Intermediate Accounting 2 Final Exam

The primary purpose of the statement of cash flows is to provide cash-basis information about the company's operating, investing, and financing activities.

False

The revenue from a service-type warranty that covers several years should all be recognized in the period the warranty is sold.

False

To classify debt security as held-to-maturity, the company needs only to have the positive intent to hold the security to maturity.

False

US GAAP requires companies to use the effective-interest method to evaluate the carrying value of bonds payable.

False

Under the accrual basis of accounting, net income is usually the same as net cash flow from operating activities.

False

Under the double-entry system, revenues must always equal expenses.

False

Under the fair value method, companies compute total compensation expense based on the fair value of options on the date of exercise.

False

Under the fair value method, the equity investor reports as revenue its share of the net income reported by the investee.

False

Paying a current liability with cash will always reduce the current ratio.

False Current Ratio = Current Assets/ Current Liabilities

Dividends are classified as an expense.

False - Temporary Liability

Which of these is not included in an employer's payroll tax expense?

Federal income taxes

The lease receivable amount includes the present value of

rental payments plus the present value of guaranteed and unguaranteed residual values.

The preemptive right of a common stockholder is the right to

share proportionately in any new issues of stock of the same class.

The normal balance of any account is the

side which increases the account.

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

the establishment of a deferred tax asset.

Which of the following is not a factor that is considered when evaluating whether or not to record a liability for pending litigation?

The type of litigation involved.

Why is the liability section of the balance sheet of primary importance to bankers?

To assist in understanding the entity's liquidity

Gannon Company acquired 20,000 shares of its own common stock at $20 per share on February 5, 2020, and sold 10,000 of these shares at $27 per share on August 9, 2021. The fair value of Gannon's common stock was $24 per share at December 31, 2020, and $25 per share at December 31, 2021. The cost method is used to record treasury stock transactions. What account(s) should Gannon credit in 2020 to record the sale of 10,000 shares?

Treasury Stock for $200,000 and Paid-in Capital from Treasury Stock for $70,000. purchase T.S. (20k*20) 400k Cash 400k Issue Cash (10k * 27) 270k T.S. (10k *20) 200k A.P.I.C - T.S. 70k

A company discloses gain contingencies in the notes only when a high probability exists for realizing them.

True

A corporation is incorporated in only one state regardless of the number of states in which it operates.

True

A deferred tax asset represents the increase in taxes refundable in future years as a result of deductible temporary differences existing at the end of the current year.

True

All cash dividends received by an investor from the investee decrease the investment's carrying value under the equity method.

True

An adjusting entry to a prepaid expense is required to recognize expired expenses.

True

An expense decreases stockholders' equity.

True

An increase in an asset is recorded by a debit.

True

Companies do not report changes in the fair value of available-for-sale debt securities as income until the security is sold.

True

Companies may use the fair value option for investments that follow the equity method of accounting.

True

Deferred tax expense is the increase in the deferred tax liability balance from the beginning to the end of the accounting period.

True

If it is probable that the expected residual value is less than the guaranteed residual value, the difference should be included in the computation of the lease liability.

True

Leasing equipment reduces the risk of obsolescence to the lessee and in many cases passes the risk of residual value to the lessor.

True

Market interest rate increase would result in the unrealized holding gain for bond issuers.

True

Permanent differences do not give rise to future taxable or deductible amounts.

True

The FASB states that when an issuer makes an additional payment to encourage conversion, the payment should be reported as an expense.

True

The cause for litigation must have occurred on or before the date of the financial statements to report a liability in the financial statements.

True

The tax effect of a loss carryforward represents future tax savings and results in the recognition of a deferred tax asset.

True

Under the straight-line method, interest expense is the difference between the interest payment and the amortization of the bonds.

True

Unearned Service Revenue is classified as a liability on the balance sheet.

True

When a lease has an unguaranteed residual value, the lessor reduces sales revenue and cost of goods sold by the present value of the unguaranteed residual value.

True

If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting

Unrealized Holding Gain/Loss-Income.

If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a

credit to Interest Expense.

