Acc422 Intermediate Accounting Final Exam


1) Which of the following is NOT considered cash for financial reporting purposes?

A.
Coin, currency, and available funds

B.
Postdated checks and I.O.U.'s

C.
Petty cash funds and change funds

D.
Money orders, certified checks, and personal checks

2) Which of the following is considered cash?

A.
Money market savings certificates

B.
Postdated checks

C.
Certificates of deposit (CDs)

D.
Money market checking accounts

3) Which of the following items should NOT be included in the Cash caption on the balance sheet?

A.
Amounts on deposit in checking account at the bank

B.
Postage stamps on hand

C.
Coins and currency in the cash register

D.
Checks from other parties presently in the cash register

4) Which of the following is a generally accepted method of determining the amount of the adjustment to bad debt expense?

A.
A percentage of accounts receivable NOT adjusted for the balance in the allowance

B.
An amount derived from aging accounts receivable and NOT adjusted for the balance in the allowance

C.
A percentage of sales adjusted for the balance in the allowance

D.
A percentage of sales NOT adjusted for the balance in the allowance

5) If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as

A.
a deduction from accounts receivable in determining the net realizable value of accounts receivable.

B.
sales discounts forfeited in the cost of goods sold section of the income statement.

C.
a deduction from sales in the income statement.

D.
an item of "other expense" in the income statement.

6) Which of the following methods of determining annual bad debt expense best achieves the matching concept?

A.
Percentage of average accounts receivable

B.
Direct write-off

C.
Percentage of sales

D.
Percentage of ending accounts receivable

7) The failure to record a purchase of merchandise on account even though the goods are properly included in the physical inven¬tory results in

A.
an overstatement of assets and net income.

B.
an understatement of liabilities and an overstatement of owners' equity.

C.
an understatement of cost of goods sold and liabilities and an overstatement of assets.

D.
an understatement of assets and net income.

8) Valuation of inventories requires the deter¬mination of all of the following EXCEPT

A.
the costs to be included in inventory.

B.
the cost flow assumption to be adopted.

C.
the cost of goods held on consign¬ment from other companies.

D.
the physical goods to be included in inventory.

9) 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, overstatement.

B.
understatement, overstatement, no effect.

C.
understatement, overstatement, overstatement.

D.
overstatement, understatement, no effect.

10) Which method of inventory pricing best approximates specific identification of the actual flow of costs and units in most manufacturing situations?

A.
Average cost

B.
Base stock

C.
Last-in, first-out

D.
First-in, first-out

11) 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 decreased.

B.
Price trend cannot be determined from information given.

C.
Prices increased.

D.
Prices remained unchanged.

12) All of the following costs should be charged against revenue in the period in which costs are incurred EXCEPT for

A.
manufacturing overhead costs for a product manufactured and sold in the same accounting period.

B.
costs of normal shrinkage and scrap incurred for the manufacture of a product in ending inventory.

C.
costs from idle manufacturing capacity resulting from an unexpected plant shutdown.

D.
costs which will NOT benefit any future period.



ACC/422 Intermediate Financial Accounting

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13) 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.

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 price in the ordinary course of business less reasonably predictable costs of completion and disposal.

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 cost of sales of the following year will be understated.

B.
Income of the following year will be understated.

C.
The closing inventory of the current year is understated.

D.
The current year's income is understated.

15) When the direct method is used to record inventory at market

A.
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.

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.
a loss is recorded directly in the inventory account by crediting inventory and debiting loss on inventory decline.

16) The retail inventory method is based on the assumption that the

A.
final inventory and the total of goods available for sale contain the same proportion of high-cost and low-cost ratio goods.

B.
proportions of markups and markdowns to selling price are the same.

C.
ratio of cost to retail changes at a constant rate.

D.
ratio of gross margin to sales is approximately the same each period.

17) The gross profit method of inventory valuation is invalid when

A.
a portion of the inventory is destroyed.

B.
none of these.

C.
there is no beginning inventory because it is the first year of operation.

D.
there is a substantial increase in inventory during the year.

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 an appropriation of retained earnings.

