ACC 563 Week 11 Final Exam – Strayer University NEW

ACC/563 Week 11 Final Exam – Strayer NEW

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Week 11 Final Exam: Chapters 8 Through 17

Chapter 8
Multiple Choice

1. Of the following items, the one that should be classified as a current asset is
a. Trade installment receivables normally collectible in 18 months
b. Cash designated for the redemption of callable preferred stock
c. Cash surrender value of a life insurance policy of which the company is beneficiary
d. A deposit on machinery ordered, delivery of which will be made within six months

Answer

2. The advantage of relating a company’s bad debt experience to its accounts receivable is that this approach
a. Gives a reasonable correct statement of receivables in the balance sheet
b. Relates bad debts expense to the period of sale
c. Is the only generally accepted method for valuing accounts receivable
d. Makes estimates of uncollectible accounts unnecessary

Answer

3. Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future, failure to follow this practice usually does not make the balance sheet misleading because
a. Most short-term receivables are not interest bearing
b. The allowance for uncollectible accounts includes a discount element
c. The amount of the discount is not material
d. Most receivables can be sold to a bank or factor

Answer

4. An account that would be classified as a current liability is
a. Dividends payable in stock
b. Accounts payable – debit balance
c. Reserve for possible losses on purchase commitments
d. Excess of replacement cost over LIFO cost of basic inventory temporarily liquidated

Answer

5. 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, since it matches 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.

Answer

6. Jamison Corporation’s inventory cost on its statement of financial position was lower using first-in, first-out than last-in, first-out. Assuming no beginning inventory, what direction did the cost of purchases move during the period?
a. Up
b. Down
c. Steady
d. Cannot be determined

Answer

7. If inventory levels are stable or increasing an argument that favors the FIFO method as compared to LIFO 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 in the income statement
c. Cost assignments typically parallel the physical flow of the goods
d. Income tends to be smoothed as prices change over time

Answer

8. 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. Conventional retail
d. Weighted average

Answer

9. 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 net of conversion costs
b. Net realizable value
c. Historical cost
d. Net realizable value reduced by a normal profit margin

Answer

10. Which of the following inventory cost flow methods involves computations based on broad inventory pools of similar items?
a. Regular quantity of goods LIFO
b. Dollar-value LIFO
c. Weighted average
d. Moving average

Answer
11. When the allowance method of recognizing bad debt expense is used, the entries at the time of collection of an account previously written off would
a. Increase net income
b. Have no effect on total current assets
c. Increase working capital
d. Decrease total current liabilities

Answer

12. The original cost of an inventory item is above the replacement cost. The replacement cost is below the net realizable value less the normal profit margin. Under the lower of cost or market method the inventory item should be priced at its
a. Original cost
b. Replacement cost
c. Net realizable value
d. Net realizable value less the normal profit margin

Answer
13. Liquidity is the ability
a. To increase net assets through regular operations
b. To generate cash from sources other than regular operations
c. To convert existing assets into cash
d. Of financial statement users to predict a company’s cash flows

Answer

14. Liquidity ratios measures the
a. Operating success of a company over a period of time
b. The ability of a company to survive over a long period of time
c. The short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash
d. The number of times interest is earned

Answer

15. Working capital is a measure of
a. Financial flexibility
b. Liquidity.
c. Profitability.
d. Solvency.

Answer

16. A common measure of liquidity is
a. Return on assets.
b. Accounts receivable turnover.
c. Profit margin.
d. Debt to equity.

Answer

1. The net realizable value of receivables is calculated as the face value of the receivables less adjustments for
a. Credit sales
b. Actual uncollected amounts adjusted for purchase discounts.
c. Bad debts already written off.
d. Estimated uncollectible accounts

18. A successful discount retail store such as Wal-Mart would probably have
a. A low inventory turnover
b. A high inventory turnover
c. Zero profit margin
d. Low volume

Answer
Use the following information to answer questions
Acme Auto Supplies
Balance Sheet
December 31, 2007

Cash $ 60,000 Accounts Payable $ 65,000
Prepaid Insurance 40,000 Salaries Payable 10,000
Accounts Receivable 50,000 Mortgage Payable 90,000
Inventory 70,000 Total Liabilities $165,000
Land held for investment 80,000
Land 95,000
Building $100,000 Common Stock $120,000
Less Accumulated Retained Earnings 250,000
Depreciation (30,000) 70,000 Total stockholders’ equity $370,000
Trademark 70,000 Total Liabilities and
Total Assets $535,000 Stockholders’ Equity $535,000

19. The total amount of working capital is
a. $155,000.
b. $145,000.
c. $60,000.
d. $150,000.

Answer

20. The current ratio is
a. 1.86 : 1.
b. 2.00 : 1.
c. 3.38 : 1.
d. 2.93 : 1.

Answer

Essay

1. Define working capital.

2. Define the following terms:
a. Cash equivalents

b. Temporary investments

c. Receivables

d. Inventories

e. Payables

f. Deferrals

g. Current maturities

3. Define the following terms:
a. LIFO liquidation

b. LIFO conformity

c. Lower of cost or market inventory valuation
.

4. List and briefly define the methods of accounting for investments under SFAS No. 115“Accounting for Certain Investments in Debt and Equity Securities” (FASB ASC 320).

5. Define and discuss the two methods of estimating bad debts on receivables.

6. Why are cost flow assumptions used to determine inventory valuations? Define and explain the rationale for using each of the cost flow assumptions.

.

7. Obtain a company’s financial statements and ask the students to compute the following:
a. Working capital
b. Current ratio
c. Acid test ratio
d. Cash flow from operations to current liabilities ratio
e. Accounts receivable turnover
f. Inventory turnover

Chapter 9

Multiple Choice

1. 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. Appraised value of the land
d. Total liquidating value of the stock issued

Answer

2. 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

Answer

3. Property, plant, and equipment are conventionally presented n the balance sheet at
a. Replacement cost less accumulated depreciation
b. Historical cost less salvage value
c. Original cost adjusted for general price level changes
d. Acquisition cost less depreciated portion thereof

Answer

4. As generally used in accounting, depreciation
a. Is a process of asset valuation for balance sheet purposes
b. Applies only to long-lived intangible assets
c. Is used to indicate a decline in market value of a long-lived asset
d. Is an accounting process that allocates long-lived asset cost to accounting periods

Answer

5. Lyle, Inc., purchased certain plant assets under a deferred payment contract on December 31, 2011. The agreement was to pay $20,000 at the time of purchase and $20,000 at the end of each of the next five years. The plant assets should be valued at
a. The present value of a $20,000 ordinary annuity for five years
b. $120,000
c. $120,000 less imputed interest
d. $120,000 plus imputed interest

Answer

6. For income statement purposes, depreciation is a variable expense if the depreciation method used for book purposes is
a. Units of production
b. Straight line
c. Sum-of-the-year’s-digits
d. Declining balance

Answer

7. A method that excludes salvage value from the base for the depreciation calculation is
a. Straight line
b. Sum-of-the-year’s digits
c. Double-declining balance
d. Productive output

Answer

8. When a company purchases land with a building on it and immediately tears down the building so that the land can be used for the construction of a plant, the cost incurred to tear down the building should be
a. Expensed as incurred
b. Added to the cost of the plant
c. Added to the cost of the land
d. Amortized over the estimated time period between the tearing down of the building and the completion of the plant

Answer

9. A machine with a four-year estimated useful life and an estimated 15 percent salvage value was acquired on January 1, 2010. On December 31, 2012, the accumulated depreciation using the sum-of-year’s digits method would be
a. (Original cost less salvage value) multiplied by 9/10
b. Original cost multiplied by 9/10
c. Original cost multiplied by 9/10 less total salvage value
d. (Original cost less salvage value) multiplied by 1/10

Answer

10. The theoretical justification for reporting depreciation expense is
a. Depreciation expense represents a decrease in the value of the asset that has occurred during the accounting period.
b. Depreciation expense represents the impairment of the asset that has occurred during the accounting period.
c. Depreciation expense represents the unrealized loss that has been incurred by using the asset during the accounting period.
d. Depreciation expense represents the allocation of the historical cost of the asset that has been applied to the accounting period.

Answer

11. A company using the group depreciation method for its delivery trucks retired one of its delivery trucks due to damage before the average service life of the group was reached. An insurance recovery was received. The net book value of these group asset accounts would be decreased by the
a. Original cost of the truck
b. Original cost of the truck less the insurance recovery received
c. Original cost of the truck less depreciation on the truck to the date of retirement
d. Insurance recovery received

Answer

12. When equipment is retired, accumulated depreciation is debited for the original cost less any residual recovery under which of the following depreciation methods?

Composite Group
Depreciation Depreciation
a. No No
b. No Yes
c. Yes No
d. Yes Yes

Answer

13. Recognizing depletion expense is an example of the accounting process of

Allocation Amortization
a. No No
b. No Yes
c. Yes Yes
d. Yes No

Answer

14. A donated plant asset for which the fair value has been determined, and for which incidental costs were incurred in acceptance of the asset, should be recorded at an amount equal to its
a. Incidental costs incurred
b. Fair value and incidental costs incurred
c. Book value on books of donor and incidental costs incurred
d. Book value on books of donor

Answer

Essay

1. List the objectives of accounting for property, plant and equipment.

2. Describe how cost is assigned to individual assets when they are acquired in a lump-sum group purchase.

3. Discuss the three approaches to allocating fixed overhead to a self-construction project.

4. Discuss the issue of allocating interest to self construction projects. That is, when should interest be allocated and how much interest should be allocated?

