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MULTIPLE CHOICE—CPA Adapted

Chapter 14 – Long Term Liabilities
1. On July 1, 2010, Spear Co. issued 1,000 of its 10%, $1,000 bonds at 99 plus accrued
interest. The bonds are dated pril 1, 2010 and !ature on pril 1, 2020. "nterest is
payable se!iannually on pril 1 and October 1. #hat a!ount did Spear recei$e fro! the
bond issuance%
a. $1,01&,000
b. $1,000,000
c. $990,000
d. $9'&,000
2. On January 1, 2010, Solis Co. issued its 10% bonds in the face a!ount of $(,000,000,
)hich !ature on January 1, 2020. The bonds )ere issued for $(,*0&,000 to yield +%,
resultin, in bond pre!iu! of $*0&,000. Solis uses the effecti$e-interest !ethod of
a!orti.in, bond pre!iu!. "nterest is payable annually on /ece!ber (1. t /ece!ber
(1, 2010, Solis0s ad1usted una!orti.ed bond pre!iu! should be
a. $*0&,000.
b. $(22,*00.
c. $('*,&00.
d. $(0*,&00.
(. On July 1, 2009, 3oble, "nc. issued 9% bonds in the face a!ount of $&,000,000, )hich
!ature on July 1, 201&. The bonds )ere issued for $*,'9&,000 to yield 10%, resultin, in
a bond discount of $(0&,000. 3oble uses the effecti$e-interest !ethod of a!orti.in,
bond discount. "nterest is payable annually on June (0. t June (0, 2011, 3oble0s
una!orti.ed bond discount should be
a. $2'*,0&0.
b. $2&&,000.
c. $2**,000.
d. $21&,000.
*. On January 1, 2010, 4uff Co. sold $1,000,000 of its 10% bonds for $++&,29' to yield
12%. "nterest is payable se!iannually on January 1 and July 1. #hat a!ount should
4uff report as interest e5pense for the si5 !onths ended June (0, 2010%
a. $**,2''
b. $&0,000
c. $&(,11+
d. $'0,000
&. On January 1, 2011, /oty Co. redee!ed its 1&-year bonds of $2,&00,000 par $alue for
102. They )ere ori,inally issued on January 1, 1999 at 9+ )ith a !aturity date of
January 1, 201*. The bond issue costs relatin, to this transaction )ere $1&0,000. /oty
a!orti.es discounts, pre!iu!s, and bond issue costs usin, the strai,ht-line !ethod.
#hat a!ount of loss should /oty reco,ni.e on the rede!ption of these bonds 6i,nore
ta5es7%
a. $90,000
b. $'0,000
c. $&0,000
d. $0
'. On its /ece!ber (1, 2010 balance sheet, 8!i, Corp. reported bonds payable of
$',000,000 and related una!orti.ed bond issue costs of $(20,000. The bonds had been
issued at par. On January 2, 2011, 8!i, retired $(,000,000 of the outstandin, bonds at
par plus a call pre!iu! of $20,000. #hat a!ount should 8!i, report in its 2011 inco!e
state!ent as loss on e5tin,uish!ent of debt 6i,nore ta5es7%
a. $0
b. $20,000
c. $1'0,000
d. $2(0,000
2. On January 1, 200', 9oll Corp. issued 1,000 of its 10%, $1,000 bonds for $1,0*0,000.
These bonds )ere to !ature on January 1, 201' but )ere callable at 101 any ti!e after
/ece!ber (1, 2009. "nterest )as payable se!iannually on July 1 and January 1. On
July 1, 2011, 9oll called all of the bonds and retired the!. :ond pre!iu! )as a!orti.ed
on a strai,ht-line basis. :efore inco!e ta5es, 9oll0s ,ain or loss in 2011 on this early
e5tin,uish!ent of debt )as
a. $(0,000 ,ain.
b. $12,000 ,ain.
c. $10,000 loss.
d. $+,000 ,ain.
+. On June (0, 2011, O!ara Co. had outstandin, +%, $(,000,000 face a!ount, 1&-year
bonds !aturin, on June (0, 2021. "nterest is payable on June (0 and /ece!ber (1.
The una!orti.ed balances in the bond discount and deferred bond issue costs accounts
on June (0, 2011 )ere $10&,000 and $(0,000, respecti$ely. On June (0, 2011, O!ara
ac;uired all of these bonds at 9* and retired the!. #hat net carryin, a!ount should be
used in co!putin, ,ain or loss on this early e5tin,uish!ent of debt%
a. $2,920,000.
b. $2,+9&,000.
c. $2,+'&,000.
d. $2,+20,000.
9. ten-year bond )as issued in 2009 at a discount )ith a call pro$ision to retire the
bonds. #hen the bond issuer e5ercised the call pro$ision on an interest date in 2011,
the carryin, a!ount of the bond )as less than the call price. The a!ount of bond liability
re!o$ed fro! the accounts in 2011 should ha$e e;ualed the
a. call price.
b. call price less una!orti.ed discount.
c. face a!ount less una!orti.ed discount.
d. face a!ount plus una!orti.ed discount.
10. <ai,e Co. too= ad$anta,e of !ar=et conditions to refund debt. This )as the fourth
refundin, operation carried out by <ai,e )ithin the last three years. The e5cess of the
carryin, a!ount of the old debt o$er the a!ount paid to e5tin,uish it should be reported
as a
a. ,ain, net of inco!e ta5es.
b. loss, net of inco!e ta5es.
c. part of continuin, operations.
d. deferred credit to be a!orti.ed o$er the life of the ne) debt.
>11. 8ddy Co. is indebted to Cole under a $*00,000, 12%, three-year note dated
/ece!ber (1, 2009. :ecause of 8ddy0s financial difficulties de$elopin, in 2011, 8ddy
o)ed accrued interest of $*+,000 on the note at /ece!ber (1, 2011. ?nder a troubled
debt restructurin,, on /ece!ber (1, 2011, Cole a,reed to settle the note and accrued
interest for a tract of land ha$in, a fair $alue of $('0,000. 8ddy0s ac;uisition cost of the
land is $290,000. ",norin, inco!e ta5es, on its 2011 inco!e state!ent 8ddy should
report as a result of the troubled debt restructurin,
9ain on /isposal @estructurin, 9ain
a. $1&+,000 $0
b. $110,000 $0
c. $20,000 $*0,000
d. $20,000 $++,000
Mltiple Choi!e Ans"ers—CPA Adapted
Item Ans# Item Ans# Item Ans# Item Ans# Item Ans# Item Ans#
1. a (. a &. a 2. d 9. c >11. d
2. b *. c '. d +. c 10. c
$o# Ans"er %eri&ation
1. a 6$1,000,000 A .997 B 6$1,000,000 A .10 A (C127 D $1,01&,000.
2. b $*0&,000 E F6$(,000,000 A .107 E 6$(,*0&,000 A .0+7G D $(22,*00.
(. a 2009E2010H$*,'9&,000 B F6$*,'9&,000 A .17 E 6$&,000,000 A .097G
D $*,21*,&00.
2010E2011H$*,21*,&00 B 6$*21,*&0 E $*&0,0007 D $*,2(&,9&0
$&,000,000 E $*,2(&,9&0 D $2'*,0&0.
*. c $++&,29' A .0' D $&(,11+.
&. a 6$2,&00,000 A 1.027 E
200 000
2 300 000 12
15
$ ,
$ , ,
1 ¸ _
1
÷
¸ ,
1
¸ ]
+ ×
D $90,000.
'. d 6$(,000,000 B $20,0007 E F6$',000,000 E $(20,0007 A 1C2G D $2(0,000.
2. d
40 000
1 040 000 11
20
$ ,
$ , ,
1 ¸ _
1
÷
¸ ,
1
¸ ]
− ×
E 6$1,000,000 A 1.017 D $+,000.
+. c $(,000,000 E 6$10&,000 B $(0,0007 D $2,+'&,000.
9. c Conceptual.
10. c Conceptual.
>11. d $('0,000 E $290,000 D $20,000
6$*00,000 B $*+,0007 E $('0,000 D $++,000.
Chapter 1' – (to!)holders* E+it,
1. corporation )as or,ani.ed in January 2002 )ith authori.ed capital of $10 par $alue
co!!on stoc=. On Iebruary 1, 2010, shares )ere issued at par for cash. On Jarch 1,
2010, the corporation0s attorney accepted 2,000 shares of co!!on stoc= in settle!ent
for le,al ser$ices )ith a fair $alue of $90,000. dditional paid-in capital )ould increase
on
Iebruary 1, 2010 Jarch 1, 2010
a. Kes 3o
b. Kes Kes
c. 3o 3o
d. 3o Kes
2. On July 1, 2010, 3all Co. issued 2,&00 shares of its $10 par co!!on stoc= and &,000
shares of its $10 par con$ertible preferred stoc= for a lu!p su! of $12&,000. t this date
3all0s co!!on stoc= )as sellin, for $2* per share and the con$ertible preferred stoc=
for $1+ per share. The a!ount of the proceeds allocated to 3all0s preferred stoc= should
be
a. $'2,&00.
b. $2&,000.
c. $90,000.
d. $'+,2&0.
