ACC 423 Final Exam Complete Set-2 - 31210

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The conversion of preferred stock may be recorded by the

A.  incremental method.

B.  book value method.

C.  market value method.

D.  par value method.

 

2) Proceeds from an issue of debt securities having stock warrants should NOT be allocated between debt and equity features when

A.  the market value of the warrants is NOT readily available.

B.  exercise of the warrants within the next few fiscal periods seems remote.

C.  the allocation would result in a discount on the debt security.

D.  the warrants issued with the debt securities are nondetachable.

 

3) When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par value of the bonds and the fair market value of the warrants, the excess should be credited to

 

A.  additional paid-in capital from stock warrants.

B.  retained earnings.

C.  a liability account.

D.  premium on bonds payable.

 

4) When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the

 

A.  market value of the services received.

B.  par value of the shares issued.

C.  market value of the shares issued.

D.  Any of these provides an appropriate basis for recording the transaction.

 

5) Total stockholders' equity represents

 

A.  a claim to specific assets contributed by the owners.

B.  the maximum amount that can be borrowed by the enterprise.

C.  a claim against a portion of the total assets of an enterprise.

D.  only the amount of earnings that have been retained in the business.

 

6) A primary source of stockholders' equity is

 

A.  income retained by the corporation.

B.  appropriated retained earnings.

C.  contributions by stockholders.

D.  both income retained by the corporation and contributions by stockholders.

 

7) “Gains" on sales of treasury stock (using the cost method) should be credited to

 

A.  paid-in capital from treasury stock.

B.  capital stock.

C.  retained earnings.

D.  other income.

 

8) When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited?

 

A.  Treasury stock for the par value and paid-in capital in excess of par for the excess of the purchase price over the par value.

B.  Treasury stock for the purchase price.

C.  Paid-in capital in excess of par for the purchase price.

D.  Treasury stock for the par value and retained earnings for the excess of the purchase price over the par value.

 

9) How should a "gain" from the sale of treasury stock be reflected when using the cost method of recording treasury stock transactions?

 

A.  As ordinary earnings shown on the income statement.

B.  As an increase in the amount shown for common stock.

C.  As paid-in capital from treasury stock transactions.

D.  As an extraordinary item shown on the income statement.

 

10) What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively?

 

A.  Decrease and no effect

B.  Decrease and increase

C.  Increase and no effect

D.  Increase and decrease

 

 

11) Antidilutive securities

 

A.  should be included in the computation of diluted earnings per share but NOT basic earnings per share.

B.  include stock options and warrants whose exercise price is less than the average market price of common stock.

C.  are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share.

D.  should be ignored in all earnings per share calculations.

 

12) In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are

 

A.  weighted by the number of days outstanding.

B.  considered outstanding at the beginning of the year.

C.  weighted by the number of months outstanding.

D.  considered outstanding at the beginning of the earliest year reported.

 

13) On December 31, 2006, the stockholders' equity section of Clark, Inc., was as follows: Common stock, par value $10; authorized 30,000 shares. 

 

Issued and outstanding 9,000 shares$ 90,000

Additional paid-in capital116,000

Retained earnings174,000

Total stockholders' equity$380,000

 

On March 31, 2007, Clark declared a 10% stock dividend, and accordingly 900 additional shares were issued, when the fair market value of the stock was $18 per share. For the three months ended March 31, 2007, Clark sustained a net loss of $32,000. The balance of Clark’s retained earnings as of March 31, 2007, should be

 

A.  $125,800.

B.  $134,800.

C.  $133,000.

D.  $142,000.

 

14) At its date of incorporation, Wilson, Inc. issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Wilson acquired 20,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. There have been no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts? 

 

Retained Earnings | Additional Paid-in Capital

 

A.  Decrease | Decrease

B.  Decrease | No effect

C.  No effect | Decrease

D.  No effect | No effect

 

15) On May 1, 2007, Kent Corp. declared and issued a 10% common stock dividend. Prior to this dividend, Kent had 100,000 shares of $1 par value common stock issued and outstanding. The fair value of Kent 's common stock was $20 per share on May 1, 2007. As a result of this stock dividend, Kent's total stockholders' equity

 

A.  increased by $200,000.

B.  decreased by $10,000.

C.  decreased by $200,000.

D.  did NOT change.

 

 

16) An unrealized holding gain on a company's available-for-sale securities should be reflected in the current financial statements as

 

A.  an extraordinary item shown as a direct increase to retained earnings.

B.  a note or parenthetical disclosure only.

C.  a current gain resulting from holding securities.

D.  other comprehensive income and included in the equity section of the balance sheet.

 

17) Which of the following is NOT generally correct about recording a sale of a debt security before maturity date?

