ACC 201 Part 1 2 3 4 EXAM
Part 1
1. General Product, Inc., shipped
100 million coupons in products it sold in 2011. The coupons are redeemable for
thirty cents each. General anticipates that 70% of the coupons will be
redeemed. The coupons expire on December 31, 2012. There were 45 million
coupons redeemed in 2011, and 30 million redeemed in 2012.
What was General’s coupon
promotion expense in 2011?
A. $7.5 million B. $21.0 million C. $13.5 million D. $30.0
million
2. Which of the following is not
true about the fair value option?
A. Electing the fair value option
for held-to-maturity investments simply reclassifies those investments as
trading securities. B. All of these statements are true. C. The fair value
option is irrevocable. D. The fair value option must be elected for all shares
of an investment in a particular company.
3. Beresford, Inc., purchased
several investment securities during 2008, its first year of operations. The
following information pertains to these securities. The fluctuations in their
fair values aren’t considered permanent.
Held to maturity securities: Fair
Value Fair Value Amortized Amortized
ABC Co. Bonds 12/31/10 12/31/11
Cost 12/31/10 Cost 12/31/11
$375,000 $400,000 $367,500
$360,000
Fair Value Fair Value
Trading securities: 12/31/10
12/31/11 Cost
DEF Co. Stock $48,000 $59,500
$66,000
GEH Inc. Stock $47,000 $77,000
$39,000
IJK Inc. Stock $44,000 $38,500
$32,900
Fair Value Fair Value
Available for Sale Securities
12/31/10 12/31/11 Cost
LMN Co. Stock $130,500 $150,400
$140,000
What would be the balance in
Beresford’s accumulated other comprehensive income with respect to these
investments in its 12/31/11 balance sheet (ignore taxes)?
A. $26,500 B. $55,100 C. $50,200 D.
$10,400
4. Smith buys and sells
securities which it typically classifies as available for sale. On December 15,
2011,
Smith purchased $500,000 of Jones
shares, and elected the fair value option to account for the Jones investment.
As of December 31, 2011, the Jones shares had a fair value of $525,000. In the
2011 financial statements, Smith will show (ignore taxes)
A. investment income of $25,000
in its income statement. B. other comprehensive income of $25,000.
C. an investment in Jones of
$500,000. D. accumulated other comprehensive income of $525,000.
5. Goofy, Inc., bought 15,000
shares of Crazy Co.’s stock for $150,000 on May 5, 2010, and classified the
stock as available for sale. The market value of the stock declined to $118,000
by December 31, 2010.
Goofy reclassified this investment
as trading securities in December of 2011 when the market value had risen to
$125,000. What effect on 2011 income should be reported by Goofy for the Crazy
Co. shares?
A. $0 B. $32,000 net loss C.
$25,000 net loss D. $7,000 net gain
6. On December 31, 2011, L, Inc.,
had a $1,500,000 note payable outstanding, due July 31, 2012. L borrowed the
money to finance construction of a new plant. L planned to refinance the note
by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000
of the note on January 23,
2012. In February 2012, L
completed a $3,000,000 bond offering. L will use the bond offering proceeds to
repay the note payable at its maturity and to pay construction costs during
2012. On March 13, 2012, L issued its 2011 financial statements. What amount of
the note payable should L include in the current liabilities section of its
December 31, 2011, balance sheet?
A. $500,000 B. $0 C. $1,000,000 D.
$1,500,000
7. Hawk Corporation purchased
10,000 shares of Diamond Corporation stock in 2008 for $50 per share and
classified the investment as securities available for sale. Diamond's market
value was $60 per share on December 31, 2009 and $65 on December 31, 2010.
During 2011, Hawk sold all of its Diamond stock at $70 per share. In its 2011
income statement, Hawk would report a gain of
A. $150,000. B. $200,000. C.
$50,000. D. $300,000.
8. Hope Company bought 30% of
Faith Corporation in 2011. Hope’s purchase price equaled 30% of the book value
of Faith’s net identifiable assets, which also equaled 30% of the fair value of
Faith. During 2011, Faith reported net income in the amount of $4,000,000 and
declared and paid dividends in the amount of $500,000. Hope mistakenly
accounted for the investment as available for sale instead of using the equity
method. What effect would this error have on the investment account and net
income, respectively, for 2011?
A. Understated by $1,200,000;
overstated by $1,050,000 B. Overstated by $1,200,000; overstated by $1,200,000 C. Understated by $1,050,000; understated by
$1,050,000 D. Overstated by $1,050,000; understated by $1,050,000
9. If Dinsburry Company concluded
that an investment originally classified as a trading security would now more
appropriately be classified as held to maturity, Dinsburry would
A. not reclassify the investment,
as original classifications are irrevocable.
B. reclassify the investment as
held to maturity and immediately recognize in net income all unrealized gains
and losses as of the reclassification date.
C. reclassify the investment as
held to maturity, but there would be no income effect.
D. reclassify the investment as
held to maturity and treat the fair value as of the date of reclassification as
the investment’s amortized cost basis for future amortization.
10. On January 1, 2011, Nana
Company paid $100,000 for 8,000 shares of Papa Company common stock. These
securities were classified as trading securities. The ownership in Papa Company
is 10%. Papa reported net income of $52,000 for the year ended December 31,
2011. The fair value of the Papa stock on that date was $45 per share. What
amount will be reported in the balance sheet of Nana Company for the investment
in Papa at December 31, 2011?
