Acc4356 Exam 2 Concepts
Samson Inc. leases equipment from Gerhard for a six-year period. The lease contract includes a purchase option, the conditions of which make it likely that Samson will exercise the option. The equipment's estimated useful life is eight years. Samson should amortize the associated right-to-use asset over A) 8 years. B) 6 years. C) 7 years. D) either 6 or 8 years
A) 8 years
Which of the following is not part of the IFRS revaluation rules for tangible long-lived assets? A) A company can elect to revalue individual assets. B) If a company elects to revalue any assets, all assets of a similar class must be revalued. C) Once assets are revalued, they must be kept up to date through regular reassessments. D) If an asset is written up, the revaluation surplus account must be reclassified each year to retained earnings.
A) A company can elect to revalue individual assets.
Which of the following statements is correct? A) Amortization of discount on bonds payable (bond discount) results in an increase in a bond's carrying value. B) Amortization of discount on bonds payable (bond discount) results in a decrease in bond interest expense. C) Amortization of premium on bonds payable (bond premium) results in an increase in a bond's carrying value. D) Amortization of premium on bonds payable (bond premium) results in an increase in bond interest expense.
A) Amortization of discount on bonds payable (bond discount) results in an increase in a bond's carrying value.
Which one of the following items would be charged to the cost of a building rather than the cost of land? A) Architectural fees. B) Grading of land. C) Demolition of an existing structure. D) Cost of hauling material from a demolished structure.
A) Architectural fees.
Which of the following is an accurate statement regarding testing for impairments of tangible assets and amortizable intangible assets? A) Assets may be tested as a group if they are used in combination with other assets in the group. B) Assets are to be tested only as individual assets. C) Assets may be tested as a group only if they were purchased as a group. D) Assets need not to be tested for impairment annually
A) Assets may be tested as a group if they are used in combination with other assets in the group.
Which of the following statements regarding inventory accounting is false? A) By charging the oldest costs to the income statement, LIFO automatically includes in income any holding gains on the units that are sold. B) Under either FIFO or LIFO it is not possible to simultaneously reflect both the balance sheet inventory and cost of goods sold at current cost. C) When purchases and sales occur continuously, the costs incurred most recently will be virtually identical to current replacement cost so LIFO provides a good match between current costs and current revenues. D) To get the most recent prices into cost of goods sold, a company using LIFO will use the periodic inventory system, rather than a perpetual system, to compute its ending inventory and cost of goods sold.
A) By charging the oldest costs to the income statement, LIFO automatically includes in income any holding gains on the units that are sold.
Which of the following statements is true regarding a troubled debt restructuring? A) In a troubled debt restructuring, there is a lack of symmetry in the financial reporting of the borrower and lender. B) A troubled debt restructuring can only be accomplished through a continuation with modification of debt terms including cancelation of the original loan and execution of a new loan agreement. C) In a troubled debt restructuring, GAAP restructuring gains and losses for accounting are equal to real economic gains and losses for the companies involved. D) All accounting aspects of a troubled debt restructuring are explicitly covered by IFRS.
A) In a troubled debt restructuring, there is a lack of symmetry in the financial reporting of the borrower and lender.
Which of the following is correct with respect to ASU 842 for lease accounting? A) It retained the distinction between operating and finance leases for lessees. B) It is mandatory for fiscal years beginning after December 15, 2020 and may not be adopted early. C) It requires the lessee to record a prepaid asset and a lease liability. D) It allows the lessee to decide what borrowing rate to use to value the lease obligation.
A) It retained the distinction between operating and finance leases for lessees.
Roberts owns 100 shares of $1,000 face amount convertible bonds issued by Bearny Inc. Choose the statement that correctly describes this transaction. A) Roberts may choose to exchange the bonds for Bearny Inc. common stock, or retain the bonds until maturity. B) Roberts must exchange the bonds for Bearny Inc. common stock prior to maturity. C) Roberts must exchange the bonds for Bearny Inc. common stock at maturity. D) Bearney Inc. may require that Roberts exchange the bonds for its common stock.
A) Roberts may choose to exchange the bonds for Bearny Inc. common stock, or retain the bonds until maturity.
Which of the following statements is not correct for sale-and-leaseback transactions consistent ASC Topic 842? A) Seller-lessees have higher motivation to enter into a finance lease under ASC 842 than they did under prior GAAP (ASC 840). B) If the sellerlessee has the option to repurchase the asset at less than fair value of the asset at time of exercise, the transaction is not treated as a sale. C) If control of the asset has not been given up, the transaction is not a sale. D) The changes in ASC 842 give seller-lessees less incentive to enter into sale-andleaseback transactions.
A) Seller-lessees have higher motivation to enter into a finance lease under ASC 842 than they did under prior GAAP (ASC 840).
Which of the following is not a valid statement regarding floating-rate debt? A) The accounting entries are more complex due to the risksharing characteristics of floating rate debt. B) Floating-rate debt may benefit the issuing company if market rates fall. C) Floating-rate debt can protect the investor if market rates increase. D) Floating-rate debt is used to lower the company's overall borrowing cost.
A) The accounting entries are more complex due to the risksharing characteristics of floating rate debt.
Which of the following statements regarding inventory accounting is false? A) The tax advantage of LIFO is that it provides a lower net income than FIFO during periods of rising prices and decreasing inventory quantities. B) Managers can avoid the negative tax implications of LIFO liquidations by purchasing enough inventory before year-end to bring inventory up to the level at the start of the year. C) The size of the difference between cost of goods sold under FIFO and cost of goods sold under replacement cost depends on the amount of change in input cost as well as the inventory turnover. D) To avoid providing an incentive for managers to engage in intentional LIFO liquidations, bonus contracts should subtract out any profits from LIFO liquidations.
A) The tax advantage of LIFO is that it provides a lower net income than FIFO during periods of rising prices and decreasing inventory quantities.
Which of the following statements is false regarding factoring receivables? A) When a company factors its receivables with recourse, it cannot be required to make a payment to the factor if a customer's account proves to be uncollectible. B) When a company accepts credit cards, it is engaging in a form of factoring. C) Factoring can be done either with or without recourse. D) When a company sells its accounts receivable to a factor with recourse, a recourse obligation that is recorded would be a credit entry on its books.
A) When a company factors its receivables with recourse, it cannot be required to make a payment to the factor if a customer's account proves to be uncollectible.
Which of the following statements regarding inventory accounting is true? A) When using the absorption costing method, all production costs should be inventoried. B) Use of the variable costing method is preferred under GAAP. C) When variable costing is used, fixed production costs are included as a part of inventory cost. D) Companies frequently disclose the effects of absorption costing on reported net income
A) When using the absorption costing method, all production costs should be inventoried.
Regan, Inc. implemented a program to improve the collection of its receivables. Over the past two years, the company has collected 88% of its receivables, up from 80%. A review of the company's financial statements would be expected to show: A) a reduction in the percentage of the allowance for credit losses to receivables. B) an increase in the percentage of the allowance for credit losses to receivables. C) no difference in the percentage of the allowance for credit losses to receivables. D) None of these answer choices are correct.
A) a reduction in the percentage of the allowance for credit losses to receivables.
Current ratio distortion under LIFO inventory costing may be adjusted by A) adding the LIFO reserve to current assets. B) subtracting the LIFO reserve from current assets. C) adding the LIFO reserve to current liabilities. D) subtracting the LIFO reserve from current liabilities.
A) adding the LIFO reserve to current assets.
25) Information about credit quality, amortization cost by credit quality indicator for the prior five years and in the aggregate, and the methodology for estimating credit losses must be disclosed for A) all receivables reported at amortized cost B) only receivables expected to be collected within one year C) only receivables expected to be collected over a period exceeding one year D) only interestbearing notes
A) all receivables reported at amortized cost
U.S. GAAP for long-lived assets significantly impedes rate-of-return comparisons across companies unless the firms: A) apply the same depreciation methods and the same useful lives among similar groups of assets. B) market their products to the same customers. C) are of approximately the same size. D) have similar operating cycles.
A) apply the same depreciation methods and the same useful lives among similar groups of assets.
When interest rates have increased and bonds are retired before maturity, market value is: A) below book value generating an accounting gain. B) below book value generating an accounting loss. C) above book value generating an accounting gain. D) above book value generating an accounting loss.
A) below book value generating an accounting gain.
A seller/lessee who enters into a sale and leaseback agreement that does not meet revenue recognition criteria under ASC Topic 606 must account for the lease as a A) finance lease. B) operating lease. C) short-term lease. D) sales-type lease.
A) finance lease.
Amortizable intangible assets include all of the following except: A) goodwill. B) patents. C) copyrights. D) employment contracts.
A) goodwill
101) When the differences in useful lives of long-lived assets reflect real economic differences, the attempt on the part of financial analysts to undo these differences may: A) impede profit and loss comparisons. B) enhance profit comparisons. C) enhance profit comparisons, but impede loss comparisons. D) enhance profit and loss comparisons.
A) impede profit and loss comparisons.
Analysts must be aware that with the use of absorption costing, as inventory absorbs more fixed costs, reported net income tends to: A) increase. B) decrease. C) remain the same. D) become highly volatile.
A) increase.
Floating-rate debt is the most common method for lenders to protect themselves from losses that may arise as a result of: A) increases in the market interest rate. B) decreases in the market interest rate. C) increases in the stated interest rate on bonds. D) decreases in the stated rate on bonds.
A) increases in the market interest rate.
Flimm Company leases an asset over its estimated useful life of six years. At the inception of the lease, the present value of the lease payments is $240,000. The market value of the leased asset is $258,000. The "property rights approach" is evident under ASB Topic 842 and IFRS No. 16 because both standards require that the A) lessee recognize an asset and a liability for leases exceeding one year. B) leased property is transferred to the lessee at the end of the lease term. C) lessor must transfer the leased property at the inception of the lease. D) lessee must guarantee a residual value of the leased property
A) lessee recognize an asset and a liability for leases exceeding one year.
Financial analysts recognize that the deficiency of the FIFO cost flow assumption is the failure to A) match current costs with current revenues. B) match current costs with oldest revenues. C) match oldest costs with current revenues. D) match oldest costs with oldest revenues
A) match current costs with current revenues.
To preclude firms from generating artificial gains on exchange transactions being recorded at fair value, U.S. GAAP requires that the transaction: A) must possess commercial substance. B) have future cash flows that remain substantially the same. C) be reviewed and approved by the SEC. D) All of these answer choice criteria must be met to book an exchange transaction at the fair value of the exchanged assets.
A) must possess commercial substance.
The seller/lessee under a sales leaseback agreement that meets the criteria consistent with ASC Topic 606 must treat the leaseback portion as a(n) A) operating lease. B) short-term lease. C) finance lease. D) sales-type capital lease
A) operating lease.
An impairment loss is reported on the income statement as: A) part of income from continuing operations. B) an extraordinary item. C) part of income from discontinued operations. D) an accounting change.
A) part of income from continuing operations.
Blume Corporation leases equipment for a ten-month period. The entire related lease payment is due at the end of the ten-month period. The journal entry to recognize the monthly accrual related to the lease will include a debit to: A) short-term lease expense. B) accrued lease expense. C) leased equipment. D) interest expense.
A) short-term lease expense.
