Accounting Midterm Questions
Adam Corporation owns 1,000 shares of common stock of Rosen, Inc., a large publicly traded company listed on a major stock exchange. If Rosen issues a 20 percent stock dividend when the par value is $10 per share and the market value of $70 per share, how much and what type of income should Adam report? A. $0 B. $2,000 ordinary income C. $12,000 ordinary income D. $2,000 ordinary income and $12,000 extraordinary income
A. $0
Stanley Company purchased a machine that was installed and placed in service on January 2, 2013, at a total cost of $680,000. Residual value was estimated at $70,000. The machine is being depreciated over ten years by the double-declining-balance method. For the year 2014, Stanley should record depreciation expense of A. $108,800 B. $97,600 C. $68,000 D. $61,000
A. $108,000.
Which of the following is NOT a component of comprehensive income? A. Asset revaluation reserve B. Net income C. Foreign currency translation adjustment D. Minimum pension liability adjustment
A. Asset revaluation reserve
Which of the following reasons provides the best theoretical support for accelerated depreciation? A. Assets are more efficient in early years and initially generate more revenue. B. Expenses should be allocated in a manner that "smoothes" earnings. C. Repairs and maintenance costs will probably increase in later periods, so depreciation should decline. D. Accelerated depreciation provides easier replacement because of the time value of money.
A. Assets are more efficient in early years and initially generate more revenue.
Which of the following is true regarding SIC 12, "Consolidation - Special Purpose Entities". and FIN 46R, "Consolidation of Variable Interest Entities"? A. Both pronouncements show evidence of being a principles-based standard B. Both pronouncements state that the substance of the relationship between an entity and the variable-interest or special-purpose entity is the determining factor in deciding to consolidate a variable-interest or special-purpose entity. C. Both pronouncements state that the entity expected to bear the majority of the expected gains or losses of the variable-interest or special-purpose entity should consolidate the variable-interest or special-purpose entity. D. Both pronouncements state that technical voting control of an SPE is the determining factor in deciding to consolidate a variable-interest or special-interest entity.
A. Both pronouncements show evidence of being a principles-based standard.
Which of the following is true regarding International Accounting Standard No. 23 (IAS 23), "Borrowing costs," and FASB Statement of Financial Accounting Standards No. 34 (SFAS No. 34), "Capitalization of Interest Cost"? A. IAS 23 requires the capitalization of borrowing costs less the amount of investment income generated by borrowed construction funds temporarily invested. B. SFAS No.34 requires the capitalization of borrowing costs less the amount of investment income generated by borrowed construction funds temporarily invested. C. IAS 23 requires that all interest should be expensed. D. Both IAS 23 and SFAS No. 34 require the capitalization of borrowing costs with no adjustment for the amount of investment income generated by borrowed.
A. IAS 23 requires the capitalization of borrowing costs less the amount of investment income generated by borrowed construction funds temporarily invested.
When bonds are sold between interest dates, any accrued interest is credited to A. Interest Payable B. Interest Revenue C. Interest Receivable D. Bonds Payable
A. Interest Payable
A trademark is an example of which general category of intangible asset that should be recognized separately according to current generally accepted accounting principles? A. Marketing-related B. Customer-related C. Artistic-related D. Contract-based
A. Marketing-related
Which of the following ordinarily would be treated as a revenue expenditure rather than a capital expenditure? A. Repair and maintenance on buildings B. The replacement of a major component of a building C. An addition to an existing building D. Rearrangement costs that are identifiable, material, and are expected to provide discernable future benefits.
A. Repair and maintenance on buildings.
Ignoring income taxes, choose the correct response below regarding total stockholders' equity resulting from classifying all investments for a firm either as trading securities or securities available-for-sale. A. Stockholders' equity is the same regardless of the classification B. Stockholders' equity is greater if the investment are classified as available-for-sale. C. Stockholders' equity is greater if the investments are classified as trading securities. D. If there have been unrealized gains, classification as trading securities results in higher stockholders' equity.
