ACC 232 Exam 2

On August 1, 2025, Fowler Company acquired $500,000 face value 10% bonds of Kasnic Corporation at 104 plus accrued interest. The bonds were dated May 1, 2025, and mature on April 30, 2030, with interest payable each October 31 and April 30. The bonds will be held to maturity. What entry should Fowler make to record the purchase of the bonds on August 1, 2025? a. Debt Investments 520,000 Interest Revenue 12,500 Cash 532,500 b. Debt Investments 532,500 Cash 532,500 c. Debt Investments 532,500 Interest Revenue 12,500 Cash 520,000 d.Debt Investments. 500,000 Premium on Bonds 32,500 Cash 532,500

Debt Investments 520,000 Interest Revenue 12,500 Cash 532,500 500,000 x 1.04 = 520,000 500,000 x (0.1/2) x (3/6) = 12,500 520,000 + 12,500 = 532,000

An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as Fair Value Method Equity Method a. Income Income b. A reduction of the investment A reduction of the investment c. Income A reduction of the investment d. A reduction of the investment Income

Fair Value Method Equity Method c. Income A reduction of the investment

On its December 31, 2024 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment account. There was no change during 2025 in the composition of Calhoun's portfolio of debt investments held as available-for- sale debt securities. The following information pertains to that portfolio: Security Cost Fair value at 12/31/25 X $130,000 $160,000 Y 100,000 90,000 Z 175,000 125,000 $405,000 $375,000 The amount of unrealized loss reported as a component of comprehensive income for the year ending December 31, 2025 is a. $40,000. b. $30,000. c. $20,000. d. $0.

a. $40,000 10,000 + 30,000 = 40,000

Marle Construction enters into a contract with a customer to build a warehouse for $950,000 on March 30, 2024 with a performance bonus of $50,000 if the building is completed by July 31, 2024. The bonus is reduced by $10,000 each week that completion is delayed. Marle commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by Probability July 31, 2024 65% August 7, 2024 25% August 14, 2024 5% August 21, 2024 5% The transaction price for this transaction is a. $995,000. b. $950,000. c. $652,500. d. $685,000.

a. $995,000. 950,000 + 50,000(.65) + 40,000(.25) + 30,000(.05) + 20,000(.05)

On November 1, 2024, Green Valley Farm entered into a contract to buy a $150,000 harvester from John Deere. The contract required Green Valley Farm to pay $150,000 in advance on November 1, 2024. The harvester (cost of $110,000) was delivered to Green Valley Farm on November 30, 2024. The journal entry for John Deere to record the delivery of the equipment includes a a. debit to Unearned Sales Revenue for $150,000. b. credit to Unearned Sales Revenue for $150,000. c. credit to Cost of Goods Sold for $110,000. d. debit to Inventory for $110,000.

a. debit to Unearned Sales Revenue for $150,000.

When multiple performance obligations exist in a contract, they should be accounted for as a single performance obligation when a. each service is interdependent and interrelated. b. both performance obligations are distinct but interdependent. c. the product is distinct within the contract. d. determination cannot be made.

a. each service is interdependent and interrelated.

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

a. recognized in the current period, regardless of whether the percentage-of-completion or cost-recovery method is employed.

The percentage-of-completion method a. recognizes revenue and gross profit each period based upon progress. b. is used primarily for short-term contracts. c. accumulates construction costs in the Billings on Construction in Progress account. d. recognizes revenue and gross profits only when the contract is completed.

a. recognizes revenue and gross profit each period based upon progress.

On its December 31, 2024 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment account. There was no change during 2025 in the composition of Calhoun's portfolio of debt investments held as available-for- sale debt securities. The following information pertains to that portfolio: Security Cost Fair value at 12/31/25 X $130,000 $160,000 Y 100,000 90,000 Z 175,000 125,000 $405,000 $375,000 What amount of unrealized loss on these debt securities should be included in Calhoun's stockholders' equity section of the balance sheet at December 31, 2025? a. $40,000 b. $30,000 c. $20,000 d. $0

b. $30,000 405,000 - 375,000 = 30,000

Instrument Corporation has the following investment which was held throughout 2025-2026: Fair Value Cost 12/31/25 12/31/26 Equity inv. $900,000 $1,200,000 $1,140,000 What amount of gain or loss would Instrument Corporation report in its income statement for the year ended December 31, 2026 related to this investment? a. $60,000 gain b. $60,000 loss c. $300,000 gain d. $240,000 gain