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2020. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using effective-interest amortization, how much interest expense will be recognized in 2020?

1,176,373 exp 1 = 14,703,108 * 8%/2 = 588,124.32 discount 1 = 588,124 - (15M * 7.8 /2) = 3,124 exp 2 = ( 14,703,108 +3,124) *8% /2 = 588,249.28 588,124.32 + 588,249.28

AAA borrowed $700,000 on October 1, 2020 and is required to pay $720,000 on March 1, 2021. How much interest is recognized from October 1 to December 31, 2020?

12,000 720,000 - 700,000 = 20,000 (total interest due) Oct - Mar = 5 months 20/5 = 4/ mth 4*3= 12,000

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2019. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2021?

14,747,642 discount = 15M - 14,703,108 = 296,892 discount per period= 296,892/20*2= 7,422.3 = 14,703,108 +(7,422.3*6)

Pember Corporation started business in 2015 by issuing 200,000 shares of $20 par common stock for $27 each. In 2020, 25,000 of these shares were purchased for $39 per share by Pember Corporation and held as treasury stock. On June 15, 2021, these 25,000 shares were exchanged for a piece of property that had an assessed value of $760,000. Pember's stock is actively traded and had a market price of $45 on June 15, 2021. The cost method is used to account for treasury stock. The amount of paid-in capital from treasury stock transactions resulting from the above events would be

150,000 T.S. (25k *39) = 975k issue Property (760k + 35k*45) 1125k T.S. (25k *39) 975k APIC- TS (25k * 6) 150k

AAA manufactures high-end whole home electronic systems. The company provides a one-year warranty for all products sold. The company estimates that the warranty cost is $300 per unit sold and reported a liability for estimated warranty costs $10.4 million at the beginning of this year. If during the current year, the company sold 60,000 units for a total of $324 million and paid warranty claims of $12,000,000 on current and prior year sales, what amount of liability would the company report on its balance sheet at the end of the current year?

16,400,000 10.4 + 18 - 12 10.4- Beg warranty cost 18 - 60k* 300 12 - already claimed

Feller Company issues $20,000,000 of 10-year, 9% bonds on March 1, 2020 at 97 plus accrued interest. The bonds are dated January 1, 2020, and pay interest on June 30 and December 31. What is the total cash received on the issue date?

19,700,000 20M * 97% + 20M * 9% * 2/12

On January 1, 2020, Ellison Co. issued eight-year bonds with a face value of $6,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. The issue price of the bonds is

5,300,862. TVM Solver N = 8 *2 16 I = 8/2 4 PV = X FV = 6 M PMT = 6m * 3% = 180

Crawford Company started the year with $60000 in its Common Stock account and a credit balance in Retained Earnings of $44000. During the year, the company earned net income of $48000 and declared and paid $20000 of dividends. In addition, the company sold additional common stock amounting to $28000. As a result, the amount of its retained earnings at the end of the year would be

72,000 = 44,000+48,000-20,000 Beg RE + NI - DIV

On July 1, 2021, Nall Co. issued 2,500 shares of its $10 par common stock and 5,000 shares of its $10 par convertible preferred stock for a lump sum of $140,000. At this date Nall's common stock was selling for $24 per share and the convertible preferred stock for $18 per share. The amount of the proceeds allocated to Nall's preferred stock should be

84,000 lump sum = 140k F.V/ M.V of CS = 2,500*24 = 60k Preferred stock = 5,000 * 18 = 90k Allocation base = 60+90 = 150k CS = 60k/150k *140k PS = 90k/150k* 140k = 84k

During February 2017, its first month of operations, the owner of Schwenn Enterprises invested cash of $100,000. Schwenn had cash sales of $20,000 and paid expenses of $35,000. Assuming no other transactions impacted the cash account, what is the balance in Cash at February 28?

85,000 = 100,000+20,000-35,000

Which of the following is shown on a statement of cash flows?

A treasury stock sale

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?

Amortization of patent.

How should a "gain" from the sale of treasury stock be reflected when using the cost method of recording treasury stock transactions?

As paid-in capital from treasury stock transactions.