(. 4orton Co. )as or,ani.ed on January 2, 2010, )ith &00,000 authori.ed shares of $10
par $alue co!!on stoc=. /urin, 2010, 4orton had the follo)in, capital transactionsH
January &Lissued (2&,000 shares at $1* per share.
July 22Lpurchased 2&,000 shares at $11 per share.
3o$e!ber 2&Lsold 1&,000 shares of treasury stoc= at $1( per share.
4orton used the cost !ethod to record the purchase of the treasury shares. #hat )ould
be the balance in the <aid-in Capital fro! Treasury Stoc= account at /ece!ber (1,
2010%
a. $0.
b. $1&,000.
c. $(0,000.
d. $*&,000.
*. "n 2010, 4obbs Corp. ac;uired 9,000 shares of its o)n $1 par $alue co!!on stoc= at
$1+ per share. "n 2011, 4obbs issued *,000 of these shares at $2& per share. 4obbs
uses the cost !ethod to account for its treasury stoc= transactions. #hat accounts and
)hat a!ounts should 4obbs credit in 2011 to record the issuance of the *,000 shares%
Treasury dditional @etained Co!!on
Stoc= <aid-in Capital 8arnin,s Stoc=
a. $22,000 $20,000
b. $22,000 $2+,000
c. $9',000 $*,000
d. $'+,000 $2+,000 $*,000
&. t its date of incorporation, Sauder, "nc. issued 100,000 shares of its $10 par co!!on
stoc= at $11 per share. /urin, the current year, Sauder ac;uired 20,000 shares of its
co!!on stoc= at a price of $1' per share and accounted for the! by the cost !ethod.
Subse;uently, these shares )ere reissued at a price of $12 per share. There ha$e been
no other issuances or ac;uisitions of its o)n co!!on stoc=. #hat effect does the
reissuance of the stoc= ha$e on the follo)in, accounts%
@etained 8arnin,s dditional <aid-in Capital
a. /ecrease /ecrease
b. 3o effect /ecrease
c. /ecrease 3o effect
d. 3o effect 3o effect
'. Iar!er Corp. o)ned 20,000 shares of 8aton Corp. purchased in 2002 for $2*0,000. On
/ece!ber 1&, 2010, Iar!er declared a property di$idend of all of its 8aton Corp. shares on
the basis of one share of 8aton for e$ery 10 shares of Iar!er co!!on stoc= held by its
stoc=holders. The property di$idend )as distributed on January 1&, 2011. On the declaration
date, the a,,re,ate !ar=et price of the 8aton shares held by Iar!er )as $*00,000. The entry
to record the declaration of the di$idend )ould include a debit to @etained 8arnin,s of
a. $0.
b. $1'0,000.
c. $2*0,000.
d. $*00,000.
2. corporation declared a di$idend, a portion of )hich )as li;uidatin,. 4o) )ould this
distribution affect each of the follo)in,%
dditional
<aid-in Capital @etained 8arnin,s
a. /ecrease 3o effect
b. /ecrease /ecrease
c. 3o effect /ecrease
d. 3o effect 3o effect
+. On Jay 1, 2010, Mie= Corp. declared and issued a 10% co!!on stoc= di$idend. <rior to
this di$idend, Mie= had 100,000 shares of $1 par $alue co!!on stoc= issued and
outstandin,. The fair $alue of Mie= 0s co!!on stoc= )as $20 per share on Jay 1, 2010.
s a result of this stoc= di$idend, Mie=0s total stoc=holders0 e;uity
a. increased by $200,000.
b. decreased by $200,000.
c. decreased by $10,000.
d. did not chan,e.
9. 4o) )ould the declaration and subse;uent issuance of a 10% stoc= di$idend by the issuer
affect each of the follo)in, )hen the !ar=et $alue of the shares e5ceeds the par $alue of the
stoc=%
dditional
Co!!on Stoc= <aid-in Capital
a. 3o effect 3o effect
b. 3o effect "ncrease
c. "ncrease 3o effect
d. "ncrease "ncrease
10. On /ece!ber (1, 2010, the stoc=holders0 e;uity section of rndt, "nc., )as as follo)sH
Co!!on stoc=, par $alue $10N authori.ed (0,000 sharesN
issued and outstandin, 9,000 shares $ 90,000
dditional paid-in capital 11',000
@etained earnin,s 12*,000
Total stoc=holders0 e;uity $(+0,000
On Jarch (1, 2011, rndt declared a 10% stoc= di$idend, and accordin,ly 900
additional shares )ere issued, )hen the fair !ar=et $alue of the stoc= )as $1+ per
share. Ior the three !onths ended Jarch (1, 2011, rndt sustained a net loss of
$(2,000. The balance of rndtOs retained earnin,s as of Jarch (1, 2011, should be
a. $12&,+00.
b. $1((,000.
c. $1(*,+00.
d. $1*2,000.
>11. t /ece!ber (1, 2010 and 2011, <lan= Corp. had outstandin, 2,000 shares of $100 par $alue
+% cu!ulati$e preferred stoc= and 10,000 shares of $10 par $alue co!!on stoc=. t
/ece!ber (1, 2010, di$idends in arrears on the preferred stoc= )ere $+,000. Cash di$idends
declared in 2011 totaled $(0,000. #hat a!ounts )ere payable on each class of stoc=%
<referred Stoc= Co!!on Stoc=
a. $1',000 $1*,000
b. $22,000 $+,000
c. $2*,000 $',000
d. $(0,000 $0
Mltiple Choi!e Ans"ers—CPA Adapted
Item Ans# Item Ans# Item Ans# Item Ans# Item Ans# Item Ans#
1. d (. c &. c 2. b 9. d >11. c
2. b *. b '. d +. d 10. a
$o# Ans"er %eri&ation
1. d Conceptual.
2. b 6$2* × 2,&007 B 6$1+ × &,0007 D $1&0,000.
$90,000
LLLLL A $12&,000 D $2&,000.
$1&0,000
(. c 1&,000 × $2 D $(0,000.
*. b 6*,000 × $1+7 D $22,000N 6*,000 × $27 D $2+,000.
&. c Conceptual.
'. d $*00,000 6!ar=et $alue7.
2. b Conceptual.
+. d Conceptual.
9. d Conceptual.
10. a $12*,000 E $(2,000 E 6900 × $1+7 D $12&,+00.
>11. c 6$200,000 × .0+7 B $+,000 D $2*,000N $(0,000 E $2*,000 D $',000
Chapter 1- — %ilti&e (e!rities . Earnings Per (hare
1. On January 2, 2010, Iarr Co. issued 10-year con$ertible bonds at 10&. /urin, 2012,
these bonds )ere con$erted into co!!on stoc= ha$in, an a,,re,ate par $alue e;ual to
the total face a!ount of the bonds. t con$ersion, the !ar=et price of IarrOs co!!on
stoc= )as &0 percent abo$e its par $alue. On January 2, 2010, cash proceeds fro! the
issuance of the con$ertible bonds should be reported as
a. paid-in capital for the entire proceeds.
b. paid-in capital for the portion of the proceeds attributable to the con$ersion feature
and as a liability for the balance.
c. a liability for the face a!ount of the bonds and paid-in capital for the pre!iu! o$er
the face a!ount.
d. a liability for the entire proceeds.
2. Pan, Co. issued bonds )ith detachable co!!on stoc= )arrants. Only the )arrants had
a =no)n !ar=et $alue. The su! of the fair $alue of the )arrants and the face a!ount of
the bonds e5ceeds the cash proceeds. This e5cess is reported as
a. /iscount on :onds <ayable.
b. <re!iu! on :onds <ayable.
c. Co!!on Stoc= Subscribed.
d. <aid-in Capital in 85cess of <arLStoc= #arrants.
(. On January 1, 2010, Sharp Corp. ,ranted an e!ployee an option to purchase ',000
shares of Sharp0s $& par $alue co!!on stoc= at $20 per share. The :lac=-Scholes
option pricin, !odel deter!ines total co!pensation e5pense to be $1*0,000. The option
beca!e e5ercisable on /ece!ber (1, 2011, after the e!ployee co!pleted t)o years of
ser$ice. The !ar=et prices of Sharp0s stoc= )ere as follo)sH
January 1, 2010 $(0
/ece!ber (1, 2011 &0
Ior 2011, should reco,ni.e co!pensation e5pense under the fair $alue !ethod of
a. $90,000.
b. $(0,000.
c. $20,000.
d. $0.
