Exam 2
Which of the following statements regarding inventory accounting is false? A) The choice of method for allocating the cost of goods available for sale between ending inventory and cost of goods sold represents the major issue in inventory accounting. B) The input cost changes that occur after the purchase of inventory items in a current cost accounting system are recognized as unrealized holding gains. C) If the cost of inventory never changed, the FIFO, LIFO and weighted average cost flow would produce the same financial statement result. D) Although many firms use the LIFO cost flow assumption, there are no examples where the actual physical flow of units is also last-in, first-out.
D) Although many firms use the LIFO cost flow assumption, there are no examples where the actual physical flow of units is also last-in, first-out
When troubled debt is restructured via continuation with modification of debt terms, the original loan is: A) continued but interest and principal payments may be reduced or eliminated. B) continued but the repayment schedule may be extended over a longer time period. C) continued but the amount of collateral securing the loan is increased. D) cancelled and a new loan agreement is signed
D) cancelled and a new loan agreement is signed
The major issue in inventory accounting is A) determining whether to take inventory using cycle counts instead of counting all inventory only at the end of the year. B) deciding whether to maintain records on a periodic or perpetual basis. C) determining what goods to include in inventory. D) choosing the method for allocating goods available for sale to ending inventory and cost of goods sold.
D) choosing the method for allocating goods available for sale to ending inventory and cost of goods sold
51) The use of the lower of cost or net realizable value (LCNRV) method to value inventory for reporting purposes employs the accounting principle of: A) cost-benefit. B) matching. C) historical cost. D) conservatism.
D) conservatism
Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor's implicit lease rate, known to the lessee, is 10%. The lessor and the lessee use ASC 842 guidelines for lease accounting. Present value interest factors are: 10% 12% PV factor of $1 for 10 periods 0.38554 0.32197 PV factor for ordinary annuity for 10 periods 6.14457 5.65022 The Pepper lease is a(n): A) operating lease because ownership does not automatically transfer to the lessee at the end of the lease term. B) short-term lease because the lease value is less than the fair value of the asset. C) operating lease because the asset reverts to Blue at the end of the lease. D) finance lease because the lease term covers the major part of the economic life of the asset
D) finance lease because the lease term covers the major part of the economic life of the asset
When a specific account receivable is written off, the entry A) increases net income. B) decreases net income. C) can either decrease or increase net income. D) has no effect on net income.
D) has no effect on net income
Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus $8,000 accrued interest. On October 1, 20X1. Island and Mutual Bank execute an agreement whereby Island will pay Mutual $128,000 on the due date of the note on October 1, 20X3. Island will record this transaction to recognize: A) a debt restructuring gain of $20,000. B) a debt restructuring loss of $20,000. C) a debt restructuring gain of $8,000. D) neither a gain nor a loss from debt restructuring
D) neither a gain nor a loss from debt restructuring
To adjust for distortions that arise from off-balance sheet leases when comparing among firms, analysts relied on A) the balance sheet. B) the income statement. C) the statement of stockholders' equity. D) required note disclosures.
D) required note disclosures
Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray's incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray believes that the equipment has a 10-year service life but has reason to suspect that a major overhaul might be required in the fifth to seventh year. Since this is the first year of the equipment's production, Ray warrants equipment for eight full years anyway. On Ray's books, this lease is treated as a(n): A) operating lease. B) short-term lease. C) finance capital lease. D) sales-type capital lease.
D) sales-type capital lease
When an asset's fair value has increased and a firm elects the revaluation method, A) the amount of the necessary write-up is credited to a contra-asset account called revaluation surplus. B) subsequent depreciation is based on the asset's original cost. C) under U.S. GAAP, the accumulated depreciation account is removed and the revalued amount becomes the new book value. D) under IFRS, the accumulated depreciation account is removed and the revalued amount becomes the new book value
D) under IFRS, the accumulated depreciation account is removed and the revalued amount becomes the new book value
Which of the following is not part of the IFRS revaluation rules for tangible long-lived assets? A) A company can elect to revalue individual assets. B) If a company elects to revalue any assets, all assets of a similar class must be revalued. C) Once assets are revalued, they must be kept up to date through regular reassessments. D) If an asset is written up, the revaluation surplus account must be reclassified each year to retained earnings
A) A company can elect to revalue individual assets
Which one of the following items would be charged to the cost of a building rather than the cost of land? A) Architectural fees. B) Grading of land. C) Demolition of an existing structure. D) Cost of hauling material from a demolished structure.
A) Architectural fees
Which of the following is an accurate statement regarding testing for impairments of tangible assets and amortizable intangible assets? A) Assets may be tested as a group if they are used in combination with other assets in the group. B) Assets are to be tested only as individual assets. C) Assets may be tested as a group only if they were purchased as a group. D) Assets need not to be tested for impairment annually
A) Assets may be tested as a group if they are used in combination with other assets in the group
Which of the following statements regarding inventory accounting is false? A) By charging the oldest costs to the income statement, LIFO automatically includes in income any holding gains on the units that are sold. B) Under either FIFO or LIFO it is not possible to simultaneously reflect both the balance sheet inventory and cost of goods sold at current cost. C) When purchases and sales occur continuously, the costs incurred most recently will be virtually identical to current replacement cost so LIFO provides a good match between current costs and current revenues. D) To get the most recent prices into cost of goods sold, a company using LIFO will use the periodic inventory system, rather than a perpetual system, to compute its ending inventory and cost of goods sold.
A) By charging the oldest costs to the income statement, LIFO automatically includes in income any holding gains on the units that are sold
When the differences in useful lives of long-lived assets reflect real economic differences, the attempt on the part of financial analysts to undo these differences may: A) impede profit and loss comparisons. B) enhance profit comparisons. C) enhance profit comparisons, but impede loss comparisons. D) enhance profit and loss comparisons.
A) impede profit and loss comparisons
Analysts must be aware that with the use of absorption costing, as inventory absorbs more fixed costs, reported net income tends to: A) increase. B) decrease. C) remain the same. D) become highly volatile.
A) increase
Floating-rate debt is the most common method for lenders to protect themselves from losses that may arise as a result of: A) increases in the market interest rate. B) decreases in the market interest rate. C) increases in the stated interest rate on bonds. D) decreases in the stated rate on bonds.
A) increases in the market interest rate
As a firm liquidates old LIFO layers of inventory, the lower costs of the LIFO layers are matched against current sales dollars resulting in a profit margin that is: A) inflated. B) deflated. C) lower than normal. D) always the same as under FIFO.
A) inflated
Financial analysts recognize that the deficiency of the FIFO cost flow assumption is the failure to A) match current costs with current revenues. B) match current costs with oldest revenues. C) match oldest costs with current revenues. D) match oldest costs with oldest revenues.
A) match current costs with current revenues
To preclude firms from generating artificial gains on exchange transactions being recorded at fair value, U.S. GAAP requires that the transaction: A) must possess commercial substance. B) have future cash flows that remain substantially the same. C) be reviewed and approved by the SEC. D) All of these answer choice criteria must be met to book an exchange transaction at the fair value of the exchanged assets.
A) must possess commercial substance
When a lessee has a finance lease under ASC 842, the amount shown for the asset and the amount shown for the related liability are equal A) only at the lease inception. B) throughout the life of the lease. C) only at the termination of the lease. D) throughout the life of the lease, but only when there is an unguaranteed residual value
A) only at the lease inception
Consistent with ASC Topic 842, the amortization of the right-to-use asset fluctuates for a(n) A) operating lease. B) financing lease. C) short-term lease. D) amortization tends to fluctuate for all types of leases.
A) operating lease
An impairment loss is reported on the income statement as: A) part of income from continuing operations. B) an extraordinary item. C) part of income from discontinued operations. D) an accounting change.
A) part of income from continuing operations
Blume Corporation leases equipment for a ten-month period. The entire related lease payment is due at the end of the ten-month period. The journal entry to recognize the monthly accrual related to the lease will include a debit to: A) short-term lease expense. B) accrued lease expense. C) leased equipment. D) interest expense.
A) short-term lease expense
The Fair value adjustment—accounts receivable account is an asset valuation account A) that would be adjusted upward or downward as fair values change and as the receivables are collected. B) that is created when fair value accounting is adopted but is not subsequently adjusted. C) that can only be adjusted downward. D) that is unaffected by the subsequent collection of receivables.
A) that would be adjusted upward or downward as fair values change and as the receivables are collected
Goods held on consignment are included in the inventory valuation of: A) the consignor. B) the consignee. C) both the consignor and the consignee. D) neither the consignor nor the consignee
A) the consignor
When a financial analyst adjusts a company's reported depreciation expense to improve comparisons of profitability with another firm that uses the same depreciation method, the analyst assumes all of the following to be true except that: A) the useful lives differences are "real". B) the dollar breakdown within asset categories is similar for both firms (i.e., both have similar amounts of buildings vs. leasehold improvements, etc.). C) salvage value proportions are roughly equivalent for both firms. D) the useful life differences are artificial.
A) the useful lives differences are "real"
92) When two companies exchange products to facilitate sales to customers and the exchange also includes a cash payment, which of the following is the proper treatment of the transaction by the recipient of the cash? A) No gain or loss is recorded. B) A portion of any gain is recorded. C) The inventory received is recorded at the same value as the inventory relinquished. D) All the cash received is recognized as a gain
B) A portion of any gain is recorded
Which of the following statements regarding inventory accounting is false? A) IFRS requires the use of absorption costing. B) Both U.S. GAAP and IFRS apply lower of cost or market in the same manner when accounting for inventory. C) IFRS permits inventory reductions due to lower of cost or market write-downs to be reversed if the market recovers. D) Since the use of LIFO is not allowed under IFRS, inventory holding gains are included in income.
