annual basis.
3. assets must be depreciated on the straight-line basis.
4. salvage values must be zero.
a. 1 is correct
b. 2 is correct
c. 1 and 2 are correct
d. All are correct

Questions 7 through 10 are based on the following information:

Simpson Company applies revaluation accounting to plant assets with a carrying value of $1,600,000, a useful life of 4 years, and no salvage value. Depreciation is calculated on the straight-line basis. At the end of year 1, independent appraisers determine that the asset has a fair value of $1,500,000.

7. The journal entry to record depreciation for year one will include a
a. debit to Accumulated Depreciation for $400,000.
b. debit to Depreciation Expense for $100,000.
c. credit to Accumulated Depreciation for $100,000.
d. debit to Depreciation Expense for $400,000.

8. The journal entry to adjust the plant assets to fair value and record revaluation surplus in year one will include a
a. debit to Accumulated Depreciation for $100,000.
b. credit to Depreciation Expense for $300,000.
c. credit to Plant Assets for $300,000.
d. credit to Revaluation Surplus for $300,000.

9. The financial statements for year one will include the following information
a. Accumulated depreciation $400,000.
b. Depreciation expense $100,000.
c. Plant assets $1,500,000.
d. Revaluation surplus $100,000.

10. The entry to record depreciation for this same asset in year two will include a
a. debit to Accumulated Depreciation for $400,000.
b. debit to Depreciation Expense for $500,000.
c. credit to Accumulated Depreciation for $300,000.
d. debit to Depreciation Expense for $400,000.

Answers to multiple choice:

Short Answer:

1. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with respect to the accounting for property, plant, and equipment.

2. At a recent executive committee meeting, the controller for Marino Company remarked, “With only a single key difference between U.S. GAAP and IFRS for property, plant, and equipment, it should be smooth sailing for the FASB and IASB to converge their standards in this area.” Prepare a response to the controller.

IFRS QUESTIONS

True / False

1. Who owns the goods, as well as the costs to include in inventory, are essentially accounted for the same under IFRS and U.S. GAAP.

2. U.S. GAAP has less detailed rules related to the accounting for inventories, compared to IFRS.

3. IFRS does not permit the LIFO method to account for inventories.

4. Many U.S. companies that have international operations use LIFO for U.S. purposes but use FIFO for their foreign subsidiaries.

5. Both U.S. GAAP and IFRS permit the use of the LIFO method to account for inventories.

Answers to True / False questions:

Multiple Choice Questions:

1. Under IFRS, an entity should initially recognize inventory when
a. it has control of the inventory
b. it expects it to provide future economic benefits
c. the cost of the inventory can be reliably measured
d. all of these choices are correct

2. With respect to accounting for inventories, which of the following is a difference that exists for IFRS, as opposed to U.S. GAAP?
a. There is required recognition of certain development costs.
b. The FIFO method of inventories is prohibited.
c. The specific identification method of inventories is only allowed when goods are interchangeable.
d. The weighted average method of inventories is prohibited.

3. Under IFRS, which of the following would be included in the cost of inventories?
a. Product specific designer costs
b. Abnormal waste materials
c. Selling costs
d. All of these would be included in the cost of inventories.

4. Which of the following best describes the IFRS requirement for applying the same cost formula to all inventories?
a. When they are purchased from different suppliers.
b. When they are purchased from the same geographic region.
c. When they are similar in nature or use.
d. When they sell for the same price.

5. Under IFRS, inventories are classified as
a. noncurrent assets
b. current assets
c. stockholders’ equity
d. current liabilities

Use the following information to answer questions 6-8.

Barton Company uses a periodic inventory system. On January 1, 2012, Barton Company had 600 units of inventory on hand at a cost of $8 per unit. During 2012, Barton made the following inventory purchases.

April 1 Purchased 200 units at $10
June 1 Purchased 150 units at $12
September 1 Purchased 400 units at $14
November 1 Purchased 500 units at $15

Assume Barton Company sold 1,150 units of inventory during 2012.

6. If you assume that Barton follows IFRS and uses the FIFO method, what is the ending inventory and cost of goods sold, respectively?
a. Ending inventory = $5,800; Cost of Goods Sold = $15,900
b. Ending inventory = $8,260; Cost of Goods Sold = $13,440
c. Ending inventory = $8,211; Cost of Goods Sold = $13,489
d. Ending inventory = $10,300; Cost of Goods Sold = $11,400

7. If you assume that Barton follows IFRS and uses the Average-cost method, what is the ending inventory and cost of goods sold, respectively?
a. Ending inventory = $5,800; Cost of Goods Sold = $15,900
b. Ending inventory = $8,260; Cost of Goods Sold = $13,440
c. Ending inventory = $8,211; Cost of Goods Sold = $13,489
d. Ending inventory = $10,300; Cost of Goods Sold = $11,400

8. Based on your answers to Questions 6 and 7, which of the following is a disadvantage of using the IFRS FIFO method, as compared to Average-cost under U.S. GAAP?
a. Under FIFO, during periods of inflation, inventory costs matched against sales are greater than the inventory replacement cost.
b. When price levels increase and inventory quantities do not decrease, taxes are greater under FIFO
c. FIFO may cause poorer buying habits as management attempts to manipulate net income.
d. FIFO typically causes lower reported earnings.

9. Which of the following is an advantage for U.S. companies with international operations to use LIFO for U.S. purposes, as opposed to using FIFO for foreign subsidiaries?
a. LIFO creates paper profits.
b. LIFO generally approximates the physical flow of items.
c. Under LIFO, inventory is less vulnerable to price declines.
d. LIFO eliminates balance sheet distortion.

10. Both U.S. GAAP and IFRS exclude which of the following from the cost of inventory?
a. Selling costs
b. General administrative costs
c. Most storage costs
d. All of these are excluded by U.S. GAAP and IFRS.

Answer to Multiple Choice.

Chapter 12

INTANGIBLE ASSETS

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

1. Intangible assets derive their value from the right (claim) to receive cash in the future.

2. Internally created intangibles are recorded at cost.

3. Internally generated intangible assets are initially recorded at fair value.

4. Amortization of limited-life intangible assets should not be impacted by expected residual values.

5. Some intangible assets are not required to be amortized every year.

6. Limited-life intangibles are amortized by systematic charges to expense over their useful life.

7. The cost of acquiring a customer list from another company is recorded as an intangible asset.

8. The cost of purchased patents should be amortized over the remaining legal life of the patent.

9. If a new patent is acquired through modification of an existing patent, the remaining book value of the original patent may be amortized over the life of the new patent.

10. In a business combination, a company assigns the cost, where possible, to the identifiable tangible and intangible assets, with the remainder recorded as goodwill.

11. Internally generated goodwill should not be capitalized in the accounts.

12. Internally generated goodwill associated with a business may be recorded as an asset when a firm offer to purchase that business unit has been received.

13. All intangibles are subject to periodic consideration of impairment with corresponding potential write-downs.

14. If the fair value of an unlimited life intangible other than goodwill is less than its book value, an impairment loss must be recognized.

15. If market value of an impaired asset recovers after an impairment has been recognized, the impairment may be reversed in a subsequent period.

16. The same recoverability test that is used for impairments of property, plant, and equipment is used for impairments of indefinite-life intangibles.

17. Periodic alterations to existing products are an example of research and development costs.

18. Research and development costs that result in patents may be capitalized to the extent of the fair value of the patent.

19. Research and development costs are recorded as an intangible asset if it is felt they will provide economic benefits in future years.

20. Contra accounts must be reported for intangible assets in a manner similar to accumu-lated depreciation and property, plant, and equipment.

True False Answers—Conceptual

MULTIPLE CHOICE—Conceptual

21. Which of the following does not describe intangible assets?
a. They lack physical existence.
b. They are financial instruments.
c. They provide long-term benefits.
d. They are classified as long-term assets.

22. Which of the following characteristics do intangible assets possess?
a. Physical existence.
b. Claim to a specific amount of cash in the future.
c. Long-lived.
d. Held for resale.

23. Which characteristic is not possessed by intangible assets?
a. Physical existence.
b. Short-lived.
c. Result in future benefits.
d. Expensed over current and/or future years.

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

25. Which of the following costs incurred internally to create an intangible asset is generally expensed?
a. Research and development costs.
b. Filing costs.
c. Legal costs.
d. All of the above.

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

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

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

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

30. Companies should test indefinite life intangible assets at least annually for:
a. recoverability.
b. amortization.
c. impairment.
d. estimated useful life.

S31. One factor that is not considered in determining the useful life of an intangible asset is
a. salvage value.
b. provisions for renewal or extension.
c. legal life.
d. expected actions of competitors.

32. Which intangible assets are amortized?
Limited-Life Indefinite-Life
a. Yes Yes
b. Yes No
c. No Yes
d. No No

33. The cost of purchasing patent rights for a product that might otherwise have seriously competed with one of the purchaser’s patented products should be
a. charged off in the current period.
b. amortized over the legal life of the purchased patent.
c. added to factory overhead and allocated to production of the purchaser’s product.
d. amortized over the remaining estimated life of the original patent covering the product whose market would have been impaired by competition from the newly patented product.

34. Broadway Corporation was granted a patent on a product on January 1, 2001. To protect its patent, the corporation purchased on January 1, 2012 a patent on a competing product which was originally issued on January 10, 2008. Because of its unique plant, Broadway Corporation does not feel the competing patent can be used in producing a product. The cost of the competing patent should be
a. amortized over a maximum period of 20 years.
b. amortized over a maximum period of 16 years.
c. amortized over a maximum period of 9 years.
d. expensed in 2012.

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

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

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

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

39. When a company develops a trademark the costs directly related to securing it should generally be capitalized. Which of the following costs associated with a trademark would not be allowed to be capitalized?
a. Attorney fees.
b. Consulting fees.
c. Research and development fees.
d. Design costs.

40. In a business combination, companies record identifiable intangible assets that they can reliably measure. All other intangible assets, too difficult to identify or measure, are recorded as:
a. other assets.
b. indirect costs.
c. goodwill.
d. direct costs.

41. Goodwill may be recorded when:
a. it is identified within a company.
b. one company acquires another in a business combination.
c. the fair value of a company’s assets exceeds their cost.
d. a company has exceptional customer relations.

42. When a new company is acquired, which of these intangible assets, unrecorded on the acquired company’s books, might be recorded in addition to goodwill?
a. A brand name.
b. A patent.
c. A customer list.
d. All of the above.

43. Which of the following intangible assets could not be sold by a business to raise needed cash for a capital project?
a. Patent.
b. Copyright.
c. Goodwill.
d. Brand Name.

44. The reason goodwill is sometimes referred to as a master valuation account is because
a. it represents the purchase price of a business that is about to be sold.
b. it is the difference between the fair value of the net tangible and identifiable intangible assets as compared with the purchase price of the acquired business.
c. the value of a business is computed without consideration of goodwill and then goodwill is added to arrive at a master valuation.
d. it is the only account in the financial statements that is based on value, all other accounts are recorded at an amount other than their value.

45. Easton Company and Lofton Company were combined in a purchase transaction. Easton was able to acquire Lofton at a bargain price. The sum of the fair values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Easton. Proper accounting treatment by Easton is to report the excess amount as
a. a gain.
b. part of current income in the year of combination.
c. a deferred credit and amortize it.
d. paid-in capital.

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

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

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

49. The recoverability test is used to determine any impairment loss on which of the following types of intangible assets?
a. Indefinite life intangibles other than goodwill.
b. Indefinite life intangibles.
c. Goodwill.
d. Limited life intangibles.

50. Buerhle Company needs to determine if its indefinite-life intangibles other than goodwill have been impaired and should be reduced or written off on its balance sheet. The impairment test(s) to be used is (are)
Recoverability Test Fair Value Test
a. Yes Yes
b. Yes No
c No Yes
d. No No

51. The carrying amount of an intangible is
a. the fair value of the asset at a balance sheet date.
b. the asset’s acquisition cost less the total related amortization recorded to date.
c. equal to the balance of the related accumulated amortization account.
d. the assessed value of the asset for intangible tax purposes.

52. Which of the following research and development related costs should be capitalized and depreciated over current and future periods?
a. Research and development general laboratory building which can be put to alternative uses in the future
b. Inventory used for a specific research project
c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular research project currently in process

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

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

55. Which of the following would be considered research and development?
a. Routine efforts to refine an existing product.
b. Periodic alterations to existing production lines.
c. Marketing research to promote a new product.
d. Construction of prototypes.

56. Which of the following costs should be capitalized in the year incurred?
a. Research and development costs.
b. Costs to internally generate goodwill.
c. Organizational costs.
d. Costs to successfully defend a patent.

57. Research and development costs
a. are intangible assets.
b. may result in the development of a patent.
c. are easily identified with specific projects.
d. all of the above.

58. Which of the following is considered research and development costs?
a. Planned search or critical investigation aimed at discovery of new knowledge.
b. Translation of research findings or other knowledge into a plan or design for a new product or process.
c. Translation of research findings or other knowledge into a significant improvement of an existing product.
d. all of the above.

59. Which of the following is considered research and development costs?
a. Planned search or critical investigation aimed at discovery of new knowledge.
b. Translation of research findings or other knowledge into a plan or design for a new product or process.
c. Neither a nor b.
d. Both a and b.

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

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

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

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

64. Which of the following would not be considered an R & D activity?
a. Adaptation of an existing capability to a particular requirement or customer’s need.
b. Searching for applications of new research findings.
c. Laboratory research aimed at discovery of new knowledge.
d. Conceptual formulation and design of possible product or process alternatives.

65. Which of the following intangible assets should be shown as a separate item on the balance sheet?
a. Goodwill
b. Franchise
c. Patent
d. Trademark

66. The notes to the financial statements should include information about acquired intangible assets, and aggregate amortization expense for how many succeeding years?
a. 6
b. 5
c. 4
d. 3

67. Which of the following should be reported under the “Other Expenses and Losses” section of the income statement?
a. Goodwill impairment losses.
b. Trade name amortization expense.
c. Patent impairment losses
d. None of the above.

68. The total amount of patent cost amortized to date is usually
a. shown in a separate Accumulated Patent Amortization account which is shown contra to the Patents account.
b. shown in the current income statement.
c. reflected as credits in the Patents account.
d. reflected as a contra property, plant and equipment item.

69. Intangible assets are reported on the balance sheet
a. with an accumulated depreciation account.
b. in the property, plant, and equipment section.
c. separately from other assets.
d. none of the above.

70. Which of the following is often reported as an extraordinary item?
a. Amortization expense.
b. Impairment losses for intangible assets other than goodwill.
c. Impairment losses on goodwill.
d. None of the above.

71. Which of the following is often reported as an extraordinary item?
a. Amortization expense.
b. Impairment losses for intangible assets.
c. Research and development costs.
d. None of the above.

*72. Which of the following costs incurred with developing computer software for internal use should be capitalized?
a. Evaluation of alternatives.
b. Coding.
c. Training.
d. Maintenance.

*73. When developing computer software to be sold, which of the following costs should be capitalized?
a. Designing.
b. Coding.
c. Testing.
d. None of the above.

*74. Capitalized costs incurred to develop internal use computer software should be amortized using the:
a. percent-of-revenue approach.
b. percent-of-completion approach.
c. straight-line approach.
d. accelerated amortization approach.

*75. Capitalized costs incurred while developing computer software to be sold should be amortized using the:
a. lower of the straight-line method or the percent-of-revenue method.
b. higher of the percent-of-revenue method or the percent-of-completion method.
c. lower of the percent-of-revenue method or the percent-of-completion method.
d. higher of the straight-line method or the percent-of-revenue method.

Multiple Choice Answers—Conceptual

MULTIPLE CHOICE—Computational

76. Lynne Corporation acquired a patent on May 1, 2012. Lynne paid cash of $40,000 to the seller. Legal fees of $1,000 were paid related to the acquisition. What amount should be debited to the patent account?
a. $1,000
b. $39,000
c. $40,000
d. $41,000

77. Contreras Corporation acquired a patent on May 1, 2012. Contreras paid cash of $35,000 to the seller. Legal fees of $900 were paid related to the acquisition. What amount should be debited to the patent account?
a. $900
b. $34,100
c. $35,000
d. $35,900

78. Mini Corp. acquires a patent from Maxi Co. in exchange for 2,500 shares of Mini Corp.’s $5 par value common stock and $90,000 cash. When the patent was initially issued to Maxi Co., Mini Corp.’s stock was selling at $7.50 per share. When Mini Corp. acquired the patent, its stock was selling for $9 a share. Mini Corp. should record the patent at what amount?
a. $102,500
b. $108,750
c. $112,500
d. $90,000

79. Alonzo Co. acquires 3 patents from Shaq Corp. for a total of $300,000. The patents were carried on Shaq’s books as follows: Patent AA: $5,000; Patent BB: $2,000; and Patent CC: $3,000. When Alonzo acquired the patents their fair values were: Patent AA: $20,000; Patent BB: $240,000; and Patent CC: $60,000. At what amount should Alonzo record Patent BB?
a. $100,000
b. $200,000
c. $2,000
d. $225,000

80. Jeff Corporation purchased a limited-life intangible asset for $150,000 on May 1, 2010. It has a useful life of 10 years. What total amount of amortization expense should have been recorded on the intangible asset by December 31, 2012?
a. $ -0-
b. $30,000
c. $40,000
d. $45,000

81. Rich Corporation purchased a limited-life intangible asset for $270,000 on May 1, 2010. It has a useful life of 10 years. What total amount of amortization expense should have been recorded on the intangible asset by December 31, 2012?
a. $ -0-.
b. $54,000
c. $72,000
d. $81,000

82. Thompson Company incurred research and development costs of $100,000 and legal fees of $20,000 to acquire a patent. The patent has a legal life of 20 years and a useful life of 10 years. What amount should Thompson record as Patent Amortization Expense in the first year?
a. $ -0-.
b. $ 2,000.
c. $ 6,000.
d. $12,000.

83. ELO Corporation purchased a patent for $180,000 on September 1, 2010. It had a useful life of 10 years. On January 1, 2012, ELO spent $44,000 to successfully defend the patent in a lawsuit. ELO feels that as of that date, the remaining useful life is 5 years. What amount should be reported for patent amortization expense for 2012?
a. $41,200.
b. $40,000.
c. $37,600.
d. $31,200.

84. Danks Corporation purchased a patent for $900,000 on September 1, 2010. It had a useful life of 10 years. On January 1, 2012, Danks spent $220,000 to successfully defend the patent in a lawsuit. Danks feels that as of that date, the remaining useful life is 5 years. What amount should be reported for patent amortization expense for 2012?
a. $206,000.
b. $200,000.
c. $188,000.
d. $156,000.

85. The general ledger of Vance Corporation as of December 31, 2012, includes the following accounts:
Copyrights $ 30,000
Deposits with advertising agency (will be used to promote goodwill) 27,000
Discount on bonds payable 70,000
Excess of cost over fair value of identifiable net assets of
Acquired subsidiary 440,000
Trademarks 90,000
In the preparation of Vance’s balance sheet as of December 31, 2012, what should be reported as total intangible assets?
a. $530,000.
b. $557,000.
c. $560,000.
d. $587,000.

86. In January, 2008, Findley Corporation purchased a patent for a new consumer product for $960,000. At the time of purchase, the patent was valid for fifteen years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only ten years. During 2013 the product was permanently removed from the market under governmental order because of a potential health hazard present in the product. What amount should Findley charge to expense during 2013, assuming amortization is recorded at the end of each year?
a. $640,000.
b. $480,000.
c. $96,000.
d. $64,000.

87. Day Company purchased a patent on January 1, 2012 for $600,000. The patent had a remaining useful life of 10 years at that date. In January of 2013, Day successfully defends the patent at a cost of $270,000, extending the patent’s life to 12/31/24. What amount of amortization expense would Kerr record in 2013?
a. $60,000
b. $67,500
c. $72,500
d. $90,000

88. On January 2, 2012, Klein Co. bought a trademark from Royce, Inc. for $1,200,000. An independent research company estimated that the remaining useful life of the trademark was 10 years. Its unamortized cost on Royce’s books was $900,000. In Klein’s 2012 income statement, what amount should be reported as amortization expense?
a. $120,000.
b. $ 90,000.
c. $ 60,000.
d. $ 45,000.

89. A company acquires a patent for a drug with a remaining legal and useful life of six years on January 1, 2011 for $2,100,000. The company uses straight-line amortization for patents. On January 2, 2013, a new patent is received for a timed-release version of the same drug. The new patent has a legal and useful life of twenty years. The least amount of amortization that could be recorded in 2013 is
a. $350,000.
b. $ 70,000.
c. $ 95,454.
d. $ 80,500.

90. Blue Sky Company’s 12/31/12 balance sheet reports assets of $7,500,000 and liabilities of $3,000,000. All of Blue Sky’s assets’ book values approximate their fair value, except for land, which has a fair value that is $450,000 greater than its book value. On 12/31/12, Horace Wimp Corporation paid $7,650,000 to acquire Blue Sky. What amount of goodwill should Horace Wimp record as a result of this purchase?
a. $ -0-
b. $150,000
c. $2,700,000
d. $3,150,000

91. Dotel Company’s 12/31/12 balance sheet reports assets of $12,000,000 and liabilities of $5,000,000. All of Dotel’s assets’ book values approximate their fair value, except for land, which has a fair value that is $800,000 greater than its book value. On 12/31/12, Egbert Corporation paid $12,200,000 to acquire Dotel. What amount of goodwill should Egbert record as a result of this purchase?
a. $ -0-
b. $ 200,000
c. $4,400,000
d. $5,200,000

92. Floyd Company purchases Haeger Company for $3,200,000 cash on January 1, 2013. The book value of Haeger Company’s net assets, as reflected on its December 31, 2012 balance sheet is $2,480,000. An analysis by Floyd on December 31, 2012 indicates that the fair value of Haeger’s tangible assets exceeded the book value by $240,000, and the fair value of identifiable intangible assets exceeded book value by $180,000. How much goodwill should be recognized by Floyd Company when recording the purchase of Haeger Company?
a. $ -0-
b. $720,000
c. $480,000
d. $300,000

93. General Products Company bought Special Products Division in 2012 and appropriately recorded $500,000 of goodwill related to the purchase. On December 31, 2013, the fair value of Special Products Division is $4,000,000 and it is carried on General Product’s books for a total of $3,400,000, including the goodwill. An analysis of Special Products Division’s assets indicates that goodwill of $400,000 exists on December 31, 2013. What goodwill impairment should be recognized by General Products in 2013?
a. $0.
b. $200,000.
c. $50,000.
d. $300,000.

94. During 2012, Bond Company purchased the net assets of May Corporation for $2,000,000. On the date of the transaction, May had $600,000 of liabilities. The fair value of May’s assets when acquired were as follows:
Current assets $ 1,080,000
Noncurrent assets 2,520,000
$3,600,000
How should the $1,000,000 difference between the fair value of the net assets acquired ($3,000,000) and the cost ($2,000,000) be accounted for by Bond?
a. The $1,000,000 difference should be credited to retained earnings.
b. The $1,000,000 difference should be recognized as a gain.
c. The current assets should be recorded at $1,080,000 and the noncurrent assets should be recorded at $1,520,000.
d. A deferred credit of $1,000,000 should be set up and then amortized to income over a period not to exceed forty years.

95. The following information is available for Barkley Company’s patents:
Cost $2,580,000
Carrying amount 1,290,000
Expected future net cash flows 1,200,000
Fair value 975,000
Barkley would record a loss on impairment of
a. $ 90,000.
b. $ 315,000.
c. $1,290,000.
d. $1,380,000.

96. Harrel Company acquired a patent on an oil extraction technique on January 1, 2012 for $7,500,000. It was expected to have a 10 year life and no residual value. Harrel uses straight-line amortization for patents. On December 31, 2013, the expected future cash flows expected from the patent were expected to be $900,000 per year for the next eight years. The present value of these cash flows, discounted at Harrel’s market interest rate, is $4,200,000. At what amount should the patent be carried on the December 31, 2013 balance sheet?
a. $7,500,000
b. $7,200,000
c. $6,000,000
d. $4,200,000

97. Malrom Manufacturing Company acquired a patent on a manufacturing process on January 1, 2012 for $6,250,000. It was expected to have a 10 year life and no residual value. Malrom uses straight-line amortization for patents. On December 31, 2013, the expected future cash flows expected from the patent were expected to be $500,000 per year for the next eight years. The present value of these cash flows, discounted at Malrom’s market interest rate, is $3,000,000. At what amount should the patent be carried on the December 31, 2013 balance sheet?
a. $6,250,000
b. $5,000,000
c. $4,000,000
d. $3,000,000

98. Twilight Corporation acquired End-of-the-World Products on January 1, 2012 for $8,000,000, and recorded goodwill of $1,500,000 as a result of that purchase. At December 31, 2012, the End-of-the-World Products Division had a fair value of $6,800,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $5,800,000 at that time. What amount of loss on impairment of goodwill should Twilight record in 2012?
a. $ -0-
b. $500,000
c. $700,000
d. $1,200,000

99. Jenks Corporation acquired Linebrink Products on January 1, 2012 for $6,000,000, and recorded goodwill of $1,125,000 as a result of that purchase. At December 31, 2012, Linebrink Products had a fair value of $5,100,000. The net identifiable assets of the Linebrink (excluding goodwill) had a fair value of $4,350,000 at that time. What amount of loss on impairment of goodwill should Jenks record in 2012?
a. $ -0-
b. $375,000
c. $525,000
d. $900,000

100. In 2012, Edwards Corporation incurred research and development costs as follows:
Materials and equipment $ 90,000
Personnel 130,000
Indirect costs 150,000
$370,000
These costs relate to a product that will be marketed in 2011. It is estimated that these costs will be recouped by December 31, 2015. The equipment has no alternative future use. What is the amount of research and development costs that should be expensed in 2012?
a. $0.
b. $220,000.
c. $280,000.
d. $370,000.

101. Hall Co. incurred research and development costs in 2013 as follows:
Materials used in research and development projects $ 450,000
Equipment acquired that will have alternate future uses in future research
and development projects 3,000,000
Depreciation for 2013 on above equipment 500,000
Personnel costs of persons involved in research and development projects 750,000
Consulting fees paid to outsiders for research and development projects 300,000
Indirect costs reasonably allocable to research and development projects 225,000
$5,225,000
The amount of research and development costs charged to Hall’s 2013 income statement should be
a. $1,700,000.
b. $2,000,000.
c. $2,225,000.
d. $4,700,000.

102. Loazia Inc. incurred the following costs during the year ended December 31, 2013:
Laboratory research aimed at discovery of new knowledge $230,000
Costs of testing prototype and design modifications 45,000
Quality control during commercial production, including routine testing
of products 270,000
Construction of research facilities having an estimated useful life of
6 years but no alternative future use 360,000
The total amount to be classified and expensed as research and development in 2013 is
a. $605,000.
b. $905,000.
c. $635,000.
d. $335,000.

103. MaBelle Corporation incurred the following costs in 2012:
Acquisition of R&D equipment with a useful life of
4 years in R&D projects $600,000
Start-up costs incurred when opening a new plant 140,000
Advertising expense to introduce a new product 700,000
Engineering costs incurred to advance a product to full
production stage 500,000
What amount should MaBelle record as research & development expense in 2012?
a. $ 650,000
b. $ 740,000
c. $1,100,000
d. $1,240,000

104. Leeper Corporation incurred the following costs in 2012:
Acquisition of R&D equipment with a useful life of
4 years in R&D projects $800,000
Cost of making minor modifications to an existing product 140,000
Advertising expense to introduce a new product 700,000
Engineering costs incurred to advance a product to full
production stage 750,000
What amount should Leeper record as research & development expense in 2012?
a. $ 950,000
b. $ 940,000
c. $1,450,000
d. $1,640,000

105. Platteville Corporation has the following account balances at 12/31/12:
Amortization expense $ 30,000
Goodwill 420,000
Patent, net of $90,000 amortization 210,000
What amount should Platteville report for intangible assets on the 12/31/12 balance sheet?
a. $210,000
b. $300,000
c. $630,000
d. $660,000

*106. Shangra-La Company incurred $2,000,000 ($500,000 in 2011 and $1,500,000 in 2012) to develop a computer software product. $600,000 of this amount was expended before technological feasibility was established in early 2012. The product will earn future revenues of $4,000,000 over its 5-year life, as follows: 2012 – $1,000,000; 2013 – $1,000,000; 2014 – $800,000; 2015 – $800,000; and 2016 – $400,000. What portion of the $2,000,000 computer software costs should be expensed in 2012?
a. $350,000
b. $400,000
c. $450,000
d. $1,500,000

*107. Logan Company incurred $4,000,000 ($1,100,000 in 2011 and $2,900,000 in 2012) to develop a computer software product. $1,200,000 of this amount was expended before technological feasibility was established in early 2012. The product will earn future revenues of $8,000,000 over its 5-year life, as follows: 2012 – $2,000,000; 2013 – $2,000,000; 2014 – $1,600,000; 2015 – $1,600,000; and 2016 – $800,000. What portion of the $4,000,000 computer software costs should be expensed in 2012?
a. $700,000.
b. $750,000.
c. $800,000.
d. $2,900,000.

*108. Geller Inc. incurred $700,000 of capitalizable costs to develop computer software during 2012. The software will earn total revenues over its 4-year life as follows: 2012 – $400,000; 2013 – $500,000; 2014 – $600,000; and 2015 – $500,000. What amount of the computer software costs should be expensed in 2012?
a. $700,000
b. $140,000
c. $175,000
d. $245,000

*109. Tripiani Inc. incurred $800,000 of capitalizable costs to develop computer software during 2012. The software will earn total revenues over its 5-year life as follows: 2012 – $500,000; 2013 – $600,000; 2014 – $600,000; 2015 – $200,000; and 2016 – $100,000. What amount of the computer software costs should be expensed in 2012?
a. $200,000
b. $160,000
c. $180,000
d. $266,667

*110. Tripiani Inc. incurred $900,000 of capitalizable costs to develop computer software during 2012. The software will be used internally over its 5-year life. What amount of the computer software costs should be expensed in 2012?
a. $900,000
b. $180,000
c. $202,500
d. $300,000

Multiple Choice Answers—Computational

MULTIPLE CHOICE—CPA Adapted
111. Lopez Corp. incurred $1,260,000 of research and development costs to develop a product for which a patent was granted on January 2, 2008. Legal fees and other costs associated with registration of the patent totaled $240,000. On March 31, 2013, Lopez paid $450,000 for legal fees in a successful defense of the patent. The total amount capitalized for the patent through March 31, 2013 should be
a. $690,000.
b. $1,500,000.
c. $1,710,000.
d. $1,950,000.

112. On June 30, 2013, Cey, Inc. exchanged 4,000 shares of Seely Corp. $30 par value common stock for a patent owned by Gore Co. The Seely stock was acquired in 2013 at a cost of $110,000. At the exchange date, Seely common stock had a fair value of $46 per share, and the patent had a net carrying value of $220,000 on Gore’s books. Cey should record the patent at
a. $110,000.
b. $120,000.
c. $184,000.
d. $220,000.

113. On May 5, 2013, MacDougal Corp. exchanged 6,000 shares of its $25 par value treasury common stock for a patent owned by Masset Co. The treasury shares were acquired in 2012 for $135,000. At May 5, 2013, MacDougal’s common stock was quoted at $34 per share, and the patent had a carrying value of $165,000 on Masset’s books. MacDougal should record the patent at
a. $135,000.
b. $150,000.
c. $165,000.
d. $204,000.

114. Ely Co. bought a patent from Baden Corp. on January 1, 2013, for $450,000. An independent consultant retained by Ely estimated that the remaining useful life at January 1, 2013 is 15 years. Its unamortized cost on Baden’s accounting records was $225,000; the patent had been amortized for 5 years by Baden. How much should be amortized for the year ended December 31, 2013 by Ely Co.?
a. $0.
b. $22,500.
c. $30,000.
d. $45,000.

115. January 2, 2010, Koll, Inc. purchased a patent for a new consumer product for $450,000. At the time of purchase, the patent was valid for 15 years; however, the patent’s useful life was estimated to be only 10 years due to the competitive nature of the product. On December 31, 2013, the product was permanently withdrawn from the market under governmental order because of a potential health hazard in the product. What amount should Koll charge against income during 2013, assuming amortization is recorded at the end of each year?
a. $ 45,000
b. $270,000
c. $315,000
d. $360,000

116. On January 1, 2009, Russell Company purchased a copyright for $2,000,000, having an estimated useful life of 16 years. In January 2013, Russell paid $300,000 for legal fees in a successful defense of the copyright. Copyright amortization expense for the year ended December 31, 2013, should be
a. $0.
b. $125,000.
c. $143,750.
d. $150,000.

117. Which of the following legal fees should be capitalized?
Legal fees to Legal fees to successfully
obtain a copyright defend a trademark
a. No No
b. No Yes
c. Yes Yes
d. Yes No

118. Which of the following costs of goodwill should be amortized over their estimated useful lives?
Costs of goodwill from a Costs of developing
business combination goodwill internally
a. No No
b. No Yes
c. Yes Yes
d. Yes No

119. During 2013, Leon Co. incurred the following costs:
Testing in search for process alternatives $ 350,000
Costs of marketing research for new product 250,000
Modification of the formulation of a process 560,000
Research and development services performed by Beck Corp. for Leon 425,000
In Leon’s 2013 income statement, research and development expense should be
a. $560,000.
b. $985,000.
c. $1,335,000.
d. $1,585,000.

120. Riley Co. incurred the following costs during 2013:
Significant modification to the formulation of a chemical product $160,000
Trouble-shooting in connection with breakdowns during commercial
production 150,000
Cost of exploration of new formulas 200,000
Seasonal or other periodic design changes to existing products 185,000
Laboratory research aimed at discovery of new technology 275,000
In its income statement for the year ended December 31, 2013, Riley should report research and development expense of
a. $635,000.
b. $785,000.
c. $820,000.
d. $970,000.

Multiple Choice Answers—CPA Adapted

IFRS QUESTIONS

True/False Questions
1. As in U.S. GAAP, under IFRS the costs associated with research and development are segregated into two components.
2. Costs in the research phase are expensed under U.S. GAAP, but capitalized under IFRS.
3. Costs in the research phase are always expensed under both IFRS and U.S. GAAP.
4. IFRS differs from U.S. GAAP in the development phase in that costs are capitalized once technological feasibility is achieved.
5. The increased acceptance of IFRS has caused costs associated with internally generated intangible assets to be capitalized under U.S. GAAP.
6. IFRS permits some capitalization of internally generated intangible assets, if it is probable there will be a future benefit and the amount can be readily measured.
7. While IFRS requires an impairment test at each reporting date for long-lived assets, it requires no such test for intangibles once a legal or useful life has been determined.
8. IFRS allows reversal of impairment losses when there has been a change in economic conditions or in the expected use of the asset. Under U.S GAAP, impairment losses cannot be reversed for assets to be held and used.
9. IFRS and U.S. GAAP are similar in the accounting for impairments of assets held for disposal.
10. Under U.S. GAAP, impairment loss is measured as the excess of the carrying amount over the assets discounted cash flow.

Answers to True/False:

Multiple-Choice Questions

1. As in U.S. GAAP, under IFRS the costs associated with research and development are segregated into
a. two components, the research phase and the production phase.
b. two components, the research phase and the development phase.
c. three components, the planning phase, the research phase and the production phase.
d. three components, the analysis phase, the development phase and the production phase.

2. In accounting for internally generated intangible assets, U.S. GAAP requires that
a. all costs, no matter how immaterial, be capitalized.
b. only material costs be capitalized.
c. planned costs be capitalized, while costs in excess of plan be expensed.
d. all costs be expensed.

3. The following costs are incurred during the research and development phases of a laser bone scanner

Laboratory research aimed at discovery of new knowledge $600,000
Search for application of new research findings 400,000
Salaries of research staff designing new laser bone scanner 1,200,000
Material, labor and overhead costs of prototype laser scanner 850,000
Costs of testing prototype and design modifications 450,000
Engineering costs incurred to advance the laser scanner to full production stage (technological feasibility reached) 700,000

Identify which of these are research phase items and will be immediately expensed under
U.S. GAAP and IFRS.
U.S. GAAP IFRS¬¬¬¬¬¬¬¬¬¬¬¬¬
a. $1,000,000 $1,000,000
b. 2,200,000 1,200,000
c. 4,200,000 4,200,000
d. 4,200,000 3,500,000

4. The following costs are incurred during the research and development phases of a laser bone scanner

Laboratory research aimed at discovery of new knowledge $600,000
Search for application of new research findings 400,000
Salaries of research staff designing new laser bone scanner 1,200,000
Material, labor and overhead costs of prototype laser scanner 850,000
Costs of testing prototype and design modifications 450,000
Engineering costs incurred to advance the laser scanner to full
production stage (technological feasibility reached) 700,000

Identify which of these are development phase items and will be immediately expensed under
U.S. GAAP and IFRS.
U.S. GAAP IFRS
a. $1,000,000 $1,000,000
b. 2,200,000 1,200,000
c. 2,200,000 3,200,000
d. 3,200,000 3,200,000

5. The primary IFRS related to intangible assets and impairments is found in
a. IAS 38 and IAS 10.
b. IAS 16 and IAS 36.
c. IAS 1 and IAS 34.
d. IAS 38 and IAS 36.

6. IFRS allows reversal of impairment losses when
a. the reversal is greater than the amount of the original impairment.
b. the reversal falls in a subsequent fiscal year of the company’s operations.
c. there has been a change in economic conditions or in the expected use of the asset.
d. reversal of impairment losses is never allowed.

7. Under U.S. GAAP, impairment losses
a. can be reversed but only if the reversal is greater than the amount of the original impairment.
b. can be reversed but only if the reversal falls in a subsequent fiscal year of the company’s operations.
c. cannot be reversed for assets to be held and used.
d. none of the above.

8. IFRS and U.S. GAAP
a. are diametrically opposed in their accounting for impairments of assets held for disposal.
b. are similar in the accounting for impairments of assets held for disposal.
c. are moving toward common ground in their accounting for impairments of assets held for disposal.
d. are moving further apart in their accounting for impairments of assets held for disposal.

9. Under IFRS, costs in the development phase are
a. never capitalized, but expensed as they are under U.S. GAAP.
b. capitalized if they exceed development phase costs incurred for previously successful ventures.
c. capitalized once technological feasibility is achieved.
d. capitalized on an interim basis, but then expensed prior to the end of the company’s fiscal year.

Answers to Multiple Choice:

Short Answer

1. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with respect to the accounting for intangible assets.

2. Briefly discuss the convergence efforts that are underway in the area of intangible assets.

CHAPTER 13

CURRENT LIABILITIES AND CONTINGENCIES

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

1. A zero-interest-bearing note payable that is issued at a discount will not result in any interest expense being recognized.

2. Dividends in arrears on cumulative preferred stock should be recorded as a current liability.

3. Magazine subscriptions and airline ticket sales both result in unearned revenues.

4. Discount on Notes Payable is a contra account to Notes Payable on the balance sheet.

5. All long-term debt maturing within the next year must be classified as a current liability on the balance sheet.

6. A short-term obligation can be excluded from current liabilities if the company intends to refinance it on a long-term basis.

7. Many companies do not segregate the sales tax collected and the amount of the sale at the time of the sale.

8. A company must accrue a liability for sick pay that accumulates but does not vest.

9. Companies report the amount of social security taxes withheld from employees as well as the companies’ matching portion as current liabilities until they are remitted.

10. Accumulated rights exist when an employer has an obligation to make payment to an employee even after terminating his employment.

11. Companies should recognize the expense and related liability for compensated absences in the year earned by employees.

12. Companies should accrue an estimated loss from a loss contingency if information available prior to the issuance of financial statements indicates that it is probable that a liability has been incurred.

13. A company discloses gain contingencies in the notes only when a high probability exists for realizing them.

14. The expected profit from a sales type warranty that covers several years should all be recognized in the period the warranty is sold.

15. The fair value of an asset retirement obligation is recorded as both an increase to the related asset and a liability.

16. The cause for litigation must have occurred on or before the date of the financial statements to report a liability in the financial statements.

17. Under the expense warranty approach, companies charge warranty costs only to the period in which they comply with the warranty.

18. Prepaid insurance should be included in the numerator when computing the acid-test (quick) ratio.

19. Paying a current liability with cash will always reduce the current ratio.

20. Current liabilities are usually recorded and reported in financial statements at their full maturity value.

True False Answers—Conceptual

MULTIPLE CHOICE—Conceptual

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

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

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

24. Among the short-term obligations of Lance Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Madison National Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classified on the balance sheet of Lance Company as
a. current liabilities.
b. deferred charges.
c. long-term liabilities.
d. intermediate debt.

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

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

27. Which of the following items is a current liability?
a. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months.
b. Bonds due in three years.
c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
d. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.

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

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

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

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

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

33. Which of the following is a characteristic of a current liability but not a long-term liability?
a. Unavoidable obligation.
b. Present obligation that entails settlement by probable future transfer or use of cash, goods, or services.
c. Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.
d. Transaction or other event creating the liability has already occurred.

34. Which of the following is not considered a part of the definition of a liability?
a. Unavoidable obligation.
b. Transaction or other event creating the liability has already occurred.
c. Present obligation that entails settlement by probable future transfer or use of cash, goods, or services.
d. Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

35. Why is the liability section of the balance sheet of primary importance to bankers?
a. To evaluate the entity’s credit quality.
b. To assist in understanding the entity’s liquidity.
c. To better understand sources of repayment.
d. To evaluate operating efficiency.

36. What is the relationship between current liabilities and a company’s operating cycle?
a. Liquidation of current liabilities is reasonably expected within the company’s operating cycle (or one year if less).
b. Current liabilities are the result of operating transactions.
c. Current liabilities can’t exceed the amount incurred in one operating cycle.
d. There is no relationship between the two.

37. What is the relationship between present value and the concept of a liability?
a. Present values are used to measure certain liabilities.
b. Present values are not used to measure liabilities.
c. Present values are used to measure all liabilities.
d. Present values are only used to measure long-term liabilities.

38. What is a discount as it relates to zero-interest-bearing notes payable?
a. The discount represents the lender’s costs to underwrite the note.
b. The discount represents the credit quality of the borrower.
c. The discount represents the cost of borrowing.
d. The discount represents the allowance for uncollectible amounts.

39. Where is debt callable by the creditor reported on the debtor’s financial statements?
a. Long-term liability.
b. Current liability if the creditor intends to call the debt within the year, otherwise a long-term liability.
c. Current liability if it is probable that creditor will call the debt within the year, otherwise a long-term liability.
d. Current liability.

40. Which of the following is not a condition necessary to exclude a short-term obligation from current liabilities?
a. Intend to refinance the obligation on a long-term basis.
b. Obligation must be due with one year.
c. Demonstrate the ability to complete the refinancing.
d. Subsequently refinance the obligation on a long-term basis.

41. Which of the following does not demonstrate evidence regarding the ability to consummate a refinancing of short-term debt?
a. Management indicated that they are going to refinance the obligation.
b. Actually refinance the obligation.
c. Have capacity under existing financing agreements that can be used to refinance the obligation.
d. Enter into a financing agreement that clearly permits the entity to refinance the obligation.

42. A company has not declared a dividend on its cumulative preferred stock for the past three years. What is the required accounting treatment or disclosure in this situation?
a. Record a liability for cumulative amount of preferred stock dividends not declared.
b. Disclose the amount of the dividends in arrears.
c. Record a liability for the current year’s dividends only.
d. No disclosure or recognition is required.

43. Which of the following situations may give rise to unearned revenue?
a. Providing trade credit to customers.
b. Selling inventory.
c. Selling magazine subscriptions.
d. Providing manufacturer warranties.

44. Which of the following statements is correct?
a. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis.
b. A company may exclude a short-term obligation from current liabilities if the firm can demonstrate an ability to consummate a refinancing.
c. A company may exclude a short-term obligation from current liabilities if it is paid off after the balance sheet date and subsequently replaced by long-term debt before the balance sheet is issued.
d. None of these.
45. The ability to consummate the refinancing of a short-term obligation may be demon- strated by
a. actually refinancing the obligation by issuing a long-term obligation after the date of the balance sheet but before it is issued.
b. entering into a financing agreement that permits the enterprise to refinance the debt on a long-term basis.
c. actually refinancing the obligation by issuing equity securities after the date of the balance sheet but before it is issued.
d. all of these.

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

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

S48. If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information except
a. a general description of the financing arrangement.
b. the terms of the new obligation incurred or to be incurred.
c. the terms of any equity security issued or to be issued.
d. the number of financing institutions that refused to refinance the debt, if any.

S49. In accounting for compensated absences, the difference between vested rights and accumulated rights is
a. vested rights are normally for a longer period of employment than are accumu¬lated rights.
b. vested rights are not contingent upon an employee’s future service.
c. vested rights are a legal and binding obligation on the company, whereas accumulated rights expire at the end of the accounting period in which they arose.
d. vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do not represent monetary compensation.

P50. An employee’s net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employee’s
a. portion of FICA taxes and unemployment taxes.
b. and employer’s portion of FICA taxes, and unemployment taxes.
c. portion of FICA taxes, unemployment taxes, and any voluntary deductions.
d. portion of FICA taxes and any voluntary deductions.
51. Which of these is not included in an employer’s payroll tax expense?
a. F.I.C.A. (social security) taxes
b. Federal unemployment taxes
c. State unemployment taxes
d. Federal income taxes

52. Which of the following is a condition for accruing a liability for the cost of compensation for future absences?
a. The obligation relates to the rights that vest or accumulate.
b. Payment of the compensation is probable.
c. The obligation is attributable to employee services already performed.
d. All of these are conditions for the accrual.

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

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

55. What are compensated absences?
a. Unpaid time off.
b. A form of healthcare.
c. Payroll deductions.
d. Paid time off.

56. Which gives rise to the requirement to accrue a liability for the cost of compensated absences?
a. Payment is probable.
b. Employee rights vest or accumulate.
c. Amount can be reasonably estimated.
d. All of the above.

57. Under what conditions is an employer required to accrue a liability for sick pay?
a. Sick pay benefits can be reasonably estimated.
b. Sick pay benefits vest.
c. Sick pay benefits equal 100% of the pay.
d. Sick pay benefits accumulate.

58. Which of the following taxes does not represent a common payroll deduction?
a. Federal income taxes.
b. FICA taxes.
c. State unemployment taxes.
d. State income taxes.

59. What is a contingency?
a. An existing situation where certainty exists as to a gain or loss that will be resolved when one or more future events occur or fail to occur.
b. An existing situation where uncertainty exists as to possible loss that will be resolved when one or more future events occur.
c. An existing situation where uncertainty exists as to possible gain or loss that will not be resolved in the foreseeable future.
d. An existing situation where uncertainty exists as to possible gain or loss that will be resolved when one or more future events occur or fail to occur.

60. When is a contingent liability recorded?
a. When the amount can be reasonably estimated.
b. When the future events are probable to occur and the amount can be reasonably estimated.
c. When the future events are probable to occur.
d. When the future events will possibly occur and the amount can be reasonably estimated.

61. Which of the following is an example of a contingent liability?
a. Obligations related to product warranties.
b. Possible receipt from a litigation settlement.
c. Pending court case with a probable favorable outcome.
d. Tax loss carryforwards.

62. Which of the following terms is associated with recording a contingent liability?
a. Possible.
b. Likely.
c. Remote.
d. Probable.

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

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

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

66. Jeff Beck is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2012, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Beck had had a dispute with the Railroad for several years concerning the ownership of a small parcel of land. The representative of the Railroad has offered to assign any rights which the Railroad may have in the land to Beck in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Beck appears inclined to accept the Railroad’s offer. The Railroad’s 2012 financial statements should include the following related to the incident:
a. recognition of a loss and creation of a liability for the value of the land.
b. recognition of a loss only.
c. creation of a liability only.
d. disclosure in note form only.