>*. On January 2, 2010, for past ser$ices, @osen Corp. ,ranted 3enn <ine, its president,
1',000 stoc= appreciation ri,hts that are e5ercisable i!!ediately and e5pire on
January 2, 2011. On e5ercise, 3enn is entitled to recei$e cash for the e5cess of the
!ar=et price of the stoc= on the e5ercise date o$er the !ar=et price on the ,rant date.
3enn did not e5ercise any of the ri,hts durin, 2010. The !ar=et price of @osen0s stoc=
)as $(0 on January 2, 2010, and $*& on /ece!ber (1, 2010. s a result of the stoc=
appreciation ri,hts, @osen should reco,ni.e co!pensation e5pense for 2010 of
a. $0.
b. $+0,000.
c. $2*0,000.
d. $*+0,000.
Mltiple Choi!e Ans"ers—%ilti&e (e!rities/ CPA Adapted
Item Ans# Item Ans# Item Ans# Item Ans#
1. d 2. a (. c >*. c
$o# Ans"er %eri&ation
1. d Conceptual.
2. a Conceptual.
(. c $1*0,000 Q 2 D $20,000.
>*. c 6$*& E $(07 A 1',000 D $2*0,000.
Earnings Per (hare
&. /idde Co. had (00,000 shares of co!!on stoc= issued and outstandin, at /ece!ber
(1, 2010. 3o co!!on stoc= )as issued durin, 2011. On January 1, 2011, /idde issued
200,000 shares of noncon$ertible preferred stoc=. /urin, 2011, /idde declared and paid
$100,000 cash di$idends on the co!!on stoc= and $+0,000 on the preferred stoc=. 3et
inco!e for the year ended /ece!ber (1, 2011 )as $'20,000. #hat should be /idde0s
2011 earnin,s per co!!on share%
a. $2.02
b. $1.+0
c. $1.2(
d. $1.*2
'. t /ece!ber (1, 2011 and 2010, Jiley Corp. had 1+0,000 shares of co!!on stoc= and
10,000 shares of &%, $100 par $alue cu!ulati$e preferred stoc= outstandin,. 3o
di$idends )ere declared on either the preferred or co!!on stoc= in 2011 or 2010. 3et
inco!e for 2011 )as $*00,000. Ior 2011, earnin,s per co!!on share a!ounted to
a. $2.22.
b. $1.9*.
c. $1.'2.
d. $1.11.
2. Jarsh Co. had 2,*00,000 shares of co!!on stoc= outstandin, on January 1 and
/ece!ber (1, 2011. "n connection )ith the ac;uisition of a subsidiary co!pany in June
2010, Jarsh is re;uired to issue 100,000 additional shares of its co!!on stoc= on July
1, 2012, to the for!er o)ners of the subsidiary. Jarsh paid $200,000 in preferred stoc=
di$idends in 2011, and reported net inco!e of $(,*00,000 for the year. Jarsh0s diluted
earnin,s per share for 2011 should be
a. $1.*2.
b. $1.('.
c. $1.((.
d. $1.2+.
+. Ioyle, "nc., had &'0,000 shares of co!!on stoc= issued and outstandin, at /ece!ber (1,
2010. On July 1, 2011, an additional *0,000 shares of co!!on stoc= )ere issued for
cash. Ioyle also had une5ercised stoc= options to purchase (2,000 shares of co!!on
stoc= at $1& per share outstandin, at the be,innin, and end of 2011. The a$era,e
!ar=et price of Ioyle0s co!!on stoc= )as $20 durin, 2011. #hat is the nu!ber of
shares that should be used in co!putin, diluted earnin,s per share for the year ended
/ece!ber (1, 2011%
a. &+0,000
b. &++,000
c. '0+,000
d. '12,000
9. #hen co!putin, diluted earnin,s per share, con$ertible securities are
a. i,nored.
b. reco,ni.ed only if they are diluti$e.
c. reco,ni.ed only if they are antidiluti$e.
d. reco,ni.ed )hether they are diluti$e or antidiluti$e.
10. "n deter!inin, diluted earnin,s per share, di$idends on noncon$ertible cu!ulati$e
preferred stoc= should be
a. disre,arded.
b. added bac= to net inco!e )hether declared or not.
c. deducted fro! net inco!e only if declared.
d. deducted fro! net inco!e )hether declared or not.
11. The if-con$erted !ethod of co!putin, earnin,s per share data assu!es con$ersion of
con$ertible securities as of the
a. be,innin, of the earliest period reported 6or at ti!e of issuance, if later7.
b. be,innin, of the earliest period reported 6re,ardless of ti!e of issuance7.
c. !iddle of the earliest period reported 6re,ardless of ti!e of issuance7.
d. endin, of the earliest period reported 6re,ardless of ti!e of issuance7.
Mltiple Choi!e Ans"ers—Earnings Per (hare—CPA Adapted
Item Ans# Item Ans# Item Ans# Item Ans# Item Ans# Item Ans# Item Ans#
&. b '. b 2. d +. b 9. b 10. d 11. a
$o#Ans"er %eri&ation
&. b $'20,000 E $+0,000
LLLLLLLLL D $1.+0.
(00,000
'. b $*00,000 E 610,000 A $100 A .0&7
LLLLLLLLLLLLLLL D $1.9*.
1+0,000
2. d $(,*00,000 E $200,000
LLLLLLLLLLE D $1.2+.
2,*00,000 B 100,000
+. b &'0,000 B 6*0,000 A 'C127 B F(2,000 E 6(2,000 A $1& Q $207G D &++,000.
9. b Conceptual.
10. d Conceptual.
11. a Conceptual.
Chapter 10 1 In&estments
1. On October 1, 2010, #enn Co. purchased '00 of the $1,000 face $alue, +% bonds of Poy,
"nc., for $202,000, includin, accrued interest of $12,000. The bonds, )hich !ature on
January 1, 2012, pay interest se!iannually on January 1 and July 1. #enn used the
strai,ht-line !ethod of a!orti.ation and appropriately recorded the bonds as a$ailable-for-
sale. On #enn0s /ece!ber (1, 2011 balance sheet, the carryin, $alue of the bonds is
a. $'90,000.
b. $'+*,000.
c. $'+1,'00.
d. $'22,000.
2. Ralet Corp. be,an operations in 2010. n analysis of RaletOs e;uity securities portfolio
ac;uired in 2010 sho)s the follo)in, totals at /ece!ber (1, 2010 for tradin, and
a$ailable-for-sale securitiesH
Tradin, $ailable-for-Sale
Securities Securities
,,re,ate cost $90,000 $110,000
,,re,ate fair $alue '&,000 9&,000
#hat a!ount should Ralet report in its 2010 inco!e state!ent for unreali.ed holdin, loss%
a. $*0,000.
b. $10,000.
c. $1&,000.
d. $2&,000.
(. t /ece!ber (1, 2010, Jeter Corp. had the follo)in, e;uity securities that )ere
purchased durin, 2010, its first year of operationH
Iair ?nreali.ed
Cost Ralue 9ain 6Poss7
Tradin, SecuritiesH
Security $ 90,000 $ '0,000 $6(0,0007
: 1&,000 20,000 &,000
Totals $10&,000 $ +0,000 $62&,0007
$ailable-for-Sale SecuritiesH
Security K $ 20,000 $ +0,000 $ 10,000
M +&,000 &&,000 6(0,0007
Totals $1&&,000 $1(&,000 $620,0007
ll !ar=et declines are considered te!porary. Iair $alue ad1ust!ents at /ece!ber (1,
2010 should be established )ith a correspondin, char,e a,ainst
"nco!e Stoc=holdersO 8;uity
a. $*&,000 $ 0
b. $(0,000 $(0,000
c. $2&,000 $20,000
d. $2&,000 $ 0
*. On /ece!ber 29, 2011, Ja!es Co. sold an e;uity security that had been purchased on
January *, 2010. Ja!es o)ned no other e;uity securities. n unreali.ed holdin, loss
)as reported in the 2010 inco!e state!ent. reali.ed ,ain )as reported in the 2011
inco!e state!ent. #as the e;uity security classified as a$ailable-for-sale and did its
2010 !ar=et price decline e5ceed its 2011 !ar=et price reco$ery%
2010 Jar=et <rice
/ecline 85ceeded 2011
$ailable-for-Sale Jar=et <rice @eco$ery
a. Kes Kes
b. Kes 3o
c. 3o Kes
d. 3o 3o
?se the follo)in, infor!ation for ;uestions & throu,h 2.