B) Both U.S. GAAP and IFRS apply lower of cost or market in the same manner when accounting for inventory
If a lease contains a residual value guarantee, the lessee must: A) add the guaranteed amount to the present value of the minimum lease payments. B) add the present value of the guaranteed amount to the present value of the minimum lease payments. C) include the guaranteed amount in the minimum lease payments only if the lessee intends to keep the asset at the end of the lease. D) ignore the guaranteed amount if the lessee intends to keep the asset at the end of the lease.
B) add the present value of the guaranteed amount to the present value of the minimum lease payments
Accounts receivables initially are recognized at A) the present value of the related future cash flows. B) amortized cost. C) net realizable value. D) the future value.
B) amortized cost
Research evidence suggests that A) companies increase their allowance for credit losses when earnings are otherwise low and then decrease the provision when earnings are high. B) companies reduce their allowance for credit losses when earnings are otherwise low and then increase the provision when earnings are high. C) companies reduce their allowance for credit losses when earnings are otherwise high and then increase the provision when earnings are low. D) companies increase their allowance for credit losses when earnings are otherwise high and then decrease the provision when earnings are low.
B) companies reduce their allowance for credit losses when earnings are otherwise low and then increase the provision when earnings are high
When firms dispose of a long-lived asset by selling it before the end of its useful life, the difference between the net book value of the asset and the disposition proceeds is a/an: A) cost of goods gain or loss. B) gain or loss from continuing operations. C) gain or loss from a discontinued item. D) gain or loss from a prior period
B) gain or loss from continuing operations
The LIFO reserve disclosure is required because LIFO inventory costs are: A) higher than FIFO inventory costs. B) lower than FIFO inventory costs. C) equal to FIFO inventory costs. D) usually of no consequence.
B) lower than FIFO inventory costs
GAAP establishes specific criteria for the treatment of leases under ASC 842. If any of the criteria are met, the lessee A) must treat the lease as an operating lease. B) must treat the lease as a finance lease. C) may choose the treatment if two or less criteria are met. D) may elect to treat the lease as an operating lease if only one criterion is met.
B) must treat the lease as a finance lease
Over the lease term, the total income derived from a lease is _______ if the lease is classified as a sales-type lease instead of an operating lease. A) higher B) the same C) lower D) depends on the interest rate applied to the lease
B) the same
Island Corporation owes Mutual Bank a 10% note payable for $100,000 plus $8,000 accrued interest. On October 1, 20X1. Island and Mutual Bank execute an agreement whereby Island will pay Mutual $128,000 on the due date of the note on October 1, 20X3. What effective interest rate will Mutual Bank use for the restructured note? A) 8.7% B) 8.9% C) 10.0% D) 13.1%
C) 10.0%
Which one of the following is an example of an aggressive revenue recognition policy? A) A firm recognizes revenue at time of collection. B) A firm recognizes revenue at the expiration of the sales returns period. C) A firm with a liberal sales return policy recognizes revenue at shipment. D) A firm with a liberal sales return policy recognizes revenue at shipment with a corresponding allowance for returns and allowances.
C) A firm with a liberal sales return policy recognizes revenue at shipment
Which of the following statements is not correct regarding amortization when using the effective interest method (basis)? A) Amortization of discount on bonds payable (bond discount) increases in later years relative to earlier years of a bond's life. B) Amortization of premium on bonds payable (bond premium) increases in later years relative to earlier years of a bond's life. C) Amortization of both premium on bonds payable (bond premium) and discount on bonds payable (bond discount) decreases in later years relative to earlier years of a bonds life. D) Amortization of discount on bonds payable (bond discount) results in an increase in interest expense and in an increase in the bond's carrying value.
C) Amortization of both premium on bonds payable (bond premium) and discount on bonds payable (bond discount) decreases in later years relative to earlier years of a bonds life
Amortization of discount on bonds payable (bond discount) results in which of the following? A) A decrease in bond interest expense. B) An increase in net income. C) An increase in the carrying value of the bond. D) An increase in stockholders' equity due to the decrease in bond interest expense
C) An increase in the carrying value of the bond
Financial analysts can make comparisons between the long-lived assets of two companies, both of which use straight-line depreciation, by computing the average useful life of assets with which one of the following formulas? A) Net depreciable property, plant, and equipment/average useful life. B) Gross depreciable property, plant, and equipment/average useful life. C) Gross depreciable property, plant, and equipment/straight-line depreciation expense. D) Straight-line depreciation expense/net depreciable property, plant, and equipment.
C) Gross depreciable property, plant, and equipment/straight-line depreciation expense
According to U.S. GAAP, technological feasibility is established when an entity has completed all of the following activities necessary to establish that a product can be produced, except: A) Coding. B) Designing. C) Measuring. D) Planning.
C) Measuring
Which of the following statements regarding inventory accounting is true? A) FIFO charges the most recent costs against revenues on the income statement. B) In the U.S., FASB prefers replacement cost accounting because it records holding gains on the financial statements as they arise. C) The primary difference between FIFO and LIFO is that each method makes a different choice regarding which financial statement element is shown at the out-of-date cost. D) The specific identification method of inventory accounting is generally considered to be the most prevalent.
