Intermediate Financial Accounting Exam 2
Bret Company sold 3,000 Holsks during 2018 at a total price of $12,000,000, with a warranty guarantee that the product was free of any defects. The cost of Holsks sold is $7,200,000. The term of the assurance warranty is two years, with an estimated cost of $80,000. In addition, Bret sold extended warranties related to 1,100 Holsks for 3 years beyond the 2-year period for $110,000. Bret should recognize Unearned Warranty Revenue in 2018 of... (a)$110,000. (b)$0. (c)$80,000. (d)$190,000.
(a)$110,000. Bret should record a Warranty Liability of $80,000 on the assurance warranty, and Unearned Warranty Revenue of $110,000 on the extended warranties.
Stossel Company sells 300 units for $200 each to Liberty Inc. for cash. Stossel allows Liberty to return any unused product within 30 days and receive a full refund. The cost of each product is $120. Stossel estimates that ten units will be returned, the costs of recovering the units will be immaterial, and the returned units are expected to be resold at a profit. What amount of Sales Returns and Allowances should Stossel record in the year of the sale? (a)$2,000. (b)$0. (c)$800. (d)$1,200.
(a)$2,000. Stossel should record Sales Returns and Allowances of $2,000 (10 × $200).
On January 1, 2017, Fullbright Company sold goods to Blue Dirt Company for $400,000 in exchange for a 4-year, zero-interest-bearing note with a face amount of $629,406 (imputed rate of 12%). The goods have an inventory cost on Fullbright's books of $240,000. What amount of Interest Revenue should Fullbright recognize in 2017? (a)$48,000. (b)$57,352. (c)$75,529. (d)$229,406.
(a)$48,000. Fullbright should record interest revenue of $48,000 in 2017 ($400,000 × 12%).
The new standard, Revenue from Contracts with Customers... (a)adopts an asset-liability approach for revenue recognition. (b)adopts a revenue-gain approach for revenue recognition. (c)adopts "earned and realized" criteria. (d)adopts criteria that deemphasize the importance of contracts with customers.
(a)adopts an asset-liability approach for revenue recognition. The new standard, Revenue from Contracts with Customers, adopts an asset-liability approach for revenue recognition.
In a bill-and-hold arrangement, which of the following is not one of the criteria which must be met for the customer to have obtained control of the product? (a)The reason for the bill-and-hold arrangement must be substantive. (b)The product must be physically located in the seller's warehouse. (c)The product currently must be ready for physical transfer to the customer. (d)The seller cannot have the ability to use the product or to direct it to another customer.
(b)The product must be physically located in the seller's warehouse. For the customer to have obtained control of a product in a bill-and-hold arrangement, all of the following criteria should be met: (a) The reason for the bill-and-hold arrangement must be substantive, (b) The product must be identified separately as belonging to the customer, (c) The product currently must be ready for physical transfer to the customer, and (d) the seller cannot have the ability to use the product or to direct it to another customer.
One criteria that indicates the company should disregard revenue guidance to contracts is... (a)the contract has commercial substance. (b)each party can unilaterally terminate the contract without compensation. (c)each party's rights regarding the goods or services to be transferred can be identified. (d)the payment terms for the goods and services to be transferred can be identified.
(b)each party can unilaterally terminate the contract without compensation. The company should disregard revenue guidance to contracts if the contract is wholly unperformed, or if each party can unilaterally terminate the contract without compensation.
Which method of measuring the fair value of a performance obligation is dependent on the standalone selling prices of other goods or services promised in the contract? (a)adjusted market assessment. (b)residual value. (c)expected cost plus a margin. (d)standalone selling price.
(b)residual value. The residual value method of measuring the fair value of a performance obligation is dependent on the standalone selling prices of other goods or services promised in the contract.
On January 1, 2017, Fullbright Company sold goods to Blue Dirt Company for $400,000 in exchange for a 4-year, zero-interest-bearing note with a face amount of $629,406 (imputed rate of 12%). The goods have an inventory cost on Fullbright's books of $240,000. What amount of Sales Revenue should Fullbright recognize in 2017? (a)$229,406. (b)$240,000. (c)$400,000. (d)$629,406.
(c)$400,000. Fullbright should record revenue of $400,000 on January 1, 2017, which is the fair value of the inventory.
Sherman Company enters into a contract with a customer to build a warehouse for $400,000, with a performance bonus of $100,000 that will be paid based on the timing of completion. The amount of the performance bonus decreases by 20% per week for every week beyond the agreed-upon completion date. The contract requirements are similar to contracts that Sherman has performed previously, and management believes that such experience is predictive for this contract. Management estimates that there is a 50% probability that the contract will be completed by the agreed-upon completion date, a 30% probability that it will be completed 1 week late, and a 20% probability that it will be completed 2 weeks late. What is the total transaction price for this revenue arrangement? (a)$460,000. (b)$480,000. (c)$486,000. (d)$500,000.
(c)$486,000. Total transaction price is $486,000 [($500,000 × 50%) + ($480,000 × 30%) + ($460,000 × 20%)].
Sufjan Company has a contract to sell 200 units to a customer for $14,000. After 140 units have been delivered, Sufjan modifies the contact by promising to deliver 30 more units for an additional $60 per unit (the standalone selling price at the time of the contract modification). What is the total revenue after the modification? (a)$1,800. (b)$5,400. (c)$6,000. (d)$6,300.`
(c)$6,000. Total revenue after the modification is $6,000 [(60 × $70) + (30 × $60)].
On January 1, 2018, Purdy Company enters into a contract to transfer Blue and Rain to Georgia Co. for $300,000. The contract specifies that payment for Blue will not occur until Rain is also delivered. In other words, payment will not occur until both Blue and Rain are transferred to Georgia. Purdy determines that standalone prices are $110,000 for Blue and $190,000 for Rain. Purdy delivers Blue to Georgia on February 10, 2018. On March 15, 2018, Purdy delivers Rain to Georgia. Purdy should record... (a)Accounts Receivable of $300,000 on January 1. (b)Accounts Receivable of $110,000 on February 10. (c)Contract Asset of $110,000 on February 10. (d)Contract Asset of $110,000 on January 1.
(c)Contract Asset of $110,000 on February 10. Conditional rights to receive consideration are reported as contract assets rather than as receivables.
Which type of revenue or gain is generally recognized as time passes? (a)Revenue from sales. (b)Revenue from fees or services. (c)Revenue from interest, rents, and royalties. (d)Gain or loss from disposition.
(c)Revenue from interest, rents, and royalties. Revenue from interest, rent, and royalties is generally recognized as time passes.
In a consignment sale, the consignee... (a)makes a journal entry when the consigned merchandise is received. (b)records advertising paid for the consignment as an expense. (c)records a payable when consigned merchandise is sold. (d)recognizes both commission revenue and sales revenue.
(c)records a payable when consigned merchandise is sold. The consignee records a payable to the consignor, not sales revenue, when consigned merchandise is sold. The consignee will later record commission revenue.
An indication that the customer has not taken control of the good or service is... (a)the selling company has right to payment for the good or service. (b)the customer has physical possession of the asset. (c)the customer has no significant risks or rewards of ownership. (d)the selling company has transferred legal title to the asset.
(c)the customer has no significant risks or rewards of ownership. When the customer has significant risks or rewards of ownership, it is an indicator that the customer has obtained control, so when the customer has no significant risks or rewards of ownership, it is an indication that the customer has not taken control of the good or service.
Mocha purchases equipment, installation, and training from Lynne for a price of $1,000,000 and chooses Lynne to do the installation. Lynne charges the same price for the equipment irrespective of whether it does the installation or not. (Some companies do the installation themselves because they either prefer their own employees to do the work or because of relationships with other customers.) The price of the installation service is estimated to have a fair value of $20,000. (a)The fair value of the training sessions is estimated at $40,000. Other companies can also provide these training services. (b)Mocha is obligated to pay Lynne the $1,000,000 upon the delivery and installation of the equipment. (c)Lynne delivers the equipment on May 1, 2018, and completes the installation of the equipment on July 1, 2018. Training related to the equipment starts once the installation is completed and lasts for 1 year. The equipment has a useful life of 8 years. What amount is recorded by Lynne as Unearned Service Revenue at 7/1/18? (a)$0. (b)$18,868. (c)$20,000. (d)$37,736.