b. $60,000 loss 1,200,000 - 1,140,000 = 60,000

On January 2, 2025, Pod Company purchased 25% of the outstanding common stock of Jobs, Inc. and subsequently used the equity method to account for the investment. During 2025, Jobs reported net income of $1,260,000 and distributed dividends of $540,000. The ending balance in the Investment in Pod account at December 31, 2025 was $960,000 after applying the equity method during 2025. What purchase price did Pod pay for its investment in Jobs, Inc? a. $510,000 b. $780,000 c. $1,140,000 d.$1,410,000

b. $780,000 x + (1,260,000 x .25) - (540,000 x .25) = 960,000 x + 315,000 - 135,000 = x = 960,000 - 180,000 = 780,000

At December 31, 2025, Atlanta Company has an equity portfolio of trading securities valued at $160,000. Its cost was $132,000. If the Fair Value Adjustment has a debit balance of $8,000, which of the following journal entries is required at December 31, 2025? a. Fair Value Adjustment 28,000 Unrealized Holding Gain or Loss-Income 28,000 b. Fair Value Adjustment 20,000 Unrealized Holding Gain or Loss-Income 20,000 c. Unrealized Holding Gain or Loss-Income 28,000 Fair Value Adjustment 28,000 d. Unrealized Holding Gain or Loss-Income 20,000 Fair Value Adjustment 20,000

b. Fair Value Adjustment 20,000 Unrealized Holding Gain or Loss-Income 20,000 (160,000 - 132,000) - 8,000 = 20,000

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

b. The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee.

When a company has an obligation or right to repurchase an asset for an amount greater than or equal to its selling price, the transaction should be accounted for as a. an outright sale. b. a financing transaction. c. a repurchase transaction. d. a put option.

b. a financing transaction.

A transaction price for multiple performance obligations should be allocated a. based on the selling price from the company's competitors. b. based on what the company could sell the goods for on a standalone basis. c. based on the forecasted cost of satisfying the performance obligation. d. based on total transaction price less residual value.

b. based on what the company could sell the goods for on a standalone basis.

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

b. by using the fair value method.

Botanic Choice sells natural supplements to customers with an unconditional sales return if they are not satisfied. The sales return period extends 60 days. On February 10, 2024, a customer purchases $4,000 of products (cost $2,000). Assuming that based on prior experience, estimated returns are 20%. The journal entry to record the expected sales return and cost of goods sold includes a a. debit to Cash and a credit to Sales Revenue of $4,000. b. debit to Allowance for Sales Returns of $800 and a credit to Cost of Goods sold of $400. c. debit to Cost of Goods Sold and credit to Inventory for $2,000. d. credit to Estimated Inventory Returns of $400.

b. debit to Allowance for Sales Returns of $800 and a credit to Cost of Goods sold of $400. 4,000 x .2 = 800 2,000 x .2 = 400

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

b. held-to-maturity at amortized cost

The last step in the process for revenue recognition is to a. allocate the transaction price to the separate performance obligations. b. recognize revenue when each performance obligation is satisfied. c. determine the transaction price. d.identify the contract with customers

b. recognize revenue when each performance obligation is satisfied.

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

b. the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable.

Hayes Construction Corporation contracted to construct a building for $7,500,000. Construction began in 2024 and was completed in 2025. Data relating to the contract are summarized below: Year ended December 31, 2024 2025 Costs incurred $3,000,000 $2,250,000 Estimated costs to complete 2,000,000 — Hayes uses the percentage-of-completion method as the basis for income recognition. For the years ended December 31, 2024, and 2025, respectively, Hayes should report gross profit of a. $1,350,000 and $900,000. b. $4,500,000 and $3,000,000. c. $1,500,000 and $750,000. d. $0 and $2,250,000.

c. $1,500,000 and $750,000. 2024: $3,000,000/($3,000,000+$2,000,000) x $7,500,000 = $4,500,000 - $3,000,000 = $1,500,000 2025: [$7,500,000 - ($3,000,000 + $2,250,000) - $1,500,000] = $750,000

Cooper Construction Company had a contract starting April 2024, to construct a $24,000,000 building that is expected to be completed in September 2026, at an estimated cost of $22,000,000. At the end of 2024, the costs to date were $10,120,000 and the estimated total costs to complete had not changed. The progress billings during 2024 were $4,800,000 and the cash collected during 2024 was 3,200,000. Cooper uses the percentage-of-completion method. At December 31, 2024 Cooper would report Construction in Process in the amount of a. $920,000. b. $10,120,000. c. $11,040,000. d. $9,440,000.