@ich, "nc. ac;uired (0% of /oane Corp.0s $otin, stoc= on January 1, 2010 for $*00,000. /urin,
2010, /oane earned $1'0,000 and paid di$idends of $100,000. @ich0s (0% interest in /oane
,i$es @ich the ability to e5ercise si,nificant influence o$er /oane0s operatin, and financial
policies. /urin, 2011, /oane earned $200,000 and paid di$idends of $'0,000 on pril 1 and
$'0,000 on October 1. On July 1, 2011, @ich sold half of its stoc= in /oane for $2'*,000 cash.
&. :efore inco!e ta5es, )hat a!ount should @ich include in its 2010 inco!e state!ent as
a result of the in$est!ent%
a. $1'0,000.
b. $100,000.
c. $*+,000.
d. $(0,000.
'. The carryin, a!ount of this in$est!ent in @ich0s /ece!ber (1, 2010 balance sheet
should be
a. $*00,000.
b. $*1+,000.
c. $**+,000.
d. $*'0,000.
2. #hat should be the ,ain on sale of this in$est!ent in @ich0s 2011 inco!e state!ent%
a. $'*,000.
b. $&&,000.
c. $*9,000.
d. $*0,000.
+. On January 1, 2010, @eston Co. purchased 2&% of ce Corp.0s co!!on stoc=N no
,ood)ill resulted fro! the purchase. @eston appropriately carries this in$est!ent at
e;uity and the balance in @estonOs in$est!ent account )as $220,000 at /ece!ber (1,
2010. ce reported net inco!e of $*&0,000 for the year ended /ece!ber (1, 2010, and
paid co!!on stoc= di$idends totalin, $1+0,000 durin, 2010. 4o) !uch did @eston pay
for its 2&% interest in ce%
a. $'&2,&00.
b. $2'&,000.
c. $2+2,&00.
d. $+22,&00.
9. On /ece!ber (1, 2010, <atel Co. purchased e;uity securities as tradin, securities.
<ertinent data are as follo)sH
Iair Ralue
Security Cost t 12C(1C11
$1(2,000 $112,000
: 1'+,000 1+',000
C 2++,000 2&+,000
On /ece!ber (1, 2011, <atel transferred its in$est!ent in security C fro! tradin, to
a$ailable-for-sale because <atel intends to retain security C as a lon,-ter! in$est!ent.
#hat total a!ount of ,ain or loss on its securities should be included in <atel0s inco!e
state!ent for the year ended /ece!ber (1, 2011%
a. $(,000 ,ain.
b. $22,000 loss.
c. $(0,000 loss.
d. $*&,000 loss.
Mltiple Choi!e Ans"ers—CPA Adapted
Item Ans# Item Ans# Item Ans# Item Ans# Item Ans#
1. d (. c &. c 2. c 9. b
2. d *. d '. b +. a
$o# Ans"er %eri&ation
1. d $202,000 E $12,000 D $'90,000
1&
$'90,000 E 6$90,000 A L 7 D $'22,000.
2&
2. d $90,000 E $'&,000 D $2&,000.
(. c
*. d Conceptual.
&. c $1'0,000 A (0% D $*+,000.
'. b $*00,000 B $*+,000 E 6$100,000 A (0%7 D $*1+,000.
2. c $*1+,000 E 6$'0,000 A (0%7 B 6$200,000 A &0% A (0%7 D $*(0,000.
$2'*,000 E 6$*(0,000 Q 27 D $*9,000.
+. a $220,000 E 6$*&0,000 A 2&%7 B 6$1+0,000 A 2&%7 D $'&2,&00.
9. b $1+,000 E $1&,000 E $(0,000 D $22,000 loss.
Chapter 12 – 3e&ene 3e!ognition
1. ccordin, to the IS:0s conceptual fra!e)or=, the process of reportin, an ite! in the
financial state!ents of an entity is
a. reco,nition.
b. reali.ation.
c. allocation.
d. !atchin,.
2. 9reen Construction Co. has consistently used the percenta,e-of-co!pletion !ethod of
reco,ni.in, re$enue. /urin, 2010, 9reen entered into a fi5ed-price contract to construct
an office buildin, for $12,000,000. "nfor!ation relatin, to the contract is as follo)sH
t /ece!ber (1
2010 2011
<ercenta,e of co!pletion 1&% *&%
8sti!ated total cost at co!pletion $9,000,000 $9,'00,000
9ross profit reco,ni.ed 6cu!ulati$e7 '00,000 1,**0,000
Contract costs incurred durin, 2011 )ereH
a. $2,++0,000.
b. $2,920,000.
c. $(,1&0,000.
d. $*,(20,000.
(. :runer Constructors, "nc. has consistently used the percenta,e-of-co!pletion !ethod of
reco,ni.in, inco!e. "n 2010, :runer started )or= on a $(&,000,000 construction
contract that )as co!pleted in 2011. The follo)in, infor!ation )as ta=en fro! :runer0s
2010 accountin, recordsH
<ro,ress billin,s $11,000,000
Costs incurred 10,&00,000
Collections 2,000,000
8sti!ated costs to co!plete 21,000,000
#hat a!ount of ,ross profit should :runer ha$e reco,ni.ed in 2010 on this contract%
a. $(,&00,000
b. $2,(((,((*
c. $1,2&0,000
d. $1,1'',''2
*. /urin, 2010, 9ates Corp. started a construction 1ob )ith a total contract price of $(,&00,000.
The 1ob )as co!pleted on /ece!ber 1&, 2011. dditional data are as follo)sH
2010 2011
ctual costs incurred $1,(&0,000 $1,&2&,000
8sti!ated re!ainin, costs 1,(&0,000 L
:illed to custo!er 1,200,000 2,(00,000
@ecei$ed fro! custo!er 1,000,000 2,*00,000
?nder the co!pleted-contract !ethod, )hat a!ount should 9ates reco,ni.e as ,ross profit
for 2011%
a. $22&,000
b. $(12,&00
c. $*2&,000
d. $'2&,000
&. 4o,an Iar!s produced +00,000 pounds of cotton durin, the 2010 season. 4o,an sells
all of its cotton to Ott Co., )hich has a,reed to purchase 4o,an0s entire production at the
pre$ailin, !ar=et price. @ecent le,islation assures that the !ar=et price )ill not fall
belo) $.20 per pound durin, the ne5t t)o years. 4o,an0s costs of sellin, and distributin,
the cotton are i!!aterial and can be reasonably esti!ated. 4o,an reports its in$entory
at e5pected e5it $alue. /urin, 2010, 4o,an sold and deli$ered to Ott '00,000 pounds at
the !ar=et price of $.20. 4o,an sold the re!ainin, 200,000 pounds durin, 2011 at the
!ar=et price of $.22. #hat a!ount of re$enue should 4o,an reco,ni.e in 2010%
a. $*20,000
b. $*(2,000
c. $&'0,000
d. $&2',000
'. :raun, "nc. appropriately uses the install!ent-sales !ethod of accountin, to reco,ni.e
inco!e in its financial state!ents. So!e pertinent data relatin, to this !ethod of
accountin, includeH
2010 2011
"nstall!ent sales $2&0,000 $220,000
Cost of install!ent sales &20,000 &0*,000
9ross profit $1+0,000 $21',000
@ate of ,ross profit 2*% (0%
:alance of deferred ,ross profit at year endH
2010 $10+,000 $ (',000
2011 19+,000
Total $10+,000 $2(*,000
#hat a!ount of install!ent accounts recei$able should be presented in :raun0s
/ece!ber (1, 2011 balance sheet%
a. $220,000
b. $+10,000
c. $2+0,000
d. $+'','''
2. 4art. Co., )hich be,an operations on January 1, 2010, appropriately uses the
install!ent-sales !ethod of accountin,. The follo)in, infor!ation pertains to 4art.0s
operations for the year 2010H
"nstall!ent sales $1,200,000
@e,ular sales *+0,000
Cost of install!ent sales 220,000
Cost of re,ular sales 2++,000
9eneral and ad!inistrati$e e5penses 9',000
Collections on install!ent sales 2++,000
The deferred ,ross profit account in 4art.0s /ece!ber (1, 2010 balance sheet should
be
a. $11&,200.
b. $192,000.
c. $('*,+00.
d. $*+0,000.