(d)$37,736. Lynne should record Unearned Service Revenue of $37,736 at 7/1/18 [($40,000/$1,060,000) × $1,000,000] related to the training.
Hendrix Inc., an equipment dealer, sells equipment on January 1, 2018, to Jimi Company for $200,000. It agrees to repurchase this equipment from Jimi Company on December 31, 2019, for a price of $233,280. At 1/1/18, Hendrix should record... (a)Sales revenue of $200,000. (b)Sales revenue of $200,000 and a liability of $33,280. (c)Sales revenue of $200,000 and interest expense of $33,280. (d)A liability of $200,000.
(d)A liability of $200,000. At 1/1/18, Hendrix should record a liability of $200,000 because this agreement is a financing transaction and not a sale.
The seller of a good or service should recognize revenue when... (a)they identify the contract with customers. (b)they identify the separate performance obligations in the contract. (c)they determine the transaction price. (d)each performance obligation is satisfied.
(d)each performance obligation is satisfied. The seller of a good or service should recognize revenue when each performance obligation is satisfied.
In determining the transaction price, the company must consider... (a)variable consideration, but not noncash consideration. (b)noncash consideration, but not the time value of money. (c)the time value of money, but not consideration payable. (d)variable consideration, noncash consideration, time value of money, and consideration payable.
(d)variable consideration, noncash consideration, time value of money, and consideration payable. Variable consideration, noncash consideration, time value of money, and consideration payable must all be considered in determining the transaction price.
Direct costs incurred to sell stock such as underwriting costs should be accounted for as: 1. a reduction of additional paid-in capital. 2. an expense of the period in which the stock is issued. 3. an intangible asset. A. 1 B. 2 C. 3 D. 1 or 3
A 1. a reduction of additional paid-in capital
Revenue from a contract with a customer A) cannot be recognized until a contract exists. B) is recognized even if the contract is still wholly unperformed. C) is recognized when the customer receive the rights to receive consideration. D) can be recognized even when a contract is still pending.
A) cannot be recognized until a contract exists.
When multiple performance obligations exists in a contract, they should be accounted for as a single performance obligation when: A) each service is interdependent and interrelated. B) both performance obligations are distinct but interdependent. C) determination cannot be made. D) the product is distinct within the contract.
A) each service is interdependent and interrelated.
A contract A) is an agreement that creates enforceable rights and obligations. B) must be in writing to be an enforceable contract. C) is enforceable if each party can unilaterally terminate the contract. D) does not need to have commercial substance.
A) is an agreement that creates enforceable rights and obligations.
Noncash consideration should be: A) recognized on the basis of fair value of what is received. B) recognized on the basis of fair value of equivalent goods or services. C) recognized on the basis of fair value of what is given up. D) recognized on the basis of original cost paid by customer.
A) recognized on the basis of fair value of what is received.
The converged standard on revenue recognition: A) recognizes and measures revenue based on changes in assets and liabilities. B) simplify revenue recognition practices across entities and industries. C) reduces the number of disclosures required for revenue reporting. D) increases the complexity of financial statement preparation.
A) recognizes and measures revenue based on changes in assets and liabilities.
Blowing Rock Inc. has 5,000 shares of 5%, $100 par value, cumulative preferred stock and 30,000 shares of $1 par value common stock outstanding at December 31, 2017. There were no dividends declared in 2015. The board of directors declares and pays a $45,000 dividend in 2016 and in 2017. What is the amount of dividends received by the common stockholders in 2017? A. $15,000 B. $25,000 C. $45,000 D. $0
A. $15,000 The annual preferred dividend is ($5 X 5,000) = $25,000. The $45,000 dividend payment in 2016 would leave $5,000 in arrears. In 2017, the preferred shareholders would get $30,000 and the common shareholders would get $15,000
On September 14, 2017, Gayot Company reacquired 12,000 shares of its $1 par value common stock for $40 per share. Gayot uses the cost method to account for treasury stock. The journal entry to record the reacquisition of the stock should debit: A. Treasury Stock for $480,000 B. Common Stock for $480,000 C. Common Stock for $24,000 and Paid-in Capital in Excess of Par for $456,000 D. Treasury Stock for $24,000
A. Treasury Stock for $480,000
The role of the agent in a principle-agent relationship is to: A. arrange for the principal to provide goods or services to a customer. B. provide the goods or services for a customer. C. market the principal goods and services to prospective customers. D. develop and maintain goodwill of the principal's customers.