Goods held on consignment are included in the inventory valuation of: A) the consignor. B) the consignee. C) both the consignor and the consignee. D) neither the consignor nor the consignee.
A) the consignor.
Under current U.S. GAAP, the transferor of receivables to a securitization entity (SE) that it has formed should treat the transfer as a collateralized borrowing instead of a sale if the transferor has: A) the power to direct the activities of the SE and the right to participate in the SE's gains and losses. B) the power to direct the activities of the SE but not the right to participate in the SE's gains and losses. C) limited control over the sale of the securities. D) None of these answer choices are correct.
A) the power to direct the activities of the SE and the right to participate in the SE's gains and losses.
When a financial analyst adjusts a company's reported depreciation expense to improve comparisons of profitability with another firm that uses the same depreciation method, the analyst assumes all of the following to be true except that: A) the useful lives differences are "real". B) the dollar breakdown within asset categories is similar for both firms (i.e., both have similar amounts of buildings vs. leasehold improvements, etc.). C) salvage value proportions are roughly equivalent for both firms. D) the useful life differences are artificial.
A) the useful lives differences are "real".
The difference in the lessor's income recognition over the life of the lease, between an operating lease and a sales-type lease is: A) zero. B) the amount of the interest revenue. C) the financing revenue minus the depreciation. D) the depreciation expense.
A) zero.
Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus $8,000 accrued interest. On October 1, 20X1. Island and Mutual Bank execute an agreement whereby Island will pay Mutual $128,000 on the due date of the note on October 1, 20X3. What effective interest rate will Island use for the restructured note? A) 8.7% B) 8.9% C) 10.0% D) 13.1%
B) 8.9%
Which of the following statements regarding inventory accounting is false? A) The inventory carrying cost should include storage costs. B) A manufacturing firm that uses a just-in-time system, and wants to avoid "stockouts" if possible, would prefer a periodic inventory system. C) The use of computerized optical scanning equipment has led to the adoption of perpetual inventory systems in high-volume settings. D) Inventory carrying cost should include transportation costs that are paid by the purchaser
B) A manufacturing firm that uses a just-in-time system, and wants to avoid "stockouts" if possible, would prefer a periodic inventory system.
When two companies exchange products to facilitate sales to customers and the exchange also includes a cash payment, which of the following is the proper treatment of the transaction by the recipient of the cash? A) No gain or loss is recorded. B) A portion of any gain is recorded. C) The inventory received is recorded at the same value as the inventory relinquished. D) All the cash received is recognized as a gain.
B) A portion of any gain is recorded.
Which of the following statements regarding inventory accounting is false? A) IFRS requires the use of absorption costing. B) Both U.S. GAAP and IFRS apply lower of cost or market in the same manner when accounting for inventory. C) IFRS permits inventory reductions due to lower of cost or market writedowns to be reversed if the market recovers. D) Since the use of LIFO is not allowed under IFRS, inventory holding gains are included in income.
B) Both U.S. GAAP and IFRS apply lower of cost or market in the same manner when accounting for inventory.
Which of the following is not a difference between U.S. GAAP and IFRS treatment of impaired assets? A) The use of discounted cash flow. B) Due to differences, U.S. GAAP may trigger an impairment loss that would not be triggered by IFRS. C) The right to reverse prior impairment losses when there is a change in the estimates used to measure the loss. D) In determining the valuation, costs to sell are deducted from fair value.
B) Due to differences, U.S. GAAP may trigger an impairment loss that would not be triggered by IFRS.
TAD, Inc. uses the LIFO-lower of cost or market method to value inventory. If the inventory value is replacement cost, which one of the following statements is true? A) Historical cost is less than replacement cost. B) Replacement cost is greater than net realizable value less a normal profit margin. C) Replacement cost is greater than historical cost. D) Net realizable value is greater than historical cost.
B) Replacement cost is greater than net realizable value less a normal profit margin.
150) Which of the following statements is correct with respect to the use of fair value accounting for liabilities under IFRS? A) Both IFRS and U.S. GAAP require changes in credit quality to be recorded in operating income. B) The fair value option is permitted under IFRS only under two specific sets of circumstances. C) U.S. GAAP is more restrictive than IFRS regarding the use of fair value accounting for liabilities. D) Fair value accounting under IFRS is only permitted if the liabilities are actively managed on a fair value basis as part of the company's documented risk management or investment strategy.
B) The fair value option is permitted under IFRS only under two specific sets of circumstances.
Which one of the following explanations for the growth of accounts receivable outstripping the growth of sales represents a red flag? A) The firm adopts new credit terms that lengthen the payment terms to the industry average. B) The firm adopts an aggressive revenue recognition policy. C) The firm develops an attractive credit policy for first time buyers. D) The firm changes its timing of revenue recognition to a more conservative approach.
B) The firm adopts an aggressive revenue recognition policy.
Which of the following does not represent guidance for assets held for sale? A) They are reported in the discontinued section of the income statement. B) They are reported at the lower of book value or fair value. C) They are expected to be sold within one year. D) They are reported at the lower of book value or fair value less costs to sell.
B) They are reported at the lower of book value or fair value.
Which of the following statements regarding inventory accounting is false? A) Under U.S. GAAP, the cost flow assumption does not need to conform to the actual flow of the goods. B) Under U.S. GAAP, current cost (replacement cost) accounting may be used at the discretion of management with proper disclosure. C) The FIFO method of inventory valuation assumes that the first unit purchased is the first unit sold. D) The weighted average cost flow assumption generates numbers that are between the LIFO and FIFO assumptions.
B) Under U.S. GAAP, current cost (replacement cost) accounting may be used at the discretion of management with proper disclosure.
Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray's incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray believes that the equipment has a 10-year service life but has reason to suspect that a major overhaul might be required in the fifth to seventh year. Since this is the first year of the equipment's production, Ray warrants equipment for eight full years anyway. Ford uses which one of the following interest rates to record this lease? A) Use 9.0% because it is the lessee's incremental borrowing rate. B) Use 10.0% because it is the implicit lease rate of return to the lessor. C) Use 8.5% because it is the lesser of the implicit rate and Ray's incremental borrowing rate. D) Use 9.0% because it is the lesser of the implicit rate and Ford's incremental borrowing rate.
B) Use 10.0% because it is the implicit lease rate of return to the lessor.
When the market rate of interest is below the stated rate of interest, a bond sells at: A) par. B) a premium. C) a discount. D) stated value.
B) a premium.
If a lease contains a residual value guarantee, the lessee must: A) add the guaranteed amount to the present value of the minimum lease payments. B) add the present value of the guaranteed amount to the present value of the minimum lease payments. C) include the guaranteed amount in the minimum lease payments only if the lessee intends to keep the asset at the end of the lease. D) ignore the guaranteed amount if the lessee intends to keep the asset at the end of the lease
B) add the present value of the guaranteed amount to the present value of the minimum lease payments.
Accounts receivables initially are recognized at A) the present value of the related future cash flows. B) amortized cost. C) net realizable value. D) the future value.
B) amortized cost.
Gwen Inc. operates in a regulated industry. Recently passed regulation will require an additional expenditure of $54,000 to dispose of one of Gwen Inc.'s operational assets, which is expected to be retired in four years. The asset was acquired five years ago, with a nine-year estimated service life. A liability related to the newly legislated disposal cost should be recognized A) retrospective to the date of acquisition. B) at the date new regulation was passed. C) over the service life of the asset. D) at the end of the asset's service life.
B) at the date new regulation was passed.
The use of the fair value option tends to: A) increase income volatility. B) decrease income volatility. C) increase financial statement conservatism. D) decrease the relevance of information presented in the financial statements.
B) decrease income volatility.
Margot leases equipment with an estimated useful life of five years, for a term of four years. Margot should classify this lease as a (n) A) operating lease. B) finance lease. C) short-term lease. D) purchase.
B) finance lease
Ambiguity can arise as to whether receivables have been sold or instead are being used as collateral for a loan whenever certain obligations, duties, or rights regarding the transferred receivables are retained by the transferor. In distinguishing between sales and collateralized borrowings using receivables, the critical issue: A) is whether the terms regarding the transfer were initiated by the transferor or transferee. B) is whether the transferor surrenders control over the receivables. C) comes down to how clearly the rights, etc. being retained are specified in the transfer agreement. D) is whether any gain or loss related to the transfer is recognized in earnings.
B) is whether the transferor surrenders control over the receivables.
When market rates of interest decrease, the use of floating-rate debt benefits: A) investors. B) issuing companies. C) all parties. D) no one.
B) issuing companies.
LIFO's tax advantage is that: A) it provides a higher net income than FIFO during periods of rising prices and level inventory quantities. B) it provides a lower net income than FIFO during periods of rising prices and level inventory quantities. C) it provides a lower net income than FIFO during periods of falling prices and level inventory quantities. D) it provides a lower net income than FIFO during periods of rising prices and decreasing inventory quantities.
B) it provides a lower net income than FIFO during periods of rising prices and level inventory quantities.
Under IFRS, research must be expensed but some development expenditures may be capitalized. To capitalize development expenditures, firms must demonstrate several factors that include all of the following except: A) technical feasibility. B) length of time the intangible asset is expected to provide benefits. C) ability to use or sell the asset. D) how the intangible asset will generate probable future economic benefits.
B) length of time the intangible asset is expected to provide benefits.
Some financial analysts contend that reporting debt at amortized historical cost rather than at fair value: A) makes it more difficult to manipulate accounting numbers. B) makes it easier to manipulate accounting numbers. C) has no impact on the accounting numbers. D) makes it impossible to manipulate the accounting numbers
B) makes it easier to manipulate accounting numbers.
GAAP establishes specific criteria for the treatment of leases under ASC 842. If any of the criteria are met, the lessee A) must treat the lease as an operating lease. B) must treat the lease as a finance lease. C) may choose the treatment if two or less criteria are met. D) may elect to treat the lease as an operating lease if only one criterion is met.
B) must treat the lease as a finance lease.
When a firm does not adopt the fair value option, it A) need not disclose the fair value of its longterm notes receivable or accounts receivable B) still must disclose the fair value of its longterm notes receivable but need not disclose the accounts receivable fair value if the fair values approximates the reported value C) must disclose the fair value of its long-term notes receivable only if the reported value exceeds fair value D) must disclose both the fair value of both notes and accounts receivable under all circumstances
B) still must disclose the fair value of its longterm notes receivable but need not disclose the accounts receivable fair value if the fair values approximates the reported value
Over the lease term, the total income derived from a lease is _______ if the lease is classified as a sales-type lease instead of an operating lease. A) higher B) the same C) lower D) depends on the interest rate applied to the lease
B) the same
Which of the following is not an accurate statement regarding asset retirement obligations (AROs)? A) A liability is recorded at its present value and the liability increases over time. B) A liability is computed using a credit-adjusted risk-free rate. C) A liability is recorded with a credit entry in a contra-asset account. D) An annual expense is recorded as accretion expense.
C) A liability is recorded with a credit entry in a contra-asset account.
Which of the following statements is not correct regarding amortization when using the effective interest method (basis)? A) Amortization of discount on bonds payable (bond discount) increases in later years relative to earlier years of a bond's life. B) Amortization of premium on bonds payable (bond premium) increases in later years relative to earlier years of a bond's life. C) Amortization of both premium on bonds payable (bond premium) and discount on bonds payable (bond discount) decreases in later years relative to earlier years of a bonds life. D) Amortization of discount on bonds payable (bond discount) results in an increase in interest expense and in an increase in the bond's carrying value.
