ACC 232 Final test

Lease A does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How should the lessee classify these leases? Lease A Lease B a. Operating lease Finance lease b. Operating lease Operating lease c. Finance lease Finance lease d. Finance lease Operating lease

C. Finance lease Finance lease

Alex Company prepares its statement of cash flows using the direct method for operating activities. For the year ended December 31, 2024, Alex Company reports the following: Sales on account $2,100,000 Cash sales 1,110,000 Decrease in accounts receivable 915,000 Increase in accounts payable 108,000 Increase in inventory 72,000 Cost of goods sold 1,575,000 What is the amount of cash collections from customers reported by Alex Company for the year ended December 31, 2024? a. $3,210,000 b. $3,015,000 c. $4,125,000 d. $2,295,000

c. $4,125,000

Farm Co. leased equipment to Union Co. on July 1, 2025, and properly recorded the sales-type lease at $135,000, the present value of the lease payments discounted at 10%. The first of eight annual lease payments of $20,000 due at the beginning of each year of the lease term was received and recorded on July 3, 2025. Farm had purchased the equipment for $110,000. What amount of interest revenue from the lease should Farm report in its 2025 income statement? a. $0 b. $5,500 c. $5,750 d. $6,750

c. $5,750

Which of the following disclosures is required for a change from sum-of-the-years-digits to straight-line depreciation method? a. Cumulative effect on prior years, net of tax, in the current retained earnings statement b. Restatement of prior years' income statements c. Recomputation of current and future years' depreciation d. All of the choices are required

c. Recomputation of current and future years' depreciation

When using the indirect method to prepare the operating section of a statement of cash flows, which of the following is added to net income to compute cash provided by/used by operating activities? a. increase in accounts receivable b. gain on sale of land c. amortization of patent d. All of the choices are correct.

c. amortization of patent

Presenting consolidated financial statements this year when statements of individual companies were presented last year is a. a correction of an error. b. an accounting change that should be reported prospectively. c. an accounting change that should be reported by restating the financial statements of all prior periods presented. d.not an accounting change

c. an accounting change that should be reported by restating the financial statements of all prior periods presented.

Under the operating lease method, the lessor a. no longer reports the underlying asset on its balance sheet. b. realizes a gross profit on the sale of the asset. c. continues to recognize the underlying asset on its balance sheet and recognizes lease revenue. d. recognizes rental revenue using the effective interest amortization method.

c. continues to recognize the underlying asset on its balance sheet and recognizes lease revenue.

In an operating lease, the lessee records a. amortization expense. b. interest expense. c. lease expense. d. amortization expense and lease expense.

c. lease expense.

In a lease that is recorded as a sales-type lease by the lessor, interest revenue a. should be recognized in full as revenue at the lease's inception. b. should be recognized over the term of the lease using the straight-line method. c. should be recognized over the term of the lease using the effective interest method. d. does not arise.

c. should be recognized over the term of the lease using the effective interest method.

Xanthe Corporation had the following transactions occur in the current year: 1. Cash sale of inventory. 2. Sale of a delivery truck at book value. 3. Sale of Xanthe common stock for cash. 4. Issuance of a note payable to a bank for cash. 5. Sale of security held as an available-for-sale investment. 6. Collection of a loan receivable. How many of the above items will appear as cash inflows from investing activities on the statement of cash flows for the current year? a. five items b. four items c. three items d. two items

c. three items

In computing the present value of the lease payments, the lessee should a. use its incremental borrowing rate in all cases. b. use both its incremental borrowing rate and the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. c. use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. d. use the implicit rate in all cases.

c. use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee.

Fleming Company provided the following information on selected transactions during 2024: Dividends paid to preferred stockholders $ 500,000 Loans made to affiliated corporations 1,400,000 Proceeds from issuing bonds 1,600,000 Proceeds from issuing preferred stock 2,100,000 Proceeds from sale of equipment 800,000 Purchases of inventories 2,400,000 Purchase of land by issuing bonds 600,000 Purchases of treasury stock 1,200,000 The net cash provided (used) by financing activities during 2024 was a. $(3,300,000). b. $1,110,000. c. $2,600,000. d. $2,000,000.

d. $2,000,000.

