Multiple Choice
1. On January 1, 2016, a company's new president was awarded a $200,000 bonus that would be paid out in two $100,000 installments in 2018 (year 3) and 2019 (year 4) of employment, contingent on employment through the year ending December 31, 2017. How much should the company expense for this bonus in 2017 and 2018?$0 for 2017; $100,000 for 2018$100,000 for 2017 and $0 for 2018$100,000 for 2017 and $100,000 for 2018$200,000 for 2017 and $0 for 2018A company, upon initial recognition of an asset retirement obligation, should not take which of the following actions? Allocate asset retirement cost to expense over the useful life of the related asset.Measure the asset retirement cost at fair value.Capitalize the asset retirement cost by increasing the carrying amount of the related asset.Capitalize the asset retirement cost at its undiscounted cash flow value Which of the following is an intangible asset that is subject to the recoverability test when testing for impairment?A patentGoodwillR&D costs for a patentA trademark with an indefinite useful lifeA company reports the following information for 2016:($9,000)$5,000$5,50015,000
- On January 1, 2016, Olson Inc. issued stock options for 200,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Olson initially estimates that it is probable the goal will be achieved. Ignoring taxes, what is reduction in earnings in 2016?
A. $0
B. $200,000
C. $400,000
D. $1,200,000
- On January 1, 2016, Caifeng Foods issued stock options for 40,000 shares to a division manager. The options have an estimated fair value of $5 each. To provide additional incentive for managerial achievement, the options are not exercisable unless Caifeng's stock price increases by 5% in four years. Caifeng Foods initially estimates that it is not probable the goal will be achieved. How much compensation will be recorded in each of the next four years?
A. $10,000
B. $45,000
C. $50,000
D. No effect
2. On December 31, 2015, the Meisenhelder Company had 250,000 shares of common stock issued and outstanding. On March 31, 2016, the company sold 50,000 additional shares for cash. Meisenhelder's net income for the year ended December 31, 2016 was $700,000. During 2016, Meisenhelder declared and paid $80,000 in cash dividends on its nonconvertible preferred stock. What is the 2016 basic earnings per share (rounded)?
A. $2.16.
B. $3.50.
C. $3.10.
D. $2.80.
3. A partial listing of a company's accounts is presented below:$20,000 $24,000 $30,000 $34,000During 2016, Hutton Co. decides to use FIFO to account for its inventory transactions. Previously, it had used LIFO.
A. Hutton is not required to make any accounting adjustments.
B. Hutton has made a change in accounting principle requiring retrospective adjustment.
C. Hutton has made a change in accounting principle requiring prospective application.
D. Hutton needs to correct an accounting error.
4. Hepburn Company bought a copyright for $90,000 on January 1, 2012, at which time the copyright had an estimated useful life of 15 years. On January 5, 2015, the company determined that the copyright would expire at the end of 2018. How much should Hepburn record as amortization expense for this copyright for 2015?
A. $14,400.
B. $7,200.
C. $18,000.
D. $12,000.
5. Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2016, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively?
A. Understate, overstate, overstate
B. Overstate, understate, understate
C. Overstate, overstate, overstate
D. Understate, understate, understate
6. Which of the following is a change in reporting entity?
A. A change to the full cost method in the extractive industries.
B. Switching to the completed contract method.
C. A change from the cost to the equity method.
D. Consolidating a subsidiary not previously included in consolidated financial statements.
7. Cooper Inc. took physical inventory at the end of 2016. Purchases that were acquired FOB destination were in transit, so they were not included in the physical count.
A. Cooper needs to correct an accounting error.
B. Cooper has made a change in accounting principle, requiring retrospective adjustment.
C. Cooper is required to adjust a change in accounting estimate prospectively.
D. Cooper is not required to make any accounting adjustments. This inventory should be excluded because it had not yet reached its destination, where title passes.
8. Heuer Company's prepaid insurance was $8,000 at December 31, 2015, and $10,000 at December 31, 2016. Heuer reported insurance expense of $15,000 on the 2016 income statement. What amount would be reported in the statement of cash flows as insurance paid using the direct method?
A. $13,000.
B. $17,000.
C. $15,000.
D. $23,000.
9. Which of the following circumstances creates a future taxable amount?
A. Service fees collected in advance from customers: taxable when received, recognized for financial reporting when earned.
B. Accrued compensation costs for future payments.
C. Straight-line depreciation for financial reporting and accelerated depreciation for tax reporting.
D. Investment expenses incurred to obtain tax-exempt income (not tax deductible).
10. On October 31, 2016, Simeon Builders borrowed $16 million cash and issued a 7-month, noninterest-bearing note. The loan was made by Star Finance Co. The stated discount rate is 8%. Sky's effective interest rate on this loan is:
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A.
