Professional Documents
Culture Documents
ACCOUNTING CONCEPTS
1. Which of the following statements is/are true?
I. Accounting is a service activity intended to fulfill a useful function in society
II. Accounting involves the art of recording, classifying and summarizing transaction and events,
and interpreting the results thereof.
III. Accounting is an art but not a science
IV. Accounting provides quantitative financial information intended to be useful
in
making
economic decisions
a. I, II, III, IV
b. I, II, III
c. I, II, IV
d. II, III, IV
2. The branch of accounting concerned with the presentation of financial information primarily for use
of third person outside of business enterprise.
a. Financial Accounting
b. Management Accounting
c. Government Accounting
d. All of the above
11. The general guidelines used in accounting practice that are based on substantial authoritative
support are called
a. Accounting postulates
c. accounting procedures
b. accounting conventions
d. accounting principles
12. The specific methods used by accountants in carrying out t5he general guidelines provided by
GAAP, including the numerous rules specifying how financial data should be recorded, classified,
summarized and reported are referred to as
a. accounting postulates
c. accounting procedures
b. accounting conventions
d. accounting principles
13. The accounting entity is assumed to be separate and distinct from other entities and from the
owners, managers and employees which constitute the firm. This postulate is referred to as
a. Matching
c. Historical cost
b. Going concern
d. Specific-separate-entity
14. Unless there is specific evidence to the contrary, the firm will continue to be in existence in the
foreseeable future. This postulate is referred to as
a. Matching
c. Historical cost
b. Going concern
d. Specific-separate-entity
15. Money is the best measuring unit of a firms assets, liabilities and equity, as well as changes
therein; its instability is immaterial. This postulate is referred to as
a. Historical cost
c. Money-measuring unit
b. Revenue recognition
d. Fiscal period
16. Cost is normally the proper money measurement of a firms assets, liabilities, and equity, and
changes in them because it is objective, verifiable and convenient to obtain, approximating value at
time of acquisition. This postulate is referred to as
a. Historical cost
c. Money measuring unit
b. Revenue recognition
d. Fiscal period
17. The life of a business firm can be segmented into short run time periods in order to provide timely
financial information to aid in financial decision making; hence, periodic reporting implies the use of
accrual accounting and use of estimates ( approximations) and informed judgment by accountants.
This postulate is referred to as
a. Historical cost
c. Money measuring unit
b. Revenue recognition
d. Fiscal period
18. The point of sale when goods are delivered or services are rendered, is the time at which revenue
is to be recognized. This postulate is referred to as
a. Historical cost
c. Money measuring unit
b. Revenue recognition
d. Fiscal period
19.Goods and services used (expenses) during the fiscal period can be associated with the revenue
earned during the same fiscal period. This postulate referred to as
a. Matching
c. Historical Cost
b. Going concern
d. Specific-separate entity
20. Exception to the application of accounting theory are permitted if the amount involve is not
material; financial reporting is concerned only with information that is significant enough to affect
evaluations or decisions. This convention is called
a. Conservatism
c. Consistency
b. Objectivity
d. Materiality
21. The same accounting procedures for a given entity should be used from one period to the next.
Changes may however be made if it will result in more accurate or useful information for decision
making provided it disclosed. The convention is called
a. Conservatism
c. Consistency
b. Objectivity
d. Materiality
22. Financial statements of different firms should be based on similar accounting principles and
procedures in order to aid users of financial statements in finding similarities and differences among
firms for purposed of financial decision making This convention is called
a. Consistency
c. Objectivity
b. Comparability
d. Conservatism
23. Accounting measurement should be based on evidence that is verifiable by competent persons.
This convention is called
a. Consistency
c. Objectivity
b. Comparability
d. Conservatism
24. The accountant should recognize all possible losses but anticipate no profit. Where alternative
courses of action are available, he should choose the alternative least favorable to owners equity.
a. Consistency
c. Objectivity
b. Comparability
d. Conservatism
MULTIPLE CHOICEFinancial Accounting Standards
21.
22.
23.
The financial statements most frequently provided include all of the following except the
a. balance sheet.
b. income statement.
c. statement of cash flows.
d. statement of retained earnings.
24.
25.
26.
27.
An
a.
b.
c.
d.
28.
29.
30.
31.
32.
33.
34.
The role of the Securities and Exchange Commission in the formulation of accounting principles
can be best described as
a. consistently primary.
b. consistently secondary.
c. sometimes primary and sometimes secondary.
d. non-existent.
35.
The body that has the power to prescribe the accounting practices and standards to be employed
by companies that fall under its jurisdiction is the
a. FASB.
b. AICPA.
c. SEC.
d. APB.
36.
Companies that are listed on a stock exchange are required to submit their financial statements
to the
a. AICPA.
b. APB
c. FASB.
d. SEC.
37.
38.
39.
40.
41.
The Financial Accounting Standards Board employs a "due process" system which
a. is an efficient system for collecting dues from members.
b. enables interested parties to express their views on issues under consideration.
c. identifies the accounting issues that are the most important.
d. requires that all accountants must receive a copy of financial standards.
42.
43.
44.
45.
46.
The Governmental Accounting Standards Board's main purpose is to develop standards for
a. the General Accounting Office.
b. the Federal government.
c. state and local government.
d. the Internal Revenue Service.
47.
Which of the following organizations has not been instrumental in the development of financial
accounting standards in the United States?
a. AICPA
b. FASB
c. IASB
d. SEC
48.
An
a.
b.
c.
d.
49.
The following published documents are part of the "due process" system used by the FASB in the
evolution of a typical FASB Statement of Financial Accounting Standards:
50.
51.
1. Exposure Draft
2. Statement of Financial Accounting Standards
3. Discussion Memorandum
The chronological order in which these items are released is as follows:
a. 1, 2, 3.
b. 1, 3, 2.
c. 2, 3, 1.
d. 3, 1, 2.
P
52.
In the House of GAAP, is the following on the highest level of authoritative status (meaning
among the most authoritative)?
a.
b.
c.
d.
FASB
Technical
Bulletin
Yes
Yes
No
No
FASB
Statement
of Financial
Accounting
Standards
Yes
Yes
Yes
Yes
FASB
Interpretation
Yes
Yes
No
Yes
FASB
Statement
of Financial
Accounting
Concepts
Yes
No
No
No
53.
