1) A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amounts of cash and
A. has a current market value that is greater than its original cost.
B. bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation.
C. is so near its maturity that it presents insignificant risk of changes in interest rates.
D. is acceptable as a means to pay current liabilities.
2) Which of the following is NOT considered cash for financial reporting purposes?
A. Money orders, certified checks, and personal checks
B. Coin, currency, and available funds
C. Postdated checks and I.O.U.’s
D. Petty cash funds and change funds
3) Which of the following items should NOT be included in the Cash caption on the balance sheet?
A. Checks from other parties presently in the cash register
B. Amounts on deposit in checking account at the bank
C. Postage stamps on hand
D. Coins and currency in the cash register
4) If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as
A. an item of “other expense” in the income statement.
B. a deduction from accounts receivable in determining the net realizable value of accounts receivable.
C. sales discounts forfeited in the cost of goods sold section of the income statement.
D. a deduction from sales in the income statement.
5) The advantage of relating a company’s bad debt expense to its outstanding accounts receivable is that this approach
A. best relates bad debt expense to the period of sale.
B. is the only generally accepted method for valuing accounts receivable.
C. makes estimates of uncollectible accounts unnecessary.
D. gives a reasonably correct statement of receivables in the balance sheet.
6) Which of the following is a generally accepted method of determining the amount of the adjustment to bad debt expense?
A. A percentage of sales NOT adjusted for the balance in the allowance
B. A percentage of accounts receivable NOT adjusted for the balance in the allowance
C. An amount derived from aging accounts receivable and NOT adjusted for the balance in the allowance
D. A percentage of sales adjusted for the balance in the allowance
7) If the beginning inventory for 2006 is overstated, the effects of this error on cost of goods sold for 2006, net income for 2006, and assets at December 31, 2007, respectively, are
A. overstatement, understatement, no effect.
B. overstatement, understatement, overstatement.
C. understatement, overstatement, no effect.
D. understatement, overstatement, overstatement.
8) Valuation of inventories requires the deter¬mination of all of the following EXCEPT
A. the physical goods to be included in inventory.
B. the costs to be included in inventory.
C. the cost flow assumption to be adopted.
D. the cost of goods held on consignment from other companies.
9) Eller Co. received merchandise on consignment. As of January 31, Eller included the goods in inventory, but did NOT record the transaction. The effect of this on its financial statements for January 31 would be
A. net income was correct and current assets were understated.
B. net income, current assets, and retained earnings were overstated.
C. net income, current assets, and retained earnings were understated.
D. net income and current assets were overstated and current liabilities were understated.
10) Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the LIFO method?
A. Prices remained unchanged.
B. Prices decreased.
C. Price trend cannot be determined from information given.
D. Prices increased.
11) Which method of inventory pricing best approximates specific identification of the actual flow of costs and units in most manufacturing situations?
A. First-in, first-out
B. Average cost
C. Base stock
D. Last-in, first-out
12) All of the following costs should be charged against revenue in the period in which costs are incurred EXCEPT for
A. costs which will NOT benefit any future period.
B. manufacturing overhead costs for a product manufactured and sold in the same accounting period.
C. costs of normal shrinkage and scrap incurred for the manufacture of a product in ending inventory.
D. costs from idle manufacturing capacity resulting from an unexpected plant shutdown.
13) When the direct method is used to record inventory at market
A. a loss is recorded directly in the inventory account by crediting inventory and debiting loss on inventory decline.
B. the market value figure for ending inventory is substituted for cost and the loss is buried in cost of goods sold
C. only the portion of the loss attributable to inventory sold during the period is recorded in the financial statements.
D. there is a direct reduction in the selling price of the product that results in a loss being recorded on the income statement prior to the sale.
14) An item of inventory purchased this period for $15.00 has been incorrectly written down to its current replacement cost of $10.00. It sells during the following period for $30.00, its normal selling price, with disposal costs of $3.00 and normal profit of $12.00. Which of the following statements is NOT true?
A. The current year’s income is understated.
B. Income of the following year will be understated.
C. The closing inventory of the current year is understated.
D. The cost of sales of the following year will be understated.
15) In no case can “market” in the lower-of-cost-or-market rule be more than
A. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.
B. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal, an allowance for an approximately normal profit margin, and an adequate reserve for possible future losses.
C. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal and an allowance for an approximately normal profit margin.
D. estimated selling p
rice in the ordinary course of business.
16) The gross profit method of inventory valuation is invalid when
A. there is a substantial increase in inventory during the year.
B. none of these.
C. there is no beginning inventory because it is the first year of operation.
D. a portion of the inventory is destroyed.
17) Which of the following is NOT a basic assumption of the gross profit method?
A. Goods NOT sold must be on hand.
B. The total amount of purchases and the total amount of sales remain relatively unchanged from the comparable previous period.
C. If the sales, reduced to the cost basis, are deducted from the sum of the opening inventory plus purchases, the result is the amount of inventory on hand.
D. The beginning inventory plus the purchases equal total goods to be accounted for.
18) In 2006, Lucas Manufacturing signed a contract with a supplier to purchase raw materials in 2007 for $700,000. Before the December 31, 2006 balance sheet date, the market price for these materials dropped to $510,000. The journal entry to record this situation at December 31, 2006 will result in a credit that should be reported
A. as a current liability.
B. on the income statement.
C. as an appropriation of retained earnings.
D. as a valuation account to Inventory on the balance sheet.
19) The cost of land typically includes the purchase price and all of the following costs EXCEPT
A. street lights, sewers, and drainage systems cost.
B. assumption of any liens or mortgages on the property.
C. private driveways and parking lots.
D. grading, filling, draining, and clearing costs.
20) The cost of land does NOT include
A. costs of removing old buildings.
B. costs of improvements with limited lives.
C. costs of grading, filling, draining, and clearing.
D. special assessments.
21) Cotton Hotel Corporation recently purchased Holiday Hotel and the land on which it is located with the plan to tear down the Holiday Hotel and build a new luxury hotel on the site. The cost of the Holiday Hotel should be
A. written off as an extraordinary loss in the year the hotel is torn down.
B. capitalized as part of the cost of the land.
C. depreciated over the period from acquisition to the date the hotel is scheduled to be torn down.
D. capitalized as part of the cost of the new hotel.
22) To be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing its own building should be
A. eliminated completely from the cost of the asset.
B. allocated on an opportunity cost basis.
C. allocated on the basis of lost production.
D. allocated on a pro rata basis between the asset and normal operations.
23) Which of the following costs are capitalized for self-constructed assets?
A. Labor and overhead only
B. Materials and overhead only
C. Materials and labor only
D. Materials, labor, and overhead
24) Which of the following assets do NOT qualify for capitalization of interest costs incurred during construction of the assets?
A. Assets intended for sale or lease that are produced as discrete projects.
B. Assets financed through the issuance of long-term debt.
C. Assets under construction for an enterprise’s own use.
D. Assets NOT currently undergoing the activities necessary to prepare them for their intended use.
25) The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset and the exchange has commercial substance is usually recorded at
A. the fair value of the asset given up, and a gain but NOT a loss may be recognized.
B. the fair value of the asset received if it is equally reliable as the fair value of the asset given up.
C. the fair value of the asset given up, and a gain or loss is recognized.
D. either the fair value of the asset given up or the asset received, whichever one results in the largest gain (smallest loss) to the company.
26) Construction of a qualifying asset is started on April 1 and finished on December 1. The fraction used to multiply an expenditure made on April 1 to find weighted-average accumulated expenditures is
27) When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly measured by the
A. par value of the stock.
B. stated value of the stock.
C. book value of the stock.
D. market value of the stock.
28) Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues?
A. Associating cause and effect
B. Systematic and rational allocation
C. Immediate recognition
D. Partial recognition
29) For income statement purposes, depreciation is a variable expense if the depreciation method used is
30) If an industrial firm uses the units-of-production method for computing depreciation on its only plant asset, factory machinery, the credit to accumulated depreciation from period to period during the life of the firm will
A. be constant.
B. vary with unit sales.
C. vary with sales revenue.
D. vary with production.
31) Lennon Company purchased a depreciable asset for $200,000. The estimated salvage value is $10,000, and the estimated useful life is 10,000 hours. Lennon used the asset for 1,100 hours in the current year. The activity method will be used for depreciation. What is the depreciation expense on this asset?
