ACC 607Gleim Exam1

Verona Co. had $500,000 in current liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the current debt. What amount should Verona report as a current liability on its balance sheet at the end of the current year? 500000 100000 400000 0

100000

On January 1, Year 1, Gilson Corporation issued 1,000 of its 9%, $1,000 callable bonds for $1,030,000. The bonds are dated January 1, Year 1, and mature on December 31, Year 15. Interest is payable semiannually on January 1 and July 1. The bonds can be called by the issuer at 102 on any interest payment date after December 31, Year 5. The unamortized bond premium was $14,000 at December 31, Year 8, and the market price of the bonds was 99 on this date. In its December 31, Year 8, balance sheet, at what amount should Gilson report the carrying value of the bonds? 990000 1016000 1014000 1020000

1014000

At January 1, Jamin Co. had a credit balance of $260,000 in its allowance for uncollectible accounts. Based on past experience, 2% of Jamin's credit sales have been uncollectible. During the year, Jamin wrote off $325,000 of uncollectible accounts. Credit sales for the year were $9 million. In its December 31 balance sheet, what amount should Jamin report as allowance for uncollectible accounts? 115000 245000 440000 180000

115000

On June 1 of the current year, Dahli Corp. issued $300,000 of 8% bonds payable at par with interest payment dates of April 1 and October 1. In its income statement for the current year ended December 31, what amount of interest expense should Dahli report?

$14,000 This answer is correct. Interest expense is a function of time. Thus, regardless of when interest payment dates occur, interest expense is calculated for the amount of time the bond is outstanding during the period. The bond was issued June 1, so 7 months of interest have accrued. Interest for the entire year is $24,000 ($300,000 face amount × 8% stated rate). Accordingly, interest expense for the year was $14,000 [$24,000 × (7 ÷ 12)]. The full calculation is unnecessary because $14,000 is the only amount that is more than half of the 12-month value.

The following costs were incurred by Griff Co., a manufacturer, during the current year: Accounting and legal fees $ 25,000 Freight-in 175,000 Freight-out 160,000 Officers' salaries 150,000 Insurance 85,000 Sales representatives' salaries 215,000 What amount of these costs should be reported as general and administrative expenses?

$260,000 This answer is correct. General and administrative expenses are incurred for the direction of the entity as a whole and are not related entirely to a specific function, e.g., selling or manufacturing. They include accounting, legal, and other fees for professional services; officers' salaries; insurance; wages of office staff; miscellaneous supplies; utilities costs; and office occupancy costs. Thus, the general and administrative expenses for Griff equaled $260,000 ($25,000 + $150,000 + $85,000).

Ace Co. sold to King Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments. This note was discounted to yield a 9% rate to King. The present value factors of an ordinary annuity of $1 for five periods are as follows: 8% 3.992 9% 3.890 What should be the total interest revenue earned by King on this note?

$5,560 This answer is correct. The equal annual payment based on the terms of the note was $5,010 ($20,000 ÷ 3.992 PV of an ordinary annuity for five periods at 8%). However, the note was discounted at 9%. Thus, the amount King must have paid for the note was the present value of the periodic payments discounted at 9%, or $19,489 ($5,010 × 3.89 PV of an ordinary annuity for five periods at 9%). Total interest revenue earned by King was therefore $5,561 [(5 payments × $5,010) - $19,489 cash paid].

Frame Co. has an 8% note receivable dated June 30, Year 1, in the original amount of $150,000. Payments of $50,000 in principal plus accrued interest are due annually on July 1 for Year 2, Year 3, and Year 4. In its June 30, Year 3, balance sheet, what amount should Frame report as a current asset for interest on the note receivable?

$8,000 This answer is correct. Current assets are those reasonably expected to be realized in cash, sold, or consumed during the longer of the operating cycle of a business or 1 year. Given that the date of the balance sheet is 6/30/Yr 3, the interest to be paid on the next day, 7/1/Yr 3, should be classified as a current asset. On 7/1/Yr 3, $8,000 ($100,000 remaining principal × 8%) of interest and $50,000 of principal are to be received. The $8,000 of interest receivable is a current asset.

On June 30, Year 4, Huff Corp. issued 1,000 of its 8%, $1,000 bonds at 99. The bonds were issued through an underwriter to whom Huff paid bond issue costs of $35,000. On June 30, Year 4, Huff should report the bond liability at

$955,000 This answer is correct. A bond issued at 99 is issued at a price equal to 99% of its face amount (1,000 bonds × $1,000 face amount × .99 = $990,000). Debt issue costs must be reported in the balance sheet as a direct deduction from the face amount of the debt. Thus, the net bond liability is reported at $955,000 ($1,000,000 face amount - $10,000 discount on bond - $35,000 bond issue costs).

Selected financial information for Kristina Company for the year just ended is shown below. Net income $2,000,000 Increase in net accounts receivable 300,000 Decrease in inventory 100,000 Increase in accounts payable 200,000 Depreciation expense 400,000 Gain on the sale of available-for-sale securities 700,000 Cash receivable from the issue of common stock 800,000 Cash paid for dividends 80,000 Cash paid for the acquisition of land 1,500,000 Cash received from the sale of available-for-sale securities 2,800,000 Kristina's cash flow from financing activities for the year is 800000 (80000) 720000 3520000

(80000)

Under SFAC No. 6, Elements of Financial Statements, interrelated elements of financial statements include Distributions to Owners Notes to Financial Statements

Yes No

According to the FASB's conceptual framework, comprehensive income includes which of the following? Gross Margin Operating Income

Yes Yes

The amount by which the fair value of a debt security exceeds its cost should be accounted for in the financial statements when the security is classified as Trading Available-for-Sale

Yes Yes

A reclassification of available-for-sale debt securities to the held-to-maturity category results in a. The reversal of any unrealized gain or loss previously recognized in other comprehensive income. b. The amortization of an unrealized gain or loss existing at the transfer date. c. The reversal of any unrealized gain or loss previously recognized in earnings. d. The recognition in earnings on the transfer date of an unrealized gain or loss.

