Accountancy 422 Review—Fall 2010
Analysis of Review
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Topic
Leases
Leases
Taxes
Taxes
Earnings Per Share
Earnings Per Share
Leases
Taxes
Taxes
Leases
Pensions
Payroll
Pensions
Pensions
Error Correction
Derivatives
Earnings Per Share
Earnings Per Share
Error Correction
Error Correction
Error Correction
Old Pensions
Pensions
Derivatives
Joint ventures
Joint ventures
Investments
Joint ventures
Investments
Derivatives
Earnings per share
Derivatives
Leases
Taxes
Derivatives
Accounts Receivable
Impairment
Impairment
Discontinued Operations
Accounts Receivable/Cash Flow
Cash Flow Statement
Use
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
No
Yes
Yes
Yes
No
No
No
No
Yes
Yes
No
No
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
No
Yes
Yes
Answer
b
d
a
b
d
d
c
b
b
d
d
Cumulative
1
2
1
2
1
2
3
3
4
4
1
c
d
2
3
d
a
c
1
3
4
a
b
4
2
a
c
a
c
d
b
b
a
c
b
c
c
3
5
4
5
5
5
1
1
2
1
2/1
2
Accountancy 422 Review—Fall 2010
42
43
44.
45
46
47
48
Cash Flow Statement
Accounts Receivable
Cash Flow Statement
Cash Flow Statement
Cash Flow Statement
Long Term Construction
Long Term Construction
Yes
Yes
Yes
Yes
Yes
Yes
Yes
b
d
d
c
c
b
d
3
3
4
5
6
1
2
Accountancy 422 Review—Fall 2010
1. If a lessor appropriately classifies a lease as a
sales-type lease, the following items related to
the lease should be reported on the lessor’s
income statement in the first year of the lease.
a.
b.
c.
d.
Rental
Revenue
Interest
Revenue
Deprecia
tion
Expense
No
No
No
Yes
No
Yes
Yes
No
No
No
Yes
Yes
Gain
(loss)
On Sale
of
Leased
Property
No
Yes
Yes
No
Accountancy 422 Review—Fall 2010
2. A lease should be classified as a capital lease if
the present value of the minimum lease
payments at the beginning of the lease term is
equal to or exceeds
a. 70 percent
property.
b. 75 percent
property.
c. 80 percent
property.
d.90 percent
property.
of the fair value of the leased
of the fair value of the leased
of the fair value of the leased
of the fair value of the leased
Accountancy 422 Review—Fall 2010
3. On October 1, 1995, Pine Company
received $120,000 of rent in advance for
the period October 1, 1995, through
September 30, 1996. For income tax
purposes, $120,000 was included in the
1995 taxable income; whereas, for financial
reporting purposes, only $30,000 was
included in the 1995 pretax financial
income. The tax effects of the $90,000
difference would affect provision for
income taxes, the deferred tax asset, and
the deferred tax liability in the following
ways for 1995:
a.
b.
c.
d.
Provision for Deferred
Deferred
Income Taxes Tax Asset Tax Liability
Increase
Increase No effect
Decrease
Increase No effect
Increase
No effect Increase
Decrease
No effect
Increase
Accountancy 422 Review—Fall 2010
4.
The expected tax benefits resulting from
a net operating loss carryforward are
reported in the year of the net operating
loss as a(n)
a. Income tax refund receivable.
b. Deferred tax asset.
c. Extraordinary gain.
d.Reduction in deferred tax liability.
Accountancy 422 Review—Fall 2010
5.
In calculating diluted earnings per share,
the interest expense relating to
convertible bonds that are dilutive should
be
a. Deducted from income to arrive at
income available for common
shareholders.
b. Deducted from income, net of its tax
effect, to arrive at income available for
common shareholders.
c. Added to income to arrive at income
available for common shareholders.
d. Added to income, net of its tax effect, to
arrive at income available for common
shareholders.
Accountancy 422 Review—Fall 2010
6.
Dual presentation of earnings per share
data is required
a. For all corporations.
b. Whenever stock is reacquired.
c. When the capital structure of a
corporation is simple.
d. When the capital structure of a
corporation is complex.
Accountancy 422 Review—Fall 2010
7. Lovejoy Leasing Corp. leased a bulldozer to
a local construction company for five years.
The fair value (normal selling price) of the
bulldozer was $75,000. Lovejoy was
properly carrying the bulldozer in its
inventory account at $55,000. The
bulldozer must be returned to Lovejoy at
the end of the lease term. When setting
the lease payments, which were $16,468 at
the start of each year, Lovejoy took into
account an unguaranteed residual value of
$15,000. Initial direct costs amounted to
$300. The rate implicit in this lease was
12 percent. What amount should Lovejoy
have recorded as the cost of goods sold in
connection with this lease?
a.
b.
c.
d.