+. On January 1, 2010, Orton Co. sold a used !achine to Sin,, "nc. for $(&0,000. On this
date, the !achine had a depreciated cost of $2*&,000. Sin, paid $&0,000 cash on
January 1, 2010 and si,ned a $(00,000 note bearin, interest at 10%. The note )as
payable in three annual install!ents of $100,000 be,innin, January 1, 2011. Orton
appropriately accounted for the sale under the install!ent !ethod. Sin, !ade a ti!ely
pay!ent of the first install!ent on January 1, 2011 of $1(0,000, )hich included interest
of $(0,000 to date of pay!ent. t /ece!ber (1, 2011, Orton has deferred ,ross profit of
a. $20,000.
b. $'',000.
c. $'0,000.
d. $&1,000.
9. <iper Co. be,an operations on January 1, 2010 and appropriately uses the install!ent
!ethod of accountin,. The follo)in, infor!ation pertains to <iper0s operations for 2010H
"nstall!ent sales 1,+00,000
Cost of install!ent sales 1,0+0,000
9eneral and ad!inistrati$e e5penses 1+0,000
Collections on install!ent sales +2&,000
The balance in the deferred ,ross profit account at /ece!ber (1, 2010 should be
a. $((0,000.
b. $*9&,000.
c. $(90,000.
d. $220,000.
10. Joon Co. records all sales usin, the install!ent !ethod of accountin,. "nstall!ent sales
contracts call for (' e;ual !onthly cash pay!ents. ccordin, to the IS:0s conceptual
fra!e)or=, the a!ount of deferred ,ross profit relatin, to collections 12 !onths beyond
the balance sheet date should be reported in the
a. current liabilities section as a deferred re$enue.
b. noncurrent liabilities section as a deferred re$enue.
c. current assets section as a contra account.
d. noncurrent assets section as a contra account.
11. Crane, "nc. is a retailer of ho!e appliances and offers a ser$ice contract on each
appliance sold. Crane sells appliances on install!ent contracts, but all ser$ice contracts
!ust be paid in full at the ti!e of sale. Collections recei$ed for ser$ice contracts should
be recorded as an increase in a
a. deferred re$enue account.
b. sales contracts recei$able $aluation account.
c. stoc=holders0 $aluation account.
d. ser$ice re$enue account.
Mltiple Choi!e Ans"ers—CPA Adapted
Item Ans# Item Ans# Item Ans# Item Ans# Item Ans# Item Ans#
1. a (. d &. c 2. c 9. c 11. a
2. b *. d '. b +. c 10. c
$o# Ans"er %eri&ation
1. a Conceptual.
2. b 6$9,'00,000 A *&%7 E 6$9,000,000 A 1&%7 D $2,920,000.
$10,&00,000
(. d LLLLLL A 6$(&,000,000 E $(1,&00,0007 D $1,1'',''2.
$(1,&00,000
*. d $(,&00,000 E $1,(&0,000 E $1,&2&,000 D $'2&,000.
&. c +00,000 lbs. A $.20 D $&'0,000.
'. b 6$(',000 Q 2*%7 B 6$19+,000 Q (0%7 D $+10,000.
2. c $1,200,000 E $220,000 D $*+0,000 ,ross profit 6*0% ,ross profit rate7
$*+0,000 E 6$2++,000 A .*7 D $('*,+00.
+. c $(00,000 B $&0,000 D $(&0,000
$(&0,000 E $2*&,000 D $10&,000 ,ross profit 6(0% ,ross profit rate7
6$(00,000 E $100,0007 A (0% D $'0,000.
9. c $1,+00,000 E $1,0+0,000 D $220,000 6*0% ,ross profit rate7
$220,000 E 6$+2&,000 A *0%7 D $(90,000.
10. c Conceptual.
11. a Conceptual.
Chapter 45
A!!onting 6or Pensions . Post 3etirement 7ene6its
1. The follo)in, infor!ation pertains to 4opson Co.0s pension planH
ctuarial esti!ate of pro1ected benefit obli,ation at 1C1C11 $22,000
ssu!ed discount rate 10%
Ser$ice costs for 2011 $1+,000
<ension benefits paid durin, 2011 $1&,000
"f no chan,e in actuarial esti!ates occurred durin, 2011, 4opson0s pro1ected benefit
obli,ation at /ece!ber (1, 2011 )as
a. $'*,200.
b. $2&,000.
c. $29,200.
d. $+2,200.
2. "nterest cost included in pension e5pense reco,ni.ed for a period by an e!ployer
sponsorin, a defined-benefit pension plan represents the
a. shorta,e bet)een the e5pected and actual returns on plan assets.
b. increase in the pro1ected benefit obli,ation due to the passa,e of ti!e.
c. increase in the fair $alue of plan assets due to the passa,e of ti!e.
d. a!orti.ation of the discount on accu!ulated OC" 6<SC7.
(. Po,an Corp., a co!pany )hose stoc= is publicly traded, pro$ides a noncontributory
defined-benefit pension plan for its e!ployees. The co!pany0s actuary has pro$ided the
follo)in, infor!ation for the year ended /ece!ber (1, 2011H
<ro1ected benefit obli,ation $'00,000
ccu!ulated benefit obli,ation &2&,000
Iair $alue of plan assets +2&,000
Ser$ice cost 2*0,000
"nterest on pro1ected benefit obli,ation 2*,000
!orti.ation of prior ser$ice cost '0,000
85pected and actual return on plan assets +2,&00
The !ar=et-related asset $alue e;uals the fair $alue of plan assets. 3o contributions
ha$e been !ade for 2011 pension cost. "n its /ece!ber (1, 2011 balance sheet, Po,an
should report a pension asset C liability of
a. <ension liability of $'00,000
b. <ension asset of $+2*,000
c. <ension asset of $22&,000
d. <ension liability of $&2&,000
*. Sei,el Co. !aintains a defined-benefit pension plan for its e!ployees. t each balance
sheet date, Kea,er should report a pension asset C liability e;ual to the
a. accu!ulated benefit obli,ation.
b. pro1ected benefit obli,ation.
c. accu!ulated benefit obli,ation.
d. funded status relati$e to the pro1ected benefit obli,ation.
&. Ohl!an, "nc. !aintains a defined-benefit pension plan for its e!ployees. s of
/ece!ber (1, 2011, the !ar=et $alue of the plan assets is less than the accu!ulated
benefit obli,ation. The pro1ected benefit obli,ation e5ceeds the accu!ulated benefit
obli,ation. "n its balance sheet as of /ece!ber (1, 2011, Ohl!an should report a liability
in the a!ount of the
a. e5cess of the pro1ected benefit obli,ation o$er the fair $alue of the plan assets.
b. e5cess of the accu!ulated benefit obli,ation o$er the fair $alue of the plan assets.
c. pro1ected benefit obli,ation.
d. accu!ulated benefit obli,ation.
'. t /ece!ber (1, 2011, the follo)in, infor!ation )as pro$ided by the Rar,as Corp.
pension plan ad!inistratorH
Iair $alue of plan assets $*,&00,000
ccu!ulated benefit obli,ation &,&+0,000
<ro1ected benefit obli,ation 2,200,000
#hat is the a!ount of the pension liability that should be sho)n on Rar,as0 /ece!ber
(1, 2011 balance sheet%
a. $2,200,000
b. $2,200,000
c. $1,'20,000
d. $1,0+0,000
Mltiple Choi!e Ans"ers—CPA Adapted
Item Ans# Item Ans# Item Ans#
1. d (. c &. a
2. b *. d '. b
$o# Ans"er %eri&ation
1. d $22,000 B $1+,000 B 6$22,000 A .107 E $1&,000 D $+2,200.
2. b Conceptual.
(. c $+2&,000 - $'00,000 D $22&,000.
*. d Conceptual.
&. a Conceptual.
'. b $2,200,000 E $*,&00,000 D $2,200,000.
Chapter 41 –A!!onting 6or Leases
1. Pease does not contain a bar,ain purchase option, but the lease ter! is e;ual to 90
percent of the esti!ated econo!ic life of the leased property. Pease : does not transfer
o)nership of the property to the lessee by the end of the lease ter!, but the lease ter!
is e;ual to 2& percent of the esti!ated econo!ic life of the leased property. 4o) should
the lessee classify these leases%
Pease Pease :
a. Operatin, lease Capital lease
b. Operatin, lease Operatin, lease
c. Capital lease Capital lease
d. Capital lease Operatin, lease
2. On /ece!ber (1, 2011, :urton, "nc. leased !achinery )ith a fair $alue of $+*0,000 fro!
Cey @entals Co. The a,ree!ent is a si5-year noncancelable lease re;uirin, annual
pay!ents of $1'0,000 be,innin, /ece!ber (1, 2011. The lease is appropriately
accounted for by :urton as a capital lease. :urton0s incre!ental borro)in, rate is 11%.
:urton =no)s the interest rate i!plicit in the lease pay!ents is 10%.
