Professional Documents
Culture Documents
23. Which of the following situations does NOT base an accounting measure on present
values?
a. Pensions.
b. Prepaid insurance.
c. Leases.
d. Sinking funds.
6-2 Test Bank for Intermediate Accounting, Thirteenth Edition
26. If you invest $50,000 to earn 8% interest, which of the following compounding approaches
would return the lowest amount after one year?
a. Daily.
b. Monthly.
c. Quarterly.
d. Annually.
27. Which factor would be greater — the present value of $1 for 10 periods at 8% per period or
the future value of $1 for 10 periods at 8% per period?
a. Present value of $1 for 10 periods at 8% per period.
b. Future value of $1 for 10 periods at 8% per period.
c. The factors are the same.
d. Need more information.
28. Which of the following tables would show the smallest value for an interest rate of 5% for
six periods?
a. Future value of 1
b. Present value of 1
c. Future value of an ordinary annuity of 1
d. Present value of an ordinary annuity of 1
29. Which table would you use to determine how much you would need to have deposited three
years ago at 10% compounded annually in order to have $1,000 today?
a. Future value of 1 or present value of 1
b. Future value of an annuity due of 1
c. Future value of an ordinary annuity of 1
d. Present value of an ordinary annuity of 1
30. Which table would you use to determine how much must be deposited now in order to
provide for 5 annual withdrawals at the beginning of each year, starting one year hence?
a. Future value of an ordinary annuity of 1
b. Future value of an annuity due of 1
c. Present value of an annuity due of 1
d. None of these
31. Which table has a factor of 1.00000 for 1 period at every interest rate?
a. Future value of 1
b. Present value of 1
c. Future value of an ordinary annuity of 1
d. Present value of an ordinary annuity of 1
Accounting and the Time Value of Money 6-3
32. Which table would show the largest factor for an interest rate of 8% for five periods?
a. Future value of an ordinary annuity of 1
b. Present value of an ordinary annuity of 1
c. Future value of an annuity due of 1
d. Present value of an annuity due of 1
33. Which of the following tables would show the smallest factor for an interest rate of 10% for
six periods?
a. Future value of an ordinary annuity of 1
b. Present value of an ordinary annuity of 1
c. Future value of an annuity due of 1
d. Present value of an annuity due of 1
34. The figure .94232 is taken from the column marked 2% and the row marked three periods
in a certain interest table. From what interest table is this figure taken?
a. Future value of 1
b. Future value of annuity of 1
c. Present value of 1
d. Present value of annuity of 1
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35. Which of the following tables would show the largest value for an interest rate of 10% for 8
periods?
a. Future amount of 1 table.
b. Present value of 1 table.
c. Future amount of an ordinary annuity of 1 table.
d. Present value of an ordinary annuity of 1 table.
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36. On June 1, 2010, Pitts Company sold some equipment to Gannon Company. The two
companies entered into an installment sales contract at a rate of 8%. The contract required
8 equal annual payments with the first payment due on June 1, 2010. What type of
compound interest table is appropriate for this situation?
a. Present value of an annuity due of 1 table.
b. Present value of an ordinary annuity of 1 table.
c. Future amount of an ordinary annuity of 1 table.
d. Future amount of 1 table.
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37. Which of the following transactions would best use the present value of an annuity due of
1 table?
a. Fernetti, Inc. rents a truck for 5 years with annual rental payments of $20,000 to be
made at the beginning of each year.
b. Edmiston Co. rents a warehouse for 7 years with annual rental payments of $120,000
to be made at the end of each year.
c. Durant, Inc. borrows $20,000 and has agreed to pay back the principal plus interest in
three years.
d. Babbitt, Inc. wants to deposit a lump sum to accumulate $50,000 for the construction of
a new parking lot in 4 years.
6-4 Test Bank for Intermediate Accounting, Thirteenth Edition
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38. A series of equal receipts at equal intervals of time when each receipt is received at the
beginning of each time period is called an
a. ordinary annuity.
b. annuity in arrears.
c. annuity due.
d. unearned receipt.
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39. In the time diagram below, which concept is being depicted?
0 1 2 3 4
$1 $1 $1 $1
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41. An amount is deposited for eight years at 8%. If compounding occurs quarterly, then the
table value is found at
a. 8% for eight periods.
b. 2% for eight periods.
c. 8% for 32 periods.
d. 2% for 32 periods.
45. What is the primary difference between an ordinary annuity and an annuity due?
a. The timing of the periodic payment.
b. The interest rate.
c. Annuity due only relates to present values.
d. Ordinary annuity only relates to present values.
46. What is the relationship between the future value of one and the present value of one?
a. The present value of one equals the future value of one plus one.
b. The present value of one equals one plus future value factor for n-1 periods.
c. The present value of one equals one divided by the future value of one.
d. The present value of one equals one plus the future value factor for n+1 value
47. Peter invests $100,000 in a 3-year certificate of deposit earning 3.5% at his local bank.
Which time value concept would be used to determine the maturity value of the certificate?
a. Present value of one.
b. Future value of one.
c. Present value of an annuity due.
d. Future value of an ordinary annuity.
48. Jerry recently was offered a position with a major accounting firm. The firm offered Jerry
either a signing bonus of $23,000 payable on the first day of work or a signing bonus of
$26,000 payable after one year of employment. Assuming that the relevant interest rate is
10%, which option should Jerry choose?
a. The options are equivalent.
b. Insufficient information to determine.
c. The signing bonus of $23,000 payable on the first day of work.
d. The signing bonus of $26,000 payable after one year of employment.
49. If Jethro wanted to save a set amount each month in order to buy a new pick-up truck when
the new models are next available, which time value concept would be used to determine
the monthly payment?
a. Present value of one.
b. Future value of one.
c. Present value of an annuity due.
d. Future value of an ordinary annuity.
6-6 Test Bank for Intermediate Accounting, Thirteenth Edition
50. Betty wants to know how much she should begin saving each month to fund her retirement.
What kind of problem is this?
a. Present value of one.
b. Future value of an ordinary annuity.
c. Present value of an ordinary.
d. Future value of one.
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51 If the interest rate is 10%, the factor for the future value of annuity due of 1 for n = 5, i =
10% is equal to the factor for the future value of an ordinary annuity of 1 for n = 5, i = 10%
a. plus 1.10.
b. minus 1.10.
c. multiplied by 1.10.
d. divided by 1.10.
54. Al Darby wants to withdraw $20,000 (including principal) from an investment fund at the end
of each year for five years. How should he compute his required initial investment at the
beginning of the first year if the fund earns 10% compounded annually?
a. $20,000 times the future value of a 5-year, 10% ordinary annuity of 1.
b. $20,000 divided by the future value of a 5-year, 10% ordinary annuity of 1.
c. $20,000 times the present value of a 5-year, 10% ordinary annuity of 1.
d. $20,000 divided by the present value of a 5-year, 10% ordinary annuity of 1.
55. Sue Gray wants to invest a certain sum of money at the end of each year for five years. The
investment will earn 6% compounded annually. At the end of five years, she will need a
total of $40,000 accumulated. How should she compute her required annual invest-ment?
a. $40,000 times the future value of a 5-year, 6% ordinary annuity of 1.
b. $40,000 divided by the future value of a 5-year, 6% ordinary annuity of 1.
c. $40,000 times the present value of a 5-year, 6% ordinary annuity of 1.
d. $40,000 divided by the present value of a 5-year, 6% ordinary annuity of 1.
Accounting and the Time Value of Money 6-7
56. An accountant wishes to find the present value of an annuity of $1 payable at the beginning
of each period at 10% for eight periods. The accountant has only one present value table
which shows the present value of an annuity of $1 payable at the end of each period. To
compute the present value, the accountant would use the present value factor in the 10%
column for
a. seven periods.
b. eight periods and multiply by (1 + .10).
c. eight periods.
d. nine periods and multiply by (1 – .10).
57. If an annuity due and an ordinary annuity have the same number of equal payments and
the same interest rates, then
a. the present value of the annuity due is less than the present value of the ordinary
annuity.
b. the present value of the annuity due is greater than the present value of the ordinary
annuity.
c. the future value of the annuity due is equal to the future value of the ordinary annuity.
d. the future value of the annuity due is less than the future value of the ordinary annuity.
58. What is the relationship between the present value factor of an ordinary annuity and the
present value factor of an annuity due for the same interest rate?
a. The ordinary annuity factor is not related to the annuity due factor.
b. The annuity due factor equals one plus the ordinary annuity factor for n−1 periods.
c. The ordinary annuity factor equals one plus the annuity due factor for n+1 periods.
d. The annuity due factor equals the ordinary annuity factor for n+1 periods minus one.
59. Paula purchased a house for $300,000. After providing a 20% down payment, she borrowed
the balance from the local savings and loan under a 30-year 6% mortgage loan requiring
equal monthly installments at the end of each month. Which time value concept would be
used to determine the monthly payment?
a. Present value of one.
b. Future value of one.
c. Present value of an ordinary annuity.
d. Future value of an ordinary annuity.
60. Stemway requires a new manufacturing facility. Management found three locations; all of
which would provide needed capacity, the only difference is the price. Location A may be
purchased for $500,000. Location B may be acquired with a down payment of $100,000
and annual payments at the end of each of the next twenty years of $50,000. Location C
requires $40,000 payments at the beginning of each of the next twenty-five years. Assuming
Stemway's borrowing costs are 8% per annum, which option is the least costly to the
company?
a. Location A.
b. Location B.
c. Location C.
d. Location A and Location B.
6-8 Test Bank for Intermediate Accounting, Thirteenth Edition
CHAPTER 13
CURRENT LIABILITIES AND CONTINGENCIES
MULTIPLE CHOICE—Conceptual
21. Liabilities are
a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with generally
accepted accounting principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in the future.
24. Among the short-term obligations of Lance Company as of December 31, the balance sheet
date, are notes payable totaling $250,000 with the Madison National Bank. These are 90-
Accounting and the Time Value of Money 6-9
day notes, renewable for another 90-day period. These notes should be classified on the
balance sheet of Lance Company as
a. current liabilities.
b. deferred charges.
c. long-term liabilities.
d. intermediate debt.
25. Which of the following is not true about the discount on short-term notes payable?
a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the balance
sheet.
c. When there is a discount on a note payable, the effective interest rate is higher than the
stated discount rate.
d. All of these are true.
28. Which of the following should not be included in the current liabilities section of the balance
sheet?
a. Trade notes payable
b. Short-term zero-interest-bearing notes payable
c. The discount on short-term notes payable
d. All of these are included
31. Of the following items, the only one which should not be classified as a current liability is
a. current maturities of long-term debt.
b. sales taxes payable.
c. short-term obligations expected to be refinanced.
d. unearned revenues.
33. Which of the following is a characteristic of a current liability but not a long-term liability?
a. Unavoidable obligation.
b. Present obligation that entails settlement by probable future transfer or use of cash,
goods, or services.
c. Liquidation is reasonably expected to require use of existing resources classified as
current assets or create other current liabilities.
d. Transaction or other event creating the liability has already occurred.
34. Which of the following is not considered a part of the definition of a liability?
a. Unavoidable obligation.
b. Transaction or other event creating the liability has already occurred.
c. Present obligation that entails settlement by probable future transfer or use of cash,
goods, or services.
d. Liquidation is reasonably expected to require use of existing resources classified as
current assets or create other current liabilities.
35. Why is the liability section of the balance sheet of primary importance to bankers?
a. To evaluate the entity's credit quality.
b. To assist in understanding the entity's liquidity.
c. To better understand sources of repayment.
d. To evaluate operating efficiency.
36. What is the relationship between current liabilities and a company's operating cycle?
a. Liquidation of current liabilities is reasonably expected within the company's operating
cycle (or one year if less).
b. Current liabilities are the result of operating transactions.
c. Current liabilities can't exceed the amount incurred in one operating cycle.
d. There is no relationship between the two.
37. What is the relationship between present value and the concept of a liability?
a. Present values are used to measure certain liabilities.
b. Present values are not used to measure liabilities.
c. Present values are used to measure all liabilities.
d. Present values are only used to measure long-term liabilities.
Accounting and the Time Value of Money 6 - 11
39. Where is debt callable by the creditor reported on the debtor's financial statements?
a. Long-term liability.
b. Current liability if the creditor intends to call the debt within the year, otherwise a long-
term liability.
c. Current liability if it is probable that creditor will call the debt within the year, otherwise
a long-term liability.
d. Current liability.
40. Which of the following is not a condition necessary to exclude a short-term obligation from
current liabilities?
a. Intend to refinance the obligation on a long-term basis.
b. Obligation must be due with one year.
c. Demonstrate the ability to complete the refinancing.
d. Subsequently refinance the obligation on a long-term basis.
41. Which of the following does not demonstrate evidence regarding the ability to consummate
a refinancing of short-term debt?
a. Management indicated that they are going to refinance the obligation.
b. Actually refinance the obligation.
c. Have capacity under existing financing agreements that can be used to refinance the
obligation.
d. Enter into a financing agreement that clearly permits the entity to refinance the
obligation.
42. A company has not declared a dividend on its cumulative preferred stock for the past three
years. What is the required accounting treatment or disclosure in this situation?
a. Record a liability for cumulative amount of preferred stock dividends not declared.
b. Disclose the amount of the dividends in arrears.
c. Record a liability for the current year's dividends only.
d. No disclosure or recognition is required.
43. Which of the following situations may give rise to unearned revenue?
a. Providing trade credit to customers.
b. Selling inventory.
c. Selling magazine subscriptions.
d. Providing manufacturer warranties.
45. The ability to consummate the refinancing of a short-term obligation may be demon-
strated by
a. actually refinancing the obligation by issuing a long-term obligation after the date of the
balance sheet but before it is issued.
b. entering into a financing agreement that permits the enterprise to refinance the debt on
a long-term basis.
c. actually refinancing the obligation by issuing equity securities after the date of the
balance sheet but before it is issued.
d. all of these.
47. Which of the following is not a correct statement about sales taxes?
a. Sales taxes are an expense of the seller.
b. Many companies record sales taxes in the sales account.
c. If sales taxes are included in the sales account, the first step to find the amount of sales
taxes is to divide sales by 1 plus the sales tax rate.
d. All of these are true.
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48. If a short-term obligation is excluded from current liabilities because of refinancing, the
footnote to the financial statements describing this event should include all of the following
information except
a. a general description of the financing arrangement.
b. the terms of the new obligation incurred or to be incurred.
c. the terms of any equity security issued or to be issued.
d. the number of financing institutions that refused to refinance the debt, if any.
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49. In accounting for compensated absences, the difference between vested rights and
accumulated rights is
a. vested rights are normally for a longer period of employment than are accumulated
rights.
b. vested rights are not contingent upon an employee's future service.
c. vested rights are a legal and binding obligation on the company, whereas accumulated
rights expire at the end of the accounting period in which they arose.
d. vested rights carry a stipulated dollar amount that is owed to the employee; accumulated
rights do not represent monetary compensation.
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50. An employee's net (or take-home) pay is determined by gross earnings minus amounts for
income tax withholdings and the employee's
a. portion of FICA taxes and unemployment taxes.
b. and employer's portion of FICA taxes, and unemployment taxes.
c. portion of FICA taxes, unemployment taxes, and any voluntary deductions.
d. portion of FICA taxes and any voluntary deductions.
Accounting and the Time Value of Money 6 - 13
52. Which of the following is a condition for accruing a liability for the cost of compensation for
future absences?
a. The obligation relates to the rights that vest or accumulate.
b. Payment of the compensation is probable.
c. The obligation is attributable to employee services already performed.
d. All of these are conditions for the accrual.
53. A liability for compensated absences such as vacations, for which it is expected that
employees will be paid, should
a. be accrued during the period when the compensated time is expected to be used by
employees.
b. be accrued during the period following vesting.
c. be accrued during the period when earned.
d. not be accrued unless a written contractual obligation exists.
54. The amount of the liability for compensated absences should be based on
1. the current rates of pay in effect when employees earn the right to
compensated absences.
2. the future rates of pay expected to be paid when employees use
compensated time.
3. the present value of the amount expected to be paid in future periods.
a. 1.
b. 2.
c. 3.
d. Either 1 or 2 is acceptable.
56. Which gives rise to the requirement to accrue a liability for the cost of compensated
absences?
a. Payment is probable.
b. Employee rights vest or accumulate.
c. Amount can be reasonably estimated.
d. All of the above.
57. Under what conditions is an employer required to accrue a liability for sick pay?
a. Sick pay benefits can be reasonably estimated.
b. Sick pay benefits vest.
c. Sick pay benefits equal 100% of the pay.
d. Sick pay benefits accumulate.
6 - 14 Test Bank for Intermediate Accounting, Thirteenth Edition
58. Which of the following taxes does not represent a payroll deduction a company may incur?
a. Federal income taxes.
b. FICA taxes.
c. State unemployment taxes.
d. State income taxes.
62. Which of the following terms is associated with recording a contingent liability?
a. Possible.
b. Likely.
c. Remote.
d. Probable.
63. Which of the following is the proper way to report a gain contingency?
a. As an accrued amount.
b. As deferred revenue.
c. As an account receivable with additional disclosure explaining the nature of the
contingency.
d. As a disclosure only.
64. Which of the following contingencies need not be disclosed in the financial statements or
the notes thereto?
a. Probable losses not reasonably estimable
b. Environmental liabilities that cannot be reasonably estimated
c. Guarantees of indebtedness of others
d. All of these must be disclosed.
Accounting and the Time Value of Money 6 - 15
65. Which of the following sets of conditions would give rise to the accrual of a contingency
under current generally accepted accounting principles?
a. Amount of loss is reasonably estimable and event occurs infrequently.
b. Amount of loss is reasonably estimable and occurrence of event is probable.
c. Event is unusual in nature and occurrence of event is probable.
d. Event is unusual in nature and event occurs infrequently.
66. Jeff Beck is a farmer who owns land which borders on the right-of-way of the Northern
Railroad. On August 10, 2010, due to the admitted negligence of the Railroad, hay on the
farm was set on fire and burned. Beck had had a dispute with the Railroad for several years
concerning the ownership of a small parcel of land. The representative of the Railroad has
offered to assign any rights which the Railroad may have in the land to Beck in exchange
for a release of his right to reimbursement for the loss he has sustained from the fire. Beck
appears inclined to accept the Railroad's offer. The Railroad's 2010 financial statements
should include the following related to the incident:
a. recognition of a loss and creation of a liability for the value of the land.
b. recognition of a loss only.
c. creation of a liability only.
d. disclosure in note form only.
69. To record an asset retirement obligation (ARO), the cost associated with the ARO is
a. expensed.
b. included in the carrying amount of the related long-lived asset.
c. included in a separate account.
d. none of these.
70. A company is legally obligated for the costs associated with the retirement of a long-lived
asset
a. only when it hires another party to perform the retirement activities.
b. only if it performs the activities with its own workforce and equipment.
c. whether it hires another party to perform the retirement activities or performs the
activities itself.
d. when it is probable the asset will be retired.
6 - 16 Test Bank for Intermediate Accounting, Thirteenth Edition
71. Assume that a manufacturing corporation has (1) good quality control, (2) a one-year
operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of
guaranteeing new products against defects for three years that has resulted in material but
rather stable warranty repair and replacement costs. Any liability for the warranty
a. should be reported as long-term.
b. should be reported as current.
c. should be reported as part current and part long-term.
d. need not be disclosed.
72. Ortiz Corporation, a manufacturer of household paints, is preparing annual financial
statements at December 31, 2010. Because of a recently proven health hazard in one of its
paints, the government has clearly indicated its intention of having Ortiz recall all cans of
this paint sold in the last six months. The management of Ortiz estimates that this recall
would cost $800,000. What accounting recognition, if any, should be accorded this
situation?
a. No recognition
b. Note disclosure only
c. Operating expense of $800,000 and liability of $800,000
d. Appropriation of retained earnings of $800,000
73. Information available prior to the issuance of the financial statements indicates that it is
probable that, at the date of the financial statements, a liability has been incurred for
obligations related to product warranties. The amount of the loss involved can be reasonably
estimated. Based on the above facts, an estimated loss contingency should be
a. accrued.
b. disclosed but not accrued.
c. neither accrued nor disclosed.
d. classified as an appropriation of retained earnings.
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74. Espinosa Co. has a loss contingency to accrue. The loss amount can only be reasonably
estimated within a range of outcomes. No single amount within the range is a better estimate
than any other amount. The amount of loss accrual should be
a. zero.
b. the minimum of the range.
c. the mean of the range.
d. the maximum of the range.
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75. Dean Company becomes aware of a lawsuit after the date of the financial statements, but
before they are issued. A loss and related liability should be reported in the financial
statements if the amount can be reasonably estimated, an unfavorable outcome is highly
probable, and
a. the Dean Company admits guilt.
b. the court will decide the case within one year.
c. the damages appear to be material.
d. the cause for action occurred during the accounting period covered by the financial
statements.
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76. Use of the accrual method in accounting for product warranty costs
a. is required for federal income tax purposes.
b. is frequently justified on the basis of expediency when warranty costs are immaterial.
c. finds the expense account being charged when the seller performs in compliance with
the warranty.
d. represents accepted practice and should be used whenever the warranty is an integral
and inseparable part of the sale.
Accounting and the Time Value of Money 6 - 17
77. Which of the following best describes the accrual method of accounting for warranty costs?
a. Expensed when paid.
b. Expensed when warranty claims are certain.
c. Expensed based on estimate in year of sale.
d. Expensed when incurred.
78. Which of the following best describes the cash-basis method of accounting for warranty
costs?
a. Expensed based on estimate in year of sale.
b. Expensed when liability is accrued.
c. Expensed when warranty claims are certain.
d. Expensed when incurred.
79. Which of the following is a characteristic of the expense warranty approach, but not the
sales warranty approach?
a. Estimated liability under warranties.
b. Warranty expense.
c. Unearned warranty revenue.
d. Warranty revenue.
80. An electronics store is running a promotion where for every video game purchased, the
customer receives a coupon upon checkout to purchase a second game at a 50% discount.
The coupons expire in one year. The store normally recognized a gross profit margin of
40% of the selling price on video games. How would the store account for a purchase using
the discount coupon?
a. The reduction in sales price attributed to the coupon is recognized as premium expense.
b. The difference between the cost of the video game and the cash received is recognized
as premium expense.
c. Premium expense is not recognized.
d. The difference between the cost of the video game and the selling price prior to the
coupon is recognized as premium expense.
82. Which of the following are not factors that are considered when evaluating whether or not
to record a liability for pending litigation?
a. Time period in which the underlying cause of action occurred.
b. The type of litigation involved.
c. The probability of an unfavorable outcome.
d. The ability to make a reasonable estimate of the amount of the loss.
6 - 18 Test Bank for Intermediate Accounting, Thirteenth Edition
84. What does the current ratio inform you about a company?
a. The extent of slow-moving inventories.
b. The efficient use of assets.
c. The company's liquidity.
d. The company's profitability.
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85. Which of the following is not acceptable treatment for the presentation of current liabilities?
a. Listing current liabilities in order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied to their liquidation
d. Showing current liabilities immediately below current assets to obtain a presentation of
working capital
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86. The ratio of current assets to current liabilities is called the
a. current ratio.
b. acid-test ratio.
c. current asset turnover ratio.
d. current liability turnover ratio.
89. Each of the following are included in both the current ratio and the acid-test ratio except
a. cash.
b. short-term investments.
c. net receivables.
d. inventory.
Accounting and the Time Value of Money 6 - 19
CHAPTER 14
LONG-TERM LIABILITIES
21. An example of an item which is not a liability is
a. dividends payable in stock.
b. advances from customers on contracts.
c. accrued estimated warranty costs.
d. the portion of long-term debt due within one year.
22. The covenants and other terms of the agreement between the issuer of bonds and the
lender are set forth in the
a. bond indenture.
b. bond debenture.
c. registered bond.
d. bond coupon.
23. The term used for bonds that are unsecured as to principal is
a. junk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.
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24. Bonds for which the owners' names are not registered with the issuing corporation are called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.
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25. Bonds that pay no interest unless the issuing company is profitable are called
a. collateral trust bonds.
b. debenture bonds.
c. revenue bonds.
d. income bonds.
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26. If bonds are issued initially at a premium and the effective-interest method of amortization
is used, interest expense in the earlier years will be
a. greater than if the straight-line method were used.
b. greater than the amount of the interest payments.
c the same as if the straight-line method were used.
d. less than if the straight-line method were used.
27. The interest rate written in the terms of the bond indenture is known as the
a. coupon rate.
b. nominal rate.
c. stated rate.
d. coupon rate, nominal rate, or stated rate.
c. effective rate.
d. effective, yield, or market rate.
29. One step in calculating the issue price of the bonds is to multiply the principal by the table
value for
a. 10 periods and 10% from the present value of 1 table.
b. 20 periods and 5% from the present value of 1 table.
c. 10 periods and 8% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.
31. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from
date of issue. If the bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.
Accounting and the Time Value of Money 6 - 21
32. If bonds are initially sold at a discount and the straight-line method of amortization is used,
interest expense in the earlier years will
a. exceed what it would have been had the effective-interest method of amortization been
used.
b. be less than what it would have been had the effective-interest method of amortization
been used.
c. be the same as what it would have been had the effective-interest method of amortiza-
tion been used.
d. be less than the stated (nominal) rate of interest.
33. Under the effective-interest method of bond discount or premium amortization, the periodic
interest expense is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.
34. When the effective-interest method is used to amortize bond premium or discount, the
periodic amortization will
a. increase if the bonds were issued at a discount.
b. decrease if the bonds were issued at a premium.
c. increase if the bonds were issued at a premium.
d. increase if the bonds were issued at either a discount or a premium.
35. If bonds are issued between interest dates, the entry on the books of the issuing corporation
could include a
a. debit to Interest Payable.
b. credit to Interest Receivable.
c. credit to Interest Expense.
d. credit to Unearned Interest.
36. When the interest payment dates of a bond are May 1 and November 1, and a bond issue
is sold on June 1, the amount of cash received by the issuer will be
a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.
d. increased by accrued interest from May 1 to June 1.
38. The printing costs and legal fees associated with the issuance of bonds should
a. be expensed when incurred.
b. be reported as a deduction from the face amount of bonds payable.
c. be accumulated in a deferred charge account and amortized over the life of the bonds.
d. not be reported as an expense until the period the bonds mature or are retired.
6 - 22 Test Bank for Intermediate Accounting, Thirteenth Edition
40. An early extinguishment of bonds payable, which were originally issued at a premium, is
made by purchase of the bonds between interest dates. At the time of reacquisition
a. any costs of issuing the bonds must be amortized up to the purchase date.
b. the premium must be amortized up to the purchase date.
c. interest must be accrued from the last interest date to the purchase date.
d. all of these.
41. The generally accepted method of accounting for gains or losses from the early
extinguishment of debt treats any gain or loss as
a. an adjustment to the cost basis of the asset obtained by the debt issue.
b. an amount that should be considered a cash adjustment to the cost of any other debt
issued over the remaining life of the old debt instrument.
c. an amount received or paid to obtain a new debt instrument and, as such, should be
amortized over the life of the new debt.
d. a difference between the reacquisition price and the net carrying amount of the debt
which should be recognized in the period of redemption.
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42. "In-substance defeasance" is a term used to refer to an arrangement whereby
a. a company gets another company to cover its payments due on long-term debt.
b. a governmental unit issues debt instruments to corporations.
c. a company provides for the future repayment of a long-term debt by placing purchased
securities in an irrevocable trust.
d. a company legally extinguishes debt before its due date.
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43. A corporation borrowed money from a bank to build a building. The long-term note signed
by the corporation is secured by a mortgage that pledges title to the building as security for
the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the
loan. Which of the following relationships can you expect to apply to the situation?
a. The balance of mortgage payable at a given balance sheet date will be reported as a
long-term liability.
b. The balance of mortgage payable will remain a constant amount over the 10-year
period.
c. The amount of interest expense will decrease each period the loan is outstanding, while
the portion of the annual payment applied to the loan principal will increase each period.
d. The amount of interest expense will remain constant over the 10-year period.
S
44. A debt instrument with no ready market is exchanged for property whose fair market value
is currently indeterminable. When such a transaction takes place
a. the present value of the debt instrument must be approximated using an imputed
interest rate.
b. it should not be recorded on the books of either party until the fair market value of the
property becomes evident.
c. the board of directors of the entity receiving the property should estimate a value for the
property that will serve as a basis for the transaction.
d. the directors of both entities involved in the transaction should negotiate a value to be
assigned to the property.
Accounting and the Time Value of Money 6 - 23
45. When a note payable is issued for property, goods, or services, the present value of the
note is measured by
a. the fair value of the property, goods, or services.
b. the market value of the note.
c. using an imputed interest rate to discount all future payments on the note.
d. any of these.
46. When a note payable is exchanged for property, goods, or services, the stated interest rate
is presumed to be fair unless
a. no interest rate is stated.
b. the stated interest rate is unreasonable.
c. the stated face amount of the note is materially different from the current cash sales
price for similar items or from current market value of the note.
d. any of these.
51. Which of the following must be disclosed relative to long-term debt maturities and sinking
fund requirements?
a. The present value of future payments for sinking fund requirements and long-term debt
maturities during each of the next five years.
b. The present value of scheduled interest payments on long-term debt during each of the
next five years.
c. The amount of scheduled interest payments on long-term debt during each of the next
five years.
d. The amount of future payments for sinking fund requirements and long-term debt
maturities during each of the next five years.
52. Note disclosures for long-term debt generally include all of the following except
a. assets pledged as security.
b. call provisions and conversion privileges.
c. restrictions imposed by the creditor.
d. names of specific creditors.
*55. In a troubled debt restructuring in which the debt is continued with modified terms and the
carrying amount of the debt is less than the total future cash flows,
a. a loss should be recognized by the debtor.
b. a gain should be recognized by the debtor.
c. a new effective-interest rate must be computed.
d. no interest expense or revenue should be recognized in the future.
*57. In a troubled debt restructuring in which the debt is settled by a transfer of assets with a fair
market value less than the carrying amount of the debt, the debtor would recognize
a. no gain or loss on the settlement.
b. a gain on the settlement.
c. a loss on the settlement.
d. none of these.
Accounting and the Time Value of Money 6 - 25
*58. In a troubled debt restructuring in which the debt is continued with modified terms, a gain
should be recognized at the date of restructure, but no interest expense should be
recognized over the remaining life of the debt, whenever the
a. carrying amount of the pre-restructure debt is less than the total future cash flows.
b. carrying amount of the pre-restructure debt is greater than the total future cash flows.
c. present value of the pre-restructure debt is less than the present value of the future cash
flows.
d. present value of the pre-restructure debt is greater than the present value of the future
cash flows.
*59. In a troubled debt restructuring in which the debt is continued with modified terms and the
carrying amount of the debt is less than the total future cash flows, the creditor should
a. compute a new effective-interest rate.
b. not recognize a loss.
c. calculate its loss using the historical effective rate of the loan.
d. calculate its loss using the current effective rate of the loan.
CHAPTER 15
STOCKHOLDERS’ EQUITY
MULTIPLE CHOICE—Conceptual
21. The residual interest in a corporation belongs to the
a. management.
b. creditors.
c. common stockholders.
d. preferred stockholders.
29. The accounting problem in a lump sum issuance is the allocation of proceeds between the
classes of securities. An acceptable method of allocation is the
a. pro forma method.
b. proportional method.
c. incremental method.
d. either the proportional method or the incremental method.
30. When a corporation issues its capital stock in payment for services, the least appropriate
basis for recording the transaction is the
a. market value of the services received.
b. par value of the shares issued.
c. market value of the shares issued.
d. Any of these provides an appropriate basis for recording the transaction.
31. Direct costs incurred to sell stock such as underwriting costs should be accounted for as
1. a reduction of additional paid-in capital.
2. an expense of the period in which the stock is issued.
3. an intangible asset.
a. 1
b. 2
c. 3
d. 1 or 3
Accounting and the Time Value of Money 6 - 27
38. When treasury stock is purchased for more than the par value of the stock and the cost
method is used to account for treasury stock, what account(s) should be debited?
a. Treasury stock for the par value and paid-in capital in excess of par for the excess of
the purchase price over the par value.
b. Paid-in capital in excess of par for the purchase price.
c. Treasury stock for the purchase price.
d. Treasury stock for the par value and retained earnings for the excess of the purchase
price over the par value.
39. “Gains" on sales of treasury stock (using the cost method) should be credited to
6 - 28 Test Bank for Intermediate Accounting, Thirteenth Edition
40. Porter Corp. purchased its own par value stock on January 1, 2010 for $20,000 and debited
the treasury stock account for the purchase price. The stock was subsequently sold for
$12,000. The $8,000 difference between the cost and sales price should be recorded as a
deduction from
a. additional paid-in capital to the extent that previous net "gains" from sales of the same
class of stock are included therein; otherwise, from retained earnings.
b. additional paid-in capital without regard as to whether or not there have been previous
net "gains" from sales of the same class of stock included therein.
c. retained earnings.
d. net income.
41. How should a "gain" from the sale of treasury stock be reflected when using the cost
method of recording treasury stock transactions?
a. As ordinary earnings shown on the income statement.
b. As paid-in capital from treasury stock transactions.
c. As an increase in the amount shown for common stock.
d. As an extraordinary item shown on the income statement.
42. Which of the following best describes a possible result of treasury stock transactions by a
corporation?
a. May increase but not decrease retained earnings.
b. May increase net income if the cost method is used.
c. May decrease but not increase retained earnings.
d. May decrease but not increase net income.
43. Which of the following features of preferred stock makes the security more like debt than
an equity instrument?
a. Participating
b. Voting
c. Redeemable
d. Noncumulative
47. At the date of the financial statements, common stock shares issued would exceed common
stock shares outstanding as a result of the
a. declaration of a stock split.
b. declaration of a stock dividend.
c. purchase of treasury stock.
d. payment in full of subscribed stock.
49. Cash dividends are paid on the basis of the number of shares
a. authorized.
b. issued.
c. outstanding.
d. outstanding less the number of treasury shares.
50. Which of the following statements about property dividends is not true?
a. A property dividend is usually in the form of securities of other companies.
b. A property dividend is also called a dividend in kind.
c. The accounting for a property dividend should be based on the carrying value (book
value) of the nonmonetary assets transferred.
d. All of these statements are true.
51. Houser Corporation owns 4,000,000 shares of stock in Baha Corporation. On December
31, 2010, Houser distributed these shares of stock as a dividend to its stockholders. This
is an example of a
a. property dividend.
b. stock dividend.
c. liquidating dividend.
d. cash dividend.
53. A mining company declared a liquidating dividend. The journal entry to record the
declaration must include a debit to
a. Retained Earnings.
b. a paid-in capital account.
c. Accumulated Depletion.
d. Accumulated Depreciation.
56. The declaration and issuance of a stock dividend larger than 25% of the shares previously
outstanding
a. increases common stock outstanding and increases total stockholders' equity.
b. decreases retained earnings but does not change total stockholders' equity.
c. may increase or decrease paid-in capital in excess of par but does not change total
stockholders' equity.
d. increases retained earnings and increases total stockholders' equity.
57. Quirk Corporation issued a 100% stock dividend of its common stock which had a par value
of $10 before and after the dividend. At what amount should retained earnings be
capitalized for the additional shares issued?
a. There should be no capitalization of retained earnings.
b. Par value
c. Market value on the declaration date
d. Market value on the payment date
58. The issuer of a 5% common stock dividend to common stockholders preferably should
transfer from retained earnings to contributed capital an amount equal to the
a. market value of the shares issued.
b. book value of the shares issued.
c. minimum legal requirements.
d. par or stated value of the shares issued.
59. At the date of declaration of a small common stock dividend, the entry should not include
a. a credit to Common Stock Dividend Payable.
b. a credit to Paid-in Capital in Excess of Par.
c. a debit to Retained Earnings.
d. All of these are acceptable.
Accounting and the Time Value of Money 6 - 31
60. The balance in Common Stock Dividend Distributable should be reported as a(n)
a. deduction from common stock issued.
b. addition to capital stock.
c. current liability.
d. contra current asset.
62. What effect does the issuance of a 2-for-1 stock split have on each of the following?
Par Value per Share Retained Earnings
a. No effect No effect
b. Increase No effect
c. Decrease No effect
d. Decrease Decrease
63. Which one of the following disclosures should be made in the equity section of the balance
sheet, rather than in the notes to the financial statements?
a. Dividend preferences
b. Liquidation preferences
c. Call prices
d. Conversion or exercise prices
66. Younger Company has outstanding both common stock and nonparticipating, non-
cumulative preferred stock. The liquidation value of the preferred is equal to its par value.
The book value per share of the common stock is unaffected by
a. the declaration of a stock dividend on preferred payable in preferred stock when the
market price of the preferred is equal to its par value.
b. the declaration of a stock dividend on common stock payable in common stock when
the market price of the common is equal to its par value.
c. the payment of a previously declared cash dividend on the common stock.
d. a 2-for-1 split of the common stock.
6 - 32 Test Bank for Intermediate Accounting, Thirteenth Edition
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67. Assume common stock is the only class of stock outstanding in the Manley Corporation.
Total stockholders' equity divided by the number of common stock shares outstanding is
called
a. book value per share.
b. par value per share.
c. stated value per share.
d. market value per share.
*70. How should cumulative preferred dividends in arrears be shown in a corporation's statement
of financial position?
a. Note disclosure
b. Increase in stockholders' equity
c. Increase in current liabilities
d. Increase in current liabilities for the amount expected to be declared within the year or
operating cycle, and increase in long-term liabilities for the balance
CHAPTER 16
DILUTIVE SECURITIES AND EARNINGS PER SHARE
MULTIPLE CHOICE—Dilutive Securities, Conceptual
21. Convertible bonds
a. have priority over other indebtedness.
b. are usually secured by a first or second mortgage.
c. pay interest only in the event earnings are sufficient to cover the interest.
d. may be exchanged for equity securities.
23. When a bond issuer offers some form of additional consideration (a “sweetener”) to induce
conversion, the sweetener is accounted for as a(n)
a. extraordinary item.
b. expense.
c. loss.
d. none of these.
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24. Corporations issue convertible debt for two main reasons. One is the desire to raise equity
capital that, assuming conversion, will arise when the original debt is converted. The other
is
a. the ease with which convertible debt is sold even if the company has a poor credit rating.
b. the fact that equity capital has issue costs that convertible debt does not.
c. that many corporations can obtain financing at lower rates.
d. that convertible bonds will always sell at a premium.
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25. When convertible debt is retired by the issuer, any material difference between the cash
acquisition price and the carrying amount of the debt should be
a. reflected currently in income, but not as an extraordinary item.
b. reflected currently in income as an extraordinary item.
c. treated as a prior period adjustment.
d. treated as an adjustment of additional paid-in capital.
S
26. The conversion of preferred stock into common requires that any excess of the par value of
the common shares issued over the carrying amount of the preferred being converted
should be
a. reflected currently in income, but not as an extraordinary item.
b. reflected currently in income as an extraordinary item.
c. treated as a prior period adjustment.
d. treated as a direct reduction of retained earnings.
28. When the cash proceeds from a bond issued with detachable stock warrants exceed the
sum of the par value of the bonds and the fair market value of the warrants, the excess
should be credited to
a. additional paid-in capital from stock warrants.
b. retained earnings.
c. a liability account.
d. premium on bonds payable.
29. Proceeds from an issue of debt securities having stock warrants should not be allocated
between debt and equity features when
a. the market value of the warrants is not readily available.
b. exercise of the warrants within the next few fiscal periods seems remote.
c. the allocation would result in a discount on the debt security.
d. the warrants issued with the debt securities are nondetachable.
6 - 34 Test Bank for Intermediate Accounting, Thirteenth Edition
35. The date on which to measure the compensation element in a stock option granted to a
corporate employee ordinarily is the date on which the employee
a. is granted the option.
b. has performed all conditions precedent to exercising the option.
c. may first exercise the option.
d. exercises the option.
36. Compensation expense resulting from a compensatory stock option plan is generally
a. recognized in the period of exercise.
b. recognized in the period of the grant.
c. allocated to the periods benefited by the employee's required service.
d. allocated over the periods of the employee's service life to retirement.
37. The date on which total compensation expense is computed in a stock option plan is the date
a. of grant.
b. of exercise.
c. that the market price coincides with the option price.
c. that the market price exceeds the option price.
38. Which of the following is not a characteristic of a noncompensatory stock purchase plan?
a. It is open to almost all full-time employees.
b. The discount from market price is small.
c. The plan offers no substantive option feature.
d. All of these are characteristics.
6 - 36 Test Bank for Intermediate Accounting, Thirteenth Edition
*39. Under the intrinsic value method, compensation expense resulting from an incentive stock
option is generally
a. not recognized because no excess of market price over the option price exists at the
date of grant.
b. recognized in the period of the grant.
c. allocated to the periods benefited by the employee's required service.
d. recognized in the period of exercise.
*40. For stock appreciation rights, the measurement date for computing compensation is the
date
a. the rights mature.
b. the stock’s price reaches a predetermined amount.
c. of grant.
d. of exercise.
*42. A company estimates the fair value of SARs, using an option-pricing model, for
a. share-based equity awards.
b. share-based liability awards.
c. both equity awards and liability awards.
d. neither equity awards or liability awards.
CHAPTER 17
INVESTMENTS
21.Which of the following is not a debt security?
a. Convertible bonds
b. Commercial paper
c. Loans receivable
d. All of these are debt securities.
24. Unrealized holding gains or losses which are recognized in income are from securities
classified as
a. held-to-maturity.
b. available-for-sale.
c. trading.
d. none of these.
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25. When an investor's accounting period ends on a date that does not coincide with an interest
receipt date for bonds held as an investment, the investor must
a. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for
the amount of interest accrued since the last interest receipt date.
b. notify the issuer and request that a special payment be made for the appropriate portion
of the interest period.
c. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for
the total amount of interest to be received at the next interest receipt date.
d. do nothing special and ignore the fact that the accounting period does not coincide with
the bond's interest period.
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26. Debt securities that are accounted for at amortized cost, not fair value, are
a. held-to-maturity debt securities.
b. trading debt securities.
c. available-for-sale debt securities.
d. never-sell debt securities.
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27. Debt securities acquired by a corporation which are accounted for by recognizing unrealized
holding gains or losses and are included as other comprehensive income and as a separate
component of stockholders' equity are
a. held-to-maturity debt securities.
b. trading debt securities.
c. available-for-sale debt securities.
d. never-sell debt securities.
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28. Use of the effective-interest method in amortizing bond premiums and discounts results in
a. a greater amount of interest income over the life of the bond issue than would result
from use of the straight-line method.
b. a varying amount being recorded as interest income from period to period.
c. a variable rate of return on the book value of the investment.
d. a smaller amount of interest income over the life of the bond issue than would result
from use of the straight-line method.
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29. Equity securities acquired by a corporation which are accounted for by recognizing
unrealized holding gains or losses as other comprehensive income and as a separate
component of stockholders' equity are
a. available-for-sale securities where a company has holdings of less than 20%.
b. trading securities where a company has holdings of less than 20%.
c securities where a company has holdings of between 20% and 50%.
d. securities where a company has holdings of more than 50%.
30. A requirement for a security to be classified as held-to-maturity is
a. ability to hold the security to maturity.
b. positive intent.
c. the security must be a debt security.
d. All of these are required.
6 - 38 Test Bank for Intermediate Accounting, Thirteenth Edition
32. Watt Co. purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities
to maturity, the entry to record the investment includes
a. a debit to Held-to-Maturity Securities at $300,000.
b. a credit to Premium on Investments of $15,000.
c. a debit to Held-to-Maturity Securities at $315,000.
d. none of these.
34. In accounting for investments in debt securities that are classified as trading securities,
a. a discount is reported separately.
b. a premium is reported separately.
c. any discount or premium is not amortized.
d. none of these.
36. Jordan Co. purchased ten-year, 10% bonds that pay interest semiannually. The bonds are
sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the
principal by the table value for
a. 10 periods and 10% from the present value of 1 table.
b. 10 periods and 8% from the present value of 1 table.
c. 20 periods and 5% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.
38. An available-for-sale debt security is purchased at a discount. The entry to record the
amortization of the discount includes a
a. debit to Available-for-Sale Securities.
b. debit to the discount account.
c. debit to Interest Revenue.
d. none of these.
39. APB Opinion No. 21 specifies that, regarding the amortization of a premium or discount on
a debt security, the
a. effective-interest method of allocation must be used.
b. straight-line method of allocation must be used.
c. effective-interest method of allocation should be used but other methods can be applied
if there is no material difference in the results obtained.
d. par value method must be used and therefore no allocation is necessary.
40. Which of the following is correct about the effective-interest method of amortization?
a. The effective interest method applied to investments in debt securities is different from
that applied to bonds payable.
b. Amortization of a discount decreases from period to period.
c. Amortization of a premium decreases from period to period.
d. The effective-interest method produces a constant rate of return on the book value of
the investment from period to period.
41. When investments in debt securities are purchased between interest payment dates,
preferably the
a. securities account should include accrued interest.
b. accrued interest is debited to Interest Expense.
c. accrued interest is debited to Interest Revenue.
d. accrued interest is debited to Interest Receivable.
42. Which of the following is not generally correct about recording a sale of a debt security
before maturity date?
a. Accrued interest will be received by the seller even though it is not an interest payment
date.
b. An entry must be made to amortize a discount to the date of sale.
c. The entry to amortize a premium to the date of sale includes a credit to the Premium on
Investments in Debt Securities.
d. A gain or loss on the sale is not extraordinary.
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43. When a company has acquired a "passive interest" in another corporation, the acquiring
company should account for the investment
a. by using the equity method.
b. by using the fair value method.
c. by using the effective interest method.
d. by consolidation.
6 - 40 Test Bank for Intermediate Accounting, Thirteenth Edition
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44. Santo Corporation declares and distributes a cash dividend that is a result of current
earnings. How will the receipt of those dividends affect the investment account of the
investor under each of the following accounting methods?
Fair Value Method Equity Method
a. No Effect Decrease
b. Increase Decrease
c. No Effect No Effect
d. Decrease No Effect
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45. An investor has a long-term investment in stocks. Regular cash dividends received by the
investor are recorded as
Fair Value Method Equity Method
a. Income Income
b. A reduction of the investment A reduction of the investment
c. Income A reduction of the investment
d. A reduction of the investment Income
46. When a company holds between 20% and 50% of the outstanding stock of an investee,
which of the following statements applies?
a. The investor should always use the equity method to account for its investment.
b. The investor should use the equity method to account for its investment unless circum-
stances indicate that it is unable to exercise "significant influence" over the investee.
c. The investor must use the fair value method unless it can clearly demonstrate the ability
to exercise "significant influence" over the investee.
d. The investor should always use the fair value method to account for its investment.
47. If the parent company owns 90% of the subsidiary company's outstanding common stock,
the company should generally account for the income of the subsidiary under the
a. cost method.
b. fair value method.
c. divesture method.
d. equity method.
48. Koehn Corporation accounts for its investment in the common stock of Sells Company
under the equity method. Koehn Corporation should ordinarily record a cash dividend
received from Sells as
a. a reduction of the carrying value of the investment.
b. additional paid-in capital.
c. an addition to the carrying value of the investment.
d. dividend income.
49. Under the equity method of accounting for investments, an investor recognizes its share of
the earnings in the period in which the
a. investor sells the investment.
b. investee declares a dividend.
c. investee pays a dividend.
d. earnings are reported by the investee in its financial statements.
Accounting and the Time Value of Money 6 - 41
50. Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2010, Cosby had net
earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these
transactions using the fair value method rather than the equity method of accounting. What
effect would this have on the investment account, net income, and retained earnings,
respectively?
a. Understate, overstate, overstate
b. Overstate, understate, understate
c. Overstate, overstate, overstate
d. Understate, understate, understate
51. Dublin Co. holds a 30% stake in Club Co. which was purchased in 2011 at a cost of
$3,000,000. After applying the equity method, the Investment in Club Co. account has a
balance of $3,040,000. At December 31, 2011 the fair value of the investment is
$3,120,000. Which of the following values is acceptable for Dublin to use in its balance
sheet at December 31, 2011?
I. $3,000,000
II. $3,040,000
III. $3,120,000
a. I, II, or III.
b. I or II only.
c. II only.
d. II or III only.
*60. Companies that attempt to exploit inefficiencies in various derivative markets by attempting
to lock in profits by simultaneously entering into transactions in two or more markets are
called
a. arbitrageurs.
b. gamblers.
c. hedgers.
d. speculators.
*61. All of the following statements regarding accounting for derivatives are correct except that
a. they should be recognized in the financial statements as assets and liabilities.
b. they should be reported at fair value.
c. gains and losses resulting from speculation should be deferred.
d. gains and losses resulting from hedge transactions are reported in different ways,
depending upon the type of hedge.
Accounting and the Time Value of Money 6 - 43
*62. All of the following are characteristics of a derivative financial instrument except the
instrument
a. has one or more underlyings and an identified payment provision.
b. requires a large investment at the inception of the contract.
c. requires or permits net settlement.
d. All of these are characteristics.
*64. The accounting for fair value hedges records the derivative at its
a. amortized cost.
b. carrying value.
c. fair value.
d. historical cost.
*66. An option to convert a convertible bond into shares of common stock is a(n)
a. embedded derivative.
b. host security.
c. hybrid security.
d. fair value hedge.
*67. All of the following are requirements for disclosures related to financial instruments except
a. disclosing the fair value and related carrying value of the instruments.
b. distinguishing between financial instruments held or issued for purposes other than
trading.
c. combining or netting the fair value of separate financial instruments.
d. displaying as a separate classification of other comprehensive income the net gain/loss
on derivative instruments designated in cash flow hedges.
69. Under U.S. GAAP, which of the following models may be used to determine if an
investment is consolidated?
Risk-and-reward model Voting-interest approach
a. Yes No
b. No Yes
c. No No
d. Yes Yes
CHAPTER 18
REVENUE RECOGNITION
MULTIPLE CHOICE—Conceptual
21. The revenue recognition principle provides that revenue is recognized when
a. it is realized.
b. it is realizable.
c. it is realized or realizable and it is earned.
d. none of these.
22. When goods or services are exchanged for cash or claims to cash (receivables), revenues
are
a. earned.
b. realized.
c. recognized.
d. all of these.
23. When the entity has substantially accomplished what it must do to be entitled to the benefits
represented by the revenues, revenues are
a. earned.
b. realized.
c. recognized.
d. all of these.
Accounting and the Time Value of Money 6 - 45
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24. Which of the following is not an accurate representation concerning revenue recognition?
a. Revenue from selling products is recognized at the date of sale, usually interpreted to
mean the date of delivery to customers.
b. Revenue from services rendered is recognized when cash is received or when services
have been performed.
c. Revenue from permitting others to use enterprise assets is recognized as time passes
or as the assets are used.
d. Revenue from disposing of assets other than products is recognized at the date of sale.
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25. The process of formally recording or incorporating an item in the financial statements of an
entity is
a. allocation.
b. articulation.
c. realization.
d. recognition.
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26. Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract
on each appliance sold. Although Dot Point sells the appliances on an installment basis, all
service contracts are cash sales at the time of purchase by the buyer. Collections received
for service contracts should be recorded as
a. service revenue.
b. deferred service revenue.
c. a reduction in installment accounts receivable.
d. a direct addition to retained earnings.
27. Which of the following is not a reason why revenue is recognized at time of sale?
a. Realization has occurred.
b. The sale is the critical event.
c. Title legally passes from seller to buyer.
d. All of these are reasons to recognize revenue at time of sale.
28. An alternative available when the seller is exposed to continued risks of ownership through
return of the product is
a. recording the sale, and accounting for returns as they occur in future periods.
b. not recording a sale until all return privileges have expired.
c. recording the sale, but reducing sales by an estimate of future returns.
d. all of these.
29. A sale should not be recognized as revenue by the seller at the time of sale if
a. payment was made by check.
b. the selling price is less than the normal selling price.
c. the buyer has a right to return the product and the amount of future returns cannot be
reasonably estimated.
d. none of these.
6 - 46 Test Bank for Intermediate Accounting, Thirteenth Edition
30. The FASB concluded that if a company sells its product but gives the buyer the right to
return the product, revenue from the sales transaction shall be recognized at the time of
sale only if all of six conditions have been met. Which of the following is not one of these
six conditions?
a. The amount of future returns can be reasonably estimated.
b. The seller's price is substantially fixed or determinable at time of sale.
c. The buyer's obligation to the seller would not be changed in the event of theft or damage
of the product.
d. The buyer is obligated to pay the seller upon resale of the product.
31. In selecting an accounting method for a newly contracted long-term construction project,
the principal factor to be considered should be
a. the terms of payment in the contract.
b. the degree to which a reliable estimate of the costs to complete and extent of progress
toward completion is practicable.
c. the method commonly used by the contractor to account for other long-term construc-
tion contracts.
d. the inherent nature of the contractor's technical facilities used in construction.
32. The percentage-of-completion method must be used when certain conditions exist. Which
of the following is not one of those necessary conditions?
a. Estimates of progress toward completion, revenues, and costs are reasonably
dependable.
b. The contractor can be expected to perform the contractual obligation.
c. The buyer can be expected to satisfy some of the obligations under the contract.
d. The contract clearly specifies the enforceable rights of the parties, the consideration to
be exchanged, and the manner and terms of settlement.
33. When work to be done and costs to be incurred on a long-term contract can be estimated
dependably, which of the following methods of revenue recognition is preferable?
a. Installment-sales method
b. Percentage-of-completion method
c. Completed-contract method
d. None of these
34. How should the balances of progress billings and construction in process be shown at
reporting dates prior to the completion of a long-term contract?
a. Progress billings as deferred income, construction in progress as a deferred expense.
b. Progress billings as income, construction in process as inventory.
c. Net, as a current asset if debit balance, and current liability if credit balance.
d. Net, as income from construction if credit balance, and loss from construction if debit
balance.
36. How should earned but unbilled revenues at the balance sheet date on a long-term
construction contract be disclosed if the percentage-of-completion method of revenue
recognition is used?
a. As construction in process in the current asset section of the balance sheet.
b. As construction in process in the noncurrent asset section of the balance sheet.
c. As a receivable in the noncurrent asset section of the balance sheet.
d. In a note to the financial statements until the customer is formally billed for the portion
of work completed.
41. Cost estimates on a long-term contract may indicate that a loss will result on completion of
the entire contract. In this case, the entire expected loss should be
a. recognized in the current period, regardless of whether the percentage-of-completion or
completed-contract method is employed.
b. recognized in the current period under the percentage-of-completion method, but the
completed-contract method should defer recognition of the loss to the time when the
contract is completed.
c. recognized in the current period under the completed-contract method, but the
percentage-of-completion method should defer the loss until the contract is completed.
d. deferred and recognized when the contract is completed, regardless of whether the
percentage-of-completion or completed-contract method is employed.
6 - 48 Test Bank for Intermediate Accounting, Thirteenth Edition
42. Cost estimates at the end of the second year indicate a loss will result on completion of the
entire contract. Which of the following statements is correct?
a. Under the completed-contract method, the loss is not recognized until the year the
construction is completed.
b. Under the percentage-of-completion method, the gross profit recognized in the first year
must not be changed.
c. Under the completed-contract method, when the billings exceed the accumulated costs,
the amount of the estimated loss is reported as a current liability.
d. Under the completed-contract method, when the Construction in Process balance
exceeds the billings, the estimated loss is added to the accumulated costs.
43. The criteria for recognition of revenue at the completion of production of precious metals
and farm products include
a. an established market with quoted prices.
b. low additional costs of completion and selling.
c. units are interchangeable.
d. all of these.
44. In certain cases, revenue is recognized at the completion of production even though no sale
has been made. Which of the following statements is not true?
a. Examples involve precious metals or farm equipment.
b. The products possess immediate marketability at quoted prices.
c. No significant costs are involved in selling the product.
d. All of these statements are true.
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45. For which of the following products is it appropriate to recognize revenue at the completion
of production even though no sale has been made?
a. Automobiles
b. Large appliances
c. Single family residential units
d. Precious metals
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46. When there is a significant increase in the estimated total contract costs but the increase
does not eliminate all profit on the contract, which of the following is correct?
a. Under both the percentage-of-completion and the completed-contract methods, the
estimated cost increase requires a current period adjustment of excess gross profit
recognized on the project in prior periods.
b. Under the percentage-of-completion method only, the estimated cost increase requires
a current period adjustment of excess gross profit recognized on the project in prior
periods.
c. Under the completed-contract method only, the estimated cost increase requires a
current period adjustment of excess gross profit recognized on the project in prior
periods.
d. No current period adjustment is required.
48. The installment-sales method of recognizing profit for accounting purposes is acceptable if
a. collections in the year of sale do not exceed 30% of the total sales price.
b. an unrealized profit account is credited.
c. collection of the sales price is not reasonably assured.
d. the method is consistently used for all sales of similar merchandise.
49. The method most commonly used to report defaults and repossessions is
a. provide no basis for the repossessed asset thereby recognizing a loss.
b. record the repossessed merchandise at fair value, recording a gain or loss if appropriate.
c. record the repossessed merchandise at book value, recording no gain or loss.
d. none of these.
53. A seller is properly using the cost-recovery method for a sale. Interest will be earned on the
future payments. Which of the following statements is not correct?
a. After all costs have been recovered, any additional cash collections are included in
income.
b. Interest revenue may be recognized before all costs have been recovered.
c. The deferred gross profit is offset against the related receivable on the balance sheet.
d. Subsequent income statements report the gross profit as a separate item of revenue
when it is recognized as earned.
6 - 50 Test Bank for Intermediate Accounting, Thirteenth Edition
55. Winser, Inc. is engaged in extensive exploration for water in Utah. If, upon discovery of
water, Winser does not recognize any revenue from water sales until the sales exceed the
costs of exploration, the basis of revenue recognition being employed is the
a. production basis.
b. cash (or collection) basis.
c. sales (or accrual) basis.
d. cost recovery basis.
*62. Occasionally a franchise agreement grants the franchisee the right to make future bargain
purchases of equipment or supplies. When recording the initial franchise fee, the franchisor
should
a. increase revenue recognized from the initial franchise fee by the amount of the expected
future purchases.
b. record a portion of the initial franchise fee as unearned revenue which will increase the
selling price when the franchisee subsequently makes the bargain purchases.
c. defer recognition of any revenue from the initial franchise fee until the bargain purchases
are made.
d. None of these.
*63. A franchise agreement grants the franchisor an option to purchase the franchisee's
business. It is probable that the option will be exercised. When recording the initial franchise
fee, the franchisor should
a. record the entire initial franchise fee as a deferred credit which will reduce the
franchisor's investment in the purchased outlet when the option is exercised.
b. record the entire initial franchise fee as unearned revenue which will reduce the amount
of cash paid when the option is exercised.
c. record the portion of the initial franchise fee which is attributable to the bargain purchase
option as a reduction of the future amounts receivable from the franchisee.
d. None of these.
CHAPTER 19
ACCOUNTING FOR INCOME TAXES
MULTIPLE CHOICE—Conceptual
21. Taxable income of a corporation
a. differs from accounting income due to differences in intraperiod allocation between the
two methods of income determination.
b. differs from accounting income due to differences in interperiod allocation and
permanent differences between the two methods of income determination.
c. is based on generally accepted accounting principles.
d. is reported on the corporation's income statement.
24. Machinery was acquired at the beginning of the year. Depreciation recorded during the life
of the machinery could result in
Future Future
Taxable Amounts Deductible Amounts
a. Yes Yes
b. Yes No
c. No Yes
d. No No
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25. A temporary difference arises when a revenue item is reported for tax purposes in a period
After it is reported Before it is reported
in financial income in financial income
a. Yes Yes
b. Yes No
c. No Yes
d. No No
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26. At the December 31, 2010 balance sheet date, Unruh Corporation reports an accrued
receivable for financial reporting purposes but not for tax purposes. When this asset is
recovered in 2011, a future taxable amount will occur and
a. pretax financial income will exceed taxable income in 2011.
b. Unruh will record a decrease in a deferred tax liability in 2011.
c. total income tax expense for 2011 will exceed current tax expense for 2011.
d. Unruh will record an increase in a deferred tax asset in 2011.
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27. Assuming a 40% statutory tax rate applies to all years involved, which of the following
situations will give rise to reporting a deferred tax liability on the balance sheet?
I. A revenue is deferred for financial reporting purposes but not for tax purposes.
II. A revenue is deferred for tax purposes but not for financial reporting purposes.
III. An expense is deferred for financial reporting purposes but not for tax purposes.
IV. An expense is deferred for tax purposes but not for financial reporting purposes.
a. item II only
b. items I and II only
c. items II and III only
d. items I and IV only
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28. A major distinction between temporary and permanent differences is
a. permanent differences are not representative of acceptable accounting practice.
b. temporary differences occur frequently, whereas permanent differences occur only
once.
c. once an item is determined to be a temporary difference, it maintains that status;
however, a permanent difference can change in status with the passage of time.
d. temporary differences reverse themselves in subsequent accounting periods, whereas
permanent differences do not reverse.
6 - 54 Test Bank for Intermediate Accounting, Thirteenth Edition
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29. Which of the following are temporary differences that are normally classified as expenses
or losses that are deductible after they are recognized in financial income?
a. Advance rental receipts.
b. Product warranty liabilities.
c. Depreciable property.
d. Fines and expenses resulting from a violation of law.
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30. Which of the following is a temporary difference classified as a revenue or gain that is
taxable after it is recognized in financial income?
a. Subscriptions received in advance.
b. Prepaid royalty received in advance.
c. An installment sale accounted for on the accrual basis for financial reporting purposes
and on the installment (cash) basis for tax purposes.
d. Interest received on a municipal obligation.
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31. Which of the following differences would result in future taxable amounts?
a. Expenses or losses that are tax deductible after they are recognized in financial income.
b. Revenues or gains that are taxable before they are recognized in financial income.
c. Revenues or gains that are recognized in financial income but are never included in
taxable income.
d. Expenses or losses that are tax deductible before they are recognized in financial
income.
32. Stuart Corporation's taxable income differed from its accounting income computed for this
past year. An item that would create a permanent difference in accounting and taxable
incomes for Stuart would be
a. a balance in the Unearned Rent account at year end.
b. using accelerated depreciation for tax purposes and straight-line depreciation for book
purposes.
c. a fine resulting from violations of OSHA regulations.
d. making installment sales during the year.
35. A company uses the equity method to account for an investment. This would result in what
type of difference and in what type of deferred income tax?
Type of Difference Deferred Tax
a. Permanent Asset
b. Permanent Liability
c. Temporary Asset
d. Temporary Liability
Accounting and the Time Value of Money 6 - 55
36. A company records an unrealized loss on short-term securities. This would result in what
type of difference and in what type of deferred income tax?
Type of Difference Deferred Tax
a. Temporary Liability
b. Temporary Asset
c. Permanent Liability
d. Permanent Asset
37. Which of the following temporary differences results in a deferred tax asset in the year the
temporary difference originates?
I. Accrual for product warranty liability.
II. Subscriptions received in advance.
III. Prepaid insurance expense.
a. I and II only.
b. II only.
c. III only.
d. I and III only.
40. Tax rates other than the current tax rate may be used to calculate the deferred income tax
amount on the balance sheet if
a. it is probable that a future tax rate change will occur.
b. it appears likely that a future tax rate will be greater than the current tax rate.
c. the future tax rates have been enacted into law.
d. it appears likely that a future tax rate will be less than the current tax rate.
41. Recognition of tax benefits in the loss year due to a loss carryforward requires
a. the establishment of a deferred tax liability.
b. the establishment of a deferred tax asset.
c. the establishment of an income tax refund receivable.
d. only a note to the financial statements.
6 - 56 Test Bank for Intermediate Accounting, Thirteenth Edition
42. Recognizing a valuation allowance for a deferred tax asset requires that a company
a. consider all positive and negative information in determining the need for a valuation
allowance.
b. consider only the positive information in determining the need for a valuation allowance.
c. take an aggressive approach in its tax planning.
d. pass a recognition threshold, after assuming that it will be audited by taxing authorities.
44. With regard to uncertain tax positions, the FASB requires that companies recognize a tax
benefit when
a. it is probable and can be reasonably estimated.
b. there is at least a 51% probability that the uncertain tax position will be approved by the
taxing authorities.
c. it is more likely than not that the tax position will be sustained upon audit.
d. Any of the above exist.
45. Major reasons for disclosure of deferred income tax information is (are)
a. better assessment of quality of earnings.
b. better predictions of future cash flows.
c. that it may be helpful in setting government policy.
d. all of these.
46. Accounting for income taxes can result in the reporting of deferred taxes as any of the
following except
a. a current or long-term asset.
b. a current or long-term liability.
c. a contra-asset account.
d. All of these are acceptable methods of reporting deferred taxes.
48. Deferred tax amounts that are related to specific assets or liabilities should be classified as
current or noncurrent based on
a. their expected reversal dates.
b. their debit or credit balance.
c. the length of time the deferred tax amounts will generate future tax deferral benefits.
d. the classification of the related asset or liability.
49. Tanner, Inc. incurred a financial and taxable loss for 2010. Tanner therefore decided to use
the carryback provisions as it had been profitable up to this year. How should the amounts
related to the carryback be reported in the 2010 financial statements?
a. The reduction of the loss should be reported as a prior period adjustment.
b. The refund claimed should be reported as a deferred charge and amortized over five
years.
c. The refund claimed should be reported as revenue in the current year.
d. The refund claimed should be shown as a reduction of the loss in 2010.
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50. A deferred tax liability is classified on the balance sheet as either a current or a noncurrent
liability. The current amount of a deferred tax liability should generally be
a. the net deferred tax consequences of temporary differences that will result in net taxable
amounts during the next year.
b. totally eliminated from the financial statements if the amount is related to a noncurrent
asset.
c. based on the classification of the related asset or liability for financial reporting
purposes.
d. the total of all deferred tax consequences that are not expected to reverse in the
operating period or one year, whichever is greater.
51. All of the following are procedures for the computation of deferred income taxes except to
a. identify the types and amounts of existing temporary differences.
b. measure the total deferred tax liability for taxable temporary differences.
c. measure the total deferred tax asset for deductible temporary differences and operating
loss carrybacks.
d. All of these are procedures in computing deferred income taxes.
6 - 58 Test Bank for Intermediate Accounting, Thirteenth Edition
CHAPTER 20
ACCOUNTING FOR PENSIONS
AND POSTRETIREMENT BENEFITS
MULTIPLE CHOICE—Conceptual
21. In determining the present value of the prospective benefits (often referred to as the
projected benefit obligation), the following are considered by the actuary:
a. retirement and mortality rate.
b. interest rates.
c. benefit provisions of the plan.
d. all of these factors.
23. In all pension plans, the accounting problems include all the following except
a. measuring the amount of pension obligation.
b. disclosing the status and effects of the plan in the financial statements.
c. allocating the cost of the plan to the proper periods.
d. determining the level of individual premiums.
28. Alternative methods exist for the measurement of the pension obligation (liability). Which
measure requires the use of future salaries in its computation?
a. Vested benefit obligation
b. Accumulated benefit obligation
c. Projected benefit obligation
d. Restructured benefit obligation
30. The projected benefit obligation is the measure of pension obligation that
a. is required to be used for reporting the service cost component of pension expense.
b. requires pension expense to be determined solely on the basis of the plan formula
applied to years of service to date and based on existing salary levels.
c. requires the longest possible period for funding to maximize the tax deduction.
d. is not sanctioned under generally accepted accounting principles for reporting the
service cost component of pension expense.
6 - 60 Test Bank for Intermediate Accounting, Thirteenth Edition
33. The relationship between the amount funded and the amount reported for pension expense
is as follows:
a. pension expense must equal the amount funded.
b. pension expense will be less than the amount funded.
c. pension expense will be more than the amount funded.
d. pension expense may be greater than, equal to, or less than the amount funded.
34. The computation of pension expense includes all the following except
a. service cost component measured using current salary levels.
b. interest on projected benefit obligation.
c. expected return on plan assets.
d. All of these are included in the computation.
35. In computing the service cost component of pension expense, the FASB concluded that
a. the accumulated benefit obligation provides a more realistic measure of the pension
obligation on a going concern basis.
b. a company should employ an actuarial funding method to report pension expense that
best reflects the cost of benefits to employees.
c. the projected benefit obligation using future compensation levels provides a realistic
measure of present pension obligation and expense.
d. all of these.
36. The interest on the projected benefit obligation component of pension expense
a. reflects the incremental borrowing rate of the employer.
b. reflects the rates at which pension benefits could be effectively settled.
c. is the same as the expected return on plan assets.
d. may be stated implicitly or explicitly when reported.
37. One component of pension expense is expected return on plan assets. Plan assets include
a. contributions made by the employer and contributions made by the employee when a
contributory plan of some type is involved.
b. plan assets still under the control of the company.
c. only assets reported on the balance sheet of the employer as prepaid pension cost.
d. none of these.
Accounting and the Time Value of Money 6 - 61
39. In accounting for a pension plan, any difference between the pension cost charged to
expense and the payments into the fund should be reported as
a. an offset to the liability for prior service cost.
b. pension asset/liability.
c. as other comprehensive income (G/L)
d. as accumulated other comprehensive income (PSC).
40. Which of the following items should be included in pension expense calculated by an
employer who sponsors a defined-benefit pension plan for its employees?
Amortization of
Fair value prior
of plan assets service cost
a. Yes Yes
b. Yes No
c. No Yes
d. No No
41. A corporation has a defined-benefit plan. A pension liability will result at the end of the year
if the
a. projected benefit obligation exceeds the fair value of the plan assets.
b. fair value of the plan assets exceeds the projected benefit obligation.
c. amount of employer contributions exceeds the pension expense.
d. amount of pension expense exceeds the amount of employer contributions.
42. When a company adopts a pension plan, prior service costs should be charged to
a. accumulated other comprehensive income (PSC).
b. operations of prior periods.
c. Other comprehensive income (PSC).
d. retained earnings.
43. When a company amends a pension plan, for accounting purposes, prior service costs
should be
a. treated as a prior period adjustment because no future periods are benefited.
b. amortized in accordance with procedures used for income tax purposes.
c. recorded in other comprehensive income (PSC).
d. reported as an expense in the period the plan is amended.
45. Whenever a defined-benefit plan is amended and credit is given to employees for years of
service provided before the date of amendment
a. both the accumulated benefit obligation and the projected benefit obligation are usually
greater than before.
b. both the accumulated benefit obligation and the projected benefit obligation are usually
less than before.
c. the expense and the liability should be recognized at the time of the plan change.
d. the expense should be recognized immediately, but the liability may be deferred until a
reasonable basis for its determination has been identified.
46. The actuarial gains or losses that result from changes in the projected benefit obligation are
called
Asset Liability
Gains & Losses Gains & Losses
a. Yes Yes
b. No No
c. Yes No
d. No Yes
47. Gains and losses that relate to the computation of pension expense should be
a. recorded currently as an adjustment to pension expense in the period incurred.
b. recorded currently and in the future by applying the corridor method which provides the
amount to be amortized.
c. amortized over a 15-year period.
d. recorded only if a loss is determined.
48. The fair value of pension plan assets is used to determine the corridor and to calculate the
expected return on plan assets.
Expected Return
Corridor on Plan Assets
a. Yes Yes
b. Yes No
c. No Yes
d. No No
49. A pension fund gain or loss that is caused by a plant closing should be
a. recognized immediately as a gain or loss on the plant closing.
b. spread over the current year and future years.
c. charged or credited to the current pension expense.
d. recognized as a prior period adjustment.
53. According to the FASB, recognition of a liability is required when the projected benefit
obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan
assets exceeds the projected benefit obligation, the Board
a. requires recognition of an asset.
b. requires recognition of an asset if the excess fair value of plan assets exceeds the
corridor amount.
c. recommends recognition of an asset but does not require such recognition.
d. does not permit recognition of an asset.
54. Which of the following disclosures of pension plan information would not normally be
required?
a. The major components of pension expense
b. The amount of prior service cost changed or credited in previous years.
c. The funded status of the plan and the amounts recognized in the financial statements
d. The rates used in measuring the benefit amounts
56. Which of the following statements is true about postretirement health care benefits?
a. They are generally funded.
b. The benefits are well-defined and level in dollar amount.
c. The beneficiary is the retiree, spouse, and other dependents.
d. The benefit is payable monthly.
*57. Which of the following disclosures of postretirement benefits would not be required by
professional pronouncements?
a. Postretirement expense for the period
b. A schedule showing changes in postretirement benefits and plan assets during the year
c. The amount of the EPBO
d. The assumptions and rates used in computing the EPBO and APBO
6 - 64 Test Bank for Intermediate Accounting, Thirteenth Edition
*61. Which of the following statements about the expected postretirement benefit obligation
(EPBO) is not correct?
a. The EPBO is an actuarial present value.
b. The EPBO is recorded in the accounts.
c. The EPBO is used in measuring periodic expense.
d. All of these are correct.
*62. Which of the following statements about the recognition of a prior service cost related to a
postretirement obligation is correct?
a. The prior service amount is recognized in the income statement in the current period.
b. The prior service cost is recognized in the income statement net of tax.
c. Restatement of previously issued annual financial statements is required.
d. The prior service cost amount affects comprehensive income in the current period.
*63. Which of the following is recognized in the accounts and in the financial statements?
a. Accumulated postretirement benefit obligation
b. Postretirement asset / liability
c. Expected postretirement benefit obligation
d. All of these.
Accounting and the Time Value of Money 6 - 65
CHAPTER 21
ACCOUNTING FOR LEASES
MULTIPLE CHOICE—Conceptual
21. Major reasons why a company may become involved in leasing to other companies is (are)
a. interest revenue.
b. high residual values.
c. tax incentives.
d. all of these.
23. Which of the following best describes current practice in accounting for leases?
a. Leases are not capitalized.
b. Leases similar to installment purchases are capitalized.
c. All long-term leases are capitalized.
d. All leases are capitalized.
24. While only certain leases are currently accounted for as a sale or purchase, there is
theoretic justification for considering all leases to be sales or purchases. The principal
reason that supports this idea is that
a. all leases are generally for the economic life of the property and the residual value of
the property at the end of the lease is minimal.
b. at the end of the lease the property usually can be purchased by the lessee.
c. a lease reflects the purchase or sale of a quantifiable right to the use of property.
d. during the life of the lease the lessee can effectively treat the property as if it were owned
by the lessee.
6 - 66 Test Bank for Intermediate Accounting, Thirteenth Edition
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25. An essential element of a lease conveyance is that the
a. lessor conveys less than his or her total interest in the property.
b. lessee provides a sinking fund equal to one year's lease payments.
c. property that is the subject of the lease agreement must be held for sale by the lessor
prior to the drafting of the lease agreement.
d. term of the lease is substantially equal to the economic life of the leased property.
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26. What impact does a bargain purchase option have on the present value of the minimum
lease payments computed by the lessee?
a. No impact as the option does not enter into the transaction until the end of the lease
term.
b. The lessee must increase the present value of the minimum lease payments by the
present value of the option price.
c. The lessee must decrease the present value of the minimum lease payments by the
present value of the option price.
d. The minimum lease payments would be increased by the present value of the option
price if, at the time of the lease agreement, it appeared certain that the lessee would
exercise the option at the end of the lease and purchase the asset at the option price.
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27. The amount to be recorded as the cost of an asset under capital lease is equal to the
a. present value of the minimum lease payments.
b. present value of the minimum lease payments or the fair value of the asset, whichever
is lower.
c. present value of the minimum lease payments plus the present value of any
unguaranteed residual value.
d. carrying value of the asset on the lessor's books.
29. Which of the following is a correct statement of one of the capitalization criteria?
a. The lease transfers ownership of the property to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to or more than 75% of the estimated economic life of the leased
property.
d. The minimum lease payments (excluding executory costs) equal or exceed 90% of the
fair value of the leased property.
32. In computing the present value of the minimum lease payments, the lessee should
a. use its incremental borrowing rate in all cases.
b. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is
higher, assuming that the implicit rate is known to the lessee.
c. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is
lower, assuming that the implicit rate is known to the lessee.
d. none of these.
34. In the earlier years of a lease, from the lessee's perspective, the use of the
a. capital method will enable the lessee to report higher income, compared to the operating
method.
b. capital method will cause debt to increase, compared to the operating method.
c. operating method will cause income to decrease, compared to the capital method.
d. operating method will cause debt to increase, compared to the capital method.
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35. A lessee with a capital lease containing a bargain purchase option should depreciate the
leased asset over the
a. asset's remaining economic life.
b. term of the lease.
c. life of the asset or the term of the lease, whichever is shorter.
d. life of the asset or the term of the lease, whichever is longer.
36. Based solely upon the following sets of circumstances indicated below, which set gives rise
to a sales-type or direct-financing lease of a lessor?
Transfers Ownership Contains Bargain Collectibility of Lease Any Important
By End Of Lease? Purchase Option? Payments Assured? Uncertainties?
a. No Yes Yes No
b. Yes No No No
c. Yes No No Yes
d. No Yes Yes Yes
37. Which of the following would not be included in the Lease Receivable account?
a. Guaranteed residual value
b. Unguaranteed residual value
c. A bargain purchase option
d. All would be included
38. In a lease that is appropriately recorded as a direct-financing lease by the lessor, unearned
income
a. should be amortized over the period of the lease using the effective interest method.
b. should be amortized over the period of the lease using the straight-line method.
c. does not arise.
d. should be recognized at the lease's expiration.
6 - 68 Test Bank for Intermediate Accounting, Thirteenth Edition
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39. In order to properly record a direct-financing lease, the lessor needs to know how to
calculate the lease receivable. The lease receivable in a direct-financing lease is best
defined as
a. the amount of funds the lessor has tied up in the asset which is the subject of the direct-
financing lease.
b. the difference between the lease payments receivable and the fair market value of the
leased property.
c. the present value of minimum lease payments.
d. the total book value of the asset less any accumulated depreciation recorded by the
lessor prior to the lease agreement.
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40. If the residual value of a leased asset is guaranteed by a third party
a. it is treated by the lessee as no residual value.
b. the third party is also liable for any lease payments not paid by the lessee.
c. the net investment to be recovered by the lessor is reduced.
d. it is treated by the lessee as an additional payment and by the lessor as realized at the
end of the lease term.
41. When lessors account for residual values related to leased assets, they
a. always include the residual value because they always assume the residual value will
be realized.
b. include the unguaranteed residual value in sales revenue.
c. recognize more gross profit on a sales-type lease with a guaranteed residual value than
on a sales-type lease with an unguaranteed residual value.
d. All of the above are true with regard to lessors and residual values.
48. To avoid leased asset capitalization, companies can devise lease agreements that fail to
satisfy any of the four leasing criteria. Which of the following is not one of the ways to
accomplish this goal?
a. Lessee uses a higher interest rate than that used by lessor.
b. Set the lease term at something less than 75% of the estimated useful life of the
property.
c. Write in a bargain purchase option.
d. Use a third party to guarantee the asset’s residual value.
*49. If the lease in a sale-leaseback transaction meets one of the four leasing criteria and is
therefore accounted for as a capital lease, who records the asset on its books and which
party records interest expense during the lease period?
*50. In a sale-leaseback transaction where none of the four leasing criteria are satisfied, which
of the following is false?
a. The seller-lessee removes the asset from its books.
b. The purchaser-lessor records a gain.
c. The seller-lessee records the lease as an operating lease.
d. All of the above are false statements.
6 - 70 Test Bank for Intermediate Accounting, Thirteenth Edition
*51. When a company sells property and then leases it back, any gain on the sale should usually
be
a. recognized in the current year.
b. recognized as a prior period adjustment.
c. recognized at the end of the lease.
d. deferred and recognized as income over the term of the lease.
CHAPTER 22
ACCOUNTING CHANGES AND ERROR ANALYSIS
MULTIPLE CHOICE—Conceptual
21. Accounting changes are often made and the monetary impact is reflected in the financial
statements of a company even though, in theory, this may be a violation of the accounting
concept of
a. materiality.
b. consistency.
c. conservatism.
d. objectivity.
26. Which of the following disclosures is required for a change from sum-of-the-years-digits to
straight-line?
a. The cumulative effect on prior years, net of tax, in the current retained earnings
statement
b. Restatement of prior years’ income statements
c. Recomputation of current and future years’ depreciation
d. All of these are required.
28. Which of the following disclosures is required for a change from LIFO to FIFO?
a. The cumulative effect on prior years, net of tax, in the current retained earnings
statement
b. The justification for the change
c. Restated prior year income statements
d. All of these are required.
29. Stone Company changed its method of pricing inventories from FIFO to LIFO. What type of
accounting change does this represent?
a. A change in accounting estimate for which the financial statements for prior periods
included for comparative purposes should be presented as previously reported.
b. A change in accounting principle for which the financial statements for prior periods
included for comparative purposes should be presented as previously reported.
c. A change in accounting estimate for which the financial statements for prior periods
included for comparative purposes should be restated.
d. A change in accounting principle for which the financial statements for prior periods
included for comparative purposes should be restated.
30. Which type of accounting change should always be accounted for in current and future
periods?
a. Change in accounting principle
b. Change in reporting entity
c. Change in accounting estimate
d. Correction of an error
6 - 72 Test Bank for Intermediate Accounting, Thirteenth Edition
31. Which of the following is (are) the proper time period(s) to record the effects of a change in
accounting estimate?
a. Current period and prospectively
b. Current period and retrospectively
c. Retrospectively only
d. Current period only
32. When a company decides to switch from the double-declining balance method to the
straight-line method, this change should be handled as a
a. change in accounting principle.
b. change in accounting estimate.
c. prior period adjustment.
d. correction of an error.
33. The estimated life of a building that has been depreciated 30 years of an originally estimated
life of 50 years has been revised to a remaining life of 10 years. Based on this information,
the accountant should
a. continue to depreciate the building over the original 50-year life.
b. depreciate the remaining book value over the remaining life of the asset.
c. adjust accumulated depreciation to its appropriate balance, through net income, based
on a 40-year life, and then depreciate the adjusted book value as though the estimated
life had always been 40 years.
d. adjust accumulated depreciation to its appropriate balance through retained earnings,
based on a 40-year life, and then depreciate the adjusted book value as though the
estimated life had always been 40 years.
36. Presenting consolidated financial statements this year when statements of individual
companies were presented last year is
a. a correction of an error.
b. an accounting change that should be reported prospectively.
c. an accounting change that should be reported by restating the financial statements of
all prior periods presented.
d. not an accounting change.
Accounting and the Time Value of Money 6 - 73
40. If, at the end of a period, a company erroneously excluded some goods from its ending
inventory and also erroneously did not record the purchase of these goods in its accounting
records, these errors would cause
a. the ending inventory and retained earnings to be understated.
b. the ending inventory, cost of goods sold, and retained earnings to be understated.
c. no effect on net income, working capital, and retained earnings.
d. cost of goods sold and net income to be understated.
MULTIPLE CHOICE—Computational
41. On January 1, 2008, Neal Corporation acquired equipment at a cost of $540,000. Neal
adopted the sum-of-the-years’-digits method of depreciation for this equipment and had
been recording depreciation over an estimated life of eight years, with no residual value. At
the beginning of 2011, a decision was made to change to the straight-line method of
depreciation for this equipment. The depreciation expense for 2011 would be
a. $28,125.
b. $45,000.
c. $67,500.
d. $108,000.
42. On January 1, 2008, Knapp Corporation acquired machinery at a cost of $250,000. Knapp
adopted the double-declining balance method of depreciation for this machinery and had
been recording depreciation over an estimated useful life of ten years, with no residual
value. At the beginning of 2011, a decision was made to change to the straight-line method
of depreciation for the machinery. The depreciation expense for 2011 would be
a. $12,800.
b. $18,286.
c. $25,000.
d. $35,714.
6 - 74 Test Bank for Intermediate Accounting, Thirteenth Edition
43. On January 1, 2008, Piper Co., purchased a machine (its only depreciable asset) for
$300,000. The machine has a five-year life, and no salvage value. Sum-of-the-years'-digits
depreciation has been used for financial statement reporting and the elective straight-line
method for income tax reporting. Effective January 1, 2011, for financial statement
reporting, Piper decided to change to the straight-line method for depreciation of the
machine. Assume that Piper can justify the change.
Piper's income before depreciation, before income taxes, and before the cumulative effect
of the accounting change (if any), for the year ended December 31, 2011, is $250,000. The
income tax rate for 2011, as well as for the years 2008-2010, is 30%. What amount should
Piper report as net income for the year ended December 31, 2011?
a. $60,000
b. $91,000
c. $154,000
d. $175,000
Ventura Corporation purchased machinery on January 1, 2009 for $630,000. The company used
the sum-of-the-years’-digits method and no salvage value to depreciate the asset for the first two
years of its estimated six-year life. In 2010, Ventura changed to the straight-line depreciation
method for this asset. The following facts pertain:
2009 2010
Straight-line $105,000 $105,000
Sum-of-the-years’-digits 180,000 150,000
Accounting and the Time Value of Money 6 - 75
44. Ventura is subject to a 40% tax rate. The cumulative effect of this accounting change on
beginning retained earnings is
a. $135,000.
b. $120,000.
c. $72,000.
d. $0.
45. The amount that Ventura should report for depreciation expense on its 2011 income
statement is
a. $120,000.
b. $105,000.
c. $75,000.
d. none of the above.
46. During 2011, a construction company changed from the completed-contract method to the
percentage-of-completion method for accounting purposes but not for tax purposes. Gross
profit figures under both methods for the past three years appear below:
Completed-Contract Percentage-of-Completion
2009 $ 475,000 $ 800,000
2010 625,000 950,000
2011 700,000 1,050,000
$1,800,000 $2,800,000
Assuming an income tax rate of 40% for all years, the affect of this accounting change on
prior periods should be reported by a credit of
a. $600,000 on the 2011 income statement.
b. $390,000 on the 2011 income statement.
c. $600,000 on the 2011 retained earnings statement.
d. $390,000 on the 2011 retained earnings statement.
On January 1, 2008, Nobel Corporation acquired machinery at a cost of $600,000. Nobel adopted
the straight-line method of depreciation for this machine and had been recording depreciation over
an estimated life of ten years, with no residual value. At the beginning of 2011, a decision was
made to change to the double-declining balance method of depreciation for this machine.
47. Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning
retained earnings, is
a. $67,200.
b. $0.
c. $78,960.
d. $112,800.
48. The amount that Nobel should record as depreciation expense for 2011 is
a. $60,000.
b. $84,000.
c. $120,000.
d. none of the above.
6 - 76 Test Bank for Intermediate Accounting, Thirteenth Edition
49. On December 31, 2011 Dean Company changed its method of accounting for inventory
from weighted average cost method to the FIFO method. This change caused the 2011
beginning inventory to increase by $420,000. The cumulative effect of this accounting
change to be reported for the year ended 12/31/11, assuming a 40% tax rate, is
a. $420,000.
b. $252,000.
c. $168,000.
d. $0.
50. Heinz Company began operations on January 1, 2010, and uses the FIFO method in
costing its raw material inventory. Management is contemplating a change to the LIFO
method and is interested in determining what effect such a change will have on net income.
Accordingly, the following information has been developed:
Final Inventory 2010 2011
FIFO $640,000 $ 712,000
LIFO 560,000 636,000
Net Income (computed under the FIFO method) 980,000 1,080,000
Based on the above information, a change to the LIFO method in 2011 would result in net
income for 2011 of
a. $1,120,000.
b. $1,080,000.
c. $1,004,000.
d. $1,000,000.
51. Lanier Company began operations on January 1, 2010, and uses the FIFO method in
costing its raw material inventory. Management is contemplating a change to the LIFO
method and is interested in determining what effect such a change will have on net income.
Accordingly, the following information has been developed:
Final Inventory 2010 2011
FIFO $320,000 $360,000
LIFO 240,000 300,000
Net Income (computed under the FIFO method) 500,000 600,000
Based upon the above information, a change to the LIFO method in 2011 would result in
net income for 2011 of
a. $540,000.
b. $600,000.
c. $620,000.
d. $660,000.
52. Equipment was purchased at the beginning of 2008 for $204,000. At the time of its
purchase, the equipment was estimated to have a useful life of six years and a salvage
value of $24,000. The equipment was depreciated using the straight-line method of
depreciation through 2010. At the beginning of 2011, the estimate of useful life was revised
to a total life of eight years and the expected salvage value was changed to $15,000. The
amount to be recorded for depreciation for 2011, reflecting these changes in estimates, is
a. $12,375.
b. $19,800.
c. $22,800.
d. $23,625.
Use the following information for questions 53 and 54.
Accounting and the Time Value of Money 6 - 77
Swift Company purchased a machine on January 1, 2008, for $300,000. At the date of acquisition,
the machine had an estimated useful life of six years with no salvage. The machine is being
depreciated on a straight-line basis. On January 1, 2011, Swift determined, as a result of additional
information, that the machine had an estimated useful life of eight years from the date of acquisition
with no salvage. An accounting change was made in 2011 to reflect this additional information.
53. Assume that the direct effects of this change are limited to the effect on depreciation and
the related tax provision, and that the income tax rate was 30% in 2008, 2009, 2010, and
2011. What should be reported in Swift's income statement for the year ended December
31, 2011, as the cumulative effect on prior years of changing the estimated useful life of the
machine?
a. $0
b. $20,000
c. $30,000
d. $105,000
54. What is the amount of depreciation expense on this machine that should be charged in
Swift's income statement for the year ended December 31, 2011?
a. $30,000
b. $37,500
c. $60,000
d. $75,000
2010 2011
Ending inventory $15,000 overstatement $24,000 understatement
Depreciation expense 6,000 understatement 12,000 overstatement
55. Assume that the 2010 errors were not corrected and that no errors occurred in 2009. By
what amount will 2010 income before income taxes be overstated or understated?
a. $21,000 overstatement
b. $9,000 overstatement
c. $21,000 understatement
d. $9,000 understatement
56. Assume that no correcting entries were made at 12/31/10, or 12/31/11. Ignoring income
taxes, by how much will retained earnings at 12/31/11 be overstated or understated?
a. $24,000 overstatement
b. $21,000 overstatement
c. $30,000 understatement
d. $9,000 understatement
6 - 78 Test Bank for Intermediate Accounting, Thirteenth Edition
An insurance premium of $18,000 was prepaid in 2010 covering the years 2010, 2011, and 2012.
The prepayment was recorded with a debit to insurance expense. In addition, on December 31,
2011, fully depreciated machinery was sold for $9,500 cash, but the sale was not recorded until
2012. There were no other errors during 2011 or 2012 and no corrections have been made for any
of the errors. Ignore income tax considerations.
57. What is the total net effect of the errors on Langley's 2011 net income?
a. Net income understated by $14,500.
b. Net income overstated by $7,500.
c. Net income overstated by $13,000.
d. Net income overstated by $15,000.
58. What is the total net effect of the errors on the amount of Langley's working capital at
December 31, 2011?
a. Working capital overstated by $5,000
b. Working capital overstated by $1,500
c. Working capital understated by $4,500
d. Working capital understated by $12,000
59. What is the total effect of the errors on the balance of Langley's retained earnings at
December 31, 2011?
a. Retained earnings understated by $10,000
b. Retained earnings understated by $4,500
c. Retained earnings understated by $2,500
d. Retained earnings overstated by $3,500
60. Accrued salaries payable of $51,000 were not recorded at December 31, 2010. Office
supplies on hand of $24,000 at December 31, 2011 were erroneously treated as expense
instead of supplies inventory. Neither of these errors was discovered nor corrected. The
effect of these two errors would cause
a. 2011 net income to be understated $75,000 and December 31, 2011 retained earnings
to be understated $24,000.
b. 2010 net income and December 31, 2010 retained earnings to be understated $51,000
each.
c. 2010 net income to be overstated $27,000 and 2011 net income to be understated
$24,000.
d. 2011 net income and December 31, 2011 retained earnings to be understated $24,000
each.
Accounting and the Time Value of Money 6 - 79
61. The total effect of the errors on Bishop's 2011 net income is
a. understated by $376,800.
b. understated by $244,800.
c. overstated by $115,200.
d. overstated by $199,200.
62. The total effect of the errors on the balance of Bishop's retained earnings at December 31,
2011 is understated by
a. $328,800.
b. $268,800.
c. $184,800.
d. $136,800.
63. The total effect of the errors on the amount of Bishop's working capital at December 31,
2011 is understated by
a. $400,800.
b. $316,800.
c. $184,800.
d. $124,800.
64. Link's income statement for the year ended December 31, 2011, should show the
cumulative effect of this error in the amount of
a. $726,000.
b. $642,000.
c. $558,000.
d. $0.
65. Before the correction was made, and before the books were closed on December 31, 2011,
retained earnings was understated by
a. $810,000.
b. $726,000.
c. $642,000.
d. $558,000.