B.
on the income statement.

C.
as a valuation account to Inventory on the balance sheet.

D.
as a current liability.

19) The cost of land typically includes the purchase price and all of the following costs EXCEPT

A.
private driveways and parking lots.

B.
assumption of any liens or mortgages on the property.

C.
grading, filling, draining, and clearing costs.

D.
street lights, sewers, and drainage systems cost.

20) The cost of land does NOT include

A.
costs of improvements with limited lives.

B.
special assessments.

C.
costs of grading, filling, draining, and clearing.

D.
costs of removing old buildings.

21) If a corporation purchases a lot and building and subsequently tears down the building and uses the property as a parking lot, the proper accounting treatment of the cost of the building would depend on

A.
the contemplated future use of the parking lot.

B.
the intention of management for the property when the building was acquired.

C.
the significance of the cost allocated to the building in relation to the combined cost of the lot and building.

D.
the length of time for which the building was held prior to its demolition.

22) When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to

A.
that portion of total interest cost which would NOT have been incurred if expenditures for asset construction had NOT been made.

B.
that portion of average accumulated expenditures on which no interest cost was incurred.

C.
the total interest cost actually incurred.

D.
a cost of capital charge for stockholders' equity.

23) Historical cost is the basis advocated for recording the acquisition of property, plant, and equipment for all of the following reasons EXCEPT

A.
historical cost involves actual trans¬actions and, as such, is the most reliable basis.

B.
gains and losses should NOT be anticipated but should be recognized when the asset is sold.

C.
at the date of acquisition, cost reflects fair market value.

D.
property, plant, and equipment items are always acquired at their original historical cost.

24) Which of the following costs are capitalized for self-constructed assets?

A.
Materials and overhead only

B.
Materials, labor, and overhead

C.
Materials and labor only

D.
Labor and overhead only

25) Which of the following is NOT a condition that must be satisfied before interest capitalization can begin on a qualifying asset?

A.
The interest rate is equal to or greater than the company's cost of capital.

B.
Activities that are necessary to get the asset ready for its intended use are in progress.

C.
Interest cost is being incurred.

D.
Expenditures for the assets have been made.

26) The King-Kong Corporation exchanges one plant asset for a similar plant asset and gives cash in the exchange. The exchange is NOT expected to cause a material change in the future cash flows for either entity. If a gain on the disposal of the old asset is indicated, the gain will

A.
effectively increase the amount to be recorded as the cost of the new asset.

B.
be credited directly to the owner's capital account.

C.
be reported in the Other Revenues and Gains section of the income statement.

D.
effectively reduce the amount to be recorded as the cost of the new asset.

27) 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 received if it is equally reliable as the fair value of the asset given up.

B.
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.

C.
the fair value of the asset given up, and a gain or loss is recognized.

D.
the fair value of the asset given up, and a gain but NOT a loss may be recognized.







28) Which of the following most accurately reflects the concept of depreciation as used in accounting?

A.
A method of allocating asset cost to an expense account in a manner which closely matches the physical deterioration of the tangible asset involved.

B.
An accounting concept that allocates the portion of an asset used up during the year to the contra asset account for the purpose of properly recording the fair market value of tangible assets.

C.
The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred.

D.
The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.

29) 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 sales revenue.

C.
vary with production.

D.
vary with unit sales.

30) The major difference between the service life of an asset and its physical life is that

A.
service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last.

B.
physical life is always longer than service life.

C.
service life refers to the length of time an asset is of use to its original owner, while physical life refers to how long the asset will be used by all owners.

D.
physical life is the life of an asset without consideration of salvage value and service life requires the use of salvage value.

31) 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?

A.
$57,000

B.
$66,000

C.
$570,000

D.
$62,700

32) Harrison Company purchased a depreciable asset for $100,000. The estimated salvage value is $10,000, and the estimated useful life is 10 years. The straight-line method will be used for depreciation. What is the depreciation base of this asset?

A.
$9,000

B.
$90,000

C.
$100,000

D.
$10,000

33) 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?

A.
$19,000

B.
$22,000

C.
$190,000

D.
$20,900

34) Costs incurred internally to create intangibles are

A.
capitalized.

B.
expensed as incurred.

C.
expensed only if they have a limited life.

D.
capitalized if they have an indefinite life.

35) Which of the following methods of amortization is normally used for intangible assets?

A.
Sum-of-the-years'-digits

B.
Units of production

C.
Double-declining-balance

D.
Straight-line

36) 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.
added to factory overhead and allocated to production of the purchaser's product.

C.
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.

D.
amortized over the legal life of the purchased patent.

37) Twilight Corporation acquired End-of-the-World Products on January 1, 2008 for $2,000,000, and recorded goodwill of $375,000 as a result of that purchase. At December 31, 2008, the End-of-the-World Products Division had a fair value of $1,700,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $1,450,000 at that time. What amount of loss on impairment of goodwill should Twilight record in 2008?

A.
$ -0-

B.
$175,000

C.
$300,000

D.
$125,000

38) Malrom Manufacturing Company acquired a patent on a manufacturing process on January 1, 2006 for $10,000,000. It was expected to have a 10 year life and no residual value. Malrom uses straight-line amortization for patents. On December 31, 2007, the expected future cash flows expected from the patent were expected to be $800,000 per year for the next eight years. The present value of these cash flows, discounted at Malrom’s market interest rate, is $4,800,000. At what amount should the patent be carried on the December 31, 2007 balance sheet?

A.
$10,000,000

B.
$6,400,000

C.
$4,800,000

D.
$8,000,000

39) 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-

B.
$350,000

C.
$600,000

D.
$250,000

40) Goodwill

A.
generated internally should NOT be capitalized unless it is measured by an individual independent of the enterprise involved.

B.
represents a unique asset in that its value can be identified only with the business as a whole.

C.
exists in any company that has earnings that differ from those of a competitor.

D.
is easily computed by assigning a value to the individual attributes that comprise its existence.

41) Purchased goodwill should

A.
be written off by systematic charges as a regular operating expense over the period benefited.

B.
be written off as soon as possible as an extraordinary item.

C.
be written off as soon as possible against retained earnings.

D.
not be amortized.

42) When a patent is amortized, the credit is usually made to

A.
a Deferred Credit account.

B.
an Accumulated Amortization account.

C.
the Patent account.

D.
an expense account.



ACC/422 Intermediate Financial Accounting

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43) Which of the following items is a current liability?

A.
Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.

B.
Bonds due in three years.

C.
Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months.

D.
Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.

44) Which of the following statements is false?

A.
Under the cash basis method, warranty costs are charged to expense as they are paid.

B.
Cash dividends should be recorded as a liability when they are declared by the board of directors.

C.
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.

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.

45) 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-day notes, renewable for another 90-day period. These notes should be classified on the balance sheet of Lance Company as

A.
long-term liabilities.

B.
deferred charges.

C.
current liabilities.

D.
intermediate debt.

46) 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.
$390,000; $390,000

B.
$600,000; $390,000

C.
$600,000; $600,000

D.
$210,000; $390,000

47) 79. A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2007. Historically, 10% of customers mail in the rebate form. During 2007, 4,000,000 packages of light bulbs are sold, and 140,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2007 financial statements dated December 31?

A.
$260,000; $260,000

B.
$400,000; $260,000

C.
$400,000; $400,000

D.
$140,000; $260,000

48) 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?

A.
$75,600.

B.
$68,880.

C.
$0.

D.
$72,240.

49) A contingent liability

A.
is NOT disclosed in the financial statements.

B.
is accrued even though NOT reasonably estimated.

C.
definitely exists as a liability but its amount and due date are indeterminable.

D.
is the result of a loss contingency.

50) Which of the following contingencies need NOT be disclosed in the financial statements or the notes thereto?

A.
Guarantees of indebtedness of others

B.
Environmental liabilities that cannot be reasonably estimated

C.
Probable losses NOT reasonably estimable

D.
All of these must be disclosed.

51) Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles?

A.
Event is unusual in nature and occurrence of event is probable.

B.
Amount of loss is reasonably estimable and occurrence of event is probable.

C.
Amount of loss is reasonably estimable and event occurs infrequently.

D.
Event is unusual in nature and event occurs infrequently.

52) Bonds for which the owners' names are NOT registered with the issuing corporation are called

A.
bearer bonds.

B.
debenture bonds.

C.
secured bonds.

D.
term bonds.

53) Bonds that pay no interest unless the issuing company is profitable are called

A.
collateral trust bonds.

B.
revenue bonds.

C.
income bonds.

D.
debenture bonds.

54) The term used for bonds that are unsecured as to principal is

A.
junk bonds.

B.
indebenture bonds.

C.
callable bonds.

D.
debenture bonds.







ACC/422 Intermediate Financial Accounting

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55) 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.
[Answer Text]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.
a lease reflects the purchase or sale of a quantifiable right to the use of property.

C.
during the life of the lease the lessee can effectively treat the property as if it were owned by the lessee.

D.
at the end of the lease the property usually can be purchased by the lessee.

56) 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 decrease the present value of the minimum lease payments by the present value of the option price.

C.
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.

D.
The lessee must increase the present value of the minimum lease payments by the present value of the option price.

57) 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 term is equal to or more than 75% of the estimated economic life of the leased property.

C.
The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property.

D.
The lease contains a purchase option.

58) 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 plus the present value of any unguaranteed residual value.

C.
carrying value of the asset on the lessor's books.

D.
present value of the minimum lease payments or the fair value of the asset, whichever is lower.

59) 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 present value of minimum lease payments.

C.
the total book value of the asset less any accumulated depreciation recorded by the lessor prior to the lease agreement.

D.
the difference between the lease payments receivable and the fair market value of the leased property.

60) In computing depreciation of a leased asset, the lessee should subtract

A.
a guaranteed residual value and depreciate over the term of the lease.

B.
a guaranteed residual value and depreciate over the life of the asset.

C.
an unguaranteed residual value and depreciate over the life of the asset.

D.
an unguaranteed residual value and depreciate over the term of the lease.





Exam 2

1) Which of the following is considered cash?

  A.  Certificates of deposit (CDs)
 B.  Money market checking accounts
 C.  Money market savings certificates
 D.  Postdated checks



2) Bank overdrafts, if material, should be

  A.  reported as a deduction from the current asset section.
 B.  reported as a deduction from cash.
 C.  netted against cash and a net cash amount reported.
 D.  reported as a current liability.



3) Which of the following is NOT considered cash for financial reporting purposes?

  A.  Petty cash funds and change funds
 B.  Money orders, certified checks, and personal checks
 C.  Coin, currency, and available funds
 D.  Postdated checks and I.O.U.'s



4) If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as

  A.  a deduction from sales in the income statement.
 B.  an item of "other expense" in the income statement.
 C.  a deduction from accounts receivable in determining the net realizable value of accounts receivable.
 D.  sales discounts forfeited in the cost of goods sold section of the income statement.



5) Which of the following methods of determining annual bad debt expense best achieves the matching concept?

  A.  Percentage of sales
 B.  Percentage of ending accounts receivable
 C.  Percentage of average accounts receivable
 D.  Direct write-off



6) The advantage of relating a company's bad debt expense to its outstanding accounts receivable is that this approach

  A.  gives a reasonably correct statement of receivables in the balance sheet.
 B.  best relates bad debt expense to the period of sale.
 C.  is the only generally accepted method for valuing accounts receivable.
 D.  makes estimates of uncollectible accounts unnecessary.



7) The failure to record a purchase of mer¬chandise on account even though the goods are properly included in the physical inven¬tory results in

  A.  an overstatement of assets and net income.
 B.  an understatement of assets and net income.
 C.  an understatement of cost of goods sold and liabilities and an overstatement of assets.
 D.  an understatement of liabilities and an overstatement of owners' equity.



8) Belle Co. received merchandise on consignment. As of March 31, Belle had recorded the transaction as a purchase and included the goods in inventory. The effect of this on its financial statements for March 31 would be

  A.  no effect.
 B.  net income was correct and current assets and current liabilities were overstated.
 C.  net income, current assets, and current liabilities were overstated.
 D.  net income and current liabilities were overstated.



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, current assets, and retained earnings were overstated.
 B.  net income was correct and current assets were understated.
 C.  net income and current assets were overstated and current liabilities were understated.
 D.  net income, current assets, and retained earnings were understated.



10) The use of a Purchase Discounts account implies that the recorded cost of a purchased inventory item is its

  A.  invoice price.
 B.  invoice price less the purchase discount taken.
 C.  invoice price plus any purchase discount lost.
 D.  invoice price less the purchase discount allowable whether taken or not.



11) Which method of inventory pricing best approximates specific identification of the actual flow of costs and units in most manufacturing situations?

  A.  Average cost
 B.  Last-in, first-out
 C.  First-in, first-out
 D.  Base stock



12) When using the periodic inventory system, which of the following generally would NOT be separately accounted for in the computation of cost of goods sold?

  A.  Trade discounts applicable to purchases during the period
 B.  Purchase returns and allowances of merchandise during the period
 C.  Cash (purchase) discounts taken during the period
 D.  Cost of transportation-in for merchandise purchased during the period

 13) 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 cost of sales of the following year will be understated.
 B.  The closing inventory of the current year is understated.
 C.  The current year's income is understated.
 D.  Income of the following year will be understated.



14) Designated market value

  A.  is always the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin.
 B.  may sometimes exceed net realizable value.
 C.  should always be equal to net realizable value.
 D.  should always be equal to net realizable value less a normal profit margin.



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.
 B.  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.
 C.  estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.
 D.  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.



16) A major advantage of the retail inventory method is that it

  A.  provides reliable results in cases where the distribution of items in the inventory is different from that of items sold during the period.
 B.  gives a more accurate statement of inventory costs than other methods.
 C.  hides costs from competitors and customers.
 D.  provides a method for inventory control and facilitates determination of the periodic inventory for certain types of companies.



17) The gross profit method of inventory valuation is invalid when

  A.  a portion of the inventory is destroyed.
 B.  there is no beginning inventory because it is the first year of operation.
 C.  there is a substantial increase in inventory during the year.
 D.  none of these.



18) The retail inventory method is based on the assumption that the

  A.  final inventory and the total of goods available for sale contain the same proportion of high-cost and low-cost ratio goods.
 B.  ratio of cost to retail changes at a constant rate.
 C.  ratio of gross margin to sales is approximately the same each period.
 D.  proportions of markups and markdowns to selling price are the same.



19) Which of the following is NOT a major characteristic of a plant asset?

  A.  Possesses physical substance
 B.  Acquired for use
 C.  Acquired for resale
 D.  Yields services over a number of years



20) 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.  depreciated over the period from acquisition to the date the hotel is scheduled to be torn down.
 B.  capitalized as part of the cost of the land.
 C.  written off as an extraordinary loss in the year the hotel is torn down.
 D.  capitalized as part of the cost of the new hotel.



21) If a corporation purchases a lot and building and subsequently tears down the building and uses the property as a parking lot, the proper accounting treatment of the cost of the building would depend on

  A.  the significance of the cost allocated to the building in relation to the combined cost of the lot and building.
 B.  the contemplated future use of the parking lot.
 C.  the length of time for which the building was held prior to its demolition.
 D.  the intention of management for the property when the building was acquired.



22) The period of time during which interest must be capitalized ends when

  A.  the asset is substantially complete and ready for its intended use.
 B.  the activities that are necessary to get the asset ready for its intended use have begun.
 C.  the asset is abandoned, sold, or fully depreciated.
 D.  no further interest cost is being incurred.



23) To be consistent with the historical cost principle, overhead costs incurred by an enterprise constructing its own building should be

  A.  allocated on the basis of lost production.
 B.  allocated on a pro rata basis between the asset and normal operations.
 C.  allocated on an opportunity cost basis.
 D.  eliminated completely from the cost of the asset.



24) When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to

  A.  the total interest cost actually incurred.
 B.  that portion of average accumulated expenditures on which no interest cost was incurred.
 C.  that portion of total interest cost which would NOT have been incurred if expenditures for asset construction had NOT been made.
 D.  a cost of capital charge for stockholders' equity.



25) The King-Kong Corporation exchanges one plant asset for a similar plant asset and gives cash in the exchange. The exchange is NOT expected to cause a material change in the future cash flows for either entity. If a gain on the disposal of the old asset is indicated, the gain will

  A.  be reported in the Other Revenues and Gains section of the income statement.
 B.  be credited directly to the owner's capital account.
 C.  effectively increase the amount to be recorded as the cost of the new asset.
 D.  effectively reduce the amount to be recorded as the cost of the new asset.



26) When funds are borrowed to pay for construction of assets that qualify for capitalization of interest, the excess funds NOT needed to pay for construction may be temporarily invested in interest-bearing securities. Interest earned on these temporary investments should be

  A.  offset against interest cost incurred during construction.
 B.  recognized as revenue of the period.
 C.  multiplied by an appropriate interest rate to determine the amount of interest to be capitalized.
 D.  used to reduce the cost of assets being constructed.



27) Which of the following is NOT a condition that must be satisfied before interest capitalization can begin on a qualifying asset?

  A.  Interest cost is being incurred.
 B.  Activities that are necessary to get the asset ready for its intended use are in progress.
 C.  The interest rate is equal to or greater than the company's cost of capital.
 D.  Expenditures for the assets have been made.
28) Which of the following most accurately reflects the concept of depreciation as used in accounting?

  A.  The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred.
 B.  An accounting concept that allocates the portion of an asset used up during the year to the contra asset account for the purpose of properly recording the fair market value of tangible assets.
 C.  A method of allocating asset cost to an expense account in a manner which closely matches the physical deterioration of the tangible asset involved.
 D.  The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.



29) 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.  Partial recognition
 C.  Immediate recognition
 D.  Systematic and rational allocation



30) The major difference between the service life of an asset and its physical life is that

  A.  service life refers to the time an asset will be used by a company and physical life refers to how long the asset will last.
 B.  service life refers to the length of time an asset is of use to its original owner, while physical life refers to how long the asset will be used by all owners.
 C.  physical life is always longer than service life.
 D.  physical life is the life of an asset without consideration of salvage value and service life requires the use of salvage value.



31) 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-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset?

  A.  $17,500
 B.  $37,500
 C.  $28,125
 D.  $26,250



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?

  A.  $57,000
 B.  $570,000
 C.  $66,000
 D.  $62,700



33) Harrison Company purchased a depreciable asset for $100,000. The estimated salvage value is $10,000, and the estimated useful life is 10 years. The straight-line method will be used for depreciation. What is the depreciation base of this asset?

  A.  $9,000
 B.  $100,000
 C.  $90,000
 D.  $10,000



34) Costs incurred internally to create intangibles are

  A.  capitalized.
 B.  expensed only if they have a limited life.
 C.  expensed as incurred.
 D.  capitalized if they have an indefinite life.



35) 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.  amortized over the legal life of the purchased patent.
 B.  charged off in the current period.
 C.  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.
 D.  added to factory overhead and allocated to production of the purchaser's product.



36) Riser Corporation was granted a patent on a product on January 1, 1998. To protect its patent, the corporation purchased on January 1, 2007 a patent on a competing product which was originally issued on January 10, 2003. Because of its unique plant, Riser Corporation does NOT feel the competing patent can be used in producing a product. The cost of the competing patent should be

  A.  amortized over a maximum period of 16 years.
 B.  amortized over a maximum period of 20 years.
 C.  expensed in 2007.
 D.  amortized over a maximum period of 11 years.



37) Twilight Corporation acquired End-of-the-World Products on January 1, 2008 for $2,000,000, and recorded goodwill of $375,000 as a result of that purchase. At December 31, 2008, the End-of-the-World Products Division had a fair value of $1,700,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $1,450,000 at that time. What amount of loss on impairment of goodwill should Twilight record in 2008?

  A.  $125,000
 B.  $ -0-
 C.  $300,000
 D.  $175,000



38) 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.  $250,000
 B.  $ -0-
 C.  $600,000
 D.  $350,000



39) Malrom Manufacturing Company acquired a patent on a manufacturing process on January 1, 2006 for $10,000,000. It was expected to have a 10 year life and no residual value. Malrom uses straight-line amortization for patents. On December 31, 2007, the expected future cash flows expected from the patent were expected to be $800,000 per year for the next eight years. The present value of these cash flows, discounted at Malrom’s market interest rate, is $4,800,000. At what amount should the patent be carried on the December 31, 2007 balance sheet?

  A.  $8,000,000
 B.  $10,000,000
 C.  $4,800,000
 D.  $6,400,000



40) Goodwill

  A.  is easily computed by assigning a value to the individual attributes that comprise its existence.
 B.  generated internally should NOT be capitalized unless it is measured by an individual independent of the enterprise involved.
 C.  exists in any company that has earnings that differ from those of a competitor.
 D.  represents a unique asset in that its value can be identified only with the business as a whole.



41) 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.  part of current income in the year of combination.
 B.  an extraordinary gain.
 C.  paid-in capital.
 D.  a deferred credit and amortize it.



42) The reason goodwill is sometimes referred to as a master valuation account is because

  A.  it is the difference between the fair market value of the net tangible and identifiable intangible assets as compared with the purchase price of the acquired business.
 B.  it represents the purchase price of a business that is about to be sold.
 C.  it is the only account in the financial statements that is based on value, all other accounts are recorded at an amount other than their value.
 D.  the value of a business is computed without consideration of goodwill and then goodwill is added to arrive at a master valuation.

 43) Which of the following items is a current liability?

  A.  Bonds due in three years.
 B.  Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months.
 C.  Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.
 D.  Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.



44) Which of the following statements is false?

  A.  Cash dividends should be recorded as a liability when they are declared by the board of directors.
 B.  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.
 C.  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.
 D.  Under the cash basis method, warranty costs are charged to expense as they are paid.



45) Stock dividends distributable should be classified on the

  A.  balance sheet as an asset.
 B.  income statement as an expense.
 C.  balance sheet as an item of stockholders' equity.
 D.  balance sheet as a liability.



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 Dayse Used by Each Employee
2006 $28.50 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?

  A.  $68,880.
 B.  $0.
 C.  $72,240.
 D.  $75,600.



47) A company buys an oil rig for $1,000,000 on January 1, 2007. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $200,000 (present value at 10% is $77,110). 10% is an appropriate interest rate for this company. What expense should be recorded for 2007 as a result of these events?

  A.  Depreciation expense of $100,000 and interest expense of $7,711
 B.  Depreciation expense of $100,000 and interest expense of $20,000
 C.  Depreciation expense of $107,710 and interest expense of $7,711
 D.  Depreciation expense of $120,000



48) 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; $390,000
 B.  $390,000; $390,000
 C.  $210,000; $390,000
 D.  $600,000; $600,000



49) A contingency can be accrued when

  A.  an asset may have been impaired.
 B.  the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred.
 C.  it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated.
 D.  it is certain that funds are available to settle the disputed amount.



50) 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 occurrence of event is probable.
 B.  Event is unusual in nature and occurrence of event is probable.
 C.  Event is unusual in nature and event occurs infrequently.
 D.  Amount of loss is reasonably estimable and event occurs infrequently.



51) 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 only.
 B.  creation of a liability only.
 C.  disclosure in note form only.
 D.  recognition of a loss and creation of a liability for the value of the land.



52) An example of an item which is NOT a liability is

  A.  advances from customers on contracts.
 B.  accrued estimated warranty costs.
 C.  the portion of long-term debt due within one year.
 D.  dividends payable in stock.



53) The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the

  A.  bond debenture.
 B.  registered bond.
 C.  bond coupon.
 D.  bond indenture.



54) Bonds for which the owners' names are NOT registered with the issuing corporation are called

  A.  term bonds.
 B.  debenture bonds.
 C.  secured bonds.
 D.  bearer bonds.
55) Minimum lease payments may include a

  A.  bargain purchase option.
 B.  guaranteed residual value.
 C.  any of these.
 D.  penalty for failure to renew.



56) What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?

  A.  The lessee must increase the present value of the minimum lease payments by the present value of the option price.
 B.  The lessee must decrease the present value of the minimum lease payments by the present value of the option price.
 C.  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.
 D.  No impact as the option does NOT enter into the transaction until the end of the lease term.



57) Which of the following is a correct statement of one of the capitalization criteria?

  A.  The lease contains a purchase option.
 B.  The lease term is equal to or more than 75% of the estimated economic life of the leased property.
 C.  The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property.
 D.  The lease transfers ownership of the property to the lessor.



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 difference between the lease payments receivable and the fair market value of the leased property.
 B.  the present value of minimum lease payments.
 C.  the total book value of the asset less any accumulated depreciation recorded by the lessor prior to the lease agreement.
 D.  the amount of funds the lessor has tied up in the asset which is the subject of the direct-financing lease.



59) In the earlier years of a lease, from the lessee's perspective, the use of the

  A.  capital method will cause debt to increase, 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 enable the lessee to report higher income, 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 straight-line 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 interest method.
  

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