[$200,000 – $10,000) ÷ 10,000] × 1,100 = $20,900
32) Bigbie Company purchased a depreciable asset for $600,000. The estimated salvage value is $30,000, and the estimated useful life is 10,000 hours. Bigbie used the asset for 1,100 hours in the current year. The activity method will be used for depreciation. What is the depreciation expense on this asset?
[($600,000 – $30,000) ÷ 10,000] × 1,100 = $62,700
33) Starr Company purchased a depreciable asset for $150,000. The estimated salvage value is $10,000, and the estimated useful life is 8 years. The double-decli
ning balance method will be used for depreciation. What is the depreciation expense for the second year on this asset?
$150,000 × [(1 ÷ 8) × 2] = $37,500
($150,000 – $37,500) × [(1 ÷ 8) × 2] = $28,125
34) The cost of purchasing patent rights for a product that might otherwise have seriously competed with one of the purchaser’s patented products should be
A. charged off in the current period.
B. amortized over the remaining estimated life of the original patent covering the product whose market would have been impaired by competition from the newly patented product.
C. amortized over the legal life of the purchased patent.
D. added to factory overhead and allocated to production of the purchaser’s product.
35) Costs incurred internally to create intangibles are
B. expensed only if they have a limited life.
C. capitalized if they have an indefinite life.
D. expensed as incurred.
36) Factors considered in determining an intangible asset’s useful life include all of the following EXCEPT
A. the expected use of the asset.
B. the amortization method used.
C. any legal or contractual provisions that may limit the useful life.
D. any provisions for renewal or extension of the asset’s legal life
37) Fleming Corporation acquired Out-of-Sight Products on January 1, 2008 for $4,000,000, and recorded goodwill of $750,000 as a result of that purchase. At December 31, 2008, the Out-of-Sight Products Division had a fair value of $3,400,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $2,900,000 at that time. What amount of loss on impairment of goodwill should Fleming record in 2008?
A. $ -0-
$3,400,000 – $2,900,000 = $500,000
$750,000 – $500,000 = $250,000.
38) Mining Company acquired a patent on an oil extraction technique on January 1, 2006 for $5,000,000. It was expected to have a 10 year life and no residual value. Mining uses straight-line amortization for patents. On December 31, 2007, the expected future cash flows expected from the patent were expected to be $600,000 per year for the next eight years. The present value of these cash flows, discounted at Mining’s market interest rate, is $2,800,000. At what amount should the patent be carried on the December 31, 2007 balance sheet?
$5,000,000 – [($5,000,000 ÷ 10) × 2] = $4,000,000
39) General Products Company bought Special Products Division in 2006 and appropriately booked $250,000 of goodwill related to the purchase. On December 31, 2007, the fair value of Special Products Division is $2,000,000 and it is carried on General Product’s books for a total of $1,700,000, including the goodwill. An analysis of Special Products Division’s assets indicates that goodwill of $200,000 exists on December 31, 2007. What goodwill impairment should be recognized by General Products in 2007?
Since $2,000,000 > $1,700,000, $0 impairment
40) Easton Company and Lofton Company were combined in a purchase transaction. Easton was able to acquire Lofton at a bargain price. The sum of the market or appraised values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Easton. After revaluing noncurrent assets to zero, there was still some “negative goodwill.” Proper accounting treatment by Easton is to report the amount as
A. an extraordinary gain.
B. paid-in capital.
C. part of current income in the year of combination.
D. a deferred credit and amortize it.
41) Purchased goodwill should
A. be written off as soon as possible against retained earnings.
B. be written off by systematic charges as a regular operating expense over the period benefited.
C. be written off as soon as possible as an extraordinary item.
D. not be amortized.
42) The intangible asset goodwill may be
A. capitalized only when purchased.
B. capitalized only when created internally.
C. capitalized either when purchased or created internally.
D. written off directly to retained earnings.
43) 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 any equity security issued or to be issued.