Which of the following best describes current practice in accounting for leases? a. Leases are not capitalized. b. All long-term leases are capitalized. c. Leases similar to installment purchases are capitalized. d. All leases are capitalized.

C.

On January 1, 2025, Dean Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Dean to make annual payments of $200,000 at the end of each year for ten years with the title passing to Dean at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Dean uses the straight-line method of depreciation for all of its fixed assets. Dean accordingly accounted for this lease transaction as a finance lease. The lease payments were determined to have a present value of $1,342,016 at an effective interest rate of 8%. With respect to this lease, Dean should record for 2025 a. lease expense of $200,000. b. interest expense of $89,468 and amortization expense of $76,136. c. interest expense of $107,361 and amortization expense of $89,468 d. interest expense of $91,363 and amortization expense of $89,468.

C. interest expense of $107,361 and amortization expense of $89,468

When preparing a statement of cash flows, an increase in accounts payable during a period would require which of the following adjustments in determining cash flows from operating activities? Indirect Method Direct Method a. Increase Decrease b. Decrease Increase c. Increase Increase d. Decrease Decrease

a. Increase Decrease

In a finance lease, the lessee records a. amortization expense only. b. interest expense only. c. lease expense only. d. amortization expense and interest expense.

D. amortization expense and interest expense.

On January 1, 2022, Nobel Corporation acquired machinery for $1,600,000. Nobel adopted the straight-line method of depreciation for this machine and had been recording depreciation over an estimated life of ten years, with no residual value. At the beginning of 2025, a decision was made to change to the double-declining balance method of depreciation for this machine. The amount that Nobel should record as depreciation expense for 2025 is a. $160,000. b. $224,000. c. $320,000. d. $280,000.

c. $320,000.

Alex Company prepares its statement of cash flows using the direct method for operating activities. For the year ended December 31, 2024, Alex Company reports the following: Sales on account $2,100,000 Cash sales 1,110,000 Decrease in accounts receivable 915,000 Increase in accounts payable 108,000 Increase in inventory 72,000 Cost of goods sold 1,575,000 What amount of cash payments to suppliers will be reported by Alex Company for the year ended December 31, 2024? a. $1,539,000 b. $1,611,000 c. $1,755,000 d. $1,395,000

a. $1,539,000

Ernst Company purchased equipment that cost $3,000,000 on January 1, 2023. The entire cost was recorded as an expense. The equipment had a nine-year life and a $120,000 residual value. Ernst uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2025. Ernst is subject to a 20% tax rate. Ernst's net income for the year ended December 31, 2023, was understated by a. $2,144,000. b. $2,400,000. c. $2,680,000. d. $3,000,000.

a. $2,144,000.

Lindsay Corporation had net income for 2024 of $3,000,000. Additional information is as follows: Depreciation of plant assets: $1,200,000 Amortization of intangibles: 240,000 Increase in accounts receivable: 420,000 Increase in accounts payable: 540,000 Lindsay's net cash provided by operating activities for 2024 was a. $4,560,000. b. $4,440,000. c. $4,320,000. d. $2,680,000.

a. $4,560,000.

