321 Quizzes
Sales discounts is debited for the amount of discounts taken by customers. Sales discounts is credited for the amount of discounts taken by customers. Interest expense is debited for the amount of discounts taken by customers. Accounts receivable is credited for the amount of discounts taken by customers. ANSWER: Sales discounts is debited for the amount of discounts taken by customers
A company uses the gross method to account for cash discounts offered to its customers. If payment is made before the discount period expires, which of the following is correct?
$7,500 Explanation: [$40,000 - (2/8 × $40,000)] × 2/8
A delivery van that cost $40,000 has an expected service life of eight years and a residual value of $4,000. Depreciation for the second year of the asset's life using the double declining balance method is:
$7,000 Explanation ($40,000 - 4,000) × 7/36
A delivery van that cost $40,000 has an expected service life of eight years and a residual value of $4,000. Depreciation for the second year of the asset's life using the sum-of-the-years'-digits method is:
$26,250 Explanation 2018 depreciation: $60,000 × 50% × 3/12 = $7,500 2019 depreciation: $60,000 × 50% × 9/12 = $22,500 + $60,000 - 30,000 × 50% × 3/12 = - $3,750 $26,250
A machine is purchased on September 30, 2018, for $60,000. Useful life is estimated at four years and no residual value is anticipated. Assume that the company instead used the double declining balance depreciation method. Depreciation for 2019 should be:
$3,750 Explanation [1/4 × ($60,000/4)]
A machine is purchased on September 30, 2018, for $60,000. Useful life is estimated at four years and no residual value is anticipated. The straight-line depreciation method is used. The company's fiscal year ends on December 31. Depreciation for 2018 should be:
Paid but not yet incurred.
A prepaid expense is an expense:
Receivables likely will be overstated.
Allister Company does not use the allowance method to account for bad debts and instead any bad debts that do arise are written off as bad debt expense. What problem might this create if bad debts are material?
Is based on relative standalone selling prices.
Allocation of the transaction price to performance obligations:
Promote operational efficiency. Safeguard assets. Encourage adherence to company policies. Assure the promotion of the most qualified employees. ANSWER: Assure the promotion of the most qualified employees
An internal control system is designed to do all but which of the following?
Patent.
An item not generally classified as a current asset is:
Bonds payable.
An item not generally classified as a current liability is:
Restructuring costs.
An item typically included in the income from continuing operations section of the income statement is:
Ignore the time value of money.
Assume a prepayment is made six months in advance of delivery of a product. The seller is likely to do which of the following with respect to the time value of money over the life of the contract?
$6,000 Explanation $200,000 × 3% = $6,000. $8,000 Explanation The recourse liability would add a credit of $2,000 which would increase the loss from $6,000 to $8,000.
At the end of June, the Marquess Company factored $200,000 in accounts receivable with Homemark Finance. The transfer is made without recourse. Homemark charges a fee of 3% of receivables factored. During July, $150,000 of the factored receivables are collected. What amount of loss on sale of receivables would Marquess record in June? In question 10, if the transfer were made with recourse but is still accounted for as a sale, what amount of loss on sale of receivables would the company record in June assuming the estimated recourse liability is $2,000?
Must be recognized as an expense.
Bad debts:
Purchases.
By the gross method of accounting for purchase discounts, a discount not taken is recorded as:
Interest expense.
By the net method of accounting for purchase discounts, a discount not taken is recorded as:
$480,000; $320,000; $160,000. Explanation: Allocation ratio = 0.8 [$960,000 ÷ ($600,000 + $400,000 + $200,000)]. Allocations: 0.8 × $600,000; 0.8 × $400,000; 0.8 × $200,000.
Cello Corporation purchased three patents at a total cost of $960,000. The appraised values of the individual patents were as follows: Patent 1 $ 600,000 Patent 2 400,000 Patent 3 200,000 The costs that should be assigned to Patents 1, 2, and 3, respectively, are:
$1,057,000.
Cendant Corporation's results for the year ended December 31, 2018, include the following material items: Sales revenue $6,310,000 Cost of goods sold $3,740,000 Selling and administrative expense $1,250,000 Loss on sale of investments $192,000 Loss on discontinued operations $484,000 Loss on impairment from continuing operations $71,000 Cendant Corporation's income from continuing operations before income taxes for 2018 is
Working capital.
Current assets minus current liabilities equals:
None. $30 million. $60 million. $45 million. ANSWER: NONE Explanation: Step 1 of the impairment test: Because the sum of undiscounted cash flows ($630) is greater than book value ($570), there is no impairment.
Declarmen Corporation owns factory in the United Kingdom. A change in business climate indicates that Declarmen should investigate for possible impairment. Below are date related to the factory's assets ($ in millions): Book value $570 Undiscounted sum of future estimated cash flows $630 Present value of future cash flows $525 Fair value less cost to sell (determined by appraisal) $540 The amount of impairment loss that Declarmen should recognize according to U.S. GAAP is:
An oil well. A building. Inventories. A patent. ANSWER: Inventories
Each of the following would be considered property, plant, and equipment or an intangible asset except:
Income from continuing operations. Discontinued operations. Operating income. Net income. ANSWER: Operating Income
Earnings per share should be reported for each of the following income statement captions except:
$17,000 Explanation Focusing on the allowance account, $18,000 - 14,000 + total bad debt expense = $21,000, so bad debt expense = $17,000.
Enchill Company accrues bad debt expense during the year at an amount equal to 3% of credit sales. At the end of the year, a journal entry adjusts the allowance for uncollectible accounts to a desired amount based on an aging of accounts receivable. At the beginning of 2018, the allowance account had a credit balance of $18,000. During 2018, credit sales totaled $480,000 and receivables of $14,000 were written off. The year-end aging indicated that a $21,000 allowance for uncollectible accounts was required. Enchill's bad debt expense for 2018 would be:
$375,000 Explanation: 750,000 ÷ 6,000,000 = 0.125 depletion rate. $3,000,000 × 0.125 = $375,000
Felix Mining acquired a copper mine at a total cost of $3,000,000. The mine is expected to produce 6,000,000 tons of copper over its five-year useful life and have no residual value. During the first year of operations, 750,000 tons of copper was extracted. Depletion for the first year should be:
Income statement. Federal income tax return. Balance sheet. Statement of cash flows. The right answer is Federal Income Tax Return
Financial statements generally include all of the following except:
Income from investments. Cost of goods sold. Interest expense. Gain on sale of investments. ANSWER: COGS
For a manufacturing company, each of the following items would be considered nonoperating income for income statement purposes except:
40% Explanation: ($10,500,000 - $6,300,000) ÷ $10,500,000
For its 2018 fiscal year, the King Pharmaceutical Company reported sales of $10,500,000, cost of goods sold of $6,300,000, and net income of $525,000. The company's gross profit ratio for the year is:
Option d No, Yes Explanation Revenue is only recognized each year if revenue qualifies for recognition over time.
