MAY 10 ACCOUNTING EXAM

All else equal, a large increase in deferred revenue in the current period would be expected to produce what effect on revenue in a future period? A. Large increase, because deferred revenue becomes revenue when the seller has satisfied its performance obligations. B. Large decrease, because deferred revenue implies that less revenue has been earned, which reduces future revenue. C. No effect, because deferred revenue is a liability, so payment will use assets rather than providing revenue. D. Large decrease, because deferred revenue indicates collection problems that will reduce net revenues in future periods.

A

On December 1, 2019, Sonny Company borrowed money at the bank by signing a 90-day for $40,000, requiring 9% interest. The company made the expected adjusting entry on December 31, 2019. What will be the effect on Sonny's accounting equation when the note is paid at maturity? A. Assets will decrease by $40,900; Liabilities will decrease by $40,300: Equity will decrease by $600 B. Assets will decrease by $40,900; Liabilities will decrease by $300: Equity will decrease by $40,600 C. Assets will decrease by $40,900; Liabilities will decrease by $40,600: Equity will decrease by $300 D. Assets will decrease by $40,600; Liabilities will decrease by $40,300: Equity will decrease by $300

A

Revenue for gift card breakage should be recognized: A. When the gift card is sold. B. No later than the last day of the operating period in which the gift card is delivered to the customer. C. When the probability of gift card redemption is viewed as remote. D. Under no circumstances, as gift cards are not themselves a delivered product, but rather a selling technique.

A

Terps Company has 500 units in inventory that were purchased for $24 each. These units have a current market value of $30 each. The company's supplier has just announced a price increase to $33 that will go into effect at the beginning of next year. Management should: A. make no adjustments to the inventory account. B. adjust the inventory account using the lower of the recent market values, which is $30.00. C. adjust the inventory account using the cost, which is $24.00. D. adjust the inventory account using the average of the recent market values, which is $33.00.

A

The company bookkeeper recorded the annual repair costs on the company's machinery as an increase to the Machinery account. As a result, which of the following statements describes this situation? A. Assets will be overstated. B. Stockholders' equity will be understated. C. Expenses will be overstated. D. Liabilities will be overstated.

A

When a periodic inventory system is used: A. Cost of goods sold is a residual amount. B. Ending inventory is transferred to expense and the beginning inventory is transferred to assets. C. Two entries must be made when goods are purchased. D. A purchases account is not used; all inventory purchase entries are debits to the inventory account.

A

A company purchased office equipment for $24,500 in cash, and paid $1,470 in sales tax, $550 for installation, $3,200 for a needed adjustment to the equipment, and $2,600 for supplies that will be used for periodic routine maintenance. How should the company record this transaction? A. Debit Equipment $24,500, debit Repairs and Maintenance Expense for $5,220, debit Supplies for $2,600, and credit Cash for $32,320. B. Debit Equipment for $29,720, debit Supplies for $2,600, and credit Cash for $32,320. C. Debit Equipment for $25,970, debit Repairs and Maintenance Expense $3,750, debit Supplies for $2,600, and credit Cash for $32,320. D. Debit Equipment and credit Cash for $32,320.

B

Assume a company has a current ratio of 2.0. Payment of accrued wages payable would cause the current ratio to A. decrease. B. Increase. C. be unchanged since the effects offset one another. D. be unchanged since it has no impact on any current asset or liability accounts.

B

At the end of the 2019 accounting period, Young Company determined that the market value of its inventory was $67,300. The historical cost of this inventory was $72,900. The company uses the perpetual inventory method. The journal entry necessary to reduce the inventory to the lower of cost or market will A. decrease assets and increase gross profit and decrease net income B. decrease assets and decrease gross profit and decrease net income C. increase assets and decrease gross profit and increase net income D. decrease assets and decrease gross profit and increase net income

B

Belmont Industries announces that its gross profit rose 5% but its income from operations fell. Which of the following statements is correct? A. This is not possible given that operating income is determined by gross profit. B. This must mean that selling, general, and administrative expenses increased by more than 5%. C. This must mean that sales revenue rose more than expenses. D. This must mean that cost of goods sold decreased.

B

Companies A and B purchased identical equipment having an estimated service life of 10 years. Company A uses straight-line method of depreciation, and Company B uses Double declining balance method of depreciation. Assuming that the companies are identical in all other respects, choose the correct statement below: A. Depreciation expense for Company A will be higher in the first year than for Company B. B. Net income will be lower for Company A in the ninth year than for Company B. C. Company B will record more depreciation on this asset over the entire 10 years than will Company A. D. At the end of the third year, the book value of the asset will be lower on the books of Company A than on the books of Company B.

B

Trademarks or trade names A. must be renewed every 40 years B. are considered intangible assets with indefinite lives C. are always developed internally D. are synonymous with internally developed goodwill

B

Which of the following statements is generally true when prices are rising? A. LIFO produces taxable income that exceeds taxable income under FIFO. B. The use of LIFO will result in paying less in taxes than under FIFO. C. Managers will use LIFO if they want to maximize income reported to shareholders. D. FIFO results in paying less in taxes than under LIFO.