67. A contingency can be accrued when
a. it is certain that funds are available to settle the disputed amount.
b. an asset may have been impaired.
c. the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred.
d. it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated.

68. A contingent liability
a. definitely exists as a liability but its amount and due date are indeterminable.
b. is accrued even though not reasonably estimated.
c. is not disclosed in the financial statements.
d. is the result of a loss contingency.

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

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

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

72. Ortiz Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2012. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Ortiz recall all cans of this paint sold in the last six months. The management of Ortiz estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation?
a. No recognition
b. Note disclosure only
c. Operating expense of $800,000 and liability of $800,000
d. Appropriation of retained earnings of $800,000

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

P74. Espinosa Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be
a. zero.
b. the minimum of the range.
c. the mean of the range.
d. the maximum of the range.

S75. Dean Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, and
a. the Dean Company admits guilt.
b. the court will decide the case within one year.
c. the damages appear to be material.
d. the cause for action occurred during the accounting period covered by the financial statements.

S76. Use of the accrual method in accounting for product warranty costs
a. is required for federal income tax purposes.
b. is frequently justified on the basis of expediency when warranty costs are immaterial.
c. finds the expense account being charged when the seller performs in compliance with the warranty.
d. represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.
77. Which of the following best describes the accrual method of accounting for warranty costs?
a. Expensed when paid.
b. Expensed when warranty claims are certain.
c. Expensed based on estimate in year of sale.
d. Expensed when incurred.

78. Which of the following best describes the cash-basis method of accounting for warranty costs?
a. Expensed based on estimate in year of sale.
b. Expensed when liability is accrued.
c. Expensed when warranty claims are certain.
d. Expensed when incurred.

79. Which of the following is a characteristic of the expense warranty approach, but not the sales warranty approach?
a. Estimated liability under warranties.
b. Warranty expense.
c. Unearned warranty revenue.
d. Warranty revenue.

80. An electronics store is running a promotion where for every video game purchased, the customer receives a coupon upon checkout to purchase a second game at a 50% discount. The coupons expire in one year. The store normally recognized a gross profit margin of 40% of the selling price on video games. How would the store account for a purchase using the discount coupon?
a. The reduction in sales price attributed to the coupon is recognized as premium expense.
b. The difference between the cost of the video game and the cash received is recognized as premium expense.
c. Premium expense is not recognized.
d. The difference between the cost of the video game and the selling price prior to the coupon is recognized as premium expense.

81. What condition is necessary to recognize an asset retirement obligation?
a. Company has an existing legal obligation and can reasonably estimate the amount of the liability.
b. Company can reasonably estimate the amount of the liability.
c. Company has an existing legal obligation.
d. Obligation event has occurred.

82. Which of the following are not factors that are considered when evaluating whether or not to record a liability for pending litigation?
a. Time period in which the underlying cause of action occurred.
b. The type of litigation involved.
c. The probability of an unfavorable outcome.
d. The ability to make a reasonable estimate of the amount of the loss.

83. How do you determine the acid-test ratio?
a. The sum of cash and short-term investments divided by short-term debt.
b. Current assets divided by current liabilities.
c. Current assets divided by short-term debt.
d. The sum of cash, short-term investments and net receivables divided by current liabilities.

84. What does the current ratio inform you about a company?
a. The extent of slow-moving inventories.
b. The efficient use of assets.
c. The company’s liquidity.
d. The company’s profitability.

S85. Which of the following is not acceptable treatment for the presentation of current liabilities?
a. Listing current liabilities in order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied to their liquidation
d. Showing current liabilities immediately below current assets to obtain a presentation of working capital

P86. The ratio of current assets to current liabilities is called the
a. current ratio.
b. acid-test ratio.
c. current asset turnover ratio.
d. current liability turnover ratio.

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

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

89. Each of the following are included in both the current ratio and the acid-test ratio except
a. cash.
b. short-term investments.
c. net receivables.
d. inventory.

Multiple Choice Answers—Conceptual

MULTIPLE CHOICE—Computational

90. Glaus Corp. signed a three-month, zero-interest-bearing note on November 1, 2012 for the purchase of $250,000 of inventory. The face value of the note was $253,675. Assuming Glaus used a “Discount on Note Payable” account to initially record the note and that the discount will be amortized equally over the 3-month period, the adjusting entry made at December 31, 2012 will include a
a. debit to Discount on Note Payable for $1,225.
b. debit to Interest Expense for $2,450.
c. credit to Discount on Note Payable for $1,255.
d. credit to Interest Expense for $2,450.

91. The effective interest on a 12-month, zero-interest-bearing note payable of $300,000, discounted at the bank at 8% is
a. 8.51%.
b. 8%.
c. 11.49%.
d. 8.70%.

92. On September 1, Hydra purchased $13,300 of inventory items on credit with the terms 1/15, net 30, FOB destination. Freight charges were $280. Payment for the purchase was made on September 18. Assuming Hydra uses the perpetual inventory system and the net method of accounting for purchase discounts, what amount is recorded as inventory from this purchase?
a. $13,167.
b. $13,447.
c. $13,580.
d. $13,300.

93. Sodium Inc. borrowed $280,000 on April 1. The note requires interest at 12% and principal to be paid in one year. How much interest is recognized for the period from April 1 to December 31?
a. $0.
b. $33,600.
c. $8,400.
d. $25,200.

94. Collier borrowed $350,000 on October 1 and is required to pay $360,000 on March 1. What amount is the note payable recorded at on October 1 and how much interest is recognized from October 1 to December 31?
a. $350,000 and $0.
b. $350,000 and $6,000.
c. $360,000 and $0.
d. $350,000 and $10,000.

95. Purest owes $2 million that is due on February 28. The company borrows $1,600,000 on February 25 (5-year note) and uses the proceeds to pay down the $2 million note and uses other cash to pay the balance. How much of the $2 million note is classified as long-term in the December 31 financial statements.
a. $2,000,000.
b. $0.
c. $1,600,000.
d. $400,000.

96. Vista newspapers sold 6,000 of annual subscriptions at $125 each on September 1. How much unearned revenue will exist as of December 31?
a. $0.
b. $500,000.
c. $250,000.
d. $750,000.

97. Purchase Retailer made cash sales during the month of October of $221,000. The sales are subject to a 6% sales tax that was also collected. Which of the following would be included in the summary journal entry to reflect the sale transactions?
a. Debit Cash for $221,000.
b. Credit Sales Taxes Payable for $12,510.
c. Credit Sales Revenue for $208,490.
d. Credit Sales Taxes Payable for $13,260.

98. On February 10, 2012, after issuance of its financial statements for 2011, House Company entered into a financing agreement with Lebo Bank, allowing House Company to borrow up to $6,000,000 at any time through 2014. Amounts borrowed under the agreement bear interest at 2% above the bank’s prime interest rate and mature two years from the date of loan. House Company presently has $2,250,000 of notes payable with First National Bank maturing March 15, 2012. The company intends to borrow $3,750,000 under the agreement with Lebo and liquidate the notes payable to First National. The agreement with Lebo also requires House to maintain a working capital level of $9,000,000 and prohibits the payment of dividends on common stock without prior approval by Lebo Bank. From the above information only, the total short-term debt of House Company as of the December 31, 2012 balance sheet date is
a. $0.
b. $2,250,000.
c. $3,000,000.
d. $6,000,000.

99. On December 31, 2012, Irey Co. has $4,000,000 of short-term notes payable due on February 14, 2013. On January 10, 2013, Irey arranged a line of credit with County Bank which allows Irey to borrow up to $3,000,000 at one percent above the prime rate for three years. On February 2, 2013, Irey borrowed $2,400,000 from County Bank and used $1,000,000 additional cash to liquidate $3,400,000 of the short-term notes payable. The amount of the short-term notes payable that should be reported as current liabilities on the December 31, 2012 balance sheet which is issued on March 5, 2013 is
a. $0.
b. $600,000.
c. $1,000,000.
d. $1,600,000.

Use the following information for questions 100 and 101.
Stine Co. is a retail store operating in a state with a 6% retail sales tax. The retailer may keep 2% of the sales tax collected. Stine Co. records the sales tax in the Sales Revenue account. The amount recorded in the Sales Revenue account during May was $222,600.

100. The amount of sales taxes (to the nearest dollar) for May is
a. $13,089.
b. $12,600.
c. $13,356.
d. $14,157.

101. The amount of sales taxes payable (to the nearest dollar) to the state for the month of May is
a. $12,826.
b. $12,348.
c. $13,089.
d. $13,873.

102. Vopat, Inc., is a retail store operating in a state with a 5% retail sales tax. The state law provides that the retail sales tax collected during the month must be remitted to the state during the following month. If the amount collected is remitted to the state on or before the twentieth of the following month, the retailer may keep 3% of the sales tax collected. On April 10, 2012, Vopat remitted $135,800 tax to the state tax division for March 2012 retail sales. What was Vopat ‘s March 2012 retail sales subject to sales tax?
a. $2,716,000.
b. $2,660,000.
c. $2,800,000.
d. $2,741,667.

103. Jenkins Corporation has $2,500,000 of short-term debt it expects to retire with proceeds from the sale of 90,000 shares of common stock. If the stock is sold for $20 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities?
a. $1,800,000
b. $2,500,000
c. $700,000
d. $0

104. Ermler Corporation has $1,800,000 of short-term debt it expects to retire with proceeds from the sale of 50,000 shares of common stock. If the stock is sold for $20 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities?
a. $1,000,000
b. $1,800,000
c. $800,000
d. $0

105. Preston Co., which has a taxable payroll of $700,000, is subject to FUTA tax of 6.2% and a state contribution rate of 5.4%. However, because of stable employment experience, the company’s state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Preston Co.?
a. $81,900
b. $57,400
c. $28,000
d. $19,600

106. Roark Co., which has a taxable payroll of $600,000, is subject to FUTA tax of 6.2% and a state contribution rate of 5.4%. However, because of stable employment experience, the company’s state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Roark Co.?
a. $70,200
b. $49,200
c. $24,000
d. $16,800

107. A company gives each of its 50 employees (assume they were all employed continuously through 2012 and 2013) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2012, they made $21 per hour and in 2013 they made $24 per hour. During 2013, they took an average of 9 days of vacation each. The company’s policy is to record the liability existing at the end of each year at the wage rate for that year. What amount of vacation liability would be reflected on the 2012 and 2013 balance sheets, respectively?
a. $100,800; $140,400
b. $115,200; $144,000
c. $100,800; $144,000
d. $115,200; $140,400

108. A company gives each of its 50 employees (assume they were all employed continuously through 2012 and 2013) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2012, they made $24.50 per hour and in 2013 they made $28 per hour. During 2013, they took an average of 9 days of vacation each. The company’s policy is to record the liability existing at the end of each year at the wage rate for that year. What amount of vacation liability would be reflected on the 2012 and 2013 balance sheets, respectively?
a. $117,600; $163,800
b. $134,400; $168,000
c. $117,600; $168,000
d. $134,400; $163,800

109. The total payroll of Teeter Company for the month of October, 2012 was $600,000, of which $150,000 represented amounts paid in excess of $106,800 to certain employees. $500,000 represented amounts paid to employees in excess of the $7,000 maximum subject to unemployment taxes. $150,000 of federal income taxes and $15,000 of union dues were withheld. The state unemployment tax is 1%, the federal unemployment tax is .8%, and the current F.I.C.A. tax is 7.65% on an employee’s wages to $106,800 and 1.45% in excess of $106,800. What amount should Teeter record as payroll tax expense?
a. $197,700.
b. $188,400.
c. $38,400.
d. $47,400.

Use the following information for questions 110 and 111.
Vargas Company has 35 employees who work 8-hour days and are paid hourly. On January 1, 2011, the company began a program of granting its employees 10 days of paid vacation each year. Vacation days earned in 2011 may first be taken on January 1, 2012. Information relative to these employees is as follows:
Hourly Vacation Days Earned Vacation Days Used
Year Wages by Each Employee by Each Employee
2011 $21.50 10 0
2012 22.50 10 8
2013 23.75 10 10

Vargas has chosen to accrue the liability for compensated absences at the current rates of pay in effect when the compensated time is earned.
110. What is the amount of expense relative to compensated absences that should be reported on Vargas’s income statement for 2011?
a. $0.
b. $57,400.
c. $63,000.
d. $60,200.

111. What is the amount of the accrued liability for compensated absences that should be reported at December 31, 2013?
a. $79,100.
b. $75,600.
c. $66,500.
d. $79,800.

112. CalCount pays a weekly payroll of $170,000 that includes federal taxes withheld of $25,400, FICA taxes withheld of $15,780, and 401(k) withholdings of $18,000. What is the effect of assets and liabilities from this transaction?
a. Assets decrease $170,000 and liabilities do not change.
b. Assets decrease $128,820 and liabilities increase $41,180.
c. Assets decrease $128,820 and liabilities decrease $41,180.
d. Assets decrease $110,820 and liabilities increase $59,180.

113. CalCount provides its employees two weeks of paid vacation per year. As of December 31, 65 employees have earned two weeks of vacation time to be taken the following year. If the average weekly salary for these employees is $1,140, what is the required journal entry?
a. Debit Salaries and Wages Expense for $148,200 and credit Salaries and Wages Payable for $148,200.
b. No journal entry required.
c. Debit Salaries and Wages Payable for $147,600 and credit Salaries and Wages Expense for $147,600.
d. Debit Salaries and Wages Expense for $74,100 and credit Salaries and Wages Payable for $74,100.

114. Tender Foot Inc. is involved in litigation regarding a faulty product sold in a prior year. The company has consulted with its attorney and determined that it is possible that they may lose the case. The attorneys estimated that there is a 40% chance of losing. If this is the case, their attorney estimated that the amount of any payment would be $500,000. What is the required journal entry as a result of this litigation?
a. Debit Litigation Expense for $500,000 and credit Litigation liability for $500,000.
b. No journal entry is required.
c. Debit Litigation Expense for $200,000 and credit Litigation Liability for $200,000.
d. Debit Litigation Expense for $300,000 and credit Litigation Liability for $300,000.

115. Recycle Exploration is involved with innovative approaches to finding energy reserves. Recycle recently built a facility to extract natural gas at a cost of $15 million. However, Recycle is also legally responsible to remove the facility at the end of its useful life of twenty years. This cost is estimated to be $21 million (the present value of which is $8 million). What is the journal entry required to record the asset retirement obligation?
a. No journal entry required.
b. Debit Natural Gas Facility for $21,000,000 and credit Asset Retirement Obligation for $21,000,000
c. Debit Natural Gas Facility for $6,000,000 and credit Asset Retirement Obligation for $6,000,000.
d. Debit Natural Gas Facility for $8,000,000 and credit Asset Retirement Obligation for $8,000,000.
116. Warranty4U provides extended service contracts on electronic equipment sold through major retailers. The standard contract is for three years. During the current year, Warranty4U provided 42,000 such warranty contracts at an average price of $81 each. Related to these contracts, the company spent $400,000 servicing the contracts during the current year and expects to spend $2,100,000 more in the future. What is the net profit that the company will recognize in the current year related to these contracts?
a. $902,000.
b. $3,002,000.
c. $300,667.
d. $734,000.

117. Electronics4U manufactures high-end whole home electronic systems. The company provides a one-year warranty for all products sold. The company estimates that the warranty cost is $200 per unit sold and reported a liability for estimated warranty costs $7.8 million at the beginning of this year. If during the current year, the company sold 60,000 units for a total of $243 million and paid warranty claims of $9,000,000 on current and prior year sales, what amount of liability would the company report on its balance sheet at the end of the current year?
a. $3,000,000.
b. $4,200,000.
c. $10,800,000.
d. $12,000,000.

118. A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2012. Historically, 10% of customers mail in the rebate form. During 2012, 3,000,000 packages of light bulbs are sold, and 160,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2012 financial statements dated December 31?
a. $300,000; $300,000
b. $300,000; $140,000
c. $140,000; $140,000
d. $160,000; $140,000

119. A company buys an oil rig for $2,000,000 on January 1, 2012. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $400,000 (present value at 10% is $154,220). 10% is an appropriate interest rate for this company. What expense should be recorded for 2012 as a result of these events?
a. Depreciation expense of $240,000
b. Depreciation expense of $200,000 and interest expense of $15,422
c. Depreciation expense of $200,000 and interest expense of $40,000
d. Depreciation expense of $215,420 and interest expense of $15,422

120. Ziegler Company self insures its property for fire and storm damage. If the company were to obtain insurance on the property, it would cost them $1,500,000 per year. The company estimates that on average it will incur losses of $1,200,000 per year. During 2012, $525,000 worth of losses were sustained. How much total expense and/or loss should be recognized by Ziegler Company for 2012?
a. $525,000 in losses and no insurance expense
b. $525,000 in losses and $675,000 in insurance expense
c. $0 in losses and $1,200,000 in insurance expense
d. $0 in losses and $1,500,000 in insurance expense

121. A company offers a cash rebate of $2 on each $6 package of batteries sold during 2012. Historically, 10% of customers mail in the rebate form. During 2012, 6,000,000 packages of batteries are sold, and 210,000 $2 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2012 financial statements dated December 31?
a. $1,200,000; $1,200,000
b. $1,200,000; $780,000
c. $780,000; $780,000
d. $420,000; $780,000

122. A company buys an oil rig for $3,000,000 on January 1, 2012. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $600,000 (present value at 10% is $231,330). 10% is an appropriate interest rate for this company. What expense should be recorded for 2012 as a result of these events?
a. Depreciation expense of $360,000
b. Depreciation expense of $300,000 and interest expense of $23,133
c. Depreciation expense of $300,000 and interest expense of $60,000
d. Depreciation expense of $323,133 and interest expense of $23,133

123. During 2011, Vanpelt Co. introduced a new line of machines that carry a three-year warranty against manufacturer’s defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows:
Sales Actual Warranty Expenditures
2011 $ 600,000 $ 9,000
2012 1,500,000 65,000
2013 2,100,000 135,000
$4,200,000 $209,000
What amount should Vanpelt report as a liability at December 31, 2013?
a. $0
b. $12,000
c. $54,000
d. $169,000

124. Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from Palmer Frosted Flakes boxes and $1. The company estimates that 60% of the boxtops will be redeemed. In 2012, the company sold 675,000 boxes of Frosted Flakes and customers redeemed 330,000 boxtops receiving 110,000 bowls. If the bowls cost Palmer Company $3 each, how much liability for outstanding premiums should be recorded at the end of 2012?
a. $270,000
b. $50,000
c. $75,000
d. $138,000

125. During 2011, Stabler Co. introduced a new line of machines that carry a three-year warranty against manufacturer’s defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows:
Sales Actual Warranty Expenditures
2011 $ 400,000 $ 6,000
2012 1,000,000 40,000
2013 1,400,000 90,000
$2,800,000 $136,000
What amount should Stabler report as a liability at December 31, 2013?
a. $0
b. $28,000
c. $36,000
d. $116,000

126. LeMay Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 4 boxtops from LeMay Frosted Flakes boxes and $1. The company estimates that 60% of the boxtops will be redeemed. In 2012, the company sold 500,000 boxes of Frosted Flakes and customers redeemed 220,000 boxtops receiving 55,000 bowls. If the bowls cost LeMay Company $3 each, how much liability for outstanding premiums should be recorded at the end of 2012?
a. $150,000
b. $40,000
c. $60,000
d. $84,000

Use the following information for questions 127, 128, and 129.
Mott Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Mott $3 each. Mott estimates that 40 percent of the coupons will be redeemed. Data for 2012 and 2013 are as follows:
2012 2013
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000

127. The premium expense for 2012 is
a. $37,500.
b. $45,000.
c. $52,500.
d. $75,000.

128. The premium liability at December 31, 2012 is
a. $11,250.
b. $15,000.
c. $26,250.
d. $30,000.

129. The premium liability at December 31, 2013 is
a. $16,875
b. $31,875.
c. $33,750.
d. $63,750.

130. Winter Co. is being sued for illness caused to local residents as a result of negligence on the company’s part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Winter’s lawyer states that it is probable that Winter will lose the suit and be found liable for a judgment costing Winter anywhere from $1,600,000 to $8,000,000. However, the lawyer states that the most probable cost is $4,800,000. As a result of the above facts, Winter should accrue
a. a loss contingency of $1,600,000 and disclose an additional contingency of up to $6,400,000.
b. a loss contingency of $4,800,000 and disclose an additional contingency of up to $3,200,000.
c. a loss contingency of $4,800,000 but not disclose any additional contingency.
d. no loss contingency but disclose a contingency of $1,600,000 to $8,000,000.

131. Nance Company estimates its annual warranty expense as 2% of annual net sales. The following data relate to the calendar year 2012:
Net sales $1,500,000
Warranty liability account
Balance, Dec. 31, 2012 $10,000 debit before adjustment
Balance, Dec. 31, 2012 50,000 credit after adjustment
Which one of the following entries was made to record the 2012 estimated warranty expense?
a. Warranty Expense 30,000
Retained Earnings (prior-period adjustment) 5,000
Warranty Liability 25,000
b. Warranty Expense 25,000
Retained Earnings (prior-period adjustment) 5,000
Warranty Liability 30,000
c. Warranty Expense 20,000
Warranty Liability 20,000
d. Warranty Expense 30,000
Warranty Liability 30,000

132. In 2012, Payton Corporation began selling a new line of products that carry a two-year warranty against defects. Based upon past experience with other products, the estimated warranty costs related to dollar sales are as follows:
First year of warranty 2%
Second year of warranty 5%
Sales and actual warranty expenditures for 2012 and 2013 are presented below:
2012 2013
Sales $600,000 $800,000
Actual warranty expenditures 20,000 40,000

What is the estimated warranty liability at the end of 2013?
a. $38,000.
b. $58,000.
c. $98,000.
d. $16,000.

133. On January 3, 2012, Boyer Corp. owned a machine that had cost $300,000. The accumulated depreciation was $180,000, estimated salvage value was $18,000, and fair value was $480,000. On January 4, 2012, this machine was irreparably damaged by Pine Corp. and became worthless. In October 2012, a court awarded damages of $480,000 against Pine in favor of Boyer. At December 31, 2012, the final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in the opinion of Boyer’s attorney, Pine’s appeal will be denied. At December 31, 2012, what amount should Boyer accrue for this gain contingency?
a. $480,000.
b. $390,000.
c. $300,000.
d. $0.

134. Fuller Food Company distributes to consumers coupons which may be presented (on or before a stated expiration date) to grocers for discounts on certain products of Fuller. The grocers are reimbursed when they send the coupons to Fuller. In Fuller’s experience, 50% of such coupons are redeemed, and generally one month elapses between the date a grocer receives a coupon from a consumer and the date Fuller receives it. During 2012 Fuller issued two separate series of coupons as follows:
Consumer Amount Disbursed
Issued On Total Value Expiration Date as of 12/31/12
1/1/12 $500,000 6/30/12 $236,000
7/1/12 720,000 12/31/12 300,000
The only journal entries to date recorded debits to coupon expense and credits to cash of $715,000. The December 31, 2012 balance sheet should include a liability for unredeemed coupons of
a. $0.
b. $60,000.
c. $124,000.
d. $360,000.

135. Presented below is information available for Morton Company.
Current Assets
Cash $ 4,000
Short-term investments 75,000
Accounts receivable 61,000
Inventory 110,000
Prepaid expenses 30,000
Total current assets $280,000
Total current liabilities are $110,000. The acid-test ratio for Morton is
a. 2.55 to 1.
b. 2.27 to 1.
c. 1.27 to 1.
d. 0.72 to 1.