C) Amortization of both premium on bonds payable (bond premium) and discount on bonds payable (bond discount) decreases in later years relative to earlier years of a bonds life.
Amortization of discount on bonds payable (bond discount) results in which of the following? A) A decrease in bond interest expense. B) An increase in net income. C) An increase in the carrying value of the bond. D) An increase in stockholders' equity due to the decrease in bond interest expense
C) An increase in the carrying value of the bond.
Which of the following is false regarding uncollectible accounts? A) Most companies establish credit policies by weighing the expected cost of credit sales against the expected benefit of increased sales. B) Accrual accounting requires that some estimate of uncollectible receivables be offset against current period sales. C) Companies are generally not able to adopt stringent credit standards to keep credit losses at a minimum. D) To manage credit losses, companies often choose a profitmaximizing balance which makes uncollectible accounts unavoidable
C) Companies are generally not able to adopt stringent credit standards to keep credit losses at a minimum.
Which item below is not an accurate description of lessor disclosures under ASC 842? A) Disclosure includes qualitative and quantitative information. B) Disclosure includes the same maturity information required under ASC Topic 840, the lease standard. C) Disclosure includes operating lease income only for amounts that are variable payments. D) Disclosure includes the profit or loss associated with a sales type lease.
C) Disclosure includes operating lease income only for amounts that are variable payments.
The double extension method is an alternate term for A) Weighted average cost flow assumption B) Specific identification method C) Dollar-value LIFO D) FIFO cost flow assumption
C) Dollar-value LIFO
Which of the following is used to measure the amount of the write-down that must be recognized on an impaired asset such as depreciable equipment? A) Undiscounted total future cash inflows minus future outflows. B) Undiscounted total future cash inflows minus the current carrying value of the asset. C) Fair value of the asset minus the current carrying value of the asset. D) Discounted total future cash inflows minus future outflows.
C) Fair value of the asset minus the current carrying value of the asset.
Financial analysts can make comparisons between the long-lived assets of two companies, both of which use straight-line depreciation, by computing the average useful life of assets with which one of the following formulas? A) Net depreciable property, plant, and equipment/averag e useful life. B) Gross depreciable property, plant, and equipment/averag e useful life. C) Gross depreciable property, plant, and equipment/straight -line depreciation expense. D) Straight-line depreciation expense/net depreciable property, plant, and equipment
C) Gross depreciable property, plant, and equipment/straight -line depreciation expense.
According to U.S. GAAP, technological feasibility is established when an entity has completed all of the following activities necessary to establish that a product can be produced, except: A) Coding. B) Designing. C) Measuring. D) Planning
C) Measuring.
Which of the following is a correct statement about preparing a balance sheet? A) All current liabilities must be due within the current calendar year. B) Bonds payable are reported in longterm liabilities with the current year portion shown separately in that section of the balance sheet. C) Some financial instruments possess the characteristics of both debt and equity. D) A financial instrument's legal form will define how it is classified on the balance sheet.
C) Some financial instruments possess the characteristics of both debt and equity.
Which of the following is not a true statement regarding the fair value accounting option? A) The fair value option mutes earnings volatility. B) The fair value option reduces the need to comply with complex hedge accounting guidance. C) The fair value option increases earning volatility. D) The fair value option converges U.S. GAAP and IFRS by having an identical standard.
C) The fair value option increases earning volatility.
Regarding accounts receivable and an allowance for credit losses account, which of the following statements is false? A) Net realizable value equals the sales price of an item less reasonable further costs to both make the item ready to sell and to sell it. B) An aging of accounts receivable is a determination of how long each receivable has been on the books. C) The net realizable value of accounts receivable is decreased when a credit loss is written off. D) Receivables that result from transactions other than trade receivables, if material, are to be separately disclosed on the balance sheet.
C) The net realizable value of accounts receivable is decreased when a credit loss is written off.
Which of the following statements regarding inventory accounting is true? A) FIFO charges the most recent costs against revenues on the income statement. B) In the U.S., FASB prefers replacement cost accounting because it records holding gains on the financial statements as they arise. C) The primary difference between FIFO and LIFO is that each method makes a different choice regarding which financial statement element is shown at the out-of-date cost. D) The specific identification method of inventory accounting is generally considered to be the most prevalent.
C) The primary difference between FIFO and LIFO is that each method makes a different choice regarding which financial statement element is shown at the out-of-date cost.
In a troubled debt restructuring, the restructured loan can differ from the original loan in any of the ways listed below except: A) Scheduled interest and principal payments may be reduced or eliminated. B) The repayment schedule may be extended over a longer time period. C) The repayment schedule is shortened and the interest rate is significantly increased. D) The customer and lender can settle the loan
C) The repayment schedule is shortened and the interest rate is significantly increased.
Which of the following statements regarding inventory accounting is false? A) A cash purchase discount that is lost due to a late payment should be recorded as interest expense rather than a cost of acquiring inventory. B) Vendor allowances should be used by the buyer to lower the cost of inventory and the cost of goods sold. C) U.S. GAAP requires that inventory costs should include the costs of the purchasing department and other administrative costs incurred with the acquisition and distribution of inventory. D) Product costs, i.e. raw material, labor and certain overhead items, should be assigned to inventory and treated as assets until the inventory is sold.
C) U.S. GAAP requires that inventory costs should include the costs of the purchasing department and other administrative costs incurred with the acquisition and distribution of inventory.
125) Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 5%. These bonds will sell in the market at: A) par. B) a discount. C) a premium. D) stated value.