b

In a statement of cash flows of a business enterprise, which of the following will increase reported cash flows from operating activities using the direct method? (Ignore income tax considerations.) a. Change from straight-line to accelerated depreciation. b. Dividends received from investments. c. Gain on sale of equipment. d. Gain on early retirement of bonds.

b

In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows from a. Lending activities. b. Financing activities. c. Investing activities. d. Operating activities.

b

The objective of performing analytical procedures in planning an audit is to identify the existence of a. Related party transactions. b. Unusual transactions and events. c. Recorded transactions that were not properly authorized. d. Noncompliance with laws and regulations that went undetected because of internal control deficiency.

b

Which of the following items is included in the financing activities section of the statement of cash flows? a. Cash effects of acquiring and disposing of investments and property, plant, and equipment. b. Cash effects of transactions obtaining resources from owners and providing them with a return on their investment. c. Cash effects of transactions that enter into the determination of net income. d. Cash effects of transactions involving making and collecting loans.

b

Which of the following statements is correct regarding reporting comprehensive income? a. Comprehensive income must include all changes in shareholders' equity for the period. b. Accumulated other comprehensive income is reported in the equity section of the balance sheet. c. A separate statement of comprehensive income is required. d. Comprehensive income is reported in the year-end statements but not in the interim statements.

b

With respect to the content and form of the statement of cash flows, a. The reconciliation of the net income to net operating cash flow need not be presented when using the direct method. b. The direct method of reporting cash flows from operating activities includes disclosing the major classes of gross cash receipts and gross cash payments. c. The pronouncements covering the cash flow statement encourage the use of the indirect method. d. The indirect method adjusts ending retained earnings to reconcile it to net cash flows from operations.

b

On January 1, Year 1, Peabody Co. purchased an investment for $400,000 that represented 30% of Newman Corp.'s outstanding voting stock. For Year 1, Newman reported net income of $60,000 and paid dividends of $20,000. At year end, the fair value of Peabody's investment in Newman was $410,000. Peabody elected the fair value option for this investment. What amount should Peabody recognize in net income for Year 1 attributable to the investment? a. 18000 b. 6000 c. 16000 d. 10000

c. Financial assets measured using the FVO are reported at their fair values, and unrealized gains and losses are recognized in the income statement at subsequent reporting dates. The investor selected the FVO. Thus, it does not apply the equity method even though its 30% interest is presumed to give it significant influence over the investee. Under the FVO, dividends received are accounted for as dividend income, not a reduction of the investment. Accordingly, the investor recognizes an unrealized gain of $10,000 ($410,000 - $400,000) and dividend income of $6,000 ($20,000 × 30%), a total of $16,000.

Sun Corp. had investments in trading debt securities costing $650,000. On June 30, Year 2, Sun decided to hold the investments indefinitely and accordingly reclassified them as available-for-sale debt securities on that date. The investments' fair value was $575,000 at December 31, Year 1, $530,000 at June 30, Year 2, and $490,000 at December 31, Year 2. What amount should Sun report as net unrealized loss on available-for-sale securities in its Year 2 other comprehensive income? a.85000 b.45000 c.40000 d.160000

c. The securities were available-for-sale securities after the reclassification, which was at fair value ($530,000 at 6/30/Yr 2). Subsequent unrealized holding gains and losses are excluded from net income and reported in other comprehensive income until realized. Accordingly, the amount reported as net unrealized loss on available-for-sale securities is $40,000 ($530,000 - $490,000 fair value at 12/31/Yr 2).

On January 2, Year 4, Nast Co. issued 8% bonds with a face amount of $1 million that mature on January 2, Year 10. The bonds were issued to yield 12%, resulting in a discount of $150,000. Nast incorrectly used the straight-line method instead of the effective-interest method to amortize the discount. How is the carrying amount of the bonds affected by the error? At Dec. 31, Year 4 At Jan. 2, Year 10 a. Overstated Understated b. Understated No effect c. Understated Overstated d. Overstated No effect

d

Royce Company had the following transactions during the fiscal year ended December 31, Year 2: Accounts receivable decreased from $115,000 on December 31, Year 1, to $100,000 on December 31, Year 2. Royce's board of directors declared dividends on December 31, Year 2, of $.05 per share on the 2.8 million shares outstanding, payable to shareholders of record on January 31, Year 3. The company did not declare or pay dividends for fiscal Year 1. Sold a truck with a net carrying amount of $7,000 for $5,000 cash, reporting a loss of $2,000. Paid interest to bondholders of $780,000. The cash balance was $106,000 on December 31, Year 1, and $284,000 on December 31, Year 2. The total of cash provided (used) by operating activities plus cash provided (used) by investing activities plus cash provided (used) by financing activities is a. Equal to net income reported for fiscal year ended December 31, Year 2. b. Cash provided of $284,000. c. Cash used of $582,000. d. Cash provided of $178,000.

d

What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts when reviewing the financial statements of a nonissuer? a. Risk analysis. b. Trend analysis. c. Regression analysis. d. Ratio analysis.

d

The following trial balance of Trey Co. at December 31, Year 6, has been adjusted except for income tax expense. Dr. Cr. Cash $ 550,000 Accounts receivable, net 1,650,000 Prepaid taxes 300,000 Accounts payable $ 120,000 Common stock 500,000 Additional paid-in capital 680,000 Retained earnings 630,000 Foreign currency translation adjustment 430,000 Revenues 3,600,000 Expenses 2,600,000 $5,530,000 $5,530,000 Additional Information During Year 6, estimated tax payments of $300,000 were charged to prepaid taxes. Trey has not yet recorded income tax expense. There were no differences between financial statement and income tax income, and Trey's tax rate is 30%. Included in accounts receivable is $500,000 due from a customer. Special terms granted to this customer require payment in equal semiannual installments of $125,000 every April 1 and October 1. In Trey's December 31, Year 6, balance sheet, what amount should be reported as total retained earnings? 1630000 1200000 1330000 1029000

1330000

On June 1 of the current year, Dahli Corp. issued $300,000 of 8% bonds payable at par with interest payment dates of April 1 and October 1. In its income statement for the current year ended December 31, what amount of interest expense should Dahli report? 6000 14000 8000 12000

14000

On December 1, Year 4, Tigg Mortgage Co. gave Pod Corp. a $200,000, 12% loan. Pod received proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,450, beginning January 1, Year 5. The repayments yield an effective interest rate of 12% at a present value of $200,000 and 13.4% at a present value of $194,000. What amount of accrued interest receivable should Tigg include in its December 31, Year 4, balance sheet? 4450 0 2000 2166

2000

Ward Co. estimates its uncollectible accounts expense to be 2% of credit sales. Ward's credit sales for the current year were $1 million. During the year, Ward wrote off $18,000 of uncollectible accounts. Ward's allowance for uncollectible accounts had a $15,000 balance on January 1. In its December 31 income statement, what amount should Ward report as uncollectible accounts expense? 17000 20000 23000 18000

20000

On December 1, Year 4, Money Co. gave Home Co. a $200,000, 11% loan. Money paid proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,310, beginning January 1, Year 5. The repayments yield an effective interest rate of 11% at a present value of $200,000 and 12.4% at a present value of $194,000. What amount of income from this loan should Money report in its Year 4 income statement? 2005 1833 0

2005

The following is Gold Corp.'s June 30, Year 6, trial balance: Dr. Cr. Cash overdraft $ 10,000 Accounts receivable, net $ 35,000 Inventory 58,000 Prepaid expenses 12,000 Land held for resale 100,000 Property, plant, and equipment, net 95,000 Accounts payable and accrued expenses 32,000 Common stock 25,000 Additional paid-in capital 150,000 Retained earnings 83,000 $300,000 $300,000 Additional information: Checks amounting to $30,000 were written to vendors and recorded on June 29, Year 6, resulting in a cash overdraft of $10,000. The checks were mailed on July 9, Year 6. Land held for resale was sold for cash on July 15, Year 6. Gold issued its financial statements on July 31, Year 6. In its June 30, Year 6 balance sheet, what amount should Gold report as current assets? 225000 205000 125000 195000

225000

A company is preparing its year-end cash flow statement using the indirect method. During the year, the following transactions occurred: Dividends paid $300 Proceeds from the issuance of common stock 250 Borrowings under a line of credit 200 Proceeds from the issuance of convertible bonds 100 Proceeds from the sale of a building 150 What is the company's increase in cash flows provided by financing activities for the year? 150 550 250 50

250

The following information has been compiled by Able Manufacturing Company: Sale of company products for the period to customers with net 30-day terms amounting to $150,000. Sale of company products for the period to a customer, supported by a note for $25,000, with special terms of net 180 days. Balance of trade receivables at the end of the last period was $300,000. Collections of open trade receivables during the period was $200,000. Rental income for the period, both earned and accrued but not yet collected, from the Able Employees' Credit Union for use of company facilities was $2,000. The open trade receivables balance to be shown on the statement of financial position for the period is 277000 252000 250000 275000

250000

On January 2, Year 1, West Co. issued 9% bonds in the amount of $500,000, which mature on January 2, Year 11. The bonds were issued for $469,500 to yield 10%. Interest is payable annually on December 31. West uses the interest method of amortizing bond discount. In its June 30, Year 1, balance sheet, what amount should West report as bonds payable? 471025 470475 469500 500000

470475

The following information pertains to Oro Corp.: Credit sales for the year ended December 31 $450,000 Credit balance in allowance for uncollectible accounts at January 1 10,800 Bad debts written off during the year 18,000 According to past experience, 3% of Oro's credit sales have been uncollectible. After provision is made for bad debt expense for the year ended December 31, the allowance for uncollectible accounts balance would be 31500 24300 13500 6300

6300

Clear Co.'s trial balance has the following selected accounts: Cash (includes $10,000 in bond-sinking fund for long-term bond payable) $50,000 Accounts receivable 20,000 Allowance for doubtful accounts 5,000 Deposits received from customers 3,000 Merchandise inventory 7,000 Unearned rent 1,000 Investment in trading debt securities 2,000 What amount should Clear report as total current assets in its balance sheet? 74000 72000 67000 64000

64000

Gar, Inc.'s trial balance reflected the following liability account balances at December 31, Year 6: Accounts payable $19,000 Bonds payable, due Year 7 34,000 Deferred tax liability 4,000 Discount on bonds payable 2,000 Dividends payable on 2/15/Year 7 5,000 Income tax payable 9,000 Notes payable, due Year 8 6,000 The deferred tax liability is based on temporary differences that will reverse in Year 8 and Year 9. In Gar's December 31, Year 6, balance sheet, the current liabilities total was 69000 67000 71000 65000

65000

An internal auditor is deriving cash flow data based on an incomplete set of facts. Bad debt expense was $2,000. Additional data for this period follows: Credit sales $100,000 Gross accounts receivable -- beginning balance 5,000 Allowance for bad debts -- beginning balance (500) Accounts receivable written off 1,000 Increase in net accounts receivable (after subtraction of allowance for bad debts) 30,000 How much cash was collected this period on credit sales? 70000 68500 64000 68000

68000

Anchor Co. owns 40% of Main Co.'s common stock outstanding and 75% of Main's noncumulative preferred stock outstanding. Anchor exercises significant influence over Main's operations. During the current period, Main declared dividends of $200,000 on its common stock and $100,000 on its noncumulative preferred stock. What amount of dividend income should Anchor report on its income statement for the current period related to its investment in Main? 75000 80000 120000 225000

75000 Under the equity method, the receipt of a cash dividend from the investee should be credited to the investment account. It is a return of, not a return on, the investment. However, the equity method is not applicable to preferred stock. Thus, Anchor should report $75,000 ($100,000 × 75%) of revenue when the preferred dividends are declared.

Which of the following is ordinarily designed to detect possible material dollar misstatements in the financial statements? Post-audit working paper review. Analytical procedures. Computer controls. Tests of controls.

Analytical procedures

A gain or loss from a transaction that is unusual in nature or infrequent in occurrence should be reported separately as a component of income

Before results of discontinued operations

Which of the following are acceptable formats for reporting comprehensive income? I. In one continuous financial statement II. In a statement of changes in equity III. In a separate statement of net income IV. In two separate but consecutive financial statements

I and IV only. This answer is correct. If an entity that presents a full set of financial statements has items of other comprehensive income (OCI), it must present comprehensive income either (1) in a single continuous statement of comprehensive income or (2) in two separate but consecutive statements (an income statement and a statement of OCI).

Stone Co. is considering the acquisition of equipment. To buy the equipment, the cost is $15,192. To lease the equipment, Stone must sign a noncancelable lease and make five payments of $4,000 each. The first payment will be paid on the first day of the lease. At the time of the last payment, Stone will receive title to the equipment. The present value of an ordinary annuity of $1 is as follows: Present Value No. of Periods 10% 12% 16% 1 0.909 0.893 0.862 2 1.736 1.690 1.605 3 2.487 2.402 2.246 4 3.170 3.037 2.798 5 3.791 3.605 3.274 The interest rate implicit in this lease is approximately

16% This answer is correct. The rate implicit in the lease is the interest rate that on the lease commencement date causes the fair value of the leased asset to equal the present value of the lease payments. To perform this computation, a present value factor must be derived and compared with those in the table. The factor can be calculated by dividing the relevant present value by the periodic payment. Full cost of equipment (present value) $15,192 Minus: First payment, due immediately (4,000) Amount financed (present value of an ordinary annuity of 4 $4,000 payments) $11,192 Divided by: Periodic payment ÷ 4,000 Present value factor 2.798 Consulting the table reveals that the factor inherent in this calculation for a 4-period annuity is 16%.

A company has the following liabilities at year end: Mortgage note payable; $16,000 due within 12 months $355,000 Short-term debt that the company is refinancing with long-term debt 175,000 Deferred tax liability arising from depreciation 25,000 What amount should the company include in the current liability section of the balance sheet? 41000 191000 16000 0

16000

On November 1, Mason Corp. issued $800,000 of its 10-year, 8% term bonds dated October 1. The bonds were sold to yield 10%, with total proceeds of $700,000 plus accrued interest. Interest is paid every April 1 and October 1. What amount should Mason report for interest payable in its December 31 balance sheet? 11667 17500 10667 16000

16000

7833Rand, Inc., accepted from a customer a $40,000, 90-day, 12% interest-bearing note dated August 31. On September 30, Rand discounted the note at the Apex State Bank at 15%. However, the proceeds were not received until October 1. In Rand's September 30 balance sheet, the amount receivable from the bank, based on a 360-day year, includes accrued interest revenue of 376 170 300 462

170

On July 1, Year 1, Denver Corp. purchased 3,000 shares of Eagle Co.'s 10,000 outstanding shares of common stock for $20 per share but did not elect the fair value option. On December 15, Year 1, Eagle paid $40,000 in dividends to its common shareholders. Eagle's net income for the year ended December 31, Year 1, was $120,000, earned evenly throughout the year. In its Year 1 income statement, what amount of income from this investment should Denver report? 36000 6000 18000 12000

18000 Denver Corp.'s purchase of 30% of Eagle presumably allows it to exercise significant influence. Thus, it should apply the equity method. The investor's share of the investee's income is a function of the percentage of ownership and the length of time the investment was held. The income from this investment was therefore $18,000 [$120,000 × 30% × (6 months ÷ 12 months)].

On July 1, Lee Co. sold goods in exchange for a $200,000 8-month noninterest-bearing note receivable. At the time of the sale, the note's market rate of interest was 12%. What amount did Lee receive when the note was discounted at a bank at 10% on September 1? 180000 190000 186667 188000

190000

On January 1, Year 2, Pine Corp. sold 200 of its 8%, $1,000 bonds at 97 plus accrued interest. The bonds are dated October 1, Year 1, and mature on October 1, Year 11. Interest is payable semiannually on April 1 and October 1. Accrued interest for the period October 1, Year 1, to January 1, Year 2, amounted to $4,000. On January 1, Year 2, Pine should report bonds payable, net of discount, at 194150 196000 194000 190150

194000

The following trial balance of Trey Co. at December 31, Year 6, has been adjusted except for income tax expense. Dr. Cr. Cash $ 550,000 Accounts receivable, net 1,650,000 Prepaid taxes 300,000 Accounts payable $ 120,000 Common stock 500,000 Additional paid-in capital 680,000 Retained earnings 630,000 Foreign currency translation adjustment 430,000 Revenues 3,600,000 Expenses 2,600,000 $5,530,000 $5,530,000 Additional Information During Year 6, estimated tax payments of $300,000 were charged to prepaid taxes. Trey has not yet recorded income tax expense. There were no differences between financial statement and income tax income, and Trey's tax rate is 30%. Included in accounts receivable is $500,000 due from a customer. Special terms granted to this customer require payment in equal semiannual installments of $125,000 every April 1 and October 1. In Trey's December 31, Year 6, balance sheet, what amount should be reported as total current assets? 1950000 2500000 2200000 2250000

1950000

On March 1, Year 1, Cain Corp. issued, at 103 plus accrued interest, 200 of its 9%, $1,000 bonds. The bonds are dated January 1, Year 1, and mature on January 1, Year 11. Interest is payable semiannually on January 1 and July 1. Cain paid bond issue costs of $10,000. Cain should realize net cash receipts from the bond issuance of 199000 206000 216000 209000

199000

The following are held by Smite Co.: Cash in checking account $20,000 Cash in bond sinking fund account 30,000 Post-dated check from customer dated one month from balance sheet date 250 Petty cash 200 Commercial paper (matures in two months) 7,000 Certificate of deposit (matures in six months) 5,000 What amount should be reported as cash and cash equivalents on Smite's balance sheet? 57200 27200 32200 27450

27200 Cash consists of (1) coin and currency on hand, (2) demand deposits (checking accounts), (3) time deposits (savings accounts), and (4) near-cash assets (e.g., deposits in transit or commercial paper, also known as negotiable instruments). Thus, the cash in checking and petty cash are included in cash and cash equivalents. Cash that is restricted to use for other than current operations, designated for the acquisition or construction of noncurrent assets, or segregated for the liquidation of long-term debts (e.g., a sinking fund) is noncurrent. Undeposited checks from customers are near-cash items, but they are excluded if they are undepositable (e.g., postdated or unsigned). Cash equivalents are short-term, highly liquid investments. Normally, only investments with original maturities of 3 months or less qualify. Hence, the CD is not included. However, commercial paper with an original maturity of two months is a cash equivalent. The balance reported is therefore $27,200 ($20,000 checking + $200 petty cash + $7,000 commercial paper).

Corey Co.'s income statement accounts for the year ended December 31, Year 2, included the following: Sales $800,000 Cost of sales 320,000 Administrative expenses 80,000 Interest expenses 10,000 Other Information Available-for-sale debt securities held by the company had fair values of $250,000 and $300,000 on December 31, Year 1, and December 31, Year 2, respectively. On December 31, Year 2, 70,000 shares of common stock, $1.00 par, were outstanding. Corey repurchased 25,000 shares on June 1, Year 2. Corey's enacted tax rate for the current and future years is 30%. Corey's comprehensive income is

308,000 This answer is correct. Corey's income before income taxes for Year 2 is $390,000 ($800,000 sales - $320,000 cost of sales - $80,000 administrative expenses - $10,000 interest expense), and net income is $273,000 [$390,000 × (1.0 - .30)]. Corey's other comprehensive income includes the unrealized holding gain on available-for-sale debt securities, net of tax. Other comprehensive income is $35,000 [$50,000 × (1.0 - .30)]. Thus, comprehensive income is $308,000 ($273,000 + $35,000).

On January 2, Vole Co. issued bonds with a face value of $480,000 at a discount to yield 10%. The bonds pay interest semiannually. On June 30, Vole paid bond interest of $14,400. After Vole recorded amortization of the bond discount of $3,600, the bonds had a carrying amount of $363,600. What amount did Vole receive upon issuing the bonds? 476400 480000 367200 360000

360000

Flax Corp. uses the direct method to prepare its statement of cash flows. Flax's trial balances at December 31, Year 6 and Year 5, are as follows: December 31 Debits Year 6 Year 5 Cash $ 35,000 $ 32,000 Accounts receivable 33,000 30,000 Inventory 31,000 47,000 Property, plant, & equipment 100,000 95,000 Unamortized bond discount 4,500 5,000 Cost of goods sold 250,000 380,000 Selling expenses 141,500 172,000 General and administrative expenses 137,000 151,300 Interest expense 4,300 2,600 Income tax expense 20,400 61,200 $756,700 $976,100 December 31 Credits Year 6 Year 5 Allowance for uncollectible accounts $ 1,300 $ 1,100 Accumulated depreciation 16,500 15,000 Trade accounts payable 25,000 17,500 Income taxes payable 21,000 27,100 Deferred income taxes 5,300 4,600 8% callable bonds payable 45,000 20,000 Common stock 50,000 40,000 Additional paid-in capital 9,100 7,500 Retained earnings 44,700 64,600 Sales 538,800 778,700 $756,700 $976,100 • Flax purchased $5,000 in equipment during Year 6. • Flax allocated one-third of its depreciation expense to selling expenses and the remainder to general and administrative expenses, which include the provision for uncollectible accounts. What amount should Flax report in its statement of cash flows for the year ended December 31, Year 6, for cash paid for interest? 3800 4300 4800 1700

3800

Karl Corp.'s trial balance of income statement accounts for the year ended December 31, Year 1, included the following: Debit Credit Sales $150,000 Cost of sales $ 60,000 Administrative expenses 15,000 Loss on sale of equipment 9,000 Commissions to salespersons 10,000 Interest revenue 5,000 Freight-out 3,000 Loss on disposal of Karl's major operating segment 10,000 Bad debt expense 3,000 Totals $110,000 $155,000 Other Information: Karl's income tax rate is 30%. On Karl's income statement for Year 1, income from continuing operations is 45000 55000 38500 31500

38500

Ral Corp.'s checkbook balance on December 31, Year 7, was $5,000. In addition, Ral held the following items in its safe on that date: Check payable to Ral Corp., dated January 2, Year 8, in payment of a sale made in December Year 7, not included in December 31 checkbook balance $2,000 Check payable to Ral Corp., deposited December 15 and included in December 31 checkbook balance but returned by Bank on December 30 stamped "NSF." The check was redeposited on January 2, Year 8, and cleared on January 9 500 Check drawn on Ral Corp.'s account, payable to a vendor, dated and recorded in Ral's books on December 31, but not mailed until January 10, Year 8 300 The proper amount to be shown as cash on Ral's balance sheet at December 31, Year 7, is 5300 4800 6500 6800

4800 he December 31 checkbook balance is $5,000. The $2,000 check dated January 2, Year 8, is properly not included in this balance because it is not negotiable at year end. The $500 NSF check should not be included in cash because it is a receivable. The $300 check that was not mailed until January 10 should be added to the balance. This predated check is still within the control of the company and should not decrease the cash account. Consequently, the cash balance to be reported on the December 31, Year 7, balance sheet is $4,800. Balance per checkbook $5,000 Add: Predated check 300 Deduct: NSF check (500) Cash balance 12/31/Year 7 $4,800

A company reported the following information for Year 1: Net income $34,000 Owner contribution 9,000 Deferred gain on a highly effective cash-flow hedge 8,000 Foreign currency translation gain 2,000 Prior service cost not recognized in net periodic pension cost 5,000 What is the amount of other comprehensive income for Year 1?

5,000 This answer is correct. Other comprehensive income (OCI) includes all items of comprehensive income not included in net income. Items of OCI include, among others, gains and losses on derivatives designated and qualifying as cash flow hedges; foreign currency translation gains and losses; and prior service costs not recognized in net periodic pension cost. The deferred gain on the effective cash-flow hedge and the foreign currency translation gain have a positive effect on other comprehensive income, but the prior service cost has a negative effect. The result is an amount of other comprehensive income for Year 1 equal to $5,000 ($8,000 + $2,000 - $5,000).

As of December 15, Year 4, Aviator had dividends in arrears of $200,000 on its cumulative preferred stock. Dividends for Year 4 of $100,000 have not yet been declared. The board of directors plans to declare cash dividends on its preferred and common stock on January 16, Year 5. Aviator paid an annual bonus to its CEO based on the company's annual profits. The bonus for Year 4 was $50,000, and it will be paid on February 10, Year 5. What amount should Aviator report as current liabilities on its balance sheet at December 31, Year 4? 350000 50000 150000 200000

50

Leaf Co. purchased from Oak Co. a $20,000, 8%, 5-year note that required five equal, annual year-end payments of $5,009. The note was discounted to yield a 9% rate to Leaf. At the date of purchase, Leaf recorded the note at its present value of $19,485. What should be the total interest revenue earned by Leaf over the life of this note? 9000 5045 5560 8000

5560

On January 1, Jennie Corporation purchased 30% of the common stock of Katlee Company for $500,000. The following information relates to Katlee at the date of acquisition. Cash $ 50,000 Accounts receivable (net) 250,000 Building (net) 700,000 Land 100,000 Liabilities 100,000 Additional information relating to the purchase appears below. Jennie has the ability to exercise significant influence over Katlee and did not elect the fair value option. Both the carrying amount and the fair value are the same for receivables, land, and liabilities. The fair value of the building is $900,000. Jennie depreciates its assets on a straight-line basis. Both tangible and intangible assets are amortized over 10 years. For the current year, Katlee had net income of $400,000 and declared and paid dividends of $100,000. What amount should Jennie report for its investment in Katlee at the end of the current year? 500,000 584,000 620,000 600,000

584,000 Jennie's investment in Katlee is accounted for using the equity method. Jennie's initial investment is $500,000. To this, Jennie adds its proportional share of Katlee's earnings ($400,000 × 30% = $120,000) and subtracts its proportional share of Katlee's dividend distribution ($100,000 × 30% = $30,000). Jennie also subtracts its proportional share of depreciation on the excess of Katlee's building's fair value over its carrying amount {[($900,000 - $700,000) ÷ 10 years] = $20,000}. Jennie's share is $6,000 ($20,000 × 30%). Jennie's year-end investment in Katlee can thus be calculated as follows: Initial investment $500,000 Share of earnings 120,000 Payment of dividends (30,000) Share of excess depreciation (6,000) Ending balance $584,000

Green Corp. owns 30% of the outstanding common stock and 100% of the outstanding noncumulative nonvoting preferred stock of Axel Corp. In Year 1, Axel declared dividends of $100,000 on its common stock and $60,000 on its preferred stock. Green exercises significant influence over Axel's operations and uses the equity method to account for the investment in the common stock. What amount of dividend revenue should Green report in its income statement for the year ended December 31, Year 1? 90,000 60,000 30,000 0

60,000 Under the equity method, the receipt of a cash dividend from the investee should be credited to the investment account. It is a return of, not a return on, the investment. However, the equity method is not applicable to preferred stock. Thus, Green should report $60,000 of revenue when the preferred dividends are declared.

Barber Company has recorded the following payments for the current period: Interest paid on bank loan $300,000 Dividends paid to Barber shareholders 200,000 Repurchase of Barber stock 400,000 The amount to be shown in the financing activities section of Barber's statement of cash flows should be 500000 600000 900000 300000

600000

Dixon Company has the following items recorded on its financial records: Available-for-sale debt securities $200,000 Prepaid expenses 400,000 Treasury stock 100,000 The total amount of the above items to be shown as assets on Dixon's statement of financial position is 600000 700000 400000 500000

600000

On July 1, Year 1, Eagle Corp. issued 600 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, Year 1, and mature on April 1, Year 11. Interest is payable semiannually on April 1 and October 1. What amount did Eagle receive from the bond issuance? 600000 594000 579000 609000

609000 (A bond issued "at 99" is issued at a price equal to 99% of its face amount (600 bonds × $1,000 face amount × .99 = $594,000). Accrued interest for 3 months was $15,000 [$600,000 face amount × 10% coupon rate × (3 ÷ 12)]. The net cash received from the issuance of the bonds was therefore $609,000 ($594,000 bond proceeds + $15,000 accrued interest).)

An auditor most likely will use analytical procedures to form an overall conclusion to

Determine whether additional audit evidence may be needed.

A statement of financial position provides a basis for all of the following except Assessing liquidity and financial flexibility. Computing rates of return. Evaluating capital structure. Determining profitability and assessing past performance.

Determining profitability and assessing past performance. This answer is correct. The statement of financial position, also known as the balance sheet, reports an entity's financial position at a moment in time. It is therefore not useful for assessing past performance for a period of time. A balance sheet can be used to help users assess liquidity, financial flexibility, profitability, and risk.

25800

Flax Corp. uses the direct method to prepare its statement of cash flows. Flax's trial balances at December 31, Year 6 and Year 5, are as follows: December 31 Debits Year 6 Year 5 Cash$ 35,000$ 32,000 Accounts receivable 33,000 30,000 Inventory 31,000 47,000 Property, plant, & equipment 100,000 95,000 Unamortized bond discount 4,500 5,000 Cost of goods sold 250,000 380,000 Selling expenses 141,500 172,000 General and administrative expenses 137,000 151,300 Interest expense 4,300 2,600 Income tax expense 20,400 61,200 $756,700 $976,100 December 31 Credits Year 6 Year 5 Allowance for uncollectible accounts $ 1,300 $ 1,100 Accumulated depreciation 16,500 15,000 Trade accounts payable 25,000 17,500 Income taxes payable 21,000 27,100 Deferred income taxes 5,300 4,600 8% callable bonds payable 45,000 20,000 Common stock 50,000 40,000 Additional paid-in capital 9,100 7,500 Retained earnings 44,700 64,600 Sales 538,800 778,700 $756,700 $976,100 • Flax purchased $5,000 in equipment during Year 6. • Flax allocated one-third of its depreciation expense to selling expenses and the remainder to general and administrative expenses, which include the provision for uncollectible accounts. What amount should Flax report in its statement of cash flows for the year ended December 31, Year 6, for cash paid for income taxes? 25800 15000 19700 20400

...

Flax Corp. uses the direct method to prepare its statement of cash flows. Flax's trial balances at December 31, Year 6 and Year 5, are as follows: December 31 Debits Year 6 Year 5 Cash $ 35,000 $ 32,000 Accounts receivable 33,000 30,000 Inventory 31,000 47,000 Property, plant, & equipment 100,000 95,000 Unamortized bond discount 4,500 5,000 Cost of goods sold 250,000 380,000 Selling expenses 141,500 172,000 General and administrative expenses 137,000 151,300 Interest expense 4,300 2,600 Income tax expense 20,400 61,200 $756,700 $976,100 December 31 Credits Year 6 Year 5 Allowance for uncollectible accounts $ 1,300 $ 1,100 Accumulated depreciation 16,500 15,000 Trade accounts payable 25,000 17,500 Income taxes payable 21,000 27,100 Deferred income taxes 5,300 4,600 8% callable bonds payable 45,000 20,000 Common stock 50,000 40,000 Additional paid-in capital 9,100 7,500 Retained earnings 44,700 64,600 Sales 538,800 778,700 $756,700 $976,100 • Flax purchased $5,000 in equipment during Year 6. • Flax allocated one-third of its depreciation expense to selling expenses and the remainder to general and administrative expenses, which include the provision for uncollectible accounts. What amount should Flax report in its statement of cash flows for the year ended December 31, Year 6, for cash paid for income taxes? 25800 15000 19700 20400

On December 31, Jet Co. received two $10,000 notes receivable from customers in exchange for services rendered. On both notes, interest is calculated on the outstanding principal balance at the annual rate of 3% and payable at maturity. The note from Hart Corp., made under customary trade terms is due in 9 months and the note from Maxx, Inc., is due in 5 years. The market interest rate for similar notes on December 31 was 8%. The compound interest factors to convert future values into present values at 8% follow: Present value of $1 due in 9 months .944 Present value of $1 due in 5 years .680 At what amounts should these two notes receivable be reported in Jet's December 31 balance sheet?

Hart $10,000 Maxx $7,820 This answer is correct. The presumption when a note is exchanged for services is that the interest rate is fair. If the rate is not stated or is unreasonable, the note and the services should be recorded at the fair value of the services or the market value of the note, whichever is more clearly determinable. Without these values, the present value of the note should be the basis for recording both the note and the services. This present value is obtained by discounting all future payments on the note using an imputed rate. The 3% rate on the Maxx note is unreasonable in light of the prevailing 8% rate for similar notes. This 5-year note should therefore be discounted at an imputed rate of 8%. Because annual interest on the principal is to be paid at maturity, the lump-sum payment due in 5 years is $11,500 {$10,000 + [5 years × ($10,000 × 3%) interest]}. The present value of this amount is $7,820 ($11,500 × .680). However, present-value accounting does not apply to receivables from customers arising in the normal course of business that are due in customary trade terms not exceeding approximately 1 year. Thus, in practice, the Hart note is most likely to be reported at its face amount ($10,000).

The four major tasks that any system must perform are

Input, transformation, output, and storage.

When a full set of general-purpose financial statements is presented, comprehensive income and its components

Must be reported in a presentation that includes the components of other comprehensive income and their total.

Which of the following should be included in general and administrative expenses? Interest Advertising

No No

An investor purchased a bond classified as a long-term investment between interest dates at a discount. At the purchase date, the carrying amount of the bond is more than the Cash Paid to Seller. Face Amount of Bond

No No

Peel Co. received a cash dividend from a common stock investment. Should Peel report an increase in the investment balance if it uses the fair value method or the equity method of accounting?

No No

When the equity method is used to account for investments in common stock, which of the following affects the investor's reported investment income? Goodwill Amortization Related Cash Dividends to the Purchase from Investee CLICK TO REVEAL EXPLANATIONS a. Yes No b. No Yes c. Yes Yes d. No No

No No Under the equity method of accounting for an investment, neither amortization of goodwill nor dividends from the investee affect the investor's investment income. Goodwill resulting from an investment in another entity (i.e., the excess of the cost of the investment over the investor's share of the fair value of the investee's identifiable assets) is not amortized. Dividends from the investee are not recognized as income; rather, they reduce the investment account.

When the allowance method of recognizing uncollectible accounts is used, how would the collection of an account previously written off affect accounts receivable and the allowance for uncollectible accounts?

No effect, Increase

Which of the following is an analytical procedure that an auditor most likely uses to form an overall conclusion?

Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified.

A company has a 22% investment in another company that it accounts for using the equity method. Which of the following disclosures should be included in the company's annual financial statements? The reason for the company's decision to invest in the investee company. The names and ownership percentages of the other stockholders in the investee company. Whether the investee company is involved in any litigation. The company's accounting policy for the investment.

The company's accounting policy for the investment.

Which of the following statements is true concerning analytical procedures? Analytical procedures are more efficient, but not more effective, than tests of details and transactions. When expectations are more precise, significant variances are more likely to be due to misstatements. Analytical procedures usually involve comparisons of ratios developed from recorded amounts to assertions developed by management. Analytical procedures can replace tests of controls in gathering evidence to support the assessed risks of material misstatement.

When expectations are more precise, significant variances are more likely to be due to misstatements. This answer is correct. As the auditor's expectation becomes more precise, significant differences between the auditor's expectation and management's reported amount are more likely to be caused by misstatements. Ordinarily, the more detailed information, the more precise the expectation. For example, monthly data provide more precise expectations than annual data.

