1. A preemptive right is (Points: 4)
the right to vote in the election of directors and to establish corporate policies
the right to share in the profits when a dividend is declared
the right to maintain a proportionate interest in the ownership of the corporation
by purchasing a proportionate share of additional capital stock should such stock be issued
the right to share in the distribution of the assets of the corporation should it be
liquidated
2. When common stock is issued at an amount greater than par value, the difference between the
par value and the proceeds from the sale is recorded by (Points: 4)
crediting the common stock account
debiting an additional paid-in capital account
crediting the retained earnings account
crediting an additional paid-in capital account
3. Assume common stock is issued to employees as a result of exercising stock warrants issued
under a noncompensatory stock option plan. Which of the following accurately describes the
effect on the company's income, paid-in capital, and retained earnings, respectively? (Points: 4)
decreased, increased, and decreased
no effect, increased, and increased
decreased, increased, and no effect
no effect, increased, and no effect
4. Lopez, Inc. issued 500 shares of $50 par value convertible preferred stock at $80 a share. Each
preferred share may be converted to 6 shares of $10 par common stock. The entry to record the
conversion of all shares would include a (Points: 4)
debit to Preferred Stock for $30,000
debit to Additional Paid-in Capital on Preferred Stock for $40,000
credit to Common Stock for $25,000
credit to Additional Paid-in Capital from Preferred Stock Conversion for $10,000
5. Which of the following items could appropriately be shown in the contributed capital section
of stockholders' equity on the balance sheet? (Points: 4)
unrealized capital
donated capital
common stock option warrants
none of the above
6. When a company acquires treasury stock, what effect does this transaction have on earnings
per share and legal capital, respectively? (Points: 4)
increase, decrease
increase, increase
decrease, decrease
increase, none
7. On January 1, 2010, 70 executives were granted a performance-based stock option plan that
would award them each a maximum of 300 shares of $5 par common stock for $12 a share based
on the increase in sales over the next three years. The fair value per option on the grant date was
$16. The award table is as follows:
Increase in Sales
No. of Shares
10%
100
15%
200
20%
300
The company estimates that the sales increase will be 22% and that the annual employee
turnover rate will be 2%. The compensation expense for 2011 is (to the nearest dollar)
(Points: 4)
$82,320
$105,414
$109,760
$210,828
8. On January 1, 2010, Brennen Corporation had 20,000 shares of common shares outstanding.
During the year, it sold another 2,600 shares on July 1 and reacquired 600 shares on November
1. The corporation earned $337,600 net income. The company also has 15,000 shares of $10 par
value, 6%, cumulative preferred stock on which no dividends have been declared for the last two
years. The basic earnings per share for the year is (Points: 4)
$15.92
$15.65
$15.50
$15.08
9. Which one of the following statements concerning earnings per share amounts is true? (Points:
4)
Earnings per share related to discontinued operations must be reported on the income
statement.
Earnings per share related to extraordinary items must be reported on the income
statement.
Earnings per share related to continuing operations must be reported on the
income statement.
Earnings per share related to the cumulative effect of a change in accounting principle
must be reported on the income statement.
10. Smock Corporation had 30,000 shares of common stock outstanding during the year. In
addition, there were compensatory stock options to purchase 3,000 shares of common stock at
$20 a share outstanding the entire year. The average market price for the common stock during
the year was $36 a share. The unrecognized compensation cost (net of tax) relating to these
options was $4 a share. The denominator to compute the diluted earnings per share is (Points: 4)
31,000
31,333
31,667
33,000
11. The Carol Company has issued 10%, fully participating, cumulative preferred stock with a
total par value of $600,000 and common stock with a total par value of $900,000. No dividends
are in arrears. How much cash will be paid to the preferred stockholders and the common
stockholders, respectively, if cash dividends of $141,000 are distributed? (Points: 4)
$60,000 and $90,000
$114,000 and $27,000
$51,000 and $90,000
$60,000 and $81,000
12. Which statement best represents the relationship between date of declaration, date of record
and ex-dividend date, and date of payment, for a cash dividend. (Points: 4)
The date of payment results in the biggest decrease in the current ratio.
The date of record establishes the amount to be received.
The ex-dividend date establishes the decrease to cash.
The date of declaration establishes the increase to liabilities.
13. How will a company's total current liabilities and total stockholders' equity be affected by the
declaration of a stock dividend? (Assume the stock dividend is distributed at a later date.)
