AC 301 Semester 1 Final

Ace your homework & exams now with Quizwiz!

Compared to the accrual basis of accounting, the cash basis of accounting produces a lower amount of income by the net decrease during the accounting period of Accounts Receivable Accrued Liabilities a) Yes No b) No Yes c) Yes Yes d) No No

Accounts Receivable Accrued Liabilities b) No Yes

On April 1 Ivy Corp began operating a service company with an initial cash investment by shareholders of $1,000,000. The company provided $3,200,000 of services in April and received full payment in May. Ivy also incurred expenses of $1,500,000 in April that were paid in June. During May, Ivy paid its shareholders cash dividends of $500,000. What was the company's income before income taxes for the two months ended May 31 under the following methods of accounting? Cash Basis Accrual Basis a) $3,200,000 $1,700,000 b) $2,700,000 $1,200,000 c) $1,700,000 $1,700,000 d) $3,200,000 $1,200,000

Cash Basis Accrual Basis a) $3,200,000 $1,700,000 Cash basis income: Cash collected in May $3,200,000 Accrual basis income: Revenue recognized in April $3,200,000 Less: Expenses recognized in April (1,500,000) Income $1,700,000 A net decrease in accounts receivable means that cash collections exceeded accrual revenue. Therefore, cash basis income would be higher when compared to accrual basis. A net decrease in accrued liabilities indicates that cash payments for expenses are greater than accrual expenses. Therefore, cash basis income would be lower than accrual basis income.

Which of the following would be disclosed in the summary of significant accounting policies disclosure note? Composition of Plant Assets/ Inventory Pricing a. No Yes b. Yes No c. Yes Yes d. No No

Composition of Plant Assets/ Inventory Pricing a. No Yes Inventory pricing is a significant accounting policy that should be disclosed according to generally accepted accounting principles, but the composition of plant assets is not a policy disclosure.

At December 30, Vida Co. had cash of $200,000, a current ratio of 1.5:1, and a quick ratio of 0.5:1. On December 31, all the cash was used to reduce accounts payable. How did this cash payment affect the ratios? Current Ratio Quick Ratio a. Increased No effect b. Increased Decreased c. Decreased Increased d. Decreased No effect

Current Ratio Quick Ratio b. Increased Decreased Current ratio = Current assets ÷ Current liabilities. When the current ratio is greater than 1 to 1, an equal decrease in current assets and current liabilities will result in an increase in the current ratio. The decrease in current liabilities (the smaller number) is proportionately greater than the decrease in current assets, resulting in an increase in the ratio.

Esquire Corp. uses the periodic inventory system. During its first year of operations, Esquire made the following purchases (list in chronological order of acquisition): 20 units at $50 35 units at $40 85 units at $30 Sales for the year totaled 135 units, leaving 5 units on hand at the end of the year. Ending inventory using the FIFO method is a) $ 150 b) $ 177 c) $ 250 d) $1,540

a) $ 150 5 units x $30 = $150

On November 30, 2016, Pearman Company committed to a plan to sell a division that qualified as a component of the entity according to GAAP, and was properly classified as held for sale on December 31, 2016, the end of the company's fiscal year. The division was tested for impairment and a $400,000 loss was indicated. The division's loss from operations for 2016 was $1,000,000. The final sale was expected to occur on February 15, 2017. What before-tax amount(s) should Pearman report as loss on discontinued operations in its 2016 income statement? a) $1,400,000 loss. b) $400,000 loss. c) None d) $400,000 impairment loss included in continuing operations and a $1,000,000 loss from discontinued operations.

a) $1,400,000 loss. The $400,000 impairment loss and the $1,000,000 loss from operations should be combined for a total loss of $1,400,000.

At January 1, 2016, Simpson Co. had a credit balance of $260,000 in its allowance for uncollectible accounts. Based on past experience, 2 percent of Simpson's credit sales have been uncollectible. During 2016, Simpson wrote off $325,000 of accounts receivable. Credit sales for 2016 were $9,000,000. In its December 31, 2016, balance sheet, what amount should Simpson report as allowance for uncollectible accounts? a) $115,000 b) $180,000 c) $245,000 d) $440,000

a) $115,000 Allowance for uncollectible accounts, beginning balance $260,000 Add: Bad debt expense (2% x $9,000,000) 180,000 Less: Write-offs (325,000) Allowance for uncollectible accounts, ending balance $115,000

Date/ Balance or Transaction/ Units/ Unit Cost/ Unit Sales Price Mar 1/ Inventory/ 3,200/ $64.30/ $86.50 Mar 4/ Purchase/ 3,400/ 64.75/ 87.00 Mar 14/ Sales/ 3,600/ 87.25 Mar 25/ Purchase/ 3,500/ 66.00/ 87.25 Mar 28/ Sales/ 3,450/ 88.00 If Thomas uses a last-in, first-out periodic inventory system, the total cost of the inventory for carburetor 2642J at March 31 is a) $196,115 b) $197,488 c) $201,300 d) $268,400

a) $196,115 The ending inventory consists of 3,050 units (beginning inventory plus purchases, minus sales). Under the periodic LIFO method, those units are valued at the oldest prices for the period, which is $64.30 of the beginning inventory. Multiplying $64.30 times 3,050 units produces a total inventory value of $196,115.

Date/ Balance or Transaction/ Units/ Unit Cost/ Unit Sales Price Mar 1/ Inventory/ 3,200/ $64.30/ $86.50 Mar 4/ Purchase/ 3,400/ 64.75/ 87.00 Mar 14/ Sales/ 3,600/ 87.25 Mar 25/ Purchase/ 3,500/ 66.00/ 87.25 Mar 28/ Sales/ 3,450/ 88.00 If Thomas uses a last-in, first-out perpetual inventory system, the total cost of the inventory for carburetor 2642J at March 31 is a) $196,200 b) $197,488 c) $263,863 d) $268,400

a) $196,200 Under the perpetual LIFO method, the company begins with 3,200 units at $64.30. Added to this is the March 4 purchase of 3,400 units at $64.75. The March 14 sale uses all of the March 4 purchase and 200 of the original inventory units. Thus, the firm is left with 3,000 units at $64.30. The March 25 purchase of 3,500 at $66 is added to the previous 3,000 units. The March 28 sale of 3,450 units comes entirely from the March 25 purchase, leaving just 50 of those units at $66 each. Thus, at the end of the month, the inventory consists of two layers: 3,000 units at $64.30 ($192,200), and 50 units at $66 ($3,300). Adding the two together produces a total ending inventory of $196,200.

In Baer Food Co.'s 2016 single-step income statement, the section titled "Revenues" consisted of the following: Net sales revenue $187,000 Income on discontinued operations, including gain on disposal of $21,000, and tax expense of $6,000 13,500 Interest revenue 10,200 Gain on sale of equipment 4,700 Total revenues $215,400 In the revenues section of the 2016 income statement, Baer Food should have reported total revenues of a) $201,900 b) $203,700 c) $215,400 d) $216,300

a) $201,900 In a single-step income statement, revenues include sales as well as other revenues and gains. Sales revenue $187,000 Interest revenue 10,200 Gain on sale of equipment 4,700 Total $201,900 The discontinued operation is reported below income from continuing operations.

The balance in accounts receivable at the beginning of 2016 was $600. During 2016, $3,200 of credit sales were recorded. If the ending balance in accounts receivable was $500 and $200 in accounts receivable were written off during the year, the amount of cash collected from customers was a) $3,100 b) $3,200 c) $3,300 d) $3,800

a) $3,100 Accounts receivable, beginning balance $ 600 Add: Credit sales 3,200 Less: Write-offs (200) Less: Accounts receivable, ending balance (500) Cash collections $3,100

You borrow $15,000 to buy a car. The loan is to be paid off in monthly installments over five years at 12 percent interest annually. The first payment is due one month from today. If the present value of an ordinary annuity of $1 for = years @12% with monthly compounding is 44.955, what is the amount of each monthly payment? a) $334 b) $456 c) $546 d) $680

a) $334 PVA = PMT x PVA factor $15,000 = PMT x 44.955 PMT = $334

Mill Co.'s trial balance included the following account balances at December 31, 2016: Accounts payable $15,000 Bond payable, due 2017 22,000 Dividends payable 1/31/17 8,000 Notes payable, due 2018 20,000 What amount should be included in the current liability section of Mill's December 31, 2016, balance sheet? a) $45,000 b) $51,000 c) $65,000 d) $78,000

a) $45,000 Accounts payable $15,000 Bonds payable 22,000 Dividends payable 8,000 Total CL $45,000 Current liabilities are obligations that are expected to be paid within one year or the operating cycle, whichever is longer. The notes payable are not classified as current liabilities because they are not due until 2018.