A. arrange for the principal to provide goods or services to a customer.
Which of the following represents the total number of shares that a corporation may issue under the terms of its charter? A. authorized shares B. issued shares C. unissued shares D. outstanding shares
A. authorized shares
Assume common stock is the only class of stock outstanding in the Manley Corporation. Total stockholders' equity divided by the number of common stock shares outstanding is called A. book value per share. B. par value per share. C. stated value per share. D. fair value per share.
A. book value per share.
In January 2017, Finley Corporation, a newly formed company, issued 10,000 shares of its $10 par common stock for $15 per share. On July 1, 2017, Finley Corporation reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of these treasury shares: A. decreased total stockholders' equity. B. increased total stockholders' equity. C. did not change total stockholders' equity. D. decreased the number of issued shares.
A. decreased total stockholders' equity.
The pre-emptive right enables a stockholder to A. receive unequal amounts of dividend on a percentage basis as the preferred stockholders B. receive cash dividends before other classes of stock without the pre-emptive right. C. sell capital stock back to the corporation at the option of the stockholder. D. receive the same amount of dividends on a percentage basis as the preferred stockholders.
A. receive unequal amounts of dividend on a percentage basis as the preferred stockholders
The residual interest in a corporation belongs to A. the common stockholders B. the preferred stockholders C. the Board of directors D. management
A. the common stockholders
Partial satisfaction of a multiple performance obligation is reported on the balance sheet as: A) contract liability. B) contract asset. C) unearned service revenue. D) receivable.
B) contract asset.
Terpsichore Inc., has 1,000 shares of 5%, $100 par value, cumulative preferred stock and 200,000 shares of $1 par value common stock outstanding at December 31, 2017, and December 31, 2016. No dividends were paid in 2016. In 2017, $75,000 of dividends are declared and paid. If the preferred stock is nonparticipating, what are the dividends received by the preferred stockholders in 2017? A. $5,000. B. $10,000. C. $42,500. D. $65,000.
B. $10,000. The annual preferred dividend is ($5 X 1,000) =$5,000 so dividends in arrears at 12/31/2016 would be $5,000. 2017 preferred dividends would be $5,000 + $5,000 = $10,000.
Presented below is information related to Polaris Corporation: Common Stock, $1 par $10,350,000 Paid-in Capital in Excess of Par—Common Stock 6,520,000 Paid-in Capital in Excess of Cost—Treasury Stock 400,000 Retained Earnings 9,543,000 Treasury Common Stock (at cost) 695,000 The total stockholders' equity of Polaris Corporation is: A. $25,318,000 B. $26,118,000 C. $27,108,000 D. $27,508,000
B. $26,118,000 10,350,000 + 6,520,000 + 400,000 + 9,543,000 - 695,000
Duszynski Company issues 20,000 shares of its $.50 par value common stock having a market value of $25 per share and 6,000 shares of its $25 par value preferred stock having a market value of $50 per share for a lump sum of $750,000. The proceeds allocated to the common stock is A. $450,000 B. $468,750 C. $500,000 D. $705,000
B. $468,750 20,000*25 = 500,000 6,000*50 = 300,000 Total = 800,000 500,000/800,000 = .625 750,000 * .625 = 468,750
Which of the following is not a legal restriction related to profit distributions by a corporation? A. The amount distributed to owners must be in compliance with the state laws governing corporations. B. The amount distributed in any one year can never exceed the net income reported for that year. C. Profit distributions must be formally approved by the board of directors. D. Dividends must be in full agreement with the capital stock contracts as to preferences and participation.
B. The amount distributed in any one year can never exceed the net income reported for that year.
An entry is not made on the: A. date of declaration. B. date of record. C. date of payment. D. An entry is made on all of these dates.
B. date of record.
The pre-emptive right of a common stockholder is the right to: A. share proportionately in corporate assets upon liquidation. B. share proportionately in any new issues of stock of the same class. C. receive cash dividends before they are distributed to preferred stockholders. D. exclude preferred stockholders from voting rights.