A. $315,600 B. $300,000 C.
$360,000 D. $284,400
11. B Corp. has an employee
benefit plan for compensated absences that gives employees 10 paid vacation
days and 10 paid sick days. Both vacation and sick days can be carried over
indefinitely. Employees can elect to receive payment in lieu of vacation days;
however, no payment is given for sick days not taken. At December 31, 2011, B’s
unadjusted balance of liability for compensated absences was $42,000. B
estimated that there were 300 vacation days and 150 sick days available at
December 31, 2011. B’s employees earn an average of $200 per day. In its
December 31, 2011, balance sheet, what amount of liability for compensated
absences is B required to report?
A. $90,000 B. $144,000 C. $60,000
D. $84,000
12. On January 1, 2011, G
Corporation agreed to grant its employees two weeks vacation each year, with
the stipulation that vacations earned each year can be taken the following year.
For the year ended December 31, 2011, G’s employees each earned an average of
$800 per week. 500 vacation weeks earned in 2011 were not taken during 2011.
Wage rates for employees rose by an average of 5 percent by the time vacations
actually were taken in 2012. What is the amount of G’s 2012 wages expense
related to 2011 vacation time?
A. $420,000 B. $400,000 C.
$20,000 D. $0
13. Under IFRS No. 9, which is
not a category for accounting for investments?
A. Fair value through profit and
loss B. Held-to-maturity C. Fair value through other comprehensive income D.
Amortized cost
14. Assume that, on 1/1/11, Sosa
Enterprises paid $5,100,000 for its investment in 36,000 shares of Orioles Co.
Further, assume that Orioles has 120,000 total shares of stock issued and
estimates an 8 year remaining useful life and straight-line depreciation with
no residual value for its depreciable assets.
At 1/1/11, the book value of
Orioles’ identifiable net assets was $7,000,000, and the fair value of Orioles
was $10,000,000. The difference between Orioles’ fair value and the book value
of its identifiable net assets is attributable to $1,800,000 of land and the
remainder to depreciable assets. Goodwill was not part of this transaction.
The following information
pertains to Orioles during 2011:
What amount would Sosa
Enterprises report in its year-end 2011 balance sheet for its investment in
Orioles Co.?
Net income $600,000
Dividends declared and paid
$360,000
Market price of common stock on
12/31/11 $80/share
A. $3,027,000 B. $3,200,000 C.
$3,135,000 D. $3,180,000
15. Knique Shoes issued a
$100,000, 8-month, noninterest-bearing note. The loan was made by Second
Commercial Bank whose stated discount rate is 9%. The effective interest rate
on this loan (rounded) is
A. 9.50%. B. 9.49%. C. 9.57%. D.
9.28%.
16. Oklahoma Oil Corp. paid
interest of $785,000 during 2011, and the interest payable account decreased by
$125,000. What was interest expense for the year?
A. $890,000 B. $555,000 C.
$785,000 D. $660,000
End of exam
17. When cash is received from
customers in the form of a refundable deposit, the cash account is increased
with a corresponding increase in
A. shareholders’ equity. B.
paid-in capital. C. revenue. D. a current liability.
18. Which of the following is a
contingency that should be accrued?
A. The company deducts life
insurance premiums from employees’ paychecks.
B. It’s probable that the company
will receive $100,000 in settlement of a lawsuit.
C. The company is being sued and
a loss is reasonably possible and reasonably estimable.
D. The company offers a two-year
warranty and the expenses can be reasonably estimated.
19. What is the effective
interest rate (rounded) on a 3-month, noninterest-bearing note with a stated
rate of 12% and a maturity value of $200,000?
A. 12.0 % B. 12.4% C. 11.5% D.
3.0%
20. On January 1, 2011, Green
Corporation purchased 20% of the outstanding voting common stock of Gold
Company for $300,000. The book value of the acquired shares was $275,000. The
excess of cost over book value is attributable to an intangible asset on Gold’s
books that was undervalued and had a remaining useful life of five years. For
the year ended December 31, 2011, Gold reported net income of $125,000 and paid
cash dividends of $25,000. What is the carrying value of Green’s investment in
Gold at December 31, 2011?
A. $320,000 B. $295,000 C.
$315,000 D. $ 300,000
Part 2
1. On December 31, 2011, B Corp.
sold a machine to Royal and simultaneously leased it back for one year.
Pertinent information at this date follows: In B's December 31, 2011, balance
sheet, the deferred revenue from the sale of this machine should be
Sales price $720,000
Carrying amount 660,000
Present value of lease rentals
68,200 ($6,000 for 12 months at 12% Estimated remaining useful life 12 years
A. $60,000. B. $68,200. C.
$8,200. D. $0
2. C Corp. has a rate of return
on assets of 10%. Not including any indirect effects on earnings, the rate of
return on assets is immediately increased when C records
A Capital Lease An Operating
Lease
a. yes yes b. no no c. yes no d.
no yes
A. Option b B. Option c C. Option
a D. Option d
Operating leases don't affect assets, liabilities, or
equity. A capital lease increases assets and liabilities the same amount and
thus has no effect of equity, which is A - L = Equity. Because assets, the
denominator, increase and earnings remain the same, the rate of return
decreases.
3. If the lessor retains title to
leased property under the terms of the lease,
A. the amount to be recovered
through periodic lease payments is increased by the present value of the
residual amount.
B. the amount to be recovered
through periodic lease payments is reduced by the present value of the residual
amount.
C. the amount to be recovered
will be the same as if there were no residual value.
D. the lessor will record a
greater amount of depreciation due to the residual value.