 

A.  Accrued interest will be received by the seller even though it is NOT an interest payment date.

B.  The entry to amortize a premium to the date of sale includes a credit to the Premium on Investments in Debt Securities.

C.  An entry must be made to amortize a discount to the date of sale.

D.  A gain or loss on the sale is NOT extraordinary.

 

18) A reclassification adjustment is reported in the

 

A.  income statement as an Other Revenue or Expense.

B.  statement of comprehensive income as other comprehensive income.

C.  stockholders’ equity section of the balance sheet.

D.  statement of stockholders’ equity.

 

19) Which of the following is NOT a debt security?

 

A.  Convertible bonds

B.  All of these are debt securities.

C.  Commercial paper

D.  Loans receivable

 

20) Securities which could be classified as held-to-maturity are

 

A.  redeemable preferred stock.

B.  treasury stock.

C.  warrants.

D.  municipal bonds.

 

21) When an investor's accounting period ends on a date that does NOT coincide with an interest receipt date for bonds held as an investment, the investor must

 

A.  make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date.

B.  do nothing special and ignore the fact that the accounting period does NOT coincide with the bond's interest period.

C.  notify the issuer and request that a special payment be made for the appropriate portion of the interest period.

D.  make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of interest to be received at the next interest receipt date.

 

22) Byner Corporation accounts for its investment in the common stock of Yount Company under the equity method. Byner Corporation should ordinarily record a cash dividend received from Yount as

 

A.  a reduction of the carrying value of the investment.

B.  dividend income.

C.  additional paid-in capital.

D.  an addition to the carrying value of the investment.

 

23) Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

 

A.  investor sells the investment.

B.  earnings are reported by the investee in its financial statements.

C.  investee declares a dividend.

D.  investee pays a dividend.

 

24) An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as 

 

Fair Value Method | Equity Method

 

A.  Income | Income

B.  A reduction of the investment | Income

C.  A reduction of the investment | A reduction of the investment

D.  Income | A reduction of the investment

 

25) Held-to-maturity securities are reported at

 

A.  acquisition cost.

B.  fair value.

C.  acquisition cost plus amortization of a discount.

D.  acquisition cost plus amortization of a premium.

 

26) Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses and are included as other comprehensive income and as a separate component of stockholders' equity are

 

A.  held-to-maturity debt securities.

B.  never-sell debt securities.

C.  trading debt securities.

D.  available-for-sale debt securities.

 

27) A requirement for a security to be classified as held-to-maturity is

 

A.  ability to hold the security to maturity.

B.  positive intent.

C.  the security must be a debt security.

D.  All of these are required.

 

28) All of the following are requirements for disclosures related to financial instruments EXCEPT

 

A.  disclosing the fair value and related carrying value of the instruments.

B.  displaying as a separate classification of other comprehensive income the net gain/loss on derivative instruments designated in cash flow hedges.

C.  distinguishing between financial instruments held or issued for purposes other than trading.

D.  combining or netting the fair value of separate financial instruments.

 

29) All of the following statements regarding accounting for derivatives are correct EXCEPT that

 

A.  they should be recognized in the financial statements as assets and liabilities.

B.  gains and losses resulting from hedge transactions are reported in different ways, depending upon the type of hedge.

C.  they should be reported at fair value.

D.  gains and losses resulting from speculation should be deferred.

 

30) The accounting for fair value hedges records the derivative at its

 

A.  amortized cost.

B.  historical cost.

C.  carrying value.

D.  fair value

 

31) Taxable income of a corporation

 

A.  differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination.

B.  differs from accounting income due to differences in intraperiod allocation between the two methods of income determination.

