Accounting Exam 2

Majestic Inc. holds an investment in Cromwell bonds that pay interest each October 31. Majestic's balance sheet at December 31 should report A. interest receivable B. interest revenue C. interest payable D. interest expense

A.

Which of the following is NOT a capital expenditure? A. a tune up of a company vehicle B. the cost of installing a piece of equipment C. replacement of an old motor with a new one in a piece of equipment D. the addition of a building wing E. A complete overhaul of an air-conditioning system

A.

___________ writes inventory down when current replacement cost drops below historical cost

ALL of the inventory methods apply

___________ provides a middle-gound measure of ending inventory and cost of goods sold

Average-cost

Kline company failed to record depreciation of equipment. How does this omission affect Kline's financial statements? A. net income is overstated and assets are understated B. net income is overstated and assets are overstated C. net income is understated and assets are overstates D. net income is understated and assets are understated

B

In a period of rising prices, A. LIFO inventory will be greater than FIFO inventory B. gross profit under FIFO will be higher than under LIFO C. cost of goods sold under LIFO will be less than under FIFO D. net income under LIFO will be higher than under FIFO

B.

When applying the lower-of-cost-or market rule to inventory, "market" generally means A. original cost B. current replacement cost C. original cost, less physical deterioration D. resale value

B.

Which of the following items should be accounted for as a capital expenditure? A. costs incurred to repair leaks in the building roof B. Taxes paid in conjunction with the purchase of office equipment C. the monthly rental cost of an office building D. maintenance fees paid with funds provided by the company's capital

B.

Why would a business select an accelerated method of depreciation for tax purposes? A. accelerated depreciation method is easier to calculate because salvage value is ignored B. accelerated depreciation generates higher depreciation expense immediately, and therefore lowers tax payments in the early years of the asset's life. C. Accelerated depreciation generates a greater amount of depreciation over the life of the asset than does straight line depreciation D. MACRS depreciation follows a specific pattern of depreciation

B.

Which of the following assets is NOT subject to a decreasing book value through depreciation, depletion, or amortization? A. natural resources B. land improvements C. goodwill D. intangibles

C

A capital expense A. is expensed immediately B. is a credit like capital (owners equity) C. adds to an asset D. records additional capital

C.

An overstatement of ending inventory in one period results in A. no effect on net income of the next period B. an overstatement of net income of the next period C. an understatement of net income of the next period D. an understatement of the beginning inventory of the next period

C.

During a period of rising prices, the inventory method that will yield the highest net income and asset value is A. average cost B. LIFO C. FIFO D. specific identification

C.

Mac's investment is less than 2 percent of mobil's stock, which Mac expects to hold for three years and then sell, is what type of investment? A. equity B. trading C. available for sale D. consolidation

C.

Sales discount should appear in the financial statements A. as an addition to sales B. as an operating expense C. as a deduction from sales D. among the current liabilities E. as an addition to inventory

C.

Which statement is false? A. the cost of a plant asset minus accumulated depreciation equals the asset's book value. B. Depreciation is a process of allocating the cost of a plant asset over its useful life. C. Depreciation creates a fund to replace the asset at the end of its useful life. D. Depreciation is based on the expense recognition principle because it apportions the cost of the asset against the revenue generated over the asset's useful life.

C.

The sum of ending inventory and cost of goods sold is A. beginning inventory B. net purchases C. Gross profit D. cost of goods available

D.

When does the cost of inventory become an expense? A. when payment is made to the supplier B. when inventory is purchased from the supplier C. When cash is collected from the customer D. when inventory is delivered to a customer

D.

Which statement about depreciation is false? A. a major objective of depreciation accounting is to allocate the cost of using an asset against the revenues it helps to generate B. obsolescence as well as physical wear and tear should be considered when determining the period over which an asset should be depreciated C. depreciation is a process of allocating the cost of an asset to expense over its useful life D. depreciation should not be recorded in years in which the market value of the asset has increased

D.

Which statement is true? A. A service company purchases products from suppliers and then sells them. B. Purchase returns and allowances increase the net amount of purchases. C. The sales account is used to record only sales on account. D. Gross profit is the excess of sales revenue over cost of goods sold.

D.

Which statement is true? A. when prices are rising the inventory method that results in the lowest ending inventory value is FIFO B. The inventory method that best matches current expense with current revenue is FIFO C. An error overstating ending inventory in 2014 will understate 2014 net income. D. application of the lower-of-cost-or-market rule often results in a lower inventory value.

D.

Which item among the following is not an intangible asset? A. A trademark B. A patent C. Goodwill D. a copyright E. all of the above are intangible assets

E

____________ enables a company to keep reported income from dropping lower by liquidating older layers of inventory

FIFO

____________ maximizes reported income

FIFO

______________ results in a cost of ending inventory that is close to the current cost of replacing the inventory

FIFO

_______ matches the most current cost of goods sold against sales revenue

LIFO

_________ results in an old measure of the cost of ending inventory

LIFO

___________ generally associated with saving income taxes

LIFO

____________ enables a company to buy high-cost inventory at year-end and thereby decrease reported income and income tax

LIFO

_____________ used to account for automobiles, jewelry, and art objects

specific-unit-cost