C) a premium.
Inventory turnover distortion under LIFO inventory costing may be adjusted by: A) adding the LIFO reserve amounts to cost of goods sold and adjusting beginning and ending inventory for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs. B) subtracting the LIFO reserve amounts from cost of goods sold and adjusting beginning and ending inventory for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs. C) adding the LIFO reserve amounts to beginning and ending inventory and adjusting cost of goods sold for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs. D) subtracting the LIFO reserve amounts from beginning and ending inventory and adjusting cost of goods sold for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs.
C) adding the LIFO reserve amounts to beginning and ending inventory and adjusting cost of goods sold for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs.
LIFO layers are more likely to be liquidated when inventory records are kept on: A) an inventory group basis. B) a total inventory basis. C) an item-byitem basis. D) a specific identification basis.
C) an item-byitem basis.
The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on: A) the severity of input cost changes. B) the rapidity of physical inventory turnover. C) both the severity of input cost changes and the rapidity of physical inventory turnover. D) the rate of inflation.
C) both the severity of input cost changes and the rapidity of physical inventory turnover.
The use of the lower of cost or market (LIFO--LCM) method to value inventory indicates a probable loss has been sustained. This is an application of the accounting principle of: A) matching. B) going concern. C) conservatism. D) consistency.
C) conservatism.
Research findings almost uniformly indicate that existing U.S. GAAP for both R&D and software development is: A) satisfactory as written. B) objective. C) conservative. D) liberal.
C) conservative.
Net realizable value of receivables is gross receivables minus A) provision for credit losses and sales returns. B) provision for credit losses and estimated returns and allowances. C) estimated provision for credit losses and estimated returns and allowances. D) proven credit losses and estimated returns and allowances.
C) estimated provision for credit losses and estimated returns and allowances.
Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray's incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray believes that the equipment has a 10-year service life but has reason to suspect that a major overhaul might be required in the fifth to seventh year. Since this is the first year of the equipment's production, Ray warrants equipment for eight full years anyway. On Ford's books, this lease is treated as a/an: A) operating lease. B) short-term lease. C) finance lease. D) sales-type capital lease
C) finance lease.
The dominant method under GAAP for measuring long-lived assets is the: A) expected benefit approach. B) discounted present value approach. C) historical cost approach. D) replacement cost approach.
C) historical cost approach.
The mechanics of absorption costing can lead to year-to-year income changes: A) whenever inventory levels remain fairly constant. B) if the productivity of factory workers improves. C) if production and sales levels are not the same. D) when raw material prices are increasing.
C) if production and sales levels are not the same.
Donau Inc. performs services with a normal contract price of $265,000 for a new customer. The customer signs a non-interest bearing note of $300,000. The differences between the normal contract price and the face amount of the note is considered A) a sales discount. B) a credit allowance. C) imputed interest. D) additional service revenue
C) imputed interest.
If a bank sells a mortgage portfolio at a price that yields the purchasers a return that is lower than the average yield on the mortgages in the portfolio, the selling price: A) is equal to the carrying value of the mortgages on the bank's books. B) is lower than the carrying value of the mortgages on the bank's books. C) is higher than the carrying value of the mortgages on the bank's books. D) cannot be determined by examining the carrying value of the mortgages on the bank's books because the selling price is determined purely by the market.
C) is higher than the carrying value of the mortgages on the bank's books.
When the sum of the future cash flows of a restructured note is above the current note's carrying value, the debtor recognizes: A) a gain on the debt restructure. B) a loss on the debt restructure. C) neither a gain nor a loss on the debt restructure. D) both a restructure gain and an early extinguishment loss.
C) neither a gain nor a loss on the debt restructure.
When applying lower of cost or market under IFRS, market is defined as: A) net realizable value less normal markup. B) replacement cost. C) net realizable value. D) the middle value among the above three alternatives.
C) net realizable value.
Prior to FASB issuing pre-codified Statement of Financial Accounting Standards (SFAS) No. 13, lessees classified virtually all leases as _______ leases, which under current GAAP is consistent with accounting for _______ leases A) operating, finance B) finance, operating C) operating, short-term D) short-term, operating
C) operating, short-term
Salt Corporation issues bonds with a face amount of $10 million and a stated interest rate of 8%. The market interest rate associated with the bonds is 6%. Bond issue costs are $200,000. The bond issue costs should be recognized as a: A) deferred charge. B) period expense. C) reduction of the bond premium. D) bond discount.
C) reduction of the bond premium.
Evaluation and testing for impairment assessments of indefinite-lived intangible assets: A) follows the same process as required for impairment evaluation and testing for tangible assets. B) requires only assessment of qualitative factors. C) requires a quantitative impairment test if, after a qualitative assessment, it is more likely than not that the asset is impaired. D) requires a two-step process to be completed for all impairment assessments
C) requires a quantitative impairment test if, after a qualitative assessment, it is more likely than not that the asset is impaired.
If a car dealership leases cars for four years with guaranteed purchase options, guaranteed residual values, and insured financing agreements, the dealership classifies the lease as a(n): A) operating lease. B) short-term lease. C) sales-type lease. D) finance lease
C) sales-type lease
The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on the rapidity of the inventory turnover and the: A) change in accounts receivable turnover. B) divergence of total asset turnover from previous periods. C) severity of input cost change. D) rapidity of fixed asset turnover.
C) severity of input cost change.
Presume that an asset exchange transaction does not culminate an earning process and that the transaction does not involve cash. In such a case: A) a gain will be recognized only when the fair value of the acquired assets exceeds the book value of the relinquished assets. B) a loss will be recognized only when the fair value of the acquired assets exceeds the book value of the relinquished assets. C) the assets acquired are recorded at the book value of the assets relinquished. D) a gain will be recognized only when the fair value of the acquired assets exceeds the fair value of the relinquished assets.
