Financial Accounting II Final Exam

Paid-in-capital in excess of par is reported: A. as an increase in shareholders' equity B. as a non-current asset C. as a non-current liability D. as a reduction of shareholders' equity

A. as an increase in shareholders' equity

The valuation allowance account that is used in conjunction with deferred tax assets is a(n): A. contra asset B. component of shareholders' equity C. liability D. asset

A. contra asset

The employer has an obligation to provide future benefits for: A. defined benefit pension plans B. defined benefit and defined contribution plans C. defined contribution pension plans D. none of these answer choices are correct

A. defined benefit pension plans

ABC declared and paid cash dividends to its common shareholders in January of the current year. The dividend: A. has no effect on the earnings per share for the coming year B. will be added to the numerator of the earnings per share fraction for the current year C. will be subtracted from the numerator of the earnings per share fraction for the current year D. will be added to the denominator of the earnings per share fraction for the current year

A. has no effect on the earnings per share for the coming year

Accumulated other comprehensive income is reported: A. in the balance sheet as a component of shareholders' equity B. in the statement of comprehensive income C. in the balance sheet as an asset D. in the balance sheet as a liability

A. in the balance sheet as a component of shareholders' equity

Interest cost is calculated by multiplying the: A. ABO by the expected return on the plan assets B. PBO by the discount rate C. ABO by the discount rate D. PBO by the expected return on plan assets

B. PBO by the discount rate

The PBO is increased by: A. a return on plan assets that is lower than expected B. an increase in the average life expectancy of employees C. an increase in the actuary's assumed discount rate D. amortization of prior service cost

B. an increase in the average life expectancy of employees

GAAP regarding accounting for income taxes requires the following procedures? A. computation of deferred income tax based on temporary and permanent differences B. computation of income tax expense based on taxable income C. computation of deferred income tax based on permanent differences D. computation of deferred tax assets and liabilities based on temporary differences

B. computation of income tax expense based on taxable income

In terms of business volume, the dominant form of business organization is the: A. proprietorship B. corporation C. partnership D. limited liability company

B. corporation

Trading securities, by definition, are properly classified in the balance sheet as: A. shareholders' equity B. current assets C. other assets D. intangible assets

B. current assets

The interest rate that determines the amount of interest expense each interest date is referred to as the: A. cash rate B. effective rate C. stated rate D. expense rate

B. effective rate

A deferred tax asset represents a: A. future tax refund B. future income tax benefit C. future amount of money to be paid out D. future cash collection

B. future income tax benefit

Which of the following is not a characteristic of a liability? A. it arises from present obligations to other entities B. it must be payable in cash C. it results from past transactions or events D. it represents a probable, future sacrifice of economic benefits

B. it must be payable in cash

Current liabilities normally are recorded at their: A. cost B. maturity amount C. present value D. expected value

B. maturity amount

An underfunded pension plan means that the: A. ABO is less than plan assets B. ABO exceeds plan assets C. PBO exceeds plan assets D. PBO is less than plan assets

C. PBO exceeds plan assets

Barr Corp. is the lessee in a finance lease. Barr would record: A. lease expense B. interest expense C. a right-of-use asset D. depreciation expense

C. a right-of-use asset

The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease, and (c) would not have been incurred had the lease agreement not occurred, are referred to as initial direct costs. Initial direct costs are expensed at the beginning of the lease in: A. a sales-type lease without a selling profit B. an operating lease C. a sales-type lease with a selling profit D. any sales-type lease

C. a sales-type lease with a selling profit

Olsson Corporation received a check from its underwriters for $72 million. This was for the issue of one million of its $5 par stock that the underwriters expect to sell for $72 per share. Which is the correct entry to record the issue of the stock?

Cash 72,000,000 common stock. 5,000,000 PICEP 67,000,000

Which of the following transactions decreases retained earnings? A. a stock dividend B. a property dividend C. a cash dividend D. all of these answer choices are correct

D. all of these answer choices are correct

The board of directors of Capstone Inc. declared a $0.60 per share cash dividend on its $1 par common stock. On the date of declaration, there were 50,000 shares authorized, 20,000 shares issued, and 5,000 shares held as treasury stock. What is the entry for the dividend declaration?

Retained earnings 9,000 Cash dividends payable 9,000

What is the effect of the declaration and subsequent issuance of a 10% stock dividend on each of the following? Retained earnings. Paid in capital A. decrease increase B. no effect increase C. increase decrease D. no effect no effect

option A

Interest cost will: A. Increase the PBO and increase pension expense B. Increase the PBO and reduce plan assets. C. Increase pension expense and reduce plan assets D. Increase pension expense and reduce the return on plan assets

A. increase the PBO and increase pension expense

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. no effect, because deferred revenue is a liability, so payment will use assets rather than providing revenue C. large decrease, because deferred revenue indicated collection problems that will reduce net revenues in future periods D. large decrease, because deferred revenue implies that less revenue has been earned, which reduces future revenue

A. large increase, because deferred revenue becomes revenue when the seller has satisfied its performance obligations

ABC Books is the lessor in a lease agreement. From the perspective of the lessor, the lease may be classified as: A. operating or sales-type B. operating, sales-type, indirect financing C. operating, finance, or sales-type D. operating or finance

A. operating or sales-type

Bonds usually sell at their: A. present value B. statistical expected value C. face value D. maturity value

A. present value

Payment of retirement benefits: A. reduces the PBO B. reduces the GBO C. increases the PBO D. increases the ABO

A. reduces the PBO

When more than one security is sold for a single price and the total selling price is not equal to the sum of the market prices, the cash received is allocated between the securities based on: A. relative market values B. par amounts

A. relative market values

Accumulated Other Comprehensive Income in the shareholders' equity section of the balance sheet reflects changes in the fair value of securities for which type of securities? A. securities available-for-sale B. held-to-maturity securities C. consolidated securities D. trading securities

A. securities available-for-sale

Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax asset? A. subscriptions collected in advance B. depreciation early in the life of an asset C. unrealized gain from recording investments at fair value D. none of these answer choices are correct

A. subscriptions collected in advance

When the total expenses over the life of an operating lease are compared to the total expenses over the life of a finance lease, one will find that: A. the expenses of the finance lease and operating lease are equal B. the expenses of an operating lease are greater than the expenses of a finance lease C. the expenses of a finance lease are greater than the expenses of the operating lease D. no meaningful comparison can be made

A. the expenses of the finance lease and operating lease are equal

In a finance lease, the amortization of the right-of-use asset in the third year is: A. the same as in the fourth year B. less than in the fourth year C. zero D. more than in the fourth year

A. the same as in the fourth year

Which of the following statements is true when dividends are not declared or paid on cumulative preferred stock? A. the unpaid dividends are reported in a note to the financial statements B. the shareholders must be allowed to convert their shares to common stock C. the unpaid dividends are accrued as a liability D. the unpaid dividends accrue interest until paid

A. the unpaid dividends are reported in a note to the financial statements

Bonds that are purchased with the intent of selling them in the near future to take advantage of short-term price changes are classified as: A. trading securities B. held-to-maturity securities C. securities available-for-sale D. consolidating securities

A. trading securities

The balance of the plan assets can change due to: A. periodic service cost, accrued interest, revised estimates, plan amendments, and the payment of benefits B. investment returns, employer contributions, and the payment of benefits C. periodic service cost, employer contributions, and the payment of benefits D. periodic service cost, accrued interest, revised estimates, employer contributions, and the payment of benefits

B. investment return, employer contributions, and the payment of benefits

For a bond issue that sells for more than the bond face amount, the effective interest rate is: A. the Wall Street Journal prime rate B. less than the rate stated on the face of the bond C. more than the rate stated on the face of the bond