Total
Current Liabilities
Total Stockholders' Equity (Points: 4)
increase
decrease
increase
no effect
no effect
decrease
no effect
no effect
14. The following information is provided for the Columbus Company:
Deferred compensation payable-stock appreciation rights $ 10
Bonds payable
120
Additional paid-in capital on common stock
20
Donated capital
16
Treasury stock (at cost)
8
Common stock, $1 par
100
Common stock option warrants
40
Unrealized increase in value of available for sale securities 28
Additional paid-in capital from treasury stock
3
Retained earnings
57
What is the total stockholders' equity of Columbus Company? (Points: 4)
$212
$228
$256
$272
none of these
15. Net assets increase from cost to selling price when revenue is recognized
During Production | At Time of Sale | At Time of Cash Receipt (Points: 4)
Yes
Yes
Yes
Yes
Yes
No
Yes
No
No
No
No
No
16. The proportional performance method is usually associated with (Points: 4)
revenue recognition in the period of sale
revenue recognition prior to the period of sale
revenue recognition after the period of sale
revenue recognition delayed until a future event occurs
17. When there is not assurance that the buyer can be expected to satisfy its obligations under a
contract, which of the following revenue recognition methods is preferable? (Points: 4)
percentage-of-completion method
installment method
deposit method
completed-contract method
18. In 2010, Alpha Construction began work on a contract with a price of $850,000 and
estimated costs of $595,000. Data for each year of the contract are as follows:
2010
2011
2012
Costs incurred during the $238,000 $319,600
year
$105,00
Estimated costs to
complete
-0-
357,000
139,400
Partial billings
260,000
210,000
380,000
Collections
240,000
200,000
410,000
Under the percentage-of-completion method of revenue recognition, gross profit in 2010 would
be (Points: 4)
$102,000
$260,000
$255,000
$425,000
19. The Naples Company uses the percentage-of-completion method and the cost-to-cost method
for its long-term construction contracts. On one such contract, Naples expects total revenues of
$260,000 and total costs of $200,000. During the first year, Naples incurred costs of $50,000 and
billed the customer $30,000 under the contract. At what net amount should Naples’ Construction
in Progress for this contract be reported at the end of the first year? (Points: 4)
$30,000
$35,000
$50,000
$65,000
20. Givens, Inc. repossessed an item it sold in 2010 with a gross profit of 40%. The fair value of
the repossessed item was $140. The remaining receivable amounted to $400. What account had
the smallest amount debited to it? (Points: 4)
Allowance for Doubtful Installment Accounts Receivable
Accounts Receivable
Repossessed Inventory
Deferred Gross Profit
21. When a down payment is received, the deposit from purchaser account used under the
deposit method is reported on the balance sheet of the seller as a(n) (Points: 4)
revenue
liability
asset
contra asset
22. As of December 31, 2010, the Austin Company reported a deferred tax asset of $60,000
related to accrued, unpaid warranty costs. However, since profits have been declining, Austin
decides that it is more likely than not that $24,000 of the deferred tax asset will not be realized.
The entry to record the valuation allowance would include a (Points: 4)
debit to Income Tax Expense for $60,000
credit to Income Tax Expense for $24,000
debit to Allowance to Reduce Deferred Tax Asset to Realizable Value for $24,000
credit to Allowance to Reduce Deferred Tax Asset to Realizable Value for $24,000
23. A deferred tax asset would result if (Points: 4)
a company recorded a tax penalty in 2010 that it paid in 2011
a company recorded more taxable depreciation in 2010 for an asset acquired in 2008
a company recorded more warranty expense in 2010 than cash paid in 2010 for
warranty repairs
a company recorded more interest expense in 2010 than cash paid in 2010 for interest
24. During its first year of operations, 2010, the Hico Company reported both a pretax financial
and a taxable loss of $200,000. The income tax rate is 30% for the current and future years. Due
to a sufficient backlog of sales orders, Hico did not establish a valuation allowance to reduce the
$60,000 deferred tax asset. However, early in 2011, one major customer, representing 60% of the
2011 year-end sales backlog, went bankrupt. Hico now believes that it is more likely than not
that 70% of the deferred tax asset will not be realized. The entry to record the valuation
allowance would be (Points: 4)
Income Tax Expense
42,000
Deferred Tax Asset
42,000
Income Tax Benefit from Operating
Loss Carryforward
42,000
Deferred Tax Asset
42,000
Income Tax Expense
42,000
Allowance to Reduce Deferred
Tax Asset to Realizable Value
42,000
Allowance to Reduce Deferred Tax
Asset to Realizable Value
42,000
Income Tax Expense
42,000
25. Which of the following statements is true regarding a defined contribution pension plan?
(Points: 4)
The pension benefits to be received by the employee during retirement are defined in the
plan.
Defined contribution plans are the most popular type of pension plan for large
corporations.
Defined contribution plans do not define the required benefits that must be paid to
retired employees.
Employers that use defined contribution plans are assuming more risks than employers
that use defined benefit plans.
26. Current GAAP regarding employers’ accounting for defined benefit pension plans defines an
underfunded pension at the end of the period when the (Points: 4)
fair value of plan assets exceeds the projected benefit obligation
projected benefit obligation exceeds the fair value of plan assets
accumulated benefit obligation exceeds the fair value of the plan assets
fair value of the plan assets exceed the accumulated benefit obligation
27. Amortization of any unrecognized net gain or loss is included in pension expense of a given
year if at the (Points: 4)
end of the year, the cumulative unrecognized net gain or loss exceeds 10% of the greater
of the actual projected benefit obligation or the fair value of the plan assets
beginning of the year, the cumulative unrecognized net gain or loss exceeds 10% of the
greater of the actual accumulated benefit obligation or the fair value of the plan assets
end of the year, the cumulative gain or loss exceeds 10% of the greater of the actual
accumulated benefit obligation or the fair value of the plan assets
beginning of the year, the unrecognized cumulative gain or loss exceeds 10% of the
greater of the actual projected benefit obligation or the fair value of the plan assets
28. The Susan Company has a defined benefit pension plan for its employees. The following
information pertains to the pension plan:
Projected benefit obligation, December 31, 2010
$1,680,000
Fair value of plan assets, December 31, 2010
1,739,000
Accrued/prepaid pension cost (asset), December 31, 2009 51,300
The December 31, 2010 adjusting journal entries include a (Points: 4)
debit to Accrued/Prepaid Pension Cost for $7,700
debit to Other Comprehensive Income for $7,700
credit to Other Comprehensive Income for $110,300
credit to Accrued/Prepaid Pension Cost for $110,300
29. Disclosures for a defined benefit pension plan should include which of the following?
I.
number of beneficiaries
II.
reconciliation of the ending value of the projected benefit obligation
III.
reconciliation of the ending fair value of the plan assets
IV.
the composition of plan assets
V.
the discount rate used
VI.
expected long-term rate of return on plan assets (Points: 4)
I, II, III, IV
I, III, V, VI
II, III, V, VI
III, IV, V, VI
30. Which of the following statements regarding postretirement benefits other than pensions is
true? (Points: 4)
A liability for postretirement benefits other than pensions is not required to be reported
on the balance sheet.
The interest component of the net postretirement benefit expense is based on the
accumulated postretirement benefit obligation (APBO).
The interest component of the net postretirement benefit expense is based on the
expected postretirement benefit obligation (EPBO).
An intangible asset for other postemployment benefits (OPEB) is required to be reported
on a company's balance sheet.
31. The interest rate that may be used to compute the interest cost component of pension expense
is equal to the (Points: 4)
company's expected long-term rate of return on plan assets
rate of return on high quality fixed-income investments
rate of interest at which the pension benefits could be effectively settled
rate of return on high quality fixed-income investments or rate of interest at which
the pension benefits could be effectively settled
32. If an employer were to account for a defined benefit pension plan on the cash basis, it would
be a violation of the (Points: 4)
going-concern assumption
accrual concept
separate entity concept
double-entry accounting
33. From the lessee's viewpoint, all of the following are advantages of leasing except that
(Points: 4)
if a lease is recorded as a capital lease, the calculated rate of return on the total
assets ratio and the current ratio will be improved
a lease agreement may reduce the risk of obsolescence for a lessee
in many cases, an asset may be leased without requiring the lessee to make a substantial
down payment
the lessee may be able to claim larger tax deductions through leasing the asset than if the
asset were purchased
34. From the lessor's standpoint, all of the following statements are true regarding leasing except
that (Points: 4)
the lease may serve as a marketing tool and thereby increase sales
if the residual value of the asset is not guaranteed, the lessor has transferred the
risks of residual value decreases to the lessee
for sales-type lease agreements, the lessor earns interest in addition to profit from the
transfer of the asset
the accounting procedures used by a lessor for a sales-type lease are similar to the
accounting procedures used for a normal sale of merchandise under a perpetual inventory system
35. Minimum lease payments do not include (Points: 4)
any guarantee by the lessee of the residual value
any payments on failure to renew or extend the lease
executory costs
minimum periodic rental payments
36. According to current GAAP, leased property recorded as a capital lease normally should be
reported as a long-term or intangible asset on the balance sheet of the lessee and the lessor as
follows:
Lessee
Lessor
(Points: 4)
included
included
included
not included
not included
not included
not included
included
37. The lessee should classify a noncancelable long-term lease as a capital lease if (Points: 4)
there is a purchase option at the end of the lease term
the present value of the minimum lease payments is at least 75% of the fair value of the
leased property
the present value of the minimum lease payments is at least 90% of the fair market
value of the leased property to the lessor
the estimated residual value of the leased property at the termination of the lease is equal
to 90% of the lessee's guaranteed residual value
38. On January 1, 2010, Victor Company signed a lease agreement requiring six annual
payments of $60,000, beginning December 31, 2010. The lease qualifies as a capital lease.
Victor's incremental borrowing rate was 9% and the lessor's implicit rate, known by Victor, was
10%. The present value factors of an ordinary annuity of $1 for six periods for interest rates of
9% and 10% are 4.485919 and 4.355261, respectively. The balance of the lease obligation on
January 1, 2011, for financial reporting purposes after the lease payment would be (round
answers to the nearest dollar) (Points: 4)
$0
$166,779
$227,448
$233,379
39. Which of the following statements regarding the calculation of the lessee's depreciation
expense for a capital lease is true? (Points: 4)
The bargain purchase option price is deducted from the original cost capitalized, and the
difference is allocated over the estimated economic life of the asset.
The guaranteed residual value is deducted from the original cost capitalized, and the
difference is allocated over the estimated economic life of the asset.
The unguaranteed residual value is deducted from the original cost capitalized, and the
difference is allocated over the term of the lease.
The guaranteed residual value is deducted from the original cost capitalized, and
the difference is allocated over the term of the lease.
40. Which of the following facts would preclude a lessor from classifying a lease as a sales-type
or direct financing lease? (Points: 4)
The undiscounted sum of the minimum lease payments is 90% of the fair value of
the leased property to the lessor.
The collectability of the minimum lease payments is reasonably assured.
The lease term is 75% of the estimated economic life of the leased property.
No important uncertainties exist about unreimbursable costs yet to be incurred by the
lessor.
41. In a statement of cash flows, increases or decreases in noncurrent assets are most closely
associated with (Points: 4)
operating activities
investing activities
financing activities.
investing or financing activities
42. A company sold equipment for $5,000. The equipment originally cost $15,000 and had
accumulated depreciation of $11,000. Which of the following statements is correct regarding the
statement of cash flows prepared using the indirect method to report operating activities? (Points:
4)
$5,000 will be added to net income.
Investing activities will reflect proceeds of $4,000 from the sale.
$1,000 will be added to net income.
$1,000 will be deducted from net income.
43. Which of the following items would be deducted from net income to determine net cash
provided by operating activities using the indirect method? (Points: 4)
loss on sale of plant assets and amortization of bond payable discount
amortization of bond payable premium and gain on sale of equipment
amortization expense and gain on sale of equipment
decrease in income taxes payable and amortization of goodwill
44. The IFRS categories of cash flows are (Points: 4)
long-term changes and short-term changes
operating and other
operating, investing, and financing
operating and nonoperating
45. When preparing a statement of cash flows under the indirect method, an increase in ending
accounts receivable over beginning accounts receivable will result in an adjustment to net
income in the operating activities section because (Points: 4)
cash was increased since accounts receivable is a current asset
the accounts receivable increase was a revenue included in net income, but it was
not a source of cash
the net increase in accounts receivable decreases net sales and represents an assumed use
of cash
all changes in noncash accounts must be disclosed on the cash flow statement
46. Generally accepted methods of accounting for a change in accounting principle include
(Points: 4)
restating prior years' financial statements presented for comparative purposes
including the cumulative effect of the change in net income
prospective changes
making a prior period adjustment
47. The mandatory adoption of a new accounting principle as a result of a new FASB statement
requires (Points: 4)
footnote disclosure only
a cumulative effect adjustment
retrospective adjustment
prospective restatement
49. The Tricia Co. presented financial statements for 2010 and 2011 that contained the following
errors:
2011
2010
Ending merchandise
inventory
$700 understated
$400 overstated
Supplies expense
500 understated
100 overstated
Assuming that no correcting entries were made, by how much would retained earnings be
understated at January 1, 2012? (Points: 4)
$1,200
$1,100
$800
$700
50. During a year-end evaluation of the financial records of the Gretchen Company for the year
ended December 31, 2010, the following was discovered:
•
Inventory on January 1, 2010, was understated by $6,000.
•
Inventory on December 31, 2010, was understated by $18,000.
•
Rent of $20,000 collected in advance on December 29, 2010, was included in income for
2010.
•
A probable, reasonably estimated contingent liability of $30,000 was not recorded as of
December 31, 2010.
Net income for 2010 (before any of the above items) was $100,000. The corrected net income,
ignoring income taxes, for 2010 should be (Points: 4)
$50,000
$58,000
$62,000
$68,000