Multiple Choice Answers—Computational

MULTIPLE CHOICE—CPA Adapted

136. Which of the following is generally associated with payables classified as accounts payable?
Periodic Payment Secured
of Interest by Collateral
a. No No
b. No Yes
c. Yes No
d. Yes Yes

137. On January 1, 2012, Beyer Co. leased a building to Heins Corp. for a ten-year term at an annual rental of $140,000. At inception of the lease, Beyer received $560,000 covering the first two years’ rent of $280,000 and a security deposit of $280,000. This deposit will not be returned to Heins 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 $560,000 should be shown as a current and long-term liability, respectively, in Beyer’s December 31, 2012 balance sheet?
Current Liability Long-term Liability
a. $0 $560,000
b. $140,000 $280,000
c. $280,000 $280,000
d. $280,000 $140,000

138. On September 1, 2012, Herman Co. issued a note payable to National Bank in the amount of $1,800,000, bearing interest at 12%, and payable in three equal annual principal payments of $600,000. 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, Herman should record accrued interest payable of
a. $72,000.
b. $66,000.
c. $48,000.
d. $44,000.

139. Included in Vernon Corp.’s liability account balances at December 31, 2012, were the following:
7% note payable issued October 1, 2012, maturing September 30, 2013 $250,000
8% note payable issued April 1, 2012, payable in six equal annual
installments of $150,000 beginning April 1, 2013 600,000
Vernon’s December 31, 2012 financial statements were issued on March 31, 2013. On January 15, 2013, the entire $600,000 balance of the 8% note was refinanced by issuance of a long-term obligation payable in a lump sum. In addition, on March 10, 2013, Vernon consummated a noncancelable agreement with the lender to refinance the 7%, $250,000 note on a long-term basis, on readily determinable terms that have not yet been implemented. On the December 31, 2012 balance sheet, the amount of the notes payable that Vernon should classify as short-term obligations is
a. $175,000.
b. $125,000.
c. $50,000.
d. $0.

140. Edge Company’s salaried employees are paid biweekly. Occasionally, advances made to employees are paid back by payroll deductions. Information relating to salaries for the calendar year 2013 is as follows:
12/31/12 12/31/13
Employee advances $24,000 $ 36,000
Accrued salaries payable 130,000 ?
Salaries expense during the year 1,300,000
Salaries paid during the year (gross) 1,250,000
At December 31, 2013, what amount should Edge report for accrued salaries payable?
a. $180,000.
b. $168,000.
c. $144,000.
d. $50,000.

141. Risen Corp.’s payroll for the pay period ended October 31, 2012 is summarized as follows:
Federal Amount of Wages Subject
Department Total Income Tax to Payroll Taxes
Payroll Wages Withheld F.I.C.A. Unemployment
Factory $ 75,000 $ 9,000 $70,000 $32,000
Sales 22,000 3,000 16,000 2,000
Office 18,000 2,000 8,000 —
$115,000 $14,000 $94,000 $34,000
Assume the following payroll tax rates:
F.I.C.A. for employer and employee 7% each
Unemployment 3%
What amount should Risen accrue as its share of payroll taxes in its October 31, 2012 balance sheet?
a. $21,600.
b. $15,020.
c. $14,180.
d. $7,600.

142. Felton 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 contract revenues. This account had a balance of $720,000 at December 31, 2011 before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account, which had a balance of $180,000 at December 31, 2011. Outstanding service contracts at December 31, 2011 expire as follows:
During 2012 During 2013 During 2014
$150,000 $240,000 $105,000
What amount should be reported as unearned service contract revenues in Felton’s December 31, 2011 balance sheet?
a. $540,000.
b. $495,000.
c. $360,000.
d. $330,000.

143. Yount Trading Stamp Co. records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Yount’s past experience indicates that only 80% of the stamps sold to licensees will be redeemed. Yount’s liability for stamp redemptions was $6,000,000 at December 31, 2011. Additional information for 2012 is as follows:
Stamp service revenue from stamps sold to licensees $4,000,000
Cost of redemptions 2,720,000
If all the stamps sold in 2012 were presented for redemption in 2013, the redemption cost would be $2,000,000. What amount should Yount report as a liability for stamp redemptions at December 31, 2012?
a. $7,280,000.
b. $5,280,000.
c. $4,880,000.
d. $3,280,000.

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

145. During 2012, Eaton Co. introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to dollar sales are 2% within 12 months following sale and 3% in the second 12 months following sale. Sales and actual warranty expenditures for the years ended December 31, 2012 and 2013 are as follows:
Actual Warranty
Sales Expenditures
2012 $ 800,000 $12,000
2013 1,000,000 35,000
$1,800,000 $47,000
At December 31, 2013, Eaton should report an estimated warranty liability of
a. $0.
b. $15,000.
c. $35,000.
d. $43,000.

146. In March 2013, an explosion occurred at Kirk Co.’s plant, causing damage to area properties. By May 2013, no claims had yet been asserted against Kirk. However, Kirk’s management and legal counsel concluded that it was reasonably possible that Kirk would be held responsible for negligence, and that $4,000,000 would be a reasonable estimate of the damages. Kirk’s $5,000,000 comprehensive public liability policy contains a $400,000 deductible clause. In Kirk’s December 31, 2012 financial statements, for which the auditor’s fieldwork was completed in April 2013, how should this casualty be reported?
a. As a note disclosing a possible liability of $4,000,000.
b. As an accrued liability of $400,000.
c. As a note disclosing a possible liability of $400,000.
d. No note disclosure of accrual is required for 2012 because the event occurred in 2013.

Multiple Choice Answers—CPA Adapted

IFRS QUESTIONS

True / False Questions
1. Short-term debt obligations are classified as current liabilities unless an agreement to refinance is completed before the financial statements are issued.
2. For purposes of recognizing a provision,”probable” is defined as more likely than not
3. A Provision differs from other liabilities in that there is greater uncertainty about the timing and amount of settlement.
4. IFRS allows for reduced disclosure of contingent liabilities if the disclosure could increase the company`s chance of losing a lawsuit.
5. Contingent liabilities are not reported in the financial statements but may be disclosed in the notes to the financial statements if the likelihood of an unfavorable outcome is possible.
6. A company can exclude a short-term obligation from current liablities if it intends to refinance the obligation and has an unconditional right to defer settlement of the obligation for at least 12 months following the due date.
7. Provisions are only recorded if it is likely that the company will have to settle an obligation at some point in the future.
8. An onerous contract is one in which the unavoidable costs of satisfying the obligations outweigh the economic benefits to be received.
9. Contingent assets are not reported in the statement of financial position.
10. IFRS uses the term “contigent” for assets and liabilities not recognized in the financial statement.

Answers to True / False:

CHAPTER 14

LONG-TERM LIABILITIES

IFRS questions are available at the end of this chapter.

TRUE FALSE—Conceptual

1. Companies usually make bond interest payments semiannually, although the interest rate is generally expressed as an annual rate.

2. A mortgage bond is referred to as a debenture bond.

3. Bond issues that mature in installments are called serial bonds.

4. If the market rate is greater than the coupon rate, bonds will be sold at a premium.

5. The interest rate written in the terms of the bond indenture is called the effective yield or market rate.

6. The stated rate is the same as the coupon rate.

7. Amortization of a premium increases bond interest expense, while amortization of a discount decreases bond interest expense.

8. A bond may only be issued on an interest payment date.

9. The cash paid for interest will always be greater than interest expense when using effective-interest amortization for a bond.

10. Bond issue costs are capitalized as a deferred charge and amortized to expense over the life of the bond issue.

11. The replacement of an existing bond issue with a new one is called refunding.

12. If a long-term note payable has a stated interest rate, that rate should be considered to be the effective rate.

13. The implicit interest rate is the rate that equates the cash received with the amounts received in the future.

14. An unrealized holding gain or loss is the net change in the fair value of the liability from one period to another, exclusive of interest expense recognized but not recorded.

15. Off-balance-sheet financing is an attempt to borrow monies in such a way to minimize the reporting of debt on the balance sheet.

16. The debt to total assets ratio will go up if an equal amount of assets and liabilities are added to the balance sheet.

17. If a company plans to retire long-term debt from a bond retirement fund, it should report the debt as current.

18. The times interest earned ratio is computed by dividing income before interest expense by interest expense.

*19. The loss to be recognized by a creditor on an impaired loan is the difference between the investment in the loan and the expected undiscounted future cash flows from the loan.

*20. In a troubled debt restructuring, the loss recognized by the creditor will equal the gain recognized by the debtor.

True False Answers—Conceptual

MULTIPLE CHOICE—Conceptual

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

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

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

P24. Bonds for which the owners’ names are not registered with the issuing corporation are called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.

S25. Bonds that pay no interest unless the issuing company is profitable are called
a. collateral trust bonds.
b. debenture bonds.
c. revenue bonds.
d. income bonds.

S26. If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be
a. greater than if the straight-line method were used.
b. greater than the amount of the interest payments.
c the same as if the straight-line method were used.
d. less than if the straight-line method were used.

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

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

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

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

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

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

32. If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will
a. exceed what it would have been had the effective-interest method of amortization been used.
b. be less than what it would have been had the effective-interest method of amortization been used.
c. be the same as what it would have been had the effective-interest method of amortiza-tion been used.
d. be less than the stated (nominal) rate of interest.

33. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.

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

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

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

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

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

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

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

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

P42. “In-substance defeasance” is a term used to refer to an arrangement whereby
a. a company gets another company to cover its payments due on long-term debt.
b. a governmental unit issues debt instruments to corporations.
c. a company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust.
d. a company legally extinguishes debt before its due date.

P43. A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation?
a. The balance of mortgage payable at a given balance sheet date will be reported as a long-term liability.
b. The balance of mortgage payable will remain a constant amount over the 10-year period.
c. The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period.
d. The amount of interest expense will remain constant over the 10-year period.

S44. A debt instrument with no ready market is exchanged for property whose fair value is currently indeterminable. When such a transaction takes place
a. the present value of the debt instrument must be approximated using an imputed interest rate.
b. it should not be recorded on the books of either party until the fair value of the property becomes evident.
c. the board of directors of the entity receiving the property should estimate a value for the property that will serve as a basis for the transaction.
d. the directors of both entities involved in the transaction should negotiate a value to be assigned to the property.
45. When a note payable is issued for property, goods, or services, the present value of the note is measured by
a. the fair value of the property, goods, or services.
b. the fair value of the note.
c. using an imputed interest rate to discount all future payments on the note.
d. any of these.

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

47. If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting
a. Bonds Payable.
b. Gain on Restructuring of Debt.
c. Unrealized Holding Gain/Loss-Income.
d. None of these.

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

S49. When a business enterprise enters into what is referred to as off-balance-sheet financing, the company
a. is attempting to conceal the debt from shareholders by having no information about the debt included in the balance sheet.
b. wishes to confine all information related to the debt to the income statement and the statement of cash flow.
c. can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost.
d. is in violation of generally accepted accounting principles.

S50. Long-term debt that matures within one year and is to be converted into stock should be reported
a. as a current liability.
b. in a special section between liabilities and stockholders’ equity.
c. as noncurrent.
d. as noncurrent and accompanied with a note explaining the method to be used in its liquidation.

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

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

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

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

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

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

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

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

*59. In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, the creditor should
a. compute a new effective-interest rate.
b. not recognize a loss.
c. calculate its loss using the historical effective rate of the loan.
d. calculate its loss using the current effective rate of the loan.

MULTIPLE CHOICE—Computational

Use the following information for questions 60 through 62:
On January 1, 2012, Ellison Co. issued eight-year bonds with a face value of $2,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:
Present value of 1 for 8 periods at 6% .627
Present value of 1 for 8 periods at 8% .540
Present value of 1 for 16 periods at 3% .623
Present value of 1 for 16 periods at 4% .534
Present value of annuity for 8 periods at 6% 6.210
Present value of annuity for 8 periods at 8% 5.747
Present value of annuity for 16 periods at 3% 12.561
Present value of annuity for 16 periods at 4% 11.652

60. The present value of the principal is
a. $1,068,000.
b. $1,080,000.
c. $1,246,000.
d. $1,254,000.

61. The present value of the interest is
a. $689,640.
b. $699,120.
c. $745,200.
d. $753,660.

62. The issue price of the bonds is
a. $1,767,120.
b. $1,769,640.
c. $1,779,120.
d. $1,999,200.

63. Downing Company issues $3,000,000, 6%, 5-year bonds dated January 1, 2012 on January 1, 2012. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009
a. $3,000,000
b. $3,129,896
c. $3,131,285
d. $3,130,385

64. Feller Company issues $10,000,000 of 10-year, 9% bonds on March 1, 2012 at 97 plus accrued interest. The bonds are dated January 1, 2012, and pay interest on June 30 and December 31. What is the total cash received on the issue date?
a. $9,700,000
b. $10,225,000
c. $9,850,000
d. $9,550,000

65. Everhart Company issues $15,000,000, 6%, 5-year bonds dated January 1, 2012 on January 1, 2012. The bonds pays interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009

a. $15,000,000
b. $15,649,482
c. $15,656,427
d. $15,651,924

66. Farmer Company issues $20,000,000 of 10-year, 9% bonds on March 1, 2012 at 97 plus accrued interest. The bonds are dated January 1, 2012, and pay interest on June 30 and December 31. What is the total cash received on the issue date?
a. $19,400,000
b. $20,450,000
c. $19,700,000
d. $19,100,000

67. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,109. Using effective-interest amortization, how much interest expense will be recognized in 2012?
a. $585,000
b. $1,170,000
c. $1,176,374
d. $1,176,249

68. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,109. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2012 balance sheet?
a. $14,709,482
b. $15,000,000
c. $14,718,844
d. $14,706,232

69. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2011. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,109. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2013?
a. $14,752,673
b. $14,955,466
c. $14,725,375
d. $14,747,642

70. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,109. What is interest expense for 2013, using straight-line amortization?
a. $1,540,207
b. $1,170,000
c. $1,176,894
d. $1,184,845

71. A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using effective-interest amortization, how much interest expense will be recognized in 2012?
a. $390,000
b. $780,000
c. $784,248
d. $784,166

72. A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2012 balance sheet?
a. $9,806,320
b. $10,000,000
c. $9,812,562
d. $9,804,154

73. A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2011. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2013?
a. $9,835,116
b. $9,970,312
c. $9,816,916
d. $9,831,762

74. A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. What is interest expense for 2013, using straight-line amortization?
a. $770,104
b. $780,000
c. $784,596
d. $789,896

75. On January 1, 2012, Huber Co. sold 12% bonds with a face value of $800,000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $861,600 to yield 10%. Using the effective-interest method of amortization, interest expense for 2012 is
a. $80,000.
b. $85,914.
c. $86,160.
d. $96,000.

76. On January 2, 2012, a calendar-year corporation sold 8% bonds with a face value of $900,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $830,400 to yield 10%. Using the effective-interest method of computing interest, how much should be charged to interest expense in 2012?
a. $72,000.
b. $83,040.
c. $83,316.
d. $90,000.
The following information applies to both questions 77 and 78.
On October 1, 2012 Macklin Corporation issued 5%, 10-year bonds with a face value of $2,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis.

77. The entry to record the issuance of the bonds would include a credit of
a. $50,000 to Interest Payable.
b. $80,000 to Discount on Bonds Payable.
c. $1,920,000 to Bonds Payable.
d. $80,000 to Premium on Bonds Payable.

78. Bond interest expense reported on the December 31, 2012 income statement of Macklin Corporation would be
a. $23,000
b. $25,000
c. $27,000
d. $46,000

The following information applies to both questions 79 and 80.
On October 1, 2012 Bartley Corporation issued 5%, 10-year bonds with a face value of $3,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis.

79. The entry to record the issuance of the bonds would include a
a. credit of $75,000 to Interest Payable.
b. credit of $120,000 to Premium on Bonds Payable.
c. credit of $2,880,000 to Bonds Payable.
d. debit of $120,000 to Discount on Bonds Payable.

80. Bond interest expense reported on the December 31, 2012 income statement of Bartley Corporation would be
a. $40,500
b. $69,000
c. $34,500
d. $37,500

81. At the beginning of 2012, Wallace Corporation issued 10% bonds with a face value of $1,500,000. These bonds mature in the five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $1,389,600 to yield 12%. Wallace uses a calendar-year reporting period. Using the effective-interest method of amortization, what amount of interest expense should be reported for 2012? (Round your answer to the nearest dollar.)
a. $172,080
b. $167,255
c. $166,750
d. $166,250

82. On January 1, Patterson Inc. issued $3,000,000, 9% bonds for $2,817,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Patterson uses the effective-interest method of amortizing bond discount. At the end of the first year, Patterson should report unamortized bond discount of
a. $164,700.
b. $171,300.
c. $154,830.
d. $153,000.

83. On January 1, Martinez Inc. issued $4,000,000, 11% bonds for $4,260,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Martinez uses the effective-interest method of amortizing bond premium. At the end of the first year, Martinez should report unamortized bond premium of:
a. $246,840
b. $246,000
c. $231,400
d. $220,000

84. At the beginning of 2012, Winston Corporation issued 10% bonds with a face value of $1,200,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $1,111,680 to yield 12%. Winston uses a calendar-year reporting period. Using the effective-interest method of amortization, what amount of interest expense should be reported for 2012? (Round your answer to the nearest dollar.)
a. $133,000
b. $133,400
c. $133,804
d. $137,664

85. Kant Corporation retires its $500,000 face value bonds at 102 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $481,250. The entry to record the redemption will include a
a. credit of $18,750 to Loss on Bond Redemption.
b. credit of $18,750 to Discount on Bonds Payable.
c. debit of $28,750 to Gain on Bond Redemption.
d. debit of $10,000 to Premium on Bonds Payable.

86. Carr Corporation retires its $500,000 face value bonds at 105 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $518,725. The entry to record the redemption will include a
a. credit of $18,725 to Loss on Bond Redemption.
b. debit of $18,725 to Premium on Bonds Payable.
c. credit of $6,275 to Gain on Bond Redemption.
d. debit of $25,000 to Premium on Bonds Payable.

87. At December 31, 2012 the following balances existed on the books of Foxworth Corporation:
Bonds Payable $3,000,000
Discount on Bonds Payable 240,000
Interest Payable 75,000
Unamortized Bond Issue Costs 180,000
If the bonds are retired on January 1, 2013, at 102, what will Foxworth report as a loss on redemption?
a. $555,000
b. $480,000
c. $405,000
d. $300,000

88. At December 31, 2012 the following balances existed on the books of Rentro Corporation:
Bonds Payable $2,500,000
Discount on Bonds Payable 200,000
Interest Payable 60,000
Unamortized Bond Issue Costs 150,000

If the bonds are retired on January 1, 2013, at 102, what will Rentro report as a loss on redemption?
a. $250,000
b. $337,500
c. $400,000
d. $460,000

89. The December 31, 2012, balance sheet of Hess Corporation includes the following items:
9% bonds payable due December 31, 2021 $2,000,000
Unamortized premium on bonds payable 54,000
The bonds were issued on December 31, 2011, at 103, with interest payable on July 1 and December 31 of each year. Hess uses straight-line amortization. On March 1, 2013, Hess retired $800,000 of these bonds at 98 plus accrued interest. What should Hess record as a gain on retirement of these bonds? Ignore taxes.
a. $37,600.
b. $21,600.
c. $37,200.
d. $40,000.

90. On January 1, 2006, Hernandez Corporation issued $3,600,000 of 10% ten-year bonds at 103. The bonds are callable at the option of Hernandez at 105. Hernandez has recorded amortization of the bond premium on the straight-line method (which was not materially different from the effective-interest method).
On December 31, 2012, when the fair value of the bonds was 96, Hernandez repurchased $800,000 of the bonds in the open market at 96. Hernandez has recorded interest and amortization for 2012. Ignoring income taxes and assuming that the gain is material, Hernandez should report this reacquisition as
a. a loss of $39,200.
b. a gain of $39,200.
c. a loss of $48,800.
d. a gain of $48,800.

91. The 10% bonds payable of Nixon Company had a net carrying amount of $760,000 on December 31, 2012. The bonds, which had a face value of $800,000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. On
July 2, 2013, several years before their maturity, Nixon retired the bonds at 102. The interest payment on July 1, 2013 was made as scheduled. What is the loss that Nixon should record on the early retirement of the bonds on July 2, 2013? Ignore taxes.
a. $16,000.
b. $50,400.
c. $44,800.
d. $56,000.

92. A corporation called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount of $600,000. To extinguish this debt, the company had to pay a call premium of $200,000. Ignoring income tax considerations, how should these amounts be treated for accounting purposes?
a. Amortize $800,000 over four years.
b. Charge $800,000 to a loss in the year of extinguishment.
c. Charge $200,000 to a loss in the year of extinguishment and amortize $600,000 over four years.
d. Either amortize $800,000 over four years or charge $800,000 to a loss immediately, whichever management selects.

93. The 12% bonds payable of Nyman Co. had a carrying amount of $2,080,000 on
December 31, 2012. The bonds, which had a face value of $2,000,000, were issued at a premium to yield 10%. Nyman uses the effective-interest method of amortization. Interest is paid on June 30 and December 31. On June 30, 2013, several years before their maturity, Nyman retired the bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes, is
a. $0.
b. $16,000.
c. $24,800.
d. $80,000.

94. Didde Company issues $15,000,000 face value of bonds at 96 on January 1, 2011. The bonds are dated January 1, 2011, pay interest semiannually at 8% on June 30 and December 31, and mature in 10 years. Straight-line amortization is used for discounts and premiums. On September 1, 2014, $9,000,000 of the bonds are called at 102 plus accrued interest. What gain or loss would be recognized on the called bonds on September 1, 2014?
a. $900,000 loss
b. $408,000 loss
c. $540,000 loss
d. $680,000 loss

95. Cortez Company issues $3,000,000 face value of bonds at 96 on January 1, 2011. The bonds are dated January 1, 2011, pay interest semiannually at 8% on June 30 and December 31, and mature in 10 years. Straight-line amortization is used for discounts and premiums. On September 1, 2014, $1,800,000 of the bonds are called at 102 plus accrued interest. What gain or loss would be recognized on the called bonds on September 1, 2014?
a. $180,000 loss
b. $81,600 loss
c. $108,000 loss
d. $136,000 loss

96. On January 1, 2012, Ann Price loaned $90,156 to Joe Kiger. A zero-interest-bearing note (face amount, $120,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2014. The prevailing rate of interest for a loan of this type is 10%. The present value of $120,000 at 10% for three years is $90,156. What amount of interest income should Ms. Price recognize in 2012?
a. $9,016.
b. $12,000.
c. $36,000.
d. $27,048.

97. On January 1, 2012, Jacobs Company sold property to Dains Company which originally cost Jacobs $950,000. There was no established exchange price for this property. Danis gave Jacobs a $1,500,000 zero-interest-bearing note payable in three equal annual installments of $500,000 with the first payment due December 31, 2012. The note has no ready market. The prevailing rate of interest for a note of this type is 10%. The present value of a $1,500,000 note payable in three equal annual installments of $500,000 at a 10% rate of interest is $1,243,500. What is the amount of interest income that should be recognized by Jacobs in 2012, using the effective-interest method?
a. $0.
b. $50,000.
c. $124,350.
d. $150,000.

98. On January 1, 2012, Crown Company sold property to Leary Company. There was no established exchange price for the property, and Leary gave Crown a $3,000,000 zero-interest-bearing note payable in 5 equal annual installments of $600,000, with the first payment due December 31, 2012. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was $2,163,000 at January 1, 2012. What should be the balance of the Discount on Notes Payable account on the books of Leary at December 31, 2012 after adjusting entries are made, assuming that the effective-interest method is used?
a. $0
b. $642,330
c. $669,600
d. $837,000

99. Putnam Company’s 2012 financial statements contain the following selected data:
Income taxes $40,000
Interest expense 25,000
Net income 60,000
Putnam’s times interest earned for 2012 is
a. 3.0 times
b. 3.4 times.
c. 4.0 times.
d. 5.0 times.

100. In the recent year Hill Corporation had net income of $280,000, interest expense of $60,000, and tax expense of $80,000. What was Hill Corporation’s times interest earned ratio for the year?
a. 7.0
b. 5.0
c. 4.7
d. 3.7

101. In recent year Cey Corporation had net income of $350,000, interest expense of $70,000, and a times interest earned ratio of 9. What was Cey Corporation’s income before taxes for the year?
a. $700,000
b. $630,000
c. $560,000
d. None of the above.