5. Explain the concept of commercial substance originally outlined in SFAS No. 158.

6. How did SFAS No. 116, now FASB ASC 605-10-15-3, change the accounting for donated assets?

7. Discuss the factors comprising the depreciation process.

8. Discuss the distinction between capital and revenue expenditures for long-term assets.

9. Define and discuss accounting for asset retirement obligations under SFAS No. 14FASB ASC 410-20.

10. Discuss the guidelines for accounting for property, plant and equipment outlined in IAS No. 16.

11. How does IAS no. 23 define borrowing costs?

12. Discuss accounting for the impairment of assets as outlined in IAS No. 36.

Chapter 10

Multiple Choice

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

Answer

2. Pence Corporation, which accounts for its investments in the common stock of Walsh Company by the equity method, should ordinarily record a dividend received from Walsh as
a. An addition to the carrying value of the investment
b. Dividend revenue
c. A reduction of the carrying value of the investment
d. Revenue from affiliate

Answer

3. On January 15, 2002, a corporation was granted a patent on a product. On January 2, 2010, to protect its patent, the corporation purchased a patent on a competing product the originally was issued on January 10, 2008. Because of its unique plant, the 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 17 years
b. Amortized over a maximum period of 13 years
c. Amortized over a maximum period of 9 years
d. Expensed in 2010

Answer

4. Pacer Company purchased 300 of the 1, 000 outstanding shares of Queen Company’s common stock for $80,000 on January 2, 2008. During 2009, Queen Company declared dividends of $8,000 and reported earnings for the year of $20,000.
If Pacer Company uses the equity method of accounting for its investment in Queen Company, its Investment in Queen Company account at December 31, 2009 should be
a. $100, 000
b. $88,000
c. $83,600
d. $80,000

Answer

5. Refer to the facts in problem (4). If Pacer Company uses the lower of cost or market method of accounting for its investment in Queen Company, and the value of its investment hasn’t changed, its Investment in Queen Company account on December 31, 2009, should be
a. $100, 000
b. $88,000
c. $80,000
d. $73,600

Answer

6. A large, publicly held company developed and registered a trademark during 2010. The cost of developing and registering the trademark should be accounted for by
a. Charging it to an asset account that should not be amortized
b. Expensing it as incurred
c. Amortizing it over 25 years if in accordance with management’s evaluation
d. Amortizing it over its useful life or 17 years, whichever is shorter

Answer

7. Goodwill should be written off
a. As soon as possible against retrained earnings
b. When there is evidence that its carrying value has been impaired
c. By systematic charges against retained earnings over the period benefited, but not more than 40 years
d. By systematic charges to expense over the period benefited, but not more than 40 years

Answer

8. A net unrealized loss on a company’s long-term portfolio of available for sale securities should be reflected in the current financial statements as
a. An extraordinary item shown as a direct reduction from retained earnings
b. A current loss resulting from holding marketable equity securities
c. A footnote or parenthetical disclosure only
d. A component of other comprehensive income

Answer

9. Changes in the fair value of a long-term available for sale equity securities portfolio should be reported as a component of
a. Other comprehensive income
b. Noncurrent assets
c. Noncurrent liabilities
d. Net income

Answer

10. Cash dividends declared out of current earnings are distributed to an investor. How will the investor’s investment account be affected by those dividends under each of the following accounting methods?
Fair Value Method Equity Method
a. Decrease No effect
b. Decrease Decrease
c. No effect Decrease
d. No effect No effect

Answer

11. An activity that would be expensed currently as research and development costs is the
a. Testing in search for or evaluation of product or process alternatives
b. Adaptation of an existing capability to a particular requirement or customer’s need as a part of continuing commercial activity
c. Legal work in connection with patent applications or litigation, and the sale or licensing of patents
d. Engineering follow-through in an early phase of commercial production

Answer

12. Should the following fees associated with the registration of an internally developed patent be capitalized?
Registration
Legal fees fees
a. Yes Yes
b. Yes No
c. No Yes
d. No No

Answer

13. Which of the following assets acquired in 2010 are amortizable?
Goodwill Trademarks
a. No No
b. No Yes
c. Yes No
d. Yes No

Answer

14. A purchased patent has a remaining life of 15 years. It should be
a. Expensed in the year of acquisition
b. Amortized over 15 years regardless of its useful life
c. Amortized over its useful life if less than 15 years
d. Amortized over 40 years

Answer

15. Which of the following amounts incurred in connection with a trademark should be capitalized?
Cost of a Registration
Successful defense fees
a. Yes No
b. Yes Yes
c. No Yes
d. No No

Answer
16. Zink Company owns 32% of Ace Company’s outstanding voting stock. Zink Company normally should account for its investment in Ace Company using the
a. Fair value method.
b. Cost method.
c. Consolidation procedure.
d. Equity method.

Answer

2. An investor purchased a bond as a long-term investment on January 1. Annual interest was received on December 31. The investor’s interest income for the year would be lowest if the bond was purchased at
a. A discount
b. A premium
c. Par
d. Face value

Answer

19. The theoretical justification for expensing research and development (R&D) cost as it is incurred is based on which of the following arguments?
a. R&D costs provide no future benefits, thus it does not meet the definition of an asset
b. R&D costs are incurred to generate current period revenue, thus the matching concept requires that it be expensed as incurred.
c. Whether R&D costs that have been incurred will provide future benefit is uncertain, thus it does not meet the definition of an asset.
d. Since R&D costs have been incurred during the current period, they meet the definition of an expense.

Answer

20. When a patent is successfully defended in court, the cost of the lawsuit
a. Should be expensed as incurred because it is a period cost.
b. Should be added to the cost of the patent and depreciated over the remaining useful life of the patent.
c. Should be added to the cost of the patent which is then expensed as a period cost.
d. Has already been expensed so there is no further action to take.

Answer

21. Goodwill is an intangible asset
a. That has a definite life and its cost should be amortized over its useful life.
b. That is recorded when the company has projected earnings in excess of earnings expected for an investment in a similar company in the same industry.
c. That is reviewed for impairment when circumstances indicate that impairment may have occurred.
d. That is reviewed annually to determine whether impairment has occurred.

Answer

22. A trading security is measured at fair value on the balance sheet date and reported as
a. A current asset, and changes in fair value are reported in earnings as unrealized gains and losses.
b. A current asset, and changes in fair value are reported in earnings as realized gains and losses.
c. Either a current or noncurrent asset depending on whether they meet the definition of a current asset.
d. A current asset, and changes in fair value are reported in accumulated other comprehensive income as unrealized gains and losses.

Answer

23. Current accounting for an available-for-sale (AFS) security is consistent with
a. The financial capital maintenance concept of income because AFS security unrealized gains and losses are reported in earnings.
b. The financial capital maintenance concept of income because AFS security unrealized gains and losses are reports in other comprehensive income.
c. The physical capital maintenance concept of income because AFS security unrealized gains and losses are reported in earnings.
d. The physical capital maintenance concept of income because AFS security unrealized gains and losses are reported in other comprehensive income.

Answer

24. The physical capital maintenance concept of income would require that an investment in the common stock of another entity be
a. Reported in the balance sheet at historical cost and that only realized gains and losses be reported in earnings.
b. Reported in the balance sheet at historical cost and that unrealized gains and losses be reported in earnings.
c. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in earnings.
d. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in other comprehensive income.

Answer

25. The economic concept of income would require that an investment in the common stock of another entity be
a. Reported in the balance sheet at historical cost and that only realized gains and losses be reported in earnings.
b. Reported in the balance sheet at historical cost and that unrealized gains and losses be reported in earnings.
c. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in earnings.
d. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in other comprehensive income.

Answer
26. Under the fair value option, an investment in the common stock of another entity will be

a. Reported as a current asset
b. Reported as a noncurrent asset
c. Reported as either a current or noncurrent asset depending on managerial intent.
d. Reported as a current asset only if it was not previously reported as an equity method investment.

Answer

27. When a company reports goodwill in its balance sheet, we know that
a. It was internally generated because the company has earnings in excess of those of other companies in the industry.
b. The company purchased it.
c. The company will be reporting amortization expense for the goodwill.
d. The company will not be reporting an impairment loss for the goodwill.

Answer
Essay

1. How are income and balance sheet values determined under the equity method?

2. Discuss accounting for equity securities under the cost method.

3. Discuss accounting for equity securities under the SFAS No. 115 now contained at FASB ASC 320.

4. Summarize the accounting requirements for investments in equity securities. That is, what methods are available and when is each method appropriate?

5. Discuss the use of the fair value option originally described in SFAS No. 159 now contained at FASB ASC 825-10.

6. Discuss accounting for investments in debt securities.

7. What is an intangible asset? How is the cost of an intangible asset amortized?
8. What is goodwill? How is goodwill written off under the provisions of SFAS No. 142 now FASB ASC 350?

9. Define research and development. How are research and development costs recorded

10. How does IAS No 39 define fair value?

Chapter 11

Multiple Choice

1. A loss from early extinguishment of debt, if material, should be reported as a component of income
a. After cumulative effect f accounting changes and after discontinued operations of a segment of a business
b. After cumulative effect of accounting changes and before discontinued operations of a segment of a business
c. Income from continuing operations
d. Before cumulative effect of accounting changes and before discontinued operation s of a segment of a business
Answer

2. Unamortized debt discount should be reported on the balance sheet of the issuer as
a. A direct deduction from the face amount of the debt
b. A direct deduction from the present value of the debt
c. A deferred charge
d. Part of the issue costs

Answer

3. An example of an item that 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

Answer

4. If bonds are issued initially at a discount and the straight-line method of amortization is used for the discount, interest expense in the earlier years will be
a. Greater than if the compound interest method were used
b. The same as if the compound interest method were used
c. Less than if the compound interest method were used
d. Less than the amount of the interest payments

Answer

5. Cole Manufacturing Corporation issued bonds with a maturity amount of $200,000 and a maturity 10 years from date of issue. If the bonds were issued at a premium, this indicates that
a. The yield (effective or market) rate of interest exceeded the nominal (coupon) rate
b. The nominal rate of interest exceeded the yield rate
c. The yield and nominal rates coincided
d. No necessary relationship exists between the two rates

Answer

6. “Trading on the equity” (financial leverage) is likely to be a good financial strategy for stockholders of companies having
a. Cyclical high and low amounts of reported earnings
b. Steady amounts of reported earnings
c. Volatile fluctuation in reported earnings over short periods of time
d. Steadily declining amounts of reported earnings

Answer

7. Theoretically, a bond payable should be reported at the present value of the interest discounted at
a. Stated interest rate for both principal and interest
b. Effective interest rate for both principal and interest
c. Stated interest rate for principal and effective interest rate for interest
d. Effective interest rate for principal and stated interest rate for interest

Answer

8. A threat of expropriation of assets that is reasonably possible, and for which the amount of loss can be reasonably estimated, is an example of a (an)
a. Loss contingency that should be disclosed, but not accrued
b. Loss contingency that should be accrued and disclosed
c. Appropriation of retained earnings against which losses should be charged
d. General business risk which should not be accrued and need not be disclosed

Answer

9. When it is necessary to impute an interest rate in connection with a note payable, the rate should be
a. Two-thirds of the prime rate effective at the time the obligation is incurred
b. The same as that used in the GNP Implicit Price Deflator
c. At least equal to the rate at which the debtor can obtain financing of a similar nature from other sources at the date of the transaction
d. As near zero as can be justified

Answer

10. Taft Company sells Lee Company a machine, the usual cash price of which is $10,000, in exchange for an $11,800 non-interest-bearing note due three years from date. If Taft records the note at $10,000, the overall effect will be
a. A correct sales price and correct interest revenue
b. A correct sales price and understated interest revenue
c. An understated sales price and understated interest revenue
d. An overstated interest price and understated interest revenue