$38,532
$40,000
$46,789
$55,300
Accountancy 422 Review—Fall 2010
8. Faire Corporation’s pretax accounting
income for 1995 was $420,000. Included
in this amount was $47,000 of rent
revenue. At the beginning of the year there
were no balances in deferred tax accounts.
The balance sheet included $15,000 of
unearned rent revenue. The $15,000 will
be earned early in 1996. The total of
$62,000 had been collected from a tenant
during 1995, and this was the amount
reported on the tax return as rent revenue.
This was the only difference between
accounting and taxable income in 1995.
Faire’s income tax rate was 40 percent in
1995 and 35 percent in 1996. Faire’s 1995
provision for income taxes should be
a.
b.
c.
d.
$168,000
$168,750
$174,000
$179,250
Accountancy 422 Review—Fall 2010
9. Ace Company incurred a net operating loss
of $525,000 during year 2000. The
effective tax rate during 2000 was 40
percent. For the three previous years, its
taxable income and effective tax rates were
as follows:
Year
1997
1998
1999
Taxable Income
$50,000
$440,000
$275,000
Effective Tax Rate
25%
30%
35%
If there were no differences between pretax
accounting income and taxable income in
any of the years, the income tax refund
receivable account should be debited at
December 31, 2000, for
a.
b.
c.
d.
$156,750
$161,750
$171,250
$210,000
Accountancy 422 Review—Fall 2010
10. Baxter Company leased equipment to
Fritz Inc. on January 1, 1999. The lease
is for an eight-year period expiring
December 31, 2006. The first of eight
equal annual payments of $900,000 was
made on January 1, 1999, at the signing
of the lease. Baxter had purchased the
equipment on December 29, 1998 for
$4,800,000. The lease is appropriately
accounted for as a sales-type lease by
Baxter. Assume that the present value at
January 1, 1999, of all rent payments
over the lease term discounted at a 10
percent interest rate was $5,280,000.
What amount of interest revenue should
Baxter record in year 2000 (the second
year of the lease period) as a result of the
lease?
a.
b.
c.
d.
$528,000
$472,000
$438,000
$391,800
Accountancy 422 Review—Fall 2010
11. Flash Company has a defined benefit
plan for its employees. The following
information relates to this plan:
Projected Benefit Obligation, 1/1/99
$10,000,000
Fair value of plan assets, 1/1/99
10,600,000
Market-related value of plan assets, 1/1/99
10,400,000
Service cost—1999
800,000
Actual return on plan assets, 1999
900,000
Settlement rate
10%
Long-term rate of return on assets
8%
Prior service costs are being amortized in the
amount of $20,000 per year. Flash’s net periodic
pension expense for the year was.
a.
b.
c.
d.
$880,000
$920,000
$948,000
$988,000
Accountancy 422 Review—Fall 2010
13. The service cost of a defined benefit
pension plan is the
a.
b.
c.
d.
annual fee charged by the plan
administrator.
change in the pension liability caused
by plan amendments.
change in the pension liability caused
by one additional year of employee
service.
annual interest charge of the pension
liability.
Accountancy 422 Review—Fall 2010
14. To compute the amortization on the
cumulative unrecognized gains and
losses in a pension plan, the corridor is
10% of the
a. average of the beginning balances of
the fair value of plan assets and the
projected benefit obligation.
b. higher of the beginning balances of
the fair value of plan assets or the
projected benefit obligation.
c. lower of the beginning balances of the
fair value of plan assets or the
projected benefit obligation.
d. higher of the beginning marketrelated value of the plan assets or the
projected benefit obligation.
Accountancy 422 Review—Fall 2010
16. A fair value hedge would most likely be
achieved with a
a. Knockout provision with an interest rate
ceiling.
b. Knockout provision with an interest rate
floor.
c. Pay-fixed, receive variable interest rate
swap.
d. Pay-variable, receive fixed interest rate
swap.
Accountancy 422 Review—Fall 2010
17. For purposes of computing weighted average
number of shares outstanding during the year,
a midyear event that must be treated as
occurring at the beginning of the year is the
a. declaration and distribution of a stock
dividend.
b. purchase of treasury stock
c. sale of additional common stock
d. issuance of stock warrants
Accountancy 422 Review—Fall 2010
18. During its fiscal year, Richard’s Distributing
Company had net income of $100,000 (no
extraordinary items) and 50,000 shares of
common stock and 10,000 shares of preferred
stock outstanding. Richards declared and paid
dividends of $0.50 per share to common and
$6.00 per share to preferred. The preferred
stock is convertible into common stock on a
share-for-share basis. For the year, Richards
Distributing Company should report diluted
earnings per share of
a.
b.
c.
d.