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More than the stated discount rate of 8%.
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B.
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Less than the stated discount rate of 8%.
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C.
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Equal to the stated discount rate of 8%.
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D.
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Unrelated to the stated discount rate of 8%.
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11. During the current year, Coleman Company had pretax accounting income of $45 million. Coleman's only temporary difference for the year was rent received for the following year in the amount of $15 million. Coleman's taxable income for the year would be:
- A. $30 million.
B. $60 million.
C. $50 million.
D. $45 million.
- Carlo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods?
Fair Value Method Equity Method
A. No Effect Decrease
B. Increase Decrease
C. No Effect No Effect
D. Decrease No Effect
12. Goshen Company bought a copyright for $90,000 on January 1, 2012, at which time the copyright had an estimated useful life of 15 years. On January 5, 2015, the company determined that the copyright would expire at the end of 2016. How much should Goshen record retrospectively as the effect of change?
A. $0.
B. $12,000.
C. $8,000.
D. $14,400.
13. The percentage-of-completion method must be used when certain conditions exist. Which of the following is not one of those necessary conditions?
A. Estimates of progress toward completion, revenues, and costs are reasonably certain
B. The contractor can be expected to perform the contractual obligation.
C. The buyer can be expected to satisfy some of the obligations under the contract.
D. The contract clearly specifies the enforceable rights of the parties, the consideration to be exchanged, and the manner and terms of settlement.
14. On December 1, 2016, Goetz Corporation leased office space for 10 years at a monthly rental of $90,000. On that date Perez paid the landlord the following amounts:
Rent deposit $90,000
First month's rent 90,000
Last month's rent 90,000
Installation of new walls and offices 495,000
$765,000
The entire amount of $765,000 was charged to rent expense in 2016. What amount should Goetz have charged to expense for the year ended December 31, 2016?
A. $90,000
B. $94,125
C. $184,125
D. $495,000
15. On January 1, 2016, Shelley Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Shelley to make annual payments of $100,000 at the end of each year for ten years with title to pass to Shelley at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Shelley uses the straight-line method of depreciation for all of its fixed assets. Shelley accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $671,008 at an effective interest rate of 8%. With respect to this capitalized lease, Shelley should record for 2016
A. lease expense of $100,000.
B. interest expense of $44,734 and depreciation expense of $38,068.
C. interest expense of $53,681 and depreciation expense of $44,734.
D. interest expense of $45,681 and depreciation expense of $67,101.
16. General purpose external financial reporting of a corporation focuses primarily on the needs of which group?
A. Regulatory and taxing authorities.
B. Investors and creditors and their advisors.
C. The Board of Directors of the corporation.
D. The management of the corporation.
17. On January 1, 2016, the Washington Group issued $100,000 par value 5%, five-year bonds when the market rate of interest was 8%. Interest is payable annually on December 31. The following present value information is available:
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5%
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8%
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Present value of $1 (n = 5)
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0.78353
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0.68058
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Present value of an ordinary annuity (n = 5)
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4.32948
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3.99271
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What amount is the value of the net bonds payable at the end of 2016?
- $88,022
- $90,064
- $100,000
- $110,000
18. The following information is for Moyano, Inc. for the year ended December 31, 2016. Moyano had a cash and cash equivalents balance of $5,200 on January 1, 2016, and $2,320 on December 31, 2016.
Required: Prepare a statement of cash flows in good form for the year using the direct method for operating activities.
19. On January 1, 2016, a company's new president wasawarded a $200,000 bonus that would be paid out in two $100,000 installments in2018 (year 3) and 2019 (year 4) of employment, contingent on employment throughthe year ending December 31, 2017. Howmuch should the company expense for this bonus in 2017 and 2018?
A. $0 for 2017; $100,000 for 2018
B. $100,000 for 2017 and $0 for 2018
C. $100,000 for 2017 and $100,000 for 2018
D. $200,000 for 2017 and $0 for 2018
20. A company, upon initial recognition of an assetretirement obligation, should not take which of the following actions?
A. Allocate asset retirement cost to expense over theuseful life of the related asset.
B. Measure the asset retirement cost at fair value.
C. Capitalize the asset retirement cost by increasing thecarrying amount of the related asset.
D. Capitalize the asset retirement cost at itsundiscounted cash flow value
21. Which of the following is an intangible asset that issubject to the recoverability test when testing for impairment?
A. A patent
B. Goodwill
C. R&D costs for a patent
D. A trademark with an indefinite useful life
22. Acompany reports the following information for 2016:
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Sale of equipment
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$20,000
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Issuance of the company's bonds
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10,000
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Dividends paid
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5,000
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Purchase of stock of another company
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2,000
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Purchase of U.S. Treasury Note
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2,000
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Income taxes paid
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2,000
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Interest income received
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500
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What is the company's net cash flow from financingactivities?