Answer

11. In the situation described in problem 10, if Lee records the asset and note at $11,800, the overall effect will be
a. A correct acquisition cost and correct interest expense
b. A correct acquisition cost and understated interest expense
c. An understated acquisition cost and understated interest expense
d. An overstated acquisition cost and understated interest expense

Answer

12. How would the amortization of premium bonds payable affect each of the following?
Carrying value of
Bond Net Income
a. Increase Decrease
b. Increase Increase
c. Decrease Decrease
d. Decrease Increase

Answer

13. For a trouble debt restructuring involving only modification of terms, it is appropriate for a debtor to recognize a gain when the carrying amount of the debt
a. Exceeds the total future cash payments specified by the new terms
b. Is less than the total future cash payments specified by the new terms
c. Exceeds the present value specified by the new terms
d. Is less than the present value specified by the new terms

Answer

14. How should the value of warrants attached to a debt security be account for?
a. No value assigned
b. A separate portion of paid-in capital
c. An appropriation of retained earnings
d. A liability

Answer

15. For the issuer of a 10-year term bond, the amount of amortization using the interest method would increase each year if the bond was sold at a
Discount Premium
a. No No
b. Yes Yes
c. No Yes
d. Yes No

Answer

16. Gain contingencies are usually recognized in the income statement when
a. Realized
b. Occurrence is reasonably possible and the amount can be reasonably estimated
c. Occurrence is probable and the amount can be reasonably estimated
d. The amount can be reasonably estimated

Answer

17. An estimated loss from a loss contingency should be accrued when
a. It is probable at the date of the financial statements that a loss has been incurred and the amount of the loss can be reasonably estimated
b. The loss has been incurred by the date of the financial statements and the amount of the loss may be material
c. It is probable at the date of the financial statements that a loss has been incurred and the amount of the loss may be material
d. It is probable that a loss will be incurred in a future period and the amount of the loss can be reasonably estimated

Answer

18. When the issuer of bonds exercises the call provision to retire the bonds, the excess of the cash paid over the carrying amount of the bonds should be recognized separately as a (an)
a. Extraordinary loss
b. Extraordinary gain
c. Loss from continuing operations
d. Loss from discontinued operations

Answer

19. A two-year note was issued in an arm’s-length transaction at face value solely for cash at the beginning of the year. There were no other rights or privileges exchanged. The interest rate is specified at 10 percent per year. Principal and interest are payable at maturity. The prevailing rate of interest for a loan of this type is 15 percent per year. What annual interest rate should be used to record interest expense for this year and next year?
This year Next Year
a. 10 percent 15 percent
b. 10 percent 10 percent
c. 15 percent 10 percent
d. 15 percent 15 percent

Answer
20. The interest rate used to calculate the cash interest payments by the issuer of bonds is
a. The market rate of interest
b. The effective interest rate
c. The stated interest rate
d. Equal to the actual interest expense rate

Answer

21. Ace Corporation has a debt to total assets ratio of 65%. This tells the user of Ace’s financial statements
a. Ace is getting a 35% return on its assets
b. There is a risk Ace cannot pay its debts as they come due
c. 65% of the assets are financed by the stockholders
d. Ace should issue more debt to reduce its risk

Answer

22. Trading on the equity (leverage) refers to the
a. Amount of working capital
b. Amount of capital provided by owners
c. Use of borrowed money to increase the return to owners
d. Number of times interest is earned

Answer

23. The current accounting treatment for convertible debt is to treat it as straight debt. This treatment can be defended on what basis?

a. Convertible debt is a complex financial instrument.
b. Convertible debt comprises two financial instruments – a debt instrument and the option to convert.
c. The debt instrument and the option to convert are not separable.
d. The option to convert is equity.

Answer

24. XYZ Company’s yearend is December 31, 20×1 and its financial statements are issued in the following March. On January 24, 20×2. A 10 year note payable came due and was paid by issuing XYZ common stock to the creditor. In its December 31, 20×1 balance sheet, XYZ should
a. Report the note as a current liability because it was due on January 24, 20×2 – only 24 days after the year end.
b. Report the note as a long-term liability because it was not paid off with a current asset or replaced by another current liability.
c. Report the note as a long-term liability because it was extinguished (paid off) on January 24, 20×2 – only 24 days after the year end.
d. Report the note as a long-term liability because it was a 10 year note.

Answer

25. A zero coupon bond is different from a typical bond issue because
a. The investor can clip the coupons and get paid for the periodic interest on the bond while a typical bond does not have coupons.
b. It is reported in the balance sheet net of the discount on the bond.
c. The zero coupon bond’s deep discount is reported as an asset and a typical bond that is issued at a discount is reported net of the discount.
d. It does not pay any periodic interest while the typical bond does.

Answer

26. An unearned revenue is an example of a(an)
a. Deferred credit.
b. Accrued liability.
c. Customer billing that takes place before a job is finished.
d. Accounts receivable.

Answer

27. A deferred credit meets the definition of a liability because
a. It is a probable future sacrifice of assets as the result of a past transaction or event.
b. It is a present obligation to transfer assets to another entity.
c. It is an accrual representing an obligation to pay money in the future.
d. It is a present obligation to provide services to another entity.

Answer

28. The physical capital maintenance concept of income would require that a company’s bonds payable be
a. Reported in the balance sheet at their amortized issue price and that changes in their market values be reported in earnings.
b. Reported in the balance sheet at their amortized issue price and that changes in their market values not be reported in earnings.
c. Reported in the balance sheet at their fair market values and that changes in their market values be reported in earnings.
d. Reported in the balance sheet at their fair market values and that changes in their market values be reported in other comprehensive income.

Answer

29. ABC Company has a note payable that is due six months after its year end. Under which of the following conditions will ABC be able to classify the note as a long term debt.
a. ABC cannot classify the note as long term because it is due within the current operating cycle or one year, whichever is longer.
b. ABC can classify the note as long term because it is due next year.
c. ABC can classify the note as long term because management intends to refinance it with long term debt and has an agreement to do so with a qualified creditor.
d. ABC can classify the note as long term because it is a 10 year note and management intends to pay the maturity value at the end of the 10 year period.

Answer

30. Current accounting treatment for gain contingencies is different from the accounting treatment for loss contingencies. Which accounting concept is this differential concept consistent with?
a. Conservatism
b. Materiality
c. Full disclosure
d. Revenue recognition

Answer

31. In general, derivative instruments are
a. Not reported in a company’s balance sheet because their impact on the company is not yet known..
b. Reported in the balance sheet at fair value and changes in their fair value are reported in earnings.
c. Reported in the balance sheet at historical cost and changes in their fair value are reported in earnings.
d. Reported in the balance sheet at fair value and changes in their fair value are reported in other comprehensive income.

Answer

32. Under a troubled debt restructuring that results in a modification of terms the debtor will report interest expense when
a. The debtor reports a gain on restructuring.
b. The future cash flows under the restructuring agreement are less than the company’s obligation at the date the restructuring takes place.
c. Always because the troubled debtor has a new agreement that obligates the company to make payments in the future.
d. The debtor reports no gain on restructuring.

Answer
Essay

1. List and discuss five factors that may be employed to determine if a particular financial instrument is a debt or equity security.

2. Discuss the definition and the proper accounting for mandatorily redeemable preferred stock.

3. Discuss the four basic reasons why a corporation may wish to issue debt rather than equity securities

4. Define the following terms:
a. Mortgage bonds

b. Debenture bonds

5. Explain how the selling price of a bond is determined.

6. What is a zero coupon bond? Discuss accounting for zero-coupon bonds.

7. Discuss the difference between the straight-line and the effective interest methods of bond premium or discount amortizations.

8. List the three methods of accounting for bonds refunding. Under current GAAP, how are
9. Discuss the factors that might motivate corporate management to decide to issue convertible debt.

10. Discuss accounting for long-term notes payable as originally described in APB Opinion No. 21.

11. Discuss accounting for contingencies

12. What is a derivative? Describe the accounting treatment for fair value and cash flow hedges required by SFAS No. 133.

13. Define the following terms:
a. Forward

b. Future

c. Option

d. Swap

e. Hybrid

14. What is a troubled debt restructuring? How is a troubled debt restructuring accomplished?

15. Obtain the financial statements of a company and ask the students to compute the:
a. Long-term debt to assets ratio
b. Interest coverage ratio
c. Debt service coverage ratio

16. How are compound financial instruments accounted for under IAS No. 32?

17. According to IAS No. 39, when are financial liabilities recognized?

Chapter 12

Multiple Choice

1. With respect to the difference between taxable income and pretax accounting income, the tax effect of the undistributed earnings of a subsidiary included in consolidated income should normally be
a. Accounted for as a timing difference
b. Accounted for as a permanent difference
c. Ignored because it must be based on estimates and assumptions
d. Ignored because it cannot be presumed that all undistributed earnings of a subsidiary will be transferred to the parent company

Answer

2. Income tax allocation procedures are not appropriate when
a. An extraordinary loss will cause the amount of income tax expense to be less than the tax on ordinary net income
b. An extraordinary gain will cause the amount of income tax expense to be greater than the tax on ordinary net income
c. Differences between net income for tax purposes and financial reporting occur because tax laws and financial accounting principles do not concur on the items to be recognized as revenue and expense
d. Differences between net income for tax purposes and financial reporting occur that will not reverse.