B. share proportionately in any new issues of stock of the same class.
Which of the following dividends do not reduce total stockholders' equity? A. Liquidating dividends. B. Stock dividends. C. Cash dividends. D. All of these answer choices reduce total stockholders' equity.
B. stock dividends.
A feature common to both stock splits and stock dividends is A. a transfer to earned capital of a corporation. B. that there is no effect on total stockholders' equity. C. an increase in total liabilities of a corporation. D. a reduction in the contributed capital of a corporation.
B. that there is no effect on total stockholders' equity.
When a customer purchases a product but is not yet ready for delivery, this is referred to as: A) a consignment. B) a principal-agent relationship. C) a bill-and-hold arrangement. D) a repurchase agreement.
C) a bill-and-hold arrangement.
The first step in the process for revenue recognition is to A) identify the separate performance obligations in the contract. B) determine the transaction price. C) identify the contract with customers. D) allocate transaction price to the separate performance obligations.
C) identify the contract with customers.
McCaffrey Corporation owned 14,000 shares of Harper Corporation's $5 par value common stock. These shares were purchased in 2010 for $326,000. On May 4, 2017, McCaffrey declared a property dividend of one share of Harper for every twenty shares of McCaffrey stock held by a stockholder. On that date, when the market price of Harper was $34 per share, there were 280,000 shares of McCaffrey outstanding. What net reduction in retained earnings would result from this property dividend? A. $150,000 B. $176,000 C. $326,000 D. $476,000
C. $326,000 280,000/20 = 14,000 shares of Harper 14,000 * $34 = $476,000 cost $326,000 unrealized gain $150,000 Retained Earnings: + 150,000 -476,000 = 326,000
Hise Inc., has 4,000 shares of 9%, $100 par value, cumulative preferred stock and 200,000 shares of $1 par value common stock outstanding at December 31, 2017, and December 31, 2016. The board of directors declared and paid a $25,000 dividend in 2016. In 2017, $74,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2017? A. $11,000 B. $36,000 C. $47,000 D. $74,000
C. $47,000 4000 * 100 * 9% = 36,000 - 25,000 11,000 in arrears 11,000 + 36,000 = 47,000
Presented below is information related to Schoenthaler Corporation: Common Stock , $5 par: $1,100,000 Paid-in Capital in Excess of Par - Common Stock: 400,000 Preferred 5 ½% Stock, $100 par: 1,500,000 Paid-in Capital in Excess of Par—Preferred Stock: 500,000 Retained Earnings: 2,000,000 Paid-in Capital in Excess of Cost - Treasury Stock: 150,000 The total stockholders' equity of Schoenthaler Corporation is: A. $3,650,000 B. $5,350,000 C. $5,650,000 D. $5,500,000
C. $5,650,000 Add all the numbers together
On January 1, 2017, Vancleave Corporation had 110,000 shares of its $.001 par value common stock outstanding. On November 27, when the market price of the stock was $8, the corporation declared a 10% stock dividend to be issued to stockholders of record on December 28, 2017. What was the impact of the 10% stock dividend on the balance of the retained earnings account? A. $11,000 decrease B. $77,000 decrease C. $88,000 decrease D. No effect
C. $88,000 decrease (110,000 * .10) = 11,000 * 8 = 88,000
The residual interest in a corporation belongs to the: A. management. B. creditors. C. common stockholders. D. preferred stockholders.
C. Common Stockholders
Which of the following best describes a possible result of treasury stock transactions by a corporation? A. May increase but not decrease retained earnings B. May increase net income if the cost method is used C. May decrease but not increase retained earnings D. May decrease but not increase net income
C. May decrease but not increase retained earnings
Which of the following best describes a possible result of treasury stock transactions by a corporation? A. May increase but not decrease retained earnings. B. May increase net income if the cost method is used. C. May decrease but not increase retained earnings. D. May decrease but not increase net income.