c. $11,040,000. [($24,000,000 - $22,000,0000 x ($10,120,000 + $22,000,000)] = $920,000 $10,120,000 + $920,000 = $11,040,000

Landis Company purchased $3,000,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2025 with interest payable on July 1 and January 1. The bonds sold for $3,124,740 at an effective interest rate of 7%. Using the effective-interest method, Landis decreased the Available-for-Sale Debt Securities account for the Ritter bonds on July 1, 2025 and December 31, 2025 by the amortized premiums of $10,620 and $10,980, respectively. At April 1, 2026, Landis sold the Ritter bonds for $3,090,000. After accruing for interest, the carrying value of the Ritter bonds on April 1, 2026 was $3,097,440. Assuming Landis has a portfolio of Available-for-Sale Debt Securities, what should Landis report as a gain or loss on the bonds? a. ($88,110) b. ($65,610) c. ($7,440) d. $0

c. ($7,440) 3,097,440 - 3,090,000 = 7,440

New Age Computers manufactures and sells pagers and radio paging systems which include a 180-day warranty on product defects. It also sells an extended warranty which provides an additional two years of protection. On May 10, it sold a paging system for $4,500 and an extended warranty for another $1,400. The journal entry to record this transaction would include a. a credit to Warranty Revenue of $5,900. b. a credit to Warranty Revenue of $1,400. c. a credit to Sales Revenue of $4,500 and a credit to Unearned Warranty Revenue of $1,400. d. a credit to Unearned Warranty Revenue of $5,900.

c. a credit to Sales Revenue of $4,500 and a credit to Unearned Warranty Revenue of $1,400.

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

c. available-for-sale debt securities.

On November 1, 2024, Green Valley Farm entered into a contract to buy a $150,000 harvester from John Deere. The contract required Green Valley Farm to pay $150,000 in advance on November 1, 2024. The harvester (cost of $110,000) was delivered to Green Valley Farm on November 30, 2024. The journal entry for John Deere to record the contract on November 1, 2024 includes a a. credit to Accounts Receivable for $150,000. b. credit to Sales Revenue for $150,000. c. credit to Unearned Sales Revenue for $150,000. d. debit to Unearned Sales Revenue for $150,000.

c. credit to Unearned Sales Revenue for $150,000.

When sales are made with a right of return, the company a. should not recognize any revenue. b. should recognize revenue for the full sales price. c. records the returned asset in a separate inventory account. d. records the estimated returns in the Sales Revenue account.

c. records the returned asset in a separate inventory account.

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

c. trading

Meyer & Smith is a full-service technology company. They provide equipment, installation services as well as training. Customers can purchase any product or service separately or as a bundled package. Container Corporation purchased computer equipment, installation, and training for a total cost of $144,000 on March 15, 2024. Estimated standalone fair values of the equipment, installation and training are $90,000, $60,000, and $30,000 respectively. The transaction price allocated to equipment, installation, and training is a. $90,000, $60,000, $30,000 respectively. b. $48,000, $48,000, $48,000 respectively. c. $144,000 for the entire bundle. d. $72,000, $48,000 and $24,000 respectively.

d. $72,000, $48,000 and $24,000 respectively. (90,000/180,000) x 144,000 = 72,000 (60,000/180,000) x 144,000 = 48,000 (30,000/180,000) x 144,000 = 24,000

Judd, Inc. owns 35% of Crosby Corporation. During the calendar year 2025, Crosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively? a. Understate, overstate, overstate b. Overstate, understate, understate c. Overstate, overstate, overstate d. Understate, understate, understate

d. Understate, understate, understate

When a customer purchases a product but is not yet ready for delivery, this is referred to as a. a repurchase agreement. b. a consignment. c. a principal-agent relationship. d. a bill-and-hold arrangement.

d. a bill-and-hold arrangement.

Consigned goods are recognized as revenues by the a. consignor when a sale to a third party has occurred. b. consignor when the merchandise has been shipped to a consignee. c. consignee when a sale to a third party has occurred. d. consignor when it receives notification and payment from consignee for goods sold.

d. consignor when it receives notification and payment from consignee for goods sold.

The second step in the process for revenue recognition is to a. allocate the transaction price to the separate performance obligations. b. determine the transaction price. c. identify the contract with customers. d. identify the separate performance obligations in the contract.

d. identify the separate performance obligations in the contract.