102. The adjusted trial balance for Lifesaver Corp. at the end of the current year, 2012, contained the following accounts.
5-year Bonds Payable 8% $2,000,000
Interest Payable 50,000
Premium on Bonds Payable 100,000
Notes Payable (3 mo.) 40,000
Notes Payable (5 yr.) 165,000
Mortgage Payable ($15,000 due currently) 200,000
Salaries and wages Payable 18,000
Income Taxes Payable (due 3/15 of 2013) 25,000

The total long-term liabilities reported on the balance sheet are
a. $2,365,000.
b. $2,350,000.
c. $2,465,000.
d. $2,450,000.

Use the following information for questions *103 through *105:

On December 31, 2010, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a $1,200,000 note with $120,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte equipment that has a fair value of $580,000, an original cost of $960,000, and accumulated depreciation of $460,000. Piper also forgives the accrued interest, extends the maturity date to December 31, 2013, reduces the face amount of the note to $500,000, and reduces the interest rate to 6%, with interest payable at the end of each year.
*103. Nolte should recognize a gain or loss on the transfer of the equipment of
a. $0.
b. $80,000 gain.
c. $120,000 gain.
d. $380,000 loss.

*104. Nolte should recognize a gain on the partial settlement and restructure of the debt of
a. $0.
b. $30,000.
c. $110,000.
d. $150,000.

*105. Nolte should record interest expense for 2013 of
a. $0.
b. $30,000.
c. $60,000.
d. $90,000.

Multiple Choice Answers—Computational

MULTIPLE CHOICE—CPA Adapted

106. On July 1, 2012, Spear Co. issued 3,000 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2012 and mature on April 1, 2022. Interest is payable semiannually on April 1 and October 1. What amount did Spear receive from the bond issuance?
a. $3,045,000
b. $3,000,000
c. $2,970,000
d. $2,895,000

107. On January 1, 2012, Solis Co. issued its 10% bonds in the face amount of $4,000,000, which mature on January 1, 2022. The bonds were issued for $4,540,000 to yield 8%, resulting in bond premium of $540,000. Solis uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2012, Solis’s adjusted unamortized bond premium should be
a. $540,000.
b. $503,200.
c. $486,000.
d. $406,000.

108. On July 1, 2011, Noble, Inc. issued 9% bonds in the face amount of $10,000,000, which mature on July 1, 2017. The bonds were issued for $9,390,000 to yield 10%, resulting in a bond discount of $610,000. Noble uses the effective-interest method of amortizing bond discount. Interest is payable annually on June 30. At June 30, 2013, Noble’s unamortized bond discount should be
a. $528,100.
b. $510,000.
c. $488,000.
d. $430,000.

109. On January 1, 2012, Huff Co. sold $3,000,000 of its 10% bonds for $2,655,888 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Huff report as interest expense for the six months ended June 30, 2012?
a. $132,798
b. $150,000
c. $159,353
d. $180,000

110. On January 1, 2013, Doty Co. redeemed its 15-year bonds of $3,500,000 par value for 102. They were originally issued on January 1, 2001 at 98 with a maturity date of
January 1, 2016. The bond issue costs relating to this transaction were $210,000. Doty amortizes discounts, premiums, and bond issue costs using the straight-line method. What amount of loss should Doty recognize on the redemption of these bonds (ignore taxes)?
a. $126,000
b. $84,000
c. $70,000
d. $0

111. On its December 31, 2012 balance sheet, Emig Corp. reported bonds payable of $9,000,000 and related unamortized bond issue costs of $480,000. The bonds had been issued at par. On January 2, 2013, Emig retired $4,500,000 of the outstanding bonds at par plus a call premium of $105,000. What amount should Emig report in its 2013 income statement as loss on extinguishment of debt (ignore taxes)?
a. $0
b. $105,000
c. $240,000
d. $345,000

112. On January 1, 2008, Goll Corp. issued 4,000 of its 10%, $1,000 bonds for $4,160,000. These bonds were to mature on January 1, 2016 but were callable at 101 any time after December 31, 2011. Interest was payable semiannually on July 1 and January 1. On
July 1, 2013, Goll called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Goll’s gain or loss in 2013 on this early extinguishment of debt was
a. $120,000 gain.
b. $48,000 gain.
c. $40,000 loss.
d. $32,000 gain.

113. On June 30, 2013, Omara Co. had outstanding 8%, $4,000,000 face amount, 15-year bonds maturing on June 30, 2023. Interest is payable on June 30 and December 31. The unamortized balances in the bond discount and deferred bond issue costs accounts on June 30, 2013 were $140,000 and $40,000, respectively. On June 30, 2013, Omara acquired all of these bonds at 94 and retired them. What net carrying amount should be used in computing gain or loss on this early extinguishment of debt?
a. $3,960,000.
b. $3,860,000.
c. $3,820,000.
d. $3,760,000.

114. A ten-year bond was issued in 2011 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 2013, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in 2013 should have equaled the
a. call price.
b. call price less unamortized discount.
c. face amount less unamortized discount.
d. face amount plus unamortized discount.

115. Paige Co. took advantage of market conditions to refund debt. This was the fourth refunding operation carried out by Paige within the last three years. The excess of the carrying amount of the old debt over the amount paid to extinguish it should be reported as a
a. gain, net of income taxes.
b. loss, net of income taxes.
c. part of continuing operations.
d. deferred credit to be amortized over the life of the new debt.

*116. Eddy Co. is indebted to Cole under a $600,000, 12%, three-year note dated
December 31, 2011. Because of Eddy’s financial difficulties developing in 2013, Eddy owed accrued interest of $72,000 on the note at December 31, 2013. Under a troubled debt restructuring, on December 31, 2013, Cole agreed to settle the note and accrued interest for a tract of land having a fair value of $540,000. Eddy’s acquisition cost of the land is $435,000. Ignoring income taxes, on its 2013 income statement Eddy should report as a result of the troubled debt restructuring
Gain on Disposal Restructuring Gain
a. $237,000 $0
b. $165,000 $0
c. $105,000 $60,000
d. $105,000 $132,000
Multiple Choice Answers—CPA Adapted

IFRS QUESTIONS

True/False
1. Similar to U.S. practice, IFRS requires that companies present current and noncurrent liabilities on the face of the balance sheet, with current liabilities generally presented in order of liquidity.

2. Similar to U.S. practice, IFRS requires that companies present current and noncurrent liabilities on the face of the balance sheet, with current liabilities generally presented in order of magnitude.

3. Both IFRS and U.S. GAAP prohibit the recognition of liabilities for future losses.

4. IFRS and U.S. GAAP are similar in the treatment of asset retirement obligations.

5. The recognition criteria for an asset retirement obligation (ARO) are more stringent under IFRS.

6. IFRS and U.S. GAAP are dissimilar in their treatment of contingencies.

7. The criteria for recognizing contingent assets are more stringent under U.S. GAAP.

8. Under IFRS, the measurement of a provision related to a contingency is based on an average estimate of the expenditure required to settle the obligation.

9. U.S. GAAP permits recognition of a restructuring liability, once a company has committed to a restructuring plan.

10. The recognition criteria for an ARO are more stringent under U.S. GAAP: The ARO is not recognized unless there is a present legal obligation and the fair value of the obligation can be reasonably estimated.

Answers to True/False:

Multiple Choice Questions
1. The primary IFRS related to reporting and recognition of liabilities is found in
a. IAS 10 and IAS 39.
b. IAS 17 and IAS 23.
c. IAS 1 and IAS 37.
d. IAS 27 and IAS 32.
2. Similar to U.S. practice, IFRS requires that companies present current and noncurrent liabilities on the face of the balance sheet with current liabilities
a. generally presented in order of magnitude.
b. presented in alphabetic order.
c. presented in order of liquidity.
d. presented in the order in which they were incurred.

3. Under IFRS, the measurement of a provision related to a contingency is based on
a. the best estimate of the expenditure required to settle the obligation.
b. the minimum amount from among a number of alternative estimates.
c. an average from among a number of alternative estimates.
d. whatever management feels that shareholders would be willing to accept because of the impact on current earnings.

4. Both U.S. GAAP and IFRS prohibit
a. the recognition of a restructuring liability, once a company has committed to a restructuring plan.
b. the recognition of liabilities for future losses.
c. communicating information on a restructuring plan to employees, before a liability can be established.
d. all of the above.

5. IFRS and U.S. GAAP are
a. similar in the treatment of asset retirement obligations (AROs).
b. significantly different when it comes to the treatment of asset retirement obligations (AROs).
c. continuing to evolve in the area of asset retirement obligations (AROs).
d. in conflict with respect to the accounting for and presentation of asset retirement obligations (AROs).

6. Both IFRS and U.S. GAAP permit valuation of long-term debt and other liabilities at
a. present value discounted at the firm’s cost of capital.
b. current market values of the obligations, based on changes in the discount rate with unrealized gains and losses reflected in a separate account in stockholders’ equity.
c. fair value with gains and losses on changes in fair value recorded in income in certain situations.
d. historic costs without reflecting changes in valuation as obligations will be retired at their maturity date.

7. As there is no comparable institution to the SEC in international securities markets, many international companies (those not registered with the SEC)
a. voluntarily adhere to SEC criteria in providing information related to contractual obligations.
b. are not required to provide disclosures such as those related to contractual obligations.
c. follow the requirements established for contractual obligations put forth by the IASB.
d. follow the requirements established for contractual obligations put forth by the FASB.

8. Under U.S. GAAP, contingent assets for insurance recoveries are recognized if __________; IFRS requires the recovery be “___________” before recognition of an asset is permitted.
a. probable and virtually certain
b. possible and very likely
c. possible and definite
d. certain and probable

9. IFRS rules for establishing restructuring liabilities could be used as an earnings management tool because IFRS rules are
a. more-stringent that U.S. GAAP.
b. less-stringent that U.S. GAAP.
c. virtually the same as U.S. GAAP.
d. totally different than U.S. GAAP.

10. A concern with IFRS is that its less-stringent rules for establishing restructuring liabilities could be used as
a. a more appropriate method than that employed under U.S. GAAP.
b. an appropriate method, but complex and difficult to explain to shareholders.
c. a method readily employed to make the understanding of financial information more comprehensible to shareholders.
d. an earinings management tool.

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 the accounting for liabilities.

1. Among the similarities are: (1) IFRS requires that companies present current and non-current liabilities on the face of the balance sheet, with current liabilities generally presented in order of liquidity, (2) Both GAAPs prohibit the recognition of liabilities for future losses; (3) IFRS and U.S. GAAP are similar in the treatment of asset retirement obligations (AROs), and (4) IFRS and U.S. GAAP are similar in their treatment of contingencies.

2. Briefly discuss how accounting convergence efforts addressing liabilities is related to the IASB/FASB conceptual framework project.

CHAPTER 15

STOCKHOLDERS’ EQUITY

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

1. A corporation is incorporated in only one state regardless of the number of states in which it operates.

2. The preemptive right allows stockholders the right to vote for directors of the company.

3. Common stock is the residual corporate interest that bears the ultimate risks of loss.

4. Earned capital consists of additional paid-in capital and retained earnings.

5. True no-par stock should be carried in the accounts at issue price without any additional paid-in capital reported.

6. Companies allocate the proceeds received from a lump-sum sale of securities based on the securities’ par values.

7. Companies should record stock issued for services or noncash property at either the fair value of the stock issued or the fair value of the consideration received.

8. Treasury stock is a company’s own stock that has been reacquired and retired.

9. The cost method records all transactions in treasury shares at their cost and reports the treasury stock as a deduction from capital stock.

10. When a corporation sells treasury stock below its cost, it usually debits the difference between cost and selling price to Paid-in Capital from Treasury Stock.

11. Participating preferred stock requires that if a company fails to pay a dividend in any year, it must make it up in a later year before paying any common dividends.

12. Callable preferred stock permits the corporation at its option to redeem the outstanding preferred shares at stipulated prices.

13. The laws of some states require that corporations restrict their legal capital from distribution to stockholders.

14. The SEC requires companies to disclose their dividend policy in their annual report.

15. All dividends, except for liquidating dividends, reduce the total stockholders’ equity of a corporation.

16. Dividends payable in assets of the corporation other than cash are called property dividends or dividends in kind.

17. When a stock dividend is less than 20-25 percent of the common stock outstanding, a company is required to transfer the fair value of the stock issued from retained earnings.

18. Stock splits and large stock dividends have the same effect on a company’s retained earnings and total stockholders’ equity.
19. The rate of return on common stock equity is computed by dividing net income by the average common stockholders’ equity.

20. The payout ratio is determined by dividing cash dividends paid to common stockholders by net income available to common stockholders.

True-False Answers—Conceptual

MULTIPLE CHOICE—Conceptual
21. The residual interest in a corporation belongs to the
a. management.
b. creditors.
c. common stockholders.
d. preferred stockholders.

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

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

S24. In a corporate form of business organization, legal capital is best defined as
a. the amount of capital the state of incorporation allows the company to accumulate over its existence.
b. the par value of all capital stock issued.
c. the amount of capital the federal government allows a corporation to generate.
d. the total capital raised by a corporation within the limits set by the Securities and Exchange Commission.

S25. Stockholders of a business enterprise are said to be the residual owners. The term residual owner means that shareholders
a. are entitled to a dividend every year in which the business earns a profit.
b. have the rights to specific assets of the business.
c. bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership.
d. can negotiate individual contracts on behalf of the enterprise.

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

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

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

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

30. When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the
a. market value of the services received.
b. par value of the shares issued.
c. market value of the shares issued.
d. Any of these provides an appropriate basis for recording the transaction.

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

32. A “secret reserve” will be created if
a. inadequate depreciation is charged to income.
b. a capital expenditure is charged to expense.
c. liabilities are understated.
d. stockholders’ equity is overstated.

P33. Which of the following represents the total number of shares that a corporation may issue under the terms of its charter?
a. authorized shares
b. issued shares
c. unissued shares
d. outstanding shares

S34. Stock that has a fixed per-share amount printed on each stock certificate is called
a. stated value stock.
b. fixed value stock.
c. uniform value stock.
d. par value stock.

S35. Which of the following is not a legal restriction related to profit distributions by a corporation?
a. The amount distributed to owners must be in compliance with the state laws governing corporations.
b. The amount distributed in any one year can never exceed the net income reported for that year.
c. Profit distributions must be formally approved by the board of directors.
d. Dividends must be in full agreement with the capital stock contracts as to preferences and participation.

S36. In January 2012, Finley Corporation, a newly formed company, issued 10,000 shares of its $10 par common stock for $15 per share. On July 1, 2012, Finley Corporation reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of these treasury shares
a. decreased total stockholders’ equity.
b. increased total stockholders’ equity.
c. did not change total stockholders’ equity.
d. decreased the number of issued shares.

P37. Treasury shares are
a. shares held as an investment by the treasurer of the corporation.
b. shares held as an investment of the corporation.
c. issued and outstanding shares.
d. issued but not outstanding shares.

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

40. Porter Corp. purchased its own par value stock on January 1, 2012 for $20,000 and debited the treasury stock account for the purchase price. The stock was subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a deduction from
a. additional paid-in capital to the extent that previous net “gains” from sales of the same class of stock are included therein; otherwise, from retained earnings.
b. additional paid-in capital without regard as to whether or not there have been previous net “gains” from sales of the same class of stock included therein.
c. retained earnings.
d. net income.

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

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

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

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

P45. According to the FASB, redeemable preferred stock should be
a. included with common stock.
b. included as a liability.
c. excluded from the stockholders’ equity heading.
d. included as a contra item in stockholders’ equity.
S46. Cumulative preferred dividends in arrears should be shown in a corporation’s balance sheet as
a. an increase in current liabilities.
b. an increase in stockholders’ equity.
c. a footnote.
d. an increase in current liabilities for the current portion and long-term liabilities for the long-term portion.

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

48. An entry is not made on the
a. date of declaration.
b. date of record.
c. date of payment.
d. An entry is made on all of these dates.

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

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

51. Houser Corporation owns 4,000,000 shares of stock in Baha Corporation. On December 31, 2012, Houser distributed these shares of stock as a dividend to its stockholders. This is an example of a
a. property dividend.
b. stock dividend.
c. liquidating dividend.
d. cash dividend.

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

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

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

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

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

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

58. The issuer of a 5% common stock dividend to common stockholders preferably should transfer from retained earnings to contributed capital an amount equal to the
a. fair value of the shares issued.
b. book value of the shares issued.
c. minimum legal requirements.
d. par or stated value of the shares issued.

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

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

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

62. What effect does the issuance of a 2-for-1 stock split have on each of the following?
Par Value per Share Retained Earnings
a. No effect No effect
b. Increase No effect
c. Decrease No effect
d. Decrease Decrease

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

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

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

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

P67. Assume common stock is the only class of stock outstanding in the Manley Corporation. Total stockholders’ equity divided by the number of common stock shares outstanding is called
a. book value per share.
b. par value per share.
c. stated value per share.
d. fair value per share.

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

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

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

Multiple Choice Answers—Conceptual

MULTIPLE CHOICE—Computational

Use the following information for questions 71 and 72.
Presented below is information related to Hale Corporation:
Common Stock, $1 par $4,800,000
Paid-in Capital in Excess of Par—Common Stock 550,000
Preferred 8 1/2% Stock, $50 par 2,000,000
Paid-in Capital in Excess of Par—Preferred Stock 400,000
Retained Earnings 1,500,000
Treasury Common Stock (at cost) 150,000

71. The total stockholders’ equity of Hale Corporation is
a. $9,100,000.
b. $9,250,000.
c. $7,600,000.
d. $7,750,000.

72. The total paid-in capital (cash collected) related to the common stock is
a. $4,800,000.
b. $5,350,000.
c. $5,750,000.
d. $5,200,000.

73. Manning Company issued 10,000 shares of its $5 par value common stock having a fair value of $25 per share and 15,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $520,000. How much of the proceeds would be allocated to the common stock?
a. $54,167
b. $236,364
c. $270,833
d. $276,250

74. Norton Company issues 4,000 shares of its $5 par value common stock having a fair value of $25 per share and 6,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $204,000. What amount of the proceeds should be allocated to the preferred stock?
a. $182,750
b. $127,500
c. $111,273
d. $95,625

75. Berry Corporation has 50,000 shares of $10 par common stock authorized. The following transactions took place during 2012, the first year of the corporation’s existence:
Sold 10,000 shares of common stock for $18 per share.
Issued 10,000 shares of common stock in exchange for a patent valued at $200,000.
At the end of the Berry’s first year, total paid-in capital amounted to
a. $80,000.
b. $180,000.
c. $200,000.
d. $380,000.
76. Glavine Company issues 6,000 shares of its $5 par value common stock having a fair value of $25 per share and 9,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $312,000. The proceeds allocated to the common stock is
a. $32,500
b. $141,818
c. $162,500
d. $170,182

77. Wheeler Company issued 5,000 shares of its $5 par value common stock having a fair value of $25 per share and 7,500 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $260,000. The proceeds allocated to the preferred stock is
a. $232,917
b. $162,500
c. $141,818
d. $118,182

78. Pember Corporation started business in 2007 by issuing 200,000 shares of $20 par common stock for $36 each. In 2012, 30,000 of these shares were purchased for $52 per share by Pember Corporation and held as treasury stock. On June 15, 2013, these 30,000 shares were exchanged for a piece of property that had an assessed value of $810,000. Perber’s stock is actively traded and had a market price of $60 on June 15, 2013. The cost method is used to account for treasury stock. The amount of paid-in capital from treasury stock transactions resulting from the above events would be
a. $1,200,000.
b. $720,000.
c. $585,000.
d. $240,000.

79. On September 1, 2012, Valdez Company reacquired 16,000 shares of its $10 par value common stock for $15 per share. Valdez uses the cost method to account for treasury stock. The journal entry to record the reacquisition of the stock should debit
a. Treasury Stock for $160,000.
b. Common Stock for $160,000.
c. Common Stock for $160,000 and Paid-in Capital in Excess of Par for $60,000.
d. Treasury Stock for $240,000.

80. Gannon Company acquired 8,000 shares of its own common stock at $20 per share on February 5, 2012, and sold 4,000 of these shares at $27 per share on August 9, 2013. The fair value of Gannon’s common stock was $24 per share at December 31, 2012, and $25 per share at December 31, 2013. The cost method is used to record treasury stock transactions. What account(s) should Gannon credit in 2013 to record the sale of 4,000 shares?
a. Treasury Stock for $108,000.
b. Treasury Stock for $80,000 and Paid-in Capital from Treasury Stock for $28,000.
c. Treasury Stock for $80,000 and Retained Earnings for $28,000.
d. Treasury Stock for $96,000 and Retained Earnings for $12,000.

81. Long Co. issued 100,000 shares of $10 par common stock for $1,200,000. Long acquired 10,000 shares of its own common stock at $15 per share. Three months later Long sold 5,000 of these shares at $19 per share. If the cost method is used to record treasury stock transactions, to record the sale of the 5,000 treasury shares, Long should credit
a. Treasury Stock for $95,000.
b. Treasury Stock for $50,000 and Paid-in Capital from Treasury Stock for $45,000.
c. Treasury Stock for $75,000 and Paid-in Capital from Treasury Stock for $20,000.
d. Treasury Stock for $75,000 and Paid-in Capital in Excess of Par for $20,000.

82. An analysis of stockholders’ equity of Hahn Corporation as of January 1, 2012, is as follows:
Common stock, par value $20; authorized 100,000 shares;
issued and outstanding 90,000 shares $1,800,000
Paid-in capital in excess of par 700,000
Retained earnings 760,000
Total $3,260,000
Hahn uses the cost method of accounting for treasury stock and during 2012 entered into the following transactions:
Acquired 2,500 shares of its stock for $75,000.
Sold 2,000 treasury shares at $35 per share.
Sold the remaining treasury shares at $20 per share.
Assuming no other equity transactions occurred during 2012, what should Hahn report at December 31, 2012, as total additional paid-in capital?
a. $695,000
b. $700,000
c. $705,000
d. $715,000

83. Percy Corporation was organized on January 1, 2012, with an authorization of 1,200,000 shares of common stock with a par value of $6 per share. During 2012, the corporation had the following capital transactions:
January 5 issued 900,000 shares @ $10 per share
July 28 purchased 120,000 shares @ $11 per share
December 31 sold the 120,000 shares held in treasury @ $18 per share
Percy used the cost method to record the purchase and reissuance of the treasury shares. What is the total amount of additional paid-in capital as of December 31, 2012?
a. $-0-.
b. $2,760,000.
c. $3,600,000.
d. $4,440,000.

84. Sosa Co.’s stockholders’ equity at January 1, 2012 is as follows:
Common stock, $10 par value; authorized 300,000 shares;
Outstanding 225,000 shares $2,250,000
Paid-in capital in excess of par 700,000
Retained earnings 2,190,000
Total $5,140,000
During 2012, Sosa had the following stock transactions:
Acquired 6,000 shares of its stock for $270,000.
Sold 3,600 treasury shares at $50 a share.
Sold the remaining treasury shares at $41 per share.
No other stock transactions occurred during 2012. Assuming Sosa uses the cost method to record treasury stock transactions, the total amount of all additional paid-in capital accounts at December 31, 2012 is
a. $691,600.
b. $670,000.
c. $708,400.
d. $727,600.

85. Presented below is the stockholders’ equity section of Oaks Corporation at December 31, 2012:
Common stock, par value $20; authorized 75,000 shares;
issued and outstanding 45,000 shares $ 900,000
Paid-in capital in excess of par value 250,000
Retained earnings 300,000
$1,450,000
During 2013, the following transactions occurred relating to stockholders’ equity:
3,000 shares were reacquired at $28 per share.
3,000 shares were reacquired at $35 per share.
1,800 shares of treasury stock were sold at $30 per share.
For the year ended December 31, 2013, Oaks reported net income of $450,000. Assuming Oaks accounts for treasury stock under the cost method, what should it report as total stockholders’ equity on its December 31, 2013, balance sheet?
a. $1,765,000.
b. $1,761,400.
c. $1,757,800.
d. $1,315,000.