B. less than the rate stated on the face of the bond

Characteristics of the corporate form that have led to the growth of this form of business ownership include all of the following except: A. limited liability B. low government regulation C. ease of ownership transfer D. ease of raising capital

B. low government regulation

The preemptive right refers to the shareholder's right to: A. receive a share of dividends B. maintain a proportional ownership interest in the corporation C. vote for members of the board of directors D. share in profits proportionally with all other stockholders

B. maintain a proportional ownership interest in the corporation

Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax liability? A. proceeds from life insurance received due to death of an executive B. prepaid utilities C. interest income on municipal bonds D. none of these answer choices are correct

B. prepaid utilities

A $500,000 bond issue sold at 98. Therefore, the bonds: A. sold for the $500,000 face amount less $10,000 of accrued interest B. sold at a discount because the stated rate of interest was lower than the effective rate C. sold at a premium because the stated rate of interest was higher than the yield rate D. sold at a discount because the effective interest rate was lower than the face rate

B. sold at a discount because the stated rate of interest was lower than the effective rate

Outstanding common stock is: A. stock that is performing well on the New York Stock Exchange B. stock owned by shareholders C. stock held in the corporate treasury D. stock that has been authorized by the state for issue

B. stock owned by shareholders

Interest expense is: A. the stated interest rate times the amount of the debt outstanding during the interest period B. the effective interest rate times the amount of the debt outstanding during the interest period C. the effective interest rate times the face amount of the debt D. the stated interest rate times the face amount of the debt

B. the effective interest rate times the amount of the debt outstanding during the interest period

Which of the following statements typifies defines contribution plans? A. present value factors are used to determine the annual contributions to the plan B. the employer's obligation is satisfied by making the periodic contribution to the plan C. investment risk is borne by the corporation sponsoring the plan D. the plans are more complex than defined benefit plans

B. the employer's obligation is satisfied by making the periodic contribution to the paln

The compensation associated with executive stock option plans is A. recorded as compensation expense on the date of grant B. the estimated fair value of the options C. allocated to expense over the number of years until expiration D. the book value of a share of the company's shares times the number of options

B. the estimated fair value of the options

A contingent loss should be reported in a disclosure note to the financial statements rather than being accrued if: A. the incurrence of a loss is more likely than not B. the incurrence of a loss is reasonably possible C. the likelihood of a loss is probable D. the likelihood of a loss is remote

B. the incurrence of a loss is reasonable possible

When the equity method of accounting for investments is used by the investor, the investment account is increased when: A. the investee reports a net loss for the year B. the investee reports net income for the year C. a cash dividend is received from the investee D. the investor records additional depreciation related to the investment

B. the investee reports net income for the year

Corporations are formed in accordance with: A. federal trade commission regulations B. the laws of individual states C. federal statutes D. the Model Business Corporation Act

B. the laws of individual states

Unrealized holding gains and losses on debt securities available-for-sale would have the following effects on retained earnings: a. (Gains) Increase. (Losses) No change b. (G) no change. (L) decrease c. (G) no change. (L) no change d. (G) increase. (L) decrease

C. (G) no change (L) no change

Preferred stock is called preferred because it usually has two preferences. These preferences relate to: A. dividends and voting rights B. par and dividends C. assets at liquidation and dividends D. the preemptive right and voting rights

C. assets at liquidation and dividends

Bond X and Bond Y are both issued by the same company. Each of the bonds has a maturity value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct? A. bond X sells for more than bond Y B. both bonds sell for the same amount C. bond Y sells for more than bond X D. both bonds sell at a discount

C. bond Y sells for more than bond X

Red Inc. issues shares of stock with a par amount of $1 per share in exchange for a machine. In accounting for the transaction: A. the machine should not be depreciated because the stock has no term to maturity B. if fair values of the stock and machine are unavailable, the stock should be recorded at its par amount C. both the stock and machine are recorded at the fair value of the stock or the fair value of the machine. whichever is more clearly determinable D. the stock is recorded at its par amount unless the fair value of the machine is readily available