C) The primary difference between FIFO and LIFO is that each method makes a different choice regarding which financial statement element is shown at the out-of-date cost
Theta Company has prepared to sell bonds with a stated rate of 6% when the market rate is 5%. These bonds will sell in the market at: A) par. B) a discount. C) a premium. D) stated value
C) a premium
The determining factor for accounting treatment of a troubled debt restructuring when there is a continuation with modification of terms is whether: A) there is a gain or loss on the transaction to the debtor. B) there is a gain or loss on the transaction to the lender. C) the undiscounted sum of the future cash flows under the restructured note is above or below the note's carrying value (including accrued interest) at the restructuring date. D) the discounted sum of the future cash flows under the restructured note is above or below the note's carrying value (including accrued interest) at the restructuring date.
C) the undiscounted sum of the future cash flows under the restructured note is above or below the note's carrying value (including accrued interest) at the restructuring date
Which of the following does not describe a difference between ASC 842 and IFRS16? A) IFRS allows some right-of-use assets to be carried at fair value. B) IFRS does not provide for operating leases. C) IFRS permits early adoption only if firms have adopted IFRS 15, the new revenue recognition standard. D) ASC 842 limits the recognized gain to that of the residual interest retained by the buyer-lessor
D) ASC 842 limits the recognized gain to that of the residual interest retained by the buyer-lessor
Which of the following is not an accurate description of the controversies surrounding the fair value accounting option? A) Advocates argue that accounting-induced volatility is eliminated and financial statement transparency is improved. B) Critics argue that opportunities are enhanced for companies to manipulate their earnings and balance sheet. C) Critics argue that companies that can use the fair value option in situations where there is not necessarily a relationship between the financial assets and liabilities which promotes the opportunity to manage earnings. D) Advocates argue that financial reporting is more accurate and transparent for those companies in financial distress.
D) Advocates argue that financial reporting is more accurate and transparent for those companies in financial distress
Under ASC 842, over the life of a lease, the amount charged to expense is: A) greater for an operating lease. B) greater for a finance lease. C) the same for a finance or operating lease. D) less for a finance lease.
C) the same for a finance or operating lease
U.S. GAAP for long-lived assets significantly impedes rate-of-return comparisons across companies unless the firms: A) apply the same depreciation methods and the same useful lives among similar groups of assets. B) market their products to the same customers. C) are of approximately the same size. D) have similar operating cycles.
A) apply the same depreciation methods and the same useful lives among similar groups of assets
When interest rates have increased and bonds are retired before maturity, market value is: A) below book value generating an accounting gain. B) below book value generating an accounting loss. C) above book value generating an accounting gain. D) above book value generating an accounting loss
A) below book value generating an accounting gain
Morey Corporation leases a tractor from Equity Leasing with a five-year non-cancelable lease on January 1, 20X1 under the following terms: 1. Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year. 2. The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor. 3. The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term. 4. The tractor has a six-year economic life. 5. Morey has an excellent credit rating. 6. Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer Which of the following entries will Morey prepare to record the lease of the tractor on January 1, 20X1? A) DR Right-of-use asset 102,607.95CR Finance lease liability 102,607.95 B) DR Right-of-use asset 131,898.70CR Cash 26,379.74CR Finance lease liability 105,518.96 C) DR Right-of-use asset 131,898.70CR Cash 131,898.70 D) DR Rent expense 26,379.74CR Cash 26,379.74
A) DR Right-of-use asset 102,607.95CR Finance lease liability 102,607.95
Smith Company is a manufacturer of medical devices and has an excellent quality control department, thus defective product returns are rare. In 20X1, Smith reported sales of $276,344,000. The company did, however, have two returns in 20X1 related to the wrong product model being shipped. Smith's 20X1 journal entry to record a $37,500 return from a customer (Foxtrot Medical) would be: A) DR Sales returns and allowances $37,500 CR Accounts receivable—Foxtrot Medical $37,500 B) DR Sales returns and allowances $37,500 CR Sales $37,500 C) DR Sales $37,500 CR Accounts receivable—Foxtrot Medical $37,500 D) DR Sales returns expense $37,500 CR Accounts receivable—Foxtrot Medical $37,500
A) DR Sales returns and allowances $37,500 CR Accounts receivable—Foxtrot Medical $37,500
Which of the following statements is true regarding sales returns and allowances? A) Ignoring estimated future returns and allowances has a minimal impact on reported earnings when the amount of actual returns and allowances is not material and does not vary greatly from year-to-year. B) The sales returns and allowances account is a contra-asset account. C) When sales returns occur, they should be debited to the sales account. D) Estimated sales returns and allowances are often material in relation to accounts receivable.