According to authoritative GAAP issued by the FASB, an entity that presents a full set of financial statements a. Must report comprehensive income if it has items of other comprehensive income (OCI). b. May report comprehensive income instead of net income. c. Must report comprehensive income even if it has no items of other comprehensive income. d. Must report other comprehensive income (OCI) in the liabilities section of the statement of financial position.

a

On July 1, Year 1, a company obtained a 2-year 8% note receivable for services rendered. At that time, the market rate of interest was 10%. The face amount of the note and the entire amount of the interest are due on June 30, Year 2. Interest receivable at December 31, Year 1, was a. 4% of the face amount of the note. b. 5% of the July 1, Year 1, present amount of the amount due June 30, Year 2. c. 5% of the face amount of the note. d. 4% of the July 1, Year 1, present amount of the amount due June 30, Year 2.

a

Redwood Co.'s financial statements had the following information at year-end: Cash $ 60,000 Accounts receivable 180,000 Allowance for uncollectible accounts 8,000 Inventory 240,000 Short-term marketable securities 90,000 Prepaid rent 18,000 Current liabilities 400,000 Long-term debt 220,000 What was Redwood's quick ratio? a. 0.81 to 1 b. 0.94 to 1 c. 1.45 to 1 d. 0.83 to 1

a

Which of the following procedures would an auditor most likely perform in planning a financial statement audit? a. Comparing the financial statements with anticipated results. b. Inquiring of the client's legal counsel concerning pending litigation. c. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities. d. Examining computer-generated exception reports to verify the effectiveness of internal control.

a

Beach Co. determined that the decline in the fair value (FV) of an investment in debt securities was below the amortized cost and permanent in nature. The investment was classified as available-for-sale on Beach's books. The controller would properly record the decrease in FV by including it in which of the following? a. Other comprehensive income section of the income statement, and writing down the cost basis to FV. b. Earnings section of the income statement and writing down the cost basis to FV. c. Discontinued operations section of the income statement, net of tax, and writing down the cost basis to FV. d. Other comprehensive income section of the income statement only.

b. The amortized cost basis is used to calculate the amount of any impairment. The amortized cost basis should be distinguished from fair value, which equals the cost basis plus or minus the net unrealized holding gain or loss. If a decline in fair value of an individual available-for-sale debt security below its amortized cost basis is other than temporary, the amortized cost basis is written down to fair value as a new cost basis. The write-down is deemed to be a realized loss and is included in earnings.

On October 1, Year 1, Park Co. purchased 200 of the $1,000 face amount, 10% bonds of Ott, Inc., for $220,000, including accrued interest of $5,000. The bonds, which mature on January 1, Year 8, pay interest semiannually on January 1 and July 1. Park used the straight-line method of amortization and appropriately recorded the bonds as a long-term investment. On Park's December 31, Year 2, balance sheet, the bonds should be reported at a.214,200 b.212,000 c.214,400 d.215,000

b. The carrying amount of a bond investment does not include the amount of accrued interest paid. Thus, these bonds were initially recorded at $215,000 ($220,000 - $5,000). Under the straight-line method, the $15,000 premium should be amortized over the 75-month period extending from October 1, Year 1, to January 1, Year 8. For the 15 months from October 1, Year 1, through December 31, Year 2, $3,000 of the premium [$15,000 × (15 months ÷ 75 months)] should be amortized. The unamortized premium of $12,000 ($15,000 - $3,000) plus the $200,000 (200 bonds × $1,000 face amount) maturity amount of the bonds equals a carrying amount at December 31, Year 2, of $212,000.

An auditor most likely will use analytical procedures to form an overall conclusion to a. Evaluate the effectiveness of the internal control activities. b. Identify auditing procedures omitted by the staff accountants. c. Determine whether additional audit evidence may be needed. d. Enhance the auditor's understanding of subsequent events.

c

On both December 31, Year 1, and December 31, Year 2, Kopp Co.'s only available-for-sale debt security had the same fair value, which was below amortized cost. Kopp considered the decline in value to be temporary in Year 1 but other than temporary in Year 2. At the end of both years the security was classified as a noncurrent asset. What should be the effects of the determination that the decline was other than temporary on Kopp's Year 2 net noncurrent assets and net income? a. Decrease in both net noncurrent assets and net income. b.No effect on both net noncurrent assets and net income. c. No effect on net noncurrent assets and decrease in net income. d. Decrease in net noncurrent assets and no effect on net income.

c

The primary purpose of a statement of cash flows is to provide relevant information about a. An entity's ability to meet cash operating needs. b. An entity's ability to generate future positive net cash flows. c. The cash receipts and cash disbursements of an entity during a period. d. Differences between net income and associated cash receipts and disbursements.

c

When the allowance method of recognizing uncollectible accounts is used, the entries at the time of collection of a small account previously written off a. Increase net income. b. Have no effect on the allowance for uncollectible accounts. c. Increase the allowance for uncollectible accounts. d. Decrease the allowance for uncollectible accounts.

c

Which of the following ratios would be the least useful in reviewing the overall profitability of a manufacturing company? a. Net income to total assets. b. Net income to sales. c. Net income to working capital. d. Net income to net worth.

c

Which result of an analytical procedure suggests the existence of obsolete merchandise? a. Decrease in the ratio of inventory to accounts receivable. b. Decrease in the ratio of gross profit to sales. c. Decrease in the inventory turnover rate. d. Decrease in the ratio of inventory to accounts payable.

c

Plack Co. purchased 10,000 shares (2% owner ship) of Ty Corp. on February 14 and did not elect the fair value option. Plack received a stock dividend of 2,000 shares on April 30, when the market value per share was $35. Ty paid a cash dividend of $2 per share on December 15. In its income statement for the year, what amount should Plack report as dividend income? a.20000 b. 90000 c. 94000 d.24000

d. Plack Co. owns 2% of the stock of Ty Corp. Accordingly, this investment should be accounted for using the fair value method. If the fair value of the stock is not readily determinable, the measurement alternative may be selected. This alternative is cost minus any impairment, plus or minus changes resulting from observable price changes for the identical or a similar investment of the same issuer. Under either method, dividends from an investee are accounted for by the investor as dividend income unless a liquidating dividend is received. The recipient of a stock dividend does not recognize income. Thus, Plack should report dividend income of $24,000 [(10,000 shares + 2,000 shares received as a stock dividend on April 30) × $2 per share dividend].