C) the assets acquired are recorded at the book value of the assets relinquished.
Consistent with ASC Topic 842, operating lease expense is equal to A) the amortization expense recognized for financing leases. B) the interest expense recognized for financing leases. C) the lease expense that would have been recognized if classified as a short-term lease. D) the amortization expense recognized if the asset had been purchased by lessee.
C) the lease expense that would have been recognized if classified as a short-term lease.
Per authoritative accounting literature, the determination of whether a transfer of receivables is a sale or collateralized borrowing hinges on whether the: A) transfer was with or without recourse. B) transferor collects payments directly from the customer. C) transferor surrenders control over the receivable. D) customer ultimately defaults.
C) transferor surrenders control over the receivable.
Which of the following is not an accurate description of the controversies surrounding the fair value accounting option? A) Advocates argue that accountinginduced volatility is eliminated and financial statement transparency is improved. B) Critics argue that opportunities are enhanced for companies to manipulate their earnings and balance sheet. C) Critics argue that companies that can use the fair value option in situations where there is not necessarily a relationship between the financial assets and liabilities which promotes the opportunity to manage earnings. D) Advocates argue that financial reporting is more accurate and transparent for those companies in financial distress.
D) Advocates argue that financial reporting is more accurate and transparent for those companies in financial distress.
Consistent with IFRS No. 7, the fair value must be disclosed for receivables and loans with the following characteristics: A) short-term maturity B) long-term maturity C) recognized at amortized cost D) All of these choices are correct
D) All of these choices are correct
Which of the following statements regarding inventory accounting is false? A) The choice of method for allocating the cost of goods available for sale between ending inventory and cost of goods sold represents the major issue in inventory accounting. B) The input cost changes that occur after the purchase of inventory items in a current cost accounting system are recognized as unrealized holding gains. C) If the cost of inventory never changed, the FIFO, LIFO and weighted average cost flow would produce the same financial statement result. D) Although many firms use the LIFO cost flow assumption, there are no examples where the actual physical flow of units is also last-in, firstout.
D) Although many firms use the LIFO cost flow assumption, there are no examples where the actual physical flow of units is also last-in, firstout. (Think quarry example)
Which of the following represent(s) a bond valuation account? A) Bond premium B) Bond discount C) Bond interest D) Both bond premium and discount
D) Both bond premium and discount
Which one of the following is an example of the expected benefit approach for valuing long-lived assets? A) Historical cost. B) Current replacement value. C) Salvage value. D) Discounted present value.
D) Discounted present value.
In comparing firms in the same industry, which of the following does not present a challenge for analysts? A) Differences in estimates of useful lives. B) The age of the companies being compared. C) The use of different depreciation methods. D) Each of these answer choices presents a challenge for analysts.
D) Each of these answer choices presents a challenge for analysts.
50) The conversion of a LIFO inventory to approximate the inventory at FIFO is accomplished through application of which one of the following formulas? A) FIFO inventory = LIFO inventory × LIFO reserve B) FIFO inventory = LIFO inventory ÷ LIFO reserve C) FIFO inventory = LIFO inventory − LIFO reserve D) FIFO inventory = LIFO inventory + LIFO reserve
D) FIFO inventory = LIFO inventory + LIFO reserve
When a company retires debt, which of the following is not an accurate statement? A) If the debt is retired at maturity, there is no opportunity for a gain or loss. B) If the debt was recorded using the fair value accounting option, there is no opportunity for a gain or loss. C) If a company retires debt early by issuing new debt at a lower market rate of interest, a gain on the extinguishment of debt will be recorded if the company did not elect to use the fair value accounting option. D) If a company finances the early retirement of debt by issuing new debt, GAAP prohibits recording a gain on the early retirement.
D) If a company finances the early retirement of debt by issuing new debt, GAAP prohibits recording a gain on the early retirement.
Which of the following statements with respect to floating-rate debt is incorrect? A) If the market rate of interest increases, the market value of the floating-rate debt will remain the same. B) If the market rate of interest decreases, the cash interest payment required by the issuing company would decrease. C) If the market rate of interest increases, the investors benefit while the issuing corporation does not benefit. D) If the market rate of interest decreases, both the issuing company and the investors benefit.
D) If the market rate of interest decreases, both the issuing company and the investors benefit.
Under ASC 842 for lease accounting, which statement below is not accurate with respect to financial reporting? A) Finance leases show separate amounts for amortization and interest expense. B) Lease expense is shown in the operating section of the statement of cash flows. C) Operating leases show total lease expenses as a single line item. D) Lease expense is shown in the financing section of the statement of cash flows.
D) Lease expense is shown in the financing section of the statement of cash flows.
In assessing whether an exchange transaction has commercial substance, the firm's future cash flows are expected to change significantly as a result of the exchange. Which item below does not describe whether a significant change in cash flow is expected? A) The risk, timing and amount of the future cash flows differs significantly from the future cash flows of the asset transferred. B) The entityspecific value of the asset differs from that of the asset transferred. C) The difference between the entity-specific value of the asset(s) received and the entityspecific value of the asset(s) transferred is significant in relation to the fair values of the assets. D) Only the timing and amount of future cash flows is required to be significant - risk and entity-specific value are optional.
D) Only the timing and amount of future cash flows is required to be significant - risk and entity-specific value are optional.
An analyst notes that ABC Inc.'s allowance for credit losses as a percentage of year-end accounts receivable has changed. Which of the following would not be a plausible explanation for the change? A) ABC's management expects a default rate on outstanding receivables different than prior years. B) ABC's management is using the allowance for credit losses to "manage" earnings. C) The company ages its receivables and the distribution of accounts receivable over the various age categories is different than prior years. D) The company has stopped making sales on credit.