For profitable long-term contracts, income is recognized in each year when revenue is recognized: At a Point in Time Upon Over Time According to Contract Completion Percentage of Completion a. No No b. Yes No c. Yes Yes d. No Yes
Statements of Financial Accounting Standards. Accounting Research Bulletins. Accounting Principles Board Opinions. All of the above are correct
GAAP includes which of the following pronouncements:
The timing of the payments (whether they are at the beginning or end of the period). Explanation: If the payments are made at the end of each period, it is an ordinary annuity. If the payments are made at the beginning of each period, it is an annuity due.
Given a set of present value tables, an annual interest rate, the dollar amount of equal payments made, and the number of semiannual payments, what other information is necessary to calculate the present value of the series of payments?
Fair value of the net assets acquired.
Goodwill is the excess of the purchase price of an acquired company over the:
$187,240. Purchase price ($173,000 x 98%) $169,540 Shipping costs $5,200 Installation costs $12,500 Total cost of equipment $187,240
Grab Manufacturing Co. purchased a 10-ton draw press at a cost of $173,000 with terms of 2/15, n/45. Payment was made within the discount period. Shipping costs were $5,200, which included $310 for insurance in transit. Installation costs totaled $12,500, which included $4,900 for taking out a section of a wall and rebuilding it because the press was too large for the doorway. The capitalized cost of the 10-ton draw press is:
$61,740 Explanation Face amount ($60,000) + interest to maturity ($60,000 × 10% × ½ year = $3,000) = maturity value ($63,000). Maturity value ($63,000) - discount ($63,000 × 12% × 2/12 year = $1,260) = $61,740.
Harmon Sporting Goods received a $60,000, 6-month, 10% note from a customer. Four months after receiving the note, it was discounted at a local bank at a 12% discount rate. The cash proceeds received by Harmon were:
$8,114 Explanation $8,114: $200 × 40.5681 (future value of an ordinary annuity for 30 periods at 2%).
Harry Morgan plans to make 30 quarterly deposits of $200 into a savings account at the end of each quarter. The savings account pays interest at an annual rate of 8%, compounded quarterly. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
$8,276 Explanation: $8,276: $200 × 41.3794 (future value of an annuity due for 30 periods at 2%).
Harry Morgan plans to make 30 quarterly deposits of $200 into a savings account. The first deposit will be made immediately. The savings account pays interest at an annual rate of 8%, compounded quarterly. How much will Harry have accumulated in the savings account at the end of the seven and a half-year period? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
$437,500. Explanation Purchase price $390,000 Shipping costs $28,000 Foundation work $7,300 Water line $3,400 Labor and testing $6,700 Materials used in testing $2,100 Total cost of equipment $437,500
Holiday Laboratories purchased a high-speed industrial centrifuge at a cost of $390,000. Shipping costs totaled $28,000. Foundation work to house the centrifuge cost $7,300. An additional water line had to be run to the equipment at a cost of $3,400. Labor and testing costs totaled $6,700. Materials used up in testing cost $2,100. The capitalized cost is:
$100,000 Explanation As of year-end 2019, revenue recognized to date is ($1,100,000 ÷ ($1,100,000 + 1,100,000)) × $3,000,000 = $1,500,000, and cost of construction recognized to date is $1,100,000, so gross profit recognized to date is $400,000. As of year-end 2020, revenue recognized to date is ($2,000,000 ÷ ($2,000,000 + 400,000)) × $3,000,000 = $2,500,000, and cost of construction recognized to date is $2,000,000, so gross profit recognized to date is $500,000. Therefore, gross profit recognized in 2020 should be $500,000 - 400,000 = $100,000.
Hollywood Construction Company recognizes revenue over time according to percentage of completion for its long-term construction contracts. During 2018, Hollywood began work on a $3,000,000 fixed-fee construction contract, which was completed in 2021. The accounting records disclosed the following data at year-end: Cumulative contract costs incurred Estimated cost to complete at end of year 2018 $200,000 $1,800,000 2019 $1,100,000 $1,100,000 2020 $2,000,000 $400,000 For the 2020 year, Hollywood should have recognized gross profit on this contract of:
In the absence of changes in costs, the results of using LIFO would be identical to those obtained by FIFO. LIFO will provide a close matching of current revenues with current costs since the most recent costs are expensed first. The ending inventory under LIFO will tend to approximate replacement cost. In periods of declining costs, cost of goods sold using LIFO will produce a lower cost of goods sold than FIFO. ANSWER: The ending inventory under LIFO will tend to approximate replacement cost.
Identify the statement below concerning the LIFO inventory method that is untrue.
Will have a credit balance prior to closing.
If revenues exceed expenses for the accounting period, the income summary account:
Assets will be overstated and income overstated.
If the required adjusting entry for depreciation expense is omitted:
$60 million. Explanation: Implied fair value of goodwill of $80 ($980 - 900) is $60 less than book value of $140.
In 2016, Cordova Inc. acquired Cordant Corporation and $140 million in goodwill was recorded. At the end of its 2018 fiscal year, management has provided the following information for a required goodwill impairment test ($ in millions): Fair value of Cordant (approximates fair value less costs to sell) $980 Fair value of Cordant's net assets (excluding goodwill) $900 Book value of Cordant's net assets (including goodwill) $1,050 Present value of estimated future cash flows $1,000 Assuming that Cordant is considered a reporting unit, the amount of goodwill impairment loss that Cordova should recognize according to U.S. GAAP is:
$250,000 Explanation: 10% × $2,500,000
In January of 2018, the Falwell Company began construction of its own manufacturing facility. During 2018, $6,000,000 in costs were incurred evenly throughout the year. Falwell took out a $2,500,000, 10% construction loan at the beginning of the year. The company had no other interest-bearing debt. What amount of interest should Falwell capitalize in 2018?