Generally Accepted Accounting Principles include: 1) FASB Technical Bulletins, 2) APB Opinions,
and 3) Widely-accepted industry practices. These three items rank from most authoritative to
least authoritative as follows:
a. 1, 2, 3.
b. 1, 3, 2.
c. 2, 1, 3.
d. 2, 3, 1.
54.
55.
The most significant current source of generally accepted accounting principles is the
a. AICPA.
b. SEC.
c. APB.
d. FASB.
56.
The most authoritative category of generally accepted accounting principles includes all of the
following except
a. Accounting Research Bulletins.
b. APB Opinions.
c. FASB Standards.
d. FASB Technical Bulletins.
57.
58.
Which of the following publications does not qualify as a statement of generally accepted
accounting principles?
a. Statements of financial standards issued by the FASB
b. Accounting interpretations issued by the FASB
c. APB Opinions
d. Accounting research studies issued by the AICPA
59.
60.
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.
22.
23.
24.
1
2
3
Both 2 and 3 are true.
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. 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.
26.
27.
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
29.
30.
31.
Of
a.
b.
c.
d.
32.
An
a.
b.
c.
33.
the following items, the only one which should not be classified as a current liability is
current maturities of long-term debt.
sales taxes payable.
short-term obligations expected to be refinanced.
unearned revenues.
c. A company may exclude a short-term obligation from current liabilities if it is paid off after the
balance sheet date and subsequently replaced by long-term debt before the balance sheet is
issued.
d. None of these.
34.
35.
36.
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.
38.
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.
39.
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.
40.
41.
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.
37.
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.
43.
1.
2.
3.
Either 1 or 2 is acceptable.
44.
45.
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.
46.
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.
47.
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. creation of a liability only.
d. disclosure in note form only.
48.
49.
10
50.
To
a.
b.
c.
d.
51.
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.
52.
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.
53.
54.
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.
55.
record an asset retirement obligation (ARO), the cost associated with the ARO is
expensed.
included in the carrying amount of the related long-lived asset.
included in a separate account.
none of these.
Mayberry 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.
Marx 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 Marx 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.
56.
57.
11
58.
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
59.
60.
61.
*62.
21.
22.
23.
Which of the following (a-c) are not true concerning a conceptual framework in account-ing?
a. It should be a basis for standard-setting.
b. It should allow practical problems to be solved more quickly by reference to it.
c. It should be based on fundamental truths that are derived from the laws of nature.
d. All of the above (a-c) are true.
24.
Which of the following is not a benefit associated with the FASB Conceptual Framework Project?
a. A conceptual framework should increase financial statement users' understanding of and
confidence in financial reporting.
b. Practical problems should be more quickly solvable by reference to an existing conceptual
framework.
c. A coherent set of accounting standards and rules should result.
d. Business entities will need far less assistance from accountants because the financial
reporting process will be quite easy to apply.
25.In the conceptual framework for financial reporting, what provides "the why"--the goals and
purposes of accounting?
a. Measurement and recognition concepts such as assumptions, principles, and constraints
12
27.
28.
The objectives of financial reporting include all of the following except to provide information that
a. is useful to the Internal Revenue Service in allocating the tax burden to the business
community.
b. is useful to those making investment and credit decisions.
c. is helpful in assessing future cash flows.
d. identifies the economic resources (assets), the claims to those resources (liabilities), and the
changes in those resources and claims.
29.
Decision makers vary widely in the types of decisions they make, the methods of decision
making they employ, the information they already possess or can obtain from other sources, and
their ability to process information. Consequently, for information to be useful there must be a
linkage between these users and the decisions they make. This link is
a. relevance.
b. reliability.
c. understandability.
d. materiality.
30.
31.
The two primary qualities that make accounting information useful for decision making are
a. comparability and consistency.
b. materiality and timeliness.
c. relevance and reliability.
d. reliability and comparability.
Accounting information is considered to be relevant when it
a. can be depended on to represent the economic conditions and events that it is intended to
represent.
b. is capable of making a difference in a decision.
c. is understandable by reasonably informed users of accounting information.
d. is verifiable and neutral.
32.
33.
The quality of information that gives assurance that it is reasonably free of error and bias and is
a faithful representation is
a. relevance.
b. reliability.
c. verifiability.
d. neutrality.
34.
According to Statement of Financial Accounting Concepts No. 2, which of the following relates to
both relevance and reliability?
a. Materiality
b. Understandability
c. Usefulness
d. All of these
13
35.
36.
37.
38.
Information is neutral if it
a. provides benefits which are at least equal to the costs of its preparation.
b. can be compared with similar information about an enterprise at other points in time.
c. would have no impact on a decision maker.
d. is free from bias toward a predetermined result.
39.
The characteristic that is demonstrated when a high degree of consensus can be secured among
independent measurers using the same measurement methods is
a. relevance.
b. reliability.
c. verifiability.
d. neutrality.
40.
41.
42.
43.
14
b. accounting entities give accountable events the same accounting treatment from period to
period.
c. extraordinary gains and losses are not included on the income statement.
d. accounting procedures are adopted which give a consistent rate of net income.
44.
Information about different entities and about different periods of the same entity can be
prepared and presented in a similar manner. Comparability and consistency are related to which
of these objectives?
Comparability
Consistency
a.
Entities
Entities
b.
Entities
Periods
c.
Periods
Entities
d.
Periods
Periods
45.When information about two different enterprises has been prepared and presented in a similar
manner, the information exhibits the characteristic of
a. relevance.
b. reliability.
c. consistency.
d. none of these.
46.
The elements of financial statements include investments by owners. These are increases in an
entity's net assets resulting from owners'
a. transfers of assets to the entity.
b. rendering services to the entity.
c. satisfaction of liabilities of the entity.
d. all of these.
47.
In classifying the elements of financial statements, the primary distinction between revenues and
gains is
a. the materiality of the amounts involved.
b. the likelihood that the transactions involved will recur in the future.
c. the nature of the activities that gave rise to the transactions involved.
d. the costs versus the benefits of the alternative methods of disclosing the transactions
involved.