A) Ignoring estimated future returns and allowances has a minimal impact on reported earnings when the amount of actual returns and allowances is not material and does not vary greatly from year-to-year
Which of the following statements is true regarding a troubled debt restructuring? A) In a troubled debt restructuring, there is a lack of symmetry in the financial reporting of the borrower and lender. B) A troubled debt restructuring can only be accomplished through a continuation with modification of debt terms including cancelation of the original loan and execution of a new loan agreement. C) In a troubled debt restructuring, GAAP restructuring gains and losses for accounting are equal to real economic gains and losses for the companies involved. D) All accounting aspects of a troubled debt restructuring are explicitly covered by IFRS.
A) In a troubled debt restructuring, there is a lack of symmetry in the financial reporting of the borrower and lender
On January 1, 20X1, Lessee Corporation entered into a ten-year lease agreement. The lease terms required annual year-end payments of $160,000. The lease agreement does not contain either a bargain purchase option or a transfer of title. The fair value of the equipment at the inception of the lease was $1,100,000; estimated life of the leased assets was fourteen years. Lessee Corporation's incremental borrowing rate was 10%; the implicit rate of interest, known to the lessee, was 12%. Applicable time value of money values are as follows: Ten-year, 10% ordinary annuity 6.144 Ten-year, 12% ordinary annuity 5.650 Ten-year, 10% annuity due 6.759 Ten-year, 12% annuity due 6.328 Lessee Corporation should classify this lease agreement as a(n): A) Operating lease B) Financing lease C) Short-term lease D) Sales-type lease
A) Operating lease
Which of the statements is not true when applying both IFRS and U.S. GAAP accounting for long-term debt? A) Periodic interest expense is computed using the contractual interest rate. B) Fixed-rate bonds are recorded at the amount of the net proceeds. C) The balance sheet carrying value is amortized cost determined using the effective interest rate at the issue date. D) Changes in interest rates after the issue date do not alter the carrying value unless fair value accounting is used.
A) Periodic interest expense is computed using the contractual interest rate
Which of the following is not a valid statement regarding floating-rate debt? A) The accounting entries are more complex due to the risk-sharing characteristics of floating rate debt. B) Floating-rate debt may benefit the issuing company if market rates fall. C) Floating-rate debt can protect the investor if market rates increase. D) Floating-rate debt is used to lower the company's overall borrowing cost
A) The accounting entries are more complex due to the risk-sharing characteristics of floating rate debt
Regan, Inc. implemented a program to improve the collection of its receivables. Over the past two years, the company has collected 88% of its receivables, up from 80%. A review of the company's financial statements would be expected to show: A) a reduction in the percentage of the allowance for credit losses to receivables. B) an increase in the percentage of the allowance for credit losses to receivables. C) no difference in the percentage of the allowance for credit losses to receivables. D) None of these answer choices are correct.
A) a reduction in the percentage of the allowance for credit losses to receivables
Information about credit quality, amortization cost by credit quality indicator for the prior five years and in the aggregate, and the methodology for estimating credit losses must be disclosed for A) all receivables reported at amortized cost B) only receivables expected to be collected within one year C) only receivables expected to be collected over a period exceeding one year D) only interest-bearing notes
A) all receivables reported at amortized cost
Unequal lease payments relating to an operating lease should be A) allocated equally to expense over the lease term. B) expensed when paid. C) allocated based on the utility of the asset. D) used to adjust the lease liability.
A) allocated equally to expense over the lease term
For a firm using LIFO, the numerator of the inventory turnover ratio is predominantly current period costs: A) and the denominator consists of old LIFO costs. B) and it must be adjusted to conform to the old LIFO costs in the denominator. C) and the denominator must be adjusted by adding the LIFO reserve to ending inventory. D) and the denominator must be adjusted by subtracting the LIFO reserve from both beginning and ending inventory.
A) and the denominator consists of old LIFO costs
Frank Ritter, Inc. enters into an arrangement with Hisker Enterprises whereby Hisker will assume $100,000 of Ritter's receivables for a 6% fee. These receivables have a related allowance for credit losses of $3,500. Assume that the transaction was a factoring arrangement with recourse and included a holdback of $6,000. If the fair value of the recourse obligation is equal to the allowance of $3,500, which one of the following entries will Ritter make to record this transaction? A) DR Cash $100,000 DR Allowance for credit losses 3,500 CR Accounts receivable $100,000 CR Recourse obligation 3,500 B) DR Cash $88,000 DR Loss on sale of receivables 6,000 DR Allowance for credit losses 3,500 DR Due from Hisker Enterprises 6,000 CR Accounts receivable $100,000 CR Recourse obligation 3,500 C) DR Cash $88,000 DR Loss on sale of receivables 12,000 CR Accounts receivable $100,000 D) DR Cash $88,000 DR Loss on sale of receivables 12,000 CR Due to Hisker Enterprises $100,000
B) DR Cash $88,000 DR Loss on sale of receivables 6,000 DR Allowance for credit losses 3,500 DR Due from Hisker Enterprises 6,000 CR Accounts receivable $100,000 CR Recourse obligation 3,500
Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor's implicit lease rate, known to the lessee, is 10%. The lessor and the lessee use ASC 842 guidelines for lease accounting. Present value interest factors are: 10% 12% PV factor of $1 for 10 periods 0.38554 0.32197 PV factor for ordinary annuity for 10 periods 6.14457 5.65022 If the equipment is worth $12,500 at the end of the lease, Pepper will make which one of the following journal entries? A) DR Finance lease liability 12,500CR Right-to-use asset 12,500 B) DR Finance lease liability 10,000CR Right-to-use asset 10,000 C) DR Finance lease liability 10,000CR Lease amortization 10,000 D) No entry required.
