EXAM

Lease A does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How should the lessee classify these leases? Lease A Lease B a.Operating lease Finance Lease b.Operating lease Operating lease c.Finance Lease Finance Lease d.Finance Lease Operating lease

C

Which of the following facts concerning plant assets should be included in the summary of significant accounting policies? Depreciation Method Composition A.No Yes B.Yes Yes C.Yes No D.No No

C

On January 1, 2019, Neal Corporation acquired equipment at a cost of $840,000. Neal adopted the sum-of-the-years'-digits method of depreciation for this equipment and had been recording depreciation over an estimated life of eight years, with no residual value. At the beginning of 2022, a decision was made to change to the straight-line method of depreciation for this equipment. The depreciation expense for 2022 would be

C. $105,000. A. $43,750. Correct! B. $70,000. D. $168,000.

During 2021, Greta Company earned net income of $262,000 which included depreciation expense of $39,000. In addition, the company experienced the following changes in the account balances listed below: Decreases Accounts receivable$ 6,000 Prepaid expenses 16,500 Accrued liabilities 12,000 Increases Accounts payable$ 22,500 Inventory 18,000 Based upon this information what amount will be shown for net cash provided by operating activities for 2021?

C. $212,500. Correct! A. $316,000. B. $302,500. D. $203,500. 262+39+6+22.5+16.5-12-18=316

Which of the following should be reported as a prior period adjustment? Change in Change from Estimated lives Unacceptable Principle of Depreciable Assets to Acceptable Principle a.Yes Yes b.No Yes c.Yes No d.No No

B

Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/20 and 12/31/21 contained the following errors: 2020 2021 Ending Inventory $ 50,000 Overstated $80,000 Under Depreciation Expense 20,000 Understated 40,000 Over Assume that the 2020 errors were not corrected and that no errors occurred in 2019. By what amount will 2020 income before income taxes be overstated or understated?

D. $30,000 understatement B. $30,000 overstatement C. $70,000 understatement Correct! A. $70,000 overstatement

Perez Company's net accounts receivable were $800,000 at December 31, 2020 and $880,000 at December 31, 2021. Net cash sales for 2021 were $520,000. The accounts receivable turnover for 2021 was 9.0. What were Perez's total net sales for 2021?

D. $7,920,000. You Answered B. $7,560,000. A. $4,680,000. Correct Answer C. $8,080,000.

Which of the following statements is correct? D. Correction of an error related to a prior period should be considered as an adjustment to current year net income. B. Prior statements should be restated for changes in accounting estimates. C. A change from expensing certain costs to capitalizing these costs due to a change in the period benefited, should be handled as a change in accounting estimate. A. Changes in accounting principle are always handled in the current or prospective period.

D. Correction of an error related to a prior period should be considered as an adjustment to current year net income. B. Prior statements should be restated for changes in accounting estimates. Correct! C. A change from expensing certain costs to capitalizing these costs due to a change in the period benefited, should be handled as a change in accounting estimate. A. Changes in accounting principle are always handled in the current or prospective period.

Which of the following is (are) the proper time period(s) to record the effects of a change in accounting estimate?

D. Current period only B. Current period and retrospectively C. Retrospectively only Correct! A. Current period and prospectively

Napier Co. provided the following information on selected transactions during 2021: Purchase of land by issuing bonds $ 1,000,000 Proceeds from issuing bonds 3,000,000 Purchases of inventory 3,800,000 Purchases of treasury stock 600,000 Loans made to affiliated corporations 1,400,000 Dividends paid to preferred stockholders 400,000 Proceeds from issuing preferred stock 1,600,000 Proceeds from sale of equipment 300,000 The net cash provided (used) by investing activities during 2021 is

A. $(300,000). C. $(2,100,000). Correct! B. $(1,100,000). D. $(4,500,000). 300,000-1,400,000

During 2021, equipment was sold for $468,000. The equipment cost $786,000 and had a book value of $432,000. Accumulated Depreciation—Equipment was $2,061,000 at 12/31/20 and $2,205,000 at 12/31/21. Depreciation expense for 2021 was

A. $144,000. D. $576,000. B. $288,000. Correct! C. $498,000. ($2,205,000 - $2,06,000 + ($786,000 - $432,000) = $498,000)

Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the non-cancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2021, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. If the present value of the future lease payments is $1,600,000 at January 1, 2021, what is the amount of the reduction in the lease liability for Alt Corp. in the second full year of the lease if Alt Corp. accounts for the lease as a finance lease? (Rounded to the nearest dollar.)

A. $414,852 B. $446,852 Correct! C. $472,350 D. $456,350

Which of the following post-balance-sheet events would require adjustment of the accounts before issuance of the financial statements?

A. Loss of plant as a result of fire. B. Changes in the quoted market prices of securities held as an investment. C. Loss on an uncollectible account receivable resulting from a customer's major flood loss. Correct! D. Loss on a lawsuit, the outcome of which was deemed uncertain at year end.

Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2021, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. If Yates records this lease as a direct-financing lease, what amount would be recorded as Lease Receivable at the inception of the lease?

A. $574,864 Correct Answer B. $1,572,563 You Answered C. $1,600,000 D. $1,724,592

On December 1, 2021, Goetz Corporation leased office space for 10 years at a monthly rental of $80,000. On that date Goetz paid the landlord the following amounts: Rent deposit$ 80,000 First month's rent 80,000 Last month's rent 80,000 Installation of new walls and offices 640,000 $ 880,000 The entire amount of $880,000 was charged to rent expense in 2021. What amount should Goetz have charged to expense for the year ended December 31, 2021?

A. $80,000 Correct! B. $85,333 C. $165,333 D, $640,000

Metcalf Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a finance lease for Metcalf. The six-year lease requires payment of $170,000 at the beginning of each year, including $25,000 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1 for six years at 10% is 4.79079. The present value of an annuity due of 1 for six years at 8% is 4.99271. Metcalf should record the leased asset at

A. $848,761.*** B. $814,435. You Answered C. $723,943. D. $694,665. =120,000*4.99271

Which of the following would be included in the Lease Receivable account? I. Guaranteed residual value. II. Unguaranteed residual value. III. Executory costs IV. Rental payments.

A. I and III only. You Answered B. II, III, and IV. C. I and II only. Correct Answer D. I, II, and IV.

Lease payments include: I. fixed payments. II. variable payments based on an index. III. a bargain purchase option. IV. a guaranteed residual value.

A. I, II, and III. B. II, III, and IV. C. I, II, and IV. Correct! D. I, II, III, and IV.

Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2021, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. From the viewpoint of Yates, what type of lease agreement exists?

A. Operating lease B. Finance lease Correct Answer C. Sales-type lease D. Direct-financing lease

What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?

A. There is no impact as the option does not enter into the transaction until the end of the lease term. Correct! B. The lessee must increase the present value of the minimum lease payments by the present value of the option price. C. The lessee must decrease the present value of the minimum lease payments by the present value of the option price. D. The minimum lease payments would be increased by the option price.

The Lease Liability account should be disclosed as

A. a current liability. B. a noncurrent liability. Correct! C. current portions in current liabilities and the remainder in noncurrent liabilities. D. deferred credits.

The primary purpose of the statement of cash flows is to provide information

A. about the operating, investing, and financing activities of an entity during a period. Correct! C. about the cash receipts and cash payments of an entity during a period. D. about the entity's ability to meet its obligations and to pay dividends. B. that is useful in assessing future cash flow prospects.

In a finance lease, the lessee records

A. amortization expense only. B. interest expense only. C. lease expense only. Correct! D. amortization expense and interest expense.

In an operating lease, the lessee records

A. amortization expense. B. interest expense. Correct! C. lease expense. D. amortization expense and lease expense.

The initial direct costs of leasing

A. are generally borne by the lessee. B. include incremental costs. Correct! C. are expensed in the period of the sale under a sales-type lease. D. include lessor advertising costs.

7. When a company sells property and then leases it back, any gain on the sale should usually be

A. deferred and recognized as income over the term of the lease. B. recognized as a prior period adjustment. C. recognized at the end of the lease. Correct Answer D. recognized in the current year.

From the lessee's perspective, in the earlier years of a lease,

A. finance leases will enable the lessee to report higher income, compared to operating leases. You Answered B. finance leases will cause debt to increase, compared to operating leases. Correct Answer C. operating leases will cause income to increase, compared to finance leases. D. operating leases will cause debt to increase, compared to finance leases.