86. On December 1, 2012, Abel Corporation exchanged 30,000 shares of its $10 par value common stock held in treasury for a used machine. The treasury shares were acquired by Abel at a cost of $40 per share, and are accounted for under the cost method. On the date of the exchange, the common stock had a fair value of $55 per share (the shares were originally issued at $30 per share). As a result of this exchange, Abel’s total stockholders’ equity will increase by
a. $300,000.
b. $1,200,000.
c. $1,650,000.
d. $1,350,000.

87. Luther Inc., has 3,000 shares of 6%, $50 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2013, and December 31, 2012. The board of directors declared and paid a $7,500 dividend in 2012. In 2013, $36,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2013?
a. $25,500
b. $18,000
c. $ 10,500
d. $ 9,000

88. Anders, Inc., has 10,000 shares of 5%, $100 par value, cumulative preferred stock and 40,000 shares of $1 par value common stock outstanding at December 31, 2013. There were no dividends declared in 2011. The board of directors declares and pays a $90,000 dividend in 2012 and in 2013. What is the amount of dividends received by the common stockholders in 2013?
a. $30,000
b. $50,000
c. $90,000
d. $0

89. Colson Inc. declared a $240,000 cash dividend. It currently has 9,000 shares of 7%, $100 par value cumulative preferred stock outstanding. It is one year in arrears on its preferred stock. How much cash will Colson distribute to the common stockholders?
a. $114,000.
b. $126,000.
c. $177,000.
d. None.

90. Pierson Corporation owned 10,000 shares of Hunter Corporation. These shares were purchased in 2009 for $90,000. On November 15, 2013, Pierson declared a property dividend of one share of Hunter for every ten shares of Pierson held by a stockholder. On that date, when the market price of Hunter was $21 per share, there were 90,000 shares of Pierson outstanding. What gain and net reduction in retained earnings would result from this property dividend?
Gain Net Reduction in
Retained Earnings
a. $0 $189,000
b. $0 $ 81,000
c. $108,000 $ 81,000
d. $108,000 $ 27,000

91. Stinson Corporation owned 30,000 shares of Matile Corporation. These shares were purchased in 2009 for $270,000. On November 15, 2013, Stinson declared a property dividend of one share of Matile for every ten shares of Stinson held by a stockholder. On that date, when the market price of Matile was $21 per share, there were 270,000 shares of Stinson outstanding. What gain and net reduction in retained earnings would result from this property dividend?
Gain Net Reduction in
Retained Earnings
a. $0 $243,000
b. $0 $567,000
c. $324,000 $81,000
d. $324,000 $243,000

92. Winger Corporation owned 300,000 shares of Fegan Corporation stock. On December 31, 2012, when Winger’s account “Equity Investment (Fegan Corporation”) had a carrying value of $5 per share, Winger distributed these shares to its stockholders as a dividend. Winger originally paid $8 for each share. Fegan has 1,000,000 shares issued and outstanding, which are traded on a national stock exchange. The quoted market price for a Fegan share was $7 on the declaration date and $9 on the distribution date.
What would be the reduction in Winger’s stockholders’ equity as a result of the above transactions?
a. $1,200,000.
b. $1,500,000.
c. $2,400,000.
d. $2,700,000.

93. Gibbs Corporation owned 20,000 shares of Oliver Corporation’s $5 par value common stock. These shares were purchased in 2009 for $180,000. On September 15, 2013, Gibbs declared a property dividend of one share of Oliver for every ten shares of Gibbs held by a stockholder. On that date, when the market price of Oliver was $21 per share, there were 180,000 shares of Gibbs outstanding. What NET reduction in retained earnings would result from this property dividend?
a. $162,000
b. $378,000
c. $108,000
d. $216,000

94. Melvern’s Corporation has an investment in 10,000 shares of Wallace Company common stock with a cost of $436,000. These shares are used in a property dividend to stockholders of Melvern’s. The property dividend is declared on May 25 and scheduled to be distributed on July 31 to stockholders of record on June 15. The fair value per share of Wallace stock is $63 on May 25, $66 on June 15, and $68 on July 31. The net effect of this property dividend on retained earnings is a reduction of
a. $680,000.
b. $660,000.
c. $630,000.
d. $436,000.

95. Hernandez Company has 490,000 shares of $10 par value common stock outstanding. During the year, Hernandez declared a 10% stock dividend when the market price of the stock was $30 per share. Four months later Hernandez declared a $.50 per share cash dividend. As a result of the dividends declared during the year, retained earnings decreased by
a. $1,739,500.
b. $735,000.
c. $269,500.
d. $245,000.

96. On June 30, 2012, when Ermler Co.’s stock was selling at $65 per share, its capital accounts were as follows:
Capital stock (par value $50; 80,000 shares issued) $4,000,000
Premium on capital stock 600,000
Retained earnings 4,200,000
If a 100% stock dividend were declared and distributed, capital stock would be
a. $4,000,000.
b. $4,600,000.
c. $8,000,000.
d. $8,800,000.

97. The stockholders’ equity section of Gunkel Corporation as of December 31, 2012, was as follows:
Common stock, par value $2; authorized 20,000 shares;
issued and outstanding 10,000 shares $ 20,000
Paid-in capital in excess of par 30,000
Retained earnings 95,000
$145,000
On March 1, 2013, the board of directors declared a 15% stock dividend, and accordingly 1,500 additional shares were issued. On March 1, 2011, the fair value of the stock was $6 per share. For the two months ended February 28, 2013, Gunkel sustained a net loss of $10,000.
What amount should Gunkel report as retained earnings as of March 1, 2013?
a. $76,000.
b. $82,000.
c. $86,000.
d. $92,000.

98. The stockholders’ equity of Howell Company at July 31, 2012 is presented below:
Common stock, par value $20, authorized 400,000 shares;
issued and outstanding 160,000 shares $3,200,000
Paid-in capital in excess of par 160,000
Retained earnings 650,000
$4,010,000
On August 1, 2012, the board of directors of Howell declared a 10% stock dividend on common stock, to be distributed on September 15th. The market price of Howell’s common stock was $35 on August 1, 2012, and $38 on September 15, 2012. What is the amount of the debit to retained earnings as a result of the declaration and distribution of this stock dividend?
a. $320,000.
b. $560,000.
c. $608,000.
d. $400,000.

99. On January 1, 2012, Dodd, Inc., declared a 15% stock dividend on its common stock when the fair value of the common stock was $20 per share. Stockholders’ equity before the stock dividend was declared consisted of:
Common stock, $10 par value, authorized 200,000 shares;
issued and outstanding 120,000 shares $1,200,000
Additional paid-in capital on common stock 150,000
Retained earnings 700,000
Total stockholders’ equity $2,050,000
What was the effect on Dodd’s retained earnings as a result of the above transaction?
a. $180,000 decrease
b. $360,000 decrease
c. $600,000 decrease
d. $300,000 decrease

100. On January 1, 2012, Culver Corporation had 110,000 shares of its $5 par value common stock outstanding. On June 1, the corporation acquired 10,000 shares of stock to be held in the treasury. On December 1, when the market price of the stock was $8, the corporation declared a 15% stock dividend to be issued to stockholders of record on December 16, 2012. What was the impact of the 15% stock dividend on the balance of the retained earnings account?
a. $750,000 decrease
b. $120,000 decrease
c. $132,000 decrease
d. No effect

101. At the beginning of 2013, Flaherty Company had retained earnings of $250,000. During the year Flaherty reported net income of $100,000, sold treasury stock at a “gain” of $36,000, declared a cash dividend of $60,000, and declared and issued a small stock dividend of 3,000 shares ($10 par value) when the fair value of the stock was $20 per share. The amount of retained earnings available for dividends at the end of 2013 was
a. $230,000.
b. $260,000.
c. $266,000.
d. $296,000.

102. Masterson Company has 420,000 shares of $10 par value common stock outstanding. During the year Masterson declared a 10% stock dividend when the market price of the stock was $36 per share. Three months later Masterson declared a $.60 per share cash dividend. As a result of the dividends declared during the year, retained earnings decreased by
a. $1,789,200
b. $1,512,000
c. $277,200
d. $264,000

Questions 103 and 104 are based on the following information.

Layne Corporation had the following information in its financial statements for the years ended 2012 and 2013:
Cash dividends for the year 2013 $ 8,000
Net income for the year ended 2013 83,000
Market price of stock, 12/31/12 10
Market price of stock, 12/31/13 12
Common stockholders’ equity, 12/31/12 1,600,000
Common stockholders’ equity, 12/31/13 1,800,000
Outstanding shares, 12/31/13 180,000
Preferred dividends for the year ended 2013 15,000

103. What is the payout ratio for Layne Corporation for the year ended 2013?
a. 27.7%
b. 18.1%
c. 11.8%
d. 9.6%

104. What is the book value per share for Layne Corporation for the year ended 2013?
a. $10.00
b. $9.92
c. $9.44
d. $8.89

105. At the beginning of 2013, Hamilton Company had retained earnings of $180,000. During the year Hamilton reported net income of $75,000, sold treasury stock at a “gain” of $27,000, declared a cash dividend of $45,000, and declared and issued a small stock dividend of 1,500 shares ($10 par value) when the fair value of the stock was $30 per share. The amount of retained earnings available for dividends at the end of 2013 was:
a. $214,500.
b. $192,000.
c. $187,500.
d. $165,000.

106. Mingenback Company has 560,000 shares of $10 par value common stock outstanding. During the year Mingenback declared a 10% stock dividend when the market price of the stock was $48 per share. Two months later Mingenback declared a $.60 per share cash dividend. As a result of the dividends declared during the year, retained earnings decreased by:
a. $352,000.
b. $369,600.
c. $2,688,000.
d. $3,057,600.

Questions 107 and 108 are based on the following information.

Sealy Corporation had the following information in its financial statements for the years ended 2012 and 2013:
Cash dividends for the year 2013 $ 5,000
Net income for the year ended 2013 78,000
Market price of stock, 12/31/12 10
Market price of stock, 12/31/13 12
Common stockholders’ equity, 12/31/12 1,000,000
Common stockholders’ equity, 12/31/13 1,200,000
Outstanding shares, 12/31/13 100,000
Preferred dividends for the year ended 2013 10,000

107. What is the rate of return on common stock equity for Sealy Corporation for the year ended 2013?
a. 7.1%
b. 6.5%
c. 6.2%
d. 5.7%

108. What is the price-earnings ratio for Sealy Corporation for the year ended 2013?
a. 14.7
b. 15.4
c. 17.6
d. 19.0

109. Mays, Inc. had net income for 2012 of $3,180,000 and earnings per share on common stock of $5. Included in the net income was $450,000 of bond interest expense related to its long-term debt. The income tax rate for 2012 was 30%. Dividends on preferred stock were $600,000. The payout ratio on common stock was 25%. What were the dividends on common stock in 2012?
a. $645,000.
b. $795,000.
c. $723,750.
d. $967,500.

110. Presented below is information related to Orender, Inc.:
December 31,
2013 2012
Common stock $ 75,000 $ 60,000
4% Preferred stock 350,000 350,000
Retained earnings (includes net income for current year) 90,000 75,000
Net income for year 40,000 32,000
What is Orender’s rate of return on common stock equity for 2013?
a. 26.7%
b. 17.3%
c. 15.8%
d. 24.2%

Use the following information for questions 111 and 112.

The following data are provided:
December 31,
2013 2012
10% Cumulative preferred stock, $50 par $100,000 $100,000
Common stock, $10 par 160,000 90,000
Additional paid-in capital 80,000 65,000
Retained earnings (includes current year net income) 240,000 215,000
Net income 70,000
Additional information:
On May 1, 2013, 7,000 shares of common stock were issued. The preferred dividends were not declared during 2013. The market price of the common stock was $50 at December 31, 2013.

111. The rate of return on common stock equity for 2013 is
a. 70 ÷ 420.
b. 70 ÷ 480.
c. 60 ÷ 420.
d. 60 ÷ 480.

112. The book value per share of common stock at 12/31/13 is
a. 470 ÷ 16.
b. 240 ÷ 16.
c. 370 ÷ 16.
d. 480 ÷ 15.

Use the following information for questions 113 and 114.

Turner Corporation had the following information in its financial statements for the year ended 2012 and 2013:
Cash dividends for the year 2013 $ 15,000
Net income for the year ended 2013 155,000
Market price of stock, 12/31/13 24
Common stockholders’ equity, 12/31/12 2,200,000
Common stockholders’ equity, 12/31/13 2,400,000
Outstanding shares, 12/31/13 160,000
Preferred dividends for the year ended 2013 30,000

113. What is the payout ratio for Turner Corporation for the year ended 2013?
a. 9.7%
b. 12.0%
c. 19.4%
d. 29.0%

114. What is the book value per share for Turner Corporation for the year ended 2013?
a. $14.81
b. $15.00
c. $13.75
d. $14.38

Use the following information for questions 115 through 117.

Written, Inc. has outstanding 500,000 shares of $2 par common stock and 100,000 shares of no-par 8% preferred stock with a stated value of $5. The preferred stock is cumulative and nonparticipating. Dividends have been paid in every year except the past two years and the current year.

*115. Assuming that $250,000 will be distributed as a dividend in the current year, how much will the common stockholders receive?
a. Zero.
b. $130,000.
c. $170,000.
d. $210,000.

*116. Assuming that $105,000 will be distributed as a dividend in the current year, how much will the preferred stockholders receive?
a. $35,000.
b. $40,000.
c. $80,000.
d. $105,000.

*117. Assuming that $305,000 will be distributed, and the preferred stock is also participating, how much will the common stockholders receive?
a. $185,000.
b. $150,000.
c. $155,000.
d. $80,000.

*118. Yoder, Inc. has 100,000 shares of $10 par value common stock and 50,000 shares of $10 par value, 6%, cumulative, participating preferred stock outstanding. Dividends on the preferred stock are one year in arrears. Assuming that Yoder wishes to distribute $270,000 as dividends, the common stockholders will receive
a. $60,000.
b. $110,000.
c. $160,000.
d. $210,000.

*119. Mann Co. has outstanding 60,000 shares of 8% preferred stock with a $10 par value and 150,000 shares of $3 par value common stock. Dividends have been paid every year except last year and the current year. If the preferred stock is cumulative and nonparticipating and $300,000 is distributed, the common stockholders will receive
a. $0.
b. $204,000.
c. $252,000.
d. $300,000.

Multiple Choice Answers—Computational

MULTIPLE CHOICE—CPA Adapted

120. A corporation was organized in January 2009 with authorized capital of $10 par value common stock. On February 1, 2012, shares were issued at par for cash. On March 1, 2012, the corporation’s attorney accepted 7,000 shares of common stock in settlement for legal services with a fair value of $90,000. Additional paid-in capital would increase on
February 1, 2012 March 1, 2012
a. Yes No
b. Yes Yes
c. No No
d. No Yes

121. On July 1, 2012, Nall Co. issued 2,500 shares of its $10 par common stock and 5,000 shares of its $10 par convertible preferred stock for a lump sum of $140,000. At this date Nall’s common stock was selling for $24 per share and the convertible preferred stock for $18 per share. The amount of the proceeds allocated to Nall’s preferred stock should be
a. $70,000.
b. $84,000.
c. $90,000.
d. $77,000.

122. Horton Co. was organized on January 2, 2012, with 500,000 authorized shares of $10 par value common stock. During 2012, Horton had the following capital transactions:
January 5—issued 375,000 shares at $14 per share.
July 27—purchased 25,000 shares at $11 per share.
November 25—sold 20,000 shares of treasury stock at $13 per share.
Horton used the cost method to record the purchase of the treasury shares. What would be the balance in the Paid-in Capital from Treasury Stock account at December 31, 2012?
a. $0.
b. $20,000.
c. $40,000.
d. $60,000.

123. In 2012, Hobbs Corp. acquired 9,000 shares of its own $1 par value common stock at $18 per share. In 2013, Hobbs issued 6,000 of these shares at $25 per share. Hobbs uses the cost method to account for its treasury stock transactions. What accounts and what amounts should Hobbs credit in 2013 to record the issuance of the 6,000 shares?
Treasury Additional Retained Common
Stock Paid-in Capital Earnings Stock
a. $108,000 $105,000
b. $108,000 $42,000
c. $144,000 $6,000
d. $102,000 $42,000 $6,000

124. At its date of incorporation, Sauder, Inc. issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Sauder acquired 20,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. There have been no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts?
Retained Earnings Additional Paid-in Capital
a. Decrease Decrease
b. No effect Decrease
c. Decrease No effect
d. No effect No effect

125. Farmer Corp. owned 20,000 shares of Eaton Corp. purchased in 2009 for $300,000. On December 15, 2012, Farmer declared a property dividend of all of its Eaton Corp. shares on the basis of one share of Eaton for every 10 shares of Farmer common stock held by its stockholders. The property dividend was distributed on January 15, 2013. On the declaration date, the aggregate market price of the Eaton shares held by Farmer was $500,000. The entry to record the declaration of the dividend would include a debit to Retained Earnings of
a. $0.
b. $200,000.
c. $300,000.
d. $500,000.

126. A corporation declared a dividend, a portion of which was liquidating. How would this distribution affect each of the following?
Additional
Paid-in Capital Retained Earnings
a. Decrease No effect
b. Decrease Decrease
c. No effect Decrease
d. No effect No effect

127. On May 1, 2012, Ziek Corp. declared and issued a 10% common stock dividend. Prior to this dividend, Ziek had 100,000 shares of $1 par value common stock issued and outstanding. The fair value of Ziek ‘s common stock was $20 per share on May 1, 2012. As a result of this stock dividend, Ziek’s total stockholders’ equity
a. increased by $200,000.
b. decreased by $200,000.
c. decreased by $10,000.
d. did not change.

128. How would the declaration and subsequent issuance of a 10% stock dividend by the issuer affect each of the following when the fair value of the shares exceeds the par value of the stock?
Additional
Common Stock Paid-in Capital
a. No effect No effect
b. No effect Increase
c. Increase No effect
d. Increase Increase

129. On December 31, 2012, the stockholders’ equity section of Arndt, Inc., was as follows:
Common stock, par value $10; authorized 30,000 shares;
issued and outstanding 9,000 shares $ 90,000
Additional paid-in capital 116,000
Retained earnings 154,000
Total stockholders’ equity $360,000
On March 31, 2013, Arndt declared a 10% stock dividend, and accordingly 900 additional shares were issued, when the fair value of the stock was $18 per share. For the three months ended March 31, 2013, Arndt sustained a net loss of $32,000. The balance of Arndt’s retained earnings as of March 31, 2013, should be
a. $105,800.
b. $113,000.
c. $114,800.
d. $122,000.

*130. At December 31, 2012 and 2013, Plank Corp. had outstanding 3,000 shares of $100 par value 8% cumulative preferred stock and 15,000 shares of $10 par value common stock. At December 31, 2012, dividends in arrears on the preferred stock were $12,000. Cash dividends declared in 2013 totaled $45,000. What amounts were payable on each class of stock?
Preferred Stock Common Stock
a. $24,000 $21,000
b. $33,000 $12,000
c. $36,000 $9,000
d. $45,000 $0

Multiple Choice Answers—CPA Adapted

IFRS QUESTIONS
True/False

1. In the United States, like many other countries, banks are major creditors as well as the largest investors.

2. The IFRS statement of recognized income and expenses is identical to the U.S. GAAP statement of retained earnings – beginning balance retained earnings, plus net income, less dividends, equals ending balance retained earnings.

3. When the statement of recognized income and expenses is utilized the requirement for additional note disclosure is reduced.

4. Under IFRS compliance requirements the U.S. GAAP formatted income statement need not be replaced with the iGAAP statement of recognized income and expenses.

5. Under IFRS compliance requirements the revaluation surplus is not considered contributed capital.

Answers to True/False:

Multiple Choice

1. The accounting for treasury stock retirements under IFRS
a. is to charge the entire amount to paid-in capital.
b. may have the excess charged to paid-in capital, depending on the original transaction related to the issuance of the stock.
c. is to charge the excess of the cost of treasury stock over par value to retained earnings.
d. is to allocate the difference between paid-in capital and retained earnings.

2. The Revaluation Surplus of IFRS is
a. similar to U.S. GAAP in that it allows both increases and decreases in valuation.
b. similar to U.S. GAAP in that it only allows for the decrease in valuation.
c. similar to U.S. GAAP in that it only allows for the increase in valuation.
d. different than U.S. GAAP in that it allows the increase in valuation.

3. The IFRS statement of recognized income and expenses
a. does not recognize charges to equity such as revaluation surplus values.
b. is a required report under IFRS reporting requirements.
c. reports the items that were charged directly to equity such as revaluation surplus.
d. is similar to the U.S. GAAP income statement in that it only reports revenues and expenses of the period.

4. Under IFRS compliance requirements the Revaluation Surplus is
a. only utilized to record the changes in depreciable items – plant and equipment.
b. considered as revenue when utilizing the U.S. GAAP formatted income statement.
c. utilized to record the changes in property, plant, and equipment.
d. reported as contributed capital.

5. The current project of the IASB and the FASB related to financial statement presentation indicates
a. that the IFRS statement of recognized income and expenses will most likely be adopted by the FASB as a U.S. requirement in the near future.
b. that the IFRS statement of recognized income and expenses will probably be eliminated.
c. that the U.S. GAAP standard for reporting comprehensive income will most likely be adopted by the IASB for IFRS.
d. that hybrid financial instruments are unacceptable.

Answers to Multiple Choice:

Short Answer

1. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with respect to the accounting for stockholders’ equity.

2. Briefly discuss the implications of the financial statement presentation project for the reporting of stockholders’ equity.

CHAPTER 16

DILUTIVE SECURITIES AND EARNINGS PER SHARE

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

1. The recording of convertible bonds at the date of issue is the same as the recording of straight debt issues.

2. Companies recognize the gain or loss on retiring convertible debt as an extraordinary item.

3. The FASB states that when an issuer makes an additional payment to encourage conversion, the payment should be reported as an expense.

4. The market value method is used to account for the exercise of convertible preferred stock.

5. Companies recognize a gain or loss when stockholders exercise convertible preferred stock.

6. A company should allocate the proceeds from the sale of debt with detachable stock warrants between the two securities based on their market values.

7. Nondetachable warrants, as with detachable warrants, require an allocation of the proceeds between the bonds and the warrants.

8. The intrinsic value of a stock option is the difference between the market price of the stock and the exercise price of the options at the grant date.

9. Under the fair value method, companies compute total compensation expense based on the fair value of options on the date of exercise.

10. The service period in stock option plans is the time between the grant date and the vesting date.

11. If an employee fails to exercise a stock option before its expiration date, the company should decrease compensation expense.

12. If an employee forfeits a stock option because of failure to satisfy a service requirement, the company should record paid-in capital from expired options.

13. If preferred stock is cumulative and no dividends are declared, the company subtracts the current year preferred dividend in computing earnings per share.

14. When stock dividends or stock splits occur, companies must restate the shares outstand-ing after the stock dividend or split, in order to compute the weighted-average number of shares.

15. If a stock dividend occurs after year-end, but before issuing the financial statements, a company must restate the weighted-average number of shares outstanding for the year.

16. Preferred dividends are subtracted from net income but not income before extraordinary items in computing earnings per share.

17. When a company has a complex capital structure, it must report both basic and diluted earnings per share.

18. In computing diluted earnings per share, stock options are considered dilutive when their option price is greater than the market price.

19. In a contingent issue agreement, the contingent shares are considered outstanding for computing diluted EPS when the earnings or market price level is met by the end of the year.

20. A company should report per share amounts for income before extraordinary items, but not for income from continuing operations.

True-False Answers—Conceptual

MULTIPLE CHOICE—Dilutive Securities, Conceptual

21. Convertible bonds
a. have priority over other indebtedness.
b. are usually secured by a first or second mortgage.
c. pay interest only in the event earnings are sufficient to cover the interest.
d. may be exchanged for equity securities.

22. The conversion of bonds is most commonly recorded by the
a. incremental method.
b. proportional method.
c. market value method.
d. book value method.