Otto services a car on August 31. The customer picks up the vehicle on September 1 and mails the payment to Otto on September 5. Otto receives the check in the mail on September 6. When should Otto show that the revenue was recognized?

August 31st Revenue is recognized when event happens not when payment is received

Participating preferred stock requires that if a company fails to pay a dividend in any year, it must make it up in a later year before paying any common dividends.

False

Pretax financial income is the amount used to compute income taxes payable.

False

Stock splits and large stock dividends have the same effect on a company's retained earnings and total stockholders' equity.

False

The FASB encourages the use of the indirect method over the direct method.

False

AAA is involved with innovative approaches to finding energy reserves. AAA recently built a facility to extract natural gas at a cost of $12 million. However, AAA is also legally responsible to remove the facility at the end of its useful life of twenty years. This cost is estimated to be $17 million (the present value of which is $6.5 million). What is the journal entry required to record the asset retirement obligation?

Debit Natural Gas Facility for $6,500,000 and credit Asset Retirement Obligation for $6,500,000.

What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively?

Decrease and increase

A company buys an oil rig for $3,000,000 on January 1, 2021. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $600,000 (present value at 10% is $231,330). 10% is an appropriate interest rate for this company. What expense should be recorded for 2021 as a result of these events?

Depreciation expense of $323,133 and interest expense of $23,133 Deprec. exp = 3M /10yr. interest exp. = 231,330 *10%

Lang Co. issued bonds with detachable common stock warrants. Only the warrants had a known market value. The sum of the fair value of the warrants and the face amount of the bonds exceeds the cash proceeds. This excess is reported as

Discount on Bonds Payable.

Which of the following best describes the accounting for assurance-type warranty costs?

Expensed based on an estimate in the year of sale.

A company should add a decrease in a deferred tax liability to income taxes payable in computing income tax expense.

False

A leased asset is always depreciated over the term of the lease by the lessee.

False

A zero-interest-bearing note payable that is issued at a discount will not result in any interest expense being recognized.

False

Collection on an account receivable will increase both cash and accounts receivable.

False

Companies allocate the proceeds received from a lump-sum sale of securities based on the securities' par values.

False

Companies recognize a gain or loss when stockholders exercise convertible preferred stock.

False

Companies should classify deferred tax accounts on the balance sheet as current assets or current liabilities.

False

Earned capital consists of additional paid-in capital and retained earnings.

False

If a company transfers held-to-maturity securities to available-for-sale securities, the unrealized gain or loss is recognized in income.

False

If an employee fails to exercise a stock option before its expiration date, the company should decrease compensation expense.

False

If the market rate is greater than the coupon rate, bonds will be sold at a premium.

False

If total assets are increased, there must be a corresponding increase in liabilities or a decrease in stockholders' equity.

False

In an operating lease, the lessee reports both interest expense and amortization expense on the income statement.

False

Income will always be greater under the cash basis of accounting than under the accrual basis of accounting.

False

When using the indirect method to prepare the operating section of a statement of cash flows, which of the following is deducted from net income to compute cash provided by/used by operating activities?

Gain on sale of land.

Which of the following describes the lease term test?

If the lease term is 75% or more of the economic life, it is a finance lease.

AAA is involved in litigation regarding a faulty product sold in a prior year. The company has consulted with its attorney and determined that it is possible that they may lose the case. The attorneys estimated that there is a 40% chance of losing. If this is the case, their attorney estimated that the amount of any payment would be $800,000. What is the required journal entry as a result of this litigation?

No journal entry is required. Not probable To report a loss and liability in litigation its has to be probable and reasonable estimable

Overton Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2020. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Overton recall all cans of this paint sold in the last six months. The management of Overton estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation?

Operating expense of $800,000 and liability of $800,000

Which of the following would be classified as a financing activity on a statement of cash flows?

Payment of a bond payable

Which of the following features of preferred stock makes it more like a debt than an equity instrument?

Redeemable

Jill Clown earned a salary of $500 for the last week of October. She will be paid on November 1. The adjusting entry for Jill's employer October 31 is:

Salaries and Wages Expense 500 Salaries and Wages Payable 500

Which of the following is not a correct statement about sales taxes?

