Part A -
1. For a liability to exist,
a. a past transaction or event must have occurred.
b. the exact amount must be known.
c. the identity of the party owed must be known.
d. an obligation to pay cash in the future must exist.
2. Which of the following shareholder rights is most commonly enhanced in an issue of preferred stock?
a. The right to vote for the board of directors
b. The right to maintain one's proportional interest in the corporation
c. The right to receive a full cash dividend before dividends are paid to other classes of stock
d. The right to vote on major corporate issues
3. Which of the following is not one of the basic shareholders rights?
a. The right to participate in earnings
b. The right to maintain one's proportional interest in the corporation
c. The right to participate in the proceeds of the sale of corporate assets upon liquidation of the corporation
d. The right to inspect the accounting records of the corporation
4. An adjustment to retained earnings as a result of a conversion of preferred stock to common stock most likely would occur when
a. par value of the preferred stock is high relative to fair value of the common stock.
b. par value of the common stock is less than the book value of the preferred stock.
c. par value of the common stock exceeds the book value of the preferred stock.
d. par value of the preferred stock is low relative to fair value of the common.
5. The entry to record the issuance of common stock for fully paid stock subscriptions is
a. a memorandum entry.
b. Common Stock Subscribed, Common Stock Additional Paid-In Capital.
c. Common Stock Subscribed, Subscriptions Receivable.
d. Common Stock Subscribed, Common Stock.
6. Farnon Company has not declared or paid dividends on its cumulative preferred stock in the last three years. These dividends should be reported
a. in a note to the financial statements.
b. as a reduction in stockholders' equity.
c. as a current liability.
d. as a noncurrent liability.
7. For which type of investments would unrealized increases and decreases be recorded directly in an owners' equity account?
a. Equity method securities
b. Available-for-sale securities
c. Trading securities
d. Held-to-maturity securities
8. Northwick Company acquired 10,000 shares of the common stock of Shaver Corp. in July 2011. The following January, Shaver announced a $100,000 net income for 2011 and declared a cash dividend of $.50 per share on its 100,000 shares of outstanding common stock. The Northwick Company dividend revenue from Shaver Corp. in January 2011 would be
a. $0.
b. $2,500.
c. $5,000.
d. $10,000.
9. Which of the following statements characterizes an operating lease?
a. The lessee records depreciation and interest.
b. The lessee records the lease obligation related to the leased asset.
c. The lessor transfers title of the leased property to the lessee for the duration of the lease term.
d. The lessor records depreciation and lease revenue.
10. For a capital lease, the amount recorded initially by the lessee as a liability should
a. exceed the present value at the beginning of the lease term of minimum lease payments during the lease term.
b. exceed the total of the minimum lease payments during the lease term.
c. not exceed the fair value of the leased property at the inception of the lease.
d. equal the total of the minimum lease payments during the lease term.
11. What are the three types of period costs that a lessee experiences with capital leases?
a. Interest expense, amortization expense, executory costs
b. Amortization expense, executory costs, lease expense
c. Executory costs, interest expense, lease expense
d. Lease expense, executory costs, initial costs
12. Draper Corp. leased a new building and land from Baylor Leasing Inc. for 25 years. At the inception of the lease the building and land have fair market values of $200,000 and $25,000, respectively. The building has an expected economic life of 30 years. Which of the following statements is correct regarding Draper's treatment of the lease?
a. Draper should treat the lease as a capital lease even though there is no bargain purchase option and no automatic transfer of ownership at the termination of the lease.
b. Draper should treat the lease as a capital lease only if there is either a bargain purchase option or an automatic transfer of ownership at the termination of the lease.
c. Draper should treat the lease as a capital lease provided that the land and building are recorded in separate asset accounts and accounted for separately.
d. Draper should treat the lease as a capital lease only if Baylor treats the transaction as a leveraged lease.
13. Which of the following creates a permanent difference between financial income and taxable income?
a. Interest received on municipal bonds
b. Completed contract method of recognizing construction revenue
c. Unearned rent revenue
d. Accelerated cost recovery on plant and equipment
14. Which of the following creates a temporary difference between financial and taxable income?
a. Interest on municipal bonds
b. Accelerated cost recovery on plant and equipment
c. Fines from violation of law
d. Premiums paid for officer's life insurance (company is beneficiary)
15. Which of the following temporary differences ordinarily creates a deferred tax asset?
a. Accrued warranty costs
b. Depreciation
c. Installment sales
d. Prepaid insurance
16. Which of the following temporary differences ordinarily results in a deferred tax liability?
a. Accrued warranty costs
b. Subscription revenue received in advance
c. Unrealized losses on marketable securities
d. Depreciation
17. When enacted tax rates change, the asset and liability method of interperiod tax allocation recognizes the rate change as
a. a cumulative effect adjustment.
b. an adjustment to be netted against the current income tax expense.
c. a separate charge to the current year's net income.
d. a separate charge or benefit to income tax expense.