$113,000 Explanation: Unamortized balance at 1/1/2020: $88,000 [8/10 × ($100,000 + 10,000)]. This amount would be written off in 2020, along with the $25,000 in legal fees.
In January of 2018, the Phillips Company purchased a patent at a cost of $100,000. In addition, $10,000 in legal fees were paid to acquire the patent. The company estimated a 10-year useful life for the patent and uses the straight-line amortization method for intangible assets. In 2020, Phillips spent $25,000 in legal fees for an unsuccessful defense of the patent. The amount charged to income (expense and loss) in 2018 related to the patent should be:
Current assets.
In a classified balance sheet, supplies would be classified among:
FIFO. LIFO. Average cost. Weighted-average cost. ANSWER: LIFO
In a period of declining costs, the use of which of the following inventory cost methods would result in the highest ending inventory?
Inventory is credited.
In a perpetual inventory system, if merchandise is returned to a supplier:
Financing activity.
In a statement of cash flows, cash received from the issuance of common stock would be classified as a:
Goods or services are transferred to the customer.
In general, revenue is recognized when the earnings process is virtually complete and:
Pension obligations. Lease obligations. Obligations expected to require the creation of other current liabilities. Mortgages payable. Answer: Obligations expected to require the creation of other liabilities
Included in the category of current liabilities would be:
25%
Income statement: 2018 Sales $2,500,000 Cost of goods sold 1,300,000 Net income 200,000 Balance sheets: 2018 2017 Accounts receivable $300,000 $200,000 Total assets 2,000,000 1,800,000 Total shareholders' equity 900,000 700,000 The return on shareholders' equity for 2018 is:
A related-party transaction.
Information not generally disclosed in the summary of significant accounting policies is:
$375,000 Explanation $300,000 + [($360,000 - $300,000) × 1.25]
J.T. Rider and Sons uses the dollar-value LIFO inventory method. At the end of 2019 the cost index is 1.25 and the ending inventory at base year cost is $360,000. If 2019 beginning inventory at base year cost was $300,000, 2019 ending inventory at dollar-value LIFO cost is:
$62,300.
Janson Corporation Co.'s trial balance included the following account balances at December 31, 2018: Accounts payable $25,000 Bond payable, due 2027 23,500 Salaries payable 17,000 Note payable, due 2019 20,300 Note payable, due 2023 40,000 What amount should be included in the current liabilities section of Janson's December 31, 2018, balance sheet?
$ 88,950.
Janson Corporation Co.'s trial balance included the following account balances at December 31, 2018: Accounts receivable $12,900 Inventories 41,000 Patent 12,300 Investments 31,200 Prepaid insurance 7,700 Note receivable, due 2021 51,900 Investments consist of treasury bills that were purchased in November, 2018 and mature in January, 2019. Prepaid insurance is for two years. What amount should be included in the current asset section of Janson's December 31, 2018, balance sheet?
$9,000 Explanation: Recording bad debt expense will credit the allowance for bad debts for $9,000, and writing off bad debts will debit it for $5,000 as well as crediting accounts receivable, so the net decrease in working capital will be $9,000 + 5,000 - 5,000 = $9,000.
Jasper Company uses the allowance method to account for bad debts. During 2018, the company recorded bad debt expense of $9,000 and wrote off as uncollectible accounts receivable totaling $5,000. These transactions caused a decrease in working capital (current assets minus current liabilities) of:
Costs are rising and inventory quantity declines.
LIFO liquidation profits occur when:
$70,000. Explanation: $85,000 = 75% × $100,000 + 25% × $40,000, which is answer b. The most likely amount is $100,000, which is answer a. $70,000, answer c, is not an acceptable estimate.
Lewis is selling a product with some of the transaction price depending on the outcome of a future event. There is a 75% chance that the event will result in $100,000 of consideration to Lewis, and a 25% chance that the event will result in $40,000 of consideration to Lewis. Which of the following is not an appropriate estimate of the amount of uncertain consideration for purposes of Lewis estimating the transaction price?
$830 million
Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores. Debit Credit Accounts receivable-trade 687 Building and equipment 926 Cash-checking 37 Interest receivable 47 Inventory 23 Land 169 Notes receivable (long-term) 459 Petty cash fund 7 Prepaid rent 37 Supplies 10 Trademark 45 Accounts payable-trade 571 Accumulated depreciation 68 Additional paid-in capital 472 Allowance for uncollectible accounts 18 Cash dividends payable 30 Common stock, at par 12 Income tax payable 50 Notes payable (long-term) 889 Retained earnings 317 Deferred revenues 20 TOTALS 2,447 2,447 What would Symphony report as total current assets?
$768 millions.
Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores. Debit Credit Accounts receivable-trade 696 Building and equipment 934 Cash-checking 54 Interest receivable 39 Inventory 26 Land 160 Notes receivable (long-term) 495 Petty cash fund 10 Prepaid rent 39 Supplies 9 Trademark 58 Accounts payable-trade 708 Accumulated depreciation 77 Additional paid-in capital 470 Allowance for uncollectible accounts 16 Cash dividends payable 27 Common stock, at par 15 Income tax payable 57 Notes payable (long-term) 840 Retained earnings 283 Deferred revenues 27 TOTALS 2,520 2,520 What would Symphony report as total shareholders' equity?
$2,424 millions.
Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores. Debit Credit Accounts receivable-trade 700 Building and equipment 939 Cash-checking 38 Interest receivable 31 Inventory 35 Land 169 Notes receivable (long-term) 496 Petty cash fund 8 Prepaid rent 37 Supplies 11 Trademark 54 Accounts payable-trade 682 Accumulated depreciation 78 Additional paid-in capital 470 Allowance for uncollectible accounts 16 Cash dividends payable 27 Common stock, at par 12 Income tax payable 55 Notes payable (long-term) 824 Retained earnings 316 Deferred revenues 38 TOTALS 2,518 2,518 What would Symphony report as total assets?