A. ($9,000)
B. $5,000
C. $5,500
D. 15,000
23. OnJanuary 1, 2016, Olson Inc. issued stock options for 200,000 shares to adivision manager. The options have an estimated fair value of $6 each. Toprovide additional incentive for managerial achievement, the options are notexercisable unless divisional revenue increases by 6% in three years. Olson initiallyestimates that it is probable the goal will be achieved. Ignoring taxes, whatis reduction in earnings in 2016?
A. $0
B. $200,000
C. $400,000
D. $1,200,000
24. On January 1, 2016, Caifeng Foods issued stock optionsfor 40,000 shares to a division manager. The options have an estimated fairvalue of $5 each. To provide additional incentive for managerial achievement,the options are not exercisable unless Caifeng's stock price increases by 5% infour years. Caifeng Foods initially estimates that it is not probable the goalwill be achieved. How much compensation will be recorded in each of the nextfour years?
A. $10,000
B. $45,000
C. $50,000
D. No effect
25. On December 31, 2015, the Meisenhelder Companyhad 250,000 shares of common stock issued and outstanding. On March 31, 2016,the company sold 50,000 additional shares for cash. Meisenhelder's net incomefor the year ended December 31, 2016 was $700,000. During 2016, Meisenhelder declaredand paid $80,000 in cash dividends on its nonconvertible preferred stock. Whatis the 2016 basic earnings per share (rounded)?
A. $2.16.
B. $3.50.
C. $3.10.
D. $2.80.
26. A partial listing of a company's accounts is presentedbelow:
Revenues $80,000
Operatingexpenses 50,000
ForeignCurrency translation adjustment gain, net of tax 4,000
IncomeTax Expense 10,000
Whatshould the company report as net income?
A. $20,000
B. $24,000
C. $30,000
D. $34,000
27. The followinginformation pertains to H Company's outstanding stock for 2016:
Common Stock, $1 Par
Shares Outstanding , 1/1/2016 10,000
2 for 1 stock split, 4/1/2016 10,000
Shares Issued, 7/1/2016 5,000
Preferred Stock, $100 par, 7%cumulative
Shares outstanding, 1/1/2016 4,000
What is the number of shares Hshould use to calculate 2016 basic earnings per share?
A. 20,000.
B. 22,500.
C. 25,000.
D. 27,000.
28. During2016, Hutton Co. decides to use FIFO to account for its inventory transactions.Previously, it had used LIFO.
A. Hutton is not required to make any accounting adjustments.
B. Hutton has made a changein accounting principle requiring retrospective adjustment.
C. Hutton has made a change in accounting principle requiring prospectiveapplication.
D. Hutton needs to correct an accounting error.
29. Hepburn Company bought a copyright for $90,000 on January 1, 2012, atwhich time the copyright had an estimated useful life of 15 years. On January5, 2015, the company determined that the copyright would expire at the end of2018. How much should Hepburn record as amortization expense for this copyrightfor 2015?
A. $14,400.
B. $7,200.
C. $18,000.
D. $12,000.
30. Judd,Inc., owns 35% of Cosby Corporation. During the calendar year 2016, Cosby hadnet earnings of $300,000 and paid dividends of $30,000. Judd mistakenlyrecorded these transactions using the fair value method rather than the equitymethod of accounting. What effect would this have on the investment account,net income, and retained earnings, respectively?
A. Understate, overstate, overstate
B. Overstate, understate, understate
C. Overstate, overstate, overstate
D. Understate, understate, understate
31. Which of the followingis a change in reporting entity?
A. A change to the full cost method in the extractive industries.
B. Switching to the completed contract method.
C. A change from the cost to the equity method.
D. Consolidating asubsidiary not previously included in consolidated financial statements.
32. Cooper Inc. tookphysical inventory at the end of 2016. Purchasesthat were acquired FOB destination were in transit, so they were not includedin the physical count.
A. Cooper needs to correct an accounting error.
B. Cooper has made a change in accounting principle, requiringretrospective adjustment.
C. Cooper is required to adjust a change in accounting estimateprospectively.
D. Cooper is not requiredto make any accounting adjustments. Thisinventory should be excluded because it had not yet reached its destination,where title passes.
33. HeuerCompany's prepaid insurance was $8,000 at December 31, 2015, and $10,000 atDecember 31, 2016. Heuer reported insurance expense of $15,000 on the 2016income statement. What amount would be reported in the statement of cash flowsas insurance paid using the direct method?