Answer

3. Which of the following would cause a deferred tax expense?
a. Writedown of goodwill due to impairment
b. Use of equity method where undistributed earnings of a 30 percent owned investee are related to probable future dividends
c. Premiums paid on insurance carried by company (beneficiary) on its officers or employees
d. Income is taxed at capital gains rates

Answer

4. Differences between taxable income and pretax accounting income arising from transactions that, under applicable tax laws and regulations, will not be offset by corresponding differences or “turn around” in future periods is a definition of
a. Permanent differences
b. Timing differences
c. Intraperiod tax allocation
d. Interperiod tax allocation

Answer

5. The tax effect of a difference between taxable income and pretax accounting income attributable to losses of a subsidiary is normally recognized for
a. Neither carrybacks nor carryforwards
b. Both carrybacks and carryforwards
c. Carrybacks but not carryforwards
d. Carryforwards but not carrybacks

Answer

6. Which of the following is not affected by tax allocation within a period?
a. Income before extraordinary items
b. Extraordinary events
c. Adjustments of prior periods
d. Operating revenues

Answer

7. Under the comprehensive deferred interperiod method of tax allocation, deferred taxes are determined on the basis of
a. Tax rates in effect when the timing differences originate without adjustment for subsequent changes in tax rates
b. Tax rates expected to be in effect when the items giving rise to the timing differences reverse themselves
c. Net valuations of assets or liabilities
d. Averages determined on an industry-by-industry basis

Answer

8. The accounting recognition of the benefit from a tax loss carryforward in most situations should be reported as
a. A reduction of the loss in the year of the loss with an appropriate valuation allowance
b. A prior period adjustment in whichever year the benefit is realized
c. An extraordinary item in the year in which the benefit is realized
d. An item on the retained earnings statement, not the income statement

Answer

9. Intraperiod tax allocation arises because
a. Items included in the determination of taxable income may be presented in different sections of the financial statements
b. Income taxes must be allocated between current and future periods
c. Certain revenues and expenses appear in the financial statements either before or after they are included in taxable income
d. Certain revenues and expenses appear in the financial statements but are excluded from taxable income

Answer

10. Assuming no prior period adjustments, would the following affect net income?
Interperiod Intraperiod
Income tax Income tax
Allocation Allocation
a. Yes Yes
b. Yes No
c. No Yes
d. No No

Answer

11. A machine with a 10-year useful life is being depreciated on a straight-line basis for financial statement purposes, and over 5 years for income tax purposes under the accelerated recovery cost system. Assuming that the company is profitable and that there are and have been no other timing differences, the related deferred income taxes would be reported in the balance sheet at the end of the first year of the estimated useful life as a
a. Current liability
b. Current asset
c. Noncurrent liability
d. Noncurrent asset

Answer

12. Smith Corporation owns only 25 percent of the voting stock of Jones Corporation, but exercises significant influence over its operating and financial policies. The tax effect of differences between taxable income and pretax accounting income attributable to undistributed earnings of Jones Corporation should be
a. Accounted for as a timing difference
b. Accounted for as a permanent difference
c. Ignored because it must be based on estimates and assumptions
d. Ignored because Smith holds less than 51 percent of the voting stock of Jones

Answer

13. A company has four “deferred income tax” accounts arising from timing differences involving (1) current assets, (2) noncurrent assets, (3) current liabilities, and (4) noncurrent liabilities. The presentation of these four “deferred income tax “ accounts in the statement of financial position should be shown as
a. A single net amount
b. A net current and a net noncurrent amount
c. Four accounts with no netting permitted
d. Valuation adjustments of the related assets and liabilities that gave rise to the deferred tax

Answer

14. A company’s only temporary difference results from using double declining balance depreciation for tax purposes and straight-line depreciation for financial reporting. The company purchases new plant assets each year. If currently enacted tax law will result in a higher tax rate for all future tax years, which accounting approach for deferred taxes will result in the lowest net income for this current year?
a. Nonallocation of deferred taxes.
b. Partial allocation of deferred taxes under the asset/liability method.
c. Comprehensive allocation of deferred taxes under the asset/liability method.
d. Comprehensive allocation of deferred taxes under the deferred method.

Answer

15. Which of the following is not an argument that an advocate of nonallocation of deferred taxes might use to support his/her position?
a. Income taxes result only from taxable income.
b. Income taxes are an expense of doing business and should be treated the same as other expenses of doing business under accrual accounting.
c. Income taxes are not levied on individual items of income or expense.
d. The current provision for income taxes is a better predictor of future cash flows than is income tax expense that includes deferred taxes.

Answer

16. Which of the following is an argument that an advocate of interperiod income tax allocation might use to support his/her position?
a. Income taxes result from taxable income.
b. Income taxes are an expense of doing business and should be treated the same as other expenses of doing business under accrual accounting.
c. Nonallocation of income taxes hides an economic difference between a company that employs tax strategies that reduce current tax payments than one that does not.
d. Income taxes are not incurred in anticipation of future benefits, nor are they expirations of cost to provide facilities to generate revenues.

Answer

17. A net operating loss carryover that occurs in a company’s second year of operations
a. May cause a company to report a tax benefit in the current period income statement.
b. Has no effect on income tax expense of the current period because no taxes are paid.
c. Causes a company to report a deferred income tax liability for taxes that are not paid currently.
d. Results in future taxable amounts.

Answer

18. Which of the following will result in a deferred tax asset?
a. Using the installment sales method for tax purposes, while using point of sale for financial reporting.
b. Reporting an unrealized gain for a trading security.
c. Using accelerated depreciation for tax purposes and straight-line depreciation for financial reporting.
d. Reporting an expected loss on from a lawsuit in the income statement, when it cannot be reported on the tax return until it is actually incurred.

Answer

19. Which of the following will result in a deferred tax liability?
a. A net operating loss carryover.
b. Reporting an unrealized gain for a trading security.
c. Reporting an unrealized gain for an available-for-sale security.
d. Reporting an expected loss on from a lawsuit in the income statement, when it cannot be reported on the tax return until it is actually incurred.

Answer

20. Which of the following causes a permanent difference between taxable income and financial accounting income?
a. The useful life of an asset is 10 years. The asset is depreciated over 7 years for tax purposes.
b. Rent received in advance is taxable upon receipt.
c. A life insurance premium paid by the corporation on a policy that names the corporation as the beneficiary.
d. A penalty paid to a bank when a CD is cashed before its maturity date.

Answer
21. Which of the following approaches to interperiod tax allocation best represents an example of the matching principle?
a. The deferred method of interperiod income tax allocation
b. Discounting deferred income taxes
c. Nonallocation of income taxes
d. The asset/liability method of income tax allocation.

Answer

22. A company that has both short-term deferred tax assets of $22,000, long-term deferred tax liabilities of $36,000, short-term deferred tax liabilities of $51,000 and short-term deferred tax assets of $60,000 should report
a. A current asset for $22,000, a current liability for $36,000, a long-term asset for $60,000, and a long-term liability for $51,000.
b. A current liability for $14,000 and a long-term asset for $9,000.
c. A current asset for $5,000.
d. A current liability for $14,000, a long-term asset for $60,000, and a long-term liability for $51,000.

Answer

23. An increase in the deferred income tax asset valuation allowance
a. Occurs when there is an operating loss carryforward.
b. Has no effect on income tax expense.
c. Occurs when there is an expected increase in future taxable icnome.
d. Increases income tax expense.

Answer

Essay

1. What are the objectives of accounting for income taxes?

2. Define the following types of differences between financial accounting income and taxable income:

3. Describe the three types of permanent differences.`

4. List and give examples of the f our types of differences that cause financial accounting income to be either greater than or less than taxable income.

5. Describe the accounting treatment for net operating losses.

6. Discuss the arguments for and against interperiod tax allocation.

7. Discuss the arguments for comprehensive vs. partial allocation of interperiod taxes.

8. Discuss the arguments for and against discounting deferred taxes.

9. Define the following:
a. Deferred method of income tax allocation

b. Asset-liability method of income tax allocation

c. Net-of-tax method

10. Discuss how SFAS No. 109, now FASB ASC 740, changed the accounting for deferred tax assets.

11. Describe the use of the valuation allowance for deferred tax assets.

12. Describe accounting for uncertain tax positions under FIN No. 48, now FASB ASC 740-10-25.

13. Discuss the rationale behind the calculation of a company’s earnings conservatism ratio.

Chapter 13

1. Under the capital method of accounting for leases the excess of aggregate rentals over the cost of leased property should be recognized as revenue of the lessor
a. In increasing amounts during the term of the lease
b. In constant amounts during the term of the lease
c. In decreasing amounts during the term of the lease
d. After the cost of leased property has been fully recovered through rentals

Answer

2. When measuring the present value of future rentals to be capitalized as part of the purchase price in a lease that is be accounted for as a purchase, identifiable payments to cover taxes, insurance, and maintenance should be
a. Included in the future rentals to be capitalized
b. Excluded from future rentals to be capitalized
c. Capitalized but at a different discount rate and recorded in a different account than future rental payments
d. Capitalized but at a different discount rate and for a relevant period that tends to be different than that for future rental payments

Answer

3. Equal monthly rental payments for a particular lease should be charged to rental expense by the lessee for which of the following?

Capital lease Operating lease
a. Yes No
b. Yes Yes
c. No No
d. No Yes

Answer

4. In a lease that is recorded as a sales-type lease by the lessor, the difference between the gross investment in the lease and sum of the present values of the components of the gross investment should be recognized as income
a. In full at the lease’s expiration
b. In full at the lease’s inception
c. Over the period of the lease using the interest method of amortization
d. Over the period of the lease using the straight-line method of amortization

Answer

5. For a six-year capital lease, the portion of the minimum lease payment in the third year applicable to the reduction of the obligation should be
a. Less than in the second year
b. More than in the second year
c. The same as in the fourth year
d. More than in the fourth year

Answer

6. Based solely upon the following sets of circumstances, indicate below which set gives rise to a sales type or direct financing lease of a lessor:

Transfers Contains
Ownership bargain
By end of purchase
Lease? Provision?
a. No Yes
b. Yes No
c. Yes Yes
d. No No

Answer

7. Generally accepted accounting principles require that certain lease agreements be accounted for as purchases. The theoretical basis for this treatment is that a lease of this type
a. Effectively conveys all of the benefits and risks incident to the ownership of property
b. Is an example of form over substance
c. Provides the use of the leased asset to the lessee for a limited period of time
d. Must be recorded in accordance with the concept of cause and effect

Answer

8. The appropriate valuation of an operating lease on the statement of financial position of a lessee is
a. Zero
b. The absolute sum of the lease payments
c. The present value of the sum of the lease payments discounted at an appropriate rate
d. The market value of the asset at the date of the inception of the lease

Answer

9. A six-year-capital lease entered into on December 31, 2008, specified equal minimum annual lease payments due on December 31, 2010. Minimum payment applicable to which of the following increased over the corresponding December 31, 2010, minimum payment?
Reduction of
Interest Expense Liability
a. Yes Yes
b. Yes No
c. No Yes
d. No No

Answer

10. Office equipment recorded under a capital lease containing a bargain purchase option should be amortized
a. Over the period of the lease using the interest method of amortization
b. Over the period of the lease using the straight-line method of amortization
c. In a manner consistent with the lessee’s normal depreciation policy for owned assets
d. In a manner consistent with the lessee’s normal depreciation policy for owned assets except that the period of amortization should be the lease term

Answer

11. What is the primary accounting issue for lessees?
a. Recording interest expense on the lease obligation.
b. Determining whether the lease meets the 90% of fair value test.
c. Off-balance sheet financing.
d. The measurement of the leased asset under a capital lease.

Answer

12. What is the primary accounting issue for lessors?
a. Off-balance sheet financing.
b. Revenue recognition and expense allocation over the lease term.
c. Treating the lease in the same manner as the lessee does.
d. Determining whether the lease is a sales-type lease or a direct financing lease.

Answer

13. For the lessor to recognize a lease as a sales-type lease, the following must occur.
a. At least one of the capital lease criteria is met, at least one of the certainty criteria is met, and there is a manufacturer or dealer’s profit.
b. At least one of the capital lease criteria is met, both certainty criteria are met, and there is a manufacturer or dealer’s profit.
c. More than one of the capital lease criteria are met, both certainty criteria are met, and there is a manufacturer or dealer’s profit.
d. Only one of the capital lease criteria is met, both certainty criteria are met, and there is a manufacturer or dealer’s profit.