$348,000 Explanation: $38,000 (materials and supplies used) + $120,000 (R&D salaries) + $50,000 (payments to external consultants) + $140,000 (purchase of R&D equipment).
Micro Tech, Inc. made the following cash expenditures during 2018 related to the development of a new technology which was patented at the end of the year: Materials and supplies used $38,000 R&D salaries $120,000 Patent filing fees $3,000 Payments to external consultants $50,000 Purchase of R&D equipment $140,000 The equipment purchased has no future use beyond the current project. $10,000 of the materials and supplies used and $32,000 in salaries relate to the construction of prototypes. In its 2018 financial statements Micro Tech should report research and development expenses of:
$192.
Misty Company reported the following before-tax items during the current year: Sales revenue $650 Selling and administrative expenses $300 Restructuring charges $40 Loss on discontinued operations $70 Misty's effective tax rate is 20%. What is Misty's net income for the current year?
$162
Misty Company reported the following before-tax items during the current year: Sales revenue $740 Selling and administrative expenses $390 Restructuring charges $80 Loss on discontinued operations $90 Misty's effective tax rate is 40%. What is Misty's income from continuing operations?
$(130,000).
On August 1, 2018, Rocket Retailers adopted a plan to discontinue its catalog sales division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by June 30, 2019. On January 31, 2019, Rocket's fiscal year-end, the following information relative to the discontinued division was accumulated: Operating loss Feb. 1, 2018-Jan. 31, 2019 $119,000 Estimated operating losses, Feb. 1-June 30, 2019 $85,000 Impairment of division assets at Jan. 31, 2019 $11,000 In its income statement for the year ended January 31, 2019, Rocket would report a before-tax loss on discontinued operations of:
$647,000 Explanation End-of-2019 inventory at end-of-2018 year cost = $640,000 ($672,000 ÷ 1.05). The increase in the end-of-2018 inventory at end-of-2018 dollars is $140,000. Adjusting this to end-of-2019 cost is $147,000 ($140,000 × 1.05) and adding this to the beginning inventory gives $647,000.
On December 31, 2018, the Charlie Company adopted the dollar-value LIFO inventory method. Inventory at the end of 2018 for its only inventory pool was $500,000 under the dollar-value LIFO method. At the end of 2019 inventory at year-end cost is $672,000 and the cost index is 1.05. Inventory at the end of 2019 at dollar-value LIFO cost is:
$5,625 Explanation: Initial straight-line depreciation is $5,000 per year ($55,000 - 5,000) ÷ 10 years. Revised depreciation after two years is [$55,000 - (2 years × $5,000)] ÷ 8 years. $8,889 Explanation: ($55,000 - (2 years × $5,000) - $5,000) × 8/36
On January 1, 2016, the Holloran Corporation purchased a machine at a cost of $55,000. The machine was expected to have a service life of 10 years and a $5,000 residual value. The straight-line depreciation method was used. In 2018 the estimate of residual value was revised from $5,000 to zero. Depreciation for 2018 should be: In question 4, assume that instead of revising residual value, in 2018 the company switched to the sum-of-the-years'-digits depreciation method. Depreciation for 2018 should be:
$626,300. Explanation Purchase price $ 540,000 Demolition costs 82,000 Legal fees 13,000 Sale of scrap (8,700) Total cost of land $ 626,300
On July 1, 2018, Larkin Co. purchased a $540,000 tract of land that is intended to be the site of a new office complex. Larkin incurred additional costs and realized salvage proceeds during 2018 as follows: Demolition of existing building on site $ 82,000 Legal and other fees to close escrow 13,000 Proceeds from sale of demolition scrap 8,700 What would be the balance in the land account as of December 31, 2018?
Present value of an annuity due of $1 at 10% for 10 periods. Explanation: Present value of an annuity due of $1 at 10% for 10 periods. The calculation is how much is recorded today, the present value of equal payments that start today (annuity due).
On March 31, 2018, the Freeman Company leased a machine. The lease agreement requires Freeman to pay 10 annual payments of $6,000 on each March 31, with the first payment due on March 31, 2018. Assuming an interest rate of 10% and that this lease is treated as an installment sale, Freeman will initially value the machine by multiplying $6,000 by which of the following factors?
$800,000
On May 31, 2018, the Arlene Corporation adopted a plan to sell its cosmetics line of business, considered a component of the entity. The assets of the component were sold on October 13, 2018, for $1,120,000. The component generated operating income from January 1, 2018, through disposal of $300,000. In its income statement for the year ended December 31, 2018, the company reported before-tax income from operations of a discontinued component of $620,000. What was the book value of the assets of the cosmetics component?
$75 million.
On November 1, 2018, Jamison Inc. adopted a plan to discontinue its barge division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by April 30, 2019. On December 31, 2018, the company's year-end, the following information relative to the discontinued division was accumulated: Operating loss Jan. 1-Dec. 31, 2018 $75 million Estimated operating losses, Jan. 1 to April 30, 2019 $94 million Excess of fair value, less costs to sell, over book value at Dec. 31, 2018 $13 million In its income statement for the year ended December 31, 2018, Jamison would report a before-tax loss on discontinued operations of:
$450,000.
On November 1, 2018, Tim's Toys borrows $30,000,000 at 9% to finance the holiday sales season. The note is for a six-month term and both principal and interest are payable at maturity. What is the balance of interest payable for the loan as of December 31, 2018?
True
Owners' equity can be expressed as assets minus liabilities.
$2,400,000 Explanation: Under IFRS, research expenditures are expensed. Development costs and patent legal and filing fees are capitalized.
Pribuss Engineering prepares its financial statements according to International Financial Reporting Standards. During 2018, the company incurred the following costs related to a new product design: Research for new pump design $2,400,000 Development of the new product $1,300,000 Legal and filing fees for a patent for the new design $52,000 Total $3,752,000 The development costs were incurred after technological and commercial feasibility was established and after the future economic benefits were deemed probable. The project was successfully completed and the new product was patented before the end of the 2018 fiscal year. What amount should Pribuss expense in its 2018 income statement related to the above expenditures?
$179,200.
Provincial Inc. reported the following before-tax income statement items: Operating income $560,000 Loss on discontinued operations 91,000 Provincial has a 32% income tax rate. Provincial would report the following amount of income tax expense as a separately stated line item in the income statement:
Confirmatory value.