D) The company has stopped making sales on credit.
U.S. GAAP capitalizes expenditures to upgrade long-lived assets when the expenditure causes any of the following conditions except: A) The useful life of the asset is extended. B) The capacity of the asset is increased. C) The efficiency of the asset is increased. D) There is an increase in the non-economic benefits associated with owning the asset (such as an increase in the appearance of the company's offices).
D) There is an increase in the non-economic benefits associated with owning the asset (such as an increase in the appearance of the company's offices).
75) Which of the following statements regarding inventory accounting is false? A) Firms that use LIFO must disclose the dollar magnitude of the difference between LIFO and FIFO cost. B) The LIFO reserve disclosure requirement is intended to help investors compare LIFO versus FIFO firms in a meaningful manner C) The formula to convert the cost of goods sold under LIFO to an estimate of the cost of goods sold under FIFO is: LIFO cost of goods sold minus increase in LIFO reserve equals FIFO cost of goods sold. D) U.S. GAAP prescribes a standardized format for disclosing the LIFO reserve.
D) U.S. GAAP prescribes a standardized format for disclosing the LIFO reserve.
Which of the following statements is false regarding accounts receivable reporting? A) Growth in accounts receivable could exceed sales growth because a firm allows its customers more time to pay. B) Many irregularities in receivables recognition can be discovered by tracking the relationship between changes in sales and changes in receivables. C) When a company adopts an aggressive revenue recognition policy, it can lead to significant journal entries of sales returns in later periods. D) When a firm's sales growth exceeds its growth in receivables, it could be an indication of aggressive revenue recognition policies.
D) When a firm's sales growth exceeds its growth in receivables, it could be an indication of aggressive revenue recognition policies.
Which of the following statements regarding inventory accounting is true? A) Analysts should be aware that when a company uses absorption costing, reported income tends to decrease as inventory absorbs more of the fixed costs. B) Variable costing includes more than the variable costs of production in the valuation of inventory. C) When physical inventory levels are decreasing and a company uses the absorption cost method, net income tends to increase. D) When physical inventory levels are increasing and a company uses the absorption cost method, net income tends to increase.
D) When physical inventory levels are increasing and a company uses the absorption cost method, net income tends to increase.
With a loan collateralized by receivables, A) the bank makes the loan without recourse. B) the bank has recourse against the accounts receivable customers. C) a company receives cash and is not responsible for repaying the loan. D) a company receives cash and is responsible for repaying the loan.
D) a company receives cash and is responsible for repaying the loan.
When certain kinds of assets are built that require public welfare and safety expenditures at the end of the asset's life, A) these estimated future expenditures are subtracted from the carrying value of the asset. B) these "asset retirement" costs are expensed when asset retirement occurs. C) this fact is only reported in the notes to the financial statements. D) a liability simultaneously arises for those future expenditures.
D) a liability simultaneously arises for those future expenditures.
Consistent with ASC topic 326, expected credit losses are recognized as A) a reduction of the related revenue. B) an addition to cost of goods sold. C) an aggregated expense. D) a separately reported loss.
D) a separately reported loss.
The major issue in inventory accounting is A) determining whether to take inventory using cycle counts instead of counting all inventory only at the end of the year. B) deciding whether to maintain records on a periodic or perpetual basis. C) determining what goods to include in inventory. D) choosing the method for allocating goods available for sale to ending inventory and cost of goods sold.
D) choosing the method for allocating goods available for sale to ending inventory and cost of goods sold.
Investors need to review transactions involving debt-for-debt swaps carefully to ensure that there is an underlying: A) loss. B) gain. C) rationale. D) economic benefit.
D) economic benefit.
Which one of the following ratios increases with the lessee's capitalization of a lease? A) Current ratio B) Return on equity C) Inventory turnover D) financial leverage
D) financial leverage
If a long-lived amortizable intangible asset's future undiscounted net cash flows fall below the asset's net book value, the asset is considered to be a/an: A) discontinued asset. B) discontinued operation. C) valuable asset. D) impaired asset.
D) impaired asset.
Erickson Company currently holds crypto currency. On its classified balance sheet, Erickson should report the crypto currency as A) cash and equivalents. B) current receivable. C) current investment. D) intangible asset.
D) intangible asset.
Management must periodically assess the reasonableness of the allowance for credit losses if it uses the A) direct writeoff method. B) percent of sales method only. C) percent of gross receivables method only. D) percent of sales or the percent of gross receivables method.
D) percent of sales or the percent of gross receivables method.
Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray's incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray believes that the equipment has a 10-year service life but has reason to suspect that a major overhaul might be required in the fifth to seventh year. Since this is the first year of the equipment's production, Ray warrants equipment for eight full years anyway. On Ray's books, this lease is treated as a(n): A) operating lease. B) short-term lease. C) finance capital lease. D) sales-type capital lease.
D) sales-type capital lease.
Morey Corporation leases a tractor from Equity Leasing with a five-year non-cancelable lease on January 1, 20X1 under the following terms: 1.Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year. 2.The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor. 3.The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term. 4.The tractor has a six-year economic life. 5.Morey has an excellent credit rating. 6.Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. For Equity Leasing, this is treated as a(n) A) operating lease. B) short-term lease. C) finance capital lease. D) sales-type capital lease.
D) sales-type capital lease.
Under ASC 842, the difference between the expense charged relating to a finance lease and an operating lease is: A) the amount of total expense, with a finance lease higher than an operating lease. B) the amount of total expense, with an operating lease higher than a finance lease. C) the number of years that recognize expense. D) the timing of the expense recognition.
D) the timing of the expense recognition.
