Intermediate Accounting Exam 2

On June 1, Parson Assoc. sold equipment to Arleo and agreed to accept a 3-month, $50,000, 10% interest-bearing note in payment at a time when the prevailing rate of interest for similar transactions was 10%. When the note was collected upon maturity, Parson would recognize interest revenue of: Multiple Choice $3,750. $0 $2,500. $1,250.

$1,250 ($50,000 × 10% × 3/12)

Surgical Equipment: (Selling Price: $260) (Cost: $170) (Cost to Sell: $30) In applying the lower of cost or net realizable value rule, the inventory of surgical equipment would be valued at: Multiple Choice $240. $152. $230. $170.

$170 (NRV = $260 − $30 = $230. $170 which is the cost is less than the $230 net realizable value.)

Wilson Links Products sells a product that involves two separate performance obligations: the SwingRight golf club weight and the SwingCoach teaching software. SwingRight has a stand-alone selling price of $150. Wilson sells both the SwingRight and the SwingCoach as a package deal for $200. The SwingCoach software is not sold separately. Wilson is aware that other vendors charge $100 for similar software, and Wilson's prices are generally 10% lower than what is charged by those vendors. Wilson estimates that it incurs approximately $65 of cost per copy of the software, and usually charges 50% above cost on similar products.Estimate the stand-alone selling price of the software using the residual approach.

$50 (200-150)

Fulbright Corp. uses the periodic inventory system. During its first year of operations, Fulbright made the following purchases (listed in chronological order of acquisition): 40 units at $100 per unit 70 units at $80 per unit 170 units at $60 per unit Sales for the year totaled 270 units, leaving 10 units on hand at the end of the year. Ending inventory using the average cost method (rounded) is: Multiple Choice $650. $1,000. $707. $600.

$707

Surgical Supplies: (Selling price: $100). (Cost: $90) (Cost to Sell: $15) In applying the lower of cost or net realizable value rule, the inventory of surgical supplies would be valued at: Multiple Choice $90. $100. $75. $85.

$85. (NRV = $100 − $15 = $85$85 net realizable value is less than $90 cost.)

Wilson Links Products sells a product that involves two separate performance obligations: the SwingRight golf club weight and the SwingCoach teaching software. SwingRight has a stand-alone selling price of $150. Wilson sells both the SwingRight and the SwingCoach as a package deal for $200. The SwingCoach software is not sold separately. Wilson is aware that other vendors charge $100 for similar software, and Wilson's prices are generally 10% lower than what is charged by those vendors. Wilson estimates that it incurs approximately $65 of cost per copy of the software, and usually charges 50% above cost on similar products.Estimate the stand-alone selling price of the software using the adjusted market assessment approach.

$90

In a perpetual average cost system: Multiple Choice A new weighted-average unit cost is calculated each time additional units are purchased. The cost allocated to ending inventory is generally the same as it would be in a periodic inventory system. The moving-average unit cost is determined following each sale. The average is determined by dividing the total number of units sold by the cost of units purchased during the period.

A new weighted-average unit cost is calculated each time additional units are purchased.

Which of the following is true? Multiple Choice A projected benefits approach is used to determine the periodic pension expense. An accumulated benefits approach is used to determine the periodic pension expense. A vested benefits approach is used to determine the periodic pension expense. The pension expense is unrelated to the pension obligation.

A projected benefits approach is used to determine the periodic pension expense.

Explodia.com sells fireworks over the Internet. Customers access Explodia's website and select particular products, and Explodia refers the customer order to a fireworks manufacturer who fulfills the order, ships to the customer, and pays Explodia a 20% commission. What is explodia acting as?

Agent

Retrospective treatment of prior years' financial statements is required when there is a change from: Multiple Choice Average cost to FIFO. FIFO to average cost. LIFO to average cost. All of these answer choices are correct.

All of these answer choices are correct

When changing from the average cost method to FIFO, the company: Multiple Choice Provides a disclosure note explaining why the change to FIFO is preferable. Revises comparative financial statements. Records a journal entry to adjust the book balances from their current amounts to what those balances would have been using FIFO. All of these answer choices are correct.

All of these answer choices are correct.

Pension expense is decreased by: Multiple Choice Amortization of prior service cost. Amortization of net gain. Benefits paid to retired employees. Prior service cost.

Amortization of net gain.

The key elements of a defined benefit pension plan include each of the following except: Multiple Choice The pension expense. The plan assets. Amortized future benefits. The employer's obligation.

Amortized future benefits.