Relevance requires that information possess predictive and/or:
$600,000 Explanation: As of year-end 2018, revenue recognized to date is ($5,400,000 ÷ ($5,400,000 + 3,600,000)) × $10,000,000 = $6,000,000, and cost of construction recognized to date is $5,400,000, so gross profit recognized to date is $600,000.
Sandlewood Construction Inc. recognizes revenue over time according to percentage of completion for its long-term construction contracts. In 2018, Sandlewood began work on a $10,000,000 construction contract, which was completed in 2019. The accounting records disclosed the following data at the end of 2018: Costs incurred $5,400,000 Estimated cost to complete $3,600,000 Progress billings $4,100,000 Cash collections $3,200,000 How much gross profit should Sandlewood have recognized in 2018?
A current asset of $1,900,000 Explanation: Construction in progress (CIP) would include cost + gross profit, or $5,400,000 + 600,000 = $6,000,000. The balance sheet would show a current asset for CIP - progress billings, or $6,000,000 - $4,100,000 = $1,900,000.
Sandlewood Construction Inc. recognizes revenue over time according to percentage of completion for its long-term construction contracts. In 2018, Sandlewood began work on a $10,000,000 construction contract, which was completed in 2019. The accounting records disclosed the following data at the end of 2018: Costs incurred $5,400,000 Estimated cost to complete $3,600,000 Progress billings $4,100,000 Cash collections $3,200,000 In addition to accounts receivable, what would appear in the 2018 balance sheet related to the construction accounts?
Present value of an ordinary annuity of $1 for 6 periods. Explanation: The calculation is how much needs to be deposited today, the present value, so that equal amounts can be withdrawn over the next six years at the end of the year (ordinary annuity).
Sandra wants to calculate how much money she needs to deposit today into a savings account which earns 5% in order to be able to withdraw $3,000 at the end of each of the next 6 years. She should use which present value concept?
$21,600 Explanation: (600 units @ $20 each) + (400 units @ $24 each).
Sanfillipo, Inc., had 800 units of inventory on hand at March 1, 2018, costing $20 each. Purchases and sales of inventory during the month of March were as follows: Date Purchases Sales March 8 600 units 15 400 units @ $22 each 22 400 units @ $24 each 27 400 units Sanfillipo uses the periodic inventory system. According to a physical count, 600 units were on hand at the end of March. If Sanfillipo instead used the perpetual inventory system, cost of goods sold for the month of March applying the LIFO inventory method would be:
$14,000 Explanation: 400 units @ $24 each + 200 units @ $22 each.
Sanfillipo, Inc., had 800 units of inventory on hand at March 1, 2018, costing $20 each. Purchases and sales of inventory during the month of March were as follows: Date Purchases Sales March 8 600 units 15 400 units @ $22 each 22 400 units @ $24 each 27 400 units Sanfillipo uses the periodic inventory system. According to a physical count, 600 units were on hand at the end of March. The cost of inventory at the end of March applying the FIFO method is:
$12,000 Explanation: 600 units @ $20 each.
Sanfillipo, Inc., had 800 units of inventory on hand at March 1, 2018, costing $20 each. Purchases and sales of inventory during the month of March were as follows: Date Purchases Sales March 8 600 units 15 400 units @ $22 each 22 400 units @ $24 each 27 400 units Sanfillipo uses the periodic inventory system. According to a physical count, 600 units were on hand at the end of March. The cost of inventory at the end of March applying the LIFO method is:
$12,900 Explanation: Average cost of purchases = $21.50 each [(800 × $20) + (400 × $22) + (400 × $24)] ÷ 1600. Ending inventory = 600 units @ $21.50 each.
Sanfillipo, Inc., had 800 units of inventory on hand at March 1, 2018, costing $20 each. Purchases and sales of inventory during the month of March were as follows: Date Purchases Sales March 8 600 units 15 400 units @ $22 each 22 400 units @ $24 each 27 400 units Sanfillipo uses the periodic inventory system. According to a physical count, 600 units were on hand at the end of March. The cost of inventory at the end of March applying the weighted average method
$260,000
Selected information from the 2018 accounting records of Dunn's Auto Dealers is as follows: Cost of furniture purchased for cash $8,000 Proceeds from bank loan 100,000 Repayment of bank loan (includes interest of $4,000) 44,000 Proceeds from sale of equipment 5,000 Cash collected from customers 320,000 Purchase of stock of another corporation as an investment 20,000 Common stock issued for cash 200,000 In its 2018 statement of cash flows, Dunn's should report net cash inflows from financing activities of:
$23,000
Selected information from the 2018 accounting records of Dunn's Auto Dealers is as follows: Cost of furniture purchased for cash $8,000 Proceeds from bank loan 100,000 Repayment of bank loan (includes interest of $4,000) 44,000 Proceeds from sale of equipment 5,000 Cash collected from customers 320,000 Purchase of stock of another corporation as an investment 20,000 Common stock issued for cash 200,000 In its 2018 statement of cash flows, Dunn's should report net cash outflows from investing activities of:
$355,000 Explanation: $320,000 (ending balance) + $12,000 (f.o.b. destination shipment made 12/30) + $23,000 (goods held on consignment).
Symington Corporation uses the periodic inventory system. At December 31, 2018, the end of the company's fiscal year, a physical count of inventory revealed an ending inventory balance of $320,000. The following items were not included in the physical count: Goods held on consignment at Murphy Corporation $23,000 Merchandise shipped to a customer on 12/30 f.o.b. destination (merchandise arrived at customer's location on 1/3/17) $12,000 Merchandise shipped to a customer on 12/29 f.o.b. shipping point (merchandise arrived at customer's location on 1/2/17) $6,000 Merchandise purchased from a supplier, shipped f.o.b. destination on 12/29, in transit at year-end $24,000 Symington's 2018 ending inventory should be:
$325,203 Explanation $325,203. $2,000,000 ÷ 6.15 (Future value of an annuity due of $1 at 7% for 5 periods).