During 2024, Orton Company earned net income of $494,000 which included depreciation expense of $78,000. In addition, the company experienced the following changes in the account balances listed below: Increases Decreases Accounts payable $45,000 Accounts receivable $12,000 Inventory 36,000 Accrued liabilities 24,000 Prepaid insurance 33,000 Based on this information what amount will be reported for net cash provided by operating activities for 2024? a. $602,000 b. $575,000 c. $395,000 d. $377,000

a. $602,000

Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/23 and 12/31/24 contained the following errors: 2023 2024 Ending inventory: $50,000 overstatement :$80,000 understatement Depreciation expense :20,000 understatement :40,000 overstatement Assume that the 2023 errors were not corrected and that no errors occurred in 2022. By what amount will 2023 income before income taxes be overstated or understated? a. $70,000 overstatement b. $30,000 overstatement c. $70,000 understatement d.$30,000 understatement

a. $70,000 overstatement

Metcalf Company leases a machine from Vollmer Corp. under an agreement that meets the criteria to be a finance lease for Metcalf. The six-year lease requires payment of $170,000 at the beginning of each year, including $25,000 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1 for six years at 10% is 4.79079. The present value of an annuity due of 1 for six years at 8% is 4.99271. Metcalf should record the lease liability as a. $848,761. b. $814,435. c. $723,943. d. $694,665.

a. $848,761.

Which of the following is (are) the proper time period(s) to record the effects of a change in accounting estimate? a. Current period and prospectively b. Current period and retrospectively c. Retrospectively only d. Current period only

a. Current period and prospectively

In 2025, Regner Company discovered an error while preparing its 2025 financial statements. A building constructed in 2024 costing $1,200,000 has not been depreciated. The estimated useful life of the building is 30 years with no salvage value. Straight-line depreciation is used. Regner did include depreciation on their tax return also using straight-line depreciation. Income tax payable was also reported correctly at a tax rate of 25%. Income before depreciation expense in 2025 was $300,000. What is the appropriate journal entry to record the prior period adjustment? a. Retained Earnings ......................30,000 Deferred Tax Asset... ..................10,000 Accumulated Depreciation........ 40,000 b. Retained Earnings ......................40,000 Accumulated Depreciation....... 40,000 c. Retained Earnings ......................30,000 Accumulated Depreciation........ 30,000 d. Retained Earnings ..................

a. Retained Earnings ......................30,000 Deferred Tax Asset... ..................10,000 Accumulated Depreciation........ 40,000

When correcting a change due to error, the restatement approach is employed by a. correcting all prior period statements presented. b. reporting current and future financial statements with the error corrected. c. just disclosing the impact on prior years in a footnote to the financial statements. d. correcting the impacted accounts in the current year only.

a. correcting all prior period statements presented.

Medical Equipment Leasing Company leased equipment to Hanover Healthcare System on January 1, 2025, for a four-year period. Equal annual payments under the lease are $250,000 and are due on January 1 of each year. The first payment was made on January 1, 2025. The implicit rate of interest contemplated by Medical Equipment Leasing and known to Hanover Healthcare is 8%. Hanover's incremental borrowing rate is 10%. The cost of the equipment on Medical Equipment Leasing accounting records was $775,000. Assuming that the lease is appropriately recorded as an operating lease, on January 1 of each year when the payment is received and recorded by Medical Equipment Leasing Company as a debit to Cash, there would also be a: a. credit to Unearned Lease Revenue of $250,000. b. credit to Lease Revenue of $250,000. c. credit to Gain on Sale of Asset of $56,250. d. credit to Accumulated Depreciation of $250,000.

a. credit to Unearned Lease Revenue of $250,000.

Failure to accrue wages in a prior period is a counterbalancing error that would cause a. net income to be overstated in the prior period. b. net income to be overstated in the current period. c. net income to be understated in the prior period. d. no impact on net income.

a. net income to be overstated in the prior period.

Fleming Company provided the following information on selected transactions during 2024: Dividends paid to preferred stockholders $ 500,000 Loans made to affiliated corporations 1,400,000 Proceeds from issuing bonds 1,600,000 Proceeds from issuing preferred stock 2,100,000 Proceeds from sale of equipment 800,000 Purchases of inventories 2,400,000 Purchase of land by issuing bonds 600,000 Purchases of treasury stock 1,200,000 The net cash provided (used) by investing activities during 2024 was a. $(1,200,000). b. $(600,000). c. $200,000. d. $800,000.

b. $(600,000).