6 - 80 Test Bank for Intermediate Accounting, Thirteenth Edition
Ernst Company purchased equipment that cost $750,000 on January 1, 2010. The entire cost was
recorded as an expense. The equipment had a nine-year life and a $30,000 residual value. Ernst
uses the straight-line method to account for depreciation expense. The error was discovered on
December 10, 2012. Ernst is subject to a 40 % tax rate.
66. Ernst’s net income for the year ended December 31, 2010, was understated by
a. $402,000.
b. $450,000.
c. $670,000.
d. $750,000.
67. Before the correction was made and before the books were closed on December 31, 2012,
retained earnings was understated by
a. $332,000.
b. $336,000.
c. $354,000.
d. $450,000.
CHAPTER 23
STATEMENT OF CASH FLOWS
MULTIPLE CHOICE—Conceptual
21. It is an objective of the statement of cash flows to
a. disclose changes during the period in all asset and all equity accounts.
b. disclose the change in working capital during the period.
c. provide information about the operating, investing, and financing activities of an entity
during a period.
d. none of these.
22. The primary purpose of the statement of cash flows is to provide information
a. about the operating, investing, and financing activities of an entity during a period.
b. that is useful in assessing cash flow prospects.
c. about the cash receipts and cash payments of an entity during a period.
d. about the entity's ability to meet its obligations, its ability to pay dividends, and its needs
for external financing.
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23. Of the following questions, which one would not be answered by the statement of cash
flows?
a. Where did the cash come from during the period?
b. What was the cash used for during the period?
c. Were all the cash expenditures of benefit to the company during the period?
d. What was the change in the cash balance during the period?
Accounting and the Time Value of Money 6 - 81
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24. The first step in the preparation of the statement of cash flows requires the use of
information included in which comparative financial statements?
a. Statements of cash flows
b. Balance sheets
c. Income statements
d. Statements of retained earnings
25. Cash equivalents are
a. treasury bills, commercial paper, and money market funds purchased with excess cash.
b. investments with original maturities of three months or less.
c. readily convertible into known amounts of cash.
d. all of these.
26. A company borrows $10,000 and signs a 90-day nontrade note payable. In preparing a
statement of cash flows (indirect method), this event would be reflected as a(n)
a. addition adjustment to net income in the cash flows from operating activities section.
b. cash outflow from investing activities.
c. cash inflow from investing activities.
d. cash inflow from financing activities.
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27. To arrive at net cash provided by operating activities, it is necessary to report revenues and
expenses on a cash basis. This is done by
a. re-recording all income statement transactions that directly affect cash in a separate
cash flow journal.
b. estimating the percentage of income statement transactions that were originally
reported on a cash basis and projecting this amount to the entire array of income
statement transactions.
c. eliminating the effects of income statement transactions that did not result in a
corresponding increase or decrease in cash.
d. eliminating all transactions that have no current or future effect on cash, such as
depreciation, from the net income computation.
28. An increase in inventory balance would be reported in a statement of cash flows using the
indirect method (reconciliation method) as a(n)
a. addition to net income in arriving at net cash flow from operating activities.
b. deduction from net income in arriving at net cash flow from operating activities.
c. cash outflow from investing activities.
d. cash outflow from financing activities.
29. A statement of cash flows typically would not disclose the effects of
a. capital stock issued at an amount greater than par value.
b. stock dividends declared.
c. cash dividends paid.
d. a purchase and immediate retirement of treasury stock.
30. When preparing a statement of cash flows (indirect method), which of the following is not
an adjustment to reconcile net income to net cash provided by operating activities?
a. A change in interest payable
b. A change in dividends payable
c. A change in income taxes payable
d. All of these are adjustments.
6 - 82 Test Bank for Intermediate Accounting, Thirteenth Edition
31. Declaration of a cash dividend on common stock affects cash flows from operating activities
under the direct and indirect methods as follows:
Direct Method Indirect Method
a. Outflow Inflow
b. Inflow Inflow
c. Outflow Outflow
d. No effect No effect
32. In a statement of cash flows, the cash flows from investing activities section should report
a. the issuance of common stock in exchange for a factory building.
b. stock dividends received.
c. a major repair to machinery charged to accumulated depreciation.
d. the assignment of accounts receivable.
P
33. Xanthe Corporation had the following transactions occur in the current year:
1. Cash sale of merchandise inventory.
2. Sale of delivery truck at book value.
3. Sale of Xanthe common stock for cash.
4. Issuance of a note payable to a bank for cash.
5. Sale of a security held as an available-for-sale investment.
6. Collection of loan receivable.
How many of the above items will appear as a cash inflow from investing activities on a
statement of cash flows for the current year?
a. Five items
b. Four items
c. Three items
d. Two items
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34. Which of the following would be classified as a financing activity on a statement of cash
flows?
a. Declaration and distribution of a stock dividend
b. Deposit to a bond sinking fund
c. Sale of a loan receivable
d. Payment of interest to a creditor
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35. The amortization of bond premium on long-term debt should be presented in a statement
of cash flows (using the indirect method for operating activities) as a(n)
a. addition to net income.
b. deduction from net income.
c. investing activity.
d. financing activity.
Accounting and the Time Value of Money 6 - 83
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36. Crabbe Company reported $80,000 of selling and administrative expenses on its income
statement for the past year. The company had depreciation expense and an increase in
prepaid expenses associated with the selling and administrative expenses for the year.
Assuming use of the direct method, how would these items be handled in converting the
accrual based selling and administrative expenses to the cash basis?
Increase in
Depreciation Prepaid Expenses
a. Deducted From Deducted From
b. Added To Added To
c. Deducted From Added To
d. Added To Deducted From
37. When preparing a statement of cash flows (indirect method), an increase in ending
inventory over beginning inventory will result in an adjustment to reported net earnings
because
a. cash was increased while cost of goods sold was decreased.
b. cost of goods sold on an accrual basis is lower than on a cash basis.
c. acquisition of inventory is an investment activity.
d. inventory purchased during the period was less than inventory sold resulting in a net
cash increase.
38. When preparing a statement of cash flows, a decrease in accounts receivable during a
period would cause which one of the following adjustments in determining cash flow from
operating activities?
Direct Method Indirect Method
a. Increase Decrease
b. Decrease Increase
c. Increase Increase
d. Decrease Decrease
39. In determining net cash flow from operating activities, a decrease in accounts payable
during a period
a. means that income on an accrual basis is less than income on a cash basis.
b. requires an addition adjustment to net income under the indirect method.
c. requires an increase adjustment to cost of goods sold under the direct method.
d. requires a decrease adjustment to cost of goods sold under the direct method.
40. When preparing a statement of cash flows, an increase in accounts payable during a period
would require which of the following adjustments in determining cash flows from operating
activities?
Indirect Method Direct Method
a. Increase Decrease
b. Decrease Increase
c. Increase Increase
d. Decrease Decrease
6 - 84 Test Bank for Intermediate Accounting, Thirteenth Edition
41. When preparing a statement of cash flows, a decrease in prepaid insurance during a period
would require which of the following adjustments in determining cash flows from operating
activities?
Indirect Method Direct Method
a. Increase Decrease
b. Decrease Increase
c. Increase Increase
d. Decrease Decrease
42. When preparing a statement of cash flows, the following are used for which method in
determining cash flows from operating activities?
Gross Accounts Receivable Net Accounts Receivable
a. Indirect Direct
b. Direct Indirect
c. Direct Direct
d. Neither Indirect
44. When using the indirect method to prepare the operating section of a statement of cash
flows, which of the following is added to net income to compute cash provided by/used by
operating activities?
a. Increase in accounts receivable.
b. Gain on sale of land.
c. Amortization of patent.
d. All of the above are added to net income to arrive at cash flow from operating activities.
45. When using the indirect method to prepare the operating section of a statement of cash
flows, which of the following is deducted from net income to compute cash provided
by/used by operating activities?
a. Decrease in accounts receivable.
b. Gain on sale of land.
c. Amortization of patent.
d. All of the above are deducted from net income to arrive at cash flow from operating
activities.
46. Which of the following is false concerning the statement of cash flows?
a. When pension expense exceeds cash funding, the difference is deducted from investing
activities on the statement of cash flows.
b. The FASB requires companies to classify all income taxes paid as operating cash
outflows.
c. Under U.S. GAAP, the purchase of land by issuing stock will be shown as a cash outflow
under investing activities and a cash inflow under financing activities.
d. All of the above are true concerning the statement of cash flows.
Accounting and the Time Value of Money 6 - 85
47. Dolan Company reports its income from investments under the equity method and
recognized income of $25,000 from its investment in Moss Co. during the current year, even
though no dividends were declared or paid by Moss during the year. On Dolan's statement
of cash flows (indirect method), the $25,000 should
a. not be shown.
b. be shown as cash inflow from investing activities.
c. be shown as cash outflow from financing activities.
d. be shown as a deduction from net income in the cash flows from operating activities
section.
48. In reporting extraordinary transactions on a statement of cash flows (indirect method), the
a. gross amount of an extraordinary gain should be deducted from net income.
b. net of tax amount of an extraordinary gain should be added to net income.
c. net of tax amount of an extraordinary gain should be deducted from net income.
d. gross amount of an extraordinary gain should be added to net income.
MULTIPLE CHOICE—Computational
Use the following information for questions 51 and 52.
Napier Co. provided the following information on selected transactions during 2011:
Purchase of land by issuing bonds $250,000
Proceeds from issuing bonds 500,000
Purchases of inventory 950,000
Purchases of treasury stock 150,000
Loans made to affiliated corporations 350,000
Dividends paid to preferred stockholders 100,000
Proceeds from issuing preferred stock 400,000
Proceeds from sale of equipment 50,000
51. The net cash provided (used) by investing activities during 2011 is
a. $50,000.
b. $(300,000).
6 - 86 Test Bank for Intermediate Accounting, Thirteenth Edition
c. $(550,000).
d. $(1,250,000).
Land was acquired for $100,000 in exchange for common stock, par $100,000, during the year; all
equipment purchased was for cash. Equipment costing $10,000 was sold for $4,000; book value
of the equipment was $8,000 and the loss was reported as an ordinary item in net income. Cash
dividends of $20,000 were charged to retained earnings and paid during the year; the transfer of
net income to retained earnings was the only other entry in the Retained Earnings account. In the
statement of cash flows for the year ended December 31, 2011, for Naley Company:
56. The following information on selected cash transactions for 2011 has been provided by
Mancuso Company:
Proceeds from sale of land $160,000
Proceeds from long-term borrowings 400,000
Purchases of plant assets 144,000
Purchases of inventories 680,000
Proceeds from sale of Mancuso common stock 240,000
What is the cash provided (used) by investing activities for the year ended December 31,
2011, as a result of the above information?
a. $16,000
b. $256,000.
c. $160,000.
d. $800,000.
57. Selected information from Dinkel Company's 2011 accounting records is as follows:
Proceeds from issuance of common stock $ 400,000
Proceeds from issuance of bonds 1,200,000
Cash dividends on common stock paid 160,000
Cash dividends on preferred stock paid 60,000
Purchases of treasury stock 120,000
Sale of stock to officers and employees not included above 100,000
6 - 88 Test Bank for Intermediate Accounting, Thirteenth Edition
Dinkel's statement of cash flows for the year ended December 31, 2011, would show net
cash provided (used) by financing activities of
a. $60,000.
b. $(220,000).
c. $160,000.
d. $1,360,000.
BALANCE SHEETS
12/31/11 12/31/10
Cash $204,000 $ 96,000
Accounts receivable 180,000 108,000
Merchandise inventory 192,000 240,000
Property, plant and equipment $304,000 $480,000
Less accumulated depreciation (160,000) 144,000 (152,000) 328,000
$720,000 $772,000
INCOME STATEMENT
For the Year Ended December 31, 2011
Sales $4,200,000
Cost of sales 3,576,000
Gross profit 624,000
Selling expenses $300,000
Administrative expenses 96,000 396,000
Income from operations 228,000
Interest expense 36,000
Income before taxes 192,000
Income taxes 48,000
Net income $ 144,000
The following additional data were provided:
1. Dividends for the year 2011 were $96,000.
2. During the year, equipment was sold for $120,000. This equipment cost $176,000 originally
and had a book value of $144,000 at the time of sale. The loss on sale was incorrectly
charged to cost of sales.
3. All depreciation expense is in the selling expense category.
Questions 58 through 62 relate to a statement of cash flows (direct method) for the year ended
December 31, 2011, for Harlan Mining Company.
a. $204,000.
b. $144,000.
c. $120,000.
d. $100,000.
60. Under the direct method, the cash received from customers is
a. $4,272,000.
b. $4,128,000.
c. $4,200,000.
d. $4,220,000.
63. During 2011, Stout Inc. had the following activities related to its financial operations:
Carrying value of convertible preferred stock in Stout,
converted into common shares of Stout $ 360,000
Payment in 2011 of cash dividend declared in 2010 to
preferred shareholders 186,000
Payment for the early retirement of long-term bonds payable
(carrying amount $2,220,000) 2,250,000
Proceeds from the sale of treasury stock (on books at cost of $258,000) 300,000
The amount of net cash used in financing activities to appear in Stout's statement of cash
flows for 2011 should be
a. $1,590,000.
b. $1,776,000.
c. $2,136,000.
d. $2,148,000.
6 - 90 Test Bank for Intermediate Accounting, Thirteenth Edition
64. Hager Company sold some of its plant assets during 2011. The original cost of the plant
assets was $750,000 and the accumulated depreciation at date of sale was $700,000. The
proceeds from the sale of the plant assets were $105,000. The information concerning the
sale of the plant assets should be shown on Hager's statement of cash flows (indirect
method) for the year ended December 31, 2011, as a(n)
a. subtraction from net income of $55,000 and a $50,000 increase in cash flows from
financing activities.
b. addition to net income of $55,000 and a $105,000 increase in cash flows from investing
activities.
c. subtraction from net income of $55,000 and a $105,000 increase in cash flows from
investing activities.
d. addition of $105,000 to net income.
65. An analysis of the machinery accounts of Noller Company for 2011 is as follows:
Machinery, Net of
Accumulated Accumulated
Machinery Depreciation Depreciation
Balance at January 1, 2011 $500,000 $125,000 $375,000
Purchases of new machinery in 2011
for cash 200,000 — 200,000
Depreciation in 2011 — 100,000 (100,000)
Balance at Dec. 31, 2011 $700,000 $225,000 $475,000
66. Equipment which cost $213,000 and had accumulated depreciation of $114,000 was sold
for $111,000. This transaction should be shown on the statement of cash flows (indirect
method) as a(n)
a. addition to net income of $12,000 and a $111,000 cash inflow from financing activities.
b. deduction from net income of $12,000 and a $99,000 cash inflow from investing
activities.
c. deduction from net income of $12,000 and a $111,000 cash inflow from investing
activities.
d. addition to net income of $12,000 and a $99,000 cash inflow from financing activities.
67. During 2011, equipment was sold for $156,000. The equipment cost $252,000 and had a
book value of $144,000. Accumulated Depreciation—Equipment was $687,000 at 12/31/10
and $735,000 at 12/31/11. Depreciation expense for 2011 was
a. $60,000.
b. $96,000.
c. $156,000.
d. $192,000.