48.
A decrease in net assets arising from peripheral or incidental transactions is called a(n)
a. capital expenditure.
b. cost.
c. loss.
d. expense.
49.
50.
51.
Which of the following is false with regard to the element "comprehensive income"?
a. It is more inclusive than the traditional notion of net income.
b. It includes net income and all other changes in equity exclusive of owners' invest-ments and
distributions to owners.
c. This concept is not yet being applied in practice.
15
52.
53.
d. It excludes prior period adjustments (transactions that relate to previous periods, such as
corrections of errors).
According to the FASB conceptual framework, earnings
a. are the same as comprehensive income.
b. exclude certain gains and losses that are included in comprehensive income.
c. include certain gains and losses that are excluded from comprehensive income.
d. include certain losses that are excluded from comprehensive income.
According to the FASB Conceptual Framework, the elements assets,
equity describe amounts of resources and claims to resources at/during a
Moment in Time
a.
Yes
b.
Yes
c.
No
d.
No
liabilities,
and
Period of Time
No
Yes
Yes
No
Which of the following basic accounting assumptions is threatened by the existence of severe
inflation in the economy?
a. Monetary unit assumption.
b. Periodicity assumption.
c. Going-concern assumption.
d. Economic entity assumption.
During the lifetime of an entity accountants produce financial statements at artificial points in
time in accordance with the concept of
54.
55.
a.
b.
c.
d.
Objectivity
No
Yes
No
Yes
Periodicity
No
No
Yes
Yes
56.
57.
58.
61.
The assumption that a business enterprise will not be sold or liquidated in the near future is
known as the
a. economic entity assumption.
16
63.
Proponents of historical cost ordinarily maintain that in comparison with all other valuation
alternatives for general purpose financial reporting, statements prepared using historical costs
are more
a. reliable.
b. relevant.
c. indicative of the entity's purchasing power.
d. conservative.
64.
Valuing assets at their liquidation values rather than their cost is inconsistent with the
a. periodicity assumption.
b. matching principle.
c. materiality constraint.
d. historical cost principle.
65.
66.
67.
68.
69.
Under Statement of Financial Accounting Concepts No. 5, which of the following, in the most
precise sense, means the process of converting noncash resources and rights into cash or claims
to cash?
a. Recognition
b. Measurement
c. Realization
d. Allocation
70.
"When products (goods or services), merchandise, or other assets are exchanged for cash or
claims to cash" is a definition of
a. allocated.
b. realized.
c. realizable.
d. earned.
17
This statement
71.
The allowance for doubtful accounts, which appears as a deduction from accounts receivable on
a balance sheet and which is based on an estimate of bad debts, is an application of the
a. consistency characteristic.
b. matching principle.
c. materiality constraint.
d. revenue recognition principle.
72.
73. Which of the following serves as the justification for the periodic recording of depreciation
expense?
a. Association of efforts (expense) with accomplishments (revenue)
b. Systematic and rational allocation of cost over the periods benefited
c. Immediate recognition of an expense
d. Minimization of income tax liability
74.
75.
Which of the following statements concerning the cost-benefit relationship is not true?
a. Business reporting should exclude information outside of management's expertise.
b. Management should not be required to report information that would significantly harm the
company's competitive position.
c. Management should not be required to provide forecasted financial information.
d. If needed by financial statement users, management should gather information not included
in the financial statements that
would not otherwise be gathered for internal use.
76.
Under Statement of Financial Accounting Concepts No. 2, which of the following relates to both
relevance and reliability?
a. Cost-benefit constraint
c.
Verifiability
b. Predictive value
d.
Representational faithfulness
Charging off the cost of a wastebasket with an estimated useful life of 10 years as an expense of
the period when purchased is an example of the application of the
a. consistency characteristic.
b. matching principle.
c. materiality constraint.
d. historical cost principle.
77.
78.
79.
80.
18
82.
Trade-offs between the characteristics that make information useful may be necessary or
beneficial. Issuance of interim financial statements is an example of a trade-off between
a. relevance and reliability.
b. reliability and periodicity.
c. timeliness and materiality.
d. understandability and timeliness.
83.
Allowing firms to estimate rather than physically count inventory at interim (quarterly) periods is
an example of a trade-off between
a. verifiability and reliability.
b. reliability and comparability.
c. timeliness and verifiability.
d. neutrality and consistency.
84.
In matters of doubt and great uncertainty, accounting issues should be resolved by choosing the
alternative that has the least favorable effect on net income, assets, and owners' equity. This
guidance comes from the
a. materiality constraint.
b. industry practices constraint.
c. conservatism constraint.
d. full disclosure principle.
MULTIPLE CHOICECash and Receivables
21.
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
22.
23.
24.
25.
Which of the following items should not be included in the Cash caption on the balance sheet?
a. Coins and currency in the cash register
b. Checks from other parties presently in the cash register
c. Amounts on deposit in checking account at the bank
d. Postage stamps on hand
A cash equivalent is a short-term, highly liquid investment that is readily convertible into known
amounts of cash and
a. is acceptable as a means to pay current liabilities.
b. has a current market value that is greater than its original cost
19
c. bears an interest rate that is at least equal to the prime rate of interest at the date of
liquidation.
d. is so near its maturity that it presents insignificant risk of changes in interest rates.
26.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.
27.
28.
29.
What is the preferable presentation of accounts receivable from officers, employees, or affiliated
companies on a balance sheet?
a. As offsets to capital.
b. By means of footnotes only.
c. As assets but separately from other receivables.
d. As trade notes and accounts receivable if they otherwise qualify as current assets.
31.
When a customer purchases merchandise inventory from a business organization, she may be
given a discount which is designed to induce prompt payment. Such a discount is called a(n)
a. trade discount.
b. nominal discount.
c. enhancement discount.
d. cash discount.
32.
33.
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.
Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted
value of the cash to be received in the future, failure to follow this practice usually does not
make the balance sheet misleading because
a. most short-term receivables are not interest-bearing.
b. the allowance for uncollectible accounts includes a discount element.
c. the amount of the discount is not material.
d. most receivables can be sold to a bank or factor.
30.
34.
35.