The Bello Corporation wishes to accumulate $2,000,000 for plant expansion. The funds are required on January 1, 2023. Bello intends to make five equal annual deposits in a fund that will earn interest at 7% compounded annually. The first deposit is made on January 1, 2018. Present value and future value facts are as follows: Present value of $1 at 7% for 5 periods .713 Present value of an ordinary annuity of $1 at 7% for 5 periods 4.100 Future value of an ordinary annuity of $1 at 7% for 5 periods 5.750 Future value of an annuity due of $1 at 7% for 5 periods 6.150 What is the amount of the required annual deposit?
A credit to revenue of $200,000.
The City of San Martin gave a parcel of land to the Canova Company as part of an agreement requiring Canova to construct its office building on the donated land. The land cost the city $80,000 when purchased several years ago and had an appraised value of $200,000 on the date it was given to Canova. As a result of the donation, Canova should record:
$180,000
The Compton Press Company reported income before taxes of $250,000. This amount included a $50,000 loss on discontinued operation. The amount reported as income from continuing operations, assuming a tax rate of 40%, is:
A $45,000 loss. Explanation Book value at disposal date: $80,000 [$120,000 − (4 × ($120,000 − $20,000) /10)]. Asset sold for $35,000. $35,000 - 80,000 = $45,000 loss.
The Cromwell Company sold equipment for $35,000. The equipment, which originally cost $120,000 and had an estimated useful life of 10 years and $20,000 residual value, was depreciated for four years using the straight-line method. Cromwell should report the following on its income statement in the year of sale:
$1,128,000 Explanation: $680,000 (beginning balance) + $1,200,000 (purchases) - $12,000 (purchase returns) - $740,000 (ending balance).
The Hamlet Company uses the periodic inventory system. Information for 2018 is as follows: Sales $2,650,000 Beginning inventory $680,000 Purchases $1,200,000 Purchase returns $12,000 Ending inventory $740,000 Hamlet's cost of goods sold for 2018 is:
Present value of a deferred annuity. Explanation: The calculation is the amount to be deposited today, the present value, of five equal payments (an annuity), that doesn't start for three years (deferred annuity).
The Jamison Corporation agrees to pay an employee $10,000 a year for five years beginning three years from today and decides to fund the payments by depositing one lump sum in a savings account today. The company should use which present value concept to determine the required deposit?
$225,000 Explanation Gross profit deferred is 30% × ($600,000 - ($200,000 + $250,000)) + 40% × ($750,000 - 300,000) = $225,000.
The Pattison Company began operations on January 2, 2018, and appropriately uses the installment sales method of accounting. The following data are available for 2018 and 2019: 2018 2019 Installment sales $600,000 $750,000 Cash collections from: 2018 sales $200,000 $250,000 2019 sales $300,000 Gross profit on sales 30% 40% The deferred gross profit that would appear in the 2019 balance sheet is:
$330,000 Explanation: $3,500,000 - ($830,000 + $2,940,000 - $600,000)
The Piazza Baseball Bat Company acquired all of the outstanding common stock of Dierdorf Lumber for $3,500,000. The book values and fair values of Dierdorf's assets and liabilities on the date of purchase were as follows: Book Value Fair Value Current assets $860,000 $830,000 Property, plant, and equipment $2,300,000 $2,940,000 Liabilities $600,000 $600,000 Piazza should record goodwill of:
$24,000 Explanation $800,000 × 3% = $24,000.
The Reingold Hat Company uses the allowance method to account for bad debts. During 2018, the company recorded $800,000 in credit sales. At the end of 2018, account balances were: Accounts receivable, $120,000; Allowance for uncollectible accounts, $3,000 (credit). If bad debt expense is estimated to be 3% of credit sales, the appropriate adjusting entry will include a debit to bad debt expense of:
$5,000 plus the present value of an ordinary annuity of $300 for 36 periods. Explanation: The cash price is equal to the present value of the future cash outflows. This includes the $5,000 today plus the value today, present value, of the $300 payments made at the end of each month (ordinary annuity).
The Richards Company purchased a machine for $5,000 down and $300 a month payable at the end of each of the next 36 months. How would the cash price of the machine be calculated, assuming the annual interest rate is given?
Monitoring the development of GAAP within the accounting profession and using its stature to influence that development.
The SEC exerts a continuing influence on the establishment of accounting standards. It does so primarily by:
Present value of $1. EXPLANATION: The calculation is for the present value today of the $15,000 to be received one year from now.
The Sanchez Company purchased a delivery truck on February 1, 2018. The purchase agreement required Sanchez to pay the total amount due of $15,000 on February 1, 2019. Assuming an 8% rate of interest, the calculation of the price of the truck would involve multiplying $15,000 by the:
$8,750,000 Explanation (progress complete × contract price = revenue) - cost = gross profit. Therefore (($1,500,000 ÷ ($1,500,000 + 6,000,000)) × contract price) - $1,500,000 = $250,000. Therefore, contract price = $8,750,000.
The Simpson Construction Company recognizes revenue over time according to percentage of completion for its long-term construction contracts. In 2018, Simpson began work on a construction contract. Information on this contract at the end of 2018 is as follows: Cost incurred during the year $1,500,000 Estimated additional cost to complete $6,000,000 Gross profit recognized in 2018 $250,000 What is the contract price (total revenue) on this contract?
$60.880 million. Explanation: $60.880 million: 0.82270 (present value of $1 in 4 periods at 5%) × $74 million [($50 million × 0.20) + ($70 million × 0.40) + ($90 million × 0.40)].
The Stacey Mack Corporation used the expected cash flow approach to determine the present value of a future obligation to be paid in four years. Estimated future payment possibilities were as follows: Possible payment Probability $ 50 million 20 % 70 million 40 % 90 million 40 % The risk-free interest rate is 5%. What is the estimated present value of the future obligation?
A change in accounting principle.
The Stibbe Construction Company switched from the completed contract method to the percentage-of-completion method of accounting for its long-term construction contracts. This is an example of:
$1,994 Explanation $1,994: $8,600÷4.31213 (present value of an annuity due for 5 periods at 8%).
The Strug Company purchased office furniture and equipment for $8,600 and agreed to pay for the purchase by making five annual installment payments beginning immediately. The installment payments include interest at 8%. What is the required annual installment payment? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
$2,154 Explanation $2,154: $8,600 ÷ 3.99271 (present value of an ordinary annuity for 5 periods at 8%).