An argument against use of the lower of cost or net realizable value rule is its lack of: Multiple Choice Relevance. Reliability. Consistency. Objectivity.

Consistency.

Masterlink Co., in applying the lower of cost or market method, reports its inventory at net realizable value. Which of the following statements is correct? Multiple Choice NRV is greater than replacement cost. Cost is less than net realizable value. Cost is greater than net realizable value. Cost is less than NRV minus a normal profit margin.

Cost is greater than net realizable value.

The largest expense on a retailer's income statement is typically: Multiple Choice Salaries and wages. Cost of goods sold. Income tax expense. Depreciation expense.

Cost of goods sold

One difference between periodic and perpetual inventory systems is: Multiple Choice Cost of goods sold is not recorded under a perpetual system until the end of the period. Cost of goods sold is not recorded under a periodic system until the end of the period. Cost of goods sold is always significantly higher under a perpetual system. Cost of goods sold is always significantly higher under a periodic system.

Cost of goods sold is not recorded under a periodic system until the end of the period.

In a perpetual inventory system, the cost of inventory sold is: Multiple Choice Debited to accounts receivable. Credited to cost of goods sold. Debited to cost of goods sold. Not recorded at the time goods are sold.

Debited to cost of goods sold

Amortizing prior service cost for pensions and other postretirement benefit plans will: Multiple Choice Decrease retained earnings. Increase assets. Decrease assets. Decrease shareholders' equity.

Decrease Retained Earnings

Under the gross method, purchase discounts taken are:

Deducted from inventory purchased

Accounting for the pledging of accounts receivable as collateral for a loan requires: Multiple Choice Disclosure of the arrangement in notes to the financial statements. None of these answer choices are correct. Reporting the receivables net of the borrowed amount. Removal of the pledged receivables from current assets and including them with noncurrent investments.

Disclosure of the arrangement in notes to the financial statements.

Long-term interest-bearing notes receivable issued at an unrealistically low interest rate will be: Multiple Choice Discounted at an imputed interest rate. Recorded at the contract amount. Recorded at an amount equal to the future cash flows. Accounted for on the installment basis.

Discounted at an imputed interest rate.

A company's total obligation for postretirement benefits is measured by the: Multiple Choice APBO. HMOP. HOBO. EPBO.

EPBO.

With respect to delaying revenue recognition until completion of a long-term contract, it is the case that: Multiple Choice Estimated losses on the overall contract are recognized before the contract is completed. Expenses are recognized each period, but revenue is only recognized when the contract is completed. Use of this approach is not permitted under generally accepted accounting principles. Neither gains nor losses are recognized until the contract is completed.

Estimated losses on the overall contract are recognized before the contract is completed.

In a period when costs are rising and inventory quantities are stable, the inventory method that would result in the highest ending inventory is: Multiple Choice Weighted average. Moving average. FIFO. LIFO.

FIFO

Which of the following would not require the company to account for the change retrospectively? Multiple Choice From average cot to FIFO. From FIFO to LIFO. From LIFO to FIFO. From LIFO to average cost.

From FIFO to LIFO.

Cash equivalents do not include: Multiple Choice Money market funds. Commercial paper. U.S. treasury bills. High grade marketable equity securities.

High grade marketable equity securities.

The pension expense includes periodic changes that occur: Multiple Choice In the PBO. In the PBO and the plan assets. In the plan assets. In the PBO and the ABO.

In the PBO and the plan assets.

A company's estimate of merchandise that will be returned by customers should be: Multiple Choice Included in inventory at an amount equal to the selling price of the merchandise. Included in inventory at an amount equal to the cost of the merchandise. Excluded from inventory but deducted from sales revenue and accounts receivable. None of these answer choices are correct.

Included in inventory at an amount equal to the cost of the merchandise.

Using the gross method, purchase discounts lost are: Multiple Choice Included in inventory purchased. Added to accounts payable. Included as a reduction to purchase returns. Deducted from discount income.

Included in inventory purchased.

Interest cost will: Multiple Choice Increase the PBO and increase pension expense. Increase pension expense and reduce plan assets. Increase the PBO and reduce plan assets. Increase pension expense and reduce the return on plan assets.

Increase the PBO and increase pension expense.

Recording pension expense would usually: Multiple Choice Increase the PBO. Increase current assets. Increase the prior service cost-AOCI. Increase the net loss-AOCI.

Increase the PBO.

In a perpetual inventory system, the cost of purchases is debited to: Multiple Choice Purchases. Cost of goods sold. Inventory. Accounts payable.

