1) Proceeds from an issue of debt securities having stock warrants should NOT be allocated between debt and equity features when
A.the allocation would result in a discount on the debt security.
B.the warrants issued with the debt securities are nondetachable.
C.exercise of the warrants within the next few fiscal periods seems remote.
D.the market value of the warrants is NOT readily available.
2) The conversion of preferred stock may be recorded by the
A.market value method.
B.par value method.
C.book value method.
3) The conversion of preferred stock into common stock requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be
A.treated as a prior period adjustment.
B.treated as a direct reduction of retained earnings.
C.reflected currently in income as an extraordinary item.
D.reflected currently in income, but NOT as an extraordinary item.
4) A primary source of stockholders' equity is
A.contributions by stockholders.
B.both income retained by the corporation and contributions by stockholders.
C.appropriated retained earnings.
D.income retained by the corporation.
5) Stockholders' equity is generally classified into two major categories:
A.retained earnings and unappropriated capital.
B.earned capital and contributed capital.
C.appropriated capital and retained earnings.
D.contributed capital and appropriated capital.
6) 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 shares issued.
B.Any of these provides an appropriate basis for recording the transaction.
C.par value of the shares issued.
D.market value of the services received.
7) Treasury shares are
A.shares held as an investment by the treasurer of the corporation.
B.issued but NOT outstanding shares.
C.shares held as an investment of the corporation.
D.issued and outstanding shares.
8) "Gains" on sales of treasury stock (using the cost method) should be credited to
A.paid-in capital from treasury stock.
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 extraordinary item shown on the income statement.
C.As paid-in capital from treasury stock transactions.
D.As an increase in the amount shown for common stock.
10) In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?
A.Annual preferred dividend
B.Annual preferred dividend divided by the income tax rate
C.Annual preferred dividend times (one minus the income tax rate)
D.Annual preferred dividend times the income tax rate
11) When computing diluted earnings per share, convertible bonds are
B.assumed converted only if they are dilutive.
C.assumed converted whether they are dilutive or antidilutive.
D.assumed converted only if they are antidilutive.
12) What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively?
A.Decrease and no effect
B.Increase and decrease
C.Increase and no effect
D.Decrease and increase
13) 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.did NOT change.
B.increased by $200,000.
C.decreased by $10,000.
D.decreased by $200,000.
How would the declaration and subsequent issuance of a 10% stock dividend by the issuer affect each of the following when the market value of the shares exceeds the par value of the stock?
Additional Common Stock | Paid-in Capital
A.Increase | Increase
B.No effect | No effect
C.Increase | No effect
D.No effect | Increase
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.No effect | No effect
B.Decrease | Decrease
C.Decrease | No effect
D.No effect | Decrease
16) Which of the following is correct about the effective-interest method of amortization?
A.The effective-interest method produces a constant rate of return on the book value of the investment from period to period.
B.The effective interest method applied to investments in debt securities is different from that applied to bonds payable.
C.Amortization of a premium decreases from period to period.
D.Amortization of a discount decreases from period to period.
17) An unrealized holding loss on a company's available-for-sale securities should be reflected in the current financial statements as
A.other comprehensive income and deducted in the equity section of the balance sheet.
B.an extraordinary item shown as a direct reduction from retained earnings.
C.a note or parenthetical disclosure only.
D.a current loss resulting from holding securities.
18) An unrealized holding gain on a company's available-for-sale securities should be reflected in the current financial statements as
A.other comprehensive income and included in the equity section of the balance sheet.
B.an extraordinary item shown as a direct increase to retained earnings.
C.a note or parenthetical disclosure only.
D.a current gain resulting from holding securities.
19) Investments in debt securities should be recorded on the date of acquisition at
A.face value plus brokerage fees and other costs incident to the purchase.
B.lower of cost or market.
C.market value plus brokerage fees and other costs incident to the purchase.
20) Securities which could be classified as held-to-maturity are
B.redeemable preferred stock.
21) Which of the following is NOT a debt security?
D.All of these are debt securities.
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.A reduction of the investment | A reduction of the investment
B.Income | Income
C.Income | A reduction of the investment
D.A reduction of the investment | Income
23) When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?
