Intermediate Accounting Final Exam Studyguide. 15. 16. 17. 18
How do you Identify a change in Accounting Principle?
Change from one GAAP approved way to another • Retrospective Approach (go back and adjust prior statements) • Change in inventory method (LIFO, FIFO, average-cost), revenue recognition for long term construction assets (completed contract, percentage of completion)
How do you Identify a change in Reporting Entity?
Change from reporting one type of entity to another type • Retrospective Approach (go back and adjust prior statements) • Presenting consolidated statements, change in subsidiaries, changing companies combined in financial statements, change of accounting method (cost, equity, consolidation) for subsidiaries.
How do you Identify a change in Accounting Estimate?
Change in estimate after more experience or new information is discovered. • Prospective Approach (current and future only) • Useful lives, salvage values, warranties, change in depreciation methods Possible to have a change in estimate effected by change in principal (depreciation)
Define Contract Modification
Companies deal with contract modifications in 2 ways. *Separate Performance Obligation* - If both conditions are met, the company records a *NEW and SEPARATE* contract. a. The promised goods or services are *distinct* (The company sells them separately and they are interdependent with other goods and services) b. The company has the right to receive an amount of *consideration that reflects the standalone selling price* of the promised goods or services. *Prospective Modification* - If the product or services are not distinct and not priced at their standalone selling price, company should use a *PROSPECTIVE METHOD* when accounting for the change. The company should recognize revenue for each remaining product at a blended price. Consideration * remaining products (Old Contract) New Consideration * New # of Products (New Contract) Total of Consideration/Total of Units
What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively? A) Increase and decrease B) Increase and no effect C) Decrease and no effect D) Decrease and increase
D) Decrease and increase
Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods? Fair Value Method Equity Method A) Increase Decrease B) Decrease No Effect C) No Effect No Effect D) No Effect Decrease
D) No Effect Decrease
When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited? A) Treasury stock for the par value and retained earnings for the excess of the purchase price over the par value. B) Paid-in capital in excess of par for the purchase price. C)Treasury stock for the par value and paid-in capital in excess of par for the excess of the purchase price over the par value. D) Treasury stock for the purchase price.
D) Treasury stock for the purchase price.
Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as A) an addition to the carrying value of the investment. B) dividend income. C) additional paid-in capital. D) a reduction of the carrying value of the investment.
D) a reduction of the carrying value of the investment.
The fourth step in the process for revenue recognition is to A) determine the transaction price. B) recognize revenue when each performance obligation is satisfied. C) identify the separate performance obligations in the contract. D) allocate transaction price to the separate performance obligations.
D) allocate transaction price to the separate performance obligations.
In the diluted earnings per share computation, the treasury stock method is used for options and warrants to reflect assumed reacquisition of common stock at the average market price during the period. If the exercise price of the options or warrants exceeds the average market price, the computation would A) fairly present the maximum potential dilution of diluted earnings per share on a prospective basis. B) reflect the excess of the number of shares assumed issued over the number of shares assumed reacquired as the potential dilution of earnings per share. C) fairly present diluted earnings per share on a prospective basis. D) be antidilutive.
D) be antidilutive.
The conversion of bonds is most commonly recorded by the A) incremental method. B) proportional method. C) market value method. D) book value method.
D) book value method.
In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are A) weighted by the number of days outstanding. B) weighted by the number of months outstanding. C) considered outstanding at the beginning of the year. D) considered outstanding at the beginning of the earliest year reported.
D) considered outstanding at the beginning of the earliest year reported.
The general rule to be applied when stock is issued for services or property other than cash is that the property or services be recorded at: A) a value that clearly reflects the intentions of the parties entering into the transaction and provides a relevant basis for recording. B) the fair market value of the stock issued. C) the fair market value of the noncash consideration received. D) either the fair market value of the stock issued or the fair market value of the noncash consideration received, whichever is more clearly determinable.
D) either the fair market value of the stock issued or the fair market value of the noncash consideration received, whichever is more clearly determinable.
The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. An acceptable method of allocation is A) the pro forma method. B) the proportional method. C) the incremental method. D) either the proportional method or the incremental method.
D) either the proportional method or the incremental method.
If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the A) fair value method. B) cost method. C) divesture method. D) equity method.
D) equity method.
The use of the net method of recognizing revenue by an agent A) could result in an understatement of the agent's revenue. B) could result in an overstatement of the agent's revenue. C) is appropriate as long as both revenue and costs are included. D) is the correct method in a principal-agent relationship.