4. Discount-Mart issued ten
thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay
interest semiannually. This is the partial bond amortization schedule for the
bonds.
Payment Cash Effective
Interest Decrease on
balance Outstanding balance
$8,640,967
1 $300, 000 345,639 345,639 8,686,606
2 300,000 347,464 347,464 8,734,070
3 300,00 349,363 349,363 8,783,433
4 300,000
What would be the total interest
cost of the bonds over their full term?
A. $7,359,033 B. $1,359,033 C. $6,000,000
D. $4,640,967
5. On December 31, 2010, Reagan,
Inc., signed a lease for some equipment having a 9-year useful life with Silver
Leasing Co. The lease payments are made by Reagan annually, beginning at
signing date. Title does not transfer to the lessee, so the equipment will be
returned to the lessor on December 31, 2016. There's no bargain purchase
option, and Reagan guarantees a residual value to the lessor on termination of
the lease.
Reagan’s lease amortization
schedule appears below:
Dec. 31 Payments Interest
decrease balance Balance
2010 $519,115
2010 $90,000 $90,000 429,115
2011 90,000 $17,165 72,835
356,280
2012 90,000 14,251 75,749 280,531
2013 90,000 11,221 78,779 201,752
2014 90,000 8,070 81,930 119,822
2015 90,000 4,793 85,207 34,615
2016 36,000 1,385 34,615 0
At what amount would Reagan
record the leased asset at inception of the agreement?
A. $429,115 B. $540,000 C.
$576,000 D. $519,115
6. Prescott Corporation issued
ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay
interest semiannually. This is the partial bond amortization schedule for the
bonds.
What is the carrying value of the
bonds as of December 31, 2012?
A. $11,432,379 B. $11,256,109 C.
$11,316,611 D. $11,375,350
7. When an equipment dealer receives
a long-term note in exchange for equipment, the present value of the future
cash flows received on the notes is
A. credited to sales revenue at
the exchange date.
B. treated as a current liability
at the exchange date.
C. recorded as interest revenue at
the exchange date.
D. recorded as interest
receivable at the exchange date.
8. On June 30, 2011, Hardy
Corporation issued $10 million of its 8% bonds for $9.2 million. The bonds were
priced to yield 10%. The bonds are dated June 30, 2011, and mature on June 30,
2018. Interest is payable semiannually on December 31 and July 1. If the
effective interest method is used, by how much should the bond discount be
reduced for the 6 months ended December 31, 2011?
A. $60,000 B. $32,000 C. $46,000 D.
$40,000
9. On January 1, 2011, Zebra
Corporation issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable
semiannually on January 1 and July 1. The bonds mature on January 1, 2021.
Zebra paid $50,000 in bond issue costs. Zebra uses the straight-line amortization
method. What is the bond carrying value reported in the December 31, 2011,
balance sheet?
A. $1,040,000 B. $1,045,000 C.
$982,000 D. $987,000
10. Technoid, Inc., sells
computer systems. Technoid leases computers to Lone Star Company on January 1,
2011. The manufacturing cost of the computers was $12 million.
This non-cancelable lease had the
following terms: * Lease payments: $2,466,754 semiannually; first payment at
January 1, 2011; remaining payments at June 30 and December 31 each year
through June 30, 2015. * Lease term: 5 years (10 semiannual payments)
* No residual value; no bargain
purchase option
* Economic life of equipment: 5
years
* Implicit interest rate and
lessee’s incremental borrowing rate: 5% semiannually
* Fair value of the computers at
January 1, 2011: $20 million
Collectibility of the rental
payments is reasonably assured, and there are no lessor costs yet to be
incurred.
What is the net carrying value of
the lease liability in Lone Star's June 30, 2011 balance sheet? Round your
answer to the nearest dollar.
A. $21,000,000 B. $2,466,754 C.
$17,533,246 D. $15,943,154
11. Prescott Corporation issued
ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay
interest semiannually. This is the partial bond amortization schedule for the
bonds.
What is the stated annual rate of
interest on the bonds?
A. 4% B. 8% C. 6% D. 3%
12. MSG Corporation has $100,000
of 10-year, 6% bonds outstanding on December 31, 2010. The bonds have 3 years
remaining to maturity. The unamortized premium remaining on these bonds was
$6,000.
MSG uses straight-line
amortization. On May 1, 2011, $10,000 of the bonds were retired at 112. How
much, and what type of gain or loss, most likely results from this retirement?
A. $667 ordinary gain B. $667 extraordinary
loss C. $667 ordinary loss D. $667 extraordinary gain
13. If the residual value of a
leased asset turns out to be more than the amount guaranteed by the lessee, the
A. lessee will reduce the last
year's depreciation. B. lessee must pay the lessor the amount of the excess.
C. lessor must compensate the
lessee for the excess. D. lessor isn't obligated to compensate the lessee for
the excess.
14. On January 1, 2011, Packard
Corporation leased equipment to Hewlitt Company. The lease term is 8 years. The
first payment of $450,000 was made on January 1, 2011. Remaining payments are
made on December 31 each year, beginning with December 31, 2011. The equipment
cost Packard Corporation $2,400,000. The present value of the minimum lease
payments is $2,640,000. The lease is appropriately classified as a sales-type
lease. Assuming the interest rate for this lease is 10%, what will be the
balance reported as a liability by Hewlitt in the December 31, 2012, balance
sheet?