C. both the stock and machine are recorded at the fair value of the stock or the fair value of the machine. whichever is more clearly determinable

When an investor accounts for an investment in common stock at fair value through net income, cash dividends are classified by the investor as: A. a deduction from the investment account B. a return of capital C. dividend income D. a loss

C. dividend income

Which of the following typically causes a permanent difference between taxable income and pretax accounting income? A. the depreciation method used for equipment B. percentage-of-completion method for long-term construction contracts C. interest income on municipal bonds D. the installment method used for sales of property

C. interest income on municipal bonds

Which of the following investment securities held by Zoogle Inc. may be classified as held-to-maturity securities in its balance sheet? A. callable preferred stock B. common stock C. long-term debenture bonds C. all of these answer choices are correct

C. long-term debenture bonds

When bonds are sold at their face amount (no discount, no premium) and the effective interest method is used, at each interest payment date, the interest expense: A. decreases B. increases C. remains the same D. is equal to the change in outstanding balance (book value)

C. remains the same

Which of the following describes defined benefit pension plans? A. they raise few accounting issues for employers B. retirement benefits depend on how much money has accumulated in an individual's account C. retirement benefits are based on the plan benefit formula D. they are simple to construct

C. retirement benefits are based on the plan benefit formula

The accounting for defined contribution pension plans is easy because each year: A. the employer records pension expense based on the earning of the plan assets B. the employer records pension expense equal to the amount paid out to retirees C. the employer records pension expense equal to the annual contribution D. the employer records pension expense based on an amount provided by the actuary

C. the employer records pension expense equal to the annual contribution

The common stock account in a company's balance sheet is measured as: A. the number of common shares outstanding multiplied by the stock's current market price per share B. the number of common shares outstanding multiplied by the stock's par per share C. the number of common shares issued multiplied by the stock's par per share D. none of these answer choices are correct

C. the number of common shares issued multiplied by the stock's par per share

Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under a contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs: A. when payments are made to the service firm B. when the repairs are performed C. when the equipment is sold D. evenly over the life of the warranty

C. when the equipment is sold

Unrealized holding gains and losses on debt securities classified as available-for-sale would have the following effects on AOCI: A. (G) increase (L) increase B. (G) decrease (L) decrease C. (G) decrease (L) increase D. (G) increase (L) decrease

D. (G) increase (L) decrease

How would the outstanding balance (book value) of bonds payable be affected by the amortization of each of the following? A. (Premium) No effect (Discount) No effect B. (Premium) No Effect. (Discount) Increase C. (Premium) Increase. (Discount) Decrease D. (Premium) Decrease. (Discount) Increase

D. (P) Decrease (D) increase

A result of inter-period tax allocation is that: A. the income tax expense shown in the income statement is equal to the deferred taxes for the year B. the income tax expense is allocated among the income statement items that caused the expense C. large fluctuations in a company's tax liability are eliminated D. The income tax expense in the income statement is the sum of the income taxes payable for the year and the changes in deferred tax asset or liability balances for the year

D. The income tax expense in the income statement is the sum of the income taxes payable for the year and the changes in deferred tax asset or liability balances for the year

A discount on a non-interest-bearing note payable is classified in the balance sheet as: A. a contingent liability B. an asset C. a component of shareholders' equity D. a contra liability

D. a contra liability

Which of the following is not a current liability? A. sales tax payable B. accounts payable C. accrued interest payable D. a note payable due in two years

D. a note payable due in two years

Which of the following may create employer liabilities in connection with their payrolls? A. employee fringe benefits B. employee withholding taxes C. employee voluntary deductions D. all of these answer choices are correct

D. all of these answer choices are correct

Sources of shareholders' equity include each of the following except: A. amounts invested by shareholders in the corporation B. amounts earned by the corporation on behalf of its shareholders C. accumulated other comprehensive income D. amounts borrowed from financial institutions