The Strug Company purchased office furniture and equipment for $8,600 and agreed to pay for the purchase by making five annual installment payments beginning one year from today. The installment payments include interest at 8%. What is the required annual installment payment? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
$9,500
The Wazoo Times Newspaper Company reported an $11,200 liability in its 2018 balance sheet for subscription revenue received in advance. During 2019, $62,000 was received from customers for subscriptions and the 2019 income statement reported subscription revenue of $63,700. What is the liability amount for deferred subscription revenue that will appear in the 2019 balance sheet?
Asset account.
The accumulated depreciation account is a contra (valuation) account to:
False
The adjusted trial balance contains only permanent accounts.
A debit to a liability.
The adjusting entry required when amounts previously recorded as deferred revenues are recognized includes:
Income from continuing operations. Operating income. Discontinued operations. All of these answer choices are incorrect. ANSWER: Operating Income
The application of intraperiod income taxes requires that income taxes be apportioned to each of the following items except:
Plus net income, minus dividends.
The balance in retained earnings at the end of the year is determined by retained earnings at the beginning of the year:
Usually one year, because the operating cycle typically is less than one year.
The basis used to classify assets as current or long-term is:
Transferring revenue and expense balances to retained earnings.
The closing process involves:
The proxy statement.
The compensation of directors and top executives is disclosed in:
$1,000
The correct amount of prepaid insurance shown on a company's December 31, 2018, balance sheet was $900. On July 1, 2019, the company paid an additional insurance premium of $600. In the December 31, 2019, balance sheet, the amount of prepaid insurance was correctly shown as $500. The amount of insurance expense that should appear in the company's 2019 income statement is:
Statements of Financial Accounting Concepts
The documents that set forth fundamental concepts on which financial accounting and reporting standards will be based are:
10.00 Explanation: Accounts receivable turnover = sales revenue ÷ average accounts receivable balance, so accounts receivable turnover = $1,500,000 ÷ ((140,000 + 160,000) ÷ 2) = 10.0.
The following data are available for the Hunting Balloon Company: Sales for the current year $1,500,000 Cost of goods sold for the current year $1,200,000 Accounts receivable, beginning of year $140,000 Accounts receivable, end of year $160,000 The accounts receivable turnover ratio for the current year is:
$54,000
The following items appeared in the 2018 year-end trial balance for the Brown Coffee Company: Debits Credits Revenues $600,000 Operating expenses $420,000 Income on discontinued operations $200,000 Restructuring costs $100,000 Interest expense $20,000 Gain on sale of investments $30,000 Income tax expense has not yet been accrued. The company's income tax rate is 40%. What amount should be reported in the company's year 2018 income statement as income from continuing operations?
$310 thousand
The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below. Assets Liabilities and Equity Current assets: Current liabilities: Cash $68 Accounts payable $227 Accounts receivable (net) 190 Other liab. 77 Notes receivable 52 Total current liabilities 304 Inventories 203 Long-term liabilities 96 Prepaid expenses 42 Total liabilities 400 Total current assets 555 Shareholders' equity: Plant assets (net) 272 Capital stock 134 Retained earnings 293 Total shareholders' equity 427 Total assets $827 Total liabilities and equity$827 Quick assets total:
The cost of grading. Title search costs. Recording fees. Property taxes for the current period. ANSWER: Property taxes for the current period
The initial cost of land would include all of the following except:
Develop a single set of global accounting standards.
The main objective of the IASB is to:
The units-of-production method.
The method that does not necessarily produce a declining pattern of depreciation over an asset's service life is:
That is useful in decision making.
The primary objective of financial reporting is to provide information:
Recognize expenses in the same period as the related revenue.
The primary objective of matching is to:
Balances in temporary accounts to a permanent account.
The purpose of closing entries is to transfer:
Representational faithfulness.
The qualitative characteristic that means there is agreement between a measure and a real-world phenomenon is:
A debit to cash. A debit to petty cash. A debit to office supplies expense. A credit to petty cash. ANSWER: A debit to office supplies expense
The replenishment of a petty cash fund might include which of the following?
Construction debt interest rates differ from the rates of other interest- bearing debt. There is no construction-related debt. There is no interest-bearing debt other than construction related. Construction debt interest rates are the same as the rates of other interest-bearing debt. ANSWER: Construction debt interest rates differ from the rates of other interest- bearing debt
The specific interest and the weighted-average interest methods for determining capitalized interest will yield the same results except when:
Relevance and faithful representation.
The two primary decision-specific qualities that make accounting information useful are:
Financial accounting.
The type of financial information to external decision makers is referred to as:
Periodicity.
The underlying assumption that assumes that the life of a company can be divided into artificial time periods is:
Going concern.
The underlying assumption that presumes a company will continue indefinitely is:
The earnings process is virtually complete.
Under the realization principle, revenue is recognized as earned when there is reasonable certainty as to the collectibility of the asset to be received and:
$155,320 Explanation $155,320: ($80,000 × 0.909) + ($100,000 × 0.826).
Wellman Company is considering investing in a two-year project. Wellman's required rate of return is 10%. The present value of $1 for one period at 10% is 0.909 and for two periods at 10% is 0.826. The project is expected to create cash flows, net of taxes, of $80,000 in the first year, and $100,000 in the second year. Wellman should invest in the project if the project's cost is less than or equal to:
Option A $60,000 & $80,000 Explanation: Gross profit realized is 40% × $150,000 = $60,000. Gross profit deferred is 40% × ($350,000 - $150,000) = $80,000.
Western Appliance Company, which began business on January 1, 2018, appropriately uses the installment sales method of accounting. The following data are available for 2018: Installment sales $350,000 Cash collections on installment sales $150,000 Gross profit on sales 40% The gross profit on installment sales for 2018 should be: Realized Deferred a. $ 60,000 $ 80,000 b. $ 80,000 $ 60,000 c. $ 140,000 $ 80,000 d. $ 140,000 $ 60,000
Construction in progress.
When accounting for a long-term construction contract for which revenue is recognized over time according to the percentage of completion, gross profit is recognized in any year is debited to:
Recognizing the portion of revenue collected in advance. Recording depreciation expense. Accruing unrecorded salaries expense. Accruing unrecorded interest revenue. ANSWER: Recording depreciation expense
Which of the following adjusting entries causes a decrease in assets?