B

Which of the following statements is not correct? A. Periodic allocations of acquisition cost, made on a systematic and rational basis, are recognized as current expense in conformity with the matching principle. B. Amortization accounting is a process of valuation, not of allocation. C. At acquisition, tangible, capital assets are recorded at cost on the basis of the cost principle. D. Subsequent to acquisition, tangible capital assets that have a limited life are reported at the cost recognized at acquisition less accumulated allocations of such cost.

B

A corporation which incurs costs in defending a patent in an infringement suit should: A. expense currently the costs of all suits. B. capitalize only the costs of unsuccessful suits. C. capitalize only the costs of successful suits. D. capitalize the cost of all such suits.

C

Error Prone Corporation's 2019 ending inventory was overstated by $20,000; however, ending inventory for 2020 was correct. Which of the following statements is correct? A. Cost of goods sold for 2020 is understated B. Cost of goods sold for 2019 is overstated C. Net Income for 2020 is understated D. Net Income for 2019 is understated

C

German Auto Parts is a defendant in a multi-million dollar lawsuit that was filed in a prior year. The lawsuit was not previously disclosed in the financial statements or accompanying footnotes, as the company has vigorously defended its position and its attorneys initially indicated that the claim was not valid. During the current year, however, the facts and circumstances have changed such that the likelihood of a loss approximating $5 million is now considered reasonably possible. How should the company recognize this lawsuit in its current year financial statements? A. Do nothing, since it was not recognized in previous periods. B. Do nothing until the matter is settled or a judgment or verdict is obtained. C. Disclose the matter in the footnotes accompanying the financial statements. D. Record a contingent liability in the amount of $5 million.

C

Other things being equal, most managers would prefer to report liabilities as noncurrent rather than current. The logic behind this preference is that the long-term classification permits the company to report: A. Higher working capital and a higher inventory turnover. B. Lower working capital and a higher current ratio. C. Higher working capital and a higher current ratio. D. Higher working capital and a lower debt to equity ratio.

C

Terps Company estimates it is probable that it will receive a $10,000 gain contingency and pay a $4,000 loss contingency. After recording the appropriate journal entries to recognize contingent amounts, the company's net assets (=assets - liabilities) will: A. Increase by $10,000. B. Increase by $6,000. C. Decrease by $4,000. D. Not change.

C

Which of the following statements about inventory classifications is not correct? A. Inventory may include materials used in producing goods for sale. B. Manufacturers hold three types of inventory that are referred to as raw materials inventory, work in process inventory, and finished goods inventory. C. Inventory is classified as a long-term asset on the balance sheet. D. Merchandisers buy inventory in finished form ready for resale.

C

Which of the following statements does not describe an essential characteristic of a liability? A. A liability is a present obligation that will be settled by a probable future transfer or use of assets. B. The obligated entity has little or no discretion to avoid the future sacrifice. C. The identity of the recipient must be known to the obligated party. D. The transaction or event obligating the enterprise has already occurred.

C

Which of the following statements is correct? A. FIFO results in a lower net income than LIFO when costs are rising. B. LIFO results in a higher net income than FIFO when costs are rising. C. LIFO results in a higher net income than FIFO when costs are falling. D. LIFO results in the same net income as FIFO when costs are rising.

C

Assume that a company uses a perpetual inventory system and records the return of inventory previously purchased on account with a debit to Accounts Payable and a credit to Inventory. This journal entry is: A. incorrect and will cause assets to be overstated. B. incorrect and will cause assets to be understated. C. incorrect and will cause liabilities to overstated. D. correct

D

The specific cost identification inventory cost flow method has all of the following characteristics except: A. It is especially applicable when small and expensive items are handled in large quantities. B. It relates cost flow to the specific flow of physical goods. C. It identifies the cost of each physical item available for sale with either the ending inventory or cost of goods sold. D. It is particularly susceptible to income manipulation.

D

What is the general principle for capitalizing costs to property, plant and equipment? A. All costs, which will provide a benefit beyond one year, are capitalized. B. Only depreciable costs are capitalized. C. All costs associated with the acquisition or construction of a plant asset are capitalized. D. All costs incurred to bring the item to its intended condition and location are capitalized.

D

When a company has inventory which is subject to gradually increasing prices, the use of the LIFO method of valuing inventory will result in the: A. highest amount of assets and the lowest amount of net income. B. highest amount of assets and the highest amount of net income. C. lowest amount of assets and the highest amount of net income. D. lowest amount of assets and the lowest amount of net income.

D

Which of the following would NOT be affected by a change from LIFO to FIFO, assuming that prices are rising? A. Current ratio B. Working Capital C. Inventory Turnover D. Quick ratio

D