18. A company would most likely choose the carryforward option for a net operating loss if the company expected
a. higher tax rates in the future compared to the past.
b. lower tax rates in the future compared to the past.
c. lower earnings in the future compared to the past.
d. higher earnings in the future compared to the past.
19. Which of the following taxes must be paid by both the employee and the employer?
a. Social security tax (FICA)
b. State unemployment tax
c. State withholding tax
d. Federal unemployment tax
20. Which of the following statements characterizes defined contribution plans?
a. They are more complex in construction than defined benefit plans.
b. The employer's obligation is satisfied by making the appropriate amount of periodic contribution.
c. The investment risk is borne by the employer.
d. Contributions are made in equal amounts by employer and employees.
21. The vested benefits of an employee in a pension plan represent benefits
a. to be paid to the retired employee in the current year.
b. to be paid to the retired employee in subsequent years.
c. to be paid from funds currently in the hands of an independent trustee.
d. that are not contingent on the employee's continuing in the service of the employer.
22. Wright, Inc. has an incentive compensation plan under which the sales manager receives a bonus equal to 10 percent of the company's income after deductions for bonus and income taxes. Income before bonus and income taxes is $400,000. The effective income tax rate is 30 percent. How much is the bonus (rounded to the nearest dollar)?
a. $40,000
b. $30,108
c. $28,000
d. $26,168
23. An enterprise provides for paid vacation periods for many of its employees. It is probable that these vacations will be taken, and there is a definite amount that accrues each year for each employee. Vacation benefits accrue in the amount of one paid vacation day per complete month of service, that is, an employee must work a complete month before receiving the benefits of another paid vacation day.
Given the above information, which of the following statements is correct?
a. Given only the above information, vacation pay should be accrued monthly, as employees render service.
b. Only if the benefits vest should vacation pay be accrued before payment.
c. Only if the benefits accumulate should the vacation pay be accrued before payment.
d. If the benefits neither vest nor accumulate, then the vacation pay should be recognized as expense only when paid.
24. Which of the following is not a post-employment benefit, according to SFAS No. 112, "Employers' Accounting for Postemployment Benefits"?
a. Salary continuation after severance
b. Health insurance paid for a three-month period following a layoff
c. Life insurance coverage paid for retirees
d. Job training for laid-off workers
25. Alta Corporation has a pension plan that has a provision that employees will receive benefits upon retirement even though the employees are not working for the company at the time of retirement. Such a plan is characterized as
a. defined benefit.
b. defined contribution.
c. noncontributory.
d. vested.
Part B -
Problem 1- On July 1, 2011, Hawkeye Aviation leased two helicopters from Honnicutt Aircraft for an initial period of 12 months with a provision for a continuation on a month-to-month basis. The lease is properly classified as an operating lease. Lease payments are to be made as follows:
First two months ............................... $15,000 per month
Second three months ............................ 12,000 per month
Third three months ............................. 10,000 per month
Last four months ............................... 8,000 per month
After the first year, the rent continues at $6,000 per month. Provide the entries required to record the lease payments for the first year on the books of
(1) Hawkeye Aviation.
(2) Honnicutt Aircraft.
Problem 2- The following transactions of the Snyder Company were completed during the fiscal year just ended:
(a) Purchased $100,000 of U.S. Treasury 7% bonds, paying 102.5 plus accrued interest of $1,750. In addition, the company paid brokerage fees of $500.
Snyder Company uses the revenue approach to record accrued interest. Snyder classified these bonds as a trading security.
(b) Purchased 1,000 shares of Ferris Company common stock at $125 per share plus brokerage fees of $950. Snyder classifies this stock as an available-for-sale security.
(c) Received semiannual interest on the U.S. Treasury Bonds.
(d) Sold 150 shares of Ferris at $132 per share.
(e) Sold $16,000 of U.S. Treasury 7% bonds at 102 plus accrued interest of $93.
(f) Purchased a $12,000, 6-month certificate of deposit. The certificate is classified as a trading security.
Prepare the entries necessary to record the above transactions.