Accruing unrecorded interest expense. Recording the amount of expired prepaid insurance. Accruing unrecorded interest revenue. Recording depreciation expense. ANSWER: Accruing unrecorded interest expense
Which of the following adjusting entries causes an increase in liabilities?
Prices of similar assets. The market price of the asset. The sum of the discounted expected cash flows. The sum of the undiscounted expected cash flows. ANSWER: The sum of the undiscounted expected cash flows
Which of the following approaches cannot be used to determine the fair value of an impaired asset?
Total expenses. Total revenues and gains. Operating income. All of these answer choices are incorrect. ANSWER: Operating Income
Which of the following captions would more likely be found in a multiple-step income statement?
Result of a past transaction. Probable future sacrifices. Present obligation. Must be legally enforceable. The correct answer is must be legally enforceable
Which of the following characteristics does not describe a liability?
Requires the receipt of cash.
Which of the following characteristics does not describe an asset?
An extended warranty. A prepayment. A right of return. An option for the customer to purchase additional products under the same terms enjoyed by other new customers ANSWER: An extended warranty
Which of the following is a separate performance obligation?
Most likely amount to be received. Minimum amount considered likely to be received. Expected value of the amount to be received. Most likely amount to be received and expected value of the amount to be received. ANSWER: Most likely amount to be received and expected value of the amount to be received
Which of the following is an acceptable way to estimate uncertain consideration?
The seller is enhancing an asset that the buyer controls as the service is performed. The seller is providing continuous effort to the buyer. The seller can estimate the percent of work completed. The sales price is fixed and determinable. ANSWER: The seller is enhancing as asset that the buyer controls as the service is performed
Which of the following is an indicator that revenue for a service can be recognized over time?
Cost effectiveness.
Which of the following is considered a practical constraint on the qualitative characteristics?
The seller regularly sells the good or service separately. The buyer could use the good or service on its own. The buyer could use the good or service in combination with goods or services the buyer could obtain elsewhere. All of the above. ANSWER: All of the Above
Which of the following is consistent with goods and services being distinct for purposes of identifying separate performance obligations?
Depreciation. Interest. Cost of goods sold. Office supplies. Answer: Interest
Which of the following is most likely an accrued liability?
The major classifications of the balance sheet are assets, liabilities, and owners' equity. The balance sheet reports the change in financial position. Assets generally are listed in order of their liquidity. The balance sheet provides information useful in assessing liquidity. Answer: The Balance sheet reports the change in financial position
Which of the following is not a characteristic of the balance sheet?
Buyer has an unconditional obligation to pay. Buyer has legal title. Buyer has scheduled delivery. Buyer has assumed the risk and rewards of ownership. ANSWER: Buyer has scheduled delivery
Which of the following is not an indicator that control of a good has passed from the seller to the buyer?
Uncertainty will not resolve until far into the future. Based on much experience with the customer, the seller anticipates a more-than-remote chance that the receivable will prove uncollectible. The seller lacks experience selling similar products. Uncertain amounts are susceptible to important factors beyond the seller's control. ANSWER: Base on much experience with the customer, the seller anticipates a more than remote chance that the receivables will prove uncollectible.
Which of the following is not an indicator that the seller may need to constrain recognition of variable consideration?
Rights. Reasonable profit margin. Approval. Commercial substance. ANSWER: Reasonable Profit Margin
Which of the following is not one of the characteristics of a contract for purposes of revenue recognition?
Identify the performance obligations of the contract. Identify the contract with the customer. Estimate the total transaction price of the contract based on the sum of the stand-alone selling prices of the goods and services in the contract. Allocate the transaction price to the performance obligations. Answer: Estimate the total transaction price of the contract based on the sum of the stand-alone selling prices of the goods and services in the contract.
Which of the following is not one of the steps for recognizing revenue?
The realization principle guides the ASU. Construction contracts are typically broken into the various separate goods and services that are included in them for purposes of revenue recognition. The time value of money is considered when estimating all transaction prices. Collectibility of the receivable is considered when determining whether revenue can be recognized. ANSWER: Collectibility of the receivable is considered when determining whether revenue can be recognized.
Which of the following is true about revenue recognition under ASU 2014-09?
Collections from customers. Interest on note payable. Purchase of equipment. Purchase of inventory. ANSWER: Purchase of Equipment
Which of the following items would not be included as a cash flow from operating activities in a statement of cash flows?
Cash in a checking account. 30-day treasury bill. Money orders waiting to be deposited. 120-day treasury bill. ANSWER: 30- day treasury bill
Which of the following might be classified as a cash equivalent?
Additions. Improvements. Repairs and maintenance. Rearrangements. ANSWER: Repairs and Maintenance
Which of the following types of subsequent expenditures is not normally capitalized?
Debt to equity.
Which ratio most directly indicates the extent of the company's reliance on financial leverage?
$40. Explanation ($50 ÷ ($100 + 50)) × $120 = $40.
Winchell wrote a contract that involves two performance obligations. Product A has a stand-alone selling price of $50, and product B has a stand-alone selling price of $100. The price for the combined product is $120. How much of the transaction price would be allocated to the performance obligation for delivering product A?
$20. Explanation Winchell would use the residual method. $120 - 100 = $20.
Winchell wrote a contract that involves two separate performance obligations. Winchell cannot estimate the stand-alone selling price of product A. Product B has a stand-alone selling price of $100. The price for the combined product is $120. How much of the transaction price would be allocated to the performance obligation for delivering product A?
A gain of $5,000. Explanation: The machine must be written up from book value ($40,000) to fair value ($45,000), recognizing a gain of $5,000. The patent is then recorded at a value of $51,000 ($45,000 + $6,000). A gain of $5,000. Explanation: The old machine must be written up from book value ($40,000) to fair value ($45,000), recognizing a gain of $5,000. The new machine is then recorded at a value of $51,000 ($45,000 + $6,000).
Wolf Computer exchanged a machine with a book value of $40,000 and a fair value of $45,000 for a patent. In addition to the machine, $6,000 in cash was given. Wolf should recognize: Assume the same facts as in question 8, except that the machine is exchanged for a similar machine rather than for a patent. Wolf should recognize:
