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									                           CPA Adapted Questions
                                     th
         (Source: Intermediate Accounting, 12 Edition; Keiso, Weygandt, Warfield)

                   Chapter 14: LONG-TERM LIABILITIES
1.   On July 1, 2007, Pryce Co. issued 1,000 of its 10%, $1,000 bonds at 99 plus accrued
     interest. The bonds are dated April 1, 2007 and mature on April 1, 2017. Interest is
     payable semiannually on April 1 and October 1. What amount did Pryce receive from the
     bond issuance?
     a. $1,015,000
     b. $1,000,000
     c. $990,000
     d. $965,000

2.   On January 1, 2007, Gomez Co. issued its 10% bonds in the face amount of $3,000,000,
     which mature on January 1, 2017. The bonds were issued for $3,405,000 to yield 8%,
     resulting in bond premium of $405,000. Gomez uses the effective-interest method of
     amortizing bond premium. Interest is payable annually on December 31. At December 31,
     2007, Gomez's adjusted unamortized bond premium should be
     a. $405,000.
     b. $377,400.
     c. $364,500.
     d. $304,500.

3.   On July 1, 2005, Kitel, Inc. issued 9% bonds in the face amount of $5,000,000, which
     mature on July 1, 2015. The bonds were issued for $4,695,000 to yield 10%, resulting in a
     bond discount of $305,000. Kitel uses the effective-interest method of amortizing bond
     discount. Interest is payable annually on June 30. At June 30, 2007, Kitel's unamortized
     bond discount should be
     a. $264,050.
     b. $255,000.
     c. $244,000.
     d. $215,000.

4.   On January 1, 2007, Nott Co. sold $1,000,000 of its 10% bonds for $885,296 to yield
     12%. Interest is payable semiannually on January 1 and July 1. What amount should Nott
     report as interest expense for the six months ended June 30, 2007?
     a. $44,266
     b. $50,000
     c. $53,118
     d. $60,000

5.   On January 1, 2007, Kite Co. redeemed its 15-year bonds of $2,500,000 par value for
     102. They were originally issued on January 1, 1995 at 98 with a maturity date of January
     1, 2010. The bond issue costs relating to this transaction were $150,000. Kite amortizes
     discounts, premiums, and bond issue costs using the straight-line method. What amount
     of loss should Kite recognize on the redemption of these bonds (ignore taxes)?
     a. $90,000
     b. $60,000
     c. $50,000
                                                                                             1
       d. $0

  6.   On its December 31, 2006 balance sheet, Lane Corp. reported bonds payable of
       $6,000,000 and related unamortized bond issue costs of $320,000. The bonds had been
       issued at par. On January 2, 2007, Lane retired $3,000,000 of the outstanding bonds at
       par plus a call premium of $70,000. What amount should Lane report in its 2007 income
       statement as loss on extinguishment of debt (ignore taxes)?
       a. $0
       b. $70,000
       c. $160,000
       d. $230,000

  7.   On January 1, 2002, Pine Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000.
       These bonds were to mature on January 1, 2012 but were callable at 101 any time after
       December 31, 2005. Interest was payable semiannually on July 1 and January 1. On July
       1, 2007, Pine called all of the bonds and retired them. Bond premium was amortized on a
       straight-line basis. Before income taxes, Pine's gain or loss in 2007 on this early
       extinguishment of debt was
       a. $30,000 gain.
       b. $12,000 gain.
       c. $10,000 loss.
       d. $8,000 gain.

  8.   On June 30, 2007, Rosen Co. had outstanding 8%, $3,000,000 face amount, 15-year
       bonds maturing on June 30, 2017. Interest is payable on June 30 and December 31. The
       unamortized balances in the bond discount and deferred bond issue costs accounts on
       June 30, 2007 were $105,000 and $30,000, respectively. On June 30, 2007, Rosen
       acquired all of these bonds at 94 and retired them. What net carrying amount should be
       used in computing gain or loss on this early extinguishment of debt?
       a. $2,970,000.
       b. $2,895,000.
       c. $2,865,000.
       d. $2,820,000.

  9. A ten-year bond was issued in 2005 at a discount with a call provision to retire the bonds.
When the bond issuer exercised the call provision on an interest date in 2007, the carrying
amount of the bond was less than the call price. The amount of bond liability removed from the
accounts in 2007 should have equaled the
      a. call price.
      b. call price less unamortized discount.
      c. face amount less unamortized discount.
      d. face amount plus unamortized discount.

 10.   Starr Co. took advantage of market conditions to refund debt. This was the fourth
       refunding operation carried out by Starr within the last three years. The excess of the
       carrying amount of the old debt over the amount paid to extinguish it should be reported
       as a
       a. gain, net of income taxes.
       b. loss, net of income taxes.
       c. part of continuing operations.
       d. deferred credit to be amortized over the life of the new debt.

                                                                                              2
11.        Brye Co. is indebted to Dole under a $400,000, 12%, three-year note dated December 31,
           2005. Because of Brye's financial difficulties developing in 2007, Brye owed accrued
           interest of $48,000 on the note at December 31, 2007. Under a troubled debt
           restructuring, on December 31, 2007, Dole agreed to settle the note and accrued interest
           for a tract of land having a fair value of $360,000. Brye's acquisition cost of the land is
           $290,000. Ignoring income taxes, on its 2007 income statement Brye should report as a
           result of the troubled debt restructuring
               Gain on Disposal Restructuring Gain
           a.     $158,000               $0
           b.     $110,000               $0
           c.      $70,000               $40,000
           d.      $70,000               $88,000



Multiple Choice Answers
 Item       Ans.   Item   Ans.   Item   Ans.     Item   Ans.       Item   Ans.   Item   Ans.
      1.     a       3.    a       5.    a         7.    d           9.    c      11.    d
      2.     b       4.    c       6.    d         8.    c          10.    a



                                         DERIVATIONS
No.        Answer Derivation
 1.          a       ($1,000,000 × .99) + ($1,000,000 × .10 × 3/12) = $1,015,000.

 2.          b       $405,000 – [($3,000,000 × .10) – ($3,405,000 × .08)] = $377,400.

 3.          a       2005-2006: $4,695,000 + [($4,695,000 × .1) – ($5,000,000 × .09)]
                                = $4,714,500.
                     2006-2007: $4,714,500 + ($471,450 – $450,000) = $4,735,950
                                $5,000,000 – $4,735,950 = $264,050.

  4.         c       $885,296 × .06 = $53,118.

  5.         a                               [            15
                                                               (
                                                        $200,000
                     ($2,500,000 × 1.02) – $2,300,000 + ————— × 12                 )] = $90,000.
  6.         d       ($3,000,000 + $70,000) – [($6,000,000 – $320,000) × 1/2] = $230,000.

  7.         d       [$1,040,000 – ( ———— × 11)] – ($1,000,000 × 1.01) = $8,000.
                                     $40,000
                                       20

  8.         c       $3,000,000 – ($105,000 + $30,000) = $2,865,000.

  9.         c       Conceptual.

 10.         a       Conceptual.

 11.         d       $360,000 – $290,000 = $70,000
                                                                                                    3
                ($400,000 + $48,000) – $360,000 = $88,000.
                   Chapter 15: STOCKHOLDERS’ EQUITY

1.   A corporation was organized in January 2004 with authorized capital of $10 par value
     common stock. On February 1, 2007, shares were issued at par for cash. On March 1,
     2007, the corporation's attorney accepted 7,000 shares of common stock in settlement for
     legal services with a fair value of $90,000. Additional paid-in capital would increase on
        February 1, 2007 March 1, 2007
     a.        Yes                  No
     b.        Yes                 Yes
     c.        No                   No
     d.        No                  Yes

2.   On July 1, 2007, Cole Co. issued 2,500 shares of its $10 par common stock and 5,000
     shares of its $10 par convertible preferred stock for a lump sum of $125,000. At this date
     Cole's common stock was selling for $24 per share and the convertible preferred stock for
     $18 per share. The amount of the proceeds allocated to Cole's preferred stock should be
     a. $62,500.
     b. $75,000.
     c. $90,000.
     d. $68,750.