A. Stockholders' equity is the same regardless of the classification.
Torlin Inc. neglected to amortize the discount on outstanding ten-year bonds payable. What is the effect of the failure to record discount amortization on interest expense and bond carrying value, respectively? A. Understate ; understate B. Understate ; overstate C. Overstate ; overstate D. Overstate ; understate
A. Understate ; understate
Callable bonds a. can be redeemed by the issuer at some time at a pre-specified price. b. can be converted to stock. c. mature in a series of payments. d. None of these is correct.
A. can be redeemed by the issuer at some time at a pre-specified price.
Generally accepted accounting principles require that certain lease agreements be accounted for as purchases. The theoretical basis for this treatment is that a lease of this type A. effectively conveys all of the benefits and risks incident to the ownership of property. B. is an example of form over substance. C. provides the use of the leased asset to the lessee for a limited period of time. D. must be recorded in accordance with the concept of cause and effect.
A. effectively conveys all of the benefits and risks incident to the ownership of property.
The net amount required to retire a bond before maturity (assuming no call premium and constant interest rates) is the A. face value of the bond plus any unamortized premium or minus any unamortized discount. B. issuance price of the bond plus any unamortized discount or minus any unamortized premium. C. face value of the bond plus any unamortized discount or minus any unamortized premium. D. maturity value of the bond plus any unamortized discount or minus any unamortized premium.
A. face value of the bond plus any unamortized premium or minus any unamortized discount.
The impairment test for an intangible asset with an indefinite life compares the A. fair value of the asset to its book value. B. sum of the undiscounted cash flows expected to be generated by the asset to its book value. C. sum of the discounted cash flows expected to be generated by the asset to its fair value. D. sum of the undiscounted cash flows expected to be generated by the asset to its fair value.
A. fair value of the assets to its book value.
On September 20, 2014, Shunt Corporation declared the distribution of the following dividend to its stockholders of record as of September 30, 2014: - Investment in 100,000 shares of Ramen Corporation stock, carrying value $600,000; fair market value on September 20, $1,450,000; fair market value on September 30, $1,575,000. The entry to record the declaration of the property dividend would include a debt to Retained Earnings of A. $1,575,000 B. $1,450,000 C. $830,000 D. $600,000
B. $1,450,000
The Mailer Corporation had the following classes of stock outstanding as of December 31, 2014: Common Stock, $20 Par Value, 20,000 shares outstanding Preferred Stock, 6 percent, $100 par value, cumulative, 2,000 shares outstanding No dividends were paid on preferred stock for 2012 and 2013. On December 31,2014, a total cash dividend of $200,000 was declared. What are the amounts of dividends payable on both the common and preferred stock, respectively? A. $0 and $200,000 B. $164,000 and $36,000 C. $176,000 and $24,000 D. $188,000 and $12,000
B. $164,000 and $36,000
On October 1, Ryan Company purchased $200,000 face value 12% bonds for 98 plus accrued interest and brokerage fees and classified them as held-to-maturity securities. Interest is paid semiannually on January 1 and July 1. Brokerage fees for this transaction were $700. At what amount should this acquisition of bonds be recorded? A. $196,000 B. $196,700 C. $202,000 D. $202,700
B. $196,700
Danville Corporation bought a new machine and agreed to pay for it in equal annual installments of $6,000 at the end of each of the next five years. Assume the prevailing interest rate for this type of transaction is 12%. Assume the present value of an ordinary annuity of $1 at 12% for rive periods is 3.60. The future amount of an ordinary annuity of $1 at 12% for five periods is 6.35. The present value of $1 at 12% is 0.567. How much should Danville record as the note payable on the balance sheet if financial statements were prepared today? A. $17,010 B. $21,600 C. $30,000 D. $38,100
B. $21,600
Gunther Inc. purchased $400,000 of Malone Corp. ten-year bonds with a stated interest rate of 8 percent payable quarterly. At the time the bonds were purchased, the market interest rate was 12 percent. Determine the amount of premium or discount on the purchase of the bonds. A. $92,442 premium B. $92,442 discount C. $81,143 premium D. $81,143 discount
B. $92,442 discount
Which of the following is an appropriate presentation of treasury stock? A. As a marketable security B. As a deduction at cost from total stockholders' equity C. As a deduction at cost from total contingent liabilities D. As a deduction at par from total stockholders' equity.