Which of the following methods of determining bad debt expense does not properly match
expense and revenue?
20
a. Charging bad debts with a percentage of sales under the allowance method.
b. Charging bad debts with an amount derived from a percentage of accounts receivable under
the allowance method.
c. Charging bad debts with an amount derived from aging accounts receivable under the
allowance method.
d. Charging bad debts as accounts are written off as uncollectible.
36.
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
37.
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 adjusted for the balance in the allowance
b. A percentage of sales not adjusted for the balance in the allowance
c. A percentage of accounts receivable not adjusted for the balance in the allowance
d. An amount derived from aging accounts receivable and not adjusted for the balance in the
allowance
38.
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.
39.
40.
Which of the following is true when accounts receivable are factored without recourse?
a. The transaction may be accounted for either as a secured borrowing or as a sale, depending
upon the substance of the transaction.
b. The receivables are used as collateral for a promissory note issued to the factor by the owner
of the receivables.
c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting the
receivables.
d. The financing cost (interest expense) should be recognized ratably over the collection period
of the receivables.
Which of the following statements is incorrect regarding the classification of accounts and notes
receivable?
a. Segregation of the different types of receivables is required if they are material.
b. Disclose any loss contingencies that exist on the receivables.
c. Any discount or premium resulting from the determination of present value in notes
receivable transactions is an asset or liability respectively.
d. Valuation accounts should be appropriately offset against the proper receivable accounts.
42.
Of the following conditions, which is the only one that is not required if the transfer of receivables
with recourse is to be accounted for as a sale?
a. The transferor is obligated to make a genuine effort to identify those receivables that are
uncollectible.
b. The transferor surrenders control of the future economic benefits of the receivables.
c. The transferee cannot require the transferor to repurchase the receivables.
d. The transferor's obligation under the recourse provisions can be reasonably estimated.
43.
41.
21
a.
b.
c.
d.
44.
number of times the average balance of accounts receivable is collected during the period.
percentage of accounts receivable turned over to a collection agency during the period.
percentage of accounts receivable arising during certain seasons.
number of times the average balance of inventory is sold during the period.
*45.
*46.
*47.
*48.
21.
22.
23.
24.
Which of the following items should be included in a company's inventory at the balance sheet
date?
a. Goods in transit which were purchased f.o.b. destination.
b. Goods received from another company for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call for at his or her
convenience.
d. None of these.
22
During 2007 Foley Corporation transferred inventory to Kline Corporation and agreed to repurchase the
merchandise early in 2008. Kline then used the inventory as collateral to borrow from Norwalk Bank,
remitting the proceeds to Foley. In 2008 when Foley repurchased the inventory, Kline used the proceeds
to repay its bank loan.
25.
26.
On whose books should the cost of the inventory appear at the December 31, 2007 balance
sheet date?
a. Foley Corporation
b. Kline Corporation
c. Norwalk Bank
d. Kline Corporation, with Foley making appropriate note disclosure of the transaction
27.
28.
29.
The accountant for the Orion Sales Company is preparing the income statement for 2007 and the
balance sheet at December 31, 2007. Orion uses the periodic inventory system. The January 1,
2007 merchandise inventory balance will appear
a. only as an asset on the balance sheet.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement and as a current
asset on the balance sheet.
d. as an addition in the cost of goods sold section of the income statement and as a current
asset on the balance sheet.
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. overstatement, understatement, no effect.
c. understatement, overstatement, overstatement.
d. understatement, overstatement, no effect.
30.
31.
The failure to record a purchase of merchandise on account even though the goods are properly
included in the physical inventory 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.
32.
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.
33.
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.
23
Cross Co. accepted delivery of merchandise which it purchased on account. As of December 31,
Cross had recorded the transaction, but did not include the merchandise in its inventory. The
effect of this on its financial statements for December 31 would be
a. net income, current assets, and retained earnings were understated.
b. net income was correct and current assets were understated.
c. net income was understated and current liabilities were overstated.
d. net income was overstated and current assets were understated.
35.
On June 15, 2007, Tolon Corporation accepted delivery of merchandise which it pur-chased on
account. As of June 30, Tolon had not recorded the transaction or included the merchandise in its
inventory. The effect of this on its balance sheet for June 30, 2007 would be
a. assets and stockholders' equity were overstated but liabilities were not affected.
b. stockholders' equity was the only item affected by the omission.
c. assets, liabilities, and stockholders' equity were understated.
d. none of these.
36.
37.
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 which will not benefit any future period.
c. costs from idle manufacturing capacity resulting from an unexpected plant shutdown.
d. costs of normal shrinkage and scrap incurred for the manufacture of a product in ending
inventory.
38.
Which of the following types of interest cost incurred in connection with the purchase or
manufacture of inventory should be capitalized as a product cost?
a. Purchase discounts lost
b. Interest incurred during the production of discrete projects such as ships or real estate
projects
c. Interest incurred on notes payable to vendors for routine purchases made on a repetitive
basis
d. All of these should be capitalized.
39.
The use of a Discounts Lost account implies that the recorded cost of a purchased inventory item
is its
a. invoice price.
b. invoice price plus the purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.
40.
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 plus any purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.
24
41.
Which of the following recording procedures would result in the highest cost of goods sold for
2007?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken shown
under "other expenses" in the income statement
a. 1
b. 2
c. Either 1 or 2 will result in the same cost of goods sold.
d. Cannot be determined from the information provided.
42.
Which of the following recording procedures would result in the highest net income for 2007?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken shown
under "other expenses" in the income statement
a. 1
b. 2
c. Either 1 or 2 will result in the same net income.
d. Cannot be determined from the information provided.
43.
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. Cash (purchase) discounts taken during the period
c. Purchase returns and allowances of merchandise during the period
d. Cost of transportation-in for merchandise purchased during the period
44.
45.
Which inventory costing method most closely approximates current cost for each of the
following:
Ending Inventory Cost of Goods Sold
a.
FIFO
FIFO
b.
FIFO
LIFO
c.
LIFO
FIFO
d.
LIFO
LIFO
46.
In situations where there is a rapid turnover, an inventory method which produces a balance
sheet valuation similar to the first-in, first-out method is
a. average cost.
b. base stock.
c. joint cost.
d. prime cost.