A. $1,509,000 B. $1,950,000 C.
$1,704,900 D. $1,959,000
15. On January 1, 2011, Princess
Corporation leased equipment to King Company. The lease term is 8 years. The
first payment of $675,000 was made on January 1, 2011. The equipment cost
Princess Corporation $3,600,000. The present value of the minimum lease
payments is $3,960,000. The lease is appropriately classified as a sales-type
lease. Assuming the interest rate for this lease is 10%, how much interest
revenue will Princess record in 2012 on this lease?
A. $328,500. B. $293,850. C. $261,000.
D. $325,350.
16. S Corp. has a rate of return
on assets of 10% and a debt/equity ratio of 2 to 1. Not including any indirect
effects on earnings, the immediate impact of recording a capital lease on these
ratios is a(an) Return on Assets Debt/Equity Ratio
a. increase increase b. decrease
decrease c. increase decrease d. decrease increase
A. Option a B. Option d C. Option
c D. Option b
17. Technoid, Inc., sells
computer systems. Technoid leases computers to Lone Star Company on January 1,
2011. The manufacturing cost of the computers was $12 million.
This non-cancelable lease had the
following terms:
* Lease payments: $2,466,754
semiannually; first payment at January 1, 2011; remaining payments at June 30
and December 31 each year through June 30, 2015.
* Lease term: 5 years (10
semiannual payments)
* No residual value; no bargain
purchase option
* Economic life of equipment: 5
years
* Implicit interest rate and
lessee’s incremental borrowing rate: 5% semiannually
* Fair value of the computers at
January 1, 2011: $20 million
Collectibility of the rental
payments is reasonably assured, and there are no lessor costs yet to be
incurred. Lone Star Company would account for this as a(an)
A. capital lease. B. sales-type
lease. C. direct financing lease. D. operating lease.
18. Technoid, Inc., sells
computer systems. Technoid leases computers to Lone Star Company on January 1,
2011. The manufacturing cost of the computers was $12 million.
This non-cancelable lease had the
following terms:
* Lease payments: $2,466,754
semiannually; first payment at January 1, 2011; remaining payments at June 30
and December 31 each year through June 30, 2015.
* Lease term: 5 years (10
semi-annual payments)
* No residual value; no bargain
purchase option
* Economic life of equipment: 5
years
* Implicit interest rate and
lessee's incremental borrowing rate: 5% semi-annually
* Fair value of the computers at
January 1, 2011: $20 million
Collectibility of the rental
payments is reasonably assured, and there are no lessor costs yet to be
incurred. Technoid would account for this as a(an)
A. capital lease. B. direct
financing lease. C. sales-type lease. D. operating lease.
19. On December 31, 2010, Reagan,
Inc., signed a lease for some equipment having a 9-year useful life with Silver
Leasing Co. The lease payments are made by Reagan annually, beginning at
signing date. Title does not transfer to the lessee, so the equipment will be
returned to the lessor on December 31, 2016.
There's no bargain purchase
option, and Reagan guarantees a residual value to the lessor on termination of
the lease.
Reagan’s lease amortization
schedule appears below:
What is the carrying value of the
lease liability on Reagan's December 31, 2012 balance sheet (after the third
lease payment is made)?
A. $266,280 B. $356,280 C.
$280,531 D. $190,530
20. Francisco leased equipment
from Julio on December 31, 2011. The lease is a 10-year lease with annual
payments of $150,000 due on December 31 of each year. The present value of the
lease is $1,020,000.
Francisco's incremental borrowing
rate is 12% for this type of lease. The implicit rate of 10% is known by the
lessee. What should be the balance in Francisco lease liability at December 31,
2012?
A. $824,400. B. $792,000. C.
$807,000. D. $806,400.
Part 3
1. Information for Hobson
International Corp. for the current year ($ in millions):
Income from continuing operations
before tax $150
Extraordinary loss (pretax) 30
Temporary differences (all
related to operating income):
Accrued warranty expense in
excess of write-offs included in operating income 10
Depreciation deducted on tax
return in excess of depreciated expense 25
Permanent differences (all
related to operating income):
Nondeductible portion of travel
& entertainment expense 5
The applicable enacted tax rate for
all periods is 40%
What should Hobson International
report as income from continuing operations?
A. $94 million B. $150 million C.
$88 million D. $90 million
2. Giada Foods reported $940
million in income before income taxes for 2011, its first year of operations.
Tax depreciation exceeded depreciation for financial reporting purposes by $100
million. The company also had non-tax-deductible expenses of $80 million
relating to permanent differences. The income tax rate for
2011 was 35%, but the enacted rate
for years after 2011 is 40%. The balance in the deferred tax liability in the
December 31, 2011, balance sheet is
A. $40 million. B. $35 million. C.
$56 million. D. $16 million.
3. Bumble Bee Co. had taxable
income of $7,000, MACRS depreciation of $5,000, book depreciation of $2,000,
and accrued warranty expense of $400 on the books although no warranty work was
performed.
What is Bumble Bee's pretax
accounting income?
A. $4,400. B. $3,600. C. $2,600. D.
$9,600.
4. Woody Corp. had taxable income
of $8,000 in the current year. The amount of MACRS depreciation was $3,000
while the amount of depreciation reported in the income statement was $1,000.
Assuming no other differences between tax and accounting income, Woody's pretax
accounting income was
A. $10,000. B. $5,000. C. $6,000.
D. $11,000.
5. Alamo, Inc., had $300 million
in taxable income for the current year. Alamo also had a decrease in deferred
tax assets of $30 million and an increase in deferred tax liabilities of $60
million. The company is subject to a tax rate of 40%. The total income tax
expense for the year was
A. $ 390 million. B. $180
million. C. $150 million. D. $210 million.