C.  is based on generally accepted accounting principles.

D.  is reported on the corporation's income statement.

 

32) Interperiod income tax allocation causes

 

A.  tax expense shown in the income statement to bear a normal relation to the tax liability.

B.  tax expense shown on the income statement to equal the amount of income taxes payable for the current year plus or minus the change in the deferred tax asset or liability balances for the year.

C.  tax liability shown in the balance sheet to bear a normal relation to the income before tax reported in the income statement.

D.  tax expense in the income statement to be presented with the specific revenues causing the tax.

 

33) Which of the following situations would require interperiod income tax allocation procedures?

 

A.  Interest received on municipal bonds

B.  An excess of percentage depletion over cost depletion

C.  A temporary difference exists at the balance sheet date because the tax basis of an asset or liability and its reported amount in the financial statements differ

D.  Proceeds from a life insurance policy on an officer

 

34) At the December 31, 2007 balance sheet date, Garth Brooks Corporation reports an accrued receivable for financial reporting purposes but NOT for tax purposes. When this asset is recovered in 2008, a future taxable amount will occur and

 

A.  Garth will record a decrease in a deferred tax liability in 2008.

B.  pretax financial income will exceed taxable income in 2008.

C.  total income tax expense for 2008 will exceed current tax expense for 2008.

D.  Garth will record an increase in a deferred tax asset in 2008.

 

35) Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income?

 

A.  Product warranty liabilities.

B.  Advance rental receipts.

C.  Depreciable property.

D.  Fines and expenses resulting from a violation of law.

 

36) A major distinction between temporary and permanent differences is

 

A.  temporary differences occur frequently, whereas permanent differences occur only once.

B.  permanent differences are NOT representative of acceptable accounting practice.

C.  once an item is determined to be a temporary difference, it maintains that status; however, a permanent difference can change in status with the passage of time.

D.  temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do NOT reverse.

 

37) In all pension plans, the accounting problems include all the following EXCEPT

 

A.  disclosing the status and effects of the plan in the financial statements.

B.  measuring the amount of pension obligation.

C.  allocating the cost of the plan to the proper periods.

D.  determining the level of individual premiums.

 

38) In a defined-contribution plan, a formula is used that

 

A.  ensures that pension expense and the cash funding amount will be different.

B.  defines the benefits that the employee will receive at the time of retirement.

C.  requires an employer to contribute a certain sum each period based on the formula.

D.  ensures that employers are at risk to make sure funds are available at retirement.

 

39) In a defined-benefit plan, a formula is used that

 

A.  defines the benefits that the employee will receive at the time of retirement.

B.  requires that the benefit of gain or the risk of loss from the assets contributed to the pension plan be borne by the employee.

C.  requires that pension expense and the cash funding amount be the same.

D.  defines the contribution the employer is to make; no promise is made concerning the ultimate benefits to be paid out to the employees.

 

40) The accumulated benefit obligation measures

 

A.  the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.

B.  the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.

C.  an estimated total benefit at retirement and then computes the level cost that will be sufficient, together with interest expected to accumulate at the assumed rate, to provide the total benefits at retirement.

D.  the shortest possible period for funding to maximize the tax deduction.

 

41) The projected benefit obligation is the measure of pension obligation that

 

A.  requires pension expense to be determined solely on the basis of the plan formula applied to years of service to date and based on existing salary levels.

B.  requires the longest possible period for funding to maximize the tax deduction.

C.  is NOT sanctioned under generally accepted accounting principles for reporting the service cost component of pension expense.

D.  is required to be used for reporting the service cost component of pension expense.

 

42) A corporation has a defined-benefit plan. An accrued pension cost will result at the end of the first year if the

 

A.  fair value of the plan assets exceeds the accumulated benefit obligation.

B.  amount of employer contributions exceeds the net periodic pension cost.

C.  amount of net periodic pension cost exceeds the amount of employer contributions.

D.  accumulated benefit obligation exceeds the fair value of the plan assets.

 

43) Interest cost included in the net pension cost recognized for a period by an employer sponsoring a defined-benefit pension plan represents the

 

A.  increase in the projected benefit obligation due to the passage of time.

B.  increase in the fair value of plan assets due to the passage of time.

C.  amortization of the discount on unrecognized prior service cost.

D.  shortage between the expected and actual returns on plan assets.

 