B) DR Finance lease liability 10,000CR Right-to-use asset 10,000
Which of the following is not a difference between U.S. GAAP and IFRS treatment of impaired assets? A) The use of discounted cash flow. B) Due to differences, U.S. GAAP may trigger an impairment loss that would not be triggered by IFRS. C) The right to reverse prior impairment losses when there is a change in the estimates used to measure the loss. D) In determining the valuation, costs to sell are deducted from fair value.
B) Due to differences, U.S. GAAP may trigger an impairment loss that would not be triggered by IFRS
Using the effective interest method, amortization of a discount or premium behave in this manner over the life of the outstanding bonds. A) Increase for premium bond, decrease for discounted bond B) Increase for premium bond, increase for discounted bond C) Decrease for premium bond, decrease for discounted bond D) Decrease for premium bond, increase for discounted bond
B) Increase for premium bond, increase for discounted bond
TAD, Inc. uses the LIFO-lower of cost or market method to value inventory. If the inventory value is replacement cost, which one of the following statements is true? A) Historical cost is less than replacement cost. B) Replacement cost is greater than net realizable value less a normal profit margin. C) Replacement cost is greater than historical cost. D) Net realizable value is greater than historical cost
B) Replacement cost is greater than net realizable value less a normal profit margin
Which of the following does not represent guidance for assets held for sale? A) They are reported in the discontinued section of the income statement. B) They are reported at the lower of book value or fair value. C) They are expected to be sold within one year. D) They are reported at the lower of book value or fair value less costs to sell.
B) They are reported at the lower of book value or fair value
Which of the following statements regarding inventory accounting is false? A) Under U.S. GAAP, the cost flow assumption does not need to conform to the actual flow of the goods. B) Under U.S. GAAP, current cost (replacement cost) accounting may be used at the discretion of management with proper disclosure C) The FIFO method of inventory valuation assumes that the first unit purchased is the first unit sold. D) The weighted average cost flow assumption generates numbers that are between the LIFO and FIFO assumptions
B) Under U.S. GAAP, current cost (replacement cost) accounting may be used at the discretion of management with proper disclosure
A lessor mistakenly treated a sales-type lease without manufacturing profit as an operating lease (the lessor uses straight-line depreciation). How does this mistake impact the following at the end of the first year of the lease term? Net Income and Interest Revenue: A) Overstated and Understated B) Understated and Understated C) Overstated and Overstated D) Understated and Overstated
B) Understated and Understated
Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray's incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray believes that the equipment has a 10-year service life but has reason to suspect that a major overhaul might be required in the fifth to seventh year. Since this is the first year of the equipment's production, Ray warrants equipment for eight full years anyway. Ford uses which one of the following interest rates to record this lease? A) Use 9.0% because it is the lessee's incremental borrowing rate. B) Use 10.0% because it is the implicit lease rate of return to the lessor. C) Use 8.5% because it is the lesser of the implicit rate and Ray's incremental borrowing rate. D) Use 9.0% because it is the lesser of the implicit rate and Ford's incremental borrowing rate.
B) Use 10.0% because it is the implicit lease rate of return to the lessor
When the market rate of interest is below the stated rate of interest, a bond sells at: A) par. B) a premium. C) a discount. D) stated value.
B) a premium
When a bond is sold at a discount the effective interest rate is: A) equal to the stated rate. B) above the stated rate. C) below the stated rate. D) equal to the stated rate for a period of time and then above the stated rate for a period of time.
B) above the stated rate
Consistent with ASC Topic 842, operating lease expense is equal to A) the amortization expense recognized for financing leases. B) the interest expense recognized for financing leases. C) the lease expense that would have been recognized if classified as a short-term lease. D) the amortization expense recognized if the asset had been purchased by lessee.
C) the lease expense that would have been recognized if classified as a short-term lease
Inventory turnover distortion under LIFO inventory costing may be adjusted by: A) adding the LIFO reserve amounts to cost of goods sold and adjusting beginning and ending inventory for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs. B) subtracting the LIFO reserve amounts from cost of goods sold and adjusting beginning and ending inventory for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs. C) adding the LIFO reserve amounts to beginning and ending inventory and adjusting cost of goods sold for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs. D) subtracting the LIFO reserve amounts from beginning and ending inventory and adjusting cost of goods sold for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs.
C) adding the LIFO reserve amounts to beginning and ending inventory and adjusting cost of goods sold for pre-tax LIFO liquidation profits whenever LIFO liquidation occurs
The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on: A) the severity of input cost changes. B) the rapidity of physical inventory turnover. C) both the severity of input cost changes and the rapidity of physical inventory turnover. D) the rate of inflation.