6. The EPBO for a particular
employee on January 1, 2011, was $150,000. The APBO at the beginning of the
year was $30,000. The appropriate discount rate for this postretirement plan is
5%. The employee is expected to serve the company for a total of twenty-five
years, with five of those years already served as of January 1, 2011. What is
the APBO at December 31, 2011?
A. $30,000. B. $42,800. C.
$31,500. D. $37,800.
7. The changes in account
balances for Allen Inc. for 2011 are as follows:
Assets $225,000 debit
Common stock 125,000 credit
Liabilities 80,000 credit
Paid-in capital--excess of par
15,000 credit
Assuming the only changes in
retained earnings in 2011 were for net income and a $25,000 dividend, what was
net income for 2011?
A. $20,000 B. $30,000 C. $15,000 D.
$5,000
8. Pug Corporation has 10,000
shares of $10 par common stock outstanding and 20,000 shares of $100 par, 6%
noncumulative, nonparticipating preferred stock outstanding. Dividends have not
been paid for the past two years. This year, a $150,000 dividend will be paid.
What are the dividends per share for preferred and common, respectively?
A. $6; $1.50. B. $7.50; $0. C.
$6; $3. D. $7.50; $1.50.
9. Persoff Industries
International has a defined benefit pension plan. The company revised its
estimate of future salary levels causing its defined benefit obligation to
increase by $16 million. Also, Persoff's $25 million actual return on plan
assets exceeded the $22 million expected return. Persoff prepares its financial
statements in accordance with International Financial Reporting Standards. The
company will
A. record a $16 million gain-OCI.
B. report an unrecognized net
loss as an offset to the net pension liability in the liability section of the
balance sheet.
C. report an unrecognized net
gain as an increase in the net pension asset in the liability section of the
balance sheet.
D. record a $3 million decrease
in its plan assets.
10. The following information
pertains to Havana Corporation's defined benefit pension plan:
($ in 000s) 2011 2012
Beginning Beginning
Balances balances
Projected benefit obligation
($6,000) ($6,504)
Plan assets 5,760 6,336
Prior service cost--AOCI 600 552
Net loss--AOCI 720 786
At the end of 2011, Havana
contributed $696 thousand to the pension fund and benefit payments of $624
thousand were made to retirees. The expected rate of return on plan assets was
10%, and the actuary's discount rate is 8%. There were no changes in actuarial
estimates and assumptions regarding the PBO.
What is Havana's 2011 actual
return on plan assets?
A. $6,336 thousand B. $504
thousand C. $618 thousand D. $1,128 thousand
11. JL Health Services reported a
net loss-AOCI in last year's balance sheet. This year, the company revised its
estimate of future salary levels causing its PBO estimate to decline by $24.
Also, the $48 million actual return on plan assets was less than the $54
million expected return. As a result,
A. the net pension liability will
decrease by $24 million.
B. the statement of comprehensive
income will report a $6 million gain and a $24 million loss.
C. the net pension liability will
increase by $18 million.
D. accumulated other
comprehensive income will increase by $18 million.
12. Information for Hobson
International Corp. for the current year ($ in millions):
Income from continuing operations
before tax $150
Extraordinary loss (pretax) 30
Temporary differences (all
related to operating income):
Accrued warranty expense in
excess of write-offs included in operating income 10
Depreciation deducted on tax
return in excess of depreciated expense 25
Permanent differences (all
related to operating income):
Nondeductible portion of travel
& entertainment expense 5
The applicable enacted tax rate
for all periods is 40%.
What is Hobson's income tax
payable for the current year?
A. $50 million B. $48 million C.
$52 million D. $44 million
13. The EPBO for a particular
employee on January 1, 2011, was $30,000. The APBO at the beginning of the year
was $6,000. The appropriate discount rate for this postretirement plan is 5%.
The employee is expected to serve the company for a total of twenty-five years
with five of those years already served as of January 1, 2011. What is the APBO
at December 31, 2011?
A. $6,300 B. $7,200 C. $7,500 D.
$7,560
14. Giada Foods reported $940
million in income before income taxes for 2011, its first year of operations.
Tax depreciation exceeded depreciation for financial reporting purposes by $100
million. The company also had non-tax-deductible expenses of $80 million
relating to permanent differences. The income tax rate for 2011 was 35%, but
the enacted rate for years after 2011 is 40%. The balance in the deferred tax
liability in the December 31, 2011, balance sheet is
A. $16 million. B. $56 million. C.
$35 million. D. $40 million.
15. Lucid Company declared a
property dividend of 20,000 shares of $1 par Polk Company common stock. The
Polk stock was purchased for $5 per share. Market value was $10 per share on
the declaration date and $11 per share on the distribution date. What is the
amount of the dividend?
A. $300,000. B. $100,000. C.
$200,000 D. $220,000.
16. Boxer Company owned 20,000
shares of King Company that were purchased in 2009 for $500,000.
On May 1, 2011, Boxer declared a
property dividend of 1 share of King for every 10 shares of Boxer stock. On
that date, there were 50,000 shares of Boxer stock outstanding. The market
value of the King stock was $30 per share on the date of declaration and $32
per share on the date of distribution. By how much is retained earnings reduced
by the property dividend?