3.   Norton Co. was organized on January 2, 2007, with 500,000 authorized shares of $10 par
     value common stock. During 2007, Norton had the following capital transactions:
          January 5—issued 375,000 shares at $14 per share.
          July 27—purchased 25,000 shares at $11 per share.
          November 25—sold 15,000 shares of treasury stock at $13 per share.
     Norton used the cost method to record the purchase of the treasury shares. What would
     be the balance in the Paid-in Capital from Treasury Stock account at December 31, 2007?
     a. $0.
     b. $15,000.
     c. $30,000.
     d. $45,000.

4.   In 2006, Marly Corp. acquired 9,000 shares of its own $1 par value common stock at $18
     per share. In 2007, Marly issued 4,000 of these shares at $25 per share. Marly uses the
     cost method to account for its treasury stock transactions. What accounts and what
     amounts should Marly credit in 2007 to record the issuance of the 4,000 shares?
            Treasury     Additional        Retained        Common
              Stock     Paid-in Capital    Earnings         Stock
     a.      $72,000                        $70,000
     b.      $72,000      $28,000
     c.                   $96,000                            $4,000
     d.                   $68,000           $28,000          $4,000

5.   At its date of incorporation, Wilson, Inc. issued 100,000 shares of its $10 par common
     stock at $11 per share. During the current year, Wilson acquired 20,000 shares of its
     common stock at a price of $16 per share and accounted for them by the cost method.
                                                                                             4
      Subsequently, these shares were reissued at a price of $12 per share. There have been
      no other issuances or acquisitions of its own common stock. What effect does the
      reissuance of the stock have on the following accounts?
           Retained Earnings       Additional Paid-in Capital
      a.       Decrease                   Decrease
      b.       No effect                  Decrease
      c.       Decrease                   No effect
      d.       No effect                  No effect

 6.   Palmer Corp. owned 20,000 shares of Dixon Corp. purchased in 2003 for $240,000. On
      December 15, 2006, Palmer declared a property dividend of all of its Dixon Corp. shares
      on the basis of one share of Dixon for every 10 shares of Palmer common stock held by
      its stockholders. The property dividend was distributed on January 15, 2007. On the
      declaration date, the aggregate market price of the Dixon shares held by Palmer was
      $400,000. The entry to record the declaration of the dividend would include a debit to
      Retained Earnings of
      a. $0.
      b. $160,000.
      c. $240,000.
      d. $400,000.

 7.   A corporation declared a dividend, a portion of which was liquidating. How would this
      distribution affect each of the following?
            Additional
           Paid-in Capital      Retained Earnings
      a.    Decrease              No effect
      b.    Decrease              Decrease
      c.    No effect             Decrease
      d.    No effect             No effect

 8.   On May 1, 2007, Kent Corp. declared and issued a 10% common stock dividend. Prior to
      this dividend, Kent had 100,000 shares of $1 par value common stock issued and
      outstanding. The fair value of Kent 's common stock was $20 per share on May 1, 2007.
      As a result of this stock dividend, Kent's total stockholders' equity
      a. increased by $200,000.
      b. decreased by $200,000.
      c. decreased by $10,000.
      d. did not change.

 9.   How would the declaration and subsequent issuance of a 10% stock dividend by the
      issuer affect each of the following when the market value of the shares exceeds the par
      value of the stock?
                                       Additional
          Common Stock               Paid-in Capital
      a.     No effect                 No effect
      b.     No effect                 Increase
      c.     Increase                  No effect
      d.     Increase                  Increase

10.   On December 31, 2006, the stockholders' equity section of Clark, Inc., was as follows:

                                                                                               5
                 Common stock, par value $10; authorized 30,000 shares;
                   issued and outstanding 9,000 shares                                $ 90,000
                 Additional paid-in capital                                            116,000
                 Retained earnings                                                     174,000
                 Total stockholders' equity                                           $380,000
        On March 31, 2007, Clark declared a 10% stock dividend, and accordingly 900 additional
        shares were issued, when the fair market value of the stock was $18 per share. For the
        three months ended March 31, 2007, Clark sustained a net loss of $32,000. The balance
        of Clark’s retained earnings as of March 31, 2007, should be
        a. $125,800.
        b. $133,000.
        c. $134,800.
        d. $142,000.

11.     At December 31, 2007 and 2008, Sloan Corp. had outstanding 2,000 shares of $100 par
        value 8% cumulative preferred stock and 10,000 shares of $10 par value common stock.
        At December 31, 2007, dividends in arrears on the preferred stock were $8,000. Cash
        dividends declared in 2008 totaled $30,000. What amounts were payable on each class of
        stock?
                 Preferred Stock           Common Stock
        a.         $16,000                   $14,000
        b.         $22,000                   $8,000
        c.         $24,000                   $6,000
        d.         $30,000                   $0

Multiple Choice Answers
 Item   Ans.        Item    Ans.   Item   Ans.    Item   Ans.   Item   Ans.   Item   Ans.
   1.        d         3.    c       5.    c        7.    b       9.    d      11.    c
   2.        b         4.    b       6.    d        8.    d      10.    a


                                           DERIVATIONS
No. Answer Derivation
 1.          d         Conceptual.

 2.          b         ($24 × 2,500) + ($18 × 5,000) = $150,000.

                        $90,000
                       ————— × $125,000 = $75,000.
                       $150,000

 3.          c         15,000 × $2 = $30,000.

 4.          b         (4,000 × $18) = $72,000; (4,000 × $7) = $28,000.

 5.          c         Conceptual.

 6.          d         $400,000 (market value).

 7.          b         Conceptual.
                                                                                                 6
 8.     d       Conceptual.

 9.     d       Conceptual.

10.     a       $174,000 – $32,000 – (900 × $18) = $125,800.

11.     c       ($200,000 × .08) + $8,000 = $24,000
                $30,000 – $24,000 = $6,000.



                          Chapter 16: Dilutive Securities
 1.   On January 2, 2006, Carr Co. issued 10-year convertible bonds at 105. During 2008,
      these bonds were converted into common stock having an aggregate par value equal to
      the total face amount of the bonds. At conversion, the market price of Carr’s common
      stock was 50 percent above its par value. On January 2, 2006, cash proceeds from the
      issuance of the convertible bonds should be reported as
      a. paid-in capital for the entire proceeds.
      b. paid-in capital for the portion of the proceeds attributable to the conversion feature and
          as a liability for the balance.
      c. a liability for the face amount of the bonds and paid-in capital for the premium over the
          face amount.
      d. a liability for the entire proceeds.

 2.   Kane Co. issued bonds with detachable common stock warrants. Only the warrants had a
      known market value. The sum of the fair value of the warrants and the face amount of the
      bonds exceeds the cash proceeds. This excess is reported as
      a. Discount on Bonds Payable.
      b. Premium on Bonds Payable.
      c. Common Stock Subscribed.
      d. Paid-in Capital in Excess of Par—Stock Warrants.

 3.   On January 1, 2007, Doane Corp. granted an employee an option to purchase 6,000
      shares of Doane's $5 par value common stock at $20 per share. The Black-Scholes
      option pricing model determines total compensation expense to be $140,000. The option
      became exercisable on December 31, 2008, after the employee completed two years of
      service. The market prices of Doane's stock were as follows:
             January 1, 2007                           $30
             December 31, 2008                          50
      For 2008, Doane should recognize compensation expense under the fair value method of
      a. $90,000.
      b. $30,000.
      c. $70,000.
      d. $0.

 4.   On January 2, 2007, for past services, Titus Corp. granted Ken Pine, its president, 16,000
      stock appreciation rights that are exercisable immediately and expire on January 2, 2008.
      On exercise, Pine is entitled to receive cash for the excess of the market price of the stock
      on the exercise date over the market price on the grant date. Pine did not exercise any of

                                                                                                 7
           the rights during 2007. The market price of Titus's stock was $30 on January 2, 2007, and
           $45 on December 31, 2007. As a result of the stock appreciation rights, Titus should
           recognize compensation expense for 2007 of
           a. $0.
           b. $80,000.
           c. $240,000.
           d. $480,000.

Multiple Choice Answers—Dilutive Securities
 Item       Ans.   Item   Ans.   Item   Ans.   Item   Ans.
      1.     d       2.    a       3.    c       4.    c



                          DERIVATIONS — Dilutive Securities
No.        Answer Derivation
  1.         d       Conceptual.

  2.         a       Conceptual.

  3.         c       ($140,000) ÷ 2 = $70,000.

  4.         c       ($45 – $30) × 16,000 = $240,000.


                               Chapter 16: Earnings Per Share
  1.       Peine Co. had 300,000 shares of common stock issued and outstanding at December 31,
           2006. No common stock was issued during 2007. On January 1, 2007, Peine issued
           200,000 shares of nonconvertible preferred stock. During 2007, Peine declared and paid
           $100,000 cash dividends on the common stock and $80,000 on the preferred stock. Net
           income for the year ended December 31, 2007 was $620,000. What should be Peine's
           2007 earnings per common share?
           a. $2.07
           b. $1.80
           c. $1.73
           d. $1.47

  2.       At December 31, 2007 and 2006, Glass Corp. had 180,000 shares of common stock and
           10,000 shares of 5%, $100 par value cumulative preferred stock outstanding. No
           dividends were declared on either the preferred or common stock in 2007 or 2006. Net
           income for 2007 was $400,000. For 2007, earnings per common share amounted to
           a. $2.22.
           b. $1.94.
           c. $1.67.
           d. $1.11.
  3.       Royce Co. had 2,400,000 shares of common stock outstanding on January 1 and
           December 31, 2007. In connection with the acquisition of a subsidiary company in June
           2006, Royce is required to issue 100,000 additional shares of its common stock on July 1,
           2008, to the former owners of the subsidiary. Royce paid $200,000 in preferred stock
                                                                                                  8
           dividends in 2007, and reported net income of $3,400,000 for the year. Royce's diluted
           earnings per share for 2007 should be
           a. $1.42.
           b. $1.36.
           c. $1.33.
           d. $1.28.

 4.        Eller, Inc., had 560,000 shares of common stock issued and outstanding at December 31,
           2006. On July 1, 2007, an additional 40,000 shares of common stock were issued for
           cash. Eller also had unexercised stock options to purchase 32,000 shares of common
           stock at $15 per share outstanding at the beginning and end of 2007. The average market
           price of Eller's common stock was $20 during 2007. What is the number of shares that
           should be used in computing diluted earnings per share for the year ended December 31,
           2007?
           a. 580,000
           b. 588,000
           c. 608,000
           d. 612,000

 5.        When computing diluted earnings per share, convertible securities are
           a. ignored.
           b. recognized only if they are dilutive.
           c. recognized only if they are antidilutive.
           d. recognized whether they are dilutive or antidilutive.

 6.        In determining diluted earnings per share, dividends on nonconvertible cumulative
           preferred stock should be
           a. disregarded.
           b. added back to net income whether declared or not.
           c. deducted from net income only if declared.
           d. deducted from net income whether declared or not.

 7.        The if-converted method of computing earnings per share data assumes conversion of
           convertible securities as of the
           a. beginning of the earliest period reported (or at time of issuance, if later).
           b. beginning of the earliest period reported (regardless of time of issuance).
           c. middle of the earliest period reported (regardless of time of issuance).
           d. ending of the earliest period reported (regardless of time of issuance).



Multiple Choice Answers—Earnings Per Share
 Item       Ans.   Item   Ans.   Item   Ans.   Item   Ans.   Item   Ans.   Item   Ans.   Item   Ans.
      1.     b       2.    b       3.    d       4.    b       5.    b       6.    d       7.    a

                          DERIVATIONS — Earnings Per Share
No.        Answer Derivation
 1.          b       $620,000 – $80,000
                     ————————— = $1.80.
                         300,000

                                                                                                       9
2.     b       $400,000 – (10,000 × $100 × .05)
               ——————————————— = $1.94.
                         180,000

3.     d       $3,400,000 – $200,000
               ——————————– = $1.28.
                2,400,000 + 100,000

4.     b       560,000 + (40,000 × 6/12) + [32,000 – (32,000 × $15 ÷ $20)] = 588,000.

5.     b       Conceptual.

6.     d       Conceptual.

7.     a       Conceptual.


                             Chapter 17: INVESTMENTS

1.   On October 1, 2006, Ming Co. purchased 600 of the $1,000 face value, 8% bonds of Loy,
     Inc., for $702,000, including accrued interest of $12,000. The bonds, which mature on
     January 1, 2013, pay interest semiannually on January 1 and July 1. Ming used the
     straight-line method of amortization and appropriately recorded the bonds as available-for-
     sale. On Ming's December 31, 2007 balance sheet, the carrying value of the bonds is
     a. $690,000.
     b. $684,000.
     c. $681,600.
     d. $672,000.

2.   Unruh Corp. began operations in 2007. An analysis of Unruh’s equity securities portfolio
     acquired in 2007 shows the following totals at December 31, 2007 for trading and
     available-for-sale securities:
                                                    Trading       Available-for-Sale
                                                   Securities       Securities
     Aggregate cost                                 $90,000          $110,000
     Aggregate fair value                             65,000            95,000
     What amount should Unruh report in its 2007 income statement for unrealized holding
     loss?
     a. $40,000.
     b. $10,000.
     c. $15,000.
     d. $25,000.


     3. At December 31, 2007, Malle Corp. had the following equity securities that were
        purchased during 2007, its first year of operation:
                                                               Fair  Unrealized
                                                  Cost        Value  Gain (Loss)
     Trading Securities:
        Security A                              $ 90,000    $ 60,000  $(30,000)
                  B                                15,000     20,000     5,000
                                                                                             10
           Totals                                 $105,000      $ 80,000        $(25,000)

       Available-for-Sale Securities:
          Security Y                              $ 70,000      $ 80,000        $ 10,000
                     Z                              85,000        55,000         (30,000)
          Totals                                  $155,000      $135,000        $(20,000)

       All market declines are considered temporary. Fair value adjustments at December 31,
       2007 should be established with a corresponding charge against
           Income      Stockholders’ Equity
       a. $45,000            $ 0
       b. $30,000            $30,000
       c. $25,000            $20,000
       d. $25,000            $ 0

  4.   On December 29, 2008, Greer Co. sold an equity security that had been purchased on
       January 4, 2007. Greer owned no other equity securities. An unrealized holding loss was
       reported in the 2007 income statement. A realized gain was reported in the 2008 income
       statement. Was the equity security classified as available-for-sale and did its 2007 market
       price decline exceed its 2008 market price recovery?
                                      2007 Market Price
                                    Decline Exceeded 2008
           Available-for-Sale       Market Price Recovery
       a.          Yes                       Yes
       b.          Yes                        No
       c.          No                        Yes
       d.          No                         No

Use the following information for questions 5 through 7.

Kimm, Inc. acquired 30% of Carne Corp.'s voting stock on January 1, 2007 for $400,000. During
2007, Carne earned $160,000 and paid dividends of $100,000. Kimm's 30% interest in Carne
gives Kimm the ability to exercise significant influence over Carne's operating and financial
policies. During 2008, Carne earned $200,000 and paid dividends of $60,000 on April 1 and
$60,000 on October 1. On July 1, 2008, Kimm sold half of its stock in Carne for $264,000 cash.

  5.   Before income taxes, what amount should Kimm include in its 2007 income statement as
       a result of the investment?
       a. $160,000.
       b. $100,000.
       c. $48,000.
       d. $30,000.

  6.   The carrying amount of this investment in Kimm's December 31, 2007 balance sheet
       should be
       a. $400,000.
       b. $418,000.
       c. $448,000.
       d. $460,000.

  7.   What should be the gain on sale of this investment in Kimm's 2008 income statement?
                                                                                               11
           a.       $64,000.
           b.       $55,000.
           c.       $49,000.
           d.       $40,000.

 8.        On January 1, 2007, Sloane Co. purchased 25% of Orr Corp.'s common stock; no
           goodwill resulted from the purchase. Sloane appropriately carries this investment at equity
           and the balance in Sloane’s investment account was $720,000 at December 31, 2007. Orr
           reported net income of $450,000 for the year ended December 31, 2007, and paid
           common stock dividends totaling $180,000 during 2007. How much did Sloane pay for its
           25% interest in Orr?
           a. $652,500.
           b. $765,000.
           c. $787,500.
           d. $877,500.

 9.        On December 31, 2006, Nance Co. purchased equity securities as trading securities.
           Pertinent data are as follows:
                                                     Fair Value
                Security                    Cost    At 12/31/07
                  A                       $132,000   $117,000
                  B                        168,000    186,000
                  C                        288,000    258,000
           On December 31, 2007, Nance transferred its investment in security C from trading to
           available-for-sale because Nance intends to retain security C as a long-term investment.
           What total amount of gain or loss on its securities should be included in Nance's income
           statement for the year ended December 31, 2007?
           a. $3,000 gain.
           b. $27,000 loss.
           c. $30,000 loss.
           d. $45,000 loss.



Multiple Choice Answers
 Item       Ans.       Item    Ans.   Item     Ans.   Item   Ans.   Item   Ans.
      1.        d         3.    c         5.    c       7.    c       9.    b
      2.        d         4.    d         6.    b       8.    a



                                                DERIVATIONS
No.        Answer Derivation
 1.             d        $702,000 – $12,000 = $690,000
                                              15
                                      (
                         $690,000 – $90,000 × —
                                              75
                                                        ) = $672,000.
 2.             d        $90,000 – $65,000 = $25,000.

                                                                                                   12
  3.     c

  4.     d      Conceptual.

  5.     c      $160,000 × 30% = $48,000.

  6.     b      $400,000 + $48,000 – ($100,000 × 30%) = $418,000.

  7.     c      $418,000 – ($60,000 × 30%) + ($200,000 × 50% × 30%) = $430,000.
                $264,000 – ($430,000 ÷ 2) = $49,000.

  8.     a      $720,000 – ($450,000 × 25%) + ($180,000 × 25%) = $652,500.

9. b     $18,000 – $15,000 – $30,000 = $27,000 loss.



                      Chapter 18: REVENUE RECOGNITION

  1.   According to the FASB's conceptual framework, the process of reporting an item in the
       financial statements of an entity is
       a. recognition.
       b. realization.
       c. allocation.
       d. matching.

  2.   Flynn Construction Co. has consistently used the percentage-of-completion method of
       recognizing revenue. During 2007, Flynn entered into a fixed-price contract to construct
       an office building for $12,000,000. Information relating to the contract is as follows:
                                                                    At December 31
                                                                2007                2008
           Percentage of completion                              15%                 45%
           Estimated total cost at completion                $9,000,000          $9,600,000
           Gross profit recognized (cumulative)                 600,000           1,440,000
       Contract costs incurred during 2008 were
       a. $2,880,000.
       b. $2,970,000.
       c. $3,150,000.
       d. $4,320,000.

  3.   Noland Constructors, Inc. has consistently used the percentage-of-completion method of
       recognizing income. In 2007, Noland started work on a $35,000,000 construction contract
       that was completed in 2008. The following information was taken from Noland's 2007
       accounting records:
             Progress billings                            $11,000,000
             Costs incurred                                10,500,000
             Collections                                     7,000,000
             Estimated costs to complete                   21,000,000
       What amount of gross profit should Noland have recognized in 2007 on this contract?
       a. $3,500,000
       b. $2,333,334
                                                                                             13
     c. $1,750,000
     d. $1,166,667

4.   During 2007, Eaton Corp. started a construction job with a total contract price of
     $3,500,000. The job was completed on December 15, 2008. Additional data are as follows:
                                                               2007              2008
        Actual costs incurred                                $1,350,000        $1,525,000
        Estimated remaining costs                             1,350,000             —
        Billed to customer                                    1,200,000         2,300,000
        Received from customer                                1,000,000         2,400,000
     Under the completed-contract method, what amount should Eaton recognize as gross
     profit for 2008?
     a. $225,000
     b. $312,500
     c. $475,000
     d. $625,000
5.   Penny Farms produced 800,000 pounds of cotton during the 2007 season. Penny sells all
     of its cotton to Bye Co., which has agreed to purchase Penny's entire production at the
     prevailing market price. Recent legislation assures that the market price will not fall below
     $.70 per pound during the next two years. Penny's costs of selling and distributing the
     cotton are immaterial and can be reasonably estimated. Penny reports its inventory at
     expected exit value. During 2007, Penny sold and delivered to Bye 600,000 pounds at the
     market price of $.70. Penny sold the remaining 200,000 pounds during 2008 at the market
     price of $.72. What amount of revenue should Penny recognize in 2007?
     a. $420,000
     b. $432,000
     c. $560,000
     d. $576,000

6.   Klugg, Inc. appropriately uses the installment-sales method of accounting to recognize
     income in its financial statements. Some pertinent data relating to this method of
     accounting include:
                                                                      2007       2008
     Installment sales                                              $750,000 $720,000
     Cost of installment sales                                       570,000    504,000
     Gross profit                                                   $180,000 $216,000

     Rate of gross profit                                                  24%          30%

     Balance of deferred gross profit at year end:
        2007                                                            $108,000    $ 36,000
        2008                                                                         198,000
           Total                                                        $108,000    $234,000
     What amount of installment accounts receivable should be presented in Klugg's
     December 31, 2008 balance sheet?
     a. $720,000
     b. $810,000
     c. $780,000
     d. $866,666


                                                                                               14
 7.   Neber Co., which began operations on January 1, 2007, appropriately uses the
      installment-sales method of accounting. The following information pertains to Neber's
      operations for the year 2007:
         Installment sales                                        $1,200,000
         Regular sales                                               480,000
         Cost of installment sales                                   720,000
         Cost of regular sales                                       288,000
         General and administrative expenses                          96,000
         Collections on installment sales                            288,000
      The deferred gross profit account in Neber's December 31, 2007 balance sheet should be
      a. $115,200.
      b. $192,000.
      c. $364,800.
      d. $480,000.

 8.   On January 1, 2007, Stein Co. sold a used machine to Mays, Inc. for $350,000. On this
      date, the machine had a depreciated cost of $245,000. Mays paid $50,000 cash on
      January 1, 2007 and signed a $300,000 note bearing interest at 10%. The note was
      payable in three annual installments of $100,000 beginning January 1, 2008. Stein
      appropriately accounted for the sale under the installment method. Mays made a timely
      payment of the first installment on January 1, 2008 of $130,000, which included interest of
      $30,000 to date of payment. At December 31, 2008, Stein has deferred gross profit of
      a. $70,000.
      b. $66,000.
      c. $60,000.
      d. $51,000.

 9.   Grant Co. began operations on January 1, 2007 and appropriately uses the installment
      method of accounting. The following information pertains to Grant's operations for 2007:
         Installment sales                                             1,800,000
         Cost of installment sales                                     1,080,000
         General and administrative expenses                             180,000
         Collections on installment sales                                825,000
      The balance in the deferred gross profit account at December 31, 2007 should be
      a. $330,000.
      b. $495,000.
      c. $390,000.
      d. $720,000.

10.   Lott Co. records all sales using the installment method of accounting. Installment sales
      contracts call for 36 equal monthly cash payments. According to the FASB's conceptual
      framework, the amount of deferred gross profit relating to collections 12 months beyond
      the balance sheet date should be reported in the
      a. current liabilities section as a deferred revenue.
      b. noncurrent liabilities section as a deferred revenue.
      c. current assets section as a contra account.
      d. noncurrent assets section as a contra account.

11.   Alton, Inc. is a retailer of home appliances and offers a service contract on each appliance
      sold. Alton sells appliances on installment contracts, but all service contracts must be paid
                                                                                                15
           in full at the time of sale. Collections received for service contracts should be recorded as
           an increase in a
           a. deferred revenue account.
           b. sales contracts receivable valuation account.
           c. stockholders' valuation account.
           d. service revenue account.




Multiple Choice Answers
 Item       Ans.   Item    Ans.   Item   Ans.   Item   Ans.   Item   Ans.   Item   Ans.
      1.     a       3.     d       5.    c       7.    c       9.    c      11.    a
      2.     b       4.     d       6.    b       8.    c      10.    c


                                          DERIVATIONS
No.        Answer Derivation
 1.          a       Conceptual.

 2.          b       ($9,600,000 ×45%) – ($9,000,000 ×15%) = $2,970,000.

                     $10,500,000
 3.          d       —————— ×($35,000,000 – $31,500,000) = $1,166,667.
                     $31,500,000

 4.          d       $3,500,000 – $1,350,000 – $1,525,000 = $625,000.

 5.          c       800,000 lbs. ×$.70 = $560,000.

 6.          b       ($36,000 ÷ 24%) + ($198,000 ÷ 30%) = $810,000.

 7.          c       $1,200,000 – $720,000 = $480,000 gross profit (40% gross profit rate)
                     $480,000 – ($288,000 ×.4) = $364,800.

 8.          c       $300,000 + $50,000 = $350,000
                     $350,000 – $245,000 = $105,000 gross profit (30% gross profit rate)
                     ($300,000 – $100,000) × 30% = $60,000.

 9.          c       $1,800,000 – $1,080,000 = $720,000 (40% gross profit rate)
                     $720,000 – ($825,000 ×40%) = $390,000.

10.          c       Conceptual.

11.          a       Conceptual.



                          Chapter 20: ACCOUNTING FOR PENSIONS
                             AND POSTRETIREMENT BENEFITS
                                                                                                     16
1.   The following information pertains to Mellon Co.'s pension plan:
        Actuarial estimate of projected benefit obligation at 1/1/08    $72,000
        Assumed discount rate                                              10%
        Service costs for 2008                                          $18,000
        Pension benefits paid during 2008                               $15,000


     If no change in actuarial estimates occurred during 2008, Mellon's projected benefit
     obligation at December 31, 2008 was
     a. $64,200.
     b. $75,000.
     c. $79,200.
     d. $82,200.

2.   Interest cost included in the net pension cost recognized for a period by an employer
     sponsoring a defined-benefit pension plan represents the
     a. shortage between the expected and actual returns on plan assets.
     b. increase in the projected benefit obligation due to the passage of time.
     c. increase in the fair value of plan assets due to the passage of time.
     d. amortization of the discount on unrecognized prior service cost.

3.   On January 1, 2008, Pratt Corp. adopted a defined-benefit pension plan. The plan's
     service cost of $300,000 was fully funded at the end of 2008. Prior service cost was
     funded by a contribution of $120,000 in 2008. Amortization of prior service cost was
     $48,000 for 2008. What is the amount of Pratt’s prepaid pension cost at December 31,
     2008?
     a. $72,000
     b. $120,000
     c. $168,000
     d. $180,000

4.   Reser Corp., a company whose stock is publicly traded, provides a noncontributory
     defined-benefit pension plan for its employees. The company's actuary has provided the
     following information for the year ended December 31, 2008:
          Projected benefit obligation                             $600,000
          Accumulated benefit obligation                            525,000
          Fair value of plan assets                                 825,000
          Service cost                                              240,000
          Interest on projected benefit obligation                   24,000
          Amortization of unrecognized prior service cost            60,000
          Expected and actual return on plan assets                  82,500
     The market-related asset value equals the fair value of plan assets. Prior contributions to
     the defined-benefit pension plan equaled the amount of net periodic pension cost accrued
     for the previous year end. No contributions have been made for 2008 pension cost. In its
     December 31, 2008 balance sheet, Reser should report an accrued pension cost of
     a. $406,500.
     b. $324,000.
     c. $241,500.
     d. $217,500.

                                                                                             17
  5.   Effective January 1, 2007, Quayle Co. established a defined-benefit plan with no retro-
       active benefits. The first of the required equal annual contributions was paid on December
       31, 2007. A 10% discount rate was used to calculate service cost and a 10% rate of return
       was assumed for plan assets. All information on covered employees for 2007 and 2008 is
       the same. How should the service cost for 2008 compare with 2007, and should the 2007
       balance sheet report an accrued or a prepaid pension cost?
              Service Cost                Pension Cost
                for 2008                 Reported on the
           Compared to 2007            2007 Balance Sheet
       a.       Equal to                    Accrued
       b.       Equal to                     Prepaid
       c.     Greater than                  Accrued
       d.     Greater than                   Prepaid
Use the following information for questions 6 and 7.

Tomlin Co. provides retirement benefits to employees through a funded defined-benefit pension
plan. The company administering the plan provided the following information for the year ended
December 31, 2008:
           Plan assets at fair value                                $1,200,000
           Accumulated benefit obligation                            1,335,000
           Pension expense                                             300,000
           Employer's contribution, 12/1/08                            360,000
           Unrecognized prior service cost                              30,000

On December 31, 2007, the accrued/prepaid pension cost account had a debit balance of
$45,000. Assume that the fair value of the plan assets is equal to the market-related asset value.
Prior to 2008, the fair value of plan assets exceeded the accumulated benefit obligation.

  6.   At December 31, 2008, what is the amount of prepaid pension cost?
       a. $105,000
       b. $90,000
       c. $60,000
       d. $15,000

  7.   In Tomlin's December 31, 2008 balance sheet, what is the amount of the minimum
       pension liability?
       a. $30,000
       b. $60,000
       c. $135,000
       d. $240,000

 8.    Yeager Co. maintains a defined-benefit pension plan for its employees. At each balance
       sheet date, Yeager should report a minimum liability at least equal to the
       a. accumulated benefit obligation.
       b. projected benefit obligation.
       c. unfunded accumulated benefit obligation.
       d. unfunded projected benefit obligation.

  9.   Ohlman, Inc. maintains a defined-benefit pension plan for its employees. As of December
       31, 2008, the market value of the plan assets is less than the accumulated benefit
                                                                                               18
           obligation. The projected benefit obligation exceeds the accumulated benefit obligation. In
           its balance sheet as of December 31, 2008, Ohlman should report a minimum liability in
           the amount of the
           a. excess of the projected benefit obligation over the value of the plan assets.
           b. excess of the accumulated benefit obligation over the value of the plan assets.
           c. projected benefit obligation.
           d. accumulated benefit obligation.

10.        At December 31, 2008, the following information was provided by the Nilges Corp.
           pension plan administrator:
              Fair value of plan assets                     $4,500,000
              Accumulated benefit obligation                 5,580,000
              Projected benefit obligation                   7,200,000
           What is the amount of the pension liability that should be shown on Nilges' December 31,
           2008 balance sheet?
           a. $7,200,000
           b. $2,700,000
           c. $1,620,000
           d. $1,080,000


Multiple Choice Answers
 Item       Ans.   Item   Ans.   Item   Ans.   Item   Ans.   Item   Ans.
      1.     d       3.    a       5.    d       7.    c       9.    b
      2.     b       4.    c       6.    a       8.    c      10.    d



                                         DERIVATIONS
No.        Answer Derivation
 1.          d       $72,000 + $18,000 + ($72,000 × .10) – $15,000 = $82,200.

 2.          b       Conceptual.

  3.         a       ($300,000 + $120,000) – ($300,000 + $48,000) = $72,000.

 4.          c       $240,000 + $24,000 – $82,500 + $60,000 = $241,500.

 5.          d       Conceptual.
 6.          a       $360,000 – $300,000 + $45,000 = $105,000.

 7.          c       $1,335,000 – $1,200,000 = $135,000.

 8.          c       Conceptual.

 9.          b       Conceptual.

10.          d       $5,580,000 – $4,500,000 = $1,080,000.


                                                                                                   19
                     Chapter 21: ACCOUNTING FOR LEASES
  1.   Lease A does not contain a bargain purchase option, but the lease term is equal to 90
       percent of the estimated economic life of the leased property. Lease B does not transfer
       ownership of the property to the lessee by the end of the lease term, but the lease term is
       equal to 75 percent of the estimated economic life of the leased property. How should the
       lessee classify these leases?
              Lease A                  Lease B
       a. Operating lease            Capital lease
       b. Operating lease            Operating lease
       c. Capital lease              Capital lease
       d. Capital lease              Operating lease

  2.   On December 31, 2008, Mendez, Inc. leased machinery with a fair value of $840,000 from
       Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual
       payments of $160,000 beginning December 31, 2008. The lease is appropriately
       accounted for by Mendez as a capital lease. Mendez's incremental borrowing rate is 11%.
       Mendez knows the interest rate implicit in the lease payments is 10%.
           The present value of an annuity due of 1 for 6 years at 10% is 4.7908.
           The present value of an annuity due of 1 for 6 years at 11% is 4.6959.

       In its December 31, 2008 balance sheet, Mendez should report a lease liability of
       a. $606,528.
       b. $680,000.
       c. $751,344.
       d. $766,528.

  3.   On December 31, 2007, Patten Co. leased a machine from Bass, Inc. for a five-year
       period. Equal annual payments under the lease are $630,000 (including $30,000 annual
       executory costs) and are due on December 31 of each year. The first payment was made
       on December 31, 2007, and the second payment was made on December 31, 2008. The
       five lease payments are discounted at 10% over the lease term. The present value of
       minimum lease payments at the inception of the lease and before the first annual payment
       was $2,502,000. The lease is appropriately accounted for as a capital lease by Patten. In
       its December 31, 2008 balance sheet, Patten should report a lease liability of
       a. $1,902,000.
       b. $1,872,000.
       c. $1,711,800.
       d. $1,492,200.

  4.   A lessee had a ten-year capital lease requiring equal annual payments. The reduction of
       the lease liability in year 2 should equal
       a. the current liability shown for the lease at the end of year 1.
       b. the current liability shown for the lease at the end of year 2.
       c. the reduction of the lease liability in year 1.
       d. one-tenth of the original lease liability.

Use the following information for questions 5 and 6.


                                                                                               20
On January 2, 2008, Martinez, Inc. signed a ten-year noncancelable lease for a heavy duty drill
press. The lease stipulated annual payments of $150,000 starting at the end of the first year, with
title passing to Martinez at the expiration of the lease. Martinez treated this transaction as a
capital lease. The drill press has an estimated useful life of 15 years, with no salvage value.
Martinez uses straight-line depreciation for all of its plant assets. Aggregate lease payments were
determined to have a present value of $900,000, based on implicit interest of 10%.

  5.   In its 2008 income statement, what amount of interest expense should Martinez report
       from this lease transaction?
       a. $0
       b. $56,250
       c. $75,000
       d. $90,000

  6.   In its 2008 income statement, what amount of depreciation expense should Martinez
       report from this lease transaction?
       a. $150,000
       b. $100,000
       c. $90,000
       d. $60,000

  7.   In a lease that is recorded as a sales-type lease by the lessor, interest revenue
       a. should be recognized in full as revenue at the lease's inception.
       b. should be recognized over the period of the lease using the straight-line method.
       c. should be recognized over the period of the lease using the effective interest method.
       d. does not arise.

  8.   Castro Co. manufactures equipment that is sold or leased. On December 31, 2008,
       Castro leased equipment to Ermler for a five-year period ending December 31, 2013, at
       which date ownership of the leased asset will be transferred to Ermler. Equal payments
       under the lease are $220,000 (including $20,000 executory costs) and are due on
       December 31 of each year. The first payment was made on December 31, 2008.
       Collectibility of the remaining lease payments is reasonably assured, and Castro has no
       material cost uncertainties. The normal sales price of the equipment is $770,000, and cost
       is $600,000. For the year ended December 31, 2008, what amount of income should
       Castro realize from the lease transaction?
       a. $170,000
       b. $220,000
       c. $230,000
       d. $330,000

  9.   Carey sold its headquarters building at a gain, and simultaneously leased back the
       building. The lease was reported as a capital lease. At the time of the sale, the gain
       should be reported as
       a. operating income.
       b. an extraordinary item, net of income tax.
       c. a separate component of stockholders' equity.
       d. a deferred gain.

 10.   On December 31, 2008, Devin Corp. sold a machine to Ryan and simultaneously leased it
       back for one year. Pertinent information at this date follows:

                                                                                                21
                 Sales price                                                 $900,000
                 Carrying amount                                              825,000
                 Present value of reasonable lease rentals
                   ($7,500 for 12 months @ 12%)                               85,000
                 Estimated remaining useful life                             12 years
           In Devin’s December 31, 2008 balance sheet, the deferred profit from the sale of this
           machine should be
           a. $85,000.
           b. $75,000.
           c. $10,000.
           d. $0.


Multiple Choice Answers
 Item       Ans.     Item   Ans.   Item   Ans.   Item   Ans.   Item   Ans.
      1.     c         3.    d       5.    d       7.    c       9.    d
      2.     a         4.    a       6.    d       8.    a      10.    d

                                           DERIVATIONS
No.        Answer Derivation
 1.          c         Conceptual.

 2.          a         ($160,000 × 4.7908) – $160,000 = $606,528.

 3.          d         $2,502,000 – $630,000 + $30,000 = $1,902,000 (2007).
                       $1,902,000 – [$600,000 – ($1,902,000 × .10)] = $1,492,200 (2008).

 4.          a         Conceptual.

 5.          d         $900,000 × .10 = $90,000.

 6.          d         $900,000 ÷ 15 = $60,000.

 7.          c         Conceptual.

 8.          a         $770,000 – $600,000 = $170,000.

 9.          d         Conceptual.

10.          d          $85,000
                       ———— = 9.44%, < 10% of FV of asset  it is a minor leaseback.
                       $900,000


           Chapter 22: ACCOUNTING CHANGES AND ERROR ANALYSIS
 1.        Which of the following should be reported as a prior period adjustment?
                    Change in                   Change from
                 Estimated Lives             Unaccepted Principle
                                                                                             22
          of Depreciable Assets        to Accepted Principle
     a.           Yes                          Yes
     b.            No                          Yes
     c.           Yes                           No
     d.            No                           No

2.   On December 31, 2008, Ellworth, Inc. appropriately changed its inventory valuation
     method to FIFO cost from weighted-average cost for financial statement and income tax
     purposes. The change will result in a $1,500,000 increase in the beginning inventory at
     January 1, 2008. Assume a 30% income tax rate. The cumulative effect of this accounting
     change on beginning retained earnings is
     a. $0.
     b. $450,000.
     c. $1,050,000.
     d. $1,500,000.

3.   On January 1, 2008, Bosco Corp. changed its inventory method to FIFO from LIFO for
     both financial and income tax reporting purposes. The change resulted in an $800,000
     increase in the January 1, 2008 inventory. Assume that the income tax rate for all years is
     30%. The cumulative effect of the accounting change should be reported by Bosco in its
     2008
     a. retained earnings statement as a $560,000 addition to the beginning balance.
     b. income statement as a $560,000 cumulative effect of accounting change.
     c. retained earnings statement as an $800,000 addition to the beginning balance.
     d. income statement as an $800,000 cumulative effect of accounting change.

4.   On January 1, 2005, Dent Co. purchased a machine for $792,000 and depreciated it by
     the straight-line method using an estimated useful life of eight years with no salvage
     value. On January 1, 2008, Dent determined that the machine had a useful life of six
     years from the date of acquisition and will have a salvage value of $72,000. An accounting
     change was made in 2008 to reflect these additional data. The accumulated depreciation
     for this machine should have a balance at December 31, 2008 of
     a. $438,000.
     b. $462,000.
     c. $480,000.
     d. $528,000.

5.   On January 1, 2005, Neer Co. purchased a patent for $595,000. The patent is being
     amortized over its remaining legal life of 15 years expiring on January 1, 2020. During
     2008, Neer determined that the economic benefits of the patent would not last longer than
     ten years from the date of acquisition. What amount should be reported in the balance
     sheet for the patent, net of accumulated amortization, at December 31, 2008?
     a. $357,000
     b. $408,000
     c. $420,000
     d. $436,375

6.   During 2007, a textbook written by Givens Co. personnel was sold to Grand Publishing,
     Inc., for royalties of 10% on sales. Royalties are receivable semiannually on March 31, for
     sales in July through December of the prior year, and on September 30, for sales in
     January through June of the same year.

                                                                                             23
            Royalty income of $108,000 was accrued at 12/31/07 for the period July-December
             2007.
         Royalty income of $120,000 was received on 3/31/08, and $156,000 on 9/30/08.
         Givens learned from Grand that sales subject to royalty were estimated at $1,620,000
             for the last half of 2008.
        In its income statement for 2008, Givens should report royalty income at
        a. $276,000.
        b. $288,000.
        c. $318,000.
        d. $330,000.

 7.     On January 1, 2007, Gregg Corp. acquired a machine at a cost of $500,000. It is to be
        depreciated on the straight-line method over a five-year period with no residual value.
        Because of a bookkeeping error, no depreciation was recognized in Gregg's 2007
        financial statements. The oversight was discovered during the preparation of Gregg's
        2008 financial statements. Depreciation expense on this machine for 2008 should be
        a. $0.
        b. $100,000.
        c. $125,000.
        d. $200,000.

 8.     On December 31, 2008, special insurance costs, incurred but unpaid, were not recorded.
        If these insurance costs were related to work in process, what is the effect of the omission
        on accrued liabilities and retained earnings in the December 31, 2008 balance sheet?
                 Accrued Liabilities        Retained Earnings
        a.           No effect                  No effect
        b.           No effect                 Overstated
        c.         Understated                  No effect
        d.         Understated                 Overstated

 9.     Early, Inc. is a calendar-year corporation whose financial statements for 2007 and 2008
        included errors as follows:
                 Year           Ending Inventory                 Depreciation Expense
                 2007         $162,000 overstated                $135,000 overstated
                 2008           54,000 understated                 45,000 understated
        Assume that purchases were recorded correctly and that no correcting entries were made
        at December 31, 2007, or at December 31, 2008. Ignoring income taxes, by how much
        should Early's retained earnings be retroactively adjusted at January 1, 2009?
        a. $144,000 increase
        b. $36,000 increase
        c. $18,000 decrease
        d. $9,000 increase


Multiple Choice Answers
 Item   Ans.         Item    Ans.   Item    Ans.   Item   Ans.    Item    Ans.
   1.        b          3.    a        4.     b      7.    b         9.    a
   2.        c          4.    a        6.     d      8.    c


                                                                                                 24
                                      DERIVATIONS
No. Answer       Derivation
  1.      b      Conceptual.

  2.      c      $1,500,000 × (1 – .3) = $1,050,000.

  3.      a      $800,000 × (1 – .3) = $560,000.

  4.      a      $792,000 × 3/8 = $297,000
                 $297,000 + [($792,000 – $297,000 – $72,000) × 1/3] = $438,000.

  5.      b      $595,000 × 3/15 = $119,000
                 $595,000 – $119,000 – [($595,000 – $119,000) × 1/7] = $408,000.

  6.      d      ($120,000 – $108,000) + $156,000 + ($1,620,000 × .10) = $330,000.

  7.      b      $500,000 ÷ 5 = $100,000.

  8.      c      Conceptual.

  9.      a      $54,000 (u) + $135,000 (u) – $45,000 (o) = $144,000 (u).



                  Chapter 23: STATEMENT OF CASH FLOWS
Use the following information for questions 1 and 2.
A company acquired a building, paying a portion of the purchase price in cash and issuing a
mortgage note payable to the seller for the balance.

  1.   In a statement of cash flows, what amount is included in investing activities for the above
       transaction?
       a. Cash payment
       b. Acquisition price
       c. Zero
       d. Mortgage amount

  2.   In a statement of cash flows, what amount is included in financing activities for the above
       transaction?
       a. Cash payment
       b. Acquisition price
       c. Zero
       d. Mortgage amount

Use the following information for questions 3 and 4.
Kerwin Corp.'s transactions for the year ended December 31, 2008 included the following:
 Purchased real estate for $550,000 cash which was borrowed from a bank.
 Sold available-for-sale securities for $500,000.
                                                                                               25
    Paid dividends of $600,000.
    Issued 500 shares of common stock for $250,000.
    Purchased machinery and equipment for $125,000 cash.
    Paid $450,000 toward a bank loan.
    Reduced accounts receivable by $100,000.
    Increased accounts payable $200,000.

    3.   Kerwin's net cash used in investing activities for 2008 was
         a. $675,000.
         b. $375,000.
         c. $175,000.
         d. $50,000.

    4.   Kerwin's net cash used in financing activities for 2008 was
         a. $50,000.
         b. $250,000.
         c. $450,000.
         d. $500,000.

Use the following information for questions 5 and 6.
Miloy Corp.'s transactions for the year ended December 31, 2008 included the following:
    Acquired 50% of Gant Corp.'s common stock for $180,000 cash which was borrowed from a
     bank.
    Issued 5,000 shares of its preferred stock for land having a fair value of $320,000.
    Issued 500 of its 11% debenture bonds, due 2013, for $392,000 cash.
    Purchased a patent for $220,000 cash.
    Paid $120,000 toward a bank loan.
    Sold available-for-sale securities for $796,000.
    Had a net increase in returnable customer deposits (long-term) of $88,000.

    5.   Miloy’s net cash provided by investing activities for 2008 was
         a. $296,000.
         b. $396,000.
         c. $476,000.
         d. $616,000.

    6.   Miloy’s net cash provided by financing activities for 2008 was
         a. $452,000.
         b. $540,000.
         c. $572,000.
         d. $660,000.

Use the following information for questions 7 through 9.
Talbert Corp.'s balance sheet accounts as of December 31, 2008 and 2007 and information
relating to 2008 activities are presented below.
                                                                December 31,
                                                           2008           2007
       Assets
       Cash                                             $ 440,000       $ 200,000
                                                                                     26
       Short-term investments                                      600,000           —
       Accounts receivable (net)                                 1,020,000       1,020,000
       Inventory                                                 1,380,000       1,200,000
       Long-term investments                                       400,000         600,000
       Plant assets                                              3,400,000       2,000,000
       Accumulated depreciation                                   (900,000)       (900,000)
       Patent                                                      180,000         200,000
             Total assets                                       $6,520,000      $4,320,000

       Liabilities and Stockholders' Equity
       Accounts payable and accrued liabilities                 $1,660,000      $1,440,000
       Notes payable (nontrade)                                    580,000           —
       Common stock, $10 par                                     1,600,000       1,400,000
       Additional paid-in capital                                  800,000         500,000
       Retained earnings                                         1,880,000         980,000
              Total liabilities and stockholders' equity        $6,520,000      $4,320,000

Information relating to 2008 activities:
 Net income for 2008 was $1,500,000.
 Cash dividends of $600,000 were declared and paid in 2008.
 Equipment costing $1,000,000 and having a carrying amount of $320,000 was sold in 2008
    for $360,000.
 A long-term investment was sold in 2008 for $320,000. There were no other transactions
    affecting long-term investments in 2008.
 20,000 shares of common stock were issued in 2008 for $25 a share.
 Short-term investments consist of treasury bills maturing on 6/30/09.

  7.     Net cash provided by Talbert’s 2008 operating activities was
         a. $1,500,000.
         b. $2,120,000.
         c. $2,080,000.
         d. $2,160,000.

  8.     Net cash used in Talbert’s 2008 investing activities was
         a. $2,320,000.
         b. $1,820,000.
         c. $1,680,000.
         d. $1,720,000.
  9.     Net cash provided by Talbert’s 2008 financing activities was
         a. $480,000.
         b. $520,000.
         c. $1,080,000.
         d. $1,680,000.

 10.     Bell Corp.'s comparative balance sheet at December 31, 2008 and 2007 reported
         accumulated depreciation balances of $800,000 and $600,000, respectively. Property with
         a cost of $50,000 and a carrying amount of $38,000 was the only property sold in 2008.
         Depreciation charged to operations in 2008 was
         a. $188,000.
         b. $200,000.
         c. $212,000.
                                                                                              27
        d. $224,000.

11.     Walsh Co.'s prepaid insurance was $90,000 at December 31, 2008 and $45,000 at
        December 31, 2007. Insurance expense was $36,000 for 2008 and $27,000 for 2007.
        What amount of cash disbursements for insurance would be reported in Walsh's 2008 net
        cash provided by operating activities presented on a direct basis?
        a. $99,000.
        b. $81,000.
        c. $54,000.
        d. $36,000.


Multiple Choice Answers
 Item   Ans.   Item    Ans.   Item   Ans.   Item   Ans.   Item   Ans.   Item   Ans.
   1.     a      3.     c       5.    b       7.    c       9.    a     11.     b
   2.     c      4.     b       6.    b       8.    d      10.    c


                                      DERIVATIONS
No. Answer       Derivation
  1.      a      Conceptual.

  2.      c      Conceptual.

  3.      c      ($550,000) + $500,000 – $125,000 = ($175,000).

  4.      b      $550,000 – $600,000 + $250,000 – $450,000 = ($250,000).

  5.      b      ($180,000) – $220,000 + $796,000 = $396,000.

  6.      b      $180,000 + $392,000 – $120,000 + $88,000 = $540,000.

  7.      c      $1,500,000 – $180,000 + ($900,000 – $900,000 + $680,000) + ($360,000 –
                 $320,000) + $20,000 + $220,000 – ($320,000 – $200,000) = $2,080,000.


  8.      a      $320,000 + $360,000 – ($3,400,000 + $1,000,000 – $2,000,000) = $1,720,000.

  9.      a      20,000 × $25 = $500,000
                 $500,000 + $580,000 – $600,000 = $480,000.

 10.      c      $800,000 – $600,000 + ($50,000 – $38,000) = $212,000.

11.       b      $90,000 + $36,000 – $45,000 = $81,000.


        Chapter 24: FULL DISCLOSURE IN FINANCIAL REPORTING


                                                                                          28
1.   Which of the following facts concerning plant assets should be included in the summary of
     significant accounting policies?
          Depreciation Method      Composition
     a.           No                  Yes
     b.           Yes                 Yes
     c.           Yes                 No
     d.           No                  No

2.   Parr, Inc. is a multidivisional corporation which has both intersegment sales and sales to
     unaffiliated customers. Parr should report segment financial information for each division
     meeting which of the following criteria?
     a. Segment profit or loss is 10% or more of consolidated profit or loss.
     b. Segment profit or loss is 10% or more of combined profit or loss of all company
        segments.
     c. Segment revenue is 10% or more of combined revenue of all the company segments.
     d. Segment revenue is 10% or more of consolidated revenue.

3.   Reese Corp. and its divisions are engaged solely in manufacturing operations. The
     following data (consistent with prior years' data) pertain to the industries in which
     operations were conducted for the year ended December 31, 2008.
                                                               Assets
         Industry          Revenue             Profit          12/31/08
            A           $ 8,000,000         $1,320,000      $16,000,000
            B              6,400,000         1,120,000       14,000,000
            C              4,800,000           960,000       10,000,000
            D              2,400,000           440,000         5,200,000
            E              3,400,000           540,000         5,600,000
            F              1,200,000           180,000         2,400,000
                        $26,200,000         $4,560,000      $53,200,000
     In its segment information for 2008, how many reportable segments does Reese have?
     a. Three
     b. Four
     c. Five
     d. Six

4.   The following information pertains to Maris Corp. and its divisions for the year ended
     December 31, 2008.
        Sales to unaffiliated customers                                  $2,500,000
        Intersegment sales of products similar to those sold to
            unaffiliated customers                                          750,000
        Interest earned on loans to other operating segments                 50,000
     Maris and all of its divisions are engaged solely in manufacturing operations. Maris has a
     reportable segment if that segment's revenue exceeds
     a. $330,000.
     b. $325,000.
     c. $255,000.
     d. $250,000.

5.   Advertising costs may be accrued or deferred to provide an appropriate expense in each
     period for
                                                                                         29
                Interim              Year-end
          Financial Reporting   Financial Reporting
     a.           Yes                   No
     b.           Yes                  Yes
     c.           No                    No
     d.           No                   Yes

6.   Lane Corp. has estimated that total depreciation expense for the year ending December
     31, 2008 will amount to $300,000, and that 2008 year-end bonuses to employees will total
     $600,000. In Lane's interim income statement for the six months ended June 30, 2008,
     what is the total amount of expense relating to these two items that should be reported?
     a. $0.
     b. $150,000.
     c. $450,000.
     d. $900,000.




                                                                                          30
 7.     Eddy Corp. had the following transactions during the quarter ended March 31, 2008:
              Loss from hurricane damage                                           $350,000
              Payment of fire insurance premium for calendar year 2008              500,000
        What amount should be included in Eddy's income statement for the quarter ended March
        31, 2008?
            Extraordinary Loss        Insurance Expense
        a.      $350,000                   $500,000
        b.      $350,000                   $125,000
        c.      $87,500                    $125,000
        d.      $0                         $500,000

 8.     For interim financial reporting, an extraordinary gain occurring in the second quarter
        should be
        a. recognized ratably over the last three quarters.
        b. recognized ratably over all four quarters with the first quarter being restated.
        c. recognized in the second quarter.
        d. disclosed by note only in the second quarter.

 9.     How is the average inventory used in the calculation of each of the following?
           Acid-Test (Quick) Ratio     Inventory Turnover Ratio
        a.       Numerator                     Numerator
        b.       Numerator                   Denominator
        c.        Not Used                   Denominator
        d.        Not Used                     Numerator

10.     Which of the following ratios is(are) useful in assessing a company's ability to meet
        current maturing or short-term obligations?
           Acid-Test Ratio Debt to Total Assets Ratio
        a.       No                       No
        b.       No                      Yes
        c.       Yes                     Yes
        d.       Yes                      No

11.     Which of the following ratios should be used in evaluating the effectiveness with which the
        company uses its assets?
           Receivables Turnover       Payout Ratio
        a.         Yes                    Yes
        b.          No                    No
        c.         Yes                    No
        d.          No                    Yes


Multiple Choice Answers
 Item   Ans.     Item    Ans.   Item   Ans.   Item   Ans.   Item   Ans.   Item   Ans.
   1.     c         3.    b       5.    b       7.    b       9.    c      11.    c
   2.     c         4.    b       6.    c       8.    c      10.    d




                                                                                                31
                                DERIVATIONS
No.   Answer Derivation
 1.     c     Conceptual.

 2.     c     Conceptual.

 3.     b     Revenue test: $26,200,000 × 10% = $2,620,000
              Profit test: $4,560,000 × 10% = $456,000
              Asset test: $53,200,000 × 10% = $5,320,000
              A, B, C, E.

 4.     b     ($2,500,000 + $750,000) × 10% = $325,000.

 5.     b     Conceptual.

 6.     c     ($300,000 + $600,000) ÷ 2 = $450,000.

 7.     b     Extraordinary loss = $350,000
              Insurance expense = $500,000 ÷ 4 = $125,000.

 8.     c     Conceptual.

 9.     c     Conceptual.

10.     d     Conceptual.

11.     c     Conceptual.




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