C) both the severity of input cost changes and the rapidity of physical inventory turnover
Research findings almost uniformly indicate that existing U.S. GAAP for both R&D and software development is: A) satisfactory as written. B) objective. C) conservative. D) liberal.
C) conservative
Net realizable value of receivables is gross receivables minus A) provision for credit losses and sales returns. B) provision for credit losses and estimated returns and allowances. C) estimated provision for credit losses and estimated returns and allowances. D) proven credit losses and estimated returns and allowances.
C) estimated provision for credit losses and estimated returns and allowances
The carrying cost of inventory should include all the following costs except: A) purchase costs. B) sales taxes and transportation costs paid by the purchaser. C) general administrative costs associated with the purchase of inventory. D) insurance and storage costs.
C) general administrative costs associated with the purchase of inventory
The dominant method under GAAP for measuring long-lived assets is the: A) expected benefit approach. B) discounted present value approach. C) historical cost approach. D) replacement cost approach.
C) historical cost approach
The mechanics of absorption costing can lead to year-to-year income changes: A) whenever inventory levels remain fairly constant. B) if the productivity of factory workers improves. C) if production and sales levels are not the same. D) when raw material prices are increasing.
C) if production and sales levels are not the same
If a bank sells a mortgage portfolio at a price that yields the purchasers a return that is lower than the average yield on the mortgages in the portfolio, the selling price: A) is equal to the carrying value of the mortgages on the bank's books. B) is lower than the carrying value of the mortgages on the bank's books. C) is higher than the carrying value of the mortgages on the bank's books. D) cannot be determined by examining the carrying value of the mortgages on the bank's books because the selling price is determined purely by the market.
C) is higher than the carrying value of the mortgages on the bank's books
Noncurrent monetary liabilities are initially recorded at their: A) future value. B) historical value. C) present value when incurred. D) undiscounted amount due.
C) present value when incurred
Salt Corporation issues bonds with a face amount of $10 million and a stated interest rate of 8%. The market interest rate associated with the bonds is 6%. Bond issue costs are $200,000. The bond issue costs should be recognized as a: A) deferred charge. B) period expense. C) reduction of the bond premium. D) bond discount.
C) reduction of the bond premium
Evaluation and testing for impairment assessments of indefinite-lived intangible assets: A) follows the same process as required for impairment evaluation and testing for tangible assets. B) requires only assessment of qualitative factors. C) requires a quantitative impairment test if, after a qualitative assessment, it is more likely than not that the asset is impaired. D) requires a two-step process to be completed for all impairment assessments
C) requires a quantitative impairment test if, after a qualitative assessment, it is more likely than not that the asset is impaired
Blue Manufacturing produces lathes at an inventory cost of $25,000 each that sell for $32,000 each. For credit-approved customers, Blue leases the lathes for $8,500 per year for five years. The lathes are guaranteed to last four years and generally have a six-year life. Collection is predictable and reasonably assured. Additionally, the lessor is aware of all costs to be incurred under the lease that will not be reimbursed by the lessor. Blue Manufacturing treats a lathe lease as a(an) A) operating lease. B) short-term lease. C) sales-type lease. D) direct-financing lease.
C) sales-type lease
The size of the divergence between FIFO cost of goods sold and replacement cost of goods sold depends on the rapidity of the inventory turnover and the: A) change in accounts receivable turnover. B) divergence of total asset turnover from previous periods. C) severity of input cost change. D) rapidity of fixed asset turnover.
C) severity of input cost change
Under IFRS, when an asset is revalued upward, subsequent depreciation is based on: A) the asset's original cost. B) the method used for determining depreciation on the company's tax returns. C) the asset's revaluation net book value which is the fair value at the time of revaluation. D) the amount of future cash flows the asset is expected to generate
C) the asset's revaluation net book value which is the fair value at the time of revaluation
Presume that an asset exchange transaction does not culminate an earning process and that the transaction does not involve cash. In such a case: A) a gain will be recognized only when the fair value of the acquired assets exceeds the book value of the relinquished assets. B) a loss will be recognized only when the fair value of the acquired assets exceeds the book value of the relinquished assets. C) the assets acquired are recorded at the book value of the assets relinquished D) a gain will be recognized only when the fair value of the acquired assets exceeds the fair value of the relinquished assets.
C) the assets acquired are recorded at the book value of the assets relinquished
Jones Co. sells on credit and maintains an allowance for credit losses equal to 2% of the company's total $3,450,000 receivables balance as an estimate of accounts eventually becoming actually uncollectible. Due to a cash shortfall, Jones sells $275,000 of its receivables with recourse to Ninth National Bank and the bank withholds $12,000 from the factoring proceeds to cover possible noncollections. At the time of discounting, the $12,000 was agreed upon as a reasonable estimate and there was no recourse obligation recorded. If the noncollections eventually amount to $15,000, the entry on Jones' books when notified of this fact would be: A) DR Allowance for credit losses $3,000 CR Accounts receivable (specific customers) $3,000 B) DR Allowance for credit losses $15,000 CR Accounts receivable (specific customers) $15,000 C) DR Credit loss expense $3,000 CR Cash $3,000 D) DR Allowance for credit losses $15,000 CR Due from Ninth National Bank $12,000 CR Cash 3,000
D) DR Allowance for credit losses $15,000 CR Due from Ninth National Bank $12,000 CR Cash 3,000
Which one of the following is an example of the expected benefit approach for valuing long-lived assets? A) Historical cost. B) Current replacement value. C) Salvage value. D) Discounted present value.
