1) When convertible debt is retired by the issuer, any material difference between the cash acquisition price and the carrying amount of the debt should be
A. treated as an adjustment of additional paid-in capital.
B. reflected currently in income as an extraordinary item.
C. reflected currently in income, but NOT as an extraordinary item.
D. treated as a prior period adjustment.
2) The conversion of preferred stock may be recorded by the
A. par value method.
B. book value method.
C. incremental method.
D. market 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 direct reduction of retained earnings.
B. reflected currently in income as an extraordinary item.
C. reflected currently in income, but NOT as an extraordinary item.
D. treated as a prior period adjustment.
4) The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. An acceptable method of allocation is the
A. either the proportional method or the incremental method.
B. proportional method.
C. pro forma method.
D. incremental method.
5) When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the
A. Any of these provides an appropriate basis for recording the transaction.
B. market value of the shares issued.
C. market value of the services received.
D. par value of the shares issued.
6) Total stockholders’ equity represents
A. only the amount of earnings that have been retained in the business.
B. a claim against a portion of the total assets of an enterprise.
C. a claim to specific assets contributed by the owners.
D. the maximum amount that can be borrowed by the enterprise.
7) 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 retained earnings for the excess of the purchase price over the par value.
B. Treasury stock for the purchase price.
C. 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.
D. Paid-in capital in excess of par for the purchase price.
8) “Gains” on sales of treasury stock (using the cost method) should be credited to
A. other income.
B. retained earnings.
C. paid-in capital from treasury stock.
D. capital stock.
9) Wilson Corp. purchased its own par value stock on January 1, 2007 for $20,000 and debited the treasury stock account for the purchase price. The stock was subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a deduction from
A. net income.
B. retained earnings.
C. additional paid-in capital to the extent that previous net “gains” from sales of the same class of stock are included therein; otherwise, from retained earnings.
D. additional paid-in capital without regard as to whether or NOT there have been previous net “gains” from sales of the same class of stock included therein.
10) When computing diluted earnings per share, convertible bonds are
A. assumed converted only if they are dilutive.
B. assumed converted only if they are antidilutive.
D. assumed converted whether they are dilutive or antidilutive.
11) In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are
A. considered outstanding at the beginning of the earliest year reported.
B. considered outstanding at the beginning of the year.
C. weighted by the number of days outstanding.
D. weighted by the number of months outstanding.
12) In the diluted earnings per share computation, the treasury stock method is used for options and warrants to reflect assumed reacquisition of common stock at the average market price during the period. If the exercise price of the options or warrants exceeds the average market price, the computation would
A. be antidilutive.
B. reflect the excess of the number of shares assumed issued over the number of shares assumed reacquired as the potential dilution of earnings per share.
C. fairly present diluted earnings per share on a prospective basis.
D. fairly present the maximum potential dilution of diluted earnings per share on a prospective basis.
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 capital 116,000
Retained earnings 174,000
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
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. No effect | No effect
B. Decrease | No effect
C. Decrease | Decrease
D. No effect | Decrease
15) Palmer Corp. owned 20,000 shares of Dixon Corp. purchased in 2003 for $240,000. On December 15, 2006, Palmer declared a property dividend of all of its Dixon Corp. shares on the basis of one share of Dixon for every 10 shares of Palmer common stock held by its stockholders. The property dividend was distributed on January 15, 2007. On the declaration date, the aggregate market price of the Dixon shares held by Palmer was $400,000. The entry to record the declaration of the dividend would include a debit to Retained Earnings of
16) 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. a note or parenthetical disclosure only.
C. an extraordinary item shown as a direct reduction from retained earnings.
D. a current loss resulting from holding securities.
17) When investments in debt securities are purchased between interest payment dates, preferably the
A. accrued interest is debited to Interest Receivable.
B. accrued interest is debited to Interest Revenue.
C. securities account should include accrued interest.
D. accrued interest is debited to Interest Expense.
18) A reclassification adjustment is reported in the
A. statement of stockholders’ equity.
B. income statement as an Other Revenue or Expense.
C. stockholders’ equity section of the balance sheet.
D. statement of comprehensive income as other comprehensive income.
19) Which of the following is NOT a debt security?
A. All of these are debt securities.
B. Convertible bonds
C. Commercial paper
D. Loans receivable
20) 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. do nothing special and ignore the fact that the accounting period does NOT coincide with the bond’s interest period.
B. 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.
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.
21) Pippen Co. purchased ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for
A. 20 periods and 4% from the present value of 1 table.
B. 10 periods and 10% from the present value of 1 table.
C. 10 periods and 8% from the present value of 1 table.
D. 20 periods and 5% from the present value of 1 table.
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. dividend income.
