Final Exam

An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as

Fair Value Method Equity Method Income A reduction of the investment

A significant misclassification of Accounts Receivable on the Balance Sheet would be an example of

an accounting error requiring a prior period adjustment and restatement.

On January 2, 2021, Worth Co. issued at par $2,000,000 of 5% convertible bonds. Each $1,000 bond is convertible into 10 shares of common stock. No bonds were converted during 2021. Worth had 200,000 shares of common stock outstanding during 2021. Worth's 2021 net income was $900,000 and the income tax rate was 30%. Worth's diluted earnings per share for 2021 would be (rounded to the nearest penny):

$4.41

On January 1, 2021, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2021 is $6,000,000; however, the book value to Holt is $4,950,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings using the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. 8. From the lessee's viewpoint, what type of lease in this?

Finance lease

Which of the following temporary differences results in a deferred tax asset in the year the temporary difference originates? I. Accrual for product warranty liability. II. Subscriptions received in advance. III. Prepaid insurance expense.

I and II only

Stock warrants outstanding should be classified as

Paid-in capital-stock warrants

The conversion of preferred stock is recorded by the

book value method.

A corporation has a defined-benefit plan. A pension liability will result at the end of the year if the

projected benefit obligation exceeds the fair value of the plan assets.

Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from the date of issue. If the bonds were issued at a 99, this indicates that

the effective yield or market rate of interest exceeded the stated (nominal) rate.

Recognition of tax benefits in the loss year due to a loss carryforward requires

the establishment of a deferred tax asset.

Unrealized holding gains or losses which are recognized in income are from debt securities classified as

trading

The actuarial gains or losses that result from changes in the projected benefit obligation are called

Asset Liability Gains & Losses No Gains & Losses Yes

Hayes Construction Corporation contracted to construct a building for $8,500,000. Construction began in 2021 and was completed in 2022. Data relating to the contract are summarized below: Year ended December 31, Costs incurred 2021 $3,500,000 2022 $2,150,000 Estimated costs to complete 2021 2,100,000 2022— Hayes uses the percentage-of-completion method as the basis for income recognition. For the years ended December 31, 2021, and 2022, respectively, Hayes should report GROSS PROFIT of:

$1,812,500 and $1,037,500.

Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2021, paying $1,410,375. The bonds mature January 1, 2031; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity.

$155,283

On January 1, 2020, Ann Price loaned $187,825 to Joe Kiger. A zero-interest-bearing note (face amount, $250,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2022. The prevailing rate of interest for a loan of this type is 10%. The present value of $250,000 at 10% for three years is $187,825. What amount of interest expense should Joe Kiger recognize in 2020?

$18,783

Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2021, paying $1,410,375. The bonds mature January 1, 2031; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity.

$2,571

Hill Corp. had 600,000 shares of common stock outstanding on January 1, issued 900,000 shares on July 1, and had income applicable to common stock of $2,940,000 for the year ending December 31, 2021. Earnings per share of common stock for 2021 would be

$2.80.

Mathis Co. at the end of 2020, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 1,200,000 Estimated litigation expense 3,000,000 Installment sales (2,400,000) Taxable income $ 1,800,000 The estimated litigation expense of $3,000,000 will be deductible in 2022 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $1,200,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $1,200,000 current and $1,200,000 noncurrent. The income tax rate is 20% for all years. The income tax expense is

$240,000

Manning Company issued 10,000 shares of its $5 par value common stock having a fair value of $25 per share and 15,000 shares of its $15 par value preferred stock having an unknown fair value for a lump sum of $520,000. How much of the proceeds would be allocated to the common stock?

$250,000

On January 1, 2021, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2021 is $6,000,000; however, the book value to Holt is $4,950,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings using the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. What is annual amortization expense?

$600,000

Presented below is pension information related to Woods, Inc. for the year 2021: Service cost $410,000 Interest on projected benefit obligation 270,000 Interest on vested benefits 120,000 Amortization of prior service cost due to increase in benefits 60,000 Expected return on plan assets 90,000 The amount of pension expense to be reported for 2021 is

$650,000

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, 2021. 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

$72,000, $48,000 and $24,000 respectively

On January 1, 2021, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. (a) The agreement requires equal rental payments at the beginning each year. (b) The fair value of the building on January 1, 2021 is $6,000,000; however, the book value to Holt is $4,950,000. (c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings using the straight-line method. (d) At the termination of the lease, the title to the building will be transferred to the lessee. (e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc. What is the annual lease payment excluding executory costs? (Rounded to the nearest dollar.)

$887,703

At the beginning of 2021, Pitman Co. purchased an asset for $1,800,000 with an estimated useful life of 5 years and an estimated salvage value of $150,000. For financial reporting purposes the asset is being depreciated using the straight-line method; for tax purposes MACRS depreciation is calculated at 720,000 for year one. Pitman Co.'s tax rate is 20% for 2021 and all future years. At the end of 2021, which of the following deferred tax accounts and balances is reported on Pitman's balance sheet?

Account _ Balance Deferred tax liability $78,000

In 2025, Regner Company discovered an error while preparing its 2025 financial statements. Construction of a building costing $1,200,000 was completed on 1/1/2025. Regner failed to depreciate the building for 2025. 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 was the impact on the following accounts at the start of 2025?

Accumulated Depreciation was understated by $40,000 and Retained Earnings was overstated by $30,000

Which type of accounting change should always be accounted for in current and future periods?

Change in accounting estimate

Which of the following is not a characteristic of a defined-contribution pension plan?

The benefits to be received by employees are determined by an employee's highest compensation level defined by the terms of the plan.

Which of the following is a correct statement of one of the classification tests?

The lease term is equal to or more than 75% of the estimated economic life of the leased property.

The second step in the process for revenue recognition is to

identify the separate performance obligations in the contract.

The Billings on Construction in Progress account is a(n)

contra-inventory account

Kant Corporation retires its $500,000 face value bonds at 102 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $481,250. The entry to record the redemption will include a

credit of $18,750 to Discount on Bonds Payable.

The Lease Liability account should be disclosed as

current portions in current liabilities and the remainder in noncurrent liabilities.

Counterbalancing errors do not include

errors that correct themselves in three years.

Bond interest paid is equal to the

face amount of the bonds multiplied by the stated interest rate.

Cash dividends are paid on the basis of the number of shares

outstanding

Treasury Stock is debited upon:

repurchase of stock

The cumulative feature of preferred stock

requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders.