Accounting 351 Final Exam Study Guide - McGraw Hill Questions (CH 11, 12, 13)

On January 1, 2024, the Holloran Corporation purchased a machine at a cost of $55,000. The machine was expected to have a service life of 10 years and a $5,000 residual value. The straight-line depreciation method was used. In 2026, the company switched to the double-declining-balance depreciation method. Depreciation for 2026 should be: Multiple Choice $12,750. $10,000. $11,250. $8,500.

$11,250. (($55,000 − (2 years × $5,000)) × 2 ÷ 8)

In January of 2024, the Phillips Company purchased a patent at a cost of $100,000. In addition, $10,000 in legal fees were paid to acquire the patent. The company estimated a 10-year useful life for the patent and uses the straight-line amortization method for intangible assets. In 2026, Phillips spent $25,000 in legal fees for an unsuccessful defense of the patent. The amount charged to income (expense and loss) in 2026 related to the patent should be: Multiple Choice $103,000. $36,000. $113,000. All of these answer choices are incorrect.

$113,000. Unamortized balance at 1/1/2026: $88,000 [8 ÷ 10 × ($100,000 + 10,000)]. This amount would be written off in 2026, along with the $25,000 in legal fees.

delivery van that cost $40,000 has an expected service life of 180,000 miles and a residual value of $4,000. The van was driven 24,000 miles in the first year and 36,000 miles in the second year. Accumulated depreciation by the end of the second year of the asset's life using the units-of-production method is: Multiple Choice $4,800 $12,000 $7,200 All of these answer choices are incorrect.

$12,000 Depreciation per mile = ($40,000 − $4,000) ÷ 180,000 miles = $0.20 Per mile. Accumulated depreciation = (24,000 + 36,000) × $0.20 = $12,000.

A company reports the following information at year-end: ------------BV-------Est. CF------FV Building--500,000--420,000--360,000 Patent----35,000----50,000---42,000 Copyright-40,000---38,000---29,000 Machine---100,000--120,000---85,000 Based on the above information, what is the total amount of impairment loss that the company should record at year-end? Multiple Choice $144,000 $166,000 $151,000 $159,000

$151,000 The building and the copyright are impaired since their estimated future cash flows are less than book value. The impairment loss is calculated as the difference between the book value and the fair value: Building ($500,000 − $360,000) = $140,000 and Copyright (40,000 − $29,000) = $11,000. Total impairment loss ($140,000 + $11,000) = $151,000.

On October 1, 2023, Parton Industries borrowed $12 million cash to provide working capital. The loan was made by Second Bank under a short-term line of credit. Parton issued an 8-month, "noninterest-bearing note." 8% is the bank's stated "discount rate." Parton's fiscal period is the calendar year. In Parton's 2023 income statement interest expense for the note will be: Multiple Choice $480,000 $240,000 $0 $360,000

$240,000 $12 million × 8% × 3 ÷ 12 = $240,000.

A machine is purchased on September 30, 2024, for $60,000. Useful life is estimated at four years and no residual value is anticipated. The double-declining-balance depreciation method is used. Depreciation expense for 2025 should be: Multiple Choice $15,000. $30,000. $26,250. All of the other answer choices are incorrect.

$26,250. 2024 depreciation: $60,000 × 2 ÷ 4 × 3 ÷ 12 =$ 7,500 2025 depreciation: ($60,000 − $7,500) × 2 ÷ 4 =$ 26,250

On January 1, 2023, Yukon Company agreed to grant its employees two weeks vacation each year, with the provision that vacations earned in a particular year could be taken the following year. For the year ended December 31, 2023, all twelve of Yukon's employees earned $1,200 per week each. Eight of these vacation weeks were not taken during 2023. In Yukon's 2023 income statement, how much expense should be reported for compensated absences? Multiple Choice $9,600 $0 $14,400 $28,800

$28,800 12 employees × $1,200 per employee × 2 weeks = $28,800.

During 2023 Green Thumb Company introduced a new line of garden shears that carry a two-year warranty against defects. Experience indicates that warranty costs should be 2% of net sales in the year of sale and 3% in the year after sale. Net sales and actual warranty expenditures were as follows: Year / Net sales / Actual warranty expenditures 2023 / $ 45,000 / $ 1,000 2024 / 120,000 / 3,500 At December 31, 2024, Green Thumb should report as a warranty liability of: Multiple Choice $1,250 $900 $3,750 $4,500

$3,750 (2% + 3%) × ($45,000 + $120,000) − ($1,000 + $3,500) = $3,750.

A machine is purchased on September 30, 2024, for $60,000. Useful life is estimated at four years and no residual value is anticipated. The straight-line depreciation method is used. The company's fiscal year ends on December 31. Depreciation expense for 2024 should be: Multiple Choice $3,750. $6,000. $11,250. $30,000.

$3,750. $3,750 = [1 ÷ 4 × ($60,000 ÷ 4)]

On January 1, 2024, SteveCo purchased $100,000 of Clear Company bonds at a premium of $8,000. The Clear bonds pay 8% interest but were purchased when the market interest rate was 7% for bonds of similar risk and maturity. The bonds pay interest semiannually on June 30 and December 31 of each year. SteveCo accounts for the bonds as a held-to-maturity investment, and uses the effective interest method. In SteveCo's December 31, 2024, journal entry to record the second period of interest, SteveCoRupar would record a credit to interest revenue of: Multiple Choice $4,000. $3,780. $3,500. $3,772.

$3,772.

Assume that, on January 1, 2024, Shlap Enterprises paid $4,000,000 for its investment in 60,000 shares of Dodger Company Further, assume that Dodger has 150,000 total shares of stock issued and estimates a ten-year remaining useful life and straight-line depreciation with no residual value for its depreciable assets. At January 1, 2024, the book value of Dodger' identifiable net assets was $8,000,000, and the fair value of Dodger was $12,000,000. The difference between Dodger' fair value and the book value of its identifiable net assets is attributable to $1,500,000 of land and the remainder to depreciable assets. Goodwill was not part of this transaction. 2024: Net income $ 800,000 Dividends declared and paid $ 600,000 Market price of common stock on 12/31/2024 $85/share What amount is reported in its year-end 2024 balance sheet for its investment? Multiple Choice $4,080,000 $4,000,000 $3,980,000 $4,320,000

$3,980,000 60,000/150,000 = 40% ownership, so assume the equity method. Year end investment would equal $4,000,000 + (40% × $800,000 net income) − (40% × $600,000 dividends) − [(40% × {($4,000,000 − $1,500,000)) / 10 years of additional depreciation}] = $3,980,000.

Declarmen Corporation owns a factory in the United Kingdom. A change in business climate indicates that Declarmen should investigate for possible impairment. Below are date related to the factory's assets ($ in millions): Book value $ 570 Undiscounted sum of future estimated cash flows 630 Present value of future cash flows 525 Fair value less cost to sell (determined by appraisal) 540 The amount of impairment loss that Declarmen should recognize according to International Financial Reporting Standards is: Multiple Choice $60 million. None. $30 million. $45 million.

$30 million. Under IFRS, the impairment equals book value ($570) less the greater of (a) present value of future cash flows of $525 and (b) fair value less cost to sell of $540. Impairment loss = $570 − $540 = $30.

In 2025, the controller of the Green Company discovered that 2024 depreciation expense was overstated by $40,000, a material amount. Assuming an income tax rate of 25%, the prior period adjustment to 2025 beginnings retained would be: Multiple Choice $0. $30,000 debit. $30,000 credit. All of these answer choices are incorrect.

$30,000 credit. 2024 net income was understated by $30,000 [$40,000 × (1 − 0.25)], causing beginning-of-2025 retained earnings to be understated. The adjustment increases beginning retained earnings by the after-tax impact of the error.

Felix Mining acquired a copper mine at a total cost of $3,000,000. The mine is expected to produce 6,000,000 tons of copper over its five-year useful life and have no residual value. During the first year of operations, 750,000 tons of copper was extracted. Depletion for the first year should be: Multiple Choice $600,000 $375,000 $1,500,000 All of these answer choices are incorrect.

$375,000 750,000 ÷ 6,000,000 = 0.125 depletion rate. $3,000,000 × 0.125 = $375,000

A delivery van that cost $40,000 has an expected service life of eight years and a residual value of $4,000. Depreciation expense for the second year of the asset's life using the straight-line method is: Multiple Choice $4,500 $7,000 $8,000 All of these answer choices are incorrect.

$4,500 $4,500 = ($40,000 − $4,000) ÷ 8

On November 1, Epic Distributors borrowed $24 million cash to fund an expansion of its facilities. The loan was made by WW BancCorp under a short-term line of credit. Epic issued a 9-month, 12% promissory note. Interest was payable at maturity. Epic's fiscal period is the calendar year. In Epic's adjusting entry for the note on December 31, interest expense will be: Multiple Choice $0 $480,000 $240,000 $640,000

$480,000 $24 million × 12% × 2 ÷ 12 = $480,000.

On January 1, 2024, the Holloran Corporation purchased a machine at a cost of $55,000. The machine was expected to have a service life of 10 years and a $5,000 residual value. The straight-line depreciation method was used. In 2026 the estimate of residual value was revised from $5,000 to zero. Depreciation for 2026 should be: Multiple Choice $4,500. $5,500. $5,000. $5,625.

$5,625. Initial straight-line depreciation is $5,000 per year ($55,000 − 5,000) ÷ 10 years. Revised depreciation after two years is $5,625 per year [$55,000 − (2 years × $5,000)] ÷ 8 years.

In 2024, Cordova Incorporated acquired Cordant Corporation and $140 million in goodwill was recorded. At the end of its 2026 fiscal year, management has provided the following information for a required goodwill impairment test ($ in millions): Fair value of Cordant (approximates fair value less costs to sell) $ 980 Fair value of Cordant's net assets (excluding goodwill) 900 Book value of Cordant's net assets (including goodwill) 1,050 Present value of estimated future cash flows 1,000 Assuming that Cordant is considered a reporting unit, the amount of goodwill impairment loss that Cordova should recognize according to International Financial Reporting Standards is: Multiple Choice $70 million. $50 million. $20 million. None.

$50 million. Book value of the cash generating unit of $1,050 − recoverable amount of $1,000 = $50. Recoverable amount is the higher of value in use, $1,000 (present value of estimated cash flows), and fair value less costs to sell, $980.

During 2024, a software company incurred development costs of $2,000,000 related to a new software project. Of this amount, $400,000 was incurred after technological feasibility was achieved. The project was completed in the middle of the year and the product was available for release to customers on July 1. Revenues from the sale of the new software in 2024 were $500,000 and the company anticipated future additional revenues of $4,500,000. The economic life of the software is estimated at four years. What is amortization in 2024? Multiple Choice $100,000 $20,000 $40,000 $50,000

$50,000 Costs incurred after technological feasibility but before the software is available for general release to customers are capitalized as an intangible asset. This means the capitalized amount is $400,000. Amortization for the year is the greater of the percentage-of-revenue method or the straight-line method. The percentage-of-revenue method is $400,000 × $500,000 ÷ ($500,000 + $4,500,000) = $40,000. The straight-line method is ($400,000 ÷ 4) × 1 ÷ 2 = $50,000. Therefore, amortization in 2024 is $50,000.

Reunion BBQ has $4,000,000 of notes payable due on March 11, 2024, which Reunion intends to refinance. On January 5, 2024, Reunion signed a line of credit agreement to borrow up to $3,500,000 cash on a two-year renewable basis. On the December 31, 2023, balance sheet, Reunion should classify: Multiple Choice $500,000 of notes payable as short-term and $3,500,000 as long-term obligations. $4,000,000 of notes payable as short-term obligations. $500,000 of notes payable as long-term and $3,500,000 as short-term obligations. $4,000,000 of notes payable as long-term obligations.

$500,000 of notes payable as short-term and $3,500,000 as long-term obligations. $4,000,000 notes payable − $3,500,000 demonstrated ability to refinance = $500,000 current liability.

On January 1, 2024, Normal Plastics bought 15% of Model, Incorporated's outstanding bonds for $900,000. On October 1, 2025, the bonds were valued at $1,026,000 and Normal sold half of the amount it purchased. On December 31, 2025, the remaining bonds were valued at $580,000. How much should Normal show on its 2025 income statement from this investment, assuming that it accounts for it as an available-for-sale investment? Multiple Choice $0 $306,000 $243,000 $63,000

$63,000 Normal would recognize income of ($1,026,000 − $900,000) ÷ 2 = $63,000. The remainder of the unrealized holding gain in 2025 would affect OCI as no other sale took place.

On January 2, 2024, Garner, Incorporated bought 10% of the outstanding common stock of Moody, Incorporated for $60 million cash. Garner does not exercise significant influence over Moody. At the date of acquisition of the stock, Moody's net assets had a book value and fair value of $180 million. Moody's net income for the year ended December 31, 2024, was $30 million. During 2024, Moody declared and paid cash dividends of $6 million. On December 31, 2024, the fair value of 100% of Moody's stock was $650 million. On December 31, 2024, Garner's investment should be reported at: Multiple Choice $68.0 million. $62.4 million. $60.0 million. $65.0 million.

$65.0 million. Garner own's 10% of a company valued at a total of $650,000 as of December 31, 2024, so it should carry the investment at 10% × $650,000 = $65,000.

On January 2, 2024, Garner, Incorporated bought 30% of the outstanding common stock of Moody, Incorporated for $60 million cash. At the date of acquisition of the stock, Moody's net assets had a book value and fair value of $180 million. Moody's net income for the year ended December 31, 2024, was $30 million. During 2024, Moody declared and paid cash dividends of $6 million. On December 31, 2024, the fair value of 100% of Moody's stock was $650 million. On December 31, 2024, Garner's investment account should be reported at: Multiple Choice $65.0 million. $71.1 million. $60.0 million. $67.2 million.

$67.2 million. $60 million + (30% × $30 million) − (30% × $6 million) = $67.2 million.

A delivery van that cost $40,000 has an expected service life of eight years and a residual value of $4,000. Depreciation expense for the second year of the asset's life using the double-declining-balance method is: Multiple Choice $7,500 $6,750 $4,500 All of these answer choices are incorrect.

$7,500 $7,500 = [$40,000 − (2 ÷ 8 × $40,000)] × 2 ÷ 8

In 2024, Cordova Incorporated acquired Cordant Corporation and $140 million in goodwill was recorded. At the end of its 2026 fiscal year, management has provided the following information for a required goodwill impairment test ($ in millions): Fair value of Cordant (approximates fair value less costs to sell) $ 980 Fair value of Cordant's net assets (excluding goodwill) 900 Book value of Cordant's net assets (including goodwill) 1,050 Present value of estimated future cash flows 1,000 Assuming that Cordant is considered a reporting unit, the amount of goodwill impairment loss that Cordova should recognize according to U.S. GAAP is: Multiple Choice $50 million. $20 million. $70 million. None.

$70 million. Impairment loss = $1,050 − $980 = $70.

Jasper Incorporated prepares its financial statements according to International Financial Reporting Standards. At the end of its fiscal year, the company chooses to revalue its equipment. The equipment cost $810,000, had accumulated depreciation of $360,000 at the end of the year after recording annual depreciation, and had a fair value of $495,000. After the revaluation, the equipment account will have a balance of: Multiple Choice $810,000 $891,000 $495,000 All of these answer choices are incorrect.

$891,000 $495,000 ÷ ($810,000 − 360,000) = 1.1. $810,000 × 1.1 = $891,000.

On January 2, 2024, Germane, Incorporated bought 30% of the outstanding common stock of Quality, Incorporated for $56 million cash. At the date of acquisition of the stock, Quality's net assets had a book value and fair value of $120 million. Quality's net income for the year ended December 31, 2024, was $30 million. During 2024, Quality declared and paid cash dividends of $10 million. On December 31, 2024, Germane's should report investment revenue of: Multiple Choice $9 million. $6 million. $3 million. $30 million.

$9 million. 30% × $30 million = $9 million.

Which of the following statements accurately describes depreciation? 1) Depreciation is the process of allocating the cost of the asset over periods benefited. 2) Depreciation is used to track the fair value of the asset. 3) The book value of an asset is its original cost less accumulated depreciation. Multiple Choice: 1 and 2. 1 and 3. 2 and 3. All of the other choices are correct.

1 and 3. The process of allocating the cost of plant and equipment over the periods they are used to produce revenues is known as depreciation.

On November 1, Shearer Shoes borrowed $18 million cash and issued a 6-month, "noninterest-bearing note." The loan was made by Third Commercial Bank whose stated "discount rate" is 9%. Shearer's effective interest rate on this loan is: Multiple Choice 9.42% 8.61% 9.5% 9.0%

9.42%

The Cromwell Company sold equipment for $35,000. The equipment, which originally cost $120,000 and had an estimated useful life of 10 years and $20,000 residual value, was depreciated for four years using the straight-line method. Cromwell should report the following on its income statement in the year of sale: Multiple Choice A $45,000 loss. A $45,000 gain. A $25,000 gain. All of these answer choices are incorrect.

A $45,000 loss. Book value at disposal date: $80,000 [$120,000 − (4 × ($120,000 − $20,000) ÷ 10)]. Asset sold for $35,000. $35,000 − 80,000 = $45,000 loss.

Of the following, which usually would not be classified as a current liability? Multiple Choice A nine-month note to be paid with the proceeds from the sale of common stock. Estimated warranty liability. Bonds payable maturing within the coming year. Subscription revenue received in advance.

A nine-month note to be paid with the proceeds from the sale of common stock. Payment out of the proceeds from sale of common stock means that the obligation is not going to be paid for out of current assets or give rise to a current liability, so it is classified as long-term.

Which of the following statements concerning lines of credit is untrue? Multiple Choice Banks sometimes require the company to maintain a compensating balance on deposit with the bank (say 5%) as part of the line of credit agreement. Most short-term bank loans are arranged under an existing line of credit. A line of credit is an agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and paperwork. A noncommitted line of credit is a formal agreement that usually requires the firm to pay a commitment fee to the bank.

A noncommitted line of credit is a formal agreement that usually requires the firm to pay a commitment fee to the bank. A noncommitted line of credit is an informal agreement and doesn't usually involve a commitment fee.

When applying the equity method, an investor should report dividends from the investee as: Multiple Choice An extraordinary item. Dividend revenue. An increase in the investment account. A reduction in the investment account.

A reduction in the investment account. Receipt of dividends is recorded with a debit to cash and a credit to the investment account.

After the end of the 2025 fiscal year but before financial statements were issued, Palladin Company learned that an arbitrator had made a $15 million judgment in a litigation case against it. The claim had been made in 2024 for alleged defects of products sold in 2023. Prior to learning of the judgment, Palladin had not accrued any litigation loss, and does not plan to appeal. For the 2025 fiscal year, Palladin should: Multiple Choice Do nothing relative to the contingency. Accrue a $15 million liability and explain it in a note to the financial statements. Disclose in the notes that a $15 million judgment was made after fiscal year end. Disclose the potential for a judgment in the notes, but not indicate the amount, since the judgment was made after fiscal year end.

Accrue a $15 million liability and explain it in a note to the financial statements. The event giving rise to the judgment occurred prior to year end, so the loss must be accrued.

An impairment loss has the effect of: Multiple Choice Decreasing total assets. Decreasing net income. Decreasing retained earnings. All of the other answers are correct.

All of the other answers are correct. An impairment loss is typically recorded by reducing accumulated depreciation to zero and decreasing the asset's recorded amount to its fair value. Both of these adjustments reduce total assets. In addition, an impairment loss is reported in the income statement, reducing the company's reported net income and therefore retained earnings.

On January 12, Henderson Corporation purchased bonds of Honeycutt Corporation for $73 million and classified the securities as available-for-sale. At the close of the same year, the fair value of the securities is $81 million. Henderson Corporation should report: Multiple Choice A gain of $8 million on the income statement. An increase in shareholders' equity of $8 million. An investment of $73 million. None of the choices are correct.

An increase in shareholders' equity of $8 million. Henderson has an unrealized holding gain of $81 million − $73 million = $8 million, which would be included in shareholders' equity given that the investment is accounted for as an available-for-sale investment.

Which of the following would result in a credit to a deferred revenue liability? Multiple Choice Sale of a gift card. Receipt of cash in exchange for a service to be performed next month. Both are correct. Neither are correct.

Both are correct. Sale of a gift card and advanced collections both require recognition of deferred revenue.

Commercial paper has become an increasingly popular way for companies to raise funds. Which of the following is not true regarding commercial paper? Multiple Choice Commercial paper is often purchased by other companies as a short-term investment. Usually the interest rate is lower than in a bank loan. Commercial paper usually is sold in minimum denominations of $25,000 with maturities of greater than 270 days. Interest often is discounted at the issuance of the note.

Commercial paper usually is sold in minimum denominations of $25,000 with maturities of greater than 270 days. Commercial paper is sold in minimum denominations of $25,000 with maturities ranging from 1 to 270 days.

Under IFRS, a company can demonstrate their ability to refinance long-term debt for purposes of excluding the debt from current liabilities by: Multiple Choice Completing refinancing before the date of issuance of the financial statements. Completing refinancing before the balance sheet date. Promising to refinance the liabilities. None of the choices are correct.

Completing refinancing before the balance sheet date. Ability to refinance is demonstrated by completing refinancing before the balance sheet date under IFRS.

Which of the following statements related to depreciation is true? Multiple Choice Over the life of an asset, total reported profits will be greater under the straight-line method than under the double-declining-balance method. Conceptually, activity-based depreciation provides a better matching of the asset's cost to the use of that asset to help produce revenues. The residual value of an asset depends on the depreciation method chosen. If a company uses double-declining-balance method for tax purposes, the company must also use this method for financial reporting purposes.

Conceptually, activity-based depreciation provides a better matching of the asset's cost to the use of that asset to help produce revenues.

Monterrey Incorporated is aware of a potential claim that could be made against it. Monterrey believes it is not probable that the claim will be asserted, but that, if the claim is asserted, it is probable that it would incur a $5 million loss. Monterrey's financial statements should: Multiple Choice Accrue a $5 million liability and explain it in a note to the financial statements. Disclose in the notes that a $5 million claim could be asserted and, if asserted, is probable to produce a $5 million loss. Disclose the potential for a judgment in the notes, but not indicate the amount, since the claim has not been asserted. Do nothing relative to the contingency.

Do nothing relative to the contingency. If it is not probable that the claim will be asserted, no accrual or disclosure is necessary.

Credit losses would correctly be calculated as the difference between the amortized cost of debt and: Multiple Choice Expected future cash flows multiplied by the effective interest rate that existed when the investment was acquired. Expected future cash flows multiplied by the expected future discount rate. Current cash flows multiplied by the expected future discount rate. Current cash flows multiplied by the effective interest rate that existed when the investment was acquired.

Expected future cash flows multiplied by the effective interest rate that existed when the investment was acquired. Credit losses capture declines in customer's credit quality that have occurred since the investment was acquired.

Under IFRS Number 9, equity investments can be classified as: Multiple Choice Fiduciary Trust Value. Fair Value through Profit or Loss. Held to Maturity. Available for Sale.

Fair Value through Profit or Loss. Fair value through profit or loss (FVPL) is one of the categories permitted by IFRS.

Which of the following statements is not true regarding investments in equity securities? Multiple Choice If the investor owns less than 20 percent of outstanding voting common stock, the equity method usually is not used. If the investor owns more than 50 percent of the outstanding voting common stock, the financial statements are consolidated. If the investor owns 20-50 percent of the outstanding voting common stock, the equity method always is required. If the investor owns less than 20 percent of outstanding voting common stock, the securities generally are reported at their fair value.

If the investor owns 20-50 percent of the outstanding voting common stock, the equity method always is required. The key for the equity method is whether the investor exercises significant influence over the investee. The 20% threshold is only a guideline to determine whether significant influence is the case.

Unrealized holding gains and losses for trading securities are: Multiple Choice Included in the determination of income from operations in the period of the change. Reported as a separate component of the shareholders' equity section of the balance sheet. Not reported in the income statement nor the balance sheet. Reported as extraordinary items.

Included in the determination of income from operations in the period of the change. Unrealized holding gains and losses are included in income for trading securities.

The entire amount of impairment for an available-for-sale debt investment is recognized in earnings if fair value declines below amortized cost and: Multiple Choice The company has incurred credit losses. It is more likely than not that the investor will have to sell the investment before fair value recovers. The impairment is viewed as temporary. The company has incurred non-credit losses.

It is more likely than not that the investor will have to sell the investment before fair value recovers. The impairment is recorded in earnings because the expectation is that the loss will be realized before fair value recovers.

On January 1, 2024, a company purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a useful life of eight years and an estimated residual value of $8,000. On December 31, 2026, the company sold the truck for $30,000. What amount of gain or loss should the company record on December 31, 2026? Multiple Choice Gain $5,000 Loss $3,000 Loss $18,000 Gain $22,000

Loss $3,000 ($48,000 − $8,000) ÷ 8 = depreciation of $5,000 per year. After three years, the book value would be [$48,000 − ($5,000 × 3 years)] = $33,000. The truck was sold for $30,000, so the company should record a loss of $3,000.

Under IFRS, if every amount in a range of contingent losses is equally likely, the amount accrued is the: Multiple Choice Low end of the range. High end of the range. Midpoint of the range. None of the choices are correct.

Midpoint of the range. The midpoint is accrued if each amount of the range is equally likely.

The fair value option Multiple Choice For debt is available only if anticipated to not be held to maturity. Is not available for equity-method investments. Can be traded on exchanges, similar to other options. Must be elected when a security is purchased, and is irrevocable.

Must be elected when a security is purchased, and is irrevocable. The fair value option cannot be elected or changed after the security is purchased.

Evans Company owns 450 bonds of Frazier Company classified as available-for-sale. During 2024, the fair value of those bonds increased by $9 million. What effect did this increase have on Evans' 2024 financial statements? Multiple Choice Net income increased Total assets decreased Net assets increased Shareholders' equity decreased

Net assets increased The investment would be carried at fair value on the balance sheet, so the asset would increase by $9 million.

Declarmen Corporation owns a factory in the United Kingdom. A change in business climate indicates that Declarmen should investigate for possible impairment. Below are date related to the factory's assets ($ in millions): Book value $ 570 Undiscounted sum of future estimated cash flows 630 Present value of future cash flows 525 Fair value less cost to sell (determined by appraisal) 540 The amount of impairment loss that Declarmen should recognize according to U.S. GAAP is: Multiple Choice $45 million. $60 million. $30 million. None.

None. Step 1 of the impairment test: Because the sum of undiscounted cash flows ($630) is greater than book value ($570), there is no impairment under the requirements of U.S. GAAP..

Unrealized holding gains and losses for securities to be held-to-maturity are: Multiple Choice Reported as extraordinary items. Reported as a separate component of the shareholders' equity section of the balance sheet. Not reported in the income statement nor the balance sheet. Included in the determination of income from operations in the period of the change.

Not reported in the income statement nor the balance sheet. Held-to-maturity securities are recorded at amortized cost.

A loss contingency should be accrued when the amount of loss is known and the occurrence of the loss is: Remote / Reasonably possible a.No; No b.Yes; Yes c.Yes; No d.No; Yes Multiple Choice Option a Option b Option c Option d

Option a Accrual is required only if the loss is probable.

Which of the following results in an accrued liability? Interest on a 6 month bank loan due in two months / Sales taxes collected on recent sales a.Yes; Yes b.Yes; No c.No; No d.No; Yes Multiple Choice Option a Option b Option c Option d

Option a Only a present obligation to be paid in the future constitutes a liability.

Unrealized holding gains and losses are included in an investor's earnings for: Trading Securities---Securities Available-For-Sale a.Yes; No b.Yes; Yes c.No; Yes d.No; No Multiple Choice Option a Option b Option c Option d

Option a Unrealized holding gains and losses are recognized in earnings for trading securities but not for available-for-sale securities.

Investment securities are reported on a balance sheet at fair value for: Trading Securities---Securities Available-For-Sale a.Yes; No b.Yes; Yes c.No; Yes d.No; No Multiple Choice Option a Option b Option c Option d

Option b Investments are reported at fair value on the balance sheet for both trading securities and available-for-sale securities.

There is a possibility of a safety hazard for a manufactured product. As yet, no claim has been made for damages, though there is a reasonable possibility that a claim will be made. If a claim is made, it is probable that damages will be paid and the amount of the loss can be reasonably estimated. This possible loss must be: Accrued / Disclosed a.Yes; Yes b.Yes; No c.No; Yes d.No; No Multiple Choice Option a Option b Option c Option d

Option d If it is not probable that a claim will be asserted, no accrual or disclosure is necessary.

If Arleo Company concluded that an investment originally classified as held-to-maturity would now more appropriately be classified as available-for-sale, Arleo would: Multiple Choice Need to restate earnings, as the original classification was in error. Reclassify the investment as available-for-sale and immediately recognize in accumulated other comprehensive income any unrealized holding gain or loss on the reclassification date. Reclassify the investment as available-for-sale and immediately recognize in net income any unrealized holding gain or loss on the reclassification date. Not reclassify the investment, as original classifications are irrevocable.

Reclassify the investment as available-for-sale and immediately recognize in accumulated other comprehensive income any unrealized holding gain or loss on the reclassification date. The unrealized holding gain or loss at reclassification should be accounted for in a manner consistent with the classification into which the security is being transferred.

If Reibach Incorporated concluded that an investment originally classified as a trading security would now more appropriately be classified as held-to-maturity, Reibach would: Multiple Choice Reclassify the investment as held-to-maturity and treat the fair value as of the date of reclassification as the investment's amortized cost basis for future amortization. Not reclassify the investment, as original classifications are irrevocable. Reclassify the investment as held-to-maturity, but there would be no income effect. Reclassify the investment as held-to-maturity and immediately recognize in net income all unrealized holding gains and losses that have not already been recognized as of the reclassification date.

Reclassify the investment as held-to-maturity and immediately recognize in net income all unrealized holding gains and losses that have not already been recognized as of the reclassification date. That approach catches up the accounting for the trading security classification to the point in time at which the transfer occurs.

Which of the following types of subsequent expenditures is not normally capitalized? Multiple Choice Additions. Repairs and maintenance. Rearrangements. Improvements.

Repairs and maintenance. Repairs and maintenance expenditures do not increase future benefits derived from the asset and therefore are expensed in the period incurred.

Which of the following loss contingencies generally do not require accrual? Multiple Choice Manufacturers' product guarantees. Obligations due to cash rebate offers. Retailers' extended warranties. Claims by government agencies with probable negative outcomes.

Retailers' extended warranties. An extended warranty is an agreement to provide future services, rather than an obligation arising from a prior event.

An enterprise should accrue a liability for compensation of employees' unpaid vacations if certain conditions exist. Each of the following is a condition for accrual except: Multiple Choice The employee has the right to carry forward the vacation time beyond the current period. The employee benefit has been earned. The amount of compensation is known. Compensation for the vacations is probable.

The amount of compensation is known. The amount of compensation can be estimated.

Under U.S. GAAP, liabilities payable within one year can be excluded from current liabilities only if: Multiple Choice The business intends to refinance the obligations on a long-term basis. Liabilities payable within one year always must be classified as current liabilities. The business has the demonstrated ability to refinance the obligations on a long-term basis. The business has the intent and the ability to refinance the obligation on a long-term basis.

The business has the intent and the ability to refinance the obligation on a long-term basis. The company should have the intent and ability to refinance the obligation.

The difference in testing for impairment of a finite-life versus indefinite-life intangible asset is: Multiple Choice Companies are not required to recognize impairment losses on finite-life intangible assets. Subsequent recovery of an impairment loss is allowed for a finite-life intangible asset. The measure of an impairment loss for an indefinite-life intangible assets is not based on book value. The cash flow recoverability test is omitted for an indefinite-life intangible asset.

The cash flow recoverability test is omitted for an indefinite-life intangible asset.

Warren Advertising becomes aware of a lawsuit after the end of the fiscal year, but prior to the issuance of financial statements. A loss should be accrued and a liability should be reported if the amount can be reasonably estimated and: Multiple Choice The cause for action occurred prior to the end of the fiscal year. The damages would be payable within a year. The contingency should not be accrued. The cause for action occurred prior to the end of the fiscal year and the damages would be payable within a year.

The cause for action occurred prior to the end of the fiscal year. Liabilities are recorded for events that have already occurred.

When a company reports a loss on the sale of a depreciable asset, which of the following is always true? Multiple Choice The company sold the asset before the useful life was over. The company sold the asset for less than accumulated depreciation. The company sold the asset for less than book value. The company sold the asset for less than fair value.

The company sold the asset for less than book value. The gain or loss on the sale of an asset is equal to consideration received minus the book value of the asset sold. When that book value is less than the consideration received, a loss is recorded.

MACRS depreciation is equivalent to: Multiple Choice The double-declining-balance method with a switch to straight line. The straight-line method. The straight-line method with a switch to sum-of-the-years'-digits (SYD) method. The double-declining-balance method.

The double-declining-balance method with a switch to straight line.

The essential characteristics of a liability do not include: Multiple Choice Present obligation. The existence of a legal obligation. A future sacrifice of economic benefits. The existence of a past causal transaction or event.

The existence of a legal obligation. The present obligation does not have to be a "legal obligation" for a liability to exist.

Gain contingencies usually are recognized in the income statement when: Multiple Choice The gain is probable and the amount is known. The gain is realized. The gain is probable and the amount can be reasonably estimated. The gain is reasonably possible and the amount can be reasonably estimated.

The gain is realized. Gain contingencies are not accrued, so are only recognized when they are actually realized.

Which of the following is NOT a reason why an investor might record at least some amount of credit loss for an available-for-sale investment in net income? Multiple Choice The investor determines that a credit loss exists on the investment. The investor intends to sell the investment. The investor believes it is "more likely than not" that there is a non-credit loss on the investment. The investor believes it is "more likely than not" that the investor will be required to sell the investment prior to recovering the amortized cost of the investment less any credit losses arising in the current year.

The investor believes it is "more likely than not" that there is a non-credit loss on the investment. There is no "more likely than not" non-credit loss criterion.

The equity method is used when an investor can't control, but can exercise significant influence over the operating and financial policies of the investee. We presume, in the absence of evidence to the contrary, that this is so if: Multiple Choice The investor classifies the investment as available-for-sale. The investor owns between 20% and 50% of the investee's voting shares. The investor classifies the investment as held-to-maturity. The investor owns between 51% or more of the investee's voting shares.

The investor owns between 20% and 50% of the investee's voting shares. Between 20% and 50% ownership, significant influence is presumed.

In its financial statements, an enterprise should accrue a liability for a loss contingency involving a possible cash payment if certain conditions exist. Each of the following is a condition for accrual except: Multiple Choice The amount of payment can be estimated before the financial statements are issued. The cause of the loss contingency occurred prior to the end of the year. The payment is probable. The obligation is a legally enforceable claim.

The obligation is a legally enforceable claim. The obligation can be constructive as opposed to clearly legally enforceable.

Which of the following statements accurately describes depreciable base (or allocation base)? Multiple Choice: The original cost of an asset minus its estimated residual value at the end of its service life. The original cost of an asset. The estimated amount the company expects to receive for an asset at the end of its service life. The original cost of an asset minus its estimated amount of depreciation over its service life.

The original cost of an asset minus its estimated residual value at the end of its service life. The depreciable base (or allocation base) is the amount of cost to be allocated over an asset's service life. The amount is the difference between the asset's capitalized cost at the date placed in service and the asset's estimated residual value. Residual value is the amount the company expects to receive for the asset at the end of its service life.

Which of the following approaches cannot be used to determine the fair value of an impaired asset? Multiple Choice: The sum of the undiscounted expected cash flows. Prices of similar assets. The sum of the discounted expected cash flows. The market price of the asset.

The sum of the undiscounted expected cash flows. Undiscounted cash flows do not represent fair value as the measure ignores the time value of money.

The method that does not necessarily produce a declining or constant pattern of depreciation over an asset's service life is: Multiple Choice: The double-declining-balance method. The straight-line method. The units-of-production method. All of these answer choices produce a declining pattern.

The units-of-production method. The units-of-production depreciation method is based on actual usage of the asset, which may or may not have a declining or constant pattern.

Western Manufacturing Company owns 40% of the outstanding common stock of Eastern Supply Company. During 2024, Western received a $50 million cash dividend from Eastern. What effect did this dividend have on Western's 2024 financial statements? Multiple Choice Total assets decreased. Total assets are unchanged. Net income increased. Total liabilities increased.

Total assets are unchanged. The dividend increases cash but decreases the investment asset.

Level Company owns bonds of Leader Company classified as held-to-maturity. During 2024, the fair value of those bonds increased by $4 million. Interest was received of $3 million. What effect did the investment have on Level's 2024 financial statements? Multiple Choice Shareholders' equity increased by $4 million. Total assets increased by $7 million. Total assets increased by $3 million. Net income increased by $7 million.

Total assets increased by $3 million. Receipt of interest would increase cash by $3 million.

Level Company owns bonds of Leader Company classified as available-for-sale. During 2024, the fair value of those bonds increased by $4 million. Interest was received of $3 million. What effect would the investment have on Level's 2024 financial statements? Multiple Choice Total assets increased by $3 million. Total assets increased by $7 million. Net income increased by $7 million. Shareholders' equity increased by $1 million.

Total assets increased by $7 million. Receipt of interest would increase cash by $3 million, and the increase in fair value of the bonds would increase the bond investment by $4 million.

The accounting for unrealized holding gains and losses will be different if the fair value option is elected for all of the following types of investments except: Multiple Choice Available-for-sale. Held-to-maturity. Trading security. Equity method.

Trading security. Trading securities are already accounted for at fair value.

A company made an ordinary repair to a delivery truck at a cost of $1,500. The company's accountant debited the asset account, Equipment. Was this treatment an error, and if so, what will be the effect on the financial statements? Multiple Choice No, the repair was accounted for correctly. Yes, in the years following, net income will be overstated. Yes, the error overstated assets and net income. Yes, the error understated net income.

Yes, the error overstated assets and net income. Repairs and maintenance expenditures do not increase future benefits derived from the asset and therefore are expensed in the period incurred.

Unrealized holding gains and losses for securities available-for-sale are: Multiple Choice not reported in the income statement nor the balance sheet. included in the determination of income from operations in the period of the change. reported as extraordinary items. included in accumulated other comprehensive income in the shareholders' equity section of the balance sheet.

included in accumulated other comprehensive income in the shareholders' equity section of the balance sheet. Unrealized holding gains and losses are included in accumulated other comprehensive income for available-for-sale investments.

Fair value is used as the basis for valuation of a firm's debt investments when: Multiple Choice management's intention is to dispose of the investment within one year. the investment is classified as held-to-maturity. the investment is not classified as held-to-maturity. the market value is less than cost for the investment.

the investment is not classified as held-to-maturity. Fair value is used for both trading securities and available-for-sale securities.