44) Reser Corp., a company whose stock is publicly traded, provides a noncontributory defined-benefit pension plan for its employees. The company's actuary has provided the following information for the year ended December 31, 2008: 

 

Projected benefit obligation$600,000

Accumulated benefit obligation525,000

Fair value of plan assets825,000

Service cost240,000

Interest on projected benefit obligation 24,000

Amortization of unrecognized prior service cost 60,000

Expected and actual return on plan assets 82,500

 

The market-related asset value equals the fair value of plan assets. Prior contributions to the defined-benefit pension plan equaled the amount of net periodic pension cost accrued for the previous year end. No contributions have been made for 2008 pension cost. In its December 31, 2008 balance sheet, Reser should report an accrued pension cost of

 

A.  $324,000.

B.  $241,500.

C.  $217,500.

D.  $406,500.

 

45) The following information pertains to Mellon Co.'s pension plan: 

 

Actuarial estimate of projected benefit obligation at 1/1/08$72,000

Assumed discount rate10%

Service costs for 200818,000

Pension benefits paid during 2008$15,000

 

If no change in actuarial estimates occurred during 2008, Mellon's projected benefit obligation at December 31, 2008 was

 

A.  $75,000.

B.  $79,200.

C.  $82,200.

D.  $64,200.

 

46) On January 1, 2005, Lynn Corporation acquired equipment at a cost of $600,000. Lynn adopted the double-declining balance method of depreciation for this equipment and had been recording depreciation over an estimated life of eight years, with no residual value. At the beginning of 2008, a decision was made to change to the straight-line method of depreciation for this equipment. Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning retained earnings, net of tax, is

 

A.  $0.

B.  $78,750.

C.  $77,109.

D.  $121,875.

 

47) On January 1, 2005, Foley Corporation acquired machinery at a cost of $250,000. Foley adopted the double-declining balance method of depreciation for this machinery and had been recording depreciation over an estimated useful life of ten years, with no residual value. At the beginning of 2008, a decision was made to change to the straight-line method of depreciation for the machinery. The depreciation expense to be recorded for the machinery in 2008 is (round to the nearest dollar)

 

A.  $18,286.

B.  $22,857.

C.  $25,000.

D.  $25,600.

 

48) On January 1, 2005, Baden Co., purchased a machine (its only depreciable asset) for $300,000. The machine has a five-year life, and no salvage value. Sum-of-the-years'-digits depreciation has been used for financial statement reporting and the elective straight-line method for income tax reporting. Effective January 1, 2008, for financial statement reporting, Baden decided to change to the straight-line method for depreciation of the machine. Assume that Baden can justify the change. Baden's income before depreciation, before income taxes, and before the cumulative effect of the accounting change (if any), for the year ended December 31, 2008, is $250,000. The income tax rate for 2008, as well as for the years 2005-2007, is 30%. What amount should Baden report as net income for the year ended December 31, 2008?

 

A.  $91,000

B.  $154,000

C.  $175,000

D.  $60,000

 

49) Equipment was purchased at the beginning of 2005 for $204,000. At the time of its purchase, the equipment was estimated to have a useful life of six years and a salvage value of $24,000. The equipment was depreciated using the straight-line method of depreciation through 2008. At the beginning of 2008, the estimate of useful life was revised to a total life of eight years and the expected salvage value was changed to $15,000. The amount to be recorded for depreciation for 2008, reflecting these changes in estimates, is

 

A.  $19,800.

B.  $22,800.

C.  $23,625.

D.  $12,375.

 

50) Hannah Company began operations on January 1, 2007, and uses the FIFO method in costing its raw material inventory. Management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed: 

 

Final Inventory20072008

FIFO$320,000$360,000

LIFO240,000300,000

Net Income (computed under the FIFO method)500,000600,000

 

Based upon the above information, a change to the LIFO method in 2008 would result in net income for 2008 of

 

A.  $600,000.

B.  $620,000.

C.  $660,000.

D.  $540,000.

 

51) Which type of accounting change should always be accounted for in current and future periods?

 

A.  Change in reporting entity

B.  Change in accounting estimate

C.  Correction of an error

D.  Change in accounting principle

 

 

Solution Description

Which type of accounting change should always be accounted

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