B. As a deduction at cost from total stockholders' equity.
Which of the following research and development related costs should be capitalized and amortized over current and future periods? A. Labor and material costs incurred in building a prototype model. B. Cost of testing equipment that will also be used in another separate research and development project scheduled to begin next year. C. Administrative salaries allocated to research and development. D. Research findings purchased from another company to aid a particular research project currently in process.
B. Cost of testing equipment that will also be used in another separate research and development project scheduled to begin next year.
A company owns a piece of land that originally cost $10,000 and has a fair market value of $8,000. It is exchanged along with $5,000 cash for another piece of land having a fair value of $13,000. The exchange had commercial substance. The proper journal entry to record this transaction is A. Land (New) 15,000 Land (Old) 10,000 Cash 5,000 B. Land (New) 13,000 Loss on Exchange 2,000 Land 10,000 Cash 5,000 C. Land (New) 18,000 Land (Old) 10,000 Cash 5,000 Gain on Exchange 3,000 D. Land (New) 13,000 Retained Earnings 2,000 Land (Old) 10,000 Cash 5,000
B. Land (New) 13,000 Loss on Exchange 2,000 Land 10,000 Cash 5,000
A depreciable asset has an estimated 15% salvage value. At the end of its estimated useful life, the accumulated depreciation would equal the original cost of the asset under which of the following depreciation methods? Productive Output / Sum of the Years Digits / Double Declining Balance a. Yes No No b. No No No c. No Yes No d. Yes Yes Yes
B. No No NO
How would a stock split affect each of the following? Assets / Total Stockholders' Equity / Additional Paid-In Capital A. Increase, Increase, No effect B. No effect, No effect, No effect C. No effect, No effect, Increase D. Decrease, Decrease, Decrease
B. No effect, No effect, No effect
In accordance with generally accepted accounting principles, which of the following methods of amortization is normally recommended for intangible assets? A. Sum of the years digits B. Straight line C. Group composite D. Double Declining balance
B. Straight-line
Which of the following is correct? A. The fair value of internally generated intangible assets should be estimated and recorded on the books of the entity that developed the assets even in the absence of a business acquisition. B. The fair value of internally generated intangible assets may be estimated but should not be recorded on the books or displayed on the financial statements of the entity. C. Managers may value their own companies and recognize goodwill in the company accounts even though an entity has not been acquired in a business acquisition. D. Goodwill should be recognized in the accounts whenever the value of the firm increases based on current market prices of the firm's common stock.
B. The fair value of internally generated intangible assets may be estimated but should not be recorded on the books or displayed on the financial statements of the entity.
Which of the following is true regarding the lease term? A. The lease term does not include all periods covered by bargain renewal options. B. The lease terms includes all periods for which failure to renew imposes a penalty sufficiently high that the lessee will probably renew. C. The lease term may extend beyond the date a bargain purchase option becomes exercisable. D. The lease term does not include all periods representing renewals or extensions of the lease at the lessor's option.
B. The lease terms includes all periods for which failure to renew imposes a penalty sufficiently high that the lessee will probably renew.
For the issuer of ten‐year bonds, the amount of amortization using the effective‐interest method would increase each year if the bonds were sold at a Discount Premium A. No No B. Yes Yes C. No Yes D. Yes No
B. Yes Yes
Legal fees incurred in successfully defending a patent suit should be capitalized when the patent has been Internally Developed / Purchased from an Inventory A. Yes No B. Yes Yes C. No Yes D. No No
B. Yes Yes
A donated plant asset for which the fair value has been determined, and for which incidental costs were incurred in acceptance of the asset, should be recorded at an amount equal to its A. Incidental costs incurred. B. fair value and incidental costs incurred. C. book value on books of donor and incidental costs incurred. D. book value on books of donor
B. fair value and incidental costs incurred.
The impairment test of an intangible assets with a definite life compares the A. fair value of the asset to its book value. B. sum of the undiscounted cash flows expected to be generated by the asset to its book value. C. sum of the discounted cash flows expected to be generated by the asset to its fair value. D. sum of the undiscounted cash flows expected to be generated by the asset to its fair value.