An annuity will pay eight annual payments of $100, with the first payment to be received one year from now. If the interest rate is 12 percent per year, what is the present value of this annuity? Use the appropriate table located at the end of the textbook to solve this problem. a) $497 b) $556 c) $801 d) $897

a) $497 PVA = $100 x 4.96764 = $497

An investor purchases a 10-year, $1,000 par value bond that pays annual interest of $100. If the market rate of interest is 12 percent, what is the current market value of the bond? a) $887 b) $950 c) $1,000 d) $1,100

a) $887 PVA = $100 x 5.65022 = $565 (present value of the interest payments) PV = $1,000 x 0.32197 = $322 (present value of the face amount) Total present value = $887 = current market value of the bond

The following information pertains to Tara Co.'s accounts receivable at December 31, 2016: Days Outstanding/Amount/Estimated % Uncollectible 0-60/$120,000/1% 61-120/90,000/2% Over 120/100,000/6% $310,000 During 2016, Tara wrote off $7,000 in receivables and recovered $4,000 that had been written off in prior years. Tara's December 31, 2015, allowance for uncollectible accounts was $22,000. Under the aging method, what amount of allowance for uncollectible accounts should Tara report at December 31, 2016? a) $9,000 b) $10,000 c) $13,000 d) $19,000

a) $9,000 The aging method is a balance sheet approach that calculates the required ending balance in the allowance for uncollectible accounts. The calculation is as follows: Estimated % Uncollectible x Amount = Required Balance 1% x $120,000 = $1,200 2% x $ 90,000 = 1,800 6% x $100,000 = 6,000 Total required balance $9,000

Zenk Co. wrote off obsolete inventory of $100,000 during 2016. What was the effect of this write-off on Zenk's ratio analysis? a) Decrease in the current ratio but not the quick ratio. b) Decrease in the quick ratio but not in the current ratio. c) Increase in the current ratio but not in the quick ratio. d) Increase in the quick ratio but not in the current ratio.

a) Decrease in the current ratio but not the quick ratio. Because inventory is not included in the quick ratio, the write-off of obsolete inventory would have no effect on the quick ratio; however, it would decrease the current ratio as the write-off would reduce current assets.

Which one of the following items is not included in the determination of income from continuing operations? a) Discontinued operations. b) Restructuring costs. c) Long-lived asset impairment loss. d) Unusual loss from a write-down of inventory.

a) Discontinued operations. Discontinued operations is reported in the income statement below income from continuing operations.

Which of the following items is not considered an operating cash flow in the statement of cash flows? a) Dividends paid to stockholders. b)Cash received from customers. c)Interest paid to creditors. d)Cash paid for salaries.

a) Dividends paid to stockholders. Dividends paid to shareholders is considered a financing cash flow, not an operating cash flow.

Accounting standard setting in the United States is a) Done primarily by the Securities and Exchange Commission b) Done primarily by the private sector c) The responsibility of the public sector d) Done primarily by the International Accounting Standards Committee

a) Done primarily by the Securities and Exchange Commission Accounting standards in the United States for nongovernmental entities are set primarily by the private sector. The principle standard setters are the FASB and the AICPA's AcSEC.

Total liabilities of a company's reportable segments must be reported when the company provides supplemental information on operating segments using: a) IFRS. b) U.S. GAAP. c) Both U.S. GAAP and IFRS. d) Neither U.S. GAAP nor IFRS.

a) IFRS. IFRS requires that companies disclose total liabilities of its reportable segments. This disclosure is not required under U.S. GAAP.

Under IFRS, which of the following methods is not acceptable for the valuation of inventory? a) LIFO. b) FIFO. c) Average cost. d) Specific identification.

a) LIFO. IAS No. 2 does not permit the use of LIFO.

Essex Corporation is evaluating a lease that takes effect on March 1. The company must make eight equal payments, with the first payment due on March 1. The concept most relevant to the evaluation of the lease is a) The present value of an annuity due. b) The present value of an ordinary annuity. c) The future value of an annuity due. d) The future value of an ordinary annuity.

a) The present value of an annuity due. An annuity is a series of cash flows or other economic benefits occurring at fixed intervals, ordinarily as a result of an investment. Present value is the value at a specified time of an amount or amounts to be paid or received later, discounted at some interest rate. In an annuity due, the payments occur at the beginning, rather than at the end, of the periods. Thus, the present value of an annuity due includes the initial payment at its undiscounted amount. This lease should be evaluated using the present value of an annuity due.

Windham Company has current assets of $400,000 and current liabilities of $500,000. Windham Company's current ratio would be increased by a) The purchase of $100,000 of inventory on account. b) The payment of $100,000 of accounts payable. c) The collection of $100,000 of accounts receivable. d) Refinancing a $100,000 long-term loan with short-term debt.

a) The purchase of $100,000 of inventory on account. The current ratio equals current assets divided by current liabilities. An equal increase in both the numerator and denominator of a current ratio less than 1.0 causes the ratio to increase. Windham Company's current ratio is 0.8 ($400,000 ÷ $500,000). The purchase of $100,000 of inventory on account would increase the current assets to $500,000 and the current liabilities to $600,000, resulting in a new current ratio of 0.833.

Confirmatory Value is an ingredient of the primary quality of Relevance Faithful Representation a) Yes No b) No Yes c) Yes Yes d) No No

a) Yes No Confirmatory Value is an ingredient of primary quality of relevance

West Company had the following account balances at December 31, 2016, before recording bad debt expense for the year: Accounts receivable $ 900,000 Allowance for uncollectible accounts (credit balance) 16,000 Credit sales for 2016 1,750,000 West is considering the following methods of estimating bad debts for 2016: Based on 2% of credit sales Based on 5% of year-end accounts receivable What amount should West charge to bad debt expense at the end of 2016 under each method? Percentage of Credit Sales/ Percentage of Accounts Receivable a. $35,000/$29,000 b. $35,000/$45,000 c. $51,000/$29,000 d. $51,000/$45,000

a. $35,000/$29,000 The estimate using the income statement approach is: $1,750,000 x 2% = $35,000 The estimate using the balance sheet approach is: Required ending balance ($900,000 x 5%) $45,000 Less: Allowance for uncollectible accounts before recording bad debt expense (16,000) Bad debt expense $29,000

On December 31, 2015, Bit Co. had capitalized costs for a new computer software product with an economic life of five years. Sales for 2016 were 30 percent of expected total sales of the software. At December 31, 2016, the software had a fair value equal to 90 percent of the capitalized cost. What percentage of the original capitalized cost should be reported as the net amount in Bit's December 31, 2016, balance sheet? a) 70% b) 72% c) 80% d) 90%

a. Amortization of capitalized software is the greater of the amount calculated using the percentage-of-revenue method and the straight-line method. In this case, the straight-line percentage is 20% (1/5) and the percentage-of-revenue method is 30%. Therefore, we amortize 30% of the cost yielding book value of 70%.

Slovac Company purchased a machine that has an estimated useful life of eight years for $7,500. Its salvage value is estimated at $500. What is the depreciation for the second year of the asset's life, assuming Slovac uses the double-declining-balance method of depreciation? a) $1,406 b) $1,438 c) $1,875 d) $3,750

a. Double-declining-balance depreciation rate = 2 x 1/8 = ¼ or 25% First year depreciation will be $7,500 x 0.25 = $1,875 Second year depreciation will be ($7,500 - 1,875) x 0.25 = $1,406

On September 1, year 1, for $4,000,000 cash and $2,000,000 notes payable, Norbend Corporation acquired the net assets of Crisholm Company, which had a fair value of $5,496,000 on that date. Norbend's management is of the opinion that the goodwill generated has an indefinite life. During the year-end audit for year 3 after all adjusting entries have been made, the goodwill is determined to be worthless. The amount of the write-off as of December 31, year 3 should be: a) $504,000. b) $478,800. c) $466,200. d) $474,600.

a. Given that the company paid $6,000,000 for net assets acquired with a fair value of $5,496,000, goodwill was $504,000. According to GAAP, acquired goodwill is not amortized but is qualitatively assessed and/or tested annually for impairment

Costs that are capitalized with regard to a patent include: a) Legal fees of obtaining the patent, incidental costs of obtaining the patent, and costs of successful patent infringement suits. b) Legal fees of obtaining the patent, incidental costs of obtaining the patent, and research and development costs incurred on the invention that is patented. c) Legal fees of obtaining the patent, costs of successful patent infringement suits, and research and development costs incurred on the invention that is patented. d) Incidental costs of obtaining the patent, costs of successful and unsuccessful patent infringement suits, and the value of any signed patent licensing agreement.

a. The cost should be amortized over the remaining legal life or useful life, whichever is shorter. In addition to the initial costs of obtaining a patent, legal fees incurred in the successful defense of a patent should be capitalized as part of the cost, whether it was internally developed or purchased from an inventor. The legal fees capitalized then should be amortized over the remaining useful life of the patent.

Pearl Corporation acquired manufacturing machinery on January 1 for $9,000. During the year, the machine produced 1,000 units, of which 600 were sold. There was no work-in-process inventory at the beginning or at the end of the year. Installation charges of $300 and delivery charges of $200 were also incurred. The machine is expected to have a useful life of five years with an estimated salvage value of $1,500. Pearl uses the straight-line depreciation method. The original cost of the machinery to be recorded in Pearl's books is: a) $9,500 b) $9,300 c) $9,200 d) $9,000

a. The costs of fixed assets (plant and equipment) are all costs necessary to acquire these assets and to bring them to the condition and location required for their intended use. These costs include shipping, installation, pre-use testing, sales taxes, and interest capitalization. The original cost of the machinery to be recorded in the books is the sum of the purchase price, installation, and delivery charges

Under IFRS, when a company chooses the revaluation model as its accounting policy for measuring property, plant, and equipment, which of the following statements is correct? a) When an asset is revalued, the entire class of property, plant, and equipment to which the asset belongs must be revalued. b) When an asset is revalued, individual assets within a class of property, plant, and equipment to which that asset belongs can be revalued. c) Revaluations of property, plant, and equipment must be made every three years. d) An increase in an asset's book value as a result of the first revaluation must be recognized as a component of profit and loss.

a. When as asset is revalued, the entire class of property, plant, and equipment to which the asset belongs must be revalued.

Which of the following is not a qualitative characteristic of accounting information according to the FASB's conceptual framework? a.) Auditor independence b) Neutrality c) Timeliness d) Predictive value

a.) Auditor independence Auditor independence is not a qualitative characteristic.

Esquire Corp. uses the periodic inventory system. During its first year of operations, Esquire made the following purchases (list in chronological order of acquisition): 20 units at $50 35 units at $40 85 units at $30 Sales for the year totaled 135 units, leaving 5 units on hand at the end of the year. Ending inventory using the average cost method is a) $ 150 b) $ 177 c) $ 250 d) $1,540

b) $ 177 Average Cost = $4,950 / 140 units = $35.36 per unit Ending Inventory = $35.36 x 5 = $176.79

The following information relates to Jay Co.'s accounts receivable for 2016: Accounts receivable balance, 1/1/2016 $ 650,000 Credit sales for 2016 2,700,000 Sales returns during 2016 75,000 Accounts receivable written off during 2016 40,000 Collections from customers during 2016 2,150,000 Allowance for uncollectible accounts balance, 12/31/2016 110,000 What amount should Jay report for accounts receivable, before allowances, at December 31, 2016? a) $925,000 b) $1,085,000 c) $1,125,000 d) $1,200,000

b) $1,085,000 Accounts receivable, beginning balance $ 650,000 Add: Credit sales 2,700,000 Less: Sales returns (75,000) Less: Write-offs (40,000) Less: Cash collections (2,150,000) Accounts receivable, ending balance $1,085,000

Dalton Company adopted the dollar-value LIFO inventory method on January 1, 2016. In applying the LIFO method, Dalton uses internal price indexes and the multiple-pools approach. The following data were available for Inventory Pool No. 1 for the two years following the adoption of LIFO: Ending Inventory At Current Year Cost/At Base Year Cost/Cost Index 1/1/16/$100,000/$100,000/1.00 12/31/16/126,000/120,000/1.05 12/31/17/140,800/128,000/1.10 Under the dollar-value LIFO method the inventory at December 31, 2017, should be a) $128,000 b) $129,800 c) $130,800 d) $140,800

b) $129,800 Inventory Layer Layer at Base at Base Cost at Current Ending Date Year Cost Year Cost Index Year Cost Inventory 1/1/16 $100,000 1.00 $100,000 12/31/16 120,000 $20,000 1.05 $21,000 121,000 12/31/17 128,000 8,000 1.10 8,800 129,800

On October 1, 2016, Acme Fuel Co. sold 100,000 gallons of heating oil to Karn Co. at $3 per gallon. Fifty thousand gallons were delivered on December 15, 2016, and the remaining 50,000 gallons were delivered on January 15, 2017. Payment terms were 50% due on October 1, 2016, 25% due on first delivery, and the remaining 25% due on second delivery. What amount of revenue should Acme recognize from this sale during 2017? a) $ 75,000 b) $150,000 c) $225,000 d) $300,000

b) $150,000 The earnings process is completed upon delivery of the product. Therefore, in 2017, revenue for 50,000 gallons at $3 each is recognized on January 15. The payment terms do not affect revenue recognition.

Triangle Travel offers their normal Bahama Get-Away travel package for $2,000, and offers their special Bahama Elite package (with additional guided tours) for $2,500. Triangle hasn't offered the Elite package previously, and is unsure what it would charge for the additional guided tours absent the basic Bahama Get-Away package. How much of the Elite transaction price should Triangle assign to the basic Bahama Get-Away portion of the Elite package? a) $2,500 b) $2,000 c) $1,250 d) $0

b) $2,000 Because Triangle can't estimate the stand-alone sales price of the additional guided tours, it would use the residual method to allocate transaction price to that performance obligation, so the basic Bahama Get-Away portion would be assigned an amount of the transaction price equal to its stand-alone selling price of $2,000.

Roebling Construction signed a $24 million contract on August 1, 2015, with the city of Candu to construct a bridge over the Vine River. Roebling's estimated cost of the bridge on that date was $18 million. The bridge was to be completed by April 2018. Roebling recognizes revenue over time according to percentage of completion. Roebling's fiscal year ends May 31. Data regarding the bridge contract are presented in the schedule below. At May 31 ($000 omitted) 2016/2017 Actual costs to date $ 6,000/$15,000 Estimated costs to complete 12,000/5,000 Progress billings to date 5,000 14,000 Cash collected to date 4,000 12,000 The gross profit or loss recognized in the fiscal year ended May 31, 2016, from this bridge contract is a) $6,000,000 gross profit. b) $2,000,000 gross profit. c) $3,000,000 gross profit. d) $1,000,000 gross profit.

b) $2,000,000 gross profit. Given that one-third of all costs have already been incurred ($6,000,000), the company should recognize revenue equal to one-third of the contract price, or $8,000,000. Revenues of $8,000,000 minus costs of $6,000,000 equals a gross profit of $2,000,000.

An annuity will pay four annual payments of $100, with the first payment to be received three years from now. If the interest rate is 12 percent per year, what is the present value of this annuity? Use the appropriate table located at the end of the textbook to solve this problem. a) $181 b) $242 c) $304 d) $400

b) $242 First solve for present value of a four-year ordinary annuity: PVA = $100 x 3.03735 = $304 Then discount back two years: PV = $304 x 0.79719 = $242

Fay Corporation pays its outside salespersons fixed monthly salaries as well as commissions on net sales. Sales commissions are paid in the month following the month of sale, while fixed salaries are expensed but considered advances against commissions. However, if salespersons' fixed salaries exceed their sales commissions earned for a month, such excess is not returned to the company. Pertinent data for the month of March for the three salespersons are as follows: Salesperson Fixed Salary Net Sales Commission Rate A $10,000 $200,000 4% B $14,000 $400,000 6% C $18,000 $600,000 6% Totals $42,000 $1,200,000 What amount should Fay accrue as debit to sales commissions expense and a credit to sales commissions payable at March 31? a) $26,000 b) $28,000 c) $68,000 d) $70,000

b) $28,000 Fixed salary Commissions Excess A $10,000 $8,000 $ —0— B $14,000 $24,000 $10,000 C $18,000 $36,000 $18,000

An investment product promises to pay $25,458 at the end of nine years. If an investor feels this investment should produce a rate of return of 14 percent, compounded annually, what's the most the investor should be willing to pay for the investment? n/PV of $1 @ 14% 8/0.3506 9/0.3075 10/0.2697 a) $6,866 b) $7,828 c) $8,926 d) $9,426

b) $7,828 PV = FV x PV factor, PV=$25,458 x 0.3075 = $7,828

Elmo Painting Service signed a contract charging a customer $3,000 to paint the customer's house. The contract includes all paint and all painting labor. Elmo would charge $1,200 for the paint if sold separately, and $2,800 for the labor if done using the customer's paint. How much of the transaction price would Elmo allocate to its performance obligation to provide paint to the customer? a) $0 b) $900 c) $1,200 d) $3,000

b) $900 The $3,000 transaction price would be divided between the paint and the labor. The paint's percentage of the sum of the stand-alone selling prices is $1,200 ÷ ($1,200 + $2,800) = 30%, so the paint would be allocated $3,000 × 30% = $900.

Shaefer Company prepares its financial statements according to International Financial Reporting Standards (IFRS). Shaefer sometimes has bank overdrafts that are payable on demand and that fluctuate as part of its cash management program. At the most recent financial reporting date, Shaefer had a €500,000 overdraft in one cash account and a positive balance of €3,000,000 in another cash account. Shaefer should report its cash balances as: a) A cash asset of €3,000,000 and an overdraft liability of €500,000. b) A cash asset of €2,500,000. c) An overdraft liability of (€2,500,000). d) None of the above.

b) A cash asset of €2,500,000. IFRS allows overdrafts to be offset with positive cash balances if the overdrafts are payable on demand and which fluctuate as part of its cash management program.

The Management's Discussion and Analysis (MD&A) section of an annual report a) Includes the company president's letter. b) Covers three financial aspects of a firm's business: liquidity, capital resources, and results of operations. c) Is a technical analysis of past results and a defense of those results by management. d) Covers marketing and product line issues.

b) Covers three financial aspects of a firm's business: liquidity, capital resources, and results of operations. The MD&A section is included in SEC filings. It addresses in a nonquantified manner the prospects of a company. The SEC examines it with care to determine that management has disclosed material information affecting the company's future results. Disclosures about commitments and events that may affect operations or liquidity are mandatory. Thus, the MD&A section pertains to liquidity, capital resources, and results of operations.

Jamison Corporation's inventory cost in its balance sheet is lower using the first-in, first-out method than it would have been had it used the last-in, first-out method. Assuming no beginning inventory, what direction did the cost of purchases move during the period? a) Up. b) Down. c) Unchanged. d) Can't be determined.

b) Down. If the inventory balance was lower using FIFO than LIFO, then prices during the period were moving downward. By using FIFO during such a period, the higher priced items are sold first with lower-priced goods remaining in the ending inventory.

Completeness is an ingredient of the primary quality of a) Verifiability b) Faithful representation c) Relevance d) Understandability

b) Faithful representation Completeness is an ingredient of faithful representation.

The Financial Accounting Standards Board (FASB) a) is a division of the securities and exchange commission (SEC) b) Is a private body that helps set accounting standards in the United States c) Is responsible for setting auditing standards that all auditors must follow d) Consists entirely of members of the American Institute of Certified Public Accountants

b) Is a private body that helps set accounting standards in the United States The FASB is a private body, though the SEC has the ultimate authority to set accounting standards. The FASB does not set auditing standards nor does it consist entirely of the members of the American Institute of CPAs.

In Merf's April 30, 2016, balance sheet, a note receivable was reported as a noncurrent asset and the related accrued interest for eight months was reported as a current asset. Which of the following descriptions would fit Merf's receivable classification? a) Both principal and interest amounts are due on August 31, 2016, and August 31, 2017. b) Principal is due August 31, 2017, and interest is due August 31, 2016, and August 31, 2017. c) Principal and interest are due December 31, 2016. d) Both principal and interest amounts are due on December 31, 2016, and December 31, 2017.

b) Principal is due August 31, 2017, and interest is due August 31, 2016, and August 31, 2017. The principal would have to be due after April 30, 2017, to be considered as a noncurrent asset at April 30, 2016. The accrued interest for eight months (since August 31, 2015) is a current asset at April 30, 2016. Since the principal is due August 31, 2017, additional interest would have to be recorded for the period September 1, 2016 to August 31, 2017.

The objective of financial reporting for business enterprises is based on a) Generally accepted accounting principles b) The needs of the users of the information c) The need for conservatism d) None of the above

b) The needs of the users of the information The objective of financial reporting is to provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and other similar decisions.

According to the conceptual framework, neutrality is a characteristic of a) understandability b) faithful representation c) relevance d) both relevance and faithful representation

b) faithful representation Neutrality is an attribute of faithful representation.

A company pays $20,000 for the rights to a well with 5 million gallons of water. If the company extracts 250,000 gallons of water in the first year, what is the total depletion in year 1? a) $ 400 b) $1,000 c) $1,250 d) $5,000

b. $20,000/5,000,000 gallons = $0.004/gallon ($0.004/gallon) x (250,000 gallons) = $1,000

Under IFRS, the initial revaluation of equipment when book value exceeds fair value results in a) An increase in net income. b) A decrease in net income. c) An increase in other comprehensive income. d) A decrease in other comprehensive income.

b. A decrease in income. If book value is higher than fair value, the difference is reported as an expense in the income statement.

Under IFRS, a company that acquires an intangible asset may use the revaluation model for subsequent measurement only if: a) The useful life of the intangible asset can be readily determined. b) An active market exists for the intangible asset. c) The cost of the intangible asset can be measured reliably. d) The intangible asset is a monetary asset.

b. An active market must exist for an intangible asset to be revalued.

The following FCL Corporation inventory information is available for the year ended December 31: 1) Cost 2) Retail Beginning inventory at 1/1 1) $35,000 2) $100,000 Net purchases 1) 55,000 2) 110,000 Net markups 2) 15,000 Net markdowns 2) 25,000 Net sales 2) 150,000 The December 31 ending inventory at cost using the conventional retail inventory method equals a) $17,500 b) $20,000 c) $27,500 d) $50,000

b. The conventional retail inventory method adds beginning inventory, net purchases, and markups (but not markdowns) to calculate a cost percentage. The purpose of excluding markdowns is to approximate a lower of cost and net realizable value valuation. The cost percentage is then used to reduce the retail value of the ending inventory to cost. FCL's cost-retail ratio is 40% ($90,000 ÷ $225,000), and ending inventory at cost is therefore $20,000 (40% x $50,000 ending inventory at retail).

Calculate depreciation for year 2 based on the following information: -Historical cost $40,000 -Useful life 5 years -Salvage value $3,000 -Year 1 depreciation $7,400 a) $7,000 b) $7,400 c) $8,000 d) $8,600

b. The depreciation method used must be straight line because year 1 depreciation is $7,400 (($40,000 - 3,000) / 5 = $7,400). Year 2 depreciation would also be $7,400.

Cole Co. began constructing a building for its own use in January 2016. During 2016, Cole incurred interest of $50,000 on specific construction debt, and $20,000 on other borrowings. Interest computed on the weighted-average amount of accumulated expenditures for the building during 2016 was $40,000. What amount of interest should Cole capitalize? a) $20,000 b) $40,000 c) $50,000 d) $70,000

b. The interest cost capitalized is the lesser of the formula amount based on average accumulated expenditures or the actual interest cost incurred. In this case the formula amount ($40,000) is the smaller amount and should be the amount capitalized as part of the cost of the building.

Amble Inc. exchanged a truck with a book value of $12,000 and a fair value of $20,000 for a truck and $5,000 cash. The exchange has commercial substance. At what amount should Amble record the truck received? a) $12,000 b) $15,000 c) $20,000 d) $25,000

b. The recorded cost of the new asset is equal to the fair value of the asset given up, $20,000. In this case, there are two new assets acquired: new truck, $15,000, and cash, $5,000. The gain on the trade is $8,000 (FV old truck $20,000 - 12,000 book value).

International Financial Reporting Standards are tested on the CPA exam along with U.S. GAAP. The following questions deal with the application of IFRS. If circumstances indicate that an inventory write-down is no longer appropriate: a) The write-down can be reversed under U.S. GAAP. b) The write-down can be reversed under IFRS. c) The write-down can be reversed under both U.S. GAAP and IFRS. d) The write-down can't be reversed under either U.S. GAAP or IFRS.

b. The write-down can only be reversed under IFRS.

Harper is contemplating exchanging a machine used in its operations for a similar machine on May 31. Harper will exchange machines with either Austin Corporation or Lubin Company. The data relating to the machines are presented below. Assume that the exchanges would have commercial substance. Harper Austin Lubin Original cost of the machine H - $162,500 A - $180,000 L - $150,000 Accumulated depreciation thru May 31 H - 98,500 A - 70,000 L - 65,000 Fair value at May 31 H - 80,000 A - 95,000 L - 60,000 If Harper exchanges its used machine for Lubin's used machine and also receives $20,000 cash, the gain that Harper should recognize from this transaction for financial reporting purposes would be: a) $0 b) $4,000 c) $16,000 d) $25,000

c)

Esquire Corp. uses the periodic inventory system. During its first year of operations, Esquire made the following purchases (list in chronological order of acquisition): 20 units at $50 35 units at $40 85 units at $30 Sales for the year totaled 135 units, leaving 5 units on hand at the end of the year. Ending inventory using the LIFO method is a) $ 150 b) $ 177 c) $ 250 d) $1,540

c) $ 250 5 units x $50 = $250

On May 2, a fire destroyed the entire merchandise inventory on hand of Sanchez Wholesale Corporation. The following information is available: Sales, January 1 through May 2 $360,000 Inventory, January 1 80,000 Merchandise purchases, January 1 through May 2 (including $40,000 of goods in transit on May 2, shipped f.o.b. shipping point) 330,000 Markup percentage on cost 20% What is the estimated inventory on May 2 immediately prior to the fire? a) $ 70,000 b) $ 82,000 c) $110,000 d) $122,000

c) $110,000 Inventory, 1/1 $ 80,000 Add: Purchases 330,000 Goods available for sale 410,000 Less: Cost of goods sold ($360,000 ÷ 120%) 300,000 Estimated inventory, 5/2 $110,000 Note: Although the estimated inventory is $110,000, the estimated fire loss would be $70,000 because of the $40,000 of goods in transit included in inventory.

Mowry Maintenance signs a one-year contract to provide janitorial services for a new amusement park. The contract will pay Mowry $10,000 per month as a base fee, and will pay an additional bonus of $60,000 if attendance at the park for the year exceeds a specified threshold. Mowry believes it has a 75% chance of meeting the threshold, and uses an expected value estimate to account for variable consideration. After eight months of the contract, how much revenue will Mowry have recognized? a) $0 b) $80,000 c) $110,000 d) $120,000

c) $110,000 The expected value is $165,000 (75% × ($10,000 × 12 + $60,000)) + (25% × ($10,000 × 12)). After eight months, Mowry would have recognized 8/12 of that amount, or $110,000.

The following data relates to a construction job started by Syl Co. during 2016: Total contract price $100,000 Actual costs incurred during 2016 20,000 Estimated remaining costs 40,000 Billed to customer during 2016 30,000 Received from customer during 2016 10,000 Assuming that Syl recognizes revenue over time according to percentage of completion, how much should Syl recognize as gross profit for 2016? a) $26,667 b) $0 c) $13,333 d) $33,333

c) $13,333 2016 actual costs $20,000 Total estimated costs ÷ 60,000 Ratio = 1/3 Contract price x 100,000 Revenue 33,333 2016 actual costs -20,000 Gross profit $13,333

Date/ Balance or Transaction/ Units/ Unit Cost/ Unit Sales Price Mar 1/ Inventory/ 3,200/ $64.30/ $86.50 Mar 4/ Purchase/ 3,400/ 64.75/ 87.00 Mar 14/ Sales/ 3,600/ 87.25 Mar 25/ Purchase/ 3,500/ 66.00/ 87.25 Mar 28/ Sales/ 3,450/ 88.00 If Thomas uses a first-in, first-out perpetual inventory system, the total cost of the inventory for carburetor 2642J at March 31 is a) $196,115 b) $197,488 c) $201,300 d) $263,825

c) $201,300 The company began March with 3,200 units in inventory at $64.30 each. The March 4 purchase added 3,400 additional units at $64.75 each. Under FIFO, the 3,600 units sold on March 14 were the oldest units. That sale eliminated all of the 3,200 units priced at $64.30 and 400 of the units priced at $64.75, leaving an inventory of 3,000 units at $64.75 prior to the March 25 purchase. On March 25, 3,500 units were acquired at $66. The 3,450 units sold on March 28 were the 3,000 remaining units priced at $64.75 and 450 units priced at $66. The ending inventory consists of 3,050 units at $66 each, or $201,300. The answer would have been the same under the periodic FIFO method.

Dixon Menswear Shop regularly buys shirts from Colt Company. Dixon purchased shirts from Colt on May 27, and received an invoice with a list price amount of $3,600 and payment terms of 2/10, n/30. Dixon uses the net method to record purchases. Dixon should record the purchase at a) $3,430 b) $3,500 c) $3,528 d) $3,600

c) $3,528 Under the net method, purchases are recorded net of the discount: $3,600 x 98% = $3,528

Moss Co. has determined its year-end inventory on a FIFO basis to be $400,000. Information pertaining to that inventory is as follows: Estimated selling price $408,000 Estimated costs to sell 20,000 What should be the book value of Moss's inventory? a) $408,000 b) $380,000 c) $388,000 d) $400,000

c) $388,000 Net realizable value = 388,000 ($408,000 selling price - $20,000 costs to sell.) The inventory would be valued at $388,000, the net realizable value, as it is lower than the $400,000 FIFO cost.

Perkins Appliances offers a contract in which customers receive the following: A new Perkins Pro washing machine, a warranty that protects against product defects for the first six months of use, an option to purchase a Perkins Pro dryer for a 30% discount (Perkins typically discounts that brand of dryer 10%), and a coupon to purchase an extended warranty for $150 (extended warranties regularly sell for $150). How many performance obligations are included in the contract? a) 4 b) 3 c) 2 d) 1

c) 2 The contract has two performance obligations. Delivery of the washing machine is a performance obligation. So is the option to purchase a dryer, as it includes a discount that is greater than the customer could normally obtain. The quality-assurance warranty is not a performance obligation, but rather is simply an aspect of fulfilling the obligation to deliver a washing machine of appropriate quality. The coupon for the extended warranty is not a performance obligation, as it only offers a right that customers would have absent the coupon.

Roco Company manufactures both industrial and consumer electronics. Due to a change in its strategic focus, the company decided to exit the consumer electronics business, and in 2016 sold the division to Sunny Corporation. The consumer electronics division qualifies as a component of the entity according to GAAP. How should Roco report the sale in its 2016 income statement? a) Include in income from continuing operations as a nonoperating gain or loss. b)As restructuring costs. c) As a discontinued operation, reported below income from continuing operations. d) None of the above.

c) As a discontinued operation, reported below income from continuing operations. U.S. GAAP requires that discontinued operations be disclosed separately below income from continuing operations.

In a statement of cash flows prepared under IFRS, interest paid a) Must be classified as an operating cash flow. b) Can be classified as either an operating cash flow or an investing cash flow. c) Can be classified as either an operating cash flow or a financing cash flow. d) Can be classified as either an investing cash flow or a financing cash flow.

c) Can be classified as either an operating cash flow or a financing cash flow. Interest paid can be classified as either an operating or financing cash flow.

In a multiple-step income statement for a retail company, all of the following are included in the operating section except a) Sales. b) Cost of goods sold. c) Dividend revenue. d) Administrative and selling expenses.

c) Dividend revenue. The operating section of a retailer's income statement includes all revenues and costs necessary for the operation of the retail establishment, for example, sales, cost of goods sold, administrative expenses, and selling expenses.

Bad debt expense must be estimated in order to satisfy the matching principle when expenses are recorded in the same periods as the related revenues. In estimating bad debt expense for a period, companies generally accrue a) Either an amount based on a percentage of total sales or an amount based on a percentage of accounts receivable after adjusting for any balance in the allowance for doubtful accounts. b) A percentage of total sales. c) Either an amount based on a percentage of credit sales or an amount based on a percentage of accounts receivable after adjusting for any balance in the allowance for doubtful accounts. d) An amount equal to last year's bad debt expense.

c) Either an amount based on a percentage of credit sales or an amount based on a percentage of accounts receivable after adjusting for any balance in the allowance for doubtful accounts. The allowance method records bad debt expense systematically as a percentage of either credit sales or the level of accounts receivable. The latter calculation considers the amount already existing in the allowance account. The credit is to a contra asset or allowance account. As accounts receivable are written off, they are charged to the allowance account.

Under IFRS, accounts receivable can be accounted for as "available for sale" investments if that approach is elected upon initial recognition of the receivable under: a) IASB No. 1. b) IFRS No. 9. c) IAS No. 39. d) None of the above.

c) IAS No. 39. IAS No. 39 allows receivables to be accounted for as "available for sale" investments if that approach is elected upon initial recognition of the receivable.

Madison Corporation uses the allowance method to value its accounts receivable and is making the annual adjustments at fiscal year-end, November 30. The proportion of uncollectible accounts is estimated based on past experience, which indicates 1.5% of net credit sales will be uncollectible. Total sales for the year were $2,000,000, of which $200,000 were cash transactions. Madison has determined that the Norris Corporation accounts receivable balance of $10,000 is uncollectible and will write off this account before year-end adjustments are made. Listed below are Madison's account balances at November 30 prior to any adjustments and the $10,000 write-off. Sales $2,000,000 Accounts receivable 750,000 Sales discounts 125,000 Allowance for doubtful accounts 16,500 Sales returns and allowances 175,000 Bad debt expense 0 As a result of the November 30 adjusting entry to provide for bad debts, the allowance for doubtful accounts will a) Increase by $30,000. b) Increase by $25,500. c) Increase by $22,500. d) Decrease by $22,500.

c) Increase by $22,500. The entry is to debit bad debt expense and credit the allowance account. Net credit sales were $1,500,000 ($1,800,000 - $125,000 of discounts - $175,000 of returns). Thus, the expected bad debt expense is $22,500 (1.5% x $1,500,000). This amount is recorded regardless of the balance remaining in the allowance account from previous periods. The net effect is that the allowance account is increased by $22,500

Which of the following items is not considered an investing cash flow in the statement of cash flows? a) Purchase of equipment. b) Purchase of securities. c) Issuing common stock for cash. d) Sale of land.

c) Issuing common stock for cash. Issuing common stock for cash is considered a financing cash flow, not an investing cash flow.

Recognition is the process of formally recording and reporting an item in the financial statements. In order for a revenue item to be recognized, it must be all of the following except: a) Measurable b) Relevant c) Material d) Realized or realizable

c) Material The four fundamental recognition criteria are (1) the item meets the definition of an element of financial statements, (2) the item has an attribute measurable with sufficient reliability, (3) the information is relevant, and (4) the information is reliable. In addition, revenue should be recognized when it is realized or realizable and earned.

Gar Co. factored its receivables without recourse with Ross Bank. Gar received cash as a result of this transaction, which is best described as a a) Loan from Ross collateralized by Gar's accounts receivable. b) Loan from Ross to be repaid by the proceeds from Gar's accounts receivables. c) Sale of Gar's accounts receivable to Ross, with the risk of uncollectible accounts transferred to Ross. d) Sale of Gar's accounts receivable to Ross, with the risk of uncollectible accounts retained by Gar.

c) Sale of Gar's accounts receivable to Ross, with the risk of uncollectible accounts transferred to Ross. The key phrase is "without recourse" which means that Gar Co. has transferred the collection risk to Ross Bank. Ross does not have any recourse against Gar Co. if the accounts are not collected. Thus, Gar has sold the accounts receivable to Ross Bank and has also transferred the risk associated with collection.

Verifiability as used in accounting includes a) Determining the revenue first, then determining the costs incurred in earning that revenue b) The entity's giving the same treatment to comparable transactions from period to period c) Similar results being obtained by bother the accountant and an independent party using the same measurement methods d) The disclosure of all facts that may influence the judgement of an informed reader

c) Similar results being obtained by bother the accountant and an independent party using the same measurement methods Verifiability implies a consensus among different measurers.

Which of the following is not a function of the IASB's conceptual framework? a) The conceptual framework provides guidance to standard setters to help them develop high quality standards b) The conceptual framework provides guidance to practitioners when individual standards to not apply c) The conceptual framework includes specific implementation guidance to enable consistent application of particular complex standards d) The conceptual framework emphasizes a "true and fair representation" of the company

c) The conceptual framework includes specific implementation guidance to enable consistent application of particular complex standards The conceptual framework does not include specific implementation guidance for particular complex standards.

How are management's responsibility and the auditor's report represented in the standard auditor's report? Management's Responsibility/ Auditor's Responsibility a. Implicitly Explicitly b. Implicitly Implicitly c. Explicitly Explicitly d. Explicitly Implicitly

c. Explicitly Explicitly The auditors' standard report includes a statement that the financial statements are the responsibility of the Company's management and that the auditors' responsibility is to express an opinion on the financial statements.

A company uses the allowance method to account for bad debts. What is the effect on each of the following accounts of the collection of an account previously written off? Allowance for Uncollectible Accounts/Bad Debt Expense a. Increase/Decrease b. No effect/Decrease c. Increase/No effect d. No effect/No effect

c. Increase/No effect The reinstatement of a previously written off account increases the allowance account. The collection of the reinstated account does not affect the allowance account. The net effect of the reinstatement and collection is an increase in the allowance account. Neither the reinstatement nor the subsequent collection of the account has any effect on the expense.

On January 1, 2016, D Company acquires for $100,000 a new machine with an estimated useful life of 10 years and no residual value. The machine has a drum that must be replaced every five years and costs $20,000 to replace. The company uses straight-line depreciation. Under IFRS, what is depreciation for 2016? a) $10,000. b) $10,800. c) $12,000. d) $13,200.

c. $12,000. $80,000 ÷ 10 years = $ 8,000 20,000 ÷ 5 years = 4,000 Total depreciation = $12,000

On January 2, 2016, Rafa Company purchased a franchise with a useful life of 10 years for $50,000. An additional franchise fee of 3% of franchise operating revenues also must be paid each year to the franchisor. Revenues during 2016 totaled $400,000. In its December 31, 2016, balance sheet, what net amount should Rafa report as an intangible asset-franchise? a) $33,000 b) $43,800 c) $45,000 d) $50,000

c. $50,000 ÷ 10 years = $5,000 per year in amortization. $50,000 - 5,000 = $45,000. The 3% franchise fee is a period expense and is not capitalized.

The management of Clayton LTD. determined that the cost of one of its factories may be impaired. Below are data related to the assets of the factory ($ in millions): -Book value $400 -Undiscounted sum of future estimated cash flows 420 -Present value of future cash flows 320 -Fair value less costs to sell (determined by appraisal) 330 Under IFRS, what amount of impairment loss, if any, should Clayton recognize? a) $90 million. b) $80 million. c) $70 million. d) No impairment loss is required.

c. $70 million. Book value of $400 million - 330 million recoverable amount (higher of fair value less costs to sell and present value of future cash flows).

During 2016, Burr Co. made the following expenditures related to the acquisition of land and the construction of a building: -Purchase price of land $ 60,000 -Legal fees for contracts to purchase land 2,000 -Architects' fees 8,000 -Demolition of old building on site 5,000 -Sale of scrap from old building 3,000 -Construction cost of new building (fully completed) 350,000 What amounts should be recorded as the initial values of the land and the building? 1) Land 2) Building During 2016, Burr Co. made the following expenditures related to the acquisition of land and the construction of a building: a) 1) $60,000 2) $360,000 b. 1) $62,000 2) $360,000 c. 1) $64,000 2) $358,000 d. 1) $65,000 2) $362,000

c. Costs attributable to land: $60,000 + 2,000 + 5,000 - 3,000 = $64,000 Costs attributable to building: $8,000 + 350,000 = $358,000

Dahl Corporation has just built a machine to produce car doors. Dahl had to build this machine because it couldn't purchase one that met its specifications. The following are the costs related to the machine's construction and the first month of operations: -Construction materials, $20,000 -Labor, $9,000 (construction, $3,000; testing, $1,000; operations, $5,000) -Engineering fees, $5,000 -Utilities, $4,000 (construction, $1,000; testing, $1,000; operations, $2,000) What is the initial value of the machine? a) $28,000 b) $29,000 c) $31,000 d) $38,000

c. Dahl Corporation should capitalize the materials, engineering fees, and labor and electricity for construction and testing: ($20,000 + 5,000 + 3,000 + 1,000 + 1,000 + 1,000). The labor and electricity to run the machine should not be capitalized. These should be expensed because they are not part of the construction costs and were not incurred prior to activating the asset.

JME acquired a depreciable asset on January 1, 2014, for $60,000 cash. At that time JME estimated the asset would last 10 years and have no salvage value. During 2016, JME estimated the remaining life of the asset to be only three more years with a salvage value of $3,000. If JME uses straight-line depreciation, what is the depreciation for 2016? a) $ 6,000 b) $12,000 c) $15,000 d) $16,000

c. First two years = ($60,000 - 0) ÷ 10 = $6,000 per year Year 2016 = [$60,000 - (2 x $6,000) - 3,000] ÷3 = $15,000

International Financial Reporting Standards are tested on the CPA exam along with U.S. GAAP. The following questions deal with the application of IFRS to accounting for property, plant, and equipment. Under IFRS: a) research and development expenditures are expensed in the period incurred. b) research and development expenditures are capitalized and amortized. c) development expenditures that meet certain criteria are capitalized and amortized; research expenditures are expensed in the period incurred. d) research expenditures that meet certain criteria are capitalized and amortized; development expenditures are expensed in the period incurred.

c. Only development costs that meet certain criteria can be capitalized

Bren Co.'s beginning inventory on January 1 was understated by $26,000, and its ending inventory on December 31 was overstated by $52,000. As a result, Bren's cost of goods sold for the year was a) Understated by $26,000. b) Overstated by $78,000. c) Understated by $78,000. d) Overstated by $26,000.

c. The understatement of beginning inventory and the overstatement of ending inventory both cause the cost of goods sold to be understated. The total understatement is $78,000 ($26,000 + 52,000).

Bridge Company's results for the year ended December 31, 2016, include the following material items: Sales revenue $5,000,000 Cost of goods sold 3,000,000 Administrative expenses 1,000,000 Gain on sale of equipment 200,000 Loss on discontinued operations 400,000 Understatement of depreciation expense in 2015 caused by mathematical error 250,000 Bridge Company's income from continuing operations before income taxes for 2016 is: a) $700,000 b) $950,000 c) $1,000,000 d) $1,200,000

d) $1,200,000 Other than sales, COGS, and administrative expenses, only the gain or loss from disposal of equipment is considered part of income from continuing operations. Income from continuing operations is ($5,000,000 - 3,000,000 - 1,000,000 + 200,000) = $1,200,000.

Herc Co.'s inventory at December 31, 2016, was $1,500,000 based on a physical count priced at cost, and before any necessary adjustment for the following: Merchandise costing $90,000, shipped f.o.b shipping point from a vendor on December 30, 2016, was received and recorded on January 5, 2017. Goods in the shipping area were excluded from inventory although shipment was not made until January 4, 2017. The goods, billed to the customer f.o.b. shipping point on December 30, 2016, had a cost of $120,000. What amount should Herc report as inventory in its December 31, 2016, balance sheet? a) $1,500,000 b) $1,590,000 c) $1,700,000 d) $1,710,000

d) $1,710,000

Hansen Construction Inc. has consistently recognized revenue over time according to percentage of completion. During 2016, Hansen started work on a $3,000,000 fixed-price construction contract. The accounting records disclosed the following data for the year ended December 31, 2016: Costs incurred $ 930,000 Estimated cost to complete 2,170,000 Progress billings 1,100,000 Collections 700,000 How much loss should Hansen have recognized in 2016? a) $180,000 b) $230,000 c) $ 30,000 d) $100,000

d) $100,000 Since the total cost of the contract, $3,100,000 ($930,000 + 2,170,000), is projected to exceed the contract price of $3,000,000, the excess cost of $100,000 must be recognized as a loss in 2016.

Janet Taylor Casual Wear has $75,000 in a bank account as of December 31, 2016. If the company plans on depositing $4,000 in the account at the end of each of the next × years (2017, 2018, and 2019) and all amounts in the account earn 8% per year, what will the account balance be at December 31, 2019? Ignore the effect of income taxes. 8% Interest Rate Factors Period/Future Value of an Amount of $1/Future Value of an Ordinary Annuity of $1 1/1.08/1.00 2/1.17/2.08 3/1.26/3.25 4/1.36/4.51 a) $ 87,000 b) $ 88,000 c) $ 96,070 d) $107,500

d) $107,500 Both future value tables will be used because the $75,000 already in the account will be multiplied times the future value factor of 1.26 to determine the amount three years hence, or $94,500. The three payments of $4,000 represent an ordinary annuity. Multiplying the three-period annuity factor (3.25) by the payment amount ($4,000) results in a future value of the annuity of $13,000. Adding the two elements together produces a total account balance of $107,500.

On January 1, 2016, Ott Company sold goods to Fox Company. Fox signed a noninterest-bearing note requiring payment of $60,000 annually for seven years. The first payment was made on January 1, 2016. The prevailing rate of interest for this type of note at date of issuance was 10%. Information on present value factors is as follows: Periods / Present Value of 1 at 10%/ Present Value of Ordinary Annuity of 1 at 10% 6/.56/4.36 7/.51/4.87 Ott should record sales revenue in January 2016 of a) $214,200 b) $261,600 c) $292,600 d) $321,600

d) $321,600 The sales price is equal to the present value of the note payments: Present value of first payment $ 60,000 Present value of last six payments: $60,000 x 4.36 261,600 Sales price $321,600

Under East Co's accounting System, all insurance premiums are paid are debited to prepaid insurance. During the year, East records monthly estimated charges to insurance expense with credits to prepaid insurance. Additional information to the year ended December 31 is as follows: Prepaid insurance at Jan. 1: $105,000 Insurance Exp. recog. during the year: $437,500 Prepaid insur. at Dec. 31: $122,500 What was the total amount of cash paid by Easy for insurance premiums during the year? a) $332,500 b) $420,000 c) $437,500 d) $455,000

d) $455,000 Expense recognized $437,500 Add: Increase in prepaid insurance 17,500 Cash paid for insurance $455,000

Hutch, Inc., uses the conventional retail inventory method to account for inventory. The following information relates to current year's operations: Average Cost/ Retail Beginning inventory and purchases $600,000/$920,000 Net markups 40,000/ Net markdowns 60,000/ Sales 780,000/ What amount should be reported as cost of sales for the year? a) $480,000 b) $487,500 c) $500,000 d) $525,000

d) $525,000 Cost Retail Beginning inventory and purchases $600,000 $920,000 Net markups _______ 40,000 Available for sale 600,000 960,000 Cost-to-retail percentage: $600,000 ÷ $960,000 = 62.5% Less: Net markdowns (60,000) Sales (780,000) Estimated ending inventory at retail $120,000 Estimated ending inventory at cost: ($120,000 x 62.5%) 75,000 Estimated cost of goods sold $525,000

Justin Banks just won the lottery and is trying to decide between the annual cash flow payment option of $100,000 per year for 15 years beginning today, and the lump-sum option. Justin can earn 8 percent investing his money. At what lump-sum payment amount would he be indifferent between the two alternatives? Use the appropriate table located at the end of the textbook to solve this problem. a) $824,424 b) $855,948 c) $890,378 d) $924,424

d) $924,424 PVAD = $100,000 x 9.24424 = $924,424

JME Corporation bills its customers when services are rendered and recognizes revenue at the same time. This event causes an a) Increase in assets b) Increase in net income c) Increase in retained earnings d) All of the above

d) All of the above The event is recorded as an increase to accounts receivable and an increase in revenue. An increase to accounts receivable represents an increase in assets and the increase in revenue will increase net income which will in turn increase retained earnings.

Madison Corporation uses the allowance method to value its accounts receivable and is making the annual adjustments at fiscal year-end, November 30. The proportion of uncollectible accounts is estimated based on past experience, which indicates 1.5% of net credit sales will be uncollectible. Total sales for the year were $2,000,000, of which $200,000 were cash transactions. Madison has determined that the Norris Corporation accounts receivable balance of $10,000 is uncollectible and will write off this account before year-end adjustments are made. Listed below are Madison's account balances at November 30 prior to any adjustments and the $10,000 write-off. Sales $2,000,000 Accounts receivable 750,000 Sales discounts 125,000 Allowance for doubtful accounts 16,500 Sales returns and allowances 175,000 Bad debt expense 0 The entry to write off Norris Corporation's accounts receivable balance of $10,000 will a) Increase total assets and decrease net income. b) Decrease total assets and net income. c) Have no effect on total assets and decrease net income. d) Have no effect on total assets and net income.

d) Have no effect on total assets and net income. If a company uses the allowance method, the write-off of a receivable has no effect on total assets. The journal entry involves a debit to the allowance account and a credit to accounts receivable. The net effect is that the asset section is both debited and credited for the same amount. Thus, there will be no effect on either total assets or net income.

Noncurrent assets must be reported before current assets in a balance sheet reported by a company using: a) IFRS. b) U.S. GAAP. c) Both U.S. GAAP and IFRS. d) Neither U.S. GAAP nor IFRS.

d) Neither U.S. GAAP nor IFRS. Under U.S. GAAP, we present current assets and liabilities before noncurrent assets and liabilities. Balance sheets prepared using IFRS often report noncurrent items first, but IAS No. 1 doesn't prescribe the format of the balance sheet.

Predictive Value is an ingredient of Faithful Representation Relevance a) Yes No b) No No c) Yes Yes d) No Yes

d) No Yes Predictive Value is an ingredient of relevance

The equivalent to the FASB's Financial Accounting Standards Advisory Council (FASAC) for the IASB is: a) International Financial Reporting Interpretations Committee (IFRIC) b) International Organization of Securities Commissions (IOSCO) c) International Financial Accounting Advisory Council d) Standards Advisory Council (SAC)

d) Standards Advisory Council (SAC) The equivalent to FASAC for the IASB is the Standards Advisory Council.

The Financial Accounting Standards Board has provided guidance on disclosures of transactions between related parties, for example, transactions between subsidiaries of a common parent. GAAP regarding related-party transactions requires all of the following disclosures except a) The nature of the relationship involved. b) A description of the transactions for each period an income statement is presented. c) The dollar amounts of transactions for each period an income statement is presented. d) The effect on the cash flow statement for each period a cash flow statement is presented.

d) The effect on the cash flow statement for each period a cash flow statement is presented. GAAP requires disclosure of related-party transactions except for compensation agreements, expense allowances, and transactions eliminated in consolidated working papers. Required disclosures include the relationship(s) of the related parties; a description and dollar amounts of transactions for each period presented and the effects of any change in the method of establishing their terms; and amounts due to or from the related parties and, if not apparent, the terms and manner of settlement. The effect on the cash flow statement need not be disclosed.

Under IFRS, measurement of an impairment of a receivable is required if: a) Cash payments have not been received for more than twelve months. b) It is at least more likely than not that a future loss will occur, and the amount of discounted loss is measurable. c) It is reasonably possible that prior events will give rise to a future loss that can be estimated with moderate reliability. d) There is objective evidence that a loss event has occurred that has an impact on the future cash flows to be collected and that can be estimated reliably.

d) There is objective evidence that a loss event has occurred that has an impact on the future cash flows to be collected and that can be estimated reliably.

According to the FASB's conceptual framework, comprehensive income includes which of the following? Operating Income Investments by Owners a) No Yes b) No No c) Yes Yes d) Yes No

d) Yes No Comprehensive income excludes only owners transactions

Which of the following statements is FALSE regarding recognizing revenue over time on long-term contracts? The construction-in-progress account: a) is shown net of billings as a liability if the amount is less than the amount of billings. b) is an asset. c) is shown net of billings in the balance sheet. d) does not include the cumulative effect of gross profit recognition.

d) does not include the cumulative effect of gross profit recognition. Construction-in-progress represents the costs incurred plus the cumulative pro-rata share of gross profit when revenue is recognized over time on long-term contracts.

During 2015, Yvo Corp. installed a production assembly line to manufacture furniture. In 2016, Yvo purchased a new machine and rearranged the assembly line to install this machine. The rearrangement did not increase the estimated useful life of the assembly line, but it did result in significantly more efficient production. The following expenditures were incurred in connection with this project: -Machine $75,000 -Labor to install machine 14,000 -Parts added in rearranging the assembly line to provide future benefits 40,000 -Labor and overhead to rearrange the assembly line 18,000 What amount of the above expenditures should be capitalized in 2016? a) $ 75,000 b) $ 89,000 c) $107,000 d) $147,000

d. $147,000. All of the expenditures are capitalized.

Blankbank Corporation has $150 million of goodwill on its books from the 2014 acquisition of Walsh Technology. Walsh is considered a cash-generating unit under IFRS. At the end of its 2016 fiscal year, management provided the following information for its annual goodwill impairment test ($ in millions): -Fair value of Walsh less costs to sell $455 -Fair value of Walsh's net assets (excluding goodwill) 400 -Book value of Walsh's net assets (including goodwill) 500 -Present value of estimated future cash flows 440 Under IFRS, what amount of goodwill impairment loss, if any, should Blankbank recognize? a) $100 million. b) $60 million. c) $50 million. d) $45 million

d. $45 million. Book value of $500 million - 455 million recoverable amount (higher of fair value less costs to sell and present value of future cash flows).

During the current year, Orr Company incurred the following costs: -Research and development services performed by Key Corp. for Orr $150,000 -Design, construction, and testing of preproduction prototypes and models 200,000 -Testing in search for new products or process alternatives 175,000 In its income statement for the current year, what amount should Orr report as research and development expense? a) $150,000 b) $200,000 c) $350,000 d) $525,000

d. All of the expenditures are considered research and development

On December 31, 2016, Bart Inc. purchased a machine from Fell Corp. in exchange for a noninterest-bearing note requiring eight payments of $20,000. The first payment was made on December 31, 2016, and the remaining seven payments are due annually on each December 31, beginning in 2017. At the date of the transaction, the prevailing rate of interest for this type of note was 11%. Present value factors are as follows: Period 7) 8) Present value of ordinary annuity of 1 at 11% 7) 4.712 8) 5.146 Present value of an annuity due of 1 at 11% 7) 5.231 8) 5.712 The initial value of the machine is: a) $ 94,240 b) $102,920 c) $104,620 d) $114,240

d. There are eight payments due, the first one due immediately, and the remaining seven due each year on December 31. Therefore, the correct factor to use is the present value of an annuity in advance (annuity due) for eight periods, or 5.712 x $20,000 = $114,240, the present value at the inception of the note and therefore the initial value of the machine. Another way to calculate the answer is to view the annuity as a seven-period ordinary annuity, with a down payment today of $20,000. This would yield a calculation of $20,000 + ($20,000 x 4.712) or $114,240.

WD Mining Company purchased a section of land for $600,000 in 2006 to develop a zinc mine. The mine began operating in 2008. At that time, management estimated that the mine would produce 200,000 tons of quality ore. A total of 100,000 tons of ore was mined and processed from 2008 through December 31, 2015. During January 2016, a very promising vein was discovered. The revised estimate of ore still to be mined was 250,000 tons. Estimated salvage value for the mine land was $100,000 in both 2008 and 2016. Assuming that 10,000 tons of ore was mined in 2016, the computation WD Mining Company should use to determine the amount of depletion to record in 2016 would be: a) (($600,000 - $100,000)/450,000 tons) × 10,000 tons. b) (($600,000 - $100,000)/350,000 tons) × 10,000 tons. c) (($600,000 - $100,000 - $250,000)/350,000 tons) × 10,000 tons. d) (($600,000 - $100,000 - $250,000)/250,000 tons) × 10,000 tons.

d. Because 50% of the original estimate of quality ore was recovered during the years 2008 through 2015, recorded depletion of $250,000 [50% x ($600,000 - 100,000 salvage value)]. In 2016, the earlier depletion of $250,000 is deducted from the $600,000 cost along with the $100,000 salvage value. The remaining depletable cost of $250,000 will be allocated over the 250,000 tons believed to remain in the mine. The $1 per ton depletion is then multiplied times the tons mined each year

n 2016 Sanford LTD. received a government grant of $100,000 to be used for the purchase of a machine. Sanford prepares its financial statements using IFRS. The grant must be recognized: a) as revenue in 2016. b) as a reduction in the cost of the machine. c) as deferred income in the balance sheet and then recognized in the income statement systematically over the asset's useful life. d) either b or c.

d. Both methods are acceptable.

Harper is contemplating exchanging a machine used in its operations for a similar machine on May 31. Harper will exchange machines with either Austin Corporation or Lubin Company. The data relating to the machines are presented below. Assume that the exchanges would have commercial substance. Harper Austin Lubin Original cost of the machine H - $162,500 A - $180,000 L - $150,000 Accumulated depreciation thru May 31 H - 98,500 A - 70,000 L - 65,000 Fair value at May 31 H - 80,000 A - 95,000 L - 60,000 If Harper exchanges its used machine and $15,000 cash for Austin's used machine, the gain that Harper should recognize from this transaction for financial reporting purposes would be: a) $0 b) $2,526 c) $15,000 d) $16,000

d. GAAP states that the basic principle to be followed in these exchanges is to value the asset received at fair value and to recognize gain or loss (the difference between the fair value and the book value of the asset given up). Harper's used machine has a book value of $64,000 ($162,500 cost - $98,500 accumulated depreciation). The fair value of the used machine is $80,000, resulting in a gain of $16,000 ($80,000 - 64,000). The only exceptions to using fair value are (1) when fair value is not determinable and (2) when the exchange lacks commercial substance

Black, Inc., acquired another company for $5,000,000. The fair value of all identifiable tangible and intangible assets was $4,500,000. Black will amortize any goodwill over the maximum number of years allowed. What is the annual amortization of goodwill for this acquisition? a) $12,500 b) $20,000 c) $25,000 d) 0

d. Goodwill is an indefinite life intangible asset and is therefore not amortized.

Simons Company purchased land to build a new factory. The following expenditures were made in conjunction with the land purchase: -Purchase price of the land, $150,000 -Real estate commissions of 7% of the purchase price -Land survey, $5,000 -Back taxes, $5,000 What is the initial value of the land? a) $160,000 b) $160,500 c) $165,500 d) $170,500

d. Simons Company should value the land at $170,500. All expenditures incurred to purchase land should be part of the capitalized asset. $150,000 + ($150,000 x .07) + 5,000 + 5,000

The following information concerns Franklin Inc.'s stamping machine: -Acquired: January 1, 2010 -Cost: $22 million -Depreciation: straight-line method -Estimated useful life: 12 years -Salvage value: $4 million As of December 31, 2016, the stamping machine is expected to generate $1,500,000 per year for five more years and will then be sold for $1,000,000. The stamping machine is: a) Impaired because expected salvage value has declined. b) Not impaired because annual expected revenue exceeds annual depreciation. c) Not impaired because it continues to produce revenue. d) Impaired because its book value exceeds expected future cash flows.

d. The book value of the stamping machine is its cost less accumulated depreciation. Depreciation taken through 2016 was [($22,000,000 - 4,000,000) / 12] x 7 = $10,500,000 so book value is ($22,000,000 - 10,500,000) = $11,500,000. Because the $11,500,000 book value is more than expected future cash flows of [(5 x $1,500,000) + 1,000,000] = $8,500,000, the stamping machine is impaired.

All sales and purchases for the year at Ross Corporation are credit transactions. Ross uses a perpetual inventory system. During the year, it shipped certain goods that were correctly excluded from ending inventory although the sale was not recorded. Which one of the following statements is correct? a) Accounts receivable was not affected, inventory was not affected, sales were understated, and cost of goods sold was understated. b) Accounts receivable was understated, inventory was not affected, sales were understated, and cost of goods sold was understated. c) Accounts receivable was understated, inventory was overstated, sales were understated, and cost of goods sold was overstated. d) Accounts receivable was understated, inventory was not affected, sales were understated, and cost of goods sold was not affected.

d. The failure to record a sale means that both accounts receivable and sales will be understated. However, inventory was correctly counted, so that account and cost of goods sold were unaffected.

During the year 1 year-end physical inventory count at Tequesta Corporation, $40,000 worth of inventory was counted twice. Assuming that the year 2 year-end inventory was correct, the result of the year 1 error was that: a) Year 1 retained earnings was understated, and year 2 ending inventory was correct. b) Year 1 cost of goods sold was overstated, and year 2 income was understated. c) Year 1 income was overstated, and year 2 ending inventory was overstated. d) Year 1 cost of goods sold was understated, and year 2 retained earnings was correct.

d. The overstatement (double counting) of inventory at the end of year 1 caused year 1 cost of goods sold (BI + Purchases - EI) to be understated and both inventory and income to be overstated. The year 1 ending inventory equals year 2 beginning inventory. Thus, the same overstatement caused year 2 beginning inventory and cost of goods sold to be overstated and income to be understated. This is an example of a self-correcting error. By the end of year 2, the balance sheet is correct.


Related study sets

Chapter 3 technology for success

View Set

Gender and Sexuality (AP Psychology Chapter 10)

View Set

The Renaissance in Quattrocento Italy

View Set

PSCI 2305 Soomo Webtext Chapter 1

View Set

history of law enforcement vocab

View Set