The present $alue of an annuity due of 1 for ' years at 10% is *.290+.
The present $alue of an annuity due of 1 for ' years at 11% is *.'9&9.
"n its /ece!ber (1, 2011 balance sheet, :urton should report a lease liability of
a. $'0',&2+.
b. $'+0,000.
c. $2&1,(**.
d. $2'',&2+.
(. On /ece!ber (1, 2010, 4arris Co. leased a !achine fro! Catt, "nc. for a fi$e-year
period. 8;ual annual pay!ents under the lease are $'(0,000 6includin, $(0,000 annual
e5ecutory costs7 and are due on /ece!ber (1 of each year. The first pay!ent )as
!ade on /ece!ber (1, 2010, and the second pay!ent )as !ade on /ece!ber (1,
2011. The fi$e lease pay!ents are discounted at 10% o$er the lease ter!. The present
$alue of !ini!u! lease pay!ents at the inception of the lease and before the first
annual pay!ent )as $2,&02,000. The lease is appropriately accounted for as a capital
lease by 4arris. "n its /ece!ber (1, 2011 balance sheet, 4arris should report a lease
liability of
a. $1,902,000.
b. $1,+22,000.
c. $1,211,+00.
d. $1,*92,200.
*. lessee had a ten-year capital lease re;uirin, e;ual annual pay!ents. The reduction of
the lease liability in year 2 should e;ual
a. the current liability sho)n for the lease at the end of year 1.
b. the current liability sho)n for the lease at the end of year 2.
c. the reduction of the lease liability in year 1.
d. one-tenth of the ori,inal lease liability.
?se the follo)in, infor!ation for ;uestions & and '.
On January 2, 2011, 4ernande., "nc. si,ned a ten-year noncancelable lease for a hea$y duty
drill press. The lease stipulated annual pay!ents of $1&0,000 startin, at the end of the first
year, )ith title passin, to 4ernande. at the e5piration of the lease. 4ernande. treated this
transaction as a capital lease. The drill press has an esti!ated useful life of 1& years, )ith no
sal$a,e $alue. 4ernande. uses strai,ht-line depreciation for all of its plant assets. ,,re,ate
lease pay!ents )ere deter!ined to ha$e a present $alue of $900,000, based on i!plicit interest
of 10%.
&. "n its 2011 inco!e state!ent, )hat a!ount of interest e5pense should 4ernande. report
fro! this lease transaction%
a. $0
b. $&',2&0
c. $2&,000
d. $90,000
'. "n its 2011 inco!e state!ent, )hat a!ount of depreciation e5pense should 4ernande.
report fro! this lease transaction%
a. $1&0,000
b. $100,000
c. $90,000
d. $'0,000
2. "n a lease that is recorded as a sales-type lease by the lessor, interest re$enue
a. should be reco,ni.ed in full as re$enue at the lease0s inception.
b. should be reco,ni.ed o$er the period of the lease usin, the strai,ht-line !ethod.
c. should be reco,ni.ed o$er the period of the lease usin, the effecti$e interest
!ethod.
d. does not arise.
+. Torrey Co. !anufactures e;uip!ent that is sold or leased. On /ece!ber (1, 2011,
Torrey leased e;uip!ent to /alton for a fi$e-year period endin, /ece!ber (1, 201', at
)hich date o)nership of the leased asset )ill be transferred to /alton. 8;ual pay!ents
under the lease are $220,000 6includin, $20,000 e5ecutory costs7 and are due on
/ece!ber (1 of each year. The first pay!ent )as !ade on /ece!ber (1, 2011.
Collectibility of the re!ainin, lease pay!ents is reasonably assured, and Torrey has no
!aterial cost uncertainties. The nor!al sales price of the e;uip!ent is $220,000, and
cost is $'00,000. Ior the year ended /ece!ber (1, 2011, )hat a!ount of inco!e
should Torrey reali.e fro! the lease transaction%
a. $120,000
b. $220,000
c. $2(0,000
d. $((0,000
>9. Ja!ar Co. sold its head;uarters buildin, at a ,ain, and si!ultaneously leased bac= the
buildin,. The lease )as reported as a capital lease. t the ti!e of the sale, the ,ain
should be reported as
a. operatin, inco!e.
b. an e5traordinary ite!, net of inco!e ta5.
c. a separate co!ponent of stoc=holders0 e;uity.
d. a deferred ,ain.
>10. On /ece!ber (1, 2011, 4aden Corp. sold a !achine to @yan and si!ultaneously
leased it bac= for one year. <ertinent infor!ation at this date follo)sH
Sales price $900,000
Carryin, a!ount +2&,000
<resent $alue of reasonable lease rentals
6$2,&00 for 12 !onths T 12%7 +&,000
8sti!ated re!ainin, useful life 12 years
"n 4adenOs /ece!ber (1, 2011 balance sheet, the deferred profit fro! the sale of this
!achine should be
a. $+&,000.
b. $2&,000.
c. $10,000.
d. $0.
Mltiple Choi!e Ans"ers—CPA Adapted
Item Ans# Item Ans# Item Ans# Item Ans# Item Ans#
1. c (. d &. d 2. c >9. d
2. a *. a '. d +. a >10 d
$o# Ans"er %eri&ation
1. c Conceptual.
2. a 6$1'0,000 A *.290+7 E $1'0,000 D $'0',&2+.
(. d $2,&02,000 E $'(0,000 B $(0,000 D $1,902,000 620107.
$1,902,000 E F$'00,000 E 6$1,902,000 A .107G D $1,*92,200 620117.
*. a Conceptual.
&. d $900,000 A .10 D $90,000.
'. d $900,000 Q 1& D $'0,000.
2. c Conceptual.
+. a $220,000 E $'00,000 D $120,000.
>9. d Conceptual.
>10. d
000 , 900 $
000 , 85 $
D 9.**%, U 10% of IR of asset ∴ it is a !inor leasebac=.
Chapter 441A!!onting Changes and Error Anal,sis
1. #hich of the follo)in, should be reported as a prior period ad1ust!ent%
Chan,e in Chan,e fro!
8sti!ated Pi$es ?naccepted <rinciple
of /epreciable ssets to ccepted <rinciple
a. Kes Kes
b. 3o Kes
c. Kes 3o
d. 3o 3o
2. On /ece!ber (1, 2011, 9rantha!, "nc. appropriately chan,ed its in$entory $aluation
!ethod to I"IO cost fro! )ei,hted-a$era,e cost for financial state!ent and inco!e ta5
purposes. The chan,e )ill result in a $1,&00,000 increase in the be,innin, in$entory at
January 1, 2011. ssu!e a (0% inco!e ta5 rate. The cu!ulati$e effect of this
accountin, chan,e on be,innin, retained earnin,s is
a. $0.
b. $*&0,000.
c. $1,0&0,000.
d. $1,&00,000.
(. On January 1, 2011, Irost Corp. chan,ed its in$entory !ethod to I"IO fro! P"IO for
both financial and inco!e ta5 reportin, purposes. The chan,e resulted in an $+00,000
increase in the January 1, 2011 in$entory. ssu!e that the inco!e ta5 rate for all years
is (0%. The cu!ulati$e effect of the accountin, chan,e should be reported by Irost in
its 2011
a. retained earnin,s state!ent as a $&'0,000 addition to the be,innin, balance.
b. inco!e state!ent as a $&'0,000 cu!ulati$e effect of accountin, chan,e.
c. retained earnin,s state!ent as an $+00,000 addition to the be,innin, balance.
d. inco!e state!ent as an $+00,000 cu!ulati$e effect of accountin, chan,e.
*. On January 1, 200+, Pa=e Co. purchased a !achine for $292,000 and depreciated it by
the strai,ht-line !ethod usin, an esti!ated useful life of ei,ht years )ith no sal$a,e
$alue. On January 1, 2011, Pa=e deter!ined that the !achine had a useful life of si5
years fro! the date of ac;uisition and )ill ha$e a sal$a,e $alue of $22,000. n
accountin, chan,e )as !ade in 2011 to reflect these additional data. The accu!ulated
depreciation for this !achine should ha$e a balance at /ece!ber (1, 2011 of
a. $*(+,000.
b. $*'2,000.
c. $*+0,000.
d. $&2+,000.