B. a reduction of the carrying value of the investment.
C. additional paid-in capital.
D. an addition to the carrying value of the investment.
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 always use the fair value method to account for its investment.
B. The investor should always use the equity method to account for its investment.
C. 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.
D. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise “significant influence” over the investee.
24) 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. Decrease | No Effect
B. No Effect | Decrease
C. Increase | Decrease
D. No Effect | No Effect
25) Held-to-maturity securities are reported at
A. fair value.
B. acquisition cost.
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
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 requirements for disclosures related to financial instruments EXCEPT
A. displaying as a separate classification of other comprehensive income the net gain/loss on derivative instruments designated in cash flow hedges.
B. disclosing the fair value and related carrying value of the instruments.
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) The accounting for fair value hedges records the derivative at its
A. amortized cost.
B. fair value.
C. historical cost.
D. carrying value.
30) 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 speculation should be deferred.
C. gains and losses resulting from hedge transactions are reported in different ways, depending upon the type of hedge.
D. they should be reported at fair value.
31) Taxable income of a corporation differs from pretax financial income because of
Permanent Differences | Temporary Differences
A. No | No
B. Yes | Yes
C. Yes | No
D. No | Yes
32) Which of the following situations would require interperiod income tax allocation procedures?
A. An excess of percentage depletion over cost depletion
B. 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
C. Proceeds from a life insurance policy on an officer
D. Interest received on municipal bonds
33) The rationale for interperiod income tax allocation is to
A. recognize a tax asset or liability for the tax consequences of temporary differences that exist at the balance sheet date.
B. reconcile the tax consequences of permanent and temporary differences appearing on the current year’s financial statements.
C. adjust income tax expense on the income statement to be in agreement with income taxes payable on the balance sheet.
D. recognize a distribution of earnings to the taxing agency.
34) A major distinction between temporary and permanent differences is
A. permanent differences are NOT representative of acceptable accounting practice.
B. 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.
C. temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do NOT reverse.
D. temporary differences occur frequently, whereas permanent differences occur only once.
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. Advance rental receipts.
B. Depreciable property.
C. Fines and expenses resulting from a violation of law.
D. Product warranty liabilities.
36) Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income?
A. Subscriptions received in advance.
B. An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes.
C. Interest received on a municipal obligation.
D. Prepaid royalty received in advance.
37) In a defined-contribution plan, a formula is used that
A. defines the benefits that the employee will receive at the time of retirement.
B. requires an employer to contribute a certain sum each period based on the formula.
C. ensures that employers are at risk to make sure funds are available at retirement.
D. ensures that pension expense and the cash funding amount will be different.
38) Which of the following is NOT a characteristic of a defined-contribution pension plan?
A. The employer’s contribution each period is based on a formula.
B. The accounting for a defined-contribution plan is straightforward and uncomplicated.
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 benefits to be received by employees are defined by the terms of the plan.
39) In a defined-benefit plan, the process of funding refers to
A. determining the projected benefit obligation.
B. making the periodic contributions to a funding agency to ensure that funds are available to meet retirees’ claims.
C. determining the amount that might be reported for pension expense.
D. determining the accumulated benefit obligation.
40) The relationship between the amount funded and the amount reported for pension expense is as follows:
A. pension expense must equal the amount funded.
B. pension expense will be more than the amount funded.
C. pension expense may be greater than, equal to, or less than the amount funded.
D. pension expense will be less than the amount funded.
41) 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 existing salary levels.
B. the shortest possible period for funding to maximize the tax deduction.
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 pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.
42) A corporation has a defined-benefit plan. An accrued pension cost will result at the end of the first year if the
A. accumulated benefit obligation exceeds the fair value of the plan assets.
B. amount of net periodic pension cost exceeds the amount of employer contributions.
C. amount of employer contributions exceeds the net periodic pension cost.
D. fair value of the plan assets exceeds the accumulated benefit obligation.
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?
44) Yeager Co. maintains a defined-benefit pension plan for its employees. At each balance sheet date, Yeager should report a minimum liability at least equal to the
A. accumulated benefit obligation.
B. unfunded projected benefit obligation.
C. unfunded accumulated benefit obligation.
D. projected benefit obligation.
45) 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 obligation 525,000
Fair value of plan assets 825,000
Service cost 240,000
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
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)
47) 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. 2008 net income to be understated $75,000 and December 31, 2008 retained earnings to be understated $24,000.
B. 2008 net income and December 31, 2008 retained earnings to be understated $24,000 each.
C. 2007 net income to be overstated $27,000 and 2008 net income to be understated $24,000.
D. 2007 net income and December 31, 2007 retained earnings to be understated $51,000 each.
48) 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
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
50) Which type of accounting change should always be accounted for in current and future periods?
A. Change in accounting principle
B. Correction of an error
C. Change