Answer

14. A net operating loss carryover that occurs in a company’s second year of operations
a. May cause a company to report a tax benefit in the current period income statement.
b. Has no effect on income tax expense of the current period because no taxes are paid.
c. Causes a company to report a deferred income tax liability for taxes that are not paid currently.
d. Results in future taxable amounts.

Answer

15. For a sales-type lease, the net investment is equal to
a. The present value of the minimum lease payments plus executor costs.
b. The net investment minus unearned income.
c. Sales minus the gross profit recognized on the sale.
d. The present value of the gross investment.

Answer

16. When a lease contract does not transfer title to the lessee, there is no bargain purchase option, and the lease term is not at least 75 percent of the estimated useful life of the leased asset.
a. The lessee must classify the lease as an operating lease.
b. The amount of unguaranteed salvage value, if any, determines whether the lease is a capital lease or an operating lease.
c. The interest rate used to determine the present value of the minimum lease payments also determines whether the lease is a capital lease or an operating lease.
d. The lessee must use the greater of the lessor’s rate of return or the lessee’s incremental borrowing rate to determine whether the lease is a capital lease or an operating lease.

Answer

17. When does the lessee report executory costs as an expense?
a. When they are spelled out in the lease agreement.
b. Only when they are incurred by the lessee and the lease is classified as a capital lease.
c. When they are incurred by the lessee.
d. Only when they are incurred by the lessee and the lease is classified as an operating lease.

Answer

18. If the lessor incurs initial direct cost to bring about the lease, when are those costs expensed in total during the first year of the lease term.
a. When the lease is classified as a sales-type lease.
b. When the lease is classified as a direct financing lease.
c. When the lease is classified as an operating lease.
d. Initial direct costs are always expensed during the first year of the lease term.

Answer

19. When a sale and leaseback occurs
a. A gain or loss on the sale of the leased asset is deferred and amortized over the lease term .
b. A gain on sale of the leased asset is deferred and amortized over the lease term.
c. Whether a gain or loss on sale of the leased asset is deferred and amortized over the lease term depends on whether the lease is classified as a capital lease or an operating lease.
d. Both gains and losses are recognized in earnings when the asset is sold.

Answer

20. Which of the following would indicate that the lessee should not classify a lease as a capital lease?
a. The fair value of the leased asset is $100,000 and the present value of the minimum lease payments is $95,000.
b. The lease provides for no unguaranteed salvage value.
c. The lessee has the option to purchase the leased asset in 4 years for $2 when the asset’s salvage value is expected to be $20,000.
d. The asset’s useful life is 20 years, a 4 year lease occurs when the asset is 26 years old.

Answer

Essay

1. List four advantages of leasing over the purchase of property for use by a business.

2. Define the following:
a. Capital lease

b. Operating lease

3. List the four criteria for recording a lease transaction as a capital lease.

4. How is the recorded amount of a lessee capital lease determined?

5. What is the difference between a sales-type and a direct financing type of capital lease?

6. What is a leveraged lease? How do lessees and lessors record leveraged leases?

Chapter 14

Multiple Choice

1. APB Opinion No. 8 set minimum and maximum limits on the annual provision for pension cost. An amount that was always included in the calculation of both the minimum and the maximum limit is
a. Normal cost
b. Amortization of past service cost
c. Interest on unfunded past and prior service costs
d. Retirement benefits paid

2. In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund should be reported as
a. An offset to the liability for prior service cost
b. Accrued or prepaid pension cost
c. An operating expense in this period
d. An accrued actuarial liability

Answer

3. Benefits under a pension plan that are not contingent upon an employee’s continuing service are
a. Granted under a plan of defined contribution
b. Based upon terminal funding
c. Actuarially unsound
d. Vested

Answer

4. According to SFAS No. 87, “Employer’s Accounting for Pensions,” gains and losses should be
a. Fully allocated to current and future periods
b. Offset against pension expense in the year of occurrence
c. Allocated if any unrecognized gain or loss at the beginning of the year is in excess of 10 percent of the greater of the projected benefit obligation or the market value of the plan assets
d. Disclosed in a note to the financial statements only

Answer

5. According to SFAS No. 87, prior service costs should be
a. Charged to retained earnings as a cost relating to the past
b. Amortized over the service period of each employee expected to receive benefits
c. Taken into consideration only by expensing interest on the unfunded amount
d. Recorded in full as a liability at their discounted present value

Answer

6. According to SFAS No. 87, which of the following is never recorded as a component of annual pension cost?
a. Amortization of the intangible asset recorded as the offset to the minimum pension liability
b. Amortization of prior service cost
c. Amortization of gains and losses
d. Amortization of the transition amount

7. In determining whether to accrue employee’s compensation for future absences, among the conditions that must be met are that the obligation relates to rights that
Accumulate Vest
a. No No
b. No Yes
c. Yes No
d. Yes Yes

8. The funded status of a defined benefit pension plan is equal to the
a. Vested benefit obligation minus the fair value of the pension plan assets.
b. Accumulated benefit obligation minus the fair value of the pension plan assets.
c. Projected benefit obligation minus the fair value of the pension plan assets.
d. Projected benefits plus the fair value of the pension plan assets minus employer contributions to the pension plan.
Answer

9. If the projected benefit obligation of a defined benefit pension plan exceeds the fair value of the pension plan assets, the employer must report
a. The difference as a liability in the balance sheet and a corresponding adjustment to the amount of pension expense reported in earnings.
b. The difference as a liability in the balance sheet and a corresponding adjustment to other comprehensive income, net of deferred income taxes .
c. The difference as an asset in the balance sheet and a corresponding adjustment to the amount of pension expense reported in earnings.
d. The difference as an asset in the balance sheet and a corresponding adjustment to other comprehensive income, net of deferred income taxes.

Answer

10. The funded status of a defined benefit pension plan is reported in the balance sheet.
a. As an asset, if the pension plan is underfunded.
b. As a liability, if the pension plan is underfunded.
c. Because it measures the minimum pension plan liability.
d. When it exceeds the projected benefit obligation.
Answer

11. Some theorists argue that the best measure of the employer’s defined benefit pension plan obligation is the accumulated benefit obligation.
a. Since the accumulated benefit obligation is measured using current salaries, it represents the conservative floor for a company’s pension obligation to its employees.
b. It is consistent with the measurement of pension expense.
c. Since the accumulated benefit obligation is measured using future salaries, it represents the conservative floor for a company’s pension obligation to its employees.
d. The accumulated benefit obligation measures the present value of the amounts that employees will receive from the pension plan once they retire.

12. benefits that are not contingent on the employee continuing in the service of the company are
a. Accumulated benefits.
b. Projected benefits.
c. Benefits earned to date.
d. Vested benefits.

Answer

13. The corridor approach
a. Is used to determine how much interest to add to the service cost and amortization of prior service in order to calculate pension expense for the period.
b. Is used to determine the minimum amount of accumulated unamortized net gains or losses that must be amortized during the accounting period.
c. Is used to determine the amount of prior service cost to expense each accounting period.
d. Is use to determine the pension plan’s funded status.

Answer

14. What effect did the requirement to replace the minimum liability requirement with the funded status of a pension plan have for underfunded pension plans?
a. Return on assets decreased.
b. There was no effect on return on assets.
c. The debt-to-Equity ratios increased.
d. Working capital increased.

Answer

15. What effect did the requirement to replace the minimum liability requirement with the funded status of a pension plan have for overfunded pension plans?.
a. Return on assets decreased.
b. There was no effect on return on assets.
c. The debt-to-Equity ratios increased.
e. Return on common stockholders’ equity increased.

16. Which of the following is not a difference between defined benefit pension plans and other postretirement benefits (ORBS)
a. Unlike defined benefit pension plan payments, there is no cap on the amount of OORB benefit to be paid to participants .
b. Unlike defined benefit pension plans, management promises OORB payments in exchange for current services.
c. Unlike defined benefit pension plans, employees do not accumulate additional OORB benefits with each year of service.
d. Unlike defined benefit pension plans, OORBs do not vest.

Answer

17. The expected postretirement benefit obligation (EPBO) is
a. Similar to the defined benefit pension plan’s projected benefit obligation because it is the obligation attributable to employee service rendered to date.
b. Used to calculate the interest component of OORB expense before full eligibility is achieved.
c. Recognized over the life expectancy of the employees when most participants are fully eligible to receive benefits.
d. The actuarial present value of the total benefits expected to be paid assuming full eligibility is achieved.

Answer
Essay

1. Discuss the difference between defined benefit and defined contribution pension plans.

2. Discuss the cost approach and benefits approach actuarial funding methods.

3. Define the following components of pension cost: under SFAS No. 87 (FASB ASC 715):
a. Service cost

b. Interest cost

c. Return on plan assets

d. Amortization of unrecognized prior service cost

e. Amortization of gains and losses

4. What four categories of information are required to be disclosed under the provisions of SFAS No. 35 (FASB ASC 960)?

5. Discuss the characteristics that make accounting for other postretirement benefits more difficult than accounting for pensions.

6. What changes in accounting for pensions were required by SFAS No. 158 (FASB ASC 715)?

Chapter 15

Multiple Choice

1. For a compensatory stock option plan for which the date of grant and measurement date are the same, compensation cost should be recognized in the income statement
a. At the date of retirement
b. Of each period in which services are rendered
c. At the exercise date
d. At the adoption date of the plan

Answer

2. Payment of a dividend in stock
a. Increases the current ratio
b. Decreases the amount of working capital
c. Increases total stockholders’ equity
d. Decreases book value per share of stock outstanding

Answer

3. The directors of Corel Corporation, whose $40 par value common stock is currently selling at $50 per share, have decided to issue a stock dividend. The corporation has an authorization for 200,000 shares of common, has issued 110,000 shares of which 10,000 shares are now held as treasury stock, and desires to capitalize $400,000 of the retained earnings balance. To accomplish this, the percentage of stock dividend that the directors should declare is
a. 10
b. 8
c. 5
d. 2

Answer

4. When a stock dividend is small, for example a 10% stock dividend,
a. Retained earnings is not reduced because the dividend is immaterial .
b. Retained earnings is reduced by the fair value of the stock.
c. Retained earnings is reduced to the par value of the stock.
d. Paid-in capital in excess of par value is unaffected.