Sales taxes are an expense of the seller.

Which dividends do not reduce stockholders' equity?

Stock dividends

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?

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

Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as

a footnote.

In a statement of cash flows, the cash flows from investing activities section should report

a major repair to machinery charged to accumulated depreciation.

The primary purpose of the statement of cash flows is to provide information

about the cash receipts and cash payments of an entity during a period.

Compensation expense resulting from a compensatory stock option plan is generally

allocated to the periods benefited by the employee's required service.

Depreciation is the process of:

allocating the cost of an asset to the periods in which it is used.

A single lease expense is recognized on the income statement for

an operating lease.

When computing diluted earnings per share, convertible bonds are

assumed converted only if they are dilutive.

If a company buys a $700 machine on credit, this transaction will affect the

balance sheet only.

A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should

be accrued during the period when earned.

A primary source of stockholders' equity is

both income retained by the corporation and contributions by stockholders.

The amortization of bond premium on long-term debt should be presented in a statement of cash flows (using the indirect method for operating activities) as a(n)

deduction from net income.

Taxable income of a corporation

differs from accounting income because companies use the full accrual method for financial reporting but use the modified cash basis for tax reporting.

Recognizing a valuation allowance for a deferred tax asset requires that a company

consider all positive and negative information in determining the need for a valuation allowance.

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 500,000 - 481,250

Impairments are

evaluated using the CECL model similar to receivables.

The Vintage Laundry Company purchased $8,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $1,500 on hand. The adjusting entry that should be made by the company on June 30 is:

debit Supplies Expense, $7,000; credit Supplies, $7,000. 8,500 - 1,500

When a company receives a utility bill but will not pay it right away, it should

debit Utilities Expense and credit Accounts Payable.

An increase in inventory balance would be reported in a statement of cash flows using the indirect method (reconciliation method) as a(n)

deduction from net income in arriving at net cash flow from operating activities.

If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will

exceed what it would have been had the effective-interest method of amortization been used.

One of the accounting concepts upon which adjustments for prepayments and accruals are based is:

expense recognition.

The issuer of a 5% common stock dividend to common stockholders should transfer from retained earnings to paid-in capital an amount equal to the

fair value of the shares issued.

If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be

greater than if the straight-line method were used.

To record an asset retirement obligation (ARO), the cost associated with the ARO is

included in the carrying amount of the related long-lived asset.

An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as _____________ under the fair value method and as ____________ under the equity method.

income, a reduction of the investment

When the effective-interest method is used to amortize bond premium or discount, the periodic amortization amount will

increase if the bonds were issued at either a discount or a premium.

The date on which to measure the compensation element in a stock option granted to a corporate employee ordinarily is the date on which the employee

is granted the option.

A contingent liability

is the result of a loss contingency. Gain Contingencies are not recorded Loss Contingencies are recorded with conditions.

Treasury shares are shares

issued but not outstanding.

With regard to uncertain tax positions, the FASB requires that companies recognize a tax benefit when

it is more likely than not that the tax position will be sustained upon audit.

Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a deferred tax liability on the balance sheet? I. A revenue is deferred for financial reporting purposes but not for tax purposes. II. A revenue is deferred for tax purposes but not for financial reporting purposes. III. An expense is deferred for financial reporting purposes but not for tax purposes. IV. An expense is deferred for tax purposes but not for financial reporting purposes.

items II and III only

When an investment in an available-for-sale debt security is transferred to trading because the company anticipates selling the security in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be

its fair value at the date of the transfer.

In an operating lease, the lessee records

lease expense

Securities which could be classified as held-to-maturity are:

municipal bonds.

Receiving payment of a portion of an account receivable will

not affect total assets.

When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the

par value of the shares issued.

When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par value of the bonds and the fair value of the warrants, the excess should be credited to

premium on bonds payable.

Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to

the market rate multiplied by the beginning-of-period carrying amount of the bonds.

AAA 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 premium, this indicates that

the nominal rate of interest exceeded the market rate.

In computing the present value of the lease payments, the lessee should

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