23. When a bond issuer offers some form of additional consideration (a “sweetener”) to induce conversion, the sweetener is accounted for as a(n)
a. extraordinary item.
b. expense.
c. loss.
d. none of these.

S24. Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted. The other is
a. the ease with which convertible debt is sold even if the company has a poor credit rating.
b. the fact that equity capital has issue costs that convertible debt does not.
c. that many corporations can obtain financing at lower rates.
d. that convertible bonds will always sell at a premium.
S25. When convertible debt is retired by the issuer, any material difference between the cash acquisition price and the carrying amount of the debt should be
a. reflected currently in income, but not as an extraordinary item.
b. reflected currently in income as an extraordinary item.
c. treated as a prior period adjustment.
d. treated as an adjustment of additional paid-in capital.

S26. The conversion of preferred stock into common requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be
a. reflected currently in income, but not as an extraordinary item.
b. reflected currently in income as an extraordinary item.
c. treated as a prior period adjustment.
d. treated as a direct reduction of retained earnings.

27. The conversion of preferred stock may be recorded by the
a. incremental method.
b. book value method.
c. market value method.
d. par value method.

28. When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par value of the bonds and the fair market value of the warrants, the excess should be credited to
a. additional paid-in capital from stock warrants.
b. retained earnings.
c. a liability account.
d. premium on bonds payable.

29. Proceeds from an issue of debt securities having stock warrants should not be allocated between debt and equity features when
a. the market value of the warrants is not readily available.
b. exercise of the warrants within the next few fiscal periods seems remote.
c. the allocation would result in a discount on the debt security.
d. the warrants issued with the debt securities are nondetachable.

30. Stock warrants outstanding should be classified as
a. liabilities.
b. reductions of capital contributed in excess of par value.
c. assets.
d. none of these.

P31. A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably
a. zero.
b. calculated by the excess of the proceeds over the face amount of the bonds.
c. equal to the market value of the warrants.
d. based on the relative market values of the two securities involved.

P32. The distribution of stock rights to existing common stockholders will increase paid-in capital at the
Date of Issuance Date of Exercise
of the Rights of the Rights
a. Yes Yes
b. Yes No
c. No Yes
d. No No

S33. The major difference between convertible debt and stock warrants is that upon exercise of the warrants
a. the stock is held by the company for a defined period of time before they are issued to the warrant holder.
b. the holder has to pay a certain amount of cash to obtain the shares.
c. the stock involved is restricted and can only be sold by the recipient after a set period of time.
d. no paid-in capital in excess of par can be a part of the transaction.

S34. Which of the following is not a characteristic of a noncompensatory stock option plan?
a. Substantially all full-time employees may participate on an equitable basis.
b. The plan offers no substantive option feature.
c. Unlimited time period permitted for exercise of an option as long as the holder is still employed by the company.
d. Discount from the market price of the stock no greater than would be reasonable in an offer of stock to stockholders or others.

35. The date on which to measure the compensation element in a stock option granted to a corporate employee ordinarily is the date on which the employee
a. is granted the option.
b. has performed all conditions precedent to exercising the option.
c. may first exercise the option.
d. exercises the option.

36. Compensation expense resulting from a compensatory stock option plan is generally
a. recognized in the period of exercise.
b. recognized in the period of the grant.
c. allocated to the periods benefited by the employee’s required service.
d. allocated over the periods of the employee’s service life to retirement.

37. The date on which total compensation expense is computed in a stock option plan is the date
a. of grant.
b. of exercise.
c. that the market price coincides with the option price.
c. that the market price exceeds the option price.

38. Which of the following is not a characteristic of a noncompensatory stock purchase plan?
a. It is open to almost all full-time employees.
b. The discount from market price is small.
c. The plan offers no substantive option feature.
d. All of these are characteristics.

*39. Under the intrinsic value method, compensation expense resulting from an incentive stock option is generally
a. not recognized because no excess of market price over the option price exists at the date of grant.
b. recognized in the period of the grant.
c. allocated to the periods benefited by the employee’s required service.
d. recognized in the period of exercise.

*40. For stock appreciation rights, the measurement date for computing compensation is the date
a. the rights mature.
b. the stock’s price reaches a predetermined amount.
c. of grant.
d. of exercise.

*41. An executive pays no taxes at time of exercise in a(an)
a. stock appreciation rights plan.
b. incentive stock option plan.
c. nonqualified stock option plan.
d. Taxes would be paid in all of these.

*42. A company estimates the fair value of SARs, using an option-pricing model, for
a. share-based equity awards.
b. share-based liability awards.
c. both equity awards and liability awards.
d. neither equity awards or liability awards.

Multiple Choice Answers—Dilutive Securities, Conceptual
Solutions to those Multiple Choice questions for which the answer is “none of these.”
30. additions to contributed capital.

MULTIPLE CHOICE—Dilutive Securities, Computational

43. Fogel Co. has $5,000,000 of 8% convertible bonds outstanding. Each $1,000 bond is convertible into 30 shares of $30 par value common stock. The bonds pay interest on January 31 and July 31. On July 31, 2012, the holders of $1,600,000 bonds exercised the conversion privilege. On that date the market price of the bonds was 105 and the market price of the common stock was $36. The total unamortized bond premium at the date of conversion was $350,000. Fogel should record, as a result of this conversion, a
a. credit of $272,000 to Paid-in Capital in Excess of Par.
b. credit of $240,000 to Paid-in Capital in Excess of Par.
c. credit of $112,000 to Premium on Bonds Payable.
d. loss of $16,000.
44. On July 1, 2012, an interest payment date, $80,000 of Parks Co. bonds were converted into 1,600 shares of Parks Co. common stock each having a par value of $45 and a market value of $54. There is $3,200 unamortized discount on the bonds. Using the book value method, Parks would record
a. no change in paid-in capital in excess of par.
b. a $4,800 increase in paid-in capital in excess of par.
c. a $9,600 increase in paid-in capital in excess of par.
d. a $6,400 increase in paid-in capital in excess of par.

45. Morgan Corporation had two issues of securities outstanding: common stock and an 8% convertible bond issue in the face amount of $20,000,000. Interest payment dates of the bond issue are June 30th and December 31st. The conversion clause in the bond indenture entitles the bondholders to receive forty shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2012, the holders of $3,000,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100 per bond and the market price of the common stock was $35. The total unamortized bond discount at the date of conversion was $1,250,000. In applying the book value method, what amount should Morgan credit to the account “paid-in capital in excess of par,” as a result of this conversion?
a. $412,500.
b. $200,000.
c. $1,800,000.
d. $900,000.

Use the following information for questions 46 through 48.

Chang Corporation issued $6,000,000 of 9%, ten-year convertible bonds on July 1, 2012 at 96.1 plus accrued interest. The bonds were dated April 1, 2010 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2013, $1,200,000 of these bonds were converted into 500 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion.

46. If “interest payable” were credited when the bonds were issued, what should be the amount of the debit to “interest expense” on October 1, 2012?
a. $129,000.
b. $135,200.
c. $141,000.
d. $270,000.

47. What should be the amount of the unamortized bond discount on April 1, 2013 relating to the bonds converted?
a. $46,800.
b. $43,200.
c. $23,400.
d. $44,400.

48. What was the effective interest rate on the bonds when they were issued?
a. 9%
b. Above 9%
c. Below 9%
d. Cannot determine from the information given.

49. Litke Corporation issued at a premium of $5,000 a $100,000 bond issue convertible into 2,000 shares of common stock (par value $25). At the time of the conversion, the unamortized premium is $2,000, the market value of the bonds is $110,000, and the stock is quoted on the market at $60 per share. If the bonds are converted into common, what is the amount of paid-in capital in excess of par to be recorded on the conversion of the bonds?
a. $55,000
b. $52,000
c. $62,000
d. $70,000

50. In 2012, Eklund, Inc., issued for $103 per share, 80,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Eklund’s $25 par value common stock at the option of the preferred stockholder. In August 2013, all of the preferred stock was converted into common stock. The market value of the common stock at the date of the conversion was $30 per share. What total amount should be credited to additional paid-in capital from common stock as a result of the conversion of the preferred stock into common stock?
a. $1,360,000.
b. $1,040,000.
c. $2,000,000.
d. $2,240,000.

51. On December 1, 2012, Lester Company issued at 103, four hundred of its 9%, $1,000 bonds. Attached to each bond was one detachable stock warrant entitling the holder to purchase 10 shares of Lester’s common stock. On December 1, 2012, the market value of the bonds, without the stock warrants, was 95, and the market value of each stock purchase warrant was $50. The amount of the proceeds from the issuance that should be accounted for as the initial carrying value of the bonds payable would be
a. $387,280.
b. $391,400.
c. $400,000.
d. $412,000.

52. On March 1, 2012, Ruiz Corporation issued $1,000,000 of 8% nonconvertible bonds at 104, which are due on February 28, 2032. In addition, each $1,000 bond was issued with 25 detachable stock warrants, each of which entitled the bondholder to purchase for $50 one share of Ruiz common stock, par value $25. The bonds without the warrants would normally sell at 95. On March 1, 2012, the fair value of Ruiz’s common stock was $40 per share and the fair value of the warrants was $2.00. What amount should Ruiz record on March 1, 2010 as paid-in capital from stock warrants?
a. $36,800
b. $42,600
c. $52,600
d. $50,000

53. During 2012, Gordon Company issued at 104 five hundred, $1,000 bonds due in ten years. One detachable stock warrant entitling the holder to purchase 15 shares of Gordon’s common stock was attached to each bond. At the date of issuance, the market value of the bonds, without the stock warrants, was quoted at 96. The market value of each detachable warrant was quoted at $40. What amount, if any, of the proceeds from the issuance should be accounted for as part of Gordon’s stockholders’ equity?
a. $0
b. $20,000
c. $20,800
d. $19,760

54. On April 7, 2012, Kegin Corporation sold a $3,000,000, twenty-year, 8 percent bond issue for $3,180,000. Each $1,000 bond has two detachable warrants, each of which permits the purchase of one share of the corporation’s common stock for $30. The stock has a par value of $25 per share. Immediately after the sale of the bonds, the corporation’s securities had the following market values:
8% bond without warrants $1,008
Warrants 21
Common stock 28
What accounts should Kegin credit to record the sale of the bonds?
a. Bonds Payable $3,000,000
Premium on Bonds Payable 116,400
Paid-in Capital—Stock Warrants 63,600
b. Bonds Payable $3,000,000
Premium on Bonds Payable 24,000
Paid-in Capital—Stock Warrants 126,000
c. Bonds Payable $3,000,000
Premium on Bonds Payable 52,800
Paid-in Capital—Stock Warrants 127,200
d. Bonds Payable $3,000,000
Premiums on Bonds Payable 180,000

Use the following information for questions 55 and 56.

On May 1, 2012, Payne Co. issued $500,000 of 7% bonds at 103, which are due on April 30, 2022. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Payne’s common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2012, the fair value of Payne’s common stock was $35 per share and of the warrants was $2.

55. On May 1, 2012, Payne should credit Paid-in Capital from Stock Warrants for
a. $19,200.
b. $20,000.
c. $20,600.
d. $35,000.

56. On May 1, 2012, Payne should record the bonds with a
a. discount of $20,000.
b. discount of $5,600.
c. discount of $5,000.
d. premium of $15,000.

57. On July 4, 2012, Chen Company issued for $6,300,000 a total of 60,000 shares of $100 par value, 7% noncumulative preferred stock along with one detachable warrant for each share issued. Each warrant contains a right to purchase one share of Chen $10 par value common stock for $15 per share. The stock without the warrants would normally sell for $6,150,000. The market price of the rights on July 1, 2012, was $2.50 per right. On October 31, 2012, when the market price of the common stock was $19 per share and the market value of the rights was $3.00 per right, 24,000 rights were exercised. As a result of the exercise of the 24,000 rights and the issuance of the related common stock, what journal entry would Chen make?
a. Cash 360,000
Common Stock 240,000
Paid-in Capital in Excess of Par 120,000
b. Cash 360,000
Paid-in Capital—Stock Warrants 60,000
Common Stock 240,000
Paid-in Capital in Excess of Par 180,000
c. Cash 360,000
Paid-in Capital—Stock Warrants 150,000
Common Stock 240,000
Paid-in Capital in Excess of Par 270,000
d. Cash 360,000
Paid-in Capital—Stock Warrants 90,000
Common Stock 240,000
Paid-in Capital in Excess of Par 210,000

58. Vernon Corporation offered detachable 5-year warrants to buy one share of common stock (par value $5) at $20 (at a time when the stock was selling for $32). The price paid for 4,000, $1,000 bonds with the warrants attached was $410,000. The market price of the Vernon bonds without the warrants was $360,000, and the market price of the warrants without the bonds was $40,000. What amount should be allocated to the warrants?
a. $40,000
b. $41,000
c. $48,000
d. $50,000

Use the following information for questions 59 and 60.

On May 1, 2012, Marly Co. issued $1,000,000 of 7% bonds at 103, which are due on April 30, 2022. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Marly’s common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2012, the fair value of Marly’s common stock was $35 per share and of the warrants was $2.

59. On May 1, 2012, Marly should record the bonds with a
a. discount of $40,000.
b. discount of $10,000.
c. discount of $11,200.
d. premium of $30,000.

60. On May 1, 2012, Marly should credit Paid-in Capital from Stock Warrants for
a. $70,000
b. $41,200
c. $40,000
d. $38,400

61. On July 1, 2012, Ellison Company granted Sam Wine, an employee, an option to buy 600 shares of Ellison Co. stock for $30 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $2,700. Wine exercised his option on October 1, 2012 and sold his 600 shares on December 1, 2012. Quoted market prices of Ellison Co. stock in 2012 were:
July 1 $30 per share
October 1 $36 per share
December 1 $40 per share
The service period is for three years beginning January 1, 2012. As a result of the option granted to Wine, using the fair value method, Ellison should recognize compensation expense on its books in the amount of
a. $2,700.
b. $900.
c. $675.
d. $0.

62. On January 1, 2012, Trent Company granted Dick Williams, an employee, an option to buy 300 shares of Trent Co. stock for $30 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $2,700. Williams exercised his option on September 1, 2012, and sold his 300 shares on December 1, 2012. Quoted market prices of Trent Co. stock during 2012 were:
January 1 $30 per share
September 1 $36 per share
December 1 $40 per share
The service period is for two years beginning January 1,2012. As a result of the option granted to Williams, using the fair value method, Trent should recognize compensation expense for 2012 on its books in the amount of
a. $3,000.
b. $2,700.
c. $1,350.
d. $0.

63. On December 31, 2012, Gonzalez Company granted some of its executives options to purchase 120,000 shares of the company’s $10 par common stock at an option price of $50 per share. The Black-Scholes option pricing model determines total compensation expense to be $900,000. The options become exercisable on January 1, 2013, and represent compensation for executives’ services over a three-year period beginning January 1, 2013. At December 31, 2013 none of the executives had exercised their options. What is the impact on Gonzalez’s net income for the year ended December 31, 2013 as a result of this transaction under the fair value method?
a. $300,000 increase.
b. $900,000 decrease.
c. $300,000 decrease.
d. $0.
64. On January 1, 2013 Reese Company granted Jack Buchanan, an employee, an option to buy 200 shares of Reese Co. stock for $40 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $2,400. Buchanan exercised his option on September 1, 2013, and sold his 100 shares on December 1, 2013. Quoted market prices of Reese Co. stock during 2013 were:
January 1 $40 per share
September 1 $48 per share
December 1 $54 per share
The service period is for two years beginning January 1, 2013. As a result of the option granted to Buchanan, using the fair value method, Reese should recognize compensation expense for 2013 on its books in the amount of
a. $0.
b. $1,200.
c. $2,400
d. $2,800

65. On June 30, 2012, Yang Corporation granted compensatory stock options for 30,000 shares of its $24 par value common stock to certain of its key employees. The market price of the common stock on that date was $31 per share and the option price was $28. Using a fair value option pricing model, total compensation expense is determined to be $96,000. The options are exercisable beginning January 1, 2014, providing those key employees are still in the employ of the company at the time the options are exercised. The options expire on June 30, 2015.
On January 4, 2014, when the market price of the stock was $36 per share, all options for the 30,000 shares were exercised. The service period is for two years beginning January 1, 2012. Using the fair value method, what should be the amount of compensation expense recorded by Yang Corporation for these options on December 31, 2012?
a. $96,000
b. $48,000
c. $22,500
d. $0

66. In order to retain certain key executives, Smiley Corporation granted them incentive stock options on December 31, 2011. 100,000 options were granted at an option price of $35
per share. Market prices of the stock were as follows:
December 31, 2012 $46 per share
December 31, 2013 51 per share
The options were granted as compensation for executives’ services to be rendered over a two-year period beginning January 1, 2012. The Black-Scholes option pricing model determines total compensation expense to be $1,000,000. What amount of compensation expense should Smiley recognize as a result of this plan for the year ended December 31, 2012 under the fair value method?
a. $1,750,000.
b. $1,100,000.
c. $1,000,000.
d. $500,000.

67. On January 1, 2013, Ritter Company granted stock options to officers and key employees for the purchase of 20,000 shares of the company’s $1 par common stock at $20 per share as additional compensation for services to be rendered over the next three years. The options are exercisable during a five-year period beginning January 1, 2016 by grantees still employed by Ritter. The Black-Scholes option pricing model determines total compensation expense to be $180,000. The market price of common stock was $26 per share at the date of grant. The journal entry to record the compensation expense related to these options for 2013 would include a credit to the Paid-in Capital—Stock Options account for
a. $0.
b. $36,000.
c. $40,000.
d. $60,000.

68. On January 1, 2013, Evans Company granted Tim Telfer, an employee, an option to buy 2,000 shares of Evans Co. stock for $25 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $15,000. Telfer exercised his option on September 1, 2013, and sold his 1,000 shares on December 1, 2013. Quoted market prices of Evans Co. stock during 2013 were
January 1 $25 per share
September 1 $30 per share
December 1 $34 per share
The service period is for three years beginning January 1, 2013. As a result of the option granted to Telfer, using the fair value method, Evans should recognize compensation expense for 2013 on its books in the amount of
a. $18,000.
b. $15,000.
c. $5,000.
d. $3,000.

69. On December 31, 2012, Kessler Company granted some of its executives options to purchase 75,000 shares of the company’s $10 par common stock at an option price of $50 per share. The options become exercisable on January 1, 2013, and represent compensation for executives’ services over a three-year period beginning January 1, 2013. The Black-Scholes option pricing model determines total compensation expense to be $450,000. At December 31, 2013, none of the executives had exercised their options. What is the impact on Kessler’s net income for the year ended December 31, 2013 as a result of this transaction under the fair value method?
a. $150,000 increase
b. $0
c. $150,000 decrease
d. $450,000 decrease

70. Weiser Corp. on January 1, 2009, granted stock options for 40,000 shares of its $10 par value common stock to its key employees. The market price of the common stock on that date was $23 per share and the option price was $20. The Black-Scholes option pricing model determines total compensation expense to be $360,000. The options are exercisable beginning January 1, 2012, provided those key employees are still in Weiser’s employ at the time the options are exercised. The options expire on January 1, 2013.
On January 1, 2012, when the market price of the stock was $29 per share, all 40,000 options were exercised. The amount of compensation expense Weiser should record for 2009 under the fair value method is
a. $0.
b. $60,000.
c. $120,000.
d. $180,000.

71. On December 31, 2012, Houser Company granted some of its executives options to purchase 75,000 shares of the company’s $50 par common stock at an option price of $60 per share. The Black-Scholes option pricing model determines total compensation expense to be $1,500,000. The options become exercisable on January 1, 2013, and represent compensation for executives’ past and future services over a three-year period beginning January 1, 2013. What is the impact on Houser’s total stockholders’ equity for the year ended December 31, 2012, as a result of this transaction under the fair value method?
a. $1,500,000 decrease
b. $500,000 decrease
c. $0
d. $500,000 increase

72. On June 30, 2012, Norman Corporation granted compensatory stock options for 40,000 shares of its $20 par value common stock to certain of its key employees. The market price of the common stock on that date was $36 per share and the option price was $30. The Black-Scholes option pricing model determines total compensation expense to be $480,000. The options are exercisable beginning January 1, 2013, provided those key employees are still in Norman’s employ at the time the options are exercised. The options expire on June 30, 2014.
On January 4, 2013, when the market price of the stock was $42 per share, all 40,000 options were exercised. What should be the amount of compensation expense recorded by Norman Corporation for the calendar year 2012 using the fair value method?
a. $0.
b. $192,000.
c. $240,000.
d. $480,000.

73. In order to retain certain key executives, Jensen Corporation granted them incentive stock options on December 31, 2011. 70,000 options were granted at an option price of $35 per share. Market prices of the stock were as follows:
December 31, 2012 $46 per share
December 31, 2013 51 per share
The options were granted as compensation for executives’ services to be rendered over a two-year period beginning January 1, 2012. The Black-Scholes option pricing model determines total compensation expense to be $700,000. What amount of compensation expense should Jensen recognize as a result of this plan for the year ended
December 31, 2012 under the fair value method?
a. $350,000.
b. $700,000.
c. $550,000.
d. $1,750,000.

74. Grant, Inc. had 50,000 shares of treasury stock ($10 par value) at December 31, 2012, which it acquired at $11 per share. On June 4, 2013, Grant issued 25,000 treasury shares to employees who exercised options under Grant’s employee stock option plan. The market value per share was $13 at December 31, 2012, $15 at June 4, 2013, and $18 at December 31, 2013. The stock options had been granted for $12 per share. The cost method is used. What is the balance of the treasury stock on Grant’s balance sheet at December 31, 2013?
a. $175,000.
b. $225,000.
c. $275,000.
d. $300,000.

Use the following information for questions 75 through 77.

On January 1, 2012, Korsak, Inc. established a stock appreciation rights plan for its executives. It entitled them to receive cash at any time during the next four years for the difference between the market price of its common stock and a pre-established price of $20 on 80,000 SARs. Current market prices of the stock are as follows:
January 1, 2012 $35 per share
December 31, 2012 38 per share
December 31, 2013 30 per share
December 31, 2014 33 per share

Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2012.

*75. What amount of compensation expense should Korsak recognize for the year ended December 31, 2012?
a. $240,000
b. $360,000
c. $300,000
d. $1,440,000

*76. What amount of compensation expense should Korsak recognize for the year ended December 31, 2013?
a. $0
b. $40,000
c. $400,000
d. $200,000

*77. On December 31, 2014, 16,000 SARs are exercised by executives. What amount of compensation expense should Korsak recognize for the year ended December 31, 2014?
a. $380,000
b. $260,000
c. $780,000
d. $104,000

Multiple Choice Answers—Dilutive Securities, Computational

MULTIPLE CHOICE—Dilutive Securities, CPA Adapted

78. On January 2, 2012, Farr Co. issued 10-year convertible bonds at 105. During 2012, these bonds were converted into common stock having an aggregate par value equal to the total face amount of the bonds. At conversion, the market price of Farr’s common stock was 50 percent above its par value. On January 2, 2012, cash proceeds from the issuance of the convertible bonds should be reported as
a. paid-in capital for the entire proceeds.
b. paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance.
c. a liability for the face amount of the bonds and paid-in capital for the premium over the face amount.
d. a liability for the entire proceeds.

79. Lang Co. issued bonds with detachable common stock warrants. Only the warrants had a known market value. The sum of the fair value of the warrants and the face amount of the bonds exceeds the cash proceeds. This excess is reported as
a. Discount on Bonds Payable.
b. Premium on Bonds Payable.
c. Common Stock Subscribed.
d. Paid-in Capital in Excess of Par—Stock Warrants.

80. On January 1, 2012, Sharp Corp. granted an employee an option to purchase 9,000 shares of Sharp’s $5 par value common stock at $20 per share. The Black-Scholes option pricing model determines total compensation expense to be $210,000. The option became exercisable on December 31, 2013, after the employee completed two years of service. The market prices of Sharp’s stock were as follows:
January 1, 2012 $30
December 31, 2013 50
For 2011, should recognize compensation expense under the fair value method of
a. $135,000.
b. $45,000.
c. $105,000.
d. $0.