$0.25
$0.67
$0.80
$1.67
Accountancy 422 Review—Fall 2010
23. On January 1, 2001, Cubs Corporation adopted
a defined benefit pension plan. The plan’s
service cost of $150,000 was fully funded at
the end of 2001. Prior service cost was funded
by a contribution of $60,000 at the end of
2001. Amortization of prior service cost was
$24,000 for 2001. What is the amount of
Cub’s comprehensive income at December 31,
2001?
a.
b.
c.
d.
$36,000
$60,000
$84,000
$90,000
Accountancy 422 Review—Fall 2010
24. On March 1, 2002 Vernonia Corporation
stock was trading for $43 per share. On
that date Lynn Good bought a call option
for $7.00. The expiration date was June
30. The strike price was $40. On June
30 Vernonia Corporation traded at $38
per share. What was Lynn Good’s profit
or loss on the call option?
a. $900
b. $700
c. $200
d. $500
loss
loss
gain
gain
Accountancy 422 Review—Fall 2010
30. Which of the following would most likely
be the underlying of an interest rate
swap?
a. 30-day LIBOR.
b. The fixed rate of interest stated in
the derivative.
c. The hypothetical value upon which
interest is calculated.
d. The principle amount of the loan
being hedged.
Accountancy 422 Review—Fall 2010
31. Jett Corp. had 600,000 shares of
common stock outstanding on January
1, issued 900,000 shares on July 1, and
had income applicable to common stock
of $1,260,000 for the year. Basic
earnings per share would be
a.
b.
c.
d.
$2.10
$1.00
$1.20
$1.40
Accountancy 422 Review—Fall 2010
32. The Explorer Company uses interest rate
swaps to hedge its variable rate loans. At
the beginning of the year the value of the
swaps on the books was a liability of
$2,500,000 At year end the finance
company reported that the swaps were
assets in the amount of $2,350,000 on
the finance company books. All swaps
qualify as perfect hedges. What is the
effect on Explorer’s income statement.
a.
b.
c.
d.
No effect
Gain of $150,000
Loss of $150,000
Loss of $2,350,000
Accountancy 422 Review—Fall 2010
33. On January 1, 2004, Sims Corporation
signed a ten-year noncancelable lease for
certain machinery. The terms of the
lease called for Sims to make annual
payments of $300,000 at the end of each
year for ten years with the title to pass
to Sims at the end of this period. The
machinery has an estimated life of
fifteen years and no salvage value. Sims
uses the straight line method of
depreciation for all of its fixed assets.
The present value of the minimum lease
payments is $2,013,024 at an implicit
interest rate of 8%. With respect to this
lease Sims should record for 2004
a. Lease expense of $300,000
b. Interest expense of $134,202 and
depreciation expense of $114,204
c. Interest expense of $161,043 and
depreciation expense of $134,202
d. Interest expense of $137,043 and
depreciation of $201,302
Accountancy 422 Review—Fall 2010
34. Prince Corporation recorded the
following entry for taxes in its first year
of operations:
Provision for income taxes
Income taxes payable
Deferred tax liability
$1,050,000
$966,000
$84,000
Prince uses the straight line method of
depreciation for financial reporting purposes
and accelerated depreciation for tax
purposes. The amount charged to
depreciation expense on its books this year
was $1,400,000. No differences existed
between book income and taxable income
except for the amount of depreciation.
Assuming an enacted tax rate of 30%, what
amount was deducted for depreciation on the
corporation’s tax return?
a.
b.
c.
d.
$1,120,000
$1,316,000
$1,484,000
$1,680,000
Accountancy 422 Review—Fall 2010
35. Which of the following would constitute
an embedded option to an interest rate
swap:
a.
b.
c.
d.
Early termination agreement
Knockout provision
Pay variable portion in the swap
Pay fixed portion in the swap.
Accountancy 422 Review—Fall 2010
36. A method of estimating bad debts that
focuses on the balance sheet rather than
the income statement is the allowance
method based on
a.
b.
c.
d.
Direct write-off
Aging the trade receivable accounts.
Credit sales
Specific accounts determined to be
uncollectible.
Accountancy 422 Review—Fall 2010
37. Which of the following costs of Goodwill
should be amortized over their estimated
useful lives?
a.
b.
c.
d.