D) is the correct method in a principal-agent relationship.
A dividend which is a return to stockholders of a portion of their original investments is a A) property dividend. B) liability dividend. C) participating dividend. D) liquidating dividend.
D) liquidating dividend.
Securities which could be classified as held-to-maturity are A) treasury stock. B) redeemable preferred stock. C) warrants. D) municipal bonds.
D) municipal bonds.
Under the intrinsic value method, compensation expense resulting from an incentive stock option is A) recognized in the period of the grant. B) recognized in the period of exercise. C) allocated to the periods benefited by the employee's required service. D) not recognized if the market price does not exceed the option price at the date of grant.
D) not recognized if the market price does not exceed the option price at the date of grant.
When computing diluted earnings per share, convertible securities are A) recognized only if they are antidilutive. B) recognized whether they are dilutive or antidilutive. C) ignored. D) recognized only if they are dilutive.
D) recognized only if they are dilutive.
Unconditional rights to receive consideration because a performance obligation has been satisfied are Entry field with correct answer A) reported as a contract asset on the balance sheet. B) reported as a contract liability on the balance sheet. C) are not reported on the balance sheet. D) reported as a receivable on the balance sheet.
D) reported as a receivable on the balance sheet.
An option to purchase a warranty is recorded as A) an assurance type warranty which is included in the sales price of the product. B) an expense in the period the goods or services are sold. C) a warranty liability for all costs incurred after sale due to correction of defects. D) revenue in the period that the service-type warranty is in effect.
D) revenue in the period that the service-type warranty is in effect.
If a company offers additional considerations to convertible bondholders in order to encourage conversion, it is called a(an): A) forced conversion. B) end conversion. C) additional conversion. D) sweetener.
D) sweetener.
The conversion of preferred stock into common stock requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be A) reflected currently in income as an extraordinary item. B) treated as a prior period adjustment. C) reflected currently in income, but not as an extraordinary item. D) treated as a direct reduction of retained earnings.
D) treated as a direct reduction of retained earnings.
Identify the date revenue should be recognized
Determine if you are recognizing revenue for a *period of time* or a *point in time*
Define Unrecognized Subsequent Events
Does NOT require adjustments to the financial statements Events that provide evidence about conditions that did not exist at the balance sheet date but arise subsequent to that date
What is the Journal Entry for the issuance of a Small Stock Dividend at the Date of Distribution?
Dr. Common Stock Dividend Distributable Cr. Common Stock
What is the Journal Entry for the issuance of a Small Stock Dividend at the Date of Declaration?
Dr. Retained Earnings Cr. Common Stock Dividend Distributable Cr. Paid-in Capital in Excess of Par - Common Stock
What is the Journal Entry for the purchase of Treasury Stock?
Dr. Treasury Stock Cr. Cash
Equity Security: Equity
Equity (20 - 50% ownership) • equity method* (records investment at cost of shares) • income recognized as % of investees net income • no fair value adjustment b/c assume already impacted with net income
Debt Security : Held-to-Maturity
Held-To-Maturity (positive intent and ability to hold to maturity) • amortized cost method • income recognized with interest revenue
Equity Security: Holdings
Holdings >50% • consolidation accounting method (financial statements combined) • parent and subsidiary relationship • no separate JE necessary
Define Convertible Bonds
If bonds are convertible into other securities of the corporation for a specific ed time after issuance, they are convertible bonds.
Define Interim Reports. Give an example of an Interim Report
Interim Reports cover periods less than one year. Example: Form 10-Q Also, companies should use the same accounting principles for interim reports and for annual reports. They should recognize revenues in interim periods on the same basis as they are for annual periods. *Remember there are specifics to each situation* *Review*
Define Treasury Stock
Is a corporation's own stock, reacquired after having been issued and fully paid
Define a Stock Dividend
Issuance by a corporation of its own stock to its stockholders on a pro rata(Proportionally) basis, without receiving any consideration.
Define Taxable Income
It indicates the amount used to compute income taxes payable.
What are the Journal Entry for the Grant Date under the Fair Value Method for recording stock options?
No Entry
Define the Defined Benefit Plan
Outlines the benefits the employees will receive when they retire. These benefits typically are a function of an employee's years of service and of the compensation level in the years approaching retirement. The *employees* are the beneficiaries of a defined contribution trust, but the *employer* is the beneficiary of a defined benefit trust.
Define Recognized Subsequent Events
Requires adjustments to the financial statements. Events that provide additional evidence about conditions that existed at the balance sheet date, including the estimates inherent in the process of preparing financial statements.
What are the components of Pension Expense?
Service Cost Interest on the Liability Actual return on plan assets Gain or Loss Amortization of prior service cost
Define Accumulated Benefit Obligation (ABO)
The actuarial present value of benefits attributed by a formula based on CURRENT salary levels. Uses both Vested and Novested years of service
Define Grant Date
The date an employee receives the options
Define Pension Asset/Liability
The difference between the Projected Benefit Obligation and the fair value of the plan assets.
Define Contribution Plan. What is an example or common form of this plan?
The employer agrees to contribute to a pension trust certain sum each period. *The Plan defines only the employer's contribution* Reports an asset if its over funded. Reports a liability if its underfunded Example: 401(k) plan
Define Projected Benefit Obligation (PBO)
The present value of vested and nonvested benefits accrued to date, based on employees' future salary levels. Records the largest measurement of the Pension Obligation.
What is the purpose of the statement of cash flow?
The primary purpose of the statement of cash flows is to provide information about a company's cash receipts and cash payments during a period. A secondary objective is to provide cash-basis information about the company's operating, investing, and financing activities.
What is the JE to record income tax expense? (Name the accounts and explain how the JE differs)
There are multiple ways the JE can come out. It all depends on how the numbers come out. Income Taxes Expense Deferred Tax Asset Deferred Tax Liability Income Taxes Payable
Define Preemptive Right. What is it used for?
To share any proportionately in any new issues of stock of the same class It is used to protect each stockholder's proportional interest in the company. In other words, it protects existing stockholders from involuntary dilution of ownership interest.
Debt Security: Trading
Trading (to be sold in near future, short term income generator) • fair value with amortization method • income recognized with interest revenue, holding gains/loss-income
Equity Security: Trading
Trading <20% (<20% ownership, management DOES intend to sell) • fair value method • income recognized with dividend revenue, holdings gains/loss-income
Define Temporary Differences. Examples of Temporary Differences
-Difference between the tax basis of an asset or liability and its reported carrying or book amount in the financial statements Examples: Accrued Liabilities Bad Debt Expense Unearned Revenue Depreciation
What are the 2 main reasons corporations issue convertibles?
1. To raise equity capital without giving up more ownership control than necessary. 2. To obtain debt financing at cheaper rates
Held-to-maturity securities are reported at A) acquisition cost plus amortization of a discount. B) acquisition cost plus interest. C) fair value. D) acquisition cost.
A) acquisition cost plus amortization of a discount.
Treasury shares are shares A) issued but not outstanding. B) held as an investment by the treasurer of the corporation. C) issued and outstanding. D) held as an investment of the corporation.
A) issued but not outstanding.
The balance in Common Stock Dividend Distributable should be reported as a(n) A) contra current asset. B) addition to capital stock. C) current liability. D) deduction from common stock issued.
B) addition to capital stock.
The date on which to measure the compensation element in a stock option granted to a corporate employee ordinarily is the date on which the employee A) has performed all conditions precedent to exercising the option. B) is granted the option. C) may first exercise the option. D) exercises the option.
B) is granted the option.
Disclosure related to revenue A) requires disaggregation of revenues by reportable segments. B) requires disclosure of remaining performance obligations. C) does not require capitalized costs to obtain and fulfill a contract. D) does not require judgments that affect amount and timing of revenues from contracts.
B) requires disclosure of remaining performance obligations.
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.
Debt securities that are accounted for at amortized cost, not fair value, are A) available-for-sale debt securities. B) never-sell debt securities. C) held-to-maturity debt securities. D) trading debt securities.
C) held-to-maturity debt securities.
Houser Corporation owns 4,000,000 shares of stock in Baha Corporation. On December 31, 2014, Houser distributed these shares of stock as a dividend to its stockholders. This is an example of a A) stock dividend. B) liquidating dividend. C) property dividend. D) cash dividend.
C) property dividend.
How do calculate Gross Profit under Percentage of Complete Method?
Contract Price - Current Costs - Costs to Complete = Gross Profit
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.
A requirement for a security to be classified as held-to-maturity is A) ability to hold the security to maturity. B) positive intent. C) the security must be a debt security. D) all of these are required.
D) all of these are required.
What constitutes a small stock dividend?
If the dividend is less than 20-25% of the common shares outstanding
Total stockholders' equity represents a) a claim against a portion of the total assets of a company. b) a claim to specific assets contributed by the owners. c) the maximum amount that can be borrowed by a company. d) only the amount of earnings that have been retained in the business.
a) a claim against a portion of the total assets of a company.
Define Financial Projections
are prospective financial statements that present, to the best of the responsible party's knowledge and belief, given one or more hypothetical assumptions, an entity's expected financial position, results of operations, and cash flows. The responsible party bases a financial projection on conditions it expects would exist and the course of action it expects would be taken, given one or more hypothetical assumptions.
Define Cash Equivalents. What are some examples?
are short-term, highly liquid investments that are both (a) readily convertible to known amounts of cash, and (b) so near their maturity that they present insignificant risk of changes in interest rates. Generally, only investments with original maturities of three months or less qualify under this definition Examples: Treasury bills Commercial paper Money market funds purchased with cash that is in excess of immediate needs
Define Accounting Policies
are the specific accounting principles and methods a company currently uses and considers most appropriate to present fairly its financial statements. GAAP states that information about the accounting policies adopted by a reporting entity is essential for financial statement users in making economic decisions. It recommends that companies should present as an integral part of the financial statements a statement identifying the accounting policies adopted and followed by the reporting entity. Companies should present the disclosure as the first note or in a separate Summary of Significant Accounting Policies section preceding the notes to the financial statements.
Define Related Party Transactions. Which may not exist in related party transactions?
arise when a company engages in transactions in which one of the parties has the ability to significantly influence the policies of the other. They may also occur when a non transacting party has the ability to influence the policies of the two transacting parties. Competitive, free-market dealings may not exist in related party transactions, and so an "arm's-length" basis cannot be assumed.
What are the two methods for recording Treasury Stock?
-Cost Method -Par(stated) value method
What two methods can you use to record Stock Compensation (aka Stock Option Compensation Expense). Which method is approved and REQUIRED for GAAP?
-Intrinsic-value method -Fair value method (Required by GAAP) The Fair Value method is required by GAAP)
Examples of Permanent Differences
-Result from items that (1): enter into pretax financial income by never into taxable income. (2) Enter into taxable income income but never into pretax financial income Examples: -Tax exempt interest (municipal/state) -Life insurance proceeds for key man -Life insurance premiums when corporation is beneficiary -Certain penalties, fines, bribes, kickbacks, etc. (Not Tax Deductible) -nondeductible portion of meal and entertainment expense -dividends-received deduction for corporations -excess percentage depletion over cost depletion
Why might a corporation purchase their outstanding stock?
-To provide tax-efficient distributions of excess cash to shareholders -To increase earnings per share and return on equity -To provide stock for employee stock compensation contracts ot to meet potential merger needs -To thwart takeover attempts or to reduce the number of stockholders -To make a market in the stock
What are the 5 steps in the Revenue Recognition Process?
1. Identify the contract with customers 2. Identify the separate performance obligations in the contract 3. Determine the traction price 4. Allocate the transaction price to the separate performance obligations 5. Recognize revenue when each performance obligation is satisfied.
What does GAAP require the material related to related party transactions? Also, should the company report the legal or economic substance of it?
1. The nature of the relationship(s) involved. 2. A description of the transactions (including transactions to which no amounts or nominal amounts were ascribed) for each of the periods for which income statements are presented. 3. The dollar amounts of transactions for each of the periods for which income statements are presented. 4. Amounts due from or to related parties as of the date of each balance sheet presented. Companies should report the economic substance of the transaction.
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.
1. a reduction of additional paid-in capital.
How should a "gain" from the sale of treasury stock be reflected when using the cost method of recording treasury stock transactions? A) As paid-in capital from treasury stock transactions. B) As an increase in the amount shown for common stock. C) As ordinary earnings shown on the income statement. D) As an extraordinary item shown on the income statement
A) As paid-in capital from treasury stock transactions.
Which of the following are considered equity securities? Convertible debt. Redeemable preferred stock. Call or put options. A) III only. B) I and III only. C) II only. D) I and II only.
A) III only.
When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies? A) The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee. B) The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee. C) The investor should always use the fair value method to account for its investment. D) The investor should always use the equity method to account for its investment.
A) The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee.
Contract liability is a company's obligations to transfer goods or services to a customer for which the company has received consideration from the customer. An example of a contract liability is A) Unearned magazine subscription. B) Service Revenue. C) Prepaid subscription. D) Mortgage Payable.
A) Unearned magazine subscription.
Use of the effective-interest method in amortizing bond premiums and discounts results in A) a varying amount being recorded as interest income from period to period. B) a greater amount of interest income over the life of the bond issue than would result from use of the straight-line method. C) a variable rate of return on the book value of the investment. D) a smaller amount of interest income over the life of the bond issue than would result from use of the straight-line method.
A) a varying amount being recorded as interest income from period to period.
Compensation expense resulting from a compensatory stock option plan is generally A) allocated to the periods benefited by the employee's required service. B) allocated over the periods of the employee's service life to retirement. C) recognized in the period of exercise. D) recognized in the period of the grant.
A) allocated to the periods benefited by the employee's required service.
When computing diluted earnings per share, convertible bonds are A) assumed converted only if they are dilutive. B) assumed converted whether they are dilutive or antidilutive. C) assumed converted only if they are antidilutive. D) ignored.
A) assumed converted only if they are dilutive.
Transaction price for multiple performance obligations should be allocated A) based on what the company could sell the goods for on a standalone basis. B) based on forecasted cost of satisfying performance obligation. C) based on total transaction price less residual value. D) based on selling price from the company's competitors.
A) based on what the company could sell the goods for on a standalone basis.
The conversion of preferred stock is recorded by the A) book value method. B) market value method. C) par value method. D) incremental method.
A) book value method.
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.
The cost-to-cost basis measures progress towards completion by A) comparing costs incurred to date with total costs to complete the contract. B) tracking miles of a highway completed versus miles of highway still to be completed. C) tracking results of work completed to date; it is an output measure. D) tracking floors of a building completed versus floors still to be completed.
A) comparing costs incurred to date with total costs to complete the contract.
An entry is not made on the A) date of record. B) date of payment. C) an entry is made on all of these dates. D) date of declaration.
A) date of record.
An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a A) debit to Debt Investments. B) debit to Interest Revenue. C) debit to the discount account. D) none of these answers are correct.
A) debit to Debt Investments.
The third step in the process for revenue recognition is to A) determine the transaction price. B) identify the separate performance obligations in the contract. C) allocate transaction price to the separate performance obligations. D) recognize revenue when each performance obligation is satisfied.
A) determine the transaction price.
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.
Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the A) earnings are reported by the investee in its financial statements. B) investor sells the investment. C) investee declares a dividend. D) investee pays a dividend.
A) earnings are reported by the investee in its financial statements.
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.
Investments in debt securities should be recorded on the date of acquisition at A) market value plus brokerage fees and other costs incident to the purchase. B) face value plus brokerage fees and other costs incident to the purchase. C) lower of cost or market. D) market value.
A) market value plus brokerage fees and other costs incident to the purchase.
At the date of the financial statements, common stock shares issued would exceed common stock shares outstanding as a result of the A) purchase of treasury stock. B) payment in full of subscribed stock. C) declaration of a stock split. D) declaration of a stock dividend.
A) purchase of treasury stock.
The last step in the process for revenue recognition is to A) recognize revenue when each performance obligation is satisfied. B) allocate transaction price to the separate performance obligations. C) identify the contract with customers. D) determine the transaction price.
A) recognize revenue when each performance obligation is satisfied.
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.
The percentage-of-completion method A) recognizes revenue and gross profit each period based upon progress. B) recognizes revenue and gross profits only when contract is completed. C) accumulates construction costs in the Billings on Construction in Progress account. D) is used primarily for short-term contracts.
A) recognizes revenue and gross profit each period based upon progress.
A feature common to both stock splits and stock dividends is A) that there is no effect on total stockholders' equity. B) an increase in total liabilities of a corporation. C) a reduction in the contributed capital of a corporation. D) a transfer to earned capital of a corporation.
A) that there is no effect on total stockholders' equity.
If a contract involves a significant financing component, A) the time value of money is used to determine the fair value of the transaction. B) the time value of money is not required to determine transaction price, if the payment is more than a year. C) the transaction amount should be based on the current sales price of goods or services. D) interest must be accrued on the current sales price of goods or services.
A) the time value of money is used to determine the fair value of the transaction.
Equity Security: Held-to-Maturity
Available for Sale (<20% ownership, management does NOT intend to sell) • fair value method • income recognized with dividend revenue, holdings gains/loss-equity
Debt Security: Available-for-Sale
Available for Sale (not classified as held-to-maturity nor trading) • fair value with amortization method • income recognized with interest revenue, holdings gains/loss-equity
What effect does the issuance of a 2-for-1 stock split have on each of the following? Par Value per Share Retained Earnings A) Decrease Decrease B) Decrease No effect C) No effect No effect D) Increase No effect
B) Decrease No effect
Which of the following is an advantage of a restricted-stock plan? A) It creates new job opportunities in a company. B) It never becomes completely worthless. C) It increases the market price of the stock. D) It increases the profit of a company.
B) It never becomes completely worthless.
Which of the following is not a debt security? A) Convertible bonds B) Loans receivable C) All of these are debt securities D) Commercial paper
B) Loans receivable
When investments in debt securities are purchased between interest payment dates, preferably the A) accrued interest is debited to Interest Expense. B) accrued interest is debited to Interest Revenue. C) accrued interest is debited to Interest Receivable. D) securities account should include accrued interest.
B) accrued interest is debited to Interest Revenue.
Porter Corp. purchased its own par value stock on January 1, 2014 for $20,000 and debited the treasury stock account for the purchase price. The stock was subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a deduction from A) additional paid-in capital without regard as to whether or not there have been previous net "gains" from sales of the same class of stock included therein. B) additional paid-in capital to the extent that previous net "gains" from sales of the same class of stock are included therein; otherwise, from retained earnings. C) net income. D) retained earnings.
B) additional paid-in capital to the extent that previous net "gains" from sales of the same class of stock are included therein; otherwise, from retained earnings.
Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses and are included as other comprehensive income and as a separate component of stockholders' equity are A) held-to-maturity debt securities. B) available-for-sale debt securities. C) never-sell debt securities. D) trading debt securities.
B) available-for-sale debt securities.
Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders' equity are A) securities where a company has holdings of more than 50%. B) available-for-sale securities where a company has holdings of less than 20%. C) trading securities where a company has holdings of less than 20%. D) securities where a company has holdings of between 20% and 50%.
B) available-for-sale securities where a company has holdings of less than 20%.
The if-converted method of computing earnings per share data assumes conversion of convertible securities as of the A) ending of the earliest period reported (regardless of time of issuance). B) beginning of the earliest period reported (or at time of issuance, if later). C) middle of the earliest period reported (regardless of time of issuance). D) beginning of the earliest period reported (regardless of time of issuance).
B) beginning of the earliest period reported (or at time of issuance, if later).
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) fair value per share. B) book value per share. C) par value per share. D) stated value per share.
B) book value per share.
The payout ratio can be calculated by dividing A) dividends per share by earnings per share. B) cash dividends by net income less preferred dividends. C) cash dividends by market price per share. D) dividends per share by earnings per share and dividing cash dividends by net income less preferred dividends.
B) cash dividends by net income less preferred dividends.
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.
Cash dividends are paid on the basis of the number of shares A) authorized. B) outstanding. C) outstanding less the number of treasury shares. D) issued.
B) outstanding.
Nonrefundable upfront fees A) such as activation fees for cable should be allocated over the term of the contract. B) should not be recorded as revenue if they are for future delivery of products and services. C) such as a one-time initiation fee in a health club should be recognized immediately. D) should be recognized immediately upon receipt of payment.
B) should not be recorded as revenue if they are for future delivery of products and services.
The major difference between convertible debt and stock warrants is that upon exercise of the warrants A) the stock involved is restricted and can only be sold by the recipient after a set period of time. B) the holder has to pay a certain amount of cash to obtain the shares. C) no paid-in capital in excess of par can be a part of the transaction. D) the stock is held by the company for a defined period of time before they are issued to the warrant holder.
B) the holder has to pay a certain amount of cash to obtain the shares.
When common stock is sold by a corporation a journal entry is prepared which includes a debit to cash and a credit to the common stock account. If the debit to cash is greater than the credit to the common stock account then it can be assumed that: A) the common stock was sold at a discount B) the stated value of the common stock is less than the per share price investors were willing to pay. C) a gain on the sale of stock is a part of the transaction. D) the common stock is worth more than its current market value.
B) the stated value of the common stock is less than the per share price investors were
Proceeds from an issue of debt securities having stock warrants should not be allocated between debt and equity features when A) the allocation would result in a discount on the debt security. B) the warrants issued with the debt securities are nondetachable. C) the market value of the warrants is not readily available. D) exercise of the warrants within the next few fiscal periods seems remote.
B) the warrants issued with the debt securities are nondetachable.
In accounting for a long-term construction-type contract using the percentage-of-completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the A) unbilled portion of the contract price. B) total estimated cost. C) total contract price. D) total costs incurred to date.
B) total estimated cost.
Unrealized holding gains or losses which are recognized in income are from securities classified as A) none of these answers are correct. B) trading. C) available-for-sale. D) held-to-maturity.
B) trading.
In accounting for investments in debt securities that are classified as trading securities, A) a premium is reported separately. B) unrealized holding gain or loss is reported on income statement. C) none of these answers are correct. D) a discount is reported separately.
B) unrealized holding gain or loss is reported on income statement.
Calculate Basic EPS without the Weighted-average number of shares
Basic EPS = (Net Income - Preferred Dividends)/Weighted Average Common Shares Outstanding *Practice*
How do you calculate Expected Return on Plan Assets?
Beginning Balance in Plan Assets *Expected Rate = Expected Return -Actual Return =Unexpected G/L
Define Unsecured Bond. What is one type of unsecured bond?
Bonds not backed up by collateral A debenture bond is unsecured. A "junk bond" is unsecured and also very risky.
If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)? A) Annual preferred dividend times (one minus the income tax rate) B) Annual preferred dividend times the income tax rate C) Annual preferred dividend D) Annual preferred dividend divided by the income tax rate
C) Annual preferred dividend
Consignments are a specialized marketing method whereby the A) Consignee pays for good up front and is paid when merchandise is sold. B) Consignee purchases goods for sale and sends payment when goods are sold. C) Consignee takes possession of merchandise but title remains with manufacturer. D) Consignee (agent) holds title to the product.
C) Consignee takes possession of merchandise but title remains with manufacturer.
A company must account for a contract modification as a new contract if A) The promised goods or services are distinct. B) The company has the right to receive consideration equal to standalone price. C) Goods or services are distinct and company has right to receive the standalone price. D) Goods or services are interdependent on each other.
C) Goods or services are distinct and company has right to receive the standalone price.
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 decrease but not increase net income. C) May decrease but not increase retained earnings. D) May increase net income if the cost method is used.
C) May decrease but not increase retained earnings.
With respect to the computation of earnings per share, which of the following would be most indicative of a simple capital structure? A) Common stock, preferred stock, and convertible securities outstanding in lots of even thousands B) Earnings derived from one primary line of business C) Ownership interest consisting solely of common stock D) None of these
C) Ownership interest consisting solely of common stock
Which dividends do not reduce stockholders' equity? A) Cash dividends B) Liquidating dividends C) Stock dividends D) Property dividends
C) Stock dividends
A performance obligation exists when A) a company provides interdependent product or service. B) a contract is approved and signed. C) a company provides a distinct product or service. D) a company receives the right to receive consideration.
C) a company provides a distinct product or service.
A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably A) calculated by the excess of the proceeds over the face amount of the bonds. B) equal to the market value of the warrants. C) based on the relative market values of the two securities involved. D) zero.
C) based on the relative market values of the two securities involved.
When a contract modification does not result in a separate performance obligation, the additional products are priced at the A) standalone price of the product. B) selling price specified in contract modification. C) blended price of original contract and contract modification. D) average selling price of original selling price and standalone price.
C) blended price of original contract and contract modification.
The Billings on Construction in Progress account is a(n) A) contract revenue account. B) inventory account. C) contra-inventory account. D) construction expense account.
C) contra-inventory account.
Investments in debt securities are generally recorded at A) cost including accrued interest. B) maturity value. C) cost including brokerage and other fees. D) maturity value with a separate discount or premium account.
C) cost including brokerage and other fees.
Dilutive convertible securities must be used in the computation of A) none of these. B) basic earnings per share only. C) diluted earnings per share only. D) diluted and basic earnings per share.
C) diluted earnings per share only.
When a company has an obligation or right to repurchase an asset for an amount greater than or equal to its selling price, the transaction should be treated as a A) put option. B) outright sale. C) financing transaction. D) repurchase transaction.
C) financing transaction.
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.
The second step in the process for revenue recognition is to A) identify the contract with customers. B) allocate transaction price to the separate performance obligations. C) identify the separate performance obligations in the contract. D) determine the transaction price.
C) identify the separate performance obligations in the contract.
Convertible bonds A) pay interest only in the event earnings are sufficient to cover the interest. B) are usually secured by a first or second mortgage. C) may be exchanged for equity securities. D) have priority over other indebtedness.