C. the terms of the new obligation incurred or to be incurred.
D. the number of financing institutions that refused to refinance the debt, if any.
44) Which of the following items is a current liability?
A. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months.
B. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
C. Bonds due in three years.
D. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.
45) Which of the following statements is false?
A. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing.
B. Under the cash basis method, warranty costs are charged to expense as they are paid.
C. Cash dividends should be recorded as a liability when they are declared by the board of directors.
D. FICA taxes withheld from employees’ payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority.
46) Simson Company has 35 employees who work 8-hour days and are paid hourly. On January 1, 2006 the company began a program of granting its employees 10 days of paid vacation each year. Vacation days earned in 2006 may first be taken on January 1, 2007. Information relative to these employees is as follows:
Year Hourly Wages Vacation Days Earned by Each Employee Vacation Days Used by Each Employee
2006 $25.80 10 0
2007 27.00 10 8
2008 $28.50 10 10
What is the amount of expense relative to compensated absences that should be reported on Simson’s income statement for 2006?
$25.80 × 8 × 10 × 35 = $72,2
47) A company offers a cash rebate of $1 on each $4 package of batteries sold during 2007. Historically, 10% of customers mail in the rebate form. During 2007, 6,000,000 packages of batteries are sold, and 210,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2007 financial statements dated December 31?
A. $600,000; $600,000
B. $390,000; $390,000
C. $600,000; $390,000
D. $210,000; $390,000
6,000,000 × .10 × $1 = $600,000; $600,000 – $210,000 = $390,000
48) Wellman Company self insures its property for fire and storm damage. If the company were to obtain insurance on the property, it would cost them $1,000,000 per year. The company estimates that on average it will incur losses of $800,000 per year. During 2007, $350,000 worth of losses were sustained. How much total expense and/or loss should be recognized by Wellman Company for 2007?
A. $350,000 in losses and no insurance expense
B. $350,000 in losses and $450,000 in insurance expense
C. $0 in losses and $1,000,000 in insurance expense
D. $0 in losses and $800,000 in insurance expense
49) Mark Ward is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2007, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Ward 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 Ward in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Ward appears inclined to accept the Railroad’s offer. The Railroad’s 2007 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. disclosure in note form only.
D. creation of a liability only.
50) 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. All of these must be disclosed.
D. Guarantees of indebtedness of others
51) 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 event occurs infrequently.
D. Event is unusual in nature and occurrence of event is probable.
52) Bonds for which the owners’ names are NOT registered with the issuing corporation are called
A. bearer bonds.
B. term bonds.
C. secured bonds.
D. debenture bonds.
53) An example of an item which is NOT a liability is
A. dividends payable in stock.
B. advances from customers on contracts.
C. the portion of long-term debt due within one year.
D. accrued estimated warranty costs.
54) 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. less than if the straight-line method were used.
D. the same as if the straight-line method were used.
55) 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 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.
C. The lessee must decrease the present value of the minimum lease payments by the present value of the option price.
D. The lessee must increase the present value of the minimum lease payments by the present value of the option price.
56) Minimum lease payments may include a
A. penalty for failure to renew.
B. any of these.
C. guaranteed residual value.
D. bargain purchase option.
57) Which of the following best describes current practice in accounting for leases?
A. Leases are NOT capitalized.
B. All leases are capitalized.
C. All long-term leases are capitalized.
D. Leases similar to installment purchases are capitalized.
58) 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 total book value of the asset less any accumulated depreciation recorded by the lessor prior to the lease agreement.
C. the present value of minimum lease payments.
D. the difference between the lease payments receivable and the fair market value of the leased property.
59) 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. operating method will cause debt to increase, compared to the capital method.
C. operating method will cause income to decrease, compared to the capital method.
D. capital method will cause debt to increase, compared to the operating method.
60) 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 interest method.
B. should be recognized at the lease’s expiration.
C. does NOT arise.
D. should be amortized over the period of the lease using the straight-line method.