47.
The pricing of issues from inventory must be deferred until the end of the accounting period
under the following method of inventory valuation:
a. moving average.
b. weighted-average.
c. LIFO perpetual.
d. FIFO.
48.
An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the
ending inventory valuation is
a. FIFO.
b. LIFO.
c. base stock.
d. weighted-average.
49.
Which method of inventory pricing best approximates specific identification of the actual flow of
costs and units in most manufacturing situations?
a. Average cost
25
b. First-in, first-out
c. Last-in, first-out
d. Base stock
50.
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. Prices remained unchanged.
c. Prices increased.
d. Price trend cannot be determined from information given.
51.
In a period of rising prices, the inventory method which tends to give the highest reported net
income is
a. base stock.
b. first-in, first-out.
c. last-in, first-out.
d. weighted-average.
52.
In a period of rising prices, the inventory method which tends to give the highest reported
inventory is
a. FIFO.
b. moving average.
c. LIFO.
d. weighted-average.
53.
Quayle Corporation's inventory cost on its balance sheet was lower using first-in, first-out than it
would have been using last-in, first-out. Assuming no beginning inventory, in what direction did
the cost of purchases move during the period?
a. Up
b. Down
c. Steady
d. Cannot be determined
54.
In a period of rising prices, the inventory method which tends to give the highest reported cost of
goods sold is
a. FIFO.
b. average cost.
c. LIFO.
d. none of these.
55.
Which of the following statements is not valid as it applies to inventory costing methods?
a. If inventory quantities are to be maintained, part of the earnings must be invested (plowed
back) in inventories when FIFO is used during a period of rising prices.
b. LIFO tends to smooth out the net income pattern by matching current cost of goods sold with
current revenue, when inventories remain at constant quantities.
c. When a firm using the LIFO method fails to maintain its usual inventory position (reduces
stock on hand below customary levels), there may be a matching of old costs with current
revenue.
d. The use of FIFO permits some control by management over the amount of net income for a
period through controlled purchases, which is not true with LIFO.
56.
The acquisition cost of a certain raw material changes frequently. The book value of the
inventory of this material at year end will be the same if perpetual records are kept as it would
be under a periodic inventory method only if the book value is computed under the
a. weighted-average method.
b. moving average method.
c. LIFO method.
d. FIFO method.
57.
When a company uses LIFO for external reporting purposes and FIFO for internal reporting
purposes, an Allowance to Reduce Inventory to LIFO account is used. This account should be
reported
a. on the income statement in the Other Revenues and Gains section.
b. on the income statement in the Cost of Goods Sold section.
c. on the income statement in the Other Expenses and Losses section.
26
Which of the following statements is not true as it relates to the dollar-value LIFO inventory
method?
a. It is easier to erode LIFO layers using dollar-value LIFO techniques than it is with specific
goods pooled LIFO.
b. Under the dollar-value LIFO method, it is possible to have the entire inventory in only one
pool.
c. Several pools are commonly employed in using the dollar-value LIFO inventory method.
d. Under dollar-value LIFO, increases and decreases in a pool are determined and measured in
terms of total dollar value, not physical quantity.
59.
Which of the following is not considered an advantage of LIFO when prices are rising?
a. The inventory will be overstated.
b. The more recent costs are matched against current revenues.
c. There will be a deferral of income tax.
d. A company's future reported earnings will not be affected substantially by future price
declines.
60.
Which of the following is true regarding the use of LIFO for inventory valuation?
a. If LIFO is used for external financial reporting, then it must also be used for internal reports.
b. For purposes of external financial reporting, LIFO may not be used with the lower of cost or
market approach.
c. If LIFO is used for external financial reporting, then it cannot be used for tax purposes.
d. None of these.
61.
If inventory levels are stable or increasing, an argument which is not an advantage of the LIFO
method as compared to FIFO is
a. income taxes tend to be reduced in periods of rising prices.
b. cost of goods sold tends to be stated at approximately current cost on the income statement.
c. cost assignments typically parallel the physical flow of goods.
d. income tends to be smoothed as prices change over time.
58.
22.
23.
24.
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. written off as an extraordinary loss in the year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new hotel.
25.
The cost
a. costs
b. costs
c. costs
of
of
of
of
27
d. special assessments.
26.
The cost of land typically includes the purchase price and all of the following costs except
a. grading, filling, draining, and clearing costs.
b. street lights, sewers, and drainage systems cost.
c. private driveways and parking lots.
d. assumption of any liens or mortgages on the property.
27.
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 length of time for which the building was held prior to its demolition.
c. the contemplated future use of the parking lot.
d. the intention of management for the property when the building was acquired.
28.
The debit for a sales tax properly levied and paid on the purchase of machinery preferably would
be a charge to
a. the machinery account.
b. a separate deferred charge account.
c. miscellaneous tax expense (which includes all taxes other than those on income).
d. accumulated depreciation--machinery.
29.
Historical cost is the basis advocated for recording the acquisition of property, plant, and
equipment for all of the following reasons except
a. at the date of acquisition, cost reflects fair market value.
b. property, plant, and equipment items are always acquired at their original historical cost.
c. historical cost involves actual transactions and, as such, is the most reliable basis.
d. gains and losses should not be anticipated but should be recognized when the asset is sold.
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. eliminated completely from the cost of the asset.
c. allocated on an opportunity cost basis.
d. allocated on a pro rata basis between the asset and normal operations.
32.
30.
31.
33.
Which of the following assets do not qualify for capitalization of interest costs incurred during
construction of the assets?
a. Assets under construction for an enterprise's own use.
b. Assets intended for sale or lease that are produced as discrete projects.
c. Assets financed through the issuance of long-term debt.
d. Assets not currently undergoing the activities necessary to prepare them for their intended
use.
34.
35.
When computing the amount of interest cost to be capitalized, the concept of "avoidable
interest" refers to
28
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. no further interest cost is being incurred.
c. the asset is abandoned, sold, or fully depreciated.
d. the activities that are necessary to get the asset ready for its intended use have begun.
37.
38.
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
a. 8/8.
b. 8/12.
c. 9/12.
d. 11/12.