The balance in retained earnings at December 31, 2024 was $1,440,000 and at December 31, 2025 was $1,164,000. Net income for 2025 was $1,000,000. A stock dividend was declared and distributed, increasing common stock by $500,000 and paid-in capital by $220,000. A cash dividend was also declared and paid. The amount of the cash dividend was a. $496,000. b. $556,000. c. $776,000. d. $1,276,000.

b. $556,000.

Equipment that cost $875,000 and had a book value of $390,000 was sold for proceeds of $450,000. Data from the comparative balance sheets are: 12/31/25 12/31/24 Equipment $5,400,000 $4,875,000 Accumulated Depreciation 1,650,000 1,425,000 Depreciation expense for 2025 was a. $770,000. b. $710,000. c. $135,000. d. $90,000.

b. $710,000.

When preparing a statement of cash flows, the following are used for which method in determining cash flows from operating activities? Gross Accounts Receivable Net Accounts Receivable a. Indirect Direct b. Direct Indirect c. Direct Direct d. Neither Indirect

b. Direct Indirect

Which of the following is not accounted for as a change in accounting principle? a. a change from LIFO to FIFO for inventory valuation b. a change to a different method of depreciation for plant assets c. a change from full cost to successful efforts in the extractive industry d.a change from the completed contract to the percentage-of-completion method

b. a change to a different method of depreciation for plant assets

Which of the following is an example of an accounting error that would not require correction? a. changing from the cash basis to the accrual basis of accounting b. correcting a $2,000 payroll error from a total payroll of $5,000,000 c. failure to include a significant $50,000 salvage value in computing the depreciation base for the straight-line method d. adopting a depreciation policy that sets all useful lives at 40 years, regardless of the asset

b. correcting a $2,000 payroll error from a total payroll of $5,000,000

When a lease is classified as an operating lease, a. no asset or liability is recorded by the lessee, only a rental expense. b. the lessee records a right-of-use asset and a lease liability. c. the lessee records only a lease liability. d.the lessor no longer records depreciation expense

b. the lessee records a right-of-use asset and a lease liability.

A lessor with a sales-type lease involving an unguaranteed residual value at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts? a. the lease payments plus the unguaranteed residual value b. the sales price less the present value of the unguaranteed residual value c. the cost of the asset to the lessor, less the present value of any unguaranteed residual value d. the present value of the lease payments plus the present value of the unguaranteed residual value

b. the sales price less the present value of the unguaranteed residual value

At the beginning of 2024, a construction company that began operations in 2022 changed from the completed-contract method to the percentage-of-completion method for accounting purposes but not for tax purposes. Gross profit figures under both methods for the past three years appear below Completed-Contract Percentage-of-Completion 2022 $475,000 $ 900,000 2023 625,000 950,000 2024 700,000 1,050,000 total $1,800,000 $2,900,000 The company reports two years of comparative statements. Assuming an income tax rate of 20% for all years, the effect of this accounting change on prior periods after taxes should be reported by a credit of a. $880,000 on the 2023 income statement. b. $600,000 on the 2024 income statement. c. $880,000 on the 2024 retained earnings statement. d. $340,000 on the 2023 retained earnings statement.

d. $340,000 on the 2023 retained earnings statement.

Which of the following is reported on a statement of cash flows? a. a stock dividend b. a stock split c. an appropriation of retained earnings d. None of the choices is correct.

d. None of the choices is correct.

Which of the following is accounted for as a change in accounting principle? a. a change in the estimated useful life of plant assets. b. a change from the cash basis of accounting to the accrual basis of accounting. c. a change from expensing immaterial expenditures to deferring and amortizing them as they become material. d. a change in inventory valuation from average cost to FIFO.

d. a change in inventory valuation from average cost to FIFO.

Financing activities do not include cash outflows to a. stockholders as dividends. b. lenders to pay off long-term debt. c. stockholders to repurchase common stock. d. make loans to other entities.

d. make loans to other entities.