&. On January 1, 200+, 4ess Co. purchased a patent for $&9&,000. The patent is bein,
a!orti.ed o$er its re!ainin, le,al life of 1& years e5pirin, on January 1, 202(. /urin,
2011, 4ess deter!ined that the econo!ic benefits of the patent )ould not last lon,er
than ten years fro! the date of ac;uisition. #hat a!ount should be reported in the
balance sheet for the patent, net of accu!ulated a!orti.ation, at /ece!ber (1, 2011%
a. $(&2,000
b. $*0+,000
c. $*20,000
d. $*(',(2&
'. /urin, 2010, a te5tboo= )ritten by Jercer Co. personnel )as sold to @oar= <ublishin,,
"nc., for royalties of 10% on sales. @oyalties are recei$able se!iannually on Jarch (1,
for sales in July throu,h /ece!ber of the prior year, and on Septe!ber (0, for sales in
January throu,h June of the sa!e year.
• @oyalty inco!e of $10+,000 )as accrued at 12C(1C10 for the period July-/ece!ber
2010.
• @oyalty inco!e of $120,000 )as recei$ed on (C(1C11, and $1&',000 on 9C(0C11.
• Jercer learned fro! @oar= that sales sub1ect to royalty )ere esti!ated at
$1,'20,000 for the last half of 2011.
"n its inco!e state!ent for 2011, Jercer should report royalty inco!e at
a. $22',000.
b. $2++,000.
c. $(1+,000.
d. $((0,000.
2. On January 1, 2010, Jani= Corp. ac;uired a !achine at a cost of $&00,000. "t is to be
depreciated on the strai,ht-line !ethod o$er a fi$e-year period )ith no residual $alue.
:ecause of a boo==eepin, error, no depreciation )as reco,ni.ed in Jani=0s 2010
financial state!ents. The o$ersi,ht )as disco$ered durin, the preparation of Jani=0s
2011 financial state!ents. /epreciation e5pense on this !achine for 2011 should be
a. $0.
b. $100,000.
c. $12&,000.
d. $200,000.
+. On /ece!ber (1, 2011, special insurance costs, incurred but unpaid, )ere not
recorded. "f these insurance costs )ere related to )or= in process, )hat is the effect of
the o!ission on accrued liabilities and retained earnin,s in the /ece!ber (1, 2011
balance sheet%
ccrued Piabilities @etained 8arnin,s
a. 3o effect 3o effect
b. 3o effect O$erstated
c. ?nderstated 3o effect
d. ?nderstated O$erstated
9. :lac=, "nc. is a calendar-year corporation )hose financial state!ents for 2010 and 2011
included errors as follo)sH
Kear 8ndin, "n$entory /epreciation 85pense
2010 $1'2,000 o$erstated $1(&,000 o$erstated
2011 &*,000 understated *&,000 understated
ssu!e that purchases )ere recorded correctly and that no correctin, entries )ere
!ade at /ece!ber (1, 2010, or at /ece!ber (1, 2011. ",norin, inco!e ta5es, by ho)
!uch should :lac=0s retained earnin,s be retroacti$ely ad1usted at January 1, 2012%
a. $1**,000 increase
b. $(',000 increase
c. $1+,000 decrease
d. $9,000 increase
Mltiple Choi!e Ans"ers—CPA Adapted
Item Ans# Item Ans# Item Ans# Item Ans# Item Ans#
1. b (. a &. b 2. b 9. a
2. c *. a '. d +. c
$o# Ans"er %eri&ation
1. b Conceptual.
2. c $1,&00,000 A 61 E .(7 D $1,0&0,000.
(. a $+00,000 A 61 E .(7 D $&'0,000.
*. a $292,000 A (C+ D $292,000
$292,000 B F6$292,000 E $292,000 E $22,0007 A 1C(G D $*(+,000.
&. b $&9&,000 A (C1& D $119,000
$&9&,000 E $119,000 E F6$&9&,000 E $119,0007 A 1C2G D $*0+,000.
'. d 6$120,000 E $10+,0007 B $1&',000 B 6$1,'20,000 A .107 D $((0,000.
2. b $&00,000 Q & D $100,000.
+. c Conceptual.
9. a $&*,000 6u7 B $1(&,000 6u7 E $*&,000 6o7 D $1**,000 6u7.
Chapter 481 (tatement o6 Cash 9lo"s
?se the follo)in, infor!ation for ;uestions 1 and 2.
co!pany ac;uired a buildin,, payin, a portion of the purchase price in cash and issuin, a
!ort,a,e note payable to the seller for the balance.
1. "n a state!ent of cash flo)s, )hat a!ount is included in in$estin, acti$ities for the abo$e
transaction%
a. Cash pay!ent
b. c;uisition price
c. Mero
d. Jort,a,e a!ount
2. "n a state!ent of cash flo)s, )hat a!ount is included in financin, acti$ities for the abo$e
transaction%
a. Cash pay!ent
b. c;uisition price
c. Mero
d. Jort,a,e a!ount
?se the follo)in, infor!ation for ;uestions ( and *.
S!iley Corp.0s transactions for the year ended /ece!ber (1, 2011 included the follo)in,H
• <urchased real estate for $&&0,000 cash )hich )as borro)ed fro! a ban=.
• Sold a$ailable-for-sale securities for $&00,000.
• <aid di$idends of $'00,000.
• "ssued &00 shares of co!!on stoc= for $2&0,000.
• <urchased !achinery and e;uip!ent for $12&,000 cash.
• <aid $*&0,000 to)ard a ban= loan.
• @educed accounts recei$able by $100,000.
• "ncreased accounts payable $200,000.
(. S!iley0s net cash used in in$estin, acti$ities for 2011 )as
a. $'2&,000.
b. $(2&,000.
c. $12&,000.
d. $&0,000.
*. S!iley0s net cash used in financin, acti$ities for 2011 )as
a. $&0,000.
b. $2&0,000.
c. $*&0,000.
d. $&00,000.
?se the follo)in, infor!ation for ;uestions & and '.
<ea$y Corp.0s transactions for the year ended /ece!ber (1, 2011 included the follo)in,H
• c;uired &0% of 9ant Corp.0s co!!on stoc= for $1+0,000 cash )hich )as borro)ed fro! a
ban=.
• "ssued &,000 shares of its preferred stoc= for land ha$in, a fair $alue of $(20,000.
• "ssued &00 of its 11% debenture bonds, due 201', for $(92,000 cash.
• <urchased a patent for $220,000 cash.
• <aid $120,000 to)ard a ban= loan.
• Sold a$ailable-for-sale securities for $29',000.
• 4ad a net increase in returnable custo!er deposits 6lon,-ter!7 of $++,000.
&. <ea$yOs net cash pro$ided by in$estin, acti$ities for 2011 )as
a. $29',000.
b. $(9',000.
c. $*2',000.
d. $'1',000.
'. <ea$yOs net cash pro$ided by financin, acti$ities for 2011 )as
a. $*&2,000.
b. $&*0,000.
c. $&22,000.
d. $''0,000.
?se the follo)in, infor!ation for ;uestions 2 throu,h 9.
Ja!ison Corp.0s balance sheet accounts as of /ece!ber (1, 2011 and 2010 and infor!ation
relatin, to 2011 acti$ities are presented belo).
/ece!ber (1,
2011 2010
ssets
Cash $ **0,000 $ 200,000
Short-ter! in$est!ents '00,000 L
ccounts recei$able 6net7 1,020,000 1,020,000
"n$entory 1,(+0,000 1,200,000
Pon,-ter! in$est!ents *00,000 '00,000
<lant assets (,*00,000 2,000,000
ccu!ulated depreciation 6900,0007 6900,0007
<atent 1+0,000 200,000
Total assets $',&20,000 $*,(20,000
Piabilities and Stoc=holders0 8;uity
ccounts payable and accrued liabilities $1,''0,000 $1,**0,000
3otes payable 6nontrade7 &+0,000 L
Co!!on stoc=, $10 par 1,'00,000 1,*00,000
dditional paid-in capital +00,000 &00,000
@etained earnin,s 1,++0,000 9+0,000
Total liabilities and stoc=holders0 e;uity $',&20,000 $*,(20,000
"nfor!ation relatin, to 2011 acti$itiesH
• 3et inco!e for 2011 )as $1,&00,000.
• Cash di$idends of $'00,000 )ere declared and paid in 2011.
• 8;uip!ent costin, $1,000,000 and ha$in, a carryin, a!ount of $(20,000 )as sold in 2011
for $('0,000.
• lon,-ter! in$est!ent )as sold in 2011 for $(20,000. There )ere no other transactions
affectin, lon,-ter! in$est!ents in 2011.
• 20,000 shares of co!!on stoc= )ere issued in 2011 for $2& a share.
• Short-ter! in$est!ents consist of treasury bills !aturin, on 'C(0C12.
2. 3et cash pro$ided by Ja!isonOs 2011 operatin, acti$ities )as
a. $1,&00,000.
b. $2,120,000.
c. $2,0+0,000.
d. $2,1'0,000.