Accounting and the Time Value of Money 6 - 91
Kiner Company
Statement of Cash Flows
For the Year Ended December 31, 2011
Increase (Decrease) in Cash
Cash flows from operating activities
Net income $400,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accounts receivable $(128,000)
Increase in accounts payable 64,000
Depreciation—buildings and equipment 120,000
Gain on sale of equipment (48,000)
Amortization of patents 16,000 24,000
Net cash provided by operating activities 424,000
Cash flows from investing activities
Sale of equipment 96,000
Purchase of land (200,000)
Purchase of buildings and equipment (384,000)
Net cash used by investing activities (488,000)
Cash flows from financing activities
Payment of cash dividend (120,000)
Sale of common stock 320,000
Net cash provided by financing activities 200,000
Net increase in cash 136,000
Cash, January 1, 2011 320,000
Cash, December 31, 2011 $456,000
Total assets on the balance sheet at December 31, 2011 are $2,216,000. Accumulated deprecia-
tion on the equipment sold was $112,000.
70. When the equipment was sold, the Buildings and Equipment account received a credit of
a. $96,000.
b. $208,000.
c. $160,000.
d. $112,000.
71. The book value of the buildings and equipment at December 31, 2011 was
a. $1,016,000.
b. $1,040,000.
c. $1,424,000.
d. $1,176,000.
73. The balance in the Retained Earnings account at December 31, 2011 was
a. $360,000.
b. $880,000.
c. $760,000.
d. $1,000,000.
74. Capital stock (plus any additional paid-in capital) at December 31, 2011 was
a. $800,000.
b. $920,000.
c. $520,000.
d. $1,240,000.
The balance in retained earnings at December 31, 2010 was $720,000 and at December 31, 2011
was $582,000. Net income for 2011 was $500,000. A stock dividend was declared and distributed
which increased common stock $200,000 and paid-in capital $110,000. A cash dividend was
declared and paid.
76. The stock dividend should be reported on the statement of cash flows (indirect method) as
a. an outflow from financing activities of $200,000.
b. an outflow from financing activities of $310,000.
c. an outflow from investing activities of $310,000.
d. Stock dividends are not shown on a statement of cash flows.
77. The following information was taken from the 2011 financial statements of Dunlop
Corporation:
Bonds payable, January 1, 2011 $ 500,000
Bonds payable, December 31, 2011 2,000,000
During 2011
• A $450,000 payment was made to retire bonds payable with a face amount of
$500,000.
• Bonds payable with a face amount of $200,000 were issued in exchange for
equipment.
In its statement of cash flows for the year ended December 31, 2011, what amount should
Dunlop report as proceeds from issuance of bonds payable?
a. $1,500,000
b. $1,750,000
c. $1,800,000
d. $2,200,000
6 - 94 Test Bank for Intermediate Accounting, Thirteenth Edition
78. Lindsay Corporation had net income for 2011 of $3,000,000. Additional information is as
follows:
Depreciation of plant assets $1,200,000
Amortization of intangibles 240,000
Increase in accounts receivable 420,000
Increase in accounts payable 540,000
Lindsay's net cash provided by operating activities for 2011 was
a. $4,560,000.
b. $4,440,000.
c. $4,320,000.
d. $1,680,000.
79. Net cash flow from operating activities for 2011 for Spencer Corporation was $300,000. The
following items are reported on the financial statements for 2011:
Cash dividends paid on common stock 20,000
Depreciation and amortization 12,000
Increase in accounts receivables 24,000
Based on the information above, Spencer’s net income for 2011 was
a. $312,000.
b. $296,000.
c. $264,000.
d. $256,000.
80. During 2011, Orton Company earned net income of $384,000 which included deprecia-tion
expense of $78,000. In addition, the company experienced the following changes in the
account balances listed below:
Increases Decreases
Accounts payable $45,000 Accounts receivable $12,000
Inventory 36,000 Accrued liabilities 24,000
Prepaid insurance 33,000
Based upon this information what amount will be shown for net cash provided by operating
activities for 2011?
a. $492,000
b. $465,000
c. $285,000
d. $267,000
81. Minear Company reported net income of $340,000 for the year ended 12/31/11. Included
in the computation of net income were: depreciation expense, $60,000; amortization of a
patent, $32,000; income from an investment in common stock of Brett Inc., accounted for
under the equity method, $48,000; and amortization of a bond discount, $12,000. Minear
also paid an $80,000 dividend during the year. The net cash provided by operating activities
would be reported at:
a. $396,000.
b. $316,000.
c. $284,000.
d. $204,000.
Accounting and the Time Value of Money 6 - 95
82. In preparing Titan Inc.’s statement of cash flows for the year ended December 31, 2011,
the following amounts were available:
Collect note receivable $320,000
Issue bonds payable 406,000
Purchase treasury stock 210,000
What amount should be reported on Titan, Inc.’s statement of cash flows for investing
activities?
a. $320,000
b. $110,000
c. $726,000
d. $110,000
83. In preparing Titan Inc.’s statement of cash flows for the year ended December 31, 2011,
the following amounts were available:
Collect note receivable $320,000
Issue bonds payable 406,000
Purchase treasury stock 210,000
What amount should be reported on Titan, Inc’s statement of cash flows for financing
activities?
a. $ 86,000
b. $726,000
c. $196,000
d. $110,000
84. Jarvis, Inc. reported net income of $34,000 for the year ended December 31, 2011
Included in net income were depreciation expense of $8,400 and a gain on sale of
equipment of $1,700. Each of the following accounts increased during 2011:
Accounts receivable $2,200
Inventory $4,500
Prepaid rent $6,800
Available-for-sale securities $1,000
Accounts payable $5,000
What is the amount of cash provided by operating activities for Jarvis, Inc. for the year
ended December 31, 2011?
a. $31,200
b. $33,900
c. $22,200
d. $32,200
85. Jarvis, Inc. reported net income of $34,000 for the year ended December 31, 2011
Included in net income were depreciation expense of $8,400 and a gain on sale of
equipment of $1,700. The equipment had an historical cost of $40,000 and accumulated
depreciation of $24,000. Each of the following accounts increased during 2011:
Patents $4,500
Prepaid rent $6,800
Available-for-sale securities $1,000
Bonds payable $5,000
6 - 96 Test Bank for Intermediate Accounting, Thirteenth Edition
What is the amount of cash provided by or used by investing activities for Jarvis, Inc. for
the year ended December 31, 2011?
a. ( $ 3,800)
b. $ 5,400
c. $12,200
d. $17,200
86. Jarvis, Inc. reported net income of $34,000 for the year ended December 31, 2011.
Included in net income was a gain on early extinguishment of debt of $60,000 related to
bonds payable with a book value of $1,200,000. Each of the following accounts increased
during 2011:
Notes receivable $45,000
Deferred tax liability $10,000
Treasury stock $90,000
What is the amount of cash used by financing activities for Jarvis, Inc. for the year ended
December 31, 2011?
a. $1,230,000
b. $1,240,000
c. $ 160,000
d. $ 195,000
87. During 2011, Greta Company earned net income of $192,000 which included depreciation
expense of $39,000. In addition, the Company experienced the following changes in the
account balances listed below:
Decreases Increases
Accounts receivable...... $ 6,000 Accounts payable…... $22,500
Prepaid expenses .......... 16,500 Inventory……………. ..18,000
Accrued liabilities ............ 12,000
Based upon this information what amount will be shown for net cash provided by
operating activities for 2011.
a. $246,000.
b. $232,500.
c. $142,500.
d. $133,500.
88. Cashman Company reported net income of $255,000 for the year ended 12/31/11.
Included in the computation of net income were: depreciation expense, $45,000;
amortization of a patent, $24,000; income from an investment in common stock of Linda
Inc., accounted for under the equity method, $36,000; and amortization of a bond
premium, $9,000. Cashman also paid a $60,000 dividend during the year. The net cash
provided by operating activities would be reported at:
a. $279,000.
b. $231,000.
c. $219,000.
d. $171,000.
Accounting and the Time Value of Money 6 - 97
89. Net cash flow from operating activities for 2011 for Graham Corporation was $300,000.
The following items are reported on the financial statements for 2011:
Depreciation and amortization $ 20,000
Cash dividends paid on common stock 12,000
Increase in accounts receivable 24,000
Based only on the information above, Graham’s net income for 2011 was:
a. $256,000.
b. $264,000.
c. $296,000.
d. $304,000.
90. Donnegan Company reported operating expenses of $285,000 for 2011. The following
data were extracted from the company’s financial records:
12/31/10 12/31/11
Prepaid Expenses $ 60,000 $69,000
Accrued Expenses 210,000 255,000
On a statement of cash flows for 2011, using the direct method, cash payments for
operating expenses should be:
a. $339,000.
b. $321,000.
c. $249,000.
d. $231,000.
91. The following information was taken from the 2011 financial statements of Jenny Gardner
Corporation:
Inventory, January 1, 2011 $ 90,000
Inventory, December 31, 2011 120,000
Accounts payable, January 1, 2011 75,000
Accounts payable, December 31, 2011 120,000
Sales 600,000
Cost of goods sold 450,000
If the direct method is used in the 2011 statement of cash flows, what amount should
Jenny Gardner report as cash payments to suppliers?
a. $435,000
b. $465,000
c. $495,000
d. $525,000
92. Alex Company prepares its statement of cash flows using the direct method for operating
activities. For the year ended December 31, 2011, Alex Company reports the following
activity:
Sales on account $1,300,000
Cash sales 740,000
Decrease in accounts receivable 610,000
Increase in accounts payable 72,000
Increase in inventory 48,000
Cost of good sold 975,000
6 - 98 Test Bank for Intermediate Accounting, Thirteenth Edition
What is the amount of cash collections from customers reported by Alex Company for the
year ended December 31, 2011?
a. $2,040,000
b. $1,910,000
c. $2,650,000
d. $1,430,000
93. Alex Company prepares its statement of cash flows using the direct method for operating
activities. For the year ended December 31, 2011, Alex Company reports the following
activity:
Sales on account $1,300,000
Cash sales 740,000
Decrease in accounts receivable 610,000
Increase in accounts payable 72,000
Increase in inventory 48,000
Cost of goods sold 975,000
What is the amount of cash payments to suppliers reported by Alex Company for the year
ended December 31, 2011?
a. $ 951,000
b. $ 999,000
c. $1,095,000
d. $ 855,000
Questions 94 through 97 are based on the data shown below related to the statement of cash flows
for Putnam, Inc.:
Putnam, Inc.
Comparative Balance Sheets
December 31,
2011 2010
Assets:
Current Assets:
Cash $ 690,000 $ 540,000
Accounts Receivable (net) 1,560,000 1,080,000
Merchandise Inventory 1,950,000 1,260,000
Prepaid Expenses 351,000 315,000
Total Current Assets 4,551,000 3,195,000
Long-Term Investments 225,000
Plant Assets:
Property, Plant & Equipment 2,190,000 1,440,000
Accumulated Depreciation (450,000) (270,000)
Total Plant Assets 1,740,000 1,170,000
Total Assets $6,516,000 $4,365,000
Accounting and the Time Value of Money 6 - 99
Equities:
Current Liabilities:
Accounts Payable $1,275,000 $1,095,000
Accrued Expenses 309,000 282,000
Dividends Payable 201,000
Total Current Liabilities 1,785,000 1,377,000
Long-Term Notes Payable 825,000
Stockholders' Equity:
Common Stock 3,000,000 2,400,000
Retained Earnings 906,000 588,000
Total Equities $6,516,000 $4,365,000
Putnam, Inc.
Comparative Income Statements
December 31,
2011 2010
Net Credit Sales $7,020,000 $3,753,000
Cost of Goods Sold 3,915,000 1,881,000
Gross Profit 3,105,000 1,872,000
Expenses (including Income Tax) 2,586,000 1,374,000
Net Income $ 519,000 $ 498,000
Additional Information:
a. Accounts receivable and accounts payable relate to merchandise held for sale in the
normal course of business. The allowance for bad debts was the same at the end of 2011
and 2010, and no receivables were charged against the allowance. Accounts payable are
recorded net of any discount and are always paid within the discount period.
b. The proceeds from the note payable were used to finance the acquisition of property,
plant, and equipment. Capital stock was sold to provide additional working capital.
94. What amount of cash was collected from 2011 accounts receivable?
a. $7,500,000.
b. $7,020,000.
c. $6,540,000.
d. $3,270,000.
95. What amount of cash was paid on accounts payable to suppliers during 2011?
a. $4,605,000.
b. $4,425,000.
c. $4,095,000.
d. $3,735,000.
96. The amount to be shown on the cash flow statement as net cash provided by investing
activities would total what amount?
a. $225,000.
b. $750,000.
c. $795,000.
d. $975,000.
97. The amount to be shown on the cash flow statement as net cash provided by financing
activities would total what amount?
6 - 100 Test Bank for Intermediate Accounting, Thirteenth Edition
a. $1,425,000.
b. $825,000.
c. $600,000.
d. $408,000.
Fleming Company provided the following information on selected transactions during 2011:
Dividends paid to preferred stockholders $ 150,000
Loans made to affiliated corporations 750,000
Proceeds from issuing bonds 900,000
Proceeds from issuing preferred stock 1,050,000
Proceeds from sale of equipment 450,000
Purchases of inventories 1,200,000
Purchase of land by issuing bonds 300,000
Purchases of treasury stock 600,000
98. The net cash provided (used) by investing activities during 2011 is
a. $(600,000).
b. $(300,000).
c. $150,000.
d. $450,000.
99. The net cash provided (used) by financing activities during 2011 is
a. $(1,650,000).
b. $450,000.
c. $750,000.
d. $1,200,000.
100. The net cash provided by operating activities in Sosa Company's statement of cash flows
for 2011 was $115,000. For 2011, depreciation on plant assets was $45,000, amortization
of patent was $8,000, and cash dividends paid on common stock was $54,000. Based only
on the information given above, Sosa’s net income for 2011 was
a. $115,000.
b. $62,000.
c. $8,000.
d. $116,000.
101. During 2011, Oldham Corporation, which uses the allowance method of accounting for
doubtful accounts, recorded a provision for bad debt expense of $25,000 and in addition it
wrote off, as uncollectible, accounts receivable of $10,000. As a result of these transactions,
net cash flows from operating activities would be calculated (indirect method) by adjusting
net income with a
a. $25,000 increase.
b. $10,000 increase.
c. $15,000 increase.
d. $15,000 decrease.
Accounting and the Time Value of Money 6 - 101
102. On the statement of cash flows (indirect method), the receipts from insurance companies
should
a. be shown as an addition to net income of $210,000.
b. be shown as an inflow from investing activities of $210,000.
c. be shown as an inflow from investing activities of $300,000.
d. not be shown.
103. On the statement of cash flows (indirect method), the flood loss should
a. be shown as an addition to net income of $63,000.
b. be shown as an addition to net income of $90,000.
c. be shown as an inflow from investing activities of $63,000.
d. not be shown.
104. Zook Incorporated, had net income for 2011 of $5,000,000. Additional information is as
follows:
Amortization of patents $ 45,000
Depreciation on plant assets 1,650,000
Long-term debt:
Bond premium amortization 65,000
Interest paid 900,000
Provision for doubtful accounts:
Current receivables 80,000
Long-term nontrade receivables 30,000
What should be the net cash provided by operating activities in the statement of cash flows
for the year ended December 31, 2011, based solely on the above information?
a. $6,820,000.
b. $6,870,000.
c. $6,740,000.
d. $6,840,000.
105. The net income for the year ended December 31, 2011, for Oliva Company was $1,200,000.
Additional information is as follows:
Depreciation on plant assets $600,000
Amortization of leasehold improvements 340,000
Provision for doubtful accounts on short-term receivables 120,000
Provision for doubtful accounts on long-term receivables 100,000
Interest paid on short-term borrowings 80,000
Interest paid on long-term borrowings 60,000
Based solely on the information given above, what should be the net cash provided by
operating activities in the statement of cash flows for the year ended December 31, 2011?
a. $2,260,000.
b. $2,360,000.
c. $2,340,000.
d. $2,500,000.
6 - 102 Test Bank for Intermediate Accounting, Thirteenth Edition