Answer

5. The par value method of reporting a treasury stock transaction
a. Will be reported in the balance sheet as a reduction of total stockholders’ equity.
b. Results in no change to total stockholders’ equity.
c. Results in a reduction in the number of shares that are available to be sold to prospective investors.
d. Assumes constructive retirement of the treasury shares.
Answer

6. On December 31, 2010, when the Conn Company’s stock was selling at $36 per share, its capital accounts were as follows
Capital stock (par value $20,
100,000 shares issued) $2,000,000
Premium on capital stock 800,000
Retained Earnings 4,550,000
If a 100 percent stock dividend were declared and the par value per share remained at
$20
a. No entry would need to be made to record the dividend
b. Capital stock would increase to $5,600,000
c. Capital stock would increase to $4,000,000
d. Total capital would decrease

Answer

7. A company has not paid dividends on its cumulative nonvoting preferred stock for 20 years.
Healthy earnings have been reported each year, but they have been retained to support the growth of the company. The board of directors appropriately authorized management to offer the preferred shareholders an exchange of bonds and common stock for all the preferred stock. The exchange is about to be consummated. Which of the following best describes the effect of the exchange on the company?
a. The statute of limitations applies; hence, cumulative dividends of only seven years need to be paid on the preferred stock exchanged.
b. The company should record an extraordinary gain for income determination purposes to the extent that dividends in arrears do not have to be paid in the exchange transaction.
c. Gain or loss should be recognized on the exchange by the company, and the exchange would have to be approved by the Securities and Exchange Commission.
d. Regardless of the market value of the bonds and common stock, no gain or loss should be recognized by the company on the exchange, and no dividends need to be paid on the preferred stock exchanged.

Answer

8. A restriction of retained earnings is most likely to be required by the
a. Exhaustion of potential benefits of the investment credit
b. Purchase of treasury stock
c. Payment of last maturing series of a serial bond issue
d. Amortization of past service costs related to a pension plan

Answer

9. A feature common to both stock splits and stock dividends is
a. A reduction in total capital of a corporation
b. A transfer from earned capital to paid-in capital
c. A reduction in book value per share
d. Inclusion in conventional statement of source and application of funds

Answer

10. Assuming the issuing company has only one class of stock, a transfer from retained earnings to capital stock equal to the market value of the shares issued is ordinarily a characteristic of
a. Either a stock dividend or a stock split
b. Neither a stock dividend nor a stock split
c. A stock split but not a stock dividend
d. A stock dividend but not a stock split

Answer

11. When a stock option plan for employees is compensatory, the measurement date for determining compensation cost is the
a. Date the option plan is adopted, provided it precedes the date on which the options may first be exercised by less than one operating cycle
b. Date on which the options may first be exercised (if the first actual exercise is within the same operating period) or the date on which a recipient first exercises any of his options
c. First date on which are known both the number of shares than an individual employee is entitled to receive and the option or purchase price, if any
d. Date each option is granted

Answer

12. As a minimum, how large in relation to total outstanding shares may a stock distribution be before it should be accounted for as a stock split instead of a stock dividend?
a. No less than 2 to 5 percent
b. No less than 10 to 15 percent
c. No less than 20 to 25 percent
d. No less than 45 to 50 percent

Answer

13. The dollar amount of total stockholders’ equity remains the same when there is a (an)
a. Issuance of preferred stock in exchange for convertible debentures
b. Issuance of nonconvertible bonds with detachable stock purchase warrants
c. Declaration of a stock dividend
d. Declaration of a cash dividend

Answer

14. A company with a substantial deficit undertakes a quasi-reorganization. Certain assets will be written down to their present fair market value. Liabilities will remain the same. How would the entries to record the quasi-reorganization affect each of the following?

Contributed Capital Retained Earnings
a. Increase Decrease
b. Decrease No effect
c. Decrease Increase
d. No effect Increase

Answer

15. What is the most likely effect of a stock split on the par value per share and the number of shares outstanding?
Par Value Number of shares
Per share outstanding
a. Decrease Increase
b. Decrease No effect
c. Increase Increase
d. No effect No effect

Answer

16. Gilbert Corporation issued a 40percent stock split-up of its common stock that had a par value of $10 before and after the split-up. At what amount should retained earnings be capitalized for the additional shares issued?
a. There should be no capitalization of retained earnings
b. Par value
c. Market value on the declaration date
d. Market value on the payment date

Answer

17. How would the declaration and subsequent issuance of a 10 percent stock dividend by the issuer affect each of the following when the market value of the shares exceeds the par value of the stock?

Common Stock Additional Paid-in Capital
a. No effect No effect
b. No effect Increase
c. Increase No effect
d. Increase Increase

Answer

18. A company with a $2,000,000 deficit undertakes a quasi-reorganization on November 1, 2010. Certain assets will be written down by $400, 000 to their present fair market value. Liabilities will remain the same. Capital stock was $3,000,000 and additional paid-in capital was $1,000,000 before the quasi-reorganization. How would the entries to accomplish these changes on November 1, 2010, affect each of the following?

Capital Stock Total Stockholders’ Equity
a. No effect No effect
b. No effect Decrease
c. Decrease Decrease
d. Decrease No effect

Answer

19. How would a stock split affect each of the following?
Total Stockholders’ Additional
Assets Equity Paid-in Capital
a. Increase Increase No effect
b. No effect No effect No effect
c. No effect No effect Increase
d. Decrease Decrease Decrease

Answer

20. The purchase of treasury stock
a. Decreases common stock authorized
b. Decreases common stock issued
c. Decreases common stock outstanding
d. Has no effect on common stock outstanding

Answer

21. The equation, assets = equities, expresses which of the following theories of equity?
a. Proprietary theory.
b. Commander theory.
c. Entity theory.
d. Enterprise theory.

Answer

22. Under the residual equity theory
a. A business is viewed as a social institution.
b. Management is responsible for maximizing the wealth of common stockholders.
c. A manager’s goals are considered as important as those of the common stockholders.
d. Equities are viewed as restrictions on assets..

Answer

23. Under which of the theories of equity is a manager’s goals considered as important as those of the common stockholder.
a. Proprietary theory.
b. Commander theory.
c. Entity theory.
d. Enterprise theory.

Answer

24. Which of the theories of equity is consistent with the definition of equity that is found in Statement of Financial Accounting Concepts No. 6?
a. Proprietary theory.
b. Commander theory.
c. Entity theory.
d. Enterprise theory.

Answer

25. Which of the following securities must be reported as a liability because they have the characteristics of both liabilities and equity, but the liability characteristic is dominant?
a. Redeemable preferred stock.
b. Stock options issued with a debt security .
c. Detachable stock options.
d. Mandatorily redeemable preferred stock.

Answer

26. When a dividend paid to stockholders who own mandatorily redeemable preferred stock, the company must report the dividend
a. As an adjustment to retained earnings in its statement of owners’ equity .
b. As an expense in the income statement.
c. As a reduction to other comprehensive income.
d. In the financing activities section of the statement of cash flows.

Answer

27. When preferred stock is converted to common stock
a. The debt-to-equity ratio decreases.
b. The debt-to-equity ratio increases.
c. The debt-to-equity ratio is unchanged.
d. A gain or loss is reported in earnings for the difference between the fair value of the common stock and the book value of the preferred stock that was converted .

Answer

28. When employees are granted options as part of a compensatory stock option plan,
a. Total compensation is measured using a fair value method.
b. Total compensation is measured using the intrinsic method.
c. Total compensation is measured when the options are in the money.
d. Total compensation is measured using the difference between the strike price and the fair value of the options on the grant date.

Answer

Essay

1. Discuss the following theories of equity:
a. Proprietary

b. Entity

c. Fund

d. Commander

e. Enterprise

f. Residual equity

2. What is mandatorily redeemable preferred stock and how is it accounted for under the provisions of SFAS No. 150 (FASB ASC 480-10)?

3. List and discuss four advantages of the corporate form of organization..

4. Discuss the components of a corporation’s balance sheet capital section.

5. Discuss the following special features of preferred stock:
a. Convertible

b. Call

c. Cumulative

d. Participating

e. Redemption

6. How did SFAS No. 123R change accounting for stock options?

7. Define and discuss accounting for stock warrants.

8. Discuss the difference between a stock dividend and a stock split. Include in your discussion, the reasons a company might issue either a stock dividend or a stock split.

9. Define and discuss the two methods of accounting for treasury stock.

10. Obtain the financial statements of a company and ask the students to compute the:
a. Return on common stockholders’ equity.
b. Financial structure ratio

Chapter 16

Multiple Choice

1. Consolidated statements are proper for Neely, Inc., Randle, Inc., and Walker, Inc., if
a. Neely owns 80 percent of the outstanding common stock of Randle and 40 percent of Walker; Randle owns 30 percent of Walker.
b. Neely owns 100 percent of the outstanding common stock of Randle and 90 percent of Walker; Neely bought the stock of Walker one month before the balance sheet date and sold it seven weeks later.
c. Neely owns 100 percent of the outstanding common stock of Randle and Walker; Walker is in legal reorganization.
d. Neely owns 80 percent of the outstanding common stock of Randle and 40 percent of Walker; Reeves, Inc., owns 55 percent of Walker.

Answer

2. On October 1, Company X acquired for cash all of the outstanding common stock of Company Y. Both companies have a December 31 year end and have been in business for many years. Consolidated net income for the year ended December 31 should include net income of
a. Company X for3 months and Company Y for 3 months
b. Company X for 12 months and Company Y for 3 months
c. Company X for 12 months and Company Y for 12 months
d. Company X for 12 months, but no income from Company Y until Company Y distributed a dividend

Answer

3. Arkin, Inc., owns 90 percent of the outstanding stock of Baldwin Company. Curtis, Inc., owns 10 percent of the outstanding stock of Baldwin Company. On the consolidated financial statements of Arkin, Curtis should be considered as
a. A holding company
b. A subsidiary not to be consolidated
c. An affiliate
d. A noncontrolling interest

Answer

4. A sale of goods, denominated in a currency other than the entity’s functional currency, resulted in a receivable that was fixed in terms of the amount of foreign currency that would be received. Exchange rates between the functional currency and the currency in which the transaction was denominated changed. The resulting gain should be include as a (an)
a. Other comprehensive income
b. Deferred credit
c. Component of income from continuing operations
d. Extraordinary item

Answer

5. Which of the following is not a consideration in segment reporting for diversified enterprises?
a. Allocation of joint costs
b. Transfer pricing
c. Defining the segments
d. Consolidation policy

Answer

6. Which of the following is the appropriate basis for valuing fixed assets acquired in a business combination carried out by exchanging cash for common stock?
a. Historic cost
b. Book value
c. Cost plus any excess of purchase price over book value of asset acquired
d. Fair value

Answer

7. Goodwill represents the excess of the cost of an acquired company over the
a. Sum of the fair values assigned to identifiable assets acquired less liabilities assumed
b. Sum of the fair values assigned to tangible assets acquired less liabilities assumed
c. Sum of the fair values assigned to intangible assets acquired less liabilities assumed
d. Book value of an acquired company

Answer

8. The theoretically preferred method of presenting noncontrolling interest on a consolidated balance sheet is
a. As a separate item with the deferred credits section
b. As a reduction from (contra to) goodwill from consolidation, if any
c. By means of notes or footnotes to the balance sheet
d. As a separate item within the stockholders’ equity section

Answer

9. Meredith Company and Kyle Company were combined in an acquisition transaction. Meredith was able to acquire Kyle at a bargain price. The sum of the market or appraised values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Meredith. After revaluing noncurrent assets to zero there was still some of the bargain purchase amount remaining (formerly termed negative goodwill). Proper accounting treatment by Meredith is to report the amount as
a. An extraordinary item
b. Part of current income in the year of combination
c. A deferred credit and amortize it
d. Paid-in capital

Answer

10. When translating foreign currency financial statements, which of the following accounts would be translated using current exchange rates?