D. amounts borrowed from financial institutions

For the lessee to account for a lease as a finance lease, the lease must meet: A. any one of the six criteria specified by GAAP regarding accounting for leases B. all five of the criteria specified by GAAP regarding accounting for leases C. any two of the criteria specified by GAAP regarding accounting for leases D. any one of the five criteria specified by GAAP regarding accounting for leases

D. any one of the five criteria specified by GAAP regarding accounting for leases

When using the equity method to account for an investment, cash dividends received by the investor from the investee should be recorded: A. as an increase in the investment account B. as a contra item to stockholders' equity C. as dividend income D. as a reduction in the investment account

D. as a reduction in the investment account

All of the following but one represent collections for third parties. Which one of the following is not a collection for a third party? A. social security taxes deductions B. sales tax payable C. employee insurance deductions D. customer deposits

D. customer deposits

A company has cumulative preferred stock. When computing earnings per share, the current year's dividends not declared on the preferred stock should be: A. ignored B. added to earnings for the year C. deducted, net of tax effect, from earnings for the year D. deducted from earnings for the year

D. deducted from earnings for the year

Investments in debt securities available-for-sale are reported at: A. discounted present value B. historical cost C. lower of cost or market D. fair value on the reporting date

D. fair value on the reporting date

From the perspective of the lessee, leases may be classified as either: A. finance or sales-type without selling profit B. sales-type or operating C. sales-type without selling profit or sales-type with selling profit D. finance or operating

D. finance or operating

When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash paid is: A. more than if the bonds had been sold at a discount B. less than the effective interest C. equal to the effective interest D. greater than the effective interest

D. greater than the effective interest

Which category of securities is presented on the balance sheet as amortized cost? A. trading securities B. equity investments of less than 20% ownership C. securities available-for-sale D. held-to-maturity securities

D. held-to-maturity securities

When bonds are sold at a discount and the effective interest method is used, at each interest payment date, the interest expense: A. decreases B. remains the same C. is equal to the change in book value D. increases

D. increases

GAAP regarding fair value accounting for investments in equity securities will generally apply to an investment when the percentage of ownership of another company is: A. exactly 100% B. 20% to 50% C. over 50% D. less than 20%

D. less than 20%

Which of the following does not represent potential shares for an EPS calculation? A. convertible preferred stock B. stock rights C. convertible bonds D. participating preferred stock

D. participating preferred stock

The lessee normally measures the lease liability to be recorded as the: A. sum of the cash payments over the term of the lease B. future value of the lease payments C. book value of the leased asset D. present value of the lease payments

D. present value of the lease payments

Authorized common stock refers to the total number of shares: A. issued an outstanding B. outstanding C. issued D. that can be issued

D. that can be issued

The five criteria provided in GAAP for distinguishing a finance lease from an operating lease do NOT include: A. the agreement grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise B. the agreement specifies that ownership transfers at the end of the lease term C. the non-cancelable lease term is for the major part of the remaining economic life of the underlying asset D. the collectibility of the lease payments must be reasonably predictable

D. the collectibility of the lease payments must be reasonably predictable

Short-term obligations can be reported as long-term liabilities if: A. the firm has the ability to refinance on a long-term basis B. the firm has tentative plans to issue long-term bonds C. the firm has a long-term line of credit D. the firm intends to and has the ability to refinance as long-term

D. the firm intends to and has the ability to refinance as long-term

Bonds were issued at a discount. In the bond amortization schedule: A. the interest expense is less with each successive interest payment B. the reduction is the discount is less with each successive interest payment C. the outstanding balance (book value) of the bonds declines eventually to face value D. the total effective interest over the term to maturity is equal to the amount of the discount plus the total cash interest paid

D. the total effective interest over the term to maturity is equal to the amount of the discount plus the total cash interest paid