39.
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. used to reduce the cost of assets being constructed.
c. multiplied by an appropriate interest rate to determine the amount of interest to be
capitalized.
d. recognized as revenue of the period.
40.
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. Expenditures for the assets have been made.
c. The interest rate is equal to or greater than the company's cost of capital.
d. Activities that are necessary to get the asset ready for its intended use are in progress.
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 or loss is recognized.
b. the fair value of the asset given up, and a gain but not a loss may be recognized.
c. the fair value of the asset received if it is equally reliable as the fair value of the asset given
up.
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.
41.
42.
29
43.
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. effectively reduce the amount to be recorded as the cost of the new asset.
c. effectively increase the amount to be recorded as the cost of the new asset.
d. be credited directly to the owner's capital account.
44.
45.
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.
46.
When a closely held corporation issues preferred stock for land, the land should be recorded at
the
a. total par value of the stock issued.
b. total book value of the stock issued.
c. total liquidating value of the stock issued.
d. fair market value of the land.
47.
Accounting recognition should be given to some or all of the gain realized on a nonmonetary
exchange of plant assets except when the exchange has
a. no commercial substance and additional cash is paid.
b. no commercial substance and additional cash is received.
c. commercial substance and additional cash is paid.
d. commercial substance and additional cash is received.
48.
For a nonmonetary exchange of plant assets, accounting recognition should not be given to
a. a loss when the exchange has no commercial substance.
b. a gain when the exchange has commercial substance.
c. part of a gain when the exchange has no commercial substance and cash is paid.
d. part of a gain when the exchange has no commercial substance and cash is received.
49.
When an enterprise is the recipient of a donated asset, the account credited may be a
a. paid-in capital account.
b. revenue account.
c. deferred revenue account.
d. all of these.
50.
A plant site donated by a township to a manufacturer that plans to open a new factory should be
recorded on the manufacturer's books at
a. the nominal cost of taking title to it.
b. its market value.
c. one dollar (since the site cost nothing but should be included in the balance sheet).
d. the value assigned to it by the company's directors.
51.
In order for a cost to be capitalized (capital expenditure), the following must be present:
a. The useful life of an asset must be increased.
b. The quantity of assets must be increased.
c. The quality of assets must be increased.
d. Any one of these.
52.
An improvement made to a machine increased its fair market value and its production capacity
by 25% without extending the machine's useful life. The cost of the improvement should be
a. expensed.
b. debited to accumulated depreciation.
c. capitalized in the machine account.
d. allocated between accumulated depreciation and the machine account.
30
53.
54.
55.
An
a.
b.
c.
d.
57.
When a plant asset is disposed of, a gain or loss may result. The gain or loss would be classified
as an extraordinary item on the income statement if it resulted from
a. an involuntary conversion and the conditions of the disposition are unusual and infrequent in
nature.
b. a sale prior to the completion of the estimated useful life of the asset.
c. the sale of a fully depreciated asset.
d. an abandonment of the asset.
58.
The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were
a. less than current market value.
b. greater than cost.
c. greater than book value.
d. less than book value.
59.
21.
22.
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
23.
Depreciation accounting
a. provides funds.
b. funds replacements.
c. retains funds.
d. all of these.
56.
31
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. 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.
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. 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.
25.
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 the life of an asset without consideration of salvage value and service life
requires the use of salvage value.
c. physical life is always longer than service life.
d. 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.
26.
27.
28.
29.
For income statement purposes, depreciation is a variable expense if the depreciation method
used is
a. units-of-production.
b. straight-line.
c. sum-of-the-years'-digits.
d. declining-balance.
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.
32.
24.
32
33.
A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on the
horizontal axis. Assuming linear relationships, how would the graphs for straight-line and sum-ofthe-years'-digits depreciation, respectively, be drawn?
a. Vertically and sloping down to the right
b. Vertically and sloping up to the right
c. Horizontally and sloping down to the right
d. Horizontally and sloping up to the right
34.
35.
Each year a company has been investing an increasingly greater amount in machinery. Since
there is a large number of small items with relatively similar useful lives, the company has been
applying straight-line depreciation at a uniform rate to the machinery as a group. The ratio of
this group's total accumulated depreciation to the total cost of the machinery has been steadily
increasing and now stands at .75 to 1.00. The most likely explanation for this increasing ratio is
the
a. company should have been using one of the accelerated methods of depreciation.
b. estimated average life of the machinery is less than the actual average useful life.
c. estimated average life of the machinery is greater than the actual average useful life.
d. company has been retiring fully depreciated machinery that should have remained in service.
36.
37.
Roberts Truck Rental uses the group depreciation method for its fleet of trucks. When it retires
one of its trucks and receives cash from a salvage company, the carrying value of property,
plant, and equipment will be decreased by the
a. original cost of the truck.
b. original cost of the truck less the cash proceeds.
c. cash proceeds received.
d. cash proceeds received and original cost of the truck.
38.
39.
40.
Quayle Company acquired machinery on January 1, 2002 which it depreciated under the straightline method with an estimated life of fifteen years and no salvage value. On January 1, 2007,
Quayle estimated that the remaining life of this machinery was six years with no salvage value.
How should this change be accounted for by Quayle?
a. As a prior period adjustment
b. As the cumulative effect of a change in accounting principle in 2007
c. By setting future annual depreciation equal to one-sixth of the book value on January 1, 2007
d. By continuing to depreciate the machinery over the original fifteen year life
41.
33
White Printing Company determines that a printing press used in its operations has suffered a
permanent impairment in value because of technological changes. An entry to record the
impairment should
a. recognize an extraordinary loss for the period.
b. include a credit to the equipment accumulated depreciation account.
c. include a credit to the equipment account.
d. not be made if the equipment is still being used.
43.
Dividends representing a return of capital to stockholders are not uncommon among companies
which
a. use accelerated depreciation methods.
b. use straight-line depreciation methods.
c. recognize both functional and physical factors in depreciation.
d. none of these.
44.
Depletion expense
a. is usually part of cost of goods sold.
b. includes tangible equipment costs in the depletion base.
c. excludes intangible development costs from the depletion base.
d. excludes restoration costs from the depletion base.
45.
The most common method of recording depletion for accounting purposes is the
a. percentage depletion method.
b. decreasing charge method.
c. straight-line method.
d. units-of-production method.
Of the following costs related to the development of natural resources, which one is not a part of
depletion cost?
a. Acquisition cost of the natural resource deposit
b. Exploration costs
c. Tangible equipment costs associated with machinery used to extract the natural resource
d. Intangible development costs such as drilling costs, tunnels, and shafts
48.
Which of the following disclosures is not required in the financial statements regarding
depreciation?
a. Accumulated depreciation, either by major classes of depreciable assets or in total.
b. Details demonstrating how depreciation was calculated.
c. Depreciation expense for the period.
d. Balances of major classes of depreciable assets, by nature and function.
49.
50.
47.
34
51.
*52.
53.Under MACRS, which one of the following is not considered in determining depreciation for tax
purposes?
a. Cost of asset
b. Property recovery class
c. Half-year convention
d. Salvage value
*54.
21.
22.
Which of the following methods of amortization is normally used for intangible assets?
a. Sum-of-the-years'-digits
b. Straight-line
c. Units of production
d. Double-declining-balance
23.
24.
Factors considered in determining an intangible assets useful life include all of the following
except
a. the expected use of the asset.
b. any legal or contractual provisions that may limit the useful life.
c. any provisions for renewal or extension of the assets legal life
d. the amortization method used.
25.
26.
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 legal life of the purchased patent.
35
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 20 years.
b. amortized over a maximum period of 16 years.
c. amortized over a maximum period of 11 years.
d. expensed in 2007.
28.
Wriglee, Inc. went to court this year and successfully defended its patent from infringe-ment by a
competitor. The cost of this defense should be charged to
a. patents and amortized over the legal life of the patent.
b. legal fees and amortized over 5 years or less.
c. expenses of the period.
d. patents and amortized over the remaining useful life of the patent.
29.
30.
31.
32.
Goodwill
a. generated internally should not be capitalized unless it is measured by an individual
independent of the enterprise involved.
b. is easily computed by assigning a value to the individual attributes that comprise its
existence.
c. represents a unique asset in that its value can be identified only with the business as a whole.
d. exists in any company that has earnings that differ from those of a competitor.
The reason goodwill is sometimes referred to as a master valuation account is because
a. it represents the purchase price of a business that is about to be sold.
b. 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.
c. the value of a business is computed without consideration of goodwill and then goodwill is
added to arrive at a master valuation.
d. 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.
33.
34.
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. part of current income in the year of combination.
c. a deferred credit and amortize it.
d. paid-in capital.
35.
36
37.
38.
Weaver Boxing Company needs to determine if its indefinite-life intangibles other than goodwill
have been impaired and should be reduced or written off on its balance sheet. The impairment
test(s) to be used is (are)
a.
b.
c
d.
39.
40.
41.
Which of the following principles best describes the current method of accounting for research
and development costs?
a. Associating cause and effect
b. Systematic and rational allocation
c. Income tax minimization
d. Immediate recognition as an expense
42.
How should research and development costs be accounted for, according to a Financial
Accounting Standards Board Statement?
a. Must be capitalized when incurred and then amortized over their estimated useful lives.
b. Must be expensed in the period incurred.
c. May be either capitalized or expensed when incurred, depending upon the materiality of the
amounts involved.
d. Must be expensed in the period incurred unless it can be clearly demonstrated that the
expenditure will have alternative future uses or unless contractually reimbursable.
43.
Which of the following costs should be excluded from research and development expense?
a. Modification of the design of a product
b. Acquisition of R & D equipment for use on a current project only
c. Cost of marketing research for a new product
d. Engineering activity required to advance the design of a product to the manufacturing stage
37
44.
45.
Operating losses incurred during the start-up years of a new business should be
a. accounted for and reported like the operating losses of any other business.
b. written off directly against retained earnings.
c. capitalized as a deferred charge and amortized over five years.
d. capitalized as an intangible asset and amortized over a period not to exceed 20 years.
46. The costs of organizing a corporation include legal fees, fees paid to the state of incorporation,
fees paid to promoters, and the costs of meetings for organizing the promoters. These costs are
said to benefit the corporation for the entity's entire life. These costs should be
a. capitalized and never amortized.
b. capitalized and amortized over 40 years.
c. capitalized and amortized over 5 years.
d. expensed as incurred.
An
a.
b.
c.
d.
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.
24.
25.
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.
Bonds that pay no interest unless the issuing company is profitable are called
a. collateral trust bonds.
38
b. debenture bonds.
c. revenue bonds.
d. income bonds.
S
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.
28.
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.
30.
31.
Stone, 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.
32.
33.
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.
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.
39
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.
37.
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.
39.
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.
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.
42.
43.
40
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 longterm 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.
45.
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.
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.
47.
48.
When a business enterprise enters into what is referred to as off-balance-sheet financing, the
company
a. is attempting to conceal the debt from shareholders by having no information about the debt
included in the balance sheet.
b. wishes to confine all information related to the debt to the income statement and the
statement of cash flow.
c. can enhance the quality of its financial position and perhaps permit credit to be obtained
more readily and at less cost.
d. is in violation of generally accepted accounting principles.
Long-term debt that matures within one year and is to be converted into stock should be
reported
a. as a current liability.
b. in a special section between liabilities and stockholders equity.
c. as noncurrent.
49.
50.
41
d. as noncurrent and accompanied with a note explaining the method to be used in its
liquidation.
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.
53.
54.
*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.
*56.
*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.
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.
42
22.
23.
25.
Stockholders of a business enterprise are said to be the residual owners. The term residual
owner means that shareholders
a. are entitled to a dividend every year in which the business earns a profit.
b. have the rights to specific assets of the business.
c. bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership.
d. can negotiate individual contracts on behalf of the enterprise.
26.
27.
28.
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.
24.
43
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.
b.
c.
d.
32.
33.
1
2
3
1 or 3
Stock that has a fixed per-share amount printed on each stock certificate is called
a. stated value stock.
b. fixed value stock.
c. uniform value stock.
d. par value stock.
Which of the following is not a legal restriction related to profit distributions by a corporation?
a. The amount distributed to owners must be in compliance with the state laws governing
corporations.
b. The amount distributed in any one year can never exceed the net income reported for that
year.
c. Profit distributions must be formally approved by the board of directors.
d. Dividends must be in full agreement with the capital stock contracts as to preferences and
participation.
36.
In January 2007, Castro Corporation, a newly formed company, issued 10,000 shares of its $10
par common stock for $15 per share. On July 1, 2007, Castro Corporation reacquired 1,000
shares of its outstanding stock for $12 per share. The acquisition of these treasury shares
a. decreased total stockholders' equity.
b. increased total stockholders' equity.
c. did not change total stockholders' equity.
d. decreased the number of issued shares.
37.
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.
Gains" on sales of treasury stock (using the cost method) should be credited to
a. paid-in capital from treasury stock.
b. capital stock.
34.
35.
39.
44
c. retained earnings.
d. other income.
40.
Wilson Corp. purchased its own par value stock on January 1, 2007 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
44.
45.
46.
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.
48.
An
a.
b.
c.
45
50.
51.
Farmer Corporation owns 4,000,000 shares of stock in Baha Corporation. On December 31,
2007, Farmer 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.
52.
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.
54.
55.
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.
Pryor 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.
46
At
a.
b.
c.
d.
60.
61.
62.
What effect does the issuance of a 2-for-1 stock split have on each of the following?
a.
b.
c.
d.
the date of declaration of a small common stock dividend, the entry should not include
a credit to Common Stock Dividend Payable.
a credit to Paid-in Capital in Excess of Par.
a debit to Retained Earnings.
All of these are acceptable.
Retained Earnings
No effect
No effect
No effect
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
64.
65.
66.
Windsor 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.
67.
Assume common stock is the only class of stock outstanding in the B-Bar-B 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.
47
*68.
*69.
*70.
21.
22.
A correct valuation is
a. available-for-sale at amortized cost.
b. held-to-maturity at amortized cost.
c. held-to-maturity at fair value.
d. none of these.
23.
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.
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.
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.
48
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.
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.
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.
31.
32.
33.
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.
35.
36.
Pippen 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.
49
38.
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.
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.
40.
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.
S
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.
44. Bista 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?
a.
b.
c.
d.
Equity Method
Decrease
Decrease
No Effect
No Effect
45. An investor has a long-term investment in stocks. Regular cash dividends received by the
investor are recorded as
50
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.
Byner Corporation accounts for its investment in the common stock of Yount Company under the
equity method. Byner Corporation should ordinarily record a cash dividend received from Yount
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.
50.
Dane, Inc., owns 35% of Marin Corporation. During the calendar year 2007, Marin had net
earnings of $300,000 and paid dividends of $30,000. Dane 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.
52.
53.
51
54.
55.
56. A debt security is transferred from one category to another. Generally acceptable accounting
principles require that for this particular reclassification (1) the security be transferred at fair
value at the date of transfer, and (2) the unrealized gain or loss at the date of transfer currently
carried as a separate component of stockholders' equity be amortized over the remaining life of
the security. What type of transfer is being described?
a. Transfer from trading to available-for-sale
b. Transfer from available-for-sale to trading
c. Transfer from held-to-maturity to available-for-sale
d. Transfer from available-for-sale to held-to-maturity
*57.
*58.
All
a.
b.
c.
d.
*59.
All
a.
b.
c.
d.
*60.
The accounting for fair value hedges records the derivative at its
a. amortized cost.
b. carrying value.
c. fair value.
d. historical cost.
*61.
*62.
An
a.
b.
c.
d.
*63.
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.
of the following statements regarding accounting for derivatives are correct except that
they should be recognized in the financial statements as assets and liabilities.
they should be reported at fair value.
gains and losses resulting from speculation should be deferred.
gains and losses resulting from hedge transactions are reported in different ways, depending
upon the type of hedge.
of the following are characteristics of a derivative financial instrument except the instrument
has one or more underlyings and an identified payment provision.
requires a large investment at the inception of the contract.
requires or permits net settlement.
All of these are characteristics.
52
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.
MULTIPLE CHOICERevenue Recognition
21.
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.
24.
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.
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.
53
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.
35.
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.
37.
54
c. is likely to assign a small amount of revenue to a period during which much revenue was
actually earned.
d. none of these.
S
One of the more popular input measures used to determine the progress toward completion in
the percentage-of-completion method is
a. revenue-percentage basis.
b. cost-percentage basis.
c. progress completion basis.
d. cost-to-cost basis.
39.
40.
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 percentageof-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.
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.
38.
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
55
b. Large appliances
c. Single family residential units
d. Precious metals
S
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.
47.
48.
49.
50.
51.
52.
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.
56
d. Subsequent income statements report the gross profit as a separate item of revenue when it
is recognized as earned.
54.
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.
*56.
*57.
*58.
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.
*59.
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.
*60.
MULTIPLE CHOICELeases
21.
Major reasons why a company may become involved in leasing to other companies is (are)
a. interest revenue.
b. high residual values.
57
c. tax incentives.
d. all of these.
22.
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.
An
a.
b.
c.
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.
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.
28.
29.
30.
25.
58
a.
b.
c.
d.
31.
32.
33.
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.
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.
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 directfinancing lease.
b. the difference between the lease payments receivable and the fair market value of the leased
property.
59
41.
The primary difference between a direct-financing lease and a sales-type lease is the
a. manner in which rental receipts are recorded as rental income.
b. amount of the depreciation recorded each year by the lessor.
c. recognition of the manufacturer's or dealer's profit at the inception of the lease.
d. allocation of initial direct costs by the lessor to periods benefited by the lease arrangements.
42.
A lessor with a sales-type lease involving an unguaranteed residual value available to the lessor
at the end of the lease term will report sales revenue in the period of inception of the lease at
which of the following amounts?
a. The minimum lease payments plus the unguaranteed residual value.
b. The present value of the minimum lease payments.
c. The cost of the asset to the lessor, less the present value of any unguaranteed residual value.
d. The present value of the minimum lease payments plus the present value of the
unguaranteed residual value.
43.
44.
45.
40.
*46.
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.
60