Property, Plant, and Inventories
Equipment carried at cost
a. Yes Yes
b. No No
c. Yes No
d. No Yes

Answer

11. In financial reporting for segments of a business enterprise, the operating profit or loss of a segment should include
Reasonably allocated
Common Traceable
Operating costs operating costs
a. No No
b. No Yes
c. Yes No
d. Yes Yes

Answer

12. The profitability information that should be reported for each reportable segment of a business enterprise consists of
a. An operating profit-or-loss figure consisting of segment revenues less traceable costs and allocated common costs
b. An operating profit-or-loss figure consisting of segment revenues less traceable costs but not allocated common costs
c. An operating profit-or-loss figure consisting of segment revenues less allocated common costs but not traceable costs
d. Segment revenues only

Answer

13. A foreign subsidiary’s function currency is its local currency that has not experienced significant inflation. The weighted average exchange rate for the current year would be the appropriate exchange rate for translating
Sales to
Wages expense Customers
a. Yes Yes
b. Yes No
c. No No
d. No Yes

Answer

14. A subsidiary’s functional currency is the local currency that has not experienced significant inflation. The appropriate exchange rate for translating the depreciation on plant assets in the income statement of the foreign subsidiary is the
a. Exit exchange rate
b. Historical exchange rate
c. Weighted average exchange rate over the economic life of each plant asset
d. Weighted average exchange rate for the current year

Answer

15. In a business combination that is accounted for under the acquisition method the entity that obtains control over one or more businesses and establishes the acquisition date that control was achieved is called the
a. Controller.
b. Acquirer.
c. Proprietor.
d. Controlling interest.

Answer

16. Under the acquisition method for a business combination, the cost incurred to effect the business combination, such as finders and legal fees are
a. Considered part of the historical cost of the business.
b. Expensed as incurred.
c. Allocated, along with the purchase price of the acquired company’s stock to the assets of the acquiree company.
d. Deferred until a full accounting of all costs to acquire the acquire company are known.
Answer

17. Under which of the theories of equity is a manager’s goals considered as important as those of the common stockholder.
a. Proprietary theory.
b. Commander theory.
c. Entity theory.
d. Enterprise theory.

Answer

18. For a business combination, we measure all assets and liabilities of an acquired company at fair value. Fair value
a. Is an exit value.
b. Is an entry value.
c. Is an appraisal value.
d. Can be either an exit value or an entry value depending on the circumstances.

Answer

19. Under the acquisition method of accounting for a business combination, restructuring costs are
a. Capitalized and amortized over a period not exceeding ten years.
b. Fees paid to lawyers and accountants to bring about the business combination .
c. Costs incurred to effect the business combination.
d. Treated as post acquisition expenses.

Answer

20. Under the acquisition method of accounting for a business combination, goodwill is equal to
a. The acquired company’s ability to generate excess profits .
b. The excess of the cost of the acquisition plus the fair value of the noncontrolling interest over the fair value of the acquiree’s net assets.
c. The excess of the cost of the acquisition over the fair value of the acquiree’s net assets.
d. The excess of the fair value of acquiree’s net assets over the cost of acquisition.

Answer

21. Under the acquisition method of accounting for a business combination, a bargain purchase is
a. Reported as goodwill in the balance sheet.
b. Tested annually for impairment.
c. Reported as a gain in the income statement.
d. Reported as an adjustment to other comprehensive income.

Answer

22. The acquisition method of accounting for a business combination is consistent with
a. Entity theory.
b. Proprietary theory.
c. Parent company theory.
f. Residual interest theory.

Answer

23. Under the acquisition method of accounting for a business combination when the parent company has acquired only 90% of the voting stock of a subsidiary,
a. 10% of the goodwill will be reported in a separate section of the balance sheet because it belongs to the noncontrolling interest .
b. The consolidated balance sheet will report 100% of the value of goodwill.
c. The consolidated balance sheet will report 90% of the value of goodwill.
d. Goodwill will be amortized over its useful life or 40 years whichever comes first.

Answer

24. The noncontrolling interest in a subsidiary is reported in the consolidated balance sheet
a. As an investment.
b. As a liability.
c. At fair value, as determined on the acquisition date.
d. As an element of stockholders’ equity.

Answer

Essay
1. List and explain three reasons why businesses combine.

2. Discuss the issues that are to be addressed in an acquisition method business combination effected by an exchange of equity shares.

3. How is the recorded cost determined in an acquisition business combination?

4. What are the two principles that are used to guide the preparation of consolidated financial statements?

5. Explain the concept of control as it applies to recording consolidated financial statement.

6. Discuss the following two theories of consolidation:
a. Entity

b. Patent company

7. Define noncontrolling interest. Historically, how has noncontrolling interest been disclosed on corporate balance sheets

8. According to SFAS No. 131(FASB ASC 280-10-50-20 to 25), what information should be disclosed for each operating segment?
9. How are operating segments defined by SFAS No. 131 (FASB ASC 280-10-50-1)?

10. Discuss the criteria used to determine if an operating segment is a reportable segment.

11. Discuss how foreign currency translation occurs under each of the following methods
a. Current – noncurrent

b. Monetary – nonmonetary

c. Current

d. Temporal

12. How does SFAS No. 52 (FASB ASC 830) define functional currency?

13. What are the two situations in which the local currency would not be the functional currency:?

14. Discuss the difference between translation and remeasurement.

15. Describe the four general procedures involved in the foreign currency translation process when the local currency is defined as the functional currency.

16. How are noncontrolling interested defined in IAS No. 27 and where are they to be disclosed?

Chapter 17

Multiple choice

1. Footnotes to financial statements should not be used to
a. Describe the nature and effect of a change in accounting principles
b. Identify substantial differences between book and tax income
c. Correct an improper financial statement presentation
d. Indicate bases for valuing assets

Answer

2. Assuming that none of the following have been disclosed in the financial statements, the most appropriate item for footnote disclosure is the
a. Collection of all receivables subsequent to year end
b. Revision of employees’ pension plan
c. Retirement of president of company and election of new president
d. Material decrease in the advertising budget for the coming year and its anticipated effect upon income
Answer

3. The primary responsibility for the adequacy of disclosure in the financial statements and footnotes rests with the
a. Partner assigned to the engagement
b. Auditor in charge of fieldwork
c. Staffman who drafts the statements and footnotes
d. Client

Answer

4. Which of the following situations would require adjustment to or disclosure in the financial statements?
a. A merger discussion
b. The application for a patent on a new production process
c. Discussions with a customer that could lead to a 40 percent increase in the client’s sales
d. The bankruptcy of a customer who regularly purchased 30 percent of the company’s output
Answer

5. With respect to disclosure, the unqualified short-form report
a. States that disclosure is adequate in the financial statements including the footnotes thereto
b. States that disclosure is sufficiently adequate to make the statements not misleading
c. States that all material items are disclosed in conformity with the generally accepted accounting principles
d. Implies that disclosure is adequate in the financial statements including the footnotes thereto

Answer

6. Which of the following should be disclosed in the Summary of Significant Accounting Policies?
a. Composition of plant assets
b. Pro forma effect of retroactive application of an accounting change
c. Basis of consolidation
d. Maturity dates of long-term debt

Answer

7. An Account Principles Board Opinion was concerned with disclosure of accounting policies. A singular feature of this particular opinion is that it
a. Calls for disclosure of every accounting policy followed by a reporting entity
b. Applies to immaterial items whereas most opinions are concerned solely with material items
c. Applies also to accounting policy disclosures by not-for-profit entities, whereas most opinions are concerned solely with accounting practices of profit-oriented entities
d. Prescribes a rigid format for the disclosure of policies to be reported upon

Answer

8. Significant accounting policies may not be
a. Selected on the basis of judgment
b. Selected from existing acceptable alternatives
c. Unusual or innovative in application
d. Omitted from financial statement disclosure on the basis of judgment

Answer

9. The stock of Gates, Inc., is widely held, and the company is under the jurisdiction of the Securities and Exchange Commission. In the annual report, information about the significant accounting policies adopted by Gates should be
a. Omitted because it tends to confuse users of the report
b. Included as an integral part of the financial statements
c. Presented as supplementary information
d. Omitted because all policies must comply with the regulations of the Securities and Exchange Commission

Answer

10. The basic purpose of the securities laws of the United States is to regulate the issue of investment securities by
a. Providing a regulatory framework in those states which do not have their own securities laws
b. Requiring disclosure of all relevant facts so that investors can make informed decisions
c. Prohibiting the issuance of securities which the Securities and Exchange Commission determines are not of investment grade
d. Channeling investment funds into uses which are economically most important
e. Ensuring that all shareholders have the right to vote in the election of directors

Answer

11. The Securities and Exchange Commission (SEC) was established in1934 to help regulate the U.S. securities market. Which of the following statements is true concerning the SEC?
a. The SEC prohibits the sale of speculative securities.
b. The SEC regulates only securities offered for public sale.
c. Registration with the SEC guarantees the accuracy of the registrant’s prospectus.
d. The SEC’s initial influence and authority has diminished in recent years as the stock exchanges have become more organized and better able to police themselves.
e. The SEC’s powers are broad with respect to enforcement of its reporting requirements as established in the 1933 and 1934 acts, but narrow with respect to new reporting requirements because these require confirmation by the Congress

Answer

12. One of the major purposes of federal security regulation is to
a. Establish the qualifications for accountants who are members of the profession
b. Eliminate incompetent attorneys and accountants who participate in the registration of securities to be offered to the public
c. Provide a set of uniform standards and test for accountants, attorneys, and others who practice before the Securities and Exchange Commission
d. Provide sufficient information to the investing public who purchases securities in the marketplace