For a sales-type lease,

A. the sales price includes the present value of the unguaranteed residual value. B. the present value of the guaranteed residual value is deducted to determine the cost of goods sold. Correct! C. the gross profit will be the same whether the residual value is guaranteed or unguaranteed. D. assets are depreciated by the lessor.

In computing the present value of the lease payments, the lessee should

A. use its incremental borrowing rate in all cases. You Answered B. use both its incremental borrowing rate and the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. Correct Answer C. use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee. D. use the implicit rate in all cases.

During 2021, Stout Inc. had the following activities related to its financial operations: Carrying value of convertible preferred stock in Stout, converted into shares of Stout $ 540,000 Payment in 2021 of cash dividend declared in 2020 to preferred shareholders 279,000 Payment for the early retirement of long-term bonds payable (carrying amount $3,930,000) 3,975,000 Proceeds from the sale of treasury stock (cost of $387,000) 450,000 The amount of net cash used in financing activities to appear in Stout's statement of cash flows for 2021 should be

B. $3,264,000. A. $2,985,000. Correct Answer C. $3,804,000. You Answered D. $3,822,000. 450,000-279,000-3,975,000=$3,804,000.

Accrued salaries payable of $102,000 were not recorded at December 31, 2020. Office supplies on hand of $58,000 at December 31, 2021 were erroneously treated as expense instead of supplies inventory. Neither of these errors was discovered nor corrected. The effect of these two errors would cause

B. 2020 net income and December 31, 2020 retained earnings to be understated $102,000 each. C. 2020 net income to be overstated $44,000 and 2021 net income to be understated $58,000. D. 2021 net income and December 31, 2021 retained earnings to be understated $58,000 each. Correct! A. 2021 net income to be understated $160,000 and December 31, 2021 retained earnings to be understated $58,000.

Langley Company's December 31 year-end financial statements contained the following errors: 2020 2021 Ending Inventory$ 37,500 Understated $ 55,000 Overstated Depreciation Expense 10,000 Understated

B. Retained earnings understated by $22,500 A. Retained earnings understated by $50,000 Correct! C. Retained earnings understated by $12,500 D. Retained earnings overstated by $17,500

Which of the following is accounted for as a change in accounting principle?

C. A change from expensing immaterial expenditures to deferring and amortizing them as they become material. B. A change from the cash basis of accounting to the accrual basis of accounting. A. A change in the estimated useful life of plant assets. Correct! D. A change in inventory valuation from average cost to FIFO.

Which of the following is a basic limitation associated with ratio analysis

C. The use of fair value accounting costs. D. The usefulness of a single ratio by itself. B. The use of future-oriented data items in accounting. Correct! A. The lack of comparability among firms in a given industry.

The balance in retained earnings at December 31, 2020 was $1,440,000 and at December 31, 2021 was $1,164,000. Net income for 2021 was $1,000,000. A stock dividend was declared and distributed which increased common stock $500,000 and paid-in capital $220,000. A cash dividend was declared and paid.

C. an outflow from investing activities of $720,000. A. an outflow from financing activities of $500,000. B. an outflow from financing activities of $720,000. Correct! D. stock dividends are not shown on a statement of cash flows.

The amount to be recorded as the cost of an asset under a finance lease is equal to the

Correct Answer A. present value of the lease payments. You Answered B. present value of the lease payments or the fair value of the asset, whichever is lower. C. present value of the lease payments plus the present value of any unguaranteed residual value. D. carrying value of the asset on the lessor's books.

On January 1, 2019, Hess Co. purchased a patent for $1,904,000. The patent is being amortized over its remaining legal life of 15 years expiring on January 1, 2034. During 2022, Hess determined that the economic benefits of the patent would not last longer than ten years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2022?

Correct B. $1,305,600 C. $1,344,000 A. $1,142,400 You Answered D. $1,396,400 1,904,000- ((1,904,000/15)*3) =1,523,200-(1,523,200/7)= $1,305,600

The balance in retained earnings at December 31, 2020 was $1,440,000 and at December 31, 2021 was $1,164,000. Net income for 2021 was $1,000,000. A stock dividend was declared and distributed which increased common stock $500,000 and paid-in capital $220,000. A cash dividend was declared and paid.

Correct B. $556,000. A. $496,000. D. $1,276,000. C. $776,000. (1,440,000-1,164,000)+(1,000,000-500,000-220,000)

Which of the following is not a retrospective-type accounting change?

Correct C. Sum-of-the-years'-digits method to the straight-line method B. LIFO method to the FIFO method for inventory valuation D. "Full cost" method to another method in the extractive industry A. Completed-contract method to the percentage-of-completion method for long-term construction contracts

Xanthe Corporation had the following transactions occur in the current year: 1. Cash sale of merchandise inventory. 2. Sale of delivery truck at book value. 3. Sale of Xanthe common stock for cash. 4. Issuance of a note payable to a bank for cash. 5. Sale of a security held as an available-for-sale investment. 6. Collection of loan receivable. How many of the above items will appear as a cash inflow from investing activities on a statement of cash flows for the current year?

Correct C. Three items*** A. Five items D. Two items B. Four items

Cash equivalents are

Correct D. all of these answers are correct.*** C. readily convertible into known amounts of cash. B. investments with original maturities of three months or less. A. treasury bills, commercial paper, and money market funds purchased with excess cash.

6. Torrey Co. manufactures equipment that is sold or leased. On December 31, 2021, Torrey leased equipment to Dalton for a five-year period ending December 31, 2026, at which date ownership of the leased asset will be transferred to Dalton. Equal payments under the lease are $1,100,000 (including $100,000 executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2021. Collectibility of the remaining lease payments is probable. The lease receivable before the first payment is $3,850,000, and cost is $3,000,000. For the year ended December 31, 2021, what amount of income should Torrey realize from the lease transaction?

Correct! A. $850,000 B. $1,100,000 C. $1,150,000 D. $1,650,000

If a business entity entered into certain related party transactions, it would be required to disclose all of the following information except the

Correct! B. nature of any future transactions planned between the parties and the terms involved. A. nature of the relationship between the parties to the transactions. D. amounts due from or to related parties as of the date of each balance sheet presented. C. dollar amount of the transactions for each of the periods for which an income statement is presented.

The calculation of the times interest earned involves dividing

Correct! C. Net income plus income taxes and interest expense by annual interest expense. B. Net income plus income taxes by annual interest expense. A. Net income by annual interest expense. D. None of these answers are correct.

An example of an inventory accounting policy that should be disclosed in a Summary of Significant Accounting Policies is the

Correct! C. method used for pricing inventory. B. major backlogs of inventory orders. D. separation of inventory into raw materials, work-in-process, and finished goods. A. amount of income resulting from the involuntary liquidation of LIFO.

The full disclosure principle, as adopted by the accounting profession, is best described by which of the following?

Correct! D. Disclosure of any financial facts significant enough to influence the judgment of an informed reader. C. Enough information should be disclosed in the financial statements so a person wishing to invest in the stock of the company can make a profitable decision. A. All information related to an entity's business and operating objectives is required to be disclosed in the financial statements. B. Information about each account balance appearing in the financial statements is to be included in the notes to the financial statements.

An increase in inventory balance would be reported in a statement of cash flows using the indirect method (reconciliation method) as a(n)

D. cash outflow from financing activities. A. addition to net income in arriving at net cash flow from operating activities. C. cash outflow from investing activities. Correct! B. deduction from net income in arriving at net cash flow from operating activities.

The return on common stockholders' equity is calculated by dividing

D. net income less preferred dividends by ending common stockholders' equity. C. net income by ending common stockholders' equity. Correct! B. net income less preferred dividends by average common stockholders' equity. A. net income by average common stockholders' equity.

According to GAAP, the disclosure of accounting policies adopted by a reporting entity is important to financial statement readers in determining

D. whether the working capital position is adequate for future operations. A. net income for the year. C. the value of obsolete items included in ending inventory. Correct! B. whether accounting policies are consistently applied from year to year.

Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2021 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2021, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of futurelease payments doubtful. What type of lease is this from Alt Corporation's viewpoint?A. Operating lease Correct! B. Finance lease C. Sales-type lease D. Direct-financing lease

Operating lease Correct! B. Finance lease C. Sales-type lease D. Direct-financing lease