D) Discounted present value
In comparing firms in the same industry, which of the following does not present a challenge for analysts? A) Differences in estimates of useful lives. B) The age of the companies being compared. C) The use of different depreciation methods. D) Each of these answer choices presents a challenge for analysts
D) Each of these answer choices presents a challenge for analysts
The conversion of a LIFO inventory to approximate the inventory at FIFO is accomplished through application of which one of the following formulas? A) FIFO inventory = LIFO inventory × LIFO reserve B) FIFO inventory = LIFO inventory ÷ LIFO reserve C) FIFO inventory = LIFO inventory − LIFO reserve D) FIFO inventory = LIFO inventory + LIFO reserve
D) FIFO inventory = LIFO inventory + LIFO reserve
Which of the following statements with respect to floating-rate debt is incorrect? A) If the market rate of interest increases, the market value of the floating-rate debt will remain the same. B) If the market rate of interest decreases, the cash interest payment required by the issuing company would decrease. C) If the market rate of interest increases, the investors benefit while the issuing corporation does not benefit. D) If the market rate of interest decreases, both the issuing company and the investors benefit
D) If the market rate of interest decreases, both the issuing company and the investors benefit
In assessing whether an exchange transaction has commercial substance, the firm's future cash flows are expected to change significantly as a result of the exchange. Which item below does not describe whether a significant change in cash flow is expected? A) The risk, timing and amount of the future cash flows differs significantly from the future cash flows of the asset transferred. B) The entity-specific value of the asset differs from that of the asset transferred. C) The difference between the entity-specific value of the asset(s) received and the entity-specific value of the asset(s) transferred is significant in relation to the fair values of the assets. D) Only the timing and amount of future cash flows is required to be significant - risk and entity-specific value are optional.
D) Only the timing and amount of future cash flows is required to be significant - risk and entity-specific value are optional
Similarities between U.S. GAAP and IFRS include which of the following? A) Both U.S. GAAP and IFRS permit the same cost flow assumptions. B) Inventory is carried at the lower of cost or net realizable value under both U.S. GAAP and IFRS. C) Direct costing is required under both U.S. GAAP and IFRS. D) The definition of inventory is similar in both U.S. GAAP and IFRS.
D) The definition of inventory is similar in both U.S. GAAP and IFRS
U.S. GAAP capitalizes expenditures to upgrade long-lived assets when the expenditure causes any of the following conditions except: A) The useful life of the asset is extended. B) The capacity of the asset is increased. C) The efficiency of the asset is increased. D) There is an increase in the non-economic benefits associated with owning the asset (such as an increase in the appearance of the company's offices).
D) There is an increase in the non-economic benefits associated with owning the asset (such as an increase in the appearance of the company's offices)
Which of the following statements regarding inventory accounting is false? A) Firms that use LIFO must disclose the dollar magnitude of the difference between LIFO and FIFO cost. B) The LIFO reserve disclosure requirement is intended to help investors compare LIFO versus FIFO firms in a meaningful manner. C) The formula to convert the cost of goods sold under LIFO to an estimate of the cost of goods sold under FIFO is: LIFO cost of goods sold minus increase in LIFO reserve equals FIFO cost of goods sold. D) U.S. GAAP prescribes a standardized format for disclosing the LIFO reserve.
D) U.S. GAAP prescribes a standardized format for disclosing the LIFO reserve
Which of the following statements regarding inventory accounting is true? A) Analysts should be aware that when a company uses absorption costing, reported income tends to decrease as inventory absorbs more of the fixed costs. B) Variable costing includes more than the variable costs of production in the valuation of inventory. C) When physical inventory levels are decreasing and a company uses the absorption cost method, net income tends to increase. D) When physical inventory levels are increasing and a company uses the absorption cost method, net income tends to increase.
D) When physical inventory levels are increasing and a company uses the absorption cost method, net income tends to increase
When certain kinds of assets are built that require public welfare and safety expenditures at the end of the asset's life, A) these estimated future expenditures are subtracted from the carrying value of the asset. B) these "asset retirement" costs are expensed when asset retirement occurs. C) this fact is only reported in the notes to the financial statements. D) a liability simultaneously arises for those future expenditures.
D) a liability simultaneously arises for those future expenditures
Consistent with ASC topic 326, expected credit losses are recognized as A) a reduction of the related revenue. B) an addition to cost of goods sold. C) an aggregated expense. D) a separately reported loss.
D) a separately reported loss