*81. On January 2, 2012, for past services, Rosen Corp. granted Nenn Pine, its president, 20,000 stock appreciation rights that are exercisable immediately and expire on
January 2, 2013. On exercise, Nenn is entitled to receive cash for the excess of the market price of the stock on the exercise date over the market price on the grant date. Nenn did not exercise any of the rights during 2012. The market price of Rosen’s stock was $30 on January 2, 2012, and $45 on December 31, 2012. As a result of the stock appreciation rights, Rosen should recognize compensation expense for 2012 of
a. $0.
b. $120,000.
c. $300,000.
d. $600,000.

Multiple Choice Answers—Dilutive Securities, CPA Adapted

MULTIPLE CHOICE—Earnings Per Share—Conceptual

82. With respect to the computation of earnings per share, which of the following would be most indicative of a simple capital structure?
a. Common stock, preferred stock, and convertible securities outstanding in lots of even thousands
b. Earnings derived from one primary line of business
c. Ownership interest consisting solely of common stock
d. None of these

83. In computing earnings per share for a simple capital structure, if the preferred stock is cumulative, the amount that should be deducted as an adjustment to the numerator (earnings) is the
a. preferred dividends in arrears.
b. preferred dividends in arrears times (one minus the income tax rate).
c. annual preferred dividend times (one minus the income tax rate).
d. none of these.

84. In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are
a. weighted by the number of days outstanding.
b. weighted by the number of months outstanding.
c. considered outstanding at the beginning of the year.
d. considered outstanding at the beginning of the earliest year reported.

85. What effect will the acquisition of treasury stock have on stockholders’ equity and earnings per share, respectively?
a. Decrease and no effect
b. Increase and no effect
c. Decrease and increase
d. Increase and decrease

S86. Due to the importance of earnings per share information, it is required to be reported by all
Public Companies Nonpublic Companies
a. Yes Yes
b. Yes No
c. No No
d. No Yes

P87. A convertible bond issue should be included in the diluted earnings per share computation as if the bonds had been converted into common stock, if the effect of its inclusion is
Dilutive Antidilutive
a. Yes Yes
b. Yes No
c. No Yes
d. No No

88. When computing diluted earnings per share, convertible bonds are
a. ignored.
b. assumed converted whether they are dilutive or antidilutive.
c. assumed converted only if they are antidilutive.
d. assumed converted only if they are dilutive.

89. Dilutive convertible securities must be used in the computation of
a. basic earnings per share only.
b. diluted earnings per share only.
c. diluted and basic earnings per share.
d. none of these.

90. In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?
a. Annual preferred dividend
b. Annual preferred dividend times (one minus the income tax rate)
c. Annual preferred dividend times the income tax rate
d. Annual preferred dividend divided by the income tax rate

91. In the diluted earnings per share computation, the treasury stock method is used for options and warrants to reflect assumed reacquisition of common stock at the average market price during the period. If the exercise price of the options or warrants exceeds the average market price, the computation would
a. fairly present diluted earnings per share on a prospective basis.
b. fairly present the maximum potential dilution of diluted earnings per share on a prospective basis.
c. reflect the excess of the number of shares assumed issued over the number of shares assumed reacquired as the potential dilution of earnings per share.
d. be antidilutive.

92. In applying the treasury stock method to determine the dilutive effect of stock options and warrants, the proceeds assumed to be received upon exercise of the options and warrants
a. are used to calculate the number of common shares repurchased at the average market price, when computing diluted earnings per share.
b. are added, net of tax, to the numerator of the calculation for diluted earnings per share.
c. are disregarded in the computation of earnings per share if the exercise price of the options and warrants is less than the ending market price of common stock.
d. none of these.

93. When applying the treasury stock method for diluted earnings per share, the market price of the common stock used for the repurchase is the
a. price at the end of the year.
b. average market price.
c. price at the beginning of the year.
d. none of these.

94. Antidilutive securities
a. should be included in the computation of diluted earnings per share but not basic earnings per share.
b. are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share.
c. include stock options and warrants whose exercise price is less than the average market price of common stock.
d. should be ignored in all earnings per share calculations.

*95. Assume there are two dilutive convertible securities. The one that should be used first to recalculate earnings per share is the security with the
a. greater earnings adjustment.
b. greater earnings per share adjustment.
c. smaller earnings adjustment.
d. smaller earnings per share adjustment.

MULTIPLE CHOICE—Earnings Per Share—Computational

96. Hill Corp. had 600,000 shares of common stock outstanding on January 1, issued 900,000 shares on July 1, and had income applicable to common stock of $1,680,000 for the year ending December 31, 2012. Earnings per share of common stock for 2012 would be
a. $2.80.
b. $1.33.
c. $1.60.
d. $1.87.

97. At December 31, 2012, Hancock Company had 500,000 shares of common stock issued and outstanding, 400,000 of which had been issued and outstanding throughout the year and 100,000 of which were issued on October 1, 2012. Net income for the year ended December 31, 2012, was $1,530,000. What should be Hancock’s 2012 earnings per common share, rounded to the nearest penny?
a. $3.03
b. $3.82
c. $3.60
d. $3.40

98. Milo Co. had 800,000 shares of common stock outstanding on January 1, issued 126,000 shares on May 1, purchased 63,000 shares of treasury stock on September 1, and issued 54,000 shares on November 1. The weighted average shares outstanding for the year is
a. 851,000.
b. 872,000.
c. 893,000.
d. 914,000.

99. On January 1, 2013, Gridley Corporation had 187,500 shares of its $2 par value common stock outstanding. On March 1, Gridley sold an additional 375,000 shares on the open market at $20 per share. Gridley issued a 20% stock dividend on May 1. On August 1, Gridley purchased 210,000 shares and immediately retired the stock. On November 1, 300,000 shares were sold for $25 per share. What is the weighted-average number of shares outstanding for 2013?
a. 765,000
b. 562,500
c. 358,333
d. 258,333

100. The following information is available for Barone Corporation:
January 1, 2013 Shares outstanding 1,500,000
April 1, 2013 Shares issued 240,000
July 1, 2013 Treasury shares purchased 90,000
October 1, 2013 Shares issued in a 100% stock dividend 1,650,000
The number of shares to be used in computing earnings per common share for 2013 is
a. 3,390,600.
b. 3,285,000.
c. 3,270,000.
d. 2,047,500.

101. At December 31, 2012 Rice Company had 300,000 shares of common stock and 10,000 shares of 6%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2012 or 2013. On January 30, 2014, prior to the issuance of its financial statements for the year ended December 31, 2013, Rice declared a 100% stock dividend on its common stock. Net income for 2013 was $1,140,000. In its 2013 financial statements, Rice’s 2013 earnings per common share should be
a. $1.80.
b. $1.89.
c. $3.60.
d. $3.80.

102. Fultz Company had 300,000 shares of common stock issued and outstanding at December 31, 2012. During 2013, no additional common stock was issued. On January 1, 2013, Fultz issued 400,000 shares of nonconvertible preferred stock. During 2013, Fultz declared and paid $210,000 cash dividends on the common stock and $175,000 on the nonconvertible preferred stock. Net income for the year ended December 31, 2013, was $1,120,000. What should be Fultz’s 2013 earnings per common share, rounded to the nearest penny?
a. $1.35
b. $2.45
c. $3.15
d. $3.73

103. At December 31, 2012 Pine Company had 200,000 shares of common stock and 10,000 shares of 5%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2012 or 2013. On February 10, 2014, prior to the issuance of its financial statements for the year ended December 31, 2013, Pine declared a 100% stock split on its common stock. Net income for 2013 was $900,000. In its 2013 financial statements, Pine’s 2013 earnings per common share should be
a. $4.25.
b. $4.00.
c. $2.13.
d. $1.25.

104. Stine Inc. had 400,000 shares of common stock issued and outstanding at December 31, 2012. On July 1, 2013 an additional 400,000 shares were issued for cash. Stine also had stock options outstanding at the beginning and end of 2013 which allow the holders to purchase 120,000 shares of common stock at $28 per share. The average market price of Stine’s common stock was $35 during 2013. The number of shares to be used in computing diluted earnings per share for 2013 is
a. 896,000
b. 824,000
c. 696,000
d. 624,000

105. Kasravi Co. had net income for 2013 of $400,000. The average number of shares outstanding for the period was 200,000 shares. The average number of shares under outstanding options, at an option price of $30 per share is 12,000 shares. The average market price of the common stock during the year was $36. What should Kasravi Co. report for diluted earnings per share for the year ended 2013?
a. $2.00
b. $1.98
c. $1.90
d. $1.89

106. On January 2, 2013, Worth Co. issued at par $1,000,000 of 7% convertible bonds. Each $1,000 bond is convertible into 20 shares of common stock. No bonds were converted during 2013. Worth had 200,000 shares of common stock outstanding during 2013. Worth’s 2013 net income was $300,000 and the income tax rate was 30%. Worth’s diluted earnings per share for 2013 would be (rounded to the nearest penny):
a. $1.74.
b. $1.59.
c. $1.50.
d. $1.68.

107. Beaty Inc. purchased Dunbar Co. and agreed to give stockholders of Dunbar Co. 10,000 additional shares in 2014 if Dunbar Co.’s net income in 2013 is $500,000; in 2012 Dunbar Co.’s net income is $520,000. Beaty Inc. has net income for 2012 of $300,000 and has an average number of common shares outstanding for 2012 of 100,000 shares. What should Beaty report as diluted earnings per share for 2012?
a. $3.33
b. $3.00
c. $2.73
d. $2.51

Use the following information for questions 108 and 109.

Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,000,000 of 7.5% convertible bonds outstanding during 2013. The preferred stock is convertible into 40,000 shares of common stock. During 2013, Hanson paid dividends of $.90 per share on the common stock and $3 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 2013 was $600,000 and the income tax rate was 30%.

108. Basic earnings per share for 2013 is (rounded to the nearest penny)
a. $2.20.
b. $2.42.
c. $2.51.
d. $2.70.

109. Diluted earnings per share for 2013 is (rounded to the nearest penny)
a. $2.08.
b. $2.11.
c. $2.29.
d. $2.50.

110. Fugate Company had 750,000 shares of common stock issued and outstanding at December 31, 2012. On July 1, 2013 an additional 750,000 shares were issued for cash. Fugate also had stock options outstanding at the beginning and end of 2013 which allow the holders to purchase 225,000 shares of common stock at $20 per share. The average market price of Fugate’s common stock was $25 during 2013. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2013?
a. 1,545,000
b. 1,305,000
c. 1,181,250
d. 1,170,000

111. Shipley Corporation had net income for the year of $600,000 and a weighted average number of common shares outstanding during the period of 200,000 shares. The company has a convertible bond issue outstanding. The bonds were issued four years ago at par ($2,500,000), carry a 7% interest rate, and are convertible into 40,000 shares of common stock. The company has a 40% tax rate. Diluted earnings per share are
a. $2.06
b. $2.79.
c. $2.94.
d. $3.22.

112. Colt Corporation purchased Massey Inc. and agreed to give stockholders of Massey Inc. 50,000 additional shares in 2014 if Massey Inc.’s net income in 2013 is $600,000 or more; in 2012 Massey Inc.’s net income is $615,000. Colt has net income for 2010 of $1,200,000 and has an average number of common shares outstanding for 2012 of 500,000 shares. What should Colt report as earnings per share for 2012?
Basic Earnings Diluted Earnings
Per Share Per Share
a. $2.40 $2.40
b. $2.18 $2.40
c. $2.40 $2.18
d. $2.18 $2.18

113. On January 2, 2012, Perez Co. issued at par $10,000 of 8% bonds convertible in total into 1,000 shares of Perez’s common stock. No bonds were converted during 2012. Throughout 2012, Perez had 1,000 shares of common stock outstanding. Perez’s 2012 net income was $4,000, and its income tax rate is 30%. No potentially dilutive securities other than the convertible bonds were outstanding during 2012. Perez’s diluted earnings per share for 2012 would be (rounded to the nearest penny)
a. $2.00.
b. $2.28.
c. $2.40.
d. $4.56.

114. At December 31, 2012, Kifer Company had 600,000 shares of common stock outstanding. On October 1, 2013, an additional 120,000 shares of common stock were issued. In addition, Kifer had $10,000,000 of 6% convertible bonds outstanding at December 31, 2012, which are convertible into 270,000 shares of common stock. No bonds were converted into common stock in 2013. The net income for the year ended December 31, 2013, was $3,000,000. Assuming the income tax rate was 30%, the diluted earnings per share for the year ended December 31, 2013, should be (rounded to the nearest penny)
a. $5.43.
b. $4.00.
c. $3.80.
d. $3.33.

115. On January 2, 2013, Mize Co. issued at par $300,000 of 9% convertible bonds. Each $1,000 bond is convertible into 60 shares. No bonds were converted during 2013. Mize had 100,000 shares of common stock outstanding during 2013. Mize ‘s 2013 net income was $160,000 and the income tax rate was 30%. Mize’s diluted earnings per share for 2013 would be (rounded to the nearest penny)
a. $1.36.
b. $1.52.
c. $1.60.
d. $1.79.

116. At December 31, 2012, Sager Co. had 1,200,000 shares of common stock outstanding. In addition, Sager had 450,000 shares of preferred stock which were convertible into 750,000 shares of common stock. During 2013, Sager paid $750,000 cash dividends on the common stock and $500,000 cash dividends on the preferred stock. Net income for 2013 was $4,250,000 and the income tax rate was 40%. The diluted earnings per share for 2013 is (rounded to the nearest penny)
a. $1.55.
b. $2.18.
c. $3.14.
d. $3.55.

Use the following information for questions 117 and 118.
Lerner Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,500,000 of 10% convertible bonds outstanding during 2013. The preferred stock is convertible into 40,000 shares of common stock. During 2013, Lerner paid dividends of $1.35 per share on the common stock and $4.50 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 2013 was $900,000 and the income tax rate was 30%.

117. Basic earnings per share for 2013 is (rounded to the nearest penny)
a. $3.32.
b. $3.63.
c. $3.76.
d. $4.05.

118. Diluted earnings per share for 2013 is (rounded to the nearest penny)
a. $3.21.
b. $3.37.
c. $3.53.
d. $3.69.
119. Yoder, Incorporated, has 4,200,000 shares of common stock outstanding on
December 31, 2012. An additional 800,000 shares of common stock were issued on
April 1, 2013, and 400,000 more on July 1, 2013. On October 1, 2013, Yoder issued 20,000, $1,000 face value, 8% convertible bonds. Each bond is convertible into 20 shares of common stock. No bonds were converted into common stock in 2013. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively?
a. 5,000,000 and 5,000,000
b. 5,000,000 and 5,100,000
c. 5,000,000 and 5,400,000
d. 5,400,000 and 6,200,000

120. Nolte Co. has 4,800,000 shares of common stock outstanding on December 31, 2012. An additional 200,000 shares are issued on April 1, 2013, and 480,000 more on September 1. On October 1, Nolte issued $6,000,000 of 9% convertible bonds. Each $1,000 bond is convertible into 40 shares of common stock. No bonds have been converted. The number of shares to be used in computing basic earnings per share and diluted earnings per share on December 31, 2013 is
a. 5,110,000 and 5,110,000.
b. 5,110,000 and 5,170,000.
c. 5,110,000 and 5,350,000.
d. 5,880,000 and 5,320,000.

121. At December 31, 2012, Tatum Company had 2,000,000 shares of common stock outstanding. On January 1, 2013, Tatum issued 500,000 shares of preferred stock which were convertible into 1,000,000 shares of common stock. During 2013, Tatum declared and paid $1,800,000 cash dividends on the common stock and $600,000 cash dividends on the preferred stock. Net income for the year ended December 31, 2013, was $6,000,000. Assuming an income tax rate of 30%, what should be diluted earnings per share for the year ended December 31, 2013? (Round to the nearest penny.)
a. $1.80
b. $2.00
c. $3.00
d. $2.50

122. At December 31, 2012, Emley Company had 1,200,000 shares of common stock outstanding. On September 1, 2013, an additional 400,000 shares of common stock were issued. In addition, Emley had $8,000,000 of 6% convertible bonds outstanding at December 31, 2012, which are convertible into 800,000 shares of common stock. No bonds were converted into common stock in 2013. The net income for the year ended December 31, 2013, was $3,000,000. Assuming the income tax rate was 30%, what should be the diluted earnings per share for the year ended December 31, 2013, rounded to the nearest penny?
a. $1.41
b. $2.25
c. $1.56
d. $1.63

123. Grimm Company has 2,000,000 shares of common stock outstanding on December 31, 2012. An additional 150,000 shares of common stock were issued on July 1, 2013, and 300,000 more on October 1, 2013. On April 1, 2013, Grimm issued 6,000, $1,000 face value, 8% convertible bonds. Each bond is convertible into 40 shares of common stock. No bonds were converted into common stock in 2013. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively, for the year ended December 31, 2013?
a. 2,150,000 and 2,330,000
b. 2,150,000 and 2,150,000
c. 2,150,000 and 2,390,000
d. 2,450,000 and 2,630,000

Use the following information for questions 124 and 125.
Information concerning the capital structure of Piper Corporation is as follows:
December 31,
2013 2012
Common stock 150,000 shares 150,000 shares
Convertible preferred stock 15,000 shares 15,000 shares
6% convertible bonds $2,400,000 $2,400,000
During 2013, Piper paid dividends of $0.80 per share on its common stock and $2.00 per share on its preferred stock. The preferred stock is convertible into 30,000 shares of common stock. The 6% convertible bonds are convertible into 75,000 shares of common stock. The net income for the year ended December 31, 2013, was $400,000. Assume that the income tax rate was 30%.

124. What should be the basic earnings per share for the year ended December 31, 2013, rounded to the nearest penny?
a. $1.77
b. $1.95
c. $2.47
d. $2.67

125. What should be the diluted earnings per share for the year ended December 31, 2013, rounded to the nearest penny?
a. $2.13
b. $1.96
c. $1.89
d. $1.57

126. Warrants exercisable at $20 each to obtain 50,000 shares of common stock were outstanding during a period when the average market price of the common stock was $25. Application of the treasury stock method for the assumed exercise of these warrants in computing diluted earnings per share will increase the weighted average number of outstanding shares by
a. 50,000.
b. 40,000.
c. 10,000.
d. 12,500.

127. Terry Corporation had 400,000 shares of common stock outstanding at December 31, 2012. In addition, it had 90,000 stock options outstanding, which had been granted to certain executives, and which gave them the right to purchase shares of Terry’s stock at an option price of $37 per share. The average market price of Terry’s common stock for 2012 was $50. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2012?
a. 400,000
b. 431,622
c. 466,600
d. 423,400

Multiple Choice Answers—Earnings Per Share—Computational

MULTIPLE CHOICE—Earnings Per Share—CPA Adapted

128. Didde Co. had 300,000 shares of common stock issued and outstanding at December 31, 2012. No common stock was issued during 2013. On January 1, 2013, Didde issued 200,000 shares of nonconvertible preferred stock. During 2013, Didde declared and paid $150,000 cash dividends on the common stock and $120,000 on the preferred stock. Net income for the year ended December 31, 2013 was $930,000. What should be Didde’s 2013 earnings per common share?
a. $3.10
b. $2.70
c. $2.60
d. $2.20

129. At December 31, 2013 and 2012, Miley Corp. had 180,000 shares of common stock and 10,000 shares of 6%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2013 or 2012. Net income for 2013 was $480,000. For 2013, earnings per common share amounted to
a. $2.67.
b. $2.33.
c. $2.11.
d. $2.00.

130. Marsh Co. had 2,400,000 shares of common stock outstanding on January 1 and December 31, 2013. In connection with the acquisition of a subsidiary company in June 2012, Marsh is required to issue 100,000 additional shares of its common stock on July 1, 2014, to the former owners of the subsidiary. Marsh paid $300,000 in preferred stock dividends in 2013, and reported net income of $5,100,000 for the year. Marsh’s diluted earnings per share for 2013 should be
a. $2.13.
b. $2.04.
c. $2.00.
d. $1.92.

131. Foyle, Inc., had 610,000 shares of common stock issued and outstanding at December 31, 2012. On July 1, 2013, an additional 40,000 shares of common stock were issued for cash. Foyle also had unexercised stock options to purchase 32,000 shares of common stock at $15 per share outstanding at the beginning and end of 2013. The average market price of Foyle’s common stock was $20 during 2013. What is the number of shares that should be used in computing diluted earnings per share for the year ended
December 31, 2013?
a. 630,000
b. 638,000
c. 658,000
d. 662,000

132. When computing diluted earnings per share, convertible securities are
a. ignored.
b. recognized only if they are dilutive.
c. recognized only if they are antidilutive.
d. recognized whether they are dilutive or antidilutive.

133. In determining diluted earnings per share, dividends on nonconvertible cumulative preferred stock should be
a. disregarded.
b. added back to net income whether declared or not.
c. deducted from net income only if declared.
d. deducted from net income whether declared or not.

134. The if-converted method of computing earnings per share data assumes conversion of convertible securities as of the
a. beginning of the earliest period reported (or at time of issuance, if later).
b. beginning of the earliest period reported (regardless of time of issuance).
c. middle of the earliest period reported (regardless of time of issuance).
d. ending of the earliest period reported (regardless of time of issuance).

IFRS QUESTIONS

True/False

1. IFRS and U.S. GAAP have significant differences in the reporting of securities with characteristics of debt and equity, such as convertible debt.

2. Under IFRS, all of the proceeds of convertible debt are recorded as long-term debt.

3. Under IFRS, convertible bonds are “bifurcated” —separated into the equity component (the value of the conversion option) of the bond issue and the debt component.

4. Under both U.S. GAAP and IFRS, the calculation of basic and diluted earnings per share is identical.

5. Under IFRS recording for the issuance of Bonds Payable, the Discount on Bonds Payable and the Paid-in Capital-Convertible Bonds could be utilized.

Answers to True/False:

Multiple Choice:

1. With regard to recognizing stock-based compensation
a. IFRS and U.S. GAAP follow the same model.
b. IFRS and U.S. GAAP standards are undergoing major reform on valuation issues.
c. it has been agreed that these standards will not be merged due to the differences in currencies.
d. the reform of U.S. GAAP standards will not be addressed until IFRS standards have been finalized.

2. The primary IFRS reporting standards related to financial instruments, including dilutive securities, is
a. IAS 33.
b. IAS 39.
c. IFRS 2.
d. IAS 2.

3. When $5,000,000 in convertible bonds are issued at par with $800,000 in value of the equity option embedded in the bond, the IFRS journal entry will include a debit of
a. $800,000 to Paid-in Capital — Convertible Bonds and a credit to Bonds Payable.
b. $800,000 to Premium on Bonds Payable and a credit to Paid-in Capital — Convertible Bonds.
c. $800,000 to Bonds Payable and a credit to Paid-in Capital — Convertible Bonds.
d. $4,200,000 to Cash along with a debit of $800,000 to Discount on Bonds Payable and a credit to Bonds Payable and a credit to Paid-in Capital — Convertible Bonds.

4. With regard to contracts that can be settled in either cash or shares
a. IFRS requires that share settlement must be used.
b. IFRS gives companies a choice of either cash or shares.
c. U.S. GAAP requires that share settlement must be used.
d. the FASB project proposes that the IASB adopt the U.S. GAAP approach, requiring that share settlement must be used.

5. With regard to recognizing stock-based compensation under IFRS the fair value of shares and options awarded to employees is recognized
a. in the first fiscal period of the employees’ service.
b. over the fiscal periods to which the employees’ services relate.
c. in the last fiscal period of the employees’ service when the total value can be calculated.
d. after last fiscal period of the employees’ service when the total value can be calculated.

Answers to Multiple Choice:

Short Answer

1. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with respect to the accounting for dilutive securities, stock-based compensation, and earnings per share.

2. Briefly discuss the convergence efforts that are under way by the IASB and FASB in the area of dilutive securities and earnings per share.