Inventory

When reported in financial statements, a LIFO allowance account usually:

Is added to LIFO cost to indicate what the inventory would cost on a FIFO basis.

Which of the following is not a requirement for a qualified pension plan? Multiple Choice It cannot discriminate in favor of highly paid employees. It must cover at least 80% of the employees. It must be funded in advance of retirement. Benefits must vest after a specified period of service, commonly five years.

It must cover at least 80% of the employees.

Compared to the ABO, the PBO usually is: Multiple Choice Larger. More reliable. Less relevant. More material.

Larger.

Compared to the ABO, the PBO usually is: Multiple Choice Less material. Less representationally faithful. Less relevant. Less reliable.

Less reliable

In applying LCM, market cannot be:

Less than net realizable value minus a normal profit margin.

For companies using FIFO or average cost, inventory is valued at: Multiple Choice Net realizable value. Cost. Replacement cost. Lower of cost or net realizable value.

Lower of cost or net realizable value.

Management has adopted a policy of reporting its unsold inventory at the end of each year at the lower of FIFO cost or the most recent selling price of that inventory in the current year. Which of the following statements is correct? Multiple Choice Management should instead choose the higher of the two amounts to report inventory. Management should instead compare the inventory's cost to an estimate of its selling price in the next year. Management's policy is acceptable. Management should instead report inventory at the lower of cost or market value based on replacement cost.

Management should instead compare the inventory's cost to an estimate of its selling price in the next year.

Which of the following is a correct statement concerning the reporting of the pension plan on the face of the employer's balance sheet? Multiple Choice Only the plan assets are separately reported. Only the PBO is separately reported. Both the PBO and the plan assets are separately reported. Neither the PBO nor the plan assets is separately reported.

Neither the PBO nor the plan assets is separately reported.

Cost of goods sold is given by:

Net Purchases + beginning inventory − ending inventory.

Cost of goods sold is given by: Multiple Choice Net Purchases + beginning inventory − ending inventory. Beginning inventory + accounts payable − net purchases. Beginning inventory − net purchases + ending inventory. Net purchases + ending inventory − beginning inventory.

Net Purchases + beginning inventory − ending inventory.

Under the conventional retail method, which of the following are not included in the denominator of the current period cost-to-retail conversion percentage? Multiple Choice Purchase returns. Net markups. Purchases. Net markdowns.

Net markdowns

Under the LIFO retail method, the denominator in the cost-to-retail percentage includes: Multiple Choice Net markups and net markdowns. Neither net markups nor net markdowns. Net markups, but not net markdowns. Net markdowns, but not net markups.

Net markups and net markdowns

Under the conventional retail method, the denominator in the cost-to-retail percentage includes: Multiple Choice Net markups and net markdowns. Neither net markups nor net markdowns. Net markups, but not net markdowns. Net markdowns, but not net markups.

Net markups, but not net markdowns.

Under International Financial Reporting Standards (IFRS), inventory is valued at the lower of cost and: Multiple Choice Net realizable value. Net realizable value reduced by a normal profit margin. Replacement cost. None of these answer choices are correct.

Net realizable value

Company A is identical to Company B in every regard except that Company A uses FIFO and Company B uses LIFO. In an extended period of rising inventory costs, Company A's gross profit and inventory turnover ratio, compared to Company B's, would be: Gross Profit Inventory Turnover (a.lower lower) (b.higher higher) (c.higher lower) (d.lower higher) This is with the first part being gross profit and second part being inventory turnover. Multiple Choice Option A Option B Option C Option D

Option C

A company understated its ending inventory in Year 1 by $25,000 and also understated its ending inventory in Year 2 by $20,000. Neither error was discovered until Year 3. As a result, of these two errors, gross profit for Year 2 was: Multiple Choice Overstated by $5,000. Understated by $45,000. Understated by $20,000. Overstated by $25,000.

Overstated by $5,000

Interest cost is calculated by multiplying the: Multiple Choice ABO by the expected return on the plan assets. ABO by the discount rate. PBO by the expected return on plan assets. PBO by the discount rate.

PBO by the discount rate.

Peecher accepted a three-year, noninterest-bearing note in exchange for merchandise sold. Which of the following is true? Multiple Choice Peecher would credit a discount on notes receivable when recording the sale. Peecher would debit interest revenue over the life of the note. Peecher would debit notes receivable when the note is collected. Peecher would multiply sales revenue by the effective interest rate to determine interest revenue each period.

Peecher would credit a discount on notes receivable when recording the sale.

