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Week 11 Final Exam: Chapters 8
Through 17
Chapter 8
Multiple Choice
1. Of
the following items, the one that should be classified as a current asset is
a. Trade
installment receivables normally collectible in 18 months
b. Cash
designated for the redemption of callable preferred stock
c. Cash
surrender value of a life insurance policy of which the company is beneficiary
d. A
deposit on machinery ordered, delivery of which will be made within six months
Answer
2. The
advantage of relating a company’s bad debt experience to its accounts
receivable is that this approach
a.
Gives a reasonable correct statement of
receivables in the balance sheet
b.
Relates bad debts expense to the period
of sale
c.
Is the only generally accepted method
for valuing accounts receivable
d.
Makes estimates of uncollectible
accounts unnecessary
Answer
3. 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
Answer
4. An
account that would be classified as a current liability is
a. Dividends
payable in stock
b. Accounts
payable - debit balance
c. Reserve
for possible losses on purchase commitments
d. Excess
of replacement cost over LIFO cost of basic inventory temporarily liquidated
Answer
5. 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, since it matches 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.
Answer
6. Jamison
Corporation’s inventory cost on its statement of financial position was lower
using first-in, first-out than last-in, first-out. Assuming no beginning inventory,
what direction did the cost of purchases move during the period?
a. Up
b. Down
c. Steady
d. Cannot
be determined
Answer
7. If
inventory levels are stable or increasing
an argument that favors the FIFO method as compared to LIFO 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 in the income
statement
c. Cost
assignments typically parallel the physical flow of the goods
d. Income tends to be smoothed as prices change
over time
Answer
8. 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. Conventional
retail
d. Weighted
average
Answer
9. When
inventory declines in value below original (historical) cost, and this decline
is considered other than temporary, what is the maximum amount that the
inventory can be valued at?
a. Sales
price net of conversion costs
b. Net
realizable value
c. Historical
cost
d. Net
realizable value reduced by a normal profit margin
Answer
10. Which
of the following inventory cost flow methods involves computations based on
broad inventory pools of similar items?
a. Regular
quantity of goods LIFO
b. Dollar-value
LIFO
c. Weighted
average
d. Moving
average
Answer
11. When
the allowance method of recognizing bad debt expense is used, the entries at
the time of collection of an account previously written off would
a. Increase
net income
b. Have
no effect on total current assets
c. Increase
working capital
d. Decrease
total current liabilities
Answer
12. The
original cost of an inventory item is above the replacement cost. The
replacement cost is below the net realizable value less the normal profit
margin. Under the lower of cost or market method the inventory item should be
priced at its
a. Original
cost
b. Replacement
cost
c. Net
realizable value
d. Net
realizable value less the normal profit margin
Answer
13. Liquidity is the ability
a. To increase
net assets through regular operations
b. To generate cash from sources other than regular operations
c. To convert
existing assets into cash
d. Of financial
statement users to predict a company’s cash flows
Answer
14. Liquidity ratios measures the
a. Operating
success of a company over a period of time
b. The
ability of a company to survive over a long period of time
c. The
short-term ability of a company to pay its maturing obligations and to meet
unexpected needs for cash
d. The
number of times interest is earned
Answer
15. Working capital is a measure of
a. Financial
flexibility
b. Liquidity.
c. Profitability.
d. Solvency.
Answer
16. A common measure of liquidity is
a. Return
on assets.
b. Accounts
receivable turnover.
c. Profit
margin.
d. Debt to
equity.