A. $300,000 B. $150,000 C. $0 D.
$160,000
17. Castillo Company has a
defined benefit pension plan. At the end of the reporting year, the following
data were available: beginning PBO, $75,000; service cost, $18,000; interest
cost, $5,000; benefits paid for the year, $9,000; ending PBO, $89,000; the
expected return on plan assets, $10,000; and cash deposited with pension
trustee, $17,000. There were no other pension related costs. The journal entry
to record the annual pension costs will include a credit to the PBO for
A. $23,000. B. $13,000. C.
$18,000. D. $17,000.
18. As of December 31, 2011,
Warner Corporation reported the following:
Dividends payable 20,000
Treasury stock 600,000
Paid-in capital--share repurchase
20,000
Other paid-in capital accounts
4,000,000
Retained earnings 3,000,000
During 2012, half of the treasury
stock was resold for $240,000; net income was $600,000; cash dividends declared
were $1,500,000; and stock dividends declared were $500,000. 40. What would
shareholders' equity be as of December 31, 2012?
A. The amount isn't shown. B.
$5,820,000 C. $5,760,000 D. $6,760,000
19. In its first four years of
operations Peridot Jewelers reported the following operating income (loss)
amounts:
2008 $150,000 2009 100,000 2010
(425,000) 2011 450,000
There were no other deferred
income taxes in any year. In 2010, Peridot elected to carry back its operating
loss. The enacted income tax rate was 40%. In its 2011 income statement, what
amount should Peridot report as income tax expense?
A. $180,000 B. $170,000 C.
$110,000 D. $80,000
20. The shareholders’ equity of
Red Corporation includes $200,000 of $1 par common stock and $400,000 of 6%
cumulative preferred stock. The board of directors of Green declared cash
dividends of $50,000 in 2011 after paying $20,000 cash dividends in 2010 and
$40,000 in 2009. What is the amount of dividends common shareholders will
receive in 2011?
A. $28,000 B. $22,000 C. $26,000 D.
$18,000
21. Information for Hobson
International Corp. for the current year ($ in millions):
Income from continuing operations
before tax $150
Extraordinary loss (pretax) 30
Temporary differences (all
related to operating income):
Accrued warranty expense in
excess of write-offs included in operating income 10
Depreciation deducted on tax
return in excess of depreciated expense 25
Permanent differences (all
related to operating income):
Nondeductible portion of travel
& entertainment expense 5
The applicable enacted tax rate
for all periods is 40%.
What should Hobson International
report as net income?
A. $72 million B. $88 million C.
$75 million D. $70 million
22. The following refers to the
pension spreadsheet (columns have missing amounts) for the current year for
Pancho Villa Enterprises (PVE).
What was PVE’s pension expense
for the year?
A. $260 B. $68 C. $50 D. $62
23. F Co. declares a 5% stock
dividend. If the market price at declaration is $12 per share, a shareholder
with 110 shares likely would receive
A. 5 additional shares and a
fractional share right for 2 ½ shares. B. 5 additional shares. C. fractional
share rights for 5 ½ shares. D. 5 additional shares and $6 in cash.
24. Montgomery & Co., a well
established law firm, provided 500 hours of its time to Fink Corporation in
exchange for 1,000 shares of Fink's $5 par common stock. Mitchell's usual
billing rate is $700 per hour, and Fink's stock has a book value of $250 per
share. By what amount will Fink's Paid-in capital - excess of par increase for
this transaction?
A. $345,000 B. $300,000 C.
$295,000 D. $350,000
25. Information for Hobson
International Corp. for the current year ($ in millions):
Income from continuing operations
before tax $150
Extraordinary loss (pretax) 30
Temporary differences (all
related to operating income):
Accrued warranty expense in
excess of write-offs included in operating income 10
Depreciation deducted on tax
return in excess of depreciated expense 25
Permanent differences (all
related to operating income):
Nondeductible portion of travel
& entertainment expense 5
The applicable enacted tax rate
for all periods is 40%.
How much tax on income from
continuing operations would be reported in Hobson's income statement?
A. $60 million B. $62 million C. $56
million D. $50 million
Part 4
1. Burnet Company had 30,000
shares of common stock outstanding on January 1, 2011. On April 1, 2011, the
company issued 15,000 shares of common stock. The company had outstanding fully
vested incentive stock options for 5,000 shares exercisable at $10 that had not
been exercised by its executives.
The average market price of
common stock was $9. The company reported net income in the amount of $189,374
for 2011. What is the effect of the options?
A. The options will dilute EPS by
$.09 per share. B. The options will dilute EPS by $.33 per share.
C. The options are anti-dilutive.
D. The options will dilute EPS by $.17 per share.
2. Due to an error in computing
depreciation expense, Prewitt Corporation overstated accumulated depreciation
by $20 million as of December 31, 2011. Prewitt has a tax rate of 30%.
Prewitt's retained earnings as of December 31, 2011, would be
A. understated by $6 million. B.
overstated by $14 million. C. overstated by $6 million. D. understated by $14
million
3. Rampart, Inc., recorded the
following transaction:
Land 15 million
Notes Payable 12 million
Cash 3 million
In the statement of cash flows,
this would be reported as a
A. $3 million outflow from
investing activities and $12 million noncash investing and financing activity.
B. $15 million outflow from
investing activities. C. $3 million outflow from investing activities. D. $3
million noncash investing and financing activity.
4. In its 2011 income statement,
WME reported $58,000 for insurance expense. WME paid $72,000 in insurance
premiums during 2011. In its reconciliation schedule, WME should show a
A. $14,000 negative adjustment to
net income under the indirect method for the decrease in prepaid insurance.
B. $14,000 positive adjustment to
net income under the indirect method for the increase in prepaid insurance.
C. $14,000 negative adjustment to
net income under the indirect method for the increase in prepaid insurance.
D. $14,000 positive adjustment to
net income under the indirect method for the decrease in prepaid insurance.
5. During 2011, Angel Corporation
had 900,000 shares of common stock and 50,000 shares of 6% preferred stock
outstanding. The preferred stock does not have cumulative or convertible
features. Angel declared and paid cash dividends of $300,000 and $150,000 to
common and preferred shareholders, respectively, during 2011.
On January 1, 2010, Angel issued
$2,000,000 of convertible 5% bonds at face value. Each $1,000 bond is
convertible into 5 common shares.
Angel's net income for the year
ended December 31, 2011, was $6 million. The income tax rate is 20%.
What will Angel report as diluted
earnings per share for 2011, rounded to the nearest cent?
A. $6.43 B. The correct answer
isn't given. C. $6.25 D. $6.22
6. Prior to 2011, Trapper John,
Inc., used sum-of-the-years’-digits depreciation for its store equipment.
Beginning in 2011, Trapper John decided to use straight-line depreciation for
these assets. The equipment cost $3 million when it was purchased at the
beginning of 2009, had an estimated useful life of five years and no estimated
residual value. To account for the change in 2011, Trapper John
A. would adjust accumulated
depreciation and retained earnings for the excess charges made in 2009 and
2010. B. would report depreciation expense of $400,000 in its 2011 income
statement. C. would report $3 million in depreciation expense for 2011. D.
would retrospectively report $600,000 in depreciation expense annually for 2009
and 2010, and report $600,000 in depreciation expense for 2011.
7. In its 2011 income statement,
WME reported $695,000 for service revenue earned from membership fees. WME
received $681,000 cash in advance from members during 2011. In its
reconciliation schedule, WME should show a
A. $14,000 positive adjustment to
net income under the indirect method for the decrease in unearned revenue. B.
$14,000 negative adjustment to net income under the indirect method for the
decrease in unearned revenue. C. $14,000 positive adjustment to net income
under the indirect method for the increase in unearned revenue. D. $14,000
negative adjustment to net income under the indirect method for the increase in
unearned revenue.
8. Which of the following
statements is true regarding correcting errors in previously issued financial
statements prepared in accordance with International Financial Reporting
Standards?
A. Retrospective application is
required with no exception. B. The error can be reported in the current period
if it’s not considered practicable to report it retrospectively. C. The error
can be reported prospectively if it’s not considered practicable to report it
retrospectively. D. The error can be reported in the current period if it’s not
considered practicable to report it prospectively.
9. B Company switched from the
sum-of-the-years-digits depreciation method to straight-line depreciation in
2011. The change affects machinery purchased at the beginning of 2009 at a cost
of $72,000. The machinery has an estimated life of five years and an estimated
residual value of $3,600. What is B's 2011 depreciation expense?
A. $13,680 B. $15,840 C. $9,120 D.
$19,200
10. During 2011, Falwell Inc. had
500,000 shares of common stock and 50,000 shares of 6% cumulative preferred
stock outstanding. The preferred stock has a par value of $100 per share.
Falwell did not declare or pay any dividends during 2011.
Falwell's net income for the year
ended December 31, 2011, was $2.5 million. The income tax rate is 40%.
Falwell granted 10,000 stock
options to its executives on January 1 of this year. Each option gives its
holder the right to buy 20 shares of common stock at an exercise price of $29
per share. The options vest after one year. The market price of the common
stock averaged $30 per share during 2011. What is Falwell's diluted earnings
per share for 2011, rounded to the nearest cent?
A. $3.14 B. $4.34 C. $4.90 D. The
answer can’t be determined from the information given.
11. Blue Cab Company had 50,000
shares of common stock outstanding on January 1, 2011. On April 1, 2011, the
company issued 20,000 shares of common stock. The company had outstanding fully
vested incentive stock options for 5,000 shares exercisable at $10 that had not
been exercised by its executives.
The end-of-year market price of
common stock was $13 while the average price for the year was $12. The company
reported net income in the amount of $269,915 for 2011. What is the diluted
earnings per share (rounded)?
A. $4.10. B. $4.50. C. $3.60. D.
$3.81.
12. During 2011, Falwell Inc. had
500,000 shares of common stock and 50,000 shares of 6% cumulative preferred
stock outstanding. The preferred stock has a par value of $100 per share.
Falwell did not declare or pay any dividends during 2011.
Falwell's net income for the year
ended December 31, 2011, was $2.5 million. The income tax rate is 40%.
Falwell granted 10,000 stock
options to its executives on January 1 of this year. Each option gives its holder
the right to buy 20 shares of common stock at an exercise price of $29 per
share. The options vest after one year. The market price of the common stock
averaged $30 per share during 2011.
What is Falwell's basic earnings
per share for 2011, rounded to the nearest cent?
A. The correct answer isn't
given. B. $5.00 C. $3.14 D. $4.40
13. On December 31, 2010,
Albacore Company had 300,000 shares of common stock issued and outstanding.
Albacore issued a 10% stock dividend on June 30, 2011. On September 30, 2011,
12,000 shares of common stock were reacquired as treasury stock. What is the
appropriate number of shares to be used in the basic earnings per share
computation for 2011?
A. 303,000 B. 342,000 C. 327,000 D.
312,000
14. During the current year, High
Corporation had 3 million shares of common stock outstanding. Five thousand,
$1,000, 6% convertible bonds were issued at face amount at the beginning of the
year. High reported income before tax of $4 million and net income of $2.4
million for the year. Each bond is convertible into ten shares of common. What
is diluted EPS (rounded)?
A. $.86 B. $.85 C. $.80 D. $.79
15. Bowers Corporation reported
the following ($ in 000s) for the year:
Balance
Beginning Ending
Account receivable $600 $850
Allowance for bad debt 40 35
Sales on account were $1,900, and
bad debt expense was $18 for the year. How much cash was collected from
customers on account?
A. $1,638 B. $1,627 C. $2,142 D.
$1,642
16. Sneed Corporation reported
balances in the following accounts for the current year:
Beginning Ending
Income tax payable $50 $30
Deferred tax liability 80 140
Income tax expense was $230 for
the year. What was the amount paid for taxes?
A. $210 B. $190 C. $220 D. $280
17. Under its executive stock
option plan, W Corporation granted options on January 1, 2011, that permit executives
to purchase 15 million of the company's $1 par common shares within the next
eight years, but not before December 31, 2013 (the vesting date). The exercise
price is the market price of the shares on the date of grant, $18 per share.
The fair value of the options, estimated by an appropriate option pricing model,
is $4 per option. No forfeitures are anticipated. The options are exercised on
April 2, 2014, when the market price is $21 per share. By what amount will W's
shareholder's equity be increased when the options are exercised?
A. $330 million B. $315 million C.
$270 million D. $60 million
18. Selected information from
Large Corporation's accounting records and financial statements for 2011 is as
follows ($ in millions):
Cash paid to acquire a patent $28
Treasury stock purchased for cash
25
Proceeds from sale of land and
buildings 45
Gain from the sale of land and
buildings 26
Investment revenue received 5
Cash paid to acquire office
equipment 40
Large prepares its financial
statements in accordance with IFRS. In its statements of cash flow Large most
likely reports net cash outflows from investing activities of
A. $28 million. B. $68 million. C.
$38 million. D. $18 million.
19. Like U.S. GAAP, international
standards also require a statement of cash flows. Consistent with U.S
GAAP, cash flows are classified
as operating, investing, or financing activities. However, with regard to interest
and dividend inflows and outflows, the international standard for cash flow
statements
A. allows companies to report
cash outflows from interest payments as either operating or investing cash
flows. B. designates cash outflows for interest payments and cash inflows from
interest and dividends received as operating cash flows. C. allows companies to
report cash inflows from interest and dividends as either operating or
investing cash flows. D. allows companies to report dividends paid as either
investing or operating cash flows
20. Horrocks Company granted
180,000 restricted stock awards of its no par common shares to executives,
subject to forfeiture if employment is terminated within three years. Horrocks'
common shares have a market price of $10 per share on January 1, 2010, the
grant date, and at December 31, 2011, averaging $10 throughout the year. When
calculating diluted EPS at December 31, 2011, the net increase in the
denominator of the EPS fraction will be
A. 120,000 shares. B. 60,000
shares. C. 0 shares. D. 180,000 shares.
21. The total compensation for
the award is $1,800,000 ($10 market price per share x 180,000 shares).
The stock award vests over three
years, it is expensed as $600,000 each year for three years.
At the end of 2011, the second
year, $1,200,000 has been expensed and $600,000 remains unexpensed, so $600,000
would be the assumed proceeds in an EPS calculation.
If the market price averages $10,
the $600,000 will buy back 60,000 shares and we would add to the denominator of
diluted EPS 120,000 common shares:
No adjustment to the numerator
180,000 – 60,000* = 120,000
*Assumed purchase of treasury shares
$600,000 ÷ $10 (average market
price)
60,000 shares
Which of the following would not
be accounted for using the retrospective approach?
A. A change from the full cost
method in the oil industry
B. A change in depreciation
methods
C. A change from the completed
contract method to the percent-of-completion method for long-term construction
contracts
D. A change from LIFO to FIFO
inventory costing
22. During 2011, P Company
discovered that the ending inventories reported on its financial statements were
incorrect by the following amounts:
2009 $120,000 understated
2010 $150,000 overstated
P uses the periodic inventory
system to ascertain year-end quantities that are converted to dollar amounts using
the FIFO cost method. Prior to any adjustments for these errors and ignoring
income taxes, P's retained earnings at January 1, 2011 would be
A. $30,000 overstated.
B. correct.
C. $150,000 overstated.
D. $150,000 understated.
23. Under IFRS, a deferred tax
asset for stock options
A. is the portion of the options'
intrinsic value earned to date times the tax rate. B. is created for the
cumulative amount of the fair value of the options the company has recorded for
compensation expense.
C. isn't created if the award is
"in the money;" that is, it has intrinsic value. D. is the tax rate
times the amount of compensation.
24. On January 1, 2011, G Corp.
granted stock options to key employees for the purchase of 80,000 shares of the
company’s common stock at $25 per share. The options are intended to compensate
employees for the next two years. The options are exercisable within a
four-year period beginning January 1,
2013, by the grantees still in the employ of the company. No options were
terminated during 2011, but the company does have an experience of 4%
forfeitures over the life of the stock options. The market price of the common
stock was $31 per share at the date of the grant. G Corp. used the binomial
pricing model and estimated the fair value of each of the options at $10. What
amount should G charge to compensation expense for the year ended December 31,
2011?
A. $320,000 B. $307,200 C.
$384,000 D. $400,000
25. Which of the following is not
a change in reporting entity?
A. All are changes in reporting
entity B. Reporting using comparative financial statements for the first time C.
Changing the companies that comprise a consolidated group D. Presenting
consolidated financial statements for the first time
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