Purchases equal the invoice amount: Multiple Choice Plus freight-in, plus discounts lost. Less purchase returns, plus purchase allowances. Plus freight-in, less purchase discounts. Plus discounts, less purchase returns.

Plus freight-in, less purchase discounts.

The component of pension expense that results from amending a pension plan to give recognition to previous service of currently enrolled employees is the amortization of: Multiple Choice Prior service cost. Amendment cost. Retiree service cost. Transition cost.

Prior service cost.

In a periodic inventory system, the cost of purchases is debited to: Multiple Choice Inventory. Cost of goods sold. Accounts payable. Purchases.

Purchases

Payment of retirement benefits: Multiple Choice Increases the PBO. Increases the ABO. Reduces the GBO. Reduces the PBO.

Reduces the PBO.

Which of the following is not a potential component of pension expense? Multiple Choice Return on plan assets. Prior service cost. Retiree benefits paid. Gains and losses.

Retiree benefits paid.

Which of the following describes defined benefit pension plans? Multiple Choice They raise few accounting issues for employers. Retirement benefits depend on how much money has accumulated in an individual's account. They are simple to construct. Retirement benefits are based on the plan benefit formula.

Retirement benefits are based on the plan benefit formula.

Which of the following is not included among the assumptions needed to estimate postretirement health care benefits? Multiple Choice Employee turnover. Expected retirement age of plan participants. Life expectancy of plan participants. Return on plan assets.

Return on plan assets.

The primary reason for the popularity of LIFO is that it: Multiple Choice Provides better matching of physical flow and cost flow. Saves income taxes currently. Simplifies recordkeeping. Provides a permanent reduction of income taxes.

Saves income taxes currently.

The net pension liability (PBO minus plan assets) is increased by: Multiple Choice Service cost. Expected return on plan assets. Amortization of prior service cost. Cash contributions to plan assets.

Service Cost

The net postretirement benefit liability (APBO minus plan assets) is increased by: Multiple Choice Service cost. Expected return on plan assets. Amortization of net gain. Cash contributions to plan assets.

Service Cost.

Todd Sweeney is an artist who sells his work under consignment (he displays his work in local barbershops, and customers purchase his work there). Sweeney recently transferred a painting on consignment to a local barbershop.After Sweeney has transferred a painting to a barbershop, the painting: Multiple Choice We lack sufficient information to know who should carry the painting in inventory. Should be counted in either Sweeney's or the barbershop's inventory, depending on which incurred the cost of preparing the painting for display. Should be counted in Sweeney's inventory until the barbershop sells it. Should be counted in the barbershop's inventory, as the barbershop now possesses it.

Should be counted in Sweeney's inventory until the barbershop sells it.

The use of LIFO during a long inflationary period can result in: Multiple Choice A net increase in income tax expense. An inflated balance sheet. Significant cash flow advantages over FIFO.

Significant cash flow advantages over FIFO.

"VSOE" is necessary to separately recognize revenue in multiple-element contracts for: Multiple Choice All service contracts. All product contracts. All contracts that involve at least one non-software element. Software contracts.

Software contracts.

Dollar-value LIFO: Multiple Choice Increases the recordkeeping costs of LIFO. None of these answer choices are correct. Only is allowed for internal reporting purposes. Starts with ending inventory measured at current costs and re-creates LIFO layers for measuring inventory costs.

Starts with ending inventory measured at current costs and re-creates LIFO layers for measuring inventory costs.

Dollar-value LIFO: Multiple Choice Starts with ending inventory measured at current costs and re-creates LIFO layers for measuring inventory costs. Only is allowed for internal reporting purposes. None of these answer choices are correct. Increases the recordkeeping costs of LIFO.

Starts with ending inventory measured at current costs and re-creates LIFO layers for measuring inventory costs.

The LIFO Conformity Rule states that if LIFO is used for: Multiple Choice Domestic companies, it must be used by foreign partners. One class of inventory, it must be used for all classes of inventory. One company in an affiliated group, it must be used by all companies in an affiliated group. Tax purposes, it must be used for financial reporting.

Tax purposes, it must be used for financial reporting.

If a company understates its count of ending inventory in Year 1 and it reports inventory correctly in Year 2, which of the following is true? Multiple Choice Costs of goods sold is understated at the end of Year 1. Net income is correct in Year 2. The balance of retained earnings is overstated at the end of Year 1. The balance of retained earnings is correct at the end of Year 2.

The balance of retained earnings is correct at the end of Year 2.