+. 3et cash used in Ja!isonOs 2011 in$estin, acti$ities )as
a. $2,(20,000.
b. $1,+20,000.
c. $1,'+0,000.
d. $1,220,000.
9. 3et cash pro$ided by Ja!isonOs 2011 financin, acti$ities )as
a. $*+0,000.
b. $&20,000.
c. $1,0+0,000.
d. $1,'+0,000.
10. Io55 Corp.0s co!parati$e balance sheet at /ece!ber (1, 2011 and 2010 reported
accu!ulated depreciation balances of $+00,000 and $'00,000, respecti$ely. <roperty
)ith a cost of $&0,000 and a carryin, a!ount of $(+,000 )as the only property sold in
2011. /epreciation char,ed to operations in 2011 )as
a. $1++,000.
b. $200,000.
c. $212,000.
d. $22*,000.
11. 3a,el Co.0s prepaid insurance )as $90,000 at /ece!ber (1, 2011 and $*&,000 at
/ece!ber (1, 2010. "nsurance e5pense )as $(',000 for 2011 and $22,000 for 2010.
#hat a!ount of cash disburse!ents for insurance )ould be reported in 3a,el0s 2011
net cash pro$ided by operatin, acti$ities presented on a direct basis%
a. $99,000.
b. $+1,000.
c. $&*,000.
d. $(',000.
Mltiple Choi!e Ans"ers—CPA Adapted
Item Ans# Item Ans# Item Ans# Item Ans# Item Ans# Item Ans#
1. a (. c &. b 2. c 9. a 11. b
2. c *. b '. b +. a 10. c
$o# Ans"er %eri&ation
1. a Conceptual.
2. c Conceptual.
(. c 6$&&0,0007 B $&00,000 E $12&,000 D 6$12&,0007.
*. b $&&0,000 E $'00,000 B $2&0,000 E $*&0,000 D 6$2&0,0007.
&. b 6$1+0,0007 E $220,000 B $29',000 D $(9',000.
'. b $1+0,000 B $(92,000 E $120,000 B $++,000 D $&*0,000.
2. c $1,&00,000 E $1+0,000 B 6$900,000 E $900,000 B $'+0,0007 - 6$('0,000 E
$(20,0007 B $20,000 B $220,000 E 6$(20,000 E $200,0007 D $2,0+0,000.
+. a $(20,000 B $('0,000 E 6$(,*00,000 B $1,000,000 E $2,000,0007 E $'00,000 D
$2,(20,000.
9. a 20,000 A $2& D $&00,000
$&00,000 B $&+0,000 E $'00,000 D $*+0,000.
10. c $+00,000 E $'00,000 B 6$&0,000 E $(+,0007 D $212,000.
11. b $90,000 B $(',000 E $*&,000 D $+1,000.
Chapter 441 9ll %is!losre in 9inan!ial 3eporting
1. #hich of the follo)in, facts concernin, plant assets should be included in the su!!ary
of si,nificant accountin, policies%
/epreciation Jethod Co!position
a. 3o Kes
b. Kes Kes
c. Kes 3o
d. 3o 3o
2. Iarr, "nc. is a !ultidi$isional corporation )hich has both interse,!ent sales and sales to
unaffiliated custo!ers. Iarr should report se,!ent financial infor!ation for each di$ision
!eetin, )hich of the follo)in, criteria%
a. Se,!ent profit or loss is 10% or !ore of consolidated profit or loss.
b. Se,!ent profit or loss is 10% or !ore of co!bined profit or loss of all co!pany
se,!ents.
c. Se,!ent re$enue is 10% or !ore of co!bined re$enue of all the co!pany
se,!ents.
d. Se,!ent re$enue is 10% or !ore of consolidated re$enue.
(. ?nruh Corp. and its di$isions are en,a,ed solely in !anufacturin, operations. The
follo)in, data 6consistent )ith prior years0 data7 pertain to the industries in )hich
operations )ere conducted for the year ended /ece!ber (1, 2011.
ssets
"ndustry @e$enue <rofit 12C(1C11
$ +,000,000 $1,(20,000 $1',000,000
: ',*00,000 1,120,000 1*,000,000
C *,+00,000 9'0,000 10,000,000
/ 2,*00,000 **0,000 &,200,000
8 (,*00,000 &*0,000 &,'00,000
I 1,200,000 1+0,000 2,*00,000
$2',200,000 $*,&'0,000 $&(,200,000
"n its se,!ent infor!ation for 2011, ho) !any reportable se,!ents does ?nruh ha$e%
a. Three
b. Iour
c. Ii$e
d. Si5
*. The follo)in, infor!ation pertains to 3i5on Corp. and its di$isions for the year ended
/ece!ber (1, 2011.
Sales to unaffiliated custo!ers $2,&00,000
"nterse,!ent sales of products si!ilar to those sold to
unaffiliated custo!ers 2&0,000
"nterest earned on loans to other operatin, se,!ents &0,000
3i5on and all of its di$isions are en,a,ed solely in !anufacturin, operations. 3i5on has
a reportable se,!ent if that se,!ent0s re$enue e5ceeds
a. $((0,000.
b. $(2&,000.
c. $2&&,000.
d. $2&0,000.
&. d$ertisin, costs !ay be accrued or deferred to pro$ide an appropriate e5pense in each
period for
"nteri! Kear-end
Iinancial @eportin, Iinancial @eportin,
a. Kes 3o
b. Kes Kes
c. 3o 3o
d. 3o Kes
'. Jayo Corp. has esti!ated that total depreciation e5pense for the year endin, /ece!ber (1,
2011 )ill a!ount to $(00,000, and that 2011 year-end bonuses to e!ployees )ill total
$'00,000. "n Jayo0s interi! inco!e state!ent for the si5 !onths ended June (0, 2011,
)hat is the total a!ount of e5pense relatin, to these t)o ite!s that should be reported%
a. $0.
b. $1&0,000.
c. $*&0,000.
d. $900,000.
2. Iina Corp. had the follo)in, transactions durin, the ;uarter ended Jarch (1, 2011H
Poss fro! hurricane da!a,e $(&0,000
<ay!ent of fire insurance pre!iu! for calendar year 2011 &00,000
#hat a!ount should be included in Iina0s inco!e state!ent for the ;uarter ended
Jarch (1, 2011%
85traordinary Poss "nsurance 85pense
a. $(&0,000 $&00,000
b. $(&0,000 $12&,000
c. $+2,&00 $12&,000
d. $0 $&00,000
+. Ior interi! financial reportin,, an e5traordinary ,ain occurrin, in the second ;uarter
should be
a. reco,ni.ed ratably o$er the last three ;uarters.
b. reco,ni.ed ratably o$er all four ;uarters )ith the first ;uarter bein, restated.
c. reco,ni.ed in the second ;uarter.
d. disclosed by note only in the second ;uarter.
>9. 4o) is the a$era,e in$entory used in the calculation of each of the follo)in,%
cid-Test 6Vuic=7 @atio "n$entory Turno$er @atio
a. 3u!erator 3u!erator
b. 3u!erator /eno!inator
c. 3ot ?sed /eno!inator
d. 3ot ?sed 3u!erator
>10. #hich of the follo)in, ratios is6are7 useful in assessin, a co!pany0s ability to !eet
current !aturin, or short-ter! obli,ations%
cid-Test @atio /ebt to Total ssets @atio
a. 3o 3o
b. 3o Kes
c. Kes Kes
d. Kes 3o
>11. #hich of the follo)in, ratios should be used in e$aluatin, the effecti$eness )ith )hich
the co!pany uses its assets%
@ecei$ables Turno$er <ayout @atio
a. Kes Kes
b. 3o 3o
c. Kes 3o
d. 3o Kes
Mltiple Choi!e Ans"ers—CPA Adapted
Item Ans# Item Ans# Item Ans# Item Ans# Item Ans# Item Ans#
1. c (. b &. b 2. b >9. c >11. c
2. c *. b '. c +. c >10. d
$o# Ans"er %eri&ation
1. c Conceptual.
2. c Conceptual.
(. b @e$enue testH $2',200,000 A 10% D $2,'20,000
<rofit testH $*,&'0,000 A 10% D $*&',000
sset testH $&(,200,000 A 10% D $&,(20,000
, :, C, 8.
*. b 6$2,&00,000 B $2&0,0007 A 10% D $(2&,000.
&. b Conceptual.
'. c 6$(00,000 B $'00,0007 Q 2 D $*&0,000.
2. b 85traordinary loss D $(&0,000
"nsurance e5pense D $&00,000 Q * D $12&,000.
+. c Conceptual.
>9. c Conceptual.
>10. d Conceptual.
>11. c Conceptual.