C) may be exchanged for equity securities.
The rate of return on common stock equity is calculated by dividing A) net income less preferred dividends by ending common stockholders' equity. B) net income by ending common stockholders' equity. C) net income less preferred dividends by average common stockholders' equity. D) net income by average common stockholders' equity.
C) net income less preferred dividends by average common stockholders' equity.
Stock warrants outstanding should be classified as A) reductions of capital contributed in excess of par value. B) assets. C) none of these answers are correct. D) liabilities.
C) none of these answers are correct.
Signing of the contract by the two parties is A) recorded at the time the contract is approved by both parties. B) not recorded until both parties perform under the contract. C) not recorded until one or both parties perform under the contract. D) recorded immediately after the contract is signed.
C) not recorded until one or both parties perform under the contract.
"Gains" on sales of treasury stock (using the cost method) should be credited to A) other income. B) retained earnings. C) paid-in capital from treasury stock. D) capital stock.
C) paid-in capital from treasury stock.
When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par value of the bonds and the fair market value of the warrants, the excess should be credited to A) additional paid-in capital from stock warrants. B) retained earnings. C) premium on bonds payable. D) a liability account.
C) premium on bonds payable.
On January 15, 2014, Bella Vista Company enters into a contract to build custom equipment for ABC Carpet Company. The contract specified a delivery date of March 1. The equipment was not delivered until March 31. The contract required full payment of $75,000 30 days after delivery. This contract should be A) recorded on January 15, 2014. B) recorded on March 1, 2014. C) recorded on March 31, 2014. D) recorded on April 30, 2014.
C) recorded on March 31, 2014.
When sales are made with a right of return, the company A) should not recognize any revenue. B) should recognize revenue for the full sales price. C) records the returned asset in a separate inventory account. D) record the estimated returns in the Sales Returns account.
C) records the returned asset in a separate inventory account.
The principal advantage of the completed-contract method is that A) it is not necessary to recognize revenue at the point of sale. B) a greater amount of gross profit and net income is reported than is the case when the percentage-of-completion method is used. C) reported revenue is based on final results rather than estimates of unperformed work. D) it reflects current performance when the period of a contract extends into more than one accounting period.
C) reported revenue is based on final results rather than estimates of unperformed work.
The cumulative feature of preferred stock A) means that the shareholder can accumulate preferred stock until it is equal to the par value of common stock at which time it can be converted into common stock. B) limits the amount of cumulative dividends to the par value of the preferred stock. C) requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders. D) enables a preferred stockholder to accumulate dividends until they equal the par value of the stock and receive the stock in place of the cash dividends.
C) requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders.
Under the completed-contract method A) revenue, cost, and gross profit are recognized during the production cycle. B) revenue and cost are recognized during the production cycle, but gross profit recognition is deferred until the contract is completed. C) revenue, cost, and gross profit are recognized at the time the contract is completed. D) None of these answers are correct.
C) revenue, cost, and gross profit are recognized at the time the contract is completed.
Antidilutive securities A) should be included in the computation of diluted earnings per share but not basic earnings per share. B) include stock options and warrants whose exercise price is less than the average market price of common stock. C) should be ignored in all earnings per share calculations. D) are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share.
C) should be ignored in all earnings per share calculations.
Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted. The other is A) that convertible bonds will always sell at a premium. B) the ease with which convertible debt is sold even if the company has a poor credit rating. C) that many corporations can obtain debt financing at lower rates. D) the fact that equity capital has issue costs that convertible debt does not.
C) that many corporations can obtain debt financing at lower rates.
Dividends are not paid on A) nonparticipating preferred stock. B) dividends are paid on all of these. C) treasury common stock. D) noncumulative preferred stock.
C) treasury common stock.
Define Full Disclosure Principle
Calls for financial reporting of any financial facts significant enough to influence the judgment of an informed reader
Define Financial Forecast
is a set of prospective financial statements that present, to the best of the responsible party's knowledge and belief, a company's expected financial position, results of operations, and cash flows. The responsible party bases a financial forecast on conditions it expects to exist and the course of action it expects to take.
Define Transaction Price
is the amount of consideration that a company expects to receive from a customer in exchange for transferring goods or services.
How do you identify a Correction of An Error in Financial Statements?
• Retrospective Approach (correct all prior statements presented) • Change from not GAAP method to a GAAP method, math mistakes, estimates made not in good faith, oversights, misuse of facts, incorrect expense/asset classification.