Which of the following might explain why a company has switched from a periodic system to a perpetual system to record inventory transactions? Multiple Choice An attempt by management to overstate performance and total assets in the year-end financial statements. The cost of inventory has increased during the year. The selling price of inventory has decreased during the year. The company has made several technological upgrades to its system for tracking inventory items.

The company has made several technological upgrades to its system for tracking inventory items

Inventory does not include: Multiple Choice Assets currently in production for normal sales. Assets intended to be sold in the normal course of business. The cost of office equipment. Materials used in the production of goods to be sold.

The cost of office equipment

Inventory does not include: Multiple Choice Materials used in the production of goods to be sold. The cost of office equipment. Assets intended to be sold in the normal course of business. Assets currently in production for normal sales.

The cost of office equipment

Which of the following describes defined benefit pension plans? Multiple Choice The investment risk is borne by the employee. The plans are simple and easy to construct. The investment risk is borne by the employer. Retirement benefits depend on the individual's account balance.

The investment risk is borne by the employer.

A company implements the following policy regarding inventory in transit: Goods purchased are included in inventory records, while goods sold are not included in inventory records. Management feels this policy is reasonable because it assigns inventory in transit to the party that initiated the transactions. Which of the following concepts is management not considering in implementing this policy? Multiple Choice The likelihood that inventory purchased or sold will be returned. The quantity of the inventory involved in the transaction. The party who has title to the inventory while in transit. The materiality of shipping costs.

The party who has title to the inventory while in transit

A company does not include in ending inventory any goods that have been shipped to consignees to be sold on consignment. The company has a policy of removing those goods from the inventory records at the time of shipment. Which of the following is an accurate statement regarding the company's policy?

The policy is not correct because the company has title to consignment goods until those goods are sold to a third-party customer.

A company purchases inventory for $10,000, with terms 3/10, n/30. The company uses a perpetual system and the net method to record purchases. To record this transaction, the company debits the Inventory account for $9,970. Which of the following statements is correct? Multiple Choice The company should instead credit Inventory. The company should instead debit Purchases. The recorded amount should instead be $9,700. Two of the other answers are correct.

The recorded amount should instead be $9,700.

Important elements of an internal control system for cash disbursements include each of the following except: Multiple Choice Only authorized personnel should sign checks. All expenditures should be authorized before a check is prepared. All disbursements, other than very small disbursements, should be made by check. The same person that prepares the check should also record it in the proper journal.

The same person that prepares the check should also record it in the proper journal.

A contract does not exist for purposes of applying the revenue recognition principle in all of the following cases except for when: Multiple Choice The seller believes it is not probable that it will collect the amount it's entitled to receive under the contract. The seller believes it is highly likely but not certain that the buyer will agree to the terms of the contract. The seller and buyer did not sign a formalized written contract. The seller and buyer can terminate the contract without penalty and neither has performed any obligations under the contract.

The seller and buyer did not sign a formalized written contract.

The attribution period for postretirement health care plans does not include: Multiple Choice The first five years of service. The year of hire. The employee probation period. The years of service beyond the full eligibility date.

The years of service beyond the full eligibility date.

Management adopts of policy of reporting all shipping costs (freight-in and freight-out) in an operating expense account - Shipping Expense - at the time those costs are incurred. The cost of the physical units sold are reported in the Cost of Goods Sold account at the time those units are sold. Management believes this policy better communicates its inventory decisions to financial statement users. Which of the following statements is correct? Multiple Choice Management's policy is not correct because the cost of inventory includes all costs necessary to get the inventory ready for sale. Management's policy is not correct because freight-in should be expensed only when the inventory is sold. Management's policy is not correct because the cost of freight-out represents a reduction of revenue, not an expense. Two of the other answers are correct.

Two of the other answers are correct.

The use of LIFO in accounting for a firm's inventory: Usually matches the physical flow of goods through the business. Is usually used for internal management purposes. Usually provides a better match of expenses with revenues. None of these answer choices are correct.

Usually provides a better match of expenses with revenues.

ERISA made major changes in the requirements for pension plan: Multiple Choice Vesting. Reporting. Taxing. Investing.

Vesting

Cash that is restricted and not available for current operations is reported in the balance sheet as: Multiple Choice Equity. Investments. Liabilities. A separate section between liabilities and equity.

investments

A 401k plan: Multiple Choice is a type of defined contribution pension plan. is a type of defined benefit pension plan. creates a liability for the employer. creates a liability for the employee.

is a type of defined contribution pension plan.