Answer

13. Under the Securities Act of 1933, subject to some exceptions and limitations, it is unlawful to use the mails or instruments of interstate commerce to sell or offer to sell a security to the public unless
a. A surety bond sufficient to cover potential liability to investors is obtained and filed with the Securities and Exchange Commission
b. The offer is made through underwriters qualified to offer the securities on a nationwide basis
c. A registration statement has been properly filed with the Securities and Exchange Commission, has been found to be acceptable, and is in effect
d. The Securities and Exchange Commission approves of the financial merit of the offering

Answer

14. Major, Major, and Sharpe, CPA’s , are the auditors of MacLain industries. In connection with the public offering of $10 million of MacLain securities, Major expressed an unqualified opinion as to the financial statements. Subsequent to the offering, certain misstatements and omissions are revealed. Major has been sued by the purchasers of the stock offered pursuant to the registration statement, which include the financial statements audited by Major. In the ensuing lawsuit by the MacLain investors, Major will be able to avoid liability if
a. The errors and omissions were caused primarily by MacLain
b. It can be shown that at least some of the investors did not actually read the audited financial statements
c. It can prove due diligence in the audit of the financial statements of MacLain
d. MacLain had expressly assumed any liability in connection with the public offering

Answer

15. A major impact of the Foreign Corrupt Practices Act of 1977 is that registrants subject to the Securities Exchange Act of 1934 are now required to
a. Keep records which reflect the transactions and dispositions of assets and maintain a system of internal accounting controls
b. Provide access to records by authorized agencies of the federal government
c. Records all correspondence with foreign nations
d. Prepare financial statements in accordance with international accounting standards
e. Produce full, fair, and accurate periodic reports on foreign commerce and/or foreign political party affiliations

Answer

16. The Securities and Exchange Commission’s fraud rule prohibits trading on the basis of inside information of a business corporation’s stock by
a. Officers
b. Officers and directors
c. All officers, directors, and stockholders
d. Officers, directors, and beneficial holders of 10 percent of the corporation’s stock

Answer

17. A CPA is subject to a criminal ability if the CPA
a. Refuses to turn over the working papers to the client
b. Performs an audit in a negligent manner
c. Willfully omits a material fact required to be stated in a registration statement
d. Willfully breaches the contract with the client

Answer

18. For interim financial reporting, an inventory loss from a temporary market decline in the first quarter which can reasonably be expected to be restored in the fourth quarter
a. Should be recognized as a loss proportionately in each of the first, second, third, and fourth quarters
b. Should be recognized as a loss proportionately in each of the first, second, and third quarters
c. Need not be recognized as a loss in the first quarter
d. Should be recognized as a loss in the first quarter

Answer

19. An inventory loss from a market decline occurred in the first quarter that was not expected to be restored in the fiscal year. For interim financial reporting purposes, how would the dollar amount of inventory in the balance sheet be affected in the first and fourth quarters?
First Quarter Fourth Quarter
a. Decrease No effect
b. Decrease Increase
c. No effect Decrease
d. No effect No effect

Answer
20. Footnotes to a company’s financial statements are used to
a. More fully explain certain items in the financial statements.
b. Reflect financial notes personalized by the company’s executive team.
c. Show the detail of salaries of every employee.
d. Justify fraudulent business practices.

Answer

21. The statement that “the financial statements were prepared in accordance with generally accepted accounting principles” is found in the
a. Management letter
b. Management discussion and analysis
c. Footnotes to the balance sheet.
d. Auditor’s report.

Answer

22. According to the disclosure requirements outlined in Statement of Accounting Concepts No. 5, the following is an example supplementary information that should be disclosed because it affects an area that is directly affected by existing FASB Standards
a. Management discussion and analysis.
b. Segment information.
c. Accounting policies.
d. A statement of cash flows.

Answer

23. According to the disclosure requirements outlined in Statement of Accounting Concepts No. 5, the following is an example information that should be disclosed in the notes to financial statements because it is basic to the financial statements
a. Management discussion and analysis.
b. Accounting policies.
c. Segment information.
d. The auditor’s report.

Answer

24. According to the disclosure requirements outlined in Statement of Accounting Concepts No. 5, the following is an example supplementary information that should be disclosed because it affects an area that is directly affected by existing FASB Standards
a. Management discussion and analysis.
b. Segment information.
c. Accounting policies.
d. A statement of cash flows.

Answer

25. According to the disclosure requirements outlined in Statement of Accounting Concepts No. 5, the following is an example information that should be disclosed in the notes to financial statements because it is basic to the financial statements
a. Management discussion and analysis.
b. Accounting policies.
c. Segment information.
d. The auditor’s report.

Answer

26. Norris Company settled a lawsuit in February for an amount that was significantly different from the amount that was originally accrued as an estimate of potential loss. The company’s yearend is December 31 and its financial statements are issued in March. This is an example of
a. A subsequent event that must be disclosed, but because it happened after the balance sheet date no adjustment is needed .
b. A subsequent event that provided evidence of a condition that did not exist at the balance sheet date.
c. A subsequent event that need not be disclosed because it did not occur before the company’s yearend.
d. A subsequent event that provided further evidence of conditions that existed on the balance sheet.

Answer

27. Footnote disclosure that summarizes information that does not meet the measurement and reporting requirements for presentation in a company’s financial statements, but is useful to informed readers, is required in order to meet the concept of
a. Understandability.
b. Reliability.
c. Representational faithfulness.
d. Cost/benefit.

Answer

28. A disclaimer of opinion is issued when
a. All informative disclosures have not been made in the financial statements.
b. Circumstances prevent the auditor from performing all audit procedures necessary to comply with generally accepted auditing standards.
c. The financial statements are not prepared in accordance with generally accepted accounting principles.
d. There is a potential going concern issue.

Answer

29. The discrete view of interim reporting
a. Holds that an interim period is a separate accounting period; thus, revenues and expenses should be treated as though they occurred only in one period.
b. Holds that revenues and expenses should be allocated to the various interim periods.
c. Holds that revenues and expenses should be reported as they occur.
d. Holds that an interim period is an integral part of the annual reporting period.

Answer

30. The inclusion of MD&A (Management Discussion and Analysis) in annual reports is required by the
a. FASB.
b. AICPA.
c. SEC.
d. APB.

Answer

31. Which SEC reporting form is the normal registration statement for securities to be sold to the public?
a. Form 10.
b. Form 10-K.
c. Form 10-Q.
g. Proxy Statement.

Answer

32. The Securities act of 1933
a. Regulates the trading of securities of publicly held companies .
b. Regulates the initial public sale and distribution of a corporation’s securities.
c. Addresses the personal duties of corporate officers.
d. Specifies information that is to be contained in a company’s annual report.

Answer

33. The Sarbanes-Oxley (SOX) Act of 2002 created the PCAOB. The PCAOB
a. Is primarily responsible for establishing generally accepted accounting principles.
b. Provides legal and expert services to CPA firms when they are involved in class-action law suits.
c. Oversees the conduct of acts that are intended to influence, coerce, manipulate, or mislead a CPA when he/she is preparing a company’s financial statements.
d. Oversees audits of companies whose securities are public traded.

Answer

34. Norris Company settled a lawsuit in February for an amount that was significantly different from the amount that was originally accrued as an estimate of potential loss. The company’s yearend is December 31 and its financial statements are issued in March. This is an example of
a. A subsequent event that must be disclosed, but because it happened after the balance sheet date no adjustment is needed .
b. A subsequent event that provided evidence of a condition that did not exist at the balance sheet date.
c. A subsequent event that need not be disclosed because it did not occur before the company’s yearend.
d. A subsequent event that provided further evidence of conditions that existed on the balance sheet.

Answer

35. Footnote disclosure that summarizes information that does not meet the measurement and reporting requirements for presentation in a company’s financial statements, but is useful to informed readers, is required in order to meet the concept of

a. Understandability.
b. Reliability.
c. Representational faithfulness.
d. Cost/benefit.

Answer

36. A disclaimer of opinion is issued when

a. All informative disclosures have not been made in the financial statements.
b. Circumstances prevent the auditor from performing all audit procedures necessary to comply with generally accepted auditing standards.
c. The financial statements are not prepared in accordance with generally accepted accounting principles.
d. There is a potential going concern issue.

Answer

37. The discrete view of interim reporting

a. Holds that an interim period is a separate accounting period; thus, revenues and expenses should be treated as though they occurred only in one period.
b. Holds that revenues and expenses should be allocated to the various interim periods.
c. Holds that revenues and expenses should be reported as they occur.
d. Holds that an interim period is an integral part of the annual reporting period.

Answer

38. The inclusion of MD&A (Management Discussion and Analysis) in annual reports is required by the

a. FASB.
b. AICPA.
c. SEC.
d. APB.

Answer

39. Which SEC reporting form is the normal registration statement for securities to be sold to the public?

a. Form 10.
b. Form 10-K.
c. Form 10-Q.
d. Proxy Statement.

Answer

40. The Securities act of 1933

a. Regulates the trading of securities of publicly held companies .
b. Regulates the initial public sale and distribution of a corporation’s securities.
c. Addresses the personal duties of corporate officers.
d. Specifies information that is to be contained in a company’s annual report.

Answer

41. The Sarbanes-Oxley (SOX) Act of 2002 created the PCAOB. The PCAOB

a. Is primarily responsible for establishing generally accepted accounting principles.
b. Provides legal and expert services to CPA firms when they are involved in class-action law suits.
c. Oversees the conduct of acts that are intended to influence, coerce, manipulate, or mislead a CPA when he/she is preparing a company’s financial statements.
d. Oversees audits of companies whose securities are public traded.
Answer

Essay

1. List the building blocks to disclosure described in SFAC No. 5.
2. List and discuss the types of information commonly disclosed in the footnotes to corporate financial statements.

3. List and discuss the recognition criteria for the two types of subsequent events.

4. List and discuss the three paragraphs contained in a standard unqualified audit option.

5. List and discuss the circumstances that might cause an auditor to issue each of the four types of audit opinions.

6. What information is required to be included in the MD & A section of the 10-K annual report. (Do not include the information required by item 7a).

7. Define market risk and the types of market risk to be disclosed in item &a of a company’s MD&A.
1.

8. How is the quantitative information about market risk–sensitive instruments to be disclosed according to the SEC?

9. What are the purposes of the letter to stockholders?

10. List and explain the three types of financial analysts.

11. Discuss the general purposes of:
a. The Securities Act of 1933

b. The Securities Exchange Act of 19

c. The Foreign Corrupt Practices Act of 1977

12. Discuss three general provisions of the Sarbanes-Oxley Act.

13. Discuss the general requirements of Sections 404(a) and 404(b) of the Sarbanes-Oxley Act.

14. Discuss the framework for analysis that may be used in the resolution of ethical dilemmas.

15. List the six criteria identified by the Anderson report and are indicative of effective auditor performance.

16. List the four sections of the AICPA Code of Professional Conduct.