A. $13,000.
B. $17,000.
C. $15,000.
D. $23,000.
34. Whichof the following circumstances creates a future taxable amount?
A. Service fees collected in advance from customers: taxable whenreceived, recognized for financial reporting when earned.
B. Accrued compensation costs for future payments.
C. Straight-linedepreciation for financial reporting and accelerated depreciation for taxreporting.
D. Investment expenses incurred to obtain tax-exempt income (not tax deductible).
35. On October 31,2016, Simeon Builders borrowed $16 million cash and issued a 7-month,noninterest-bearing note. The loan was made by Star Finance Co. The stateddiscount rate is 8%. Sky's effective interest rate on this loan is:
|
A.
|
More than the stated discount rate of 8%.
|
|
B.
|
Less than the stated discount rate of 8%.
|
|
C.
|
Equal to the stated discount rate of 8%.
|
|
D.
|
Unrelated to the stated discount rate of 8%.
|
36. During the current year, Coleman Company hadpretax accounting income of $45 million. Coleman's onlytemporary difference for the year was rent received for the following year inthe amount of $15 million. Coleman's taxable income for the year wouldbe:
A. $30 million.
B. $60 million.
C. $50 million.
D. $45 million.
37. Carlo Corporationdeclares and distributes a cash dividend that is a result of current earnings.How will the receipt of those dividends affect the investment account of theinvestor under each of the following accounting methods?
Fair Value Method Equity Method
A. No Effect Decrease
B. Increase Decrease
C. No Effect No Effect
D. Decrease No Effect
38. Goshen Company bought acopyright for $90,000 on January 1, 2012, at which time the copyright had anestimated useful life of 15 years. On January 5, 2015, the company determinedthat the copyright would expire at the end of 2016. How much should Goshenrecord retrospectively as the effect of change?
A. $0.
B. $12,000.
C. $8,000.
D. $14,400.
39. Thepercentage-of-completion method must be used when certain conditions exist.Which of the following is not one of those necessary conditions?
A. Estimates of progress toward completion, revenues, and costs arereasonably certain
B. The contractor can be expected to perform the contractualobligation.
C. The buyer can be expected to satisfy some of the obligations underthe contract.
D. The contract clearly specifies the enforceable rights of theparties, the consideration to be exchanged, and the manner and terms ofsettlement.
40. OnDecember 1, 2016, Goetz Corporation leased office space for 10 years at amonthly rental of $90,000. On that date Perez paid the landlord the followingamounts:
Rent deposit mce_markernbsp; 90,000
First month's rent 90,000
Last month's rent 90,000
Installation of new walls and offices 495,000
$765,000
The entire amount of $765,000 was charged to rentexpense in 2016. What amount should Goetz have charged to expense for the yearended December 31, 2016?
A. $90,000
B. $94,125
C. $184,125
D. $495,000
41. On January 1, 2016, Shelley Corporationsigned a ten-year noncancelable lease for certain machinery. The terms of thelease called for Shelley to make annual payments of $100,000 at the end of eachyear for ten years with title to pass to Shelley at the end of this period. Themachinery has an estimated useful life of 15 years and no salvage value. Shelleyuses the straight-line method of depreciation for all of its fixed assets. Shelleyaccordingly accounted for this lease transaction as a capital lease. The leasepayments were determined to have a present value of $671,008 at an effectiveinterest rate of 8%. With respect to this capitalized lease, Shelley shouldrecord for 2016
A. lease expense of $100,000.
B. interest expense of $44,734 and depreciation expense of $38,068.
C. interest expense of $53,681 and depreciation expense of $44,734.
D. interest expense of $45,681 and depreciation expense of $67,101.
42. General purpose externalfinancial reporting of a corporation focuses primarily on the needs of whichgroup?
A. Regulatory and taxingauthorities.
B. Investors and creditors andtheir advisors.
C. The Board of Directors of thecorporation.
D. The management of thecorporation.
43. On January 1, 2016, theWashington Group issued $100,000 par value 5%, five-year bonds when the marketrate of interest was 8%. Interest is payable annually on December 31. Thefollowing present value information is available:
|
|
5%
|
8%
|
|
Present value of $1 (n = 5)
|
0.78353
|
0.68058
|
|
Present value of an ordinary annuity (n = 5)
|
4.32948
|
3.99271
|
What amount is the value of the net bonds payable at the end of 2016?
A. $88,022
B. $90,064
C. $100,000
D. $110,000
44. Thefollowing information is for Moyano, Inc. for the year ended December 31, 2016.Moyano had a cash and cash equivalents balance of $5,200 on January 1, 2016,and $2,320 on December 31, 2016.
Required: Prepare a statement ofcash flows in good form for the yearusing the direct method for operating activities.