Cost of Goodwill
from a business
combination
accounted for
as a purchase
No
No
Yes
Yes
Cost of
developing
goodwill
internally
No
Yes
No
Yes
Accountancy 422 Review—Fall 2010
38. When conducting an analysis of goodwill
for impairment, the following procedure
is used:
a. The undiscounted future cash flows of
the goodwill asset are compared to
its book value to assess whether an
impairment exists
b. The discounted future cash flows of
the goodwill asset are compared to
its book value to assess whether an
impairment exists.
c. the fair value of the reporting unit is
compared to the book value of the
reporting unit.
d. cash flow from assets within the asset
group are compared to the fair value
of the goodwill
Accountancy 422 Review—Fall 2010
39. In 2005 Morpheus Company determined
that it must recognize an impairment of
goodwill in the amount of $8,400,000.
The book value of the related subsidiary
was $66,500,000 at the beginning of the
year. Morpheus decided to sell the
subsidiary during 2005 and was able to
complete the sale to Neo Company for
$16,100,000. Prior to the sale the
subsidiary had pretax loss of $4,900,000.
The effective tax rate is 40%. What
amount will Morpheus report on the
income statement for loss on
discontinued operation?
a.
b.
c.
d.
$22,260,000
$25,200,000
$28,140,000
$30,240,000
Accountancy 422 Review—Fall 2010
40. Beginning accounts receivable was
$10,000, and ending accounts receivable
was $8,000. Sales from the year totaled
$60,000, with $45,000 of it sold on
account. Based on this information,
what amounts of revenue and cash flow
from operations will be reported for the
year?
a
b
c
d
Revenue
$45,000
.
$60,000
.
$60,000
.
$45,000
.
Cash inflow
$58,000
$58,000
$62,000
$62,000
Accountancy 422 Review—Fall 2010
41. Which one of the following items would
be found in the operating activities
section of the cash flow statement under
the indirect format?
a. collections from the sale of equipment
b. payment to the shareholders for
dividends
c. increase in accounts receivable
d. proceeds from issuing bonds
Accountancy 422 Review—Fall 2010
42. Hiway Haulers owned a truck that cost
$20,000 when it was purchased on
January1, 1997. It had accumulated
depreciation of $12,000 at December 31,
1998. The company originally estimated
the truck would have a residual value
after using it for three years of $2,000.
It sold the truck for $15,000 cash on
January 1, 1999. The amount of the
gain or loss on the sale of the truck was:
a. $ 3,000 gain
b. $ 7,000 gain
c. $13,000 gain
d. $ 1,000 loss
Accountancy 422 Review—Fall 2010
43. A transaction to write-off an account
receivable would affect the:
a. Accounts Receivable and Bad Debts
Expense accounts.
b. Allowance for Doubtful Accounts and
Bad Debts Expense accounts.
c. Allowance for Doubtful Accounts and
Cash accounts.
d. Allowance for Doubtful Accounts and
Accounts Receivable accounts.
Accountancy 422 Review—Fall 2010
44. At year-end, Pat counted $300 in office
supplies on hand. The firm had $150 of
supplies on hand at the beginning of the
year and had purchased $1,800 of
supplies during the year. What was
supplies expense for the year?
a. $1,350
b. $1,950
c. $1,800
d. $1,650
Accountancy 422 Review—Fall 2010
45. Bosco Company had the following
financial information:
Accounts receivable—December 31, 2001
Cash collected from customers during 2002
Accounts receivable—December 31, 2002
Sales revenue for 2002 was:
a. $470,000
b. $460,000
c. $410,000
d. $390,000
$60,000
$400,000
$70,000
Accountancy 422 Review—Fall 2010
46. The net income for the year ended
December 31,2002 for Garfield
Corporation was $1,760,000. Additional
information is as follows:
Purchase of plant assets
Depreciation on plant assets
Dividends declared and paid
Net decrease in noncash current assets
Loss on sale of machine
$1,400,000
$ 740,000
$ 485,000
$ 145,000
$
65,000
Based on the above information, what
should be the net cash flow from
operating activities in Garfield’s
statement of cash flows for the year
ended December 31, 2002?
a.
b.
c.
d.
$2,565,000
$2,645,000
$2,710,000
$3,625,000
Accountancy 422 Review—Fall 2010
47. When goods or services are exchanged
for cash or claims to cash (receivables),
revenues are
a.
b.
c.
d.
earned.
realized or realizable.
realized or realizable and earned.
realized or realizable or earned.
Accountancy 422 Review—Fall 2010
48.
Noland
Constructors,
Inc.
has
consistently used the percentage-ofcompletion method of recognizing
income. In 2007, Noland started work
on
a
$35,000,000
construction
contract that was completed in 2008.
The following information was taken
from
Noland's
2007
accounting
records:
Progress billings
Costs incurred
Collections
Estimated costs to
complete
$11,000,000
10,500,000
7,000,000
21,000,000
What amount of revenue should Noland
have recognized in 2007 on this
contract?
a.
b.
c.
d.
$28,000,000
$24,500,000
$12,833,333
$11,666,665