Answer
1. The net realizable value of receivables is calculated
as the face value of the receivables less adjustments for
a. Credit sales
b. Actual uncollected amounts adjusted for purchase
discounts.
c. Bad debts already written off.
d. Estimated uncollectible accounts
18. A successful discount retail
store such as Wal-Mart would probably have
a. A low inventory turnover
b. A high inventory turnover
c. Zero profit margin
d. Low volume
Answer
Use the
following information to answer questions
Acme Auto Supplies
Balance Sheet
December 31, 2007
Cash $
60,000 Accounts Payable $ 65,000
Prepaid
Insurance 40,000 Salaries Payable 10,000
Accounts
Receivable 50,000 Mortgage Payable 90,000
Inventory 70,000 Total Liabilities $165,000
Land held
for investment 80,000
Land 95,000
Building $100,000 Common Stock $120,000
Less Accumulated Retained Earnings 250,000
Depreciation (30,000) 70,000 Total
stockholders’ equity $370,000
Trademark 70,000 Total Liabilities and
Total
Assets $535,000 Stockholders’ Equity $535,000
19. The
total amount of working capital is
a. $155,000.
b. $145,000.
c. $60,000.
d. $150,000.
Answer
20. The
current ratio is
a. 1.86
: 1.
b. 2.00
: 1.
c. 3.38
: 1.
d. 2.93
: 1.
Answer
Essay
1. Define
working capital.
2. Define
the following terms:
a. Cash
equivalents
b. Temporary
investments
c. Receivables
d. Inventories
e. Payables
f. Deferrals
g. Current
maturities
3. Define
the following terms:
a. LIFO
liquidation
b. LIFO
conformity
c. Lower
of cost or market inventory valuation
.
4. List
and briefly define the methods of accounting for investments under SFAS No.
115“Accounting for Certain Investments in Debt and Equity Securities” (FASB ASC
320).
5. Define
and discuss the two methods of estimating bad debts on receivables.
6. Why
are cost flow assumptions used to determine inventory valuations? Define and
explain the rationale for using each of the cost flow assumptions.
.
7. Obtain
a company’s financial statements and ask
the students to compute the following:
a. Working
capital
b. Current
ratio
c. Acid
test ratio
d. Cash
flow from operations to current liabilities ratio
e. Accounts
receivable turnover
f. Inventory
turnover
Chapter 9
Multiple Choice
1. 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. Appraised
value of the land
d. Total
liquidating value of the stock issued
Answer
2.
A principal objection to the
straight-line method of depreciation is that it
a. Provides
for the declining productivity of an aging asset
b. Ignores
variations in the rate of asset use
c. Tends
to result in a constant rate of return on a diminishing investment base
d. Gives
smaller periodic write-offs than decreasing charge methods
Answer
3.
Property, plant, and equipment are
conventionally presented n the balance sheet at
a. Replacement
cost less accumulated depreciation
b. Historical
cost less salvage value
c. Original
cost adjusted for general price level changes
d. Acquisition
cost less depreciated portion thereof
Answer
4.
As generally used in accounting,
depreciation
a. Is
a process of asset valuation for balance sheet purposes
b. Applies
only to long-lived intangible assets
c. Is
used to indicate a decline in market value of a long-lived asset
d. Is
an accounting process that allocates long-lived asset cost to accounting
periods
Answer
5.
Lyle, Inc., purchased certain plant
assets under a deferred payment contract on December 31, 2011. The agreement
was to pay $20,000 at the time of purchase and $20,000 at the end of each of
the next five years. The plant assets should be valued at
a. The
present value of a $20,000 ordinary annuity for five years
b. $120,000
c. $120,000
less imputed interest
d. $120,000
plus imputed interest
Answer
6.
For income statement purposes,
depreciation is a variable expense if the depreciation method used for book
purposes is
a. Units
of production
b. Straight
line
c. Sum-of-the-year’s-digits
d. Declining
balance
Answer
7.
A method that excludes salvage value
from the base for the depreciation calculation is
a. Straight
line
b. Sum-of-the-year’s
digits
c. Double-declining
balance
d. Productive
output
Answer
8.
When a company purchases land with a
building on it and immediately tears down the building so that the land can be
used for the construction of a plant, the cost incurred to tear down the
building should be
a. Expensed
as incurred
b. Added
to the cost of the plant
c. Added
to the cost of the land
d. Amortized
over the estimated time period between the tearing down of the building and the completion of the plant
Answer
9.
A machine with a four-year estimated
useful life and an estimated 15 percent salvage value was acquired on January
1, 2010. On December 31, 2012, the accumulated depreciation using the
sum-of-year’s digits method would be
a. (Original
cost less salvage value) multiplied by 9/10
b. Original
cost multiplied by 9/10
c. Original
cost multiplied by 9/10 less total salvage value
d. (Original
cost less salvage value) multiplied by 1/10
Answer
10. The
theoretical justification for reporting depreciation expense is
a. Depreciation
expense represents a decrease in the value of the asset that has occurred
during the accounting period.
b. Depreciation
expense represents the impairment of the asset that has occurred during the
accounting period.
c. Depreciation
expense represents the unrealized loss that has been incurred by using the
asset during the accounting period.
d. Depreciation
expense represents the allocation of the historical cost of the asset that has
been applied to the accounting period.
Answer
11. A
company using the group depreciation method for its delivery trucks retired one
of its delivery trucks due to damage before the average service life of the
group was reached. An insurance recovery was received. The net book value of
these group asset accounts would be
decreased by the
a. Original
cost of the truck
b. Original
cost of the truck less the insurance recovery received
c. Original
cost of the truck less depreciation on the truck to the date of retirement
d. Insurance
recovery received
Answer
12. When
equipment is retired, accumulated depreciation is debited for the original cost
less any residual recovery under which of the following depreciation methods?
Composite Group
Depreciation Depreciation
a. No
No
b. No
Yes
c. Yes
No
d. Yes
Yes
Answer
13. Recognizing
depletion expense is an example of the accounting process of
AllocationAmortization
a. No No
b. No Yes
c. Yes Yes
d. Yes
No
Answer
14. A donated plant asset for which the fair value
has been determined, and for which incidental costs were incurred in acceptance
of the asset, should be recorded at an amount equal to its
a. Incidental
costs incurred
b. Fair
value and incidental costs incurred
c. Book
value on books of donor and incidental costs incurred
d. Book
value on books of donor
Answer
Essay
1.
List the objectives of accounting for
property, plant and equipment.
2.
Describe how cost is assigned to
individual assets when they are acquired in a lump-sum group purchase.
3.
Discuss the three approaches to
allocating fixed overhead to a self-construction project.
4.
Discuss the issue of allocating interest
to self construction projects. That is, when should interest be allocated and
how much interest should be allocated?
5.
Explain the concept of commercial
substance originally outlined in SFAS No. 158.
6.
How did SFAS No. 116, now FASB ASC 605-10-15-3, change the accounting for
donated assets?
7.
Discuss the factors comprising the
depreciation process.
8.
Discuss the distinction between capital
and revenue expenditures for long-term assets.
9.
Define and discuss accounting for asset
retirement obligations under SFAS No. 14FASB ASC 410-20.
10.
Discuss the guidelines for accounting
for property, plant and equipment outlined in IAS No. 16.
11.
How does IAS no. 23 define borrowing
costs?
12.
Discuss accounting for the impairment of
assets as outlined in IAS No. 36.
Chapter 10
Multiple
Choice
1. 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
Answer
2. Pence
Corporation, which accounts for its investments in the common stock of Walsh
Company by the equity method, should ordinarily record a dividend received from
Walsh as
a. An
addition to the carrying value of the investment
b. Dividend
revenue
c. A
reduction of the carrying value of the investment
d. Revenue
from affiliate
Answer
3. On
January 15, 2002, a corporation was granted a patent on a product. On January
2, 2010, to protect its patent, the corporation purchased a patent on a
competing product the originally was issued on January 10, 2008. Because of its
unique plant, the 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 17 years
b. Amortized
over a maximum period of 13 years
c. Amortized
over a maximum period of 9 years
d. Expensed
in 2010
Answer
4. Pacer
Company purchased 300 of the 1, 000 outstanding shares of Queen Company’s common
stock for $80,000 on January 2, 2008. During 2009, Queen Company declared
dividends of $8,000 and reported earnings for the year of $20,000.
If
Pacer Company uses the equity method of accounting for its investment in Queen
Company, its Investment in Queen Company account at December 31, 2009 should be
a.
$100, 000
b.
$88,000
c.
$83,600
d.
$80,000
Answer
5. Refer
to the facts in problem (4). If Pacer Company uses the lower of cost or market
method of accounting for its investment in Queen Company, and the value of its
investment hasn’t changed, its Investment in Queen Company account on December
31, 2009, should be
a. $100,
000
b. $88,000
c. $80,000
d. $73,600
Answer
6. A
large, publicly held company developed and registered a trademark during 2010.
The cost of developing and registering the trademark should be accounted for by
a. Charging it to an asset account that should
not be amortized
b. Expensing it as incurred
c. Amortizing it over 25 years if in accordance
with management’s evaluation
d. Amortizing it over its useful life or 17
years, whichever is shorter
Answer
7. Goodwill
should be written off
a. As soon as possible against retrained earnings
b. When
there is evidence that its carrying value has been impaired
c. By
systematic charges against retained earnings over the period benefited, but
not more than 40 years
d. By
systematic charges to expense over the period benefited, but not more than
40 years
Answer
8. A
net unrealized loss on a company’s long-term portfolio of available for
sale securities should be reflected in the
current financial statements as
a. An
extraordinary item shown as a direct reduction from retained earnings
b. A
current loss resulting from holding marketable equity securities
c. A
footnote or parenthetical disclosure only
d. A component of other comprehensive income
Answer
9.
Changes in the fair value of a long-term
available for sale equity securities portfolio should be reported as a
component of
a. Other
comprehensive income
b. Noncurrent
assets
c. Noncurrent
liabilities
d. Net
income
Answer
10.
Cash dividends declared out of current
earnings are distributed to an investor. How will the investor’s investment
account be affected by those dividends under each of the following accounting
methods?
Fair Value Method Equity
Method
a. Decrease No effect
b. Decrease Decrease
c. No effect Decrease
d. No effect No effect
Answer
11. An
activity that would be expensed currently as research and development costs is
the
a. Testing
in search for or evaluation of product or process alternatives
b. Adaptation
of an existing capability to a particular requirement or customer’s need as a
part of continuing commercial activity
c. Legal
work in connection with patent applications or litigation, and the sale or
licensing of patents
d. Engineering
follow-through in an early phase of commercial production
Answer
12. Should
the following fees associated with the registration of an internally developed
patent be capitalized?
Registration
Legal
fees fees
a. Yes
Yes
b. Yes
No
c. No
Yes
d. No
No
Answer
13. Which
of the following assets acquired in 2010 are amortizable?
GoodwillTrademarks
a. No
No
b. No
Yes
c. Yes No
d. Yes
No
Answer
14. A
purchased patent has a remaining life of 15 years. It should be
a. Expensed
in the year of acquisition
b. Amortized
over 15 years regardless of its useful life
c. Amortized
over its useful life if less than 15 years
d. Amortized
over 40 years
Answer
15. Which
of the following amounts incurred in connection with a trademark should be
capitalized?
Cost of a Registration
Successful defensefees
a. Yes
No
b. Yes
Yes
c. No
Yes
d. No No
Answer
16. Zink Company owns 32% of Ace Company's outstanding
voting stock. Zink Company normally should account for its investment in Ace
Company using the
a.
Fair
value method.
b.
Cost
method.
c.
Consolidation
procedure.
d.
Equity
method.
Answer
2. An
investor purchased a bond as a long-term investment on January 1. Annual
interest was received on December 31. The investor’s interest income for the
year would be lowest if the bond was purchased at
a. A discount
b. A premium
c. Par
d. Face value
Answer
19. The
theoretical justification for expensing research and development (R&D) cost
as it is incurred is based on which of the following arguments?
a. R&D
costs provide no future benefits, thus it does not meet the definition of an
asset
b. R&D
costs are incurred to generate current period revenue, thus the matching
concept requires that it be expensed as incurred.
c. Whether
R&D costs that have been incurred will provide future benefit is uncertain,
thus it does not meet the definition of an asset.
d. Since
R&D costs have been incurred during the current period, they meet the
definition of an expense.
Answer
20. When
a patent is successfully defended in court, the cost of the lawsuit
a. Should
be expensed as incurred because it is a period cost.
b. Should
be added to the cost of the patent and depreciated over the remaining useful
life of the patent.
c. Should
be added to the cost of the patent which is then expensed as a period cost.
d. Has
already been expensed so there is no further action to take.
Answer
21. Goodwill
is an intangible asset
a. That
has a definite life and its cost should be amortized over its useful life.
b. That
is recorded when the company has projected earnings in excess of earnings
expected for an investment in a similar company in the same industry.
c. That
is reviewed for impairment when circumstances indicate that impairment may have
occurred.
d. That
is reviewed annually to determine whether impairment has occurred.
Answer
22. A
trading security is measured at fair value on the balance sheet date and
reported as
a. A
current asset, and changes in fair value are reported in earnings as unrealized
gains and losses.
b. A
current asset, and changes in fair value are reported in earnings as realized
gains and losses.
c. Either
a current or noncurrent asset depending on whether they meet the definition of
a current asset.
d. A
current asset, and changes in fair value are reported in accumulated other
comprehensive income as unrealized gains and losses.
Answer
23. Current
accounting for an available-for-sale (AFS) security is consistent with
a. The
financial capital maintenance concept of income because AFS security unrealized
gains and losses are reported in earnings.
b. The
financial capital maintenance concept of income because AFS security unrealized
gains and losses are reports in other comprehensive income.
c. The
physical capital maintenance concept of income because AFS security unrealized
gains and losses are reported in earnings.
d. The
physical capital maintenance concept of income because AFS security unrealized
gains and losses are reported in other comprehensive income.
Answer
24. The
physical capital maintenance concept of income would require that an investment
in the common stock of another entity be
a. Reported
in the balance sheet at historical cost and that only realized gains and losses
be reported in earnings.
b. Reported
in the balance sheet at historical cost and that unrealized gains and losses be
reported in earnings.
c. Reported
in the balance sheet at fair value and that unrealized gains and losses be
reported in earnings.
d. Reported
in the balance sheet at fair value and that unrealized gains and losses be
reported in other comprehensive income.
Answer
25. The
economic concept of income would require that an investment in the common stock
of another entity be
a. Reported
in the balance sheet at historical cost and that only realized gains and losses
be reported in earnings.
b. Reported
in the balance sheet at historical cost and that unrealized gains and losses be
reported in earnings.
c. Reported
in the balance sheet at fair value and that unrealized gains and losses be
reported in earnings.
d. Reported
in the balance sheet at fair value and that unrealized gains and losses be
reported in other comprehensive income.
Answer
26. Under the fair value option, an investment in the
common stock of another entity will be
a. Reported
as a current asset
b. Reported
as a noncurrent asset
c. Reported
as either a current or noncurrent asset depending on managerial intent.
d. Reported
as a current asset only if it was not previously reported as an equity method
investment.
Answer
27. When
a company reports goodwill in its balance sheet, we know that
a. It
was internally generated because the company has earnings in excess of those of
other companies in the industry.
b. The
company purchased it.
c. The
company will be reporting amortization expense for the goodwill.
d. The
company will not be reporting an impairment loss for the goodwill.
Answer
Essay
1.
How are income and balance sheet values
determined under the equity method?
2.
Discuss accounting for equity securities
under the cost method.
3.
Discuss accounting for equity securities
under the SFAS No. 115 now contained at FASB ASC 320.
4.
Summarize the accounting requirements
for investments in equity securities. That is, what methods are available and
when is each method appropriate?
5.
Discuss the use of the fair value option
originally described in SFAS No. 159 now contained at FASB ASC 825-10.
6.
Discuss accounting for investments in
debt securities.
7.
What is an intangible asset? How is the
cost of an intangible asset amortized?
8.
What is goodwill? How is goodwill
written off under the provisions of SFAS No. 142 now FASB ASC 350?
9.
Define research and development. How are research and development costs
recorded
10.
How does IAS No 39 define fair value?
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