C. May decrease but not increase retained earnings.
What effect does the issuance of a 2-for-1 stock split have on each of the following? A. Par Value per Share: No effect Retained Earnings: No effect B. Par Value per Share: Increase Retained Earnings: No effect C. Par Value per Share: Decrease Retained Earnings: No effect D. Par Value per Share: Decrease Retained Earnings: Decrease
C. Par Value per Share: Decrease Retained Earnings: No effect
Which of the following features of preferred stock makes the security more like debt than an equity instrument? A. Participating B. Voting C. Redeemable D. Noncumulative
C. Redeemable
At the date of declaration of a large common stock dividend, the entry should include A. a credit to Common Stock Dividend Payable B. a credit to Paid-in Capital in Excess of Par C. a debit to Retained Earnings D. a credit to Cash
C. a debit to Retained Earnings
Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as: A. an increase in current liabilities. B. an increase in stockholders' equity. C. a footnote. D. an increase in current liabilities for the current portion and long-term liabilities for the long-term portion.
C. a footnote.
Common stockholders of a business enterprise are said to be the residual owners. The term residual owner means that shareholders: A. are entitled to a dividend every year in which the business earns a profit. B. have the rights to specific assets of the business. C. bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership. D. can negotiate individual contracts on behalf of the enterprise.
C. bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership.
Additional paid-in capital is not affected by the issuance of: A. stated value stock B. par value stock C. no-par stock D. preferred stock
C. no-par stock
Cash dividends are paid on the basis of the number of shares: A. authorized. B. issued. C. outstanding. D. outstanding less the number of treasury shares.
C. outstanding.
To address inconsistencies and weaknesses, a comprehensive revenue recognition model was developed entitled the: A) Revenue Recognition Principle. B) Principle-based Revenue Accounting. C) Rules-based Revenue Accounting. D) Revenue from Contracts with Customers.
D) Revenue from Contracts with Customers.
Presented below is information related to Kaenzig Corporation: Common Stock , $1 par $2,100,000 Paid-in Capital in Excess of Par - Common Stock 550,000 Preferred 8 ½% Stock, $50 par 1,700,000 Paid-in Capital in Excess of Par—Preferred Stock 500,000 Retained Earnings 950,000 Treasury Common Stock (at cost) 250,000 The total stockholders' equity of Kaenzig Corporation is A. $2,300,000 B. $5,300,000 C. $7,400,000 D. $5,550,000
D. $5,550,000 2,100,000 + 550,000 + 1,700,000 + 950,000 + 500,000 - 250,000
Gulfport Corporation was organized in January 2017 with authorized capital of $.0001 par value common stock. On February 1, 2015, shares were issued at par for cash. On March 1, 2017, the corporation's attorney accepted 5,000 shares of common stock in settlement for legal services with a fair value of $25,250. Additional paid-in capital would increase on 2/1/2015 3/1/2017 A. Yes No B. Yes Yes C. No No D. No Yes
D. No Yes The first issuance of stock is sold at par so no additional paid-in capital is recorded. The attorney accepted the stock at ($25,250 / 5,000 shares) = $5.05, a value greater than par so additional paid-in capital is recorded.
On October 31, 2017, Lexington Corp. declared and issued a 12% common stock dividend. Prior to this dividend, Lexington had 302,000 shares of $.001 par value common stock issued and outstanding. The fair value of Lexington's common stock was $16.75 per share on October 31, 2017. As a result of this stock dividend, the company's total stockholders' equity: A. increased by $302,000 B. decreased by $5,058,198 C. decreased by $5,058,500 D. did not change
D. did not change
Treasury shares are: A. shares held as an investment by the treasurer of the corporation. B. shares held as an investment of the corporation. C. issued and outstanding shares. D. issued but not outstanding shares
D. issued but not outstanding shares
Stock that has a fixed per-share amount printed on each stock certificate is called: A. stated value stock. B. fixed value stock. C. uniform value stock. D. par value stock.
D. par value stock.
In a corporate form of business organization, legal capital is best defined as: A. the amount of capital the state of incorporation allows the company to accumulate over its existence. B. the par value of all capital stock issued. C. the amount of capital the federal government allows a corporation to generate. D. the total capital raised by a corporation within the limits set by the Securities and Exchange Commission.
b. the par value of all capital stock issued.
The amount of consideration that a company expects to receive from a customer in exchange for transferring a good or service:
the transaction price