A.The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee.
B.The investor should always use the equity method to account for its investment.
C.The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee.
D.The investor should always use the fair value method to account for its investment.
Bista 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.Increase | Decrease
B.No Effect | Decrease
C.No Effect | No Effect
D.Decrease | No Effect
25) Debt securities that are accounted for at amortized cost, NOT fair value, are
A.trading debt securities.
B.held-to-maturity debt securities.
C.available-for-sale debt securities.
D.never-sell debt securities.
26) Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders' equity are
A.trading securities where a company has holdings of less than 20%.
B.available-for-sale securities where a company has holdings of less than 20%.
C.securities where a company has holdings of between 20% and 50%.
D.securities where a company has holdings of more than 50%.
27) Use of the effective-interest method in amortizing bond premiums and discounts results in
A.a smaller amount of interest income over the life of the bond issue than would result from use of the straight-line method.
B.a greater amount of interest income over the life of the bond issue than would result from use of the straight-line method.
C.a varying amount being recorded as interest income from period to period.
D.a variable rate of return on the book value of the investment.
28) All of the following are characteristics of a derivative financial instrument EXCEPT the instrument
A.All of these are characteristics.
B.has one or more underlyings and an identified payment provision.
C.requires a large investment at the inception of the contract.
D.requires or permits net settlement.
29) The accounting for fair value hedges records the derivative at its
30) All of the following statements regarding accounting for derivatives are correct EXCEPT that
A.gains and losses resulting from hedge transactions are reported in different ways, depending upon the type of hedge.
B.they should be recognized in the financial statements as assets and liabilities.
C.they should be reported at fair value.
D.gains and losses resulting from speculation should be deferred.
31) Taxable income of a corporation differs from pretax financial income because of
Permanent Differences | Temporary Differences
A.Yes | No
B.No | No
C.No | Yes
D.Yes | Yes
32) The rationale for interperiod income tax allocation is to
A.adjust income tax expense on the income statement to be in agreement with income taxes payable on the balance sheet.
B.recognize a tax asset or liability for the tax consequences of temporary differences that exist at the balance sheet date.
C.recognize a distribution of earnings to the taxing agency.
D.reconcile the tax consequences of permanent and temporary differences appearing on the current year's financial statements.
33) Interperiod income tax allocation causes
A.tax expense in the income statement to be presented with the specific revenues causing the tax.
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 expense shown in the income statement to bear a normal relation to the tax liability.
D.tax liability shown in the balance sheet to bear a normal relation to the income before tax reported in the income statement.
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.Garth will record an increase in a deferred tax asset in 2008.
D.total income tax expense for 2008 will exceed current tax expense for 2008.
35) Which of the following differences would result in future taxable amounts?
A.Revenues or gains that are taxable before they are recognized in financial income.
B.Expenses or losses that are tax deductible after they are recognized in financial income.
C.Expenses or losses that are tax deductible before they are recognized in financial income.
D.Revenues or gains that are recognized in financial income but are never included in taxable income.
36) 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.Fines and expenses resulting from a violation of law.
37) 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.ensures that employers are at risk to make sure funds are available at retirement.
D.requires an employer to contribute a certain sum each period based on the formula.
38) In accounting for a defined-benefit pension plan
A.the employer's responsibility is simply to make a contribution each year based on the formula established in the plan.
B.an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised.
C.the liability is determined based upon known variables that reflect future salary levels promised to employees.
D.the expense recognized each period is equal to the cash contribution.
39) Which of the following is NOT a characteristic of a defined-contribution pension plan?
A.The benefits to be received by employees are defined by the terms of the plan.
B.The employer's contribution each period is based on a formula.
C.The benefit of gain or the risk of loss from the assets contributed to the pension fund are borne by the employee.
D.The accounting for a defined-contribution plan is straightforward and uncomplicated.
40) In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund should be reported as
A.a charge or credit to unrealized appreciation and depreciation.
B.an offset to the liability for prior service cost.
C.accrued or prepaid pension cost.
D.an accrued actuarial liability.
41) The projected benefit obligation is the measure of pension obligation that
A.is NOT sanctioned under generally accepted accounting principles for reporting the service cost component of pension expense.
B.is required to be used for reporting the service cost component of pension expense.
C.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.
D.requires the longest possible period for funding to maximize the tax deduction.
42) The relationship between the amount funded and the amount reported for pension expense is as follows:
A.pension expense may be greater than, equal to, or less than the amount funded.
B.pension expense must equal the amount funded.
C.pension expense will be less than the amount funded.
D.pension expense will be more than the amount funded.
43) On January 1, 2008, Pratt Corp. adopted a defined-benefit pension plan. The plan's service cost of $300,000 was fully funded at the end of 2008. Prior service cost was funded by a contribution of $120,000 in 2008. Amortization of prior service cost was $48,000 for 2008. What is the amount of Pratt's prepaid pension cost at December 31, 2008?
($300,000 + $120,000) – ($300,000 + $48,000) = $72,000
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
Interest on projected benefit obligation24,000
Amortization of unrecognized prior service cost60,000
Expected and actual return on plan assets82,500
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
$240,000 + $24,000 – $82,500 + $60,000 = $241,500
45) Effective January 1, 2007, Quayle Co. established a defined-benefit plan with no retro-active benefits. The first of the required equal annual contributions was paid on December 31, 2007. A 10% discount rate was used to calculate service cost and a 10% rate of return was assumed for plan assets. All information on covered employees for 2007 and 2008 is the same. How should the service cost for 2008 compare with 2007, and should the 2007 balance sheet report an accrued or a prepaid pension cost?
Service Cost for 2008 Compared to 2007 | Pension Cost Reported on the 2007 Balance Sheet
A.Greater than | Prepaid
B.Equal to | Accrued
C.Equal to | Prepaid
D.Greater than | Accrued
46) 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)
$250,000 – [($250,000 0.2) + ($200,000 × 0.2) + ($160,000 × 0.2)] = $128,000
$128,000 ÷ 7 = $18,286
47) During 2008, a construction company changed from the completed-contract method to the percentage-of-completion method for accounting purposes but NOT for tax purposes. Gross profit figures under both methods for the past three years appear below:
2006$ 475,000$ 800,000
Assuming an income tax rate of 40% for all years, the effect of this accounting change on prior periods should be reported by a credit of
A.$390,000 on the 2008 income statement.
B.$600,000 on the 2008 income statement.
C.$390,000 on the 2008 retained earnings statement.
D.$600,000 on the 2008 retained earnings statement.
[($800,000 + $950,000) – ($475,000 + $625,000)] × (1 – .40) = $390,000
48) Accrued salaries payable of $51,000 were NOT recorded at December 31, 2007. Office supplies on hand of $24,000 at December 31, 2008 were erroneously treated as expense instead of supplies inventory. Neither of these errors was discovered nor corrected. The effect of these two errors would cause
A.2007 net income and December 31, 2007 retained earnings to be understated $51,000 each.
B.2008 net income to be understated $75,000 and December 31, 2008 retained earnings to be understated $24,000.
C.2008 net income and December 31, 2008 retained earnings to be understated $24,000 each.
D.2007 net income to be overstated $27,000 and 2008 net income to be understated $24,000.
2008 NI = $17,000 (u) + $8,000 (u) = $25,000 (u).
2008 RE = $8,000 (u) [The 2007 $17,000 (o) is offset by 2008 $17,000 (u)].
49) The estimated life of a building that has been depreciated 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should
A.depreciate the remaining book value over the remaining life of the asset.
B.continue to depreciate the building over the original 50-year life.
C.adjust accumulated depreciation to its appropriate balance through retained earnings, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.
D.adjust accumulated depreciation to its appropriate balance, through net income, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.
50) Which type of accounting change should always be accounted for in current and future periods?
A.Change in reporting entity
B.Change in accounting principle
C.Correction of an error
D.Change in accounting estimate
51) When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as a
A.change in accounting estimate.
B.change in accounting principle.
C.correction of an error.
D.prior period adjustment.