B. sum of the undiscounted cash flows expected to be generated by the asset to its book value.
From the standpoint of the lessee, the minimum lease payment includes all of the following except A. the guaranteed residual value B. the lessee's obligation to pay executory costs. C. the bargain purchase option. D. any payment that the lessee must make upon failure to extend or renew the lease.
B. the lessee's obligation to pay executory costs.
Waltham Corporation was organized on January 2 with 100,000 authorized shares of $10 par value common stock. During the year, Waltham had the following capital transactions. - January 5 - Issued 75,000 shares at $14 per share. - December 27 - Purchased 5,000 shares at $11 per share. Waltham used the par value method to record the purchase of the treasury shares. What would be the balance in the paid-in capital from treasury stock account at December 31? A. $0 B. $5,000 C. $15,000 D. $20,000
C. $15,000
Select the statement that is INCORRECT concerning the appropriations of retained earnings. A. Appropriation of retained earnings reflect funds set aside for a designated purpose, such as plant expansion. B. Appropriations of retained earnings do not change the total amount of stockholders' equity. C. Appropriations of retained earnings can be made as a result of contractual requirements. D. Appropriations of retained earnings can be made at the discretion of the board of directors.
C. Appropriations of retained earnings can be made as a result of contractual requirements.
Which of the following is true? A. Trading Securities can be classified as current or noncurrent depending on management's intent. B. Held to Maturity securities should not be classified as current under any circumstance. C. Available for sale securities can be classified as current or noncurrent depending on management's intent. D. Trading securities should not be classified as current under any circumstance.
C. Available for sale securities can be classified as current or noncurrent depending on management's intent.
When a company issues bonds, how are unamortized bond discounts and premiums classified on the balance sheet? A. Bond discounts are classified as assets, and bond premiums are classified as contra-asset accounts. B. Bond discounts are classified as expenses, and bond premiums are classified as revenues. C. Bond premiums are classified as additions to, and bond discounts are classified as deductions from, the face value of bonds. D. None of these are correct.
C. Bond premiums are classified as additions to, and bond discounts are classified as deductions from, the face value of bonds.
Which of the following best describes the approach prescribed in IAS 38, Intangible Assets? A. Expense all research and development costs B. Capitalize all research and development costs C. Expense all research costs and capitalize all development costs D. Capitalize all research costs and expense all development costs
C. Expense all research costs and capitalize all development costs.
When an investor purchases sufficient common stock to gain significant influence over the investee, what is the proper accounting treatment of any excess of cost over book value acquired? A. The excess remains in the asset account until the investment is sold. B. The excess is immediately charged to expense in the period in which the investment is made. C. The excess is amortized over the period of time that is reasonable in light of the underlying cause of the excess. D. The excess is charged to retained earnings at the time the investor resells the common stock.
C. The excess is amortized over the period of time that is reasonable in light of the underlying cause of the excess.
An improvement made to a machine increased its fair market value and its production capacity by 25 percent without extending the machine's useful life. The cost of the improvement should be A. expensed. B. debited to Accumulated Depreciation. C. capitalized in the machine account. D. allocated between Accumulated Depreciation and the machine account.
C. capitalized in the machine account.
If the residual value of a leased asset is greater than the amount guaranteed by the lessee, the lessee A. pays the lessor for the difference. B. recognizes a gain at the end of the lease term. C. has no obligation related to the residual value. D. pays the lessor for the difference.
C. has no obligation related to the residual value.
Farnon company has not declared or paid dividends on its cumulative preferred stock in the last three years. These dividends should be reported A. as a current liability. B. as a reduction in stockholders' equity C. in a note to the financial statements. D. as a noncurrent liability.
C. in a note to the financial statements.
If an investment in stock is reclassified from available-for-sale securities to trading securities, the stock should be recorded on the date it is reclassified at the A. market value at the date of acquisition. B. book value at the date of reclassification. C. market value at the date of reclassification. D. lower-of-cost-or-market value at the date of reclassification
C. market value at the date of reclassification.
Statement of Financial Accounting Standards No. 160, "Noncontrolling Interests in Consolidated Financial Statements: An Amendment of ARB No. 51", requires that the amount of equity interest provided by outside shareholders of subsidiaries that are not 100% owned by the parent company requires this amount be shown as A. noncontrolling interest in the liabilities section of the balance sheet B minority interest in the "mezzanine" section of the balance sheet between liabilities and owners' equity C. noncontrolling interest in the equity section of the balance sheet D. minority interest in the equity section of the balance sheet.
C. noncontrolling interest in the equity section of the balance sheet.
Cirrus Inc. purchased certain plant assets under a deferred payment contract. The agreement was to pay $40,000 per year for ten years. The plant assets should be valued at A. $400,000. B. $400,000 plus imputed interest. C. present value of $40,000 annuity for ten years at an imputed interest rate. D. future value of $40,000 annuity for ten years at an imputed interest rate.
C. present value of $40,000 annuity for ten years at an imputed interest rate.
Under the provision of FASB ASC Topic 825 (Financial Instruments) A. the election of the fair value option for investment securities classified as available for sale securities would result in unrealized gains an losses on those securities being included in other comprehensive income. B. the election of the fair value option for investment securities classified as trading securities would result in unrealized gains and losses on these securities being included in other comprehensive income. C. the election of the fair value option for investment securities classified as held to maturity securities would result in unrealized gains and losses on these securities being included in earnings in the income statement. D. the election of the fair value option for investment securities currently classified as trading, available for sale, or held to maturity is not available and can only be applied to new securities that an entity purchases.
C. the election of the fair value option for investment securities classified as held to maturity securities would result in unrealized gains and losses on these securities being included in earnings in the income statement.
If the lessee and the lessor use different interest rates to account for a capital lease, then A. the lease will never be accounted for as a capital lease by the lessee. B. total expenses (or revenues) will be equal for both lessee and lessor. C. total expenses (or revenues) will be different for the lessee and the lessor. D. GAAP has been violated since the lessor and the lessee are not allowed to use different interest rates in accounting for capital leases.
C. total expenses (or revenues) will be different for the lessee and the lessor.
Eli Corporation issued $200,000 of 10-year bonds on January 1. The bonds pay interest on January 1 and July 1 and have a stated rate of 10 percent. If the market rate of interest at the time the bonds are sold is 8 percent, what will be the issuance price of the bonds? A. $175,078 B. $211,283 C. $215,902 D. $227,183
D. $227,183
When a company replaces an old asphalt roof on its plant with a new fiberglass insulated roof, which of the following types of expenditure has occurred? A. Ordinary repairs and maintenance B. Addition C. Rearrangement D. Betterment
D. Betterment
Which of the following is true regarding the provisions of International Accounting Standard No. 39, "Financial Instruments: Recognition and Measurement (amended 2005)? A. IAS No. 39 applies only to financial assets. B. IAS No. 39 applies only to financial liabilities C. IAS No. 39 applies only to accounting for derivatives and loans and receivables. D. IAS No. 39 applies to both financial assets and financial liabilities.
D. IAS No. 39 applies to both financial assets and financial liabilities.
Which of the following depreciation methods is computed in the same way as depletion? A. Straight line B. Sum of the years digits C. Double declining balance D. Productive output
D. Productive output
When a company purchases land with a building on it and immediately tears down the building so that the land can be used for the construction of a plant, the costs incurred to tear down the building should be A. amortized over the estimated time period between the tearing down of the building and the completion of the plant. B. expensed as incurred. C. added to the cost of the plant. D. added to the cost of the land.
D. added to the cost of the land.
The par value of common stock represents the A. liquidation value of the stock. B. book value of the stock. C. amount received by the corporation when the stock was originally issued. D. legal nominal value assigned to the stock.
D. legal nominal value assigned to the stock.
The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were A. less than current market value. B. greater than cost C. greater than book value. d. less than book value.
D. less than book value.
When bonds are redeemed by the issuer prior to their maturity date, any gain or loss on the redemption, if material, is A. amortized over the period remaining to maturity and reported as an extraordinary item in the income statement. B. amortized over the period remaining to maturity and reported as part of income from continuing operations in the income statement. C. reported in the income statement as an extraordinary item in the period of redemption. D. reported in the income statement as part of income from continuing operations in the period of redemption.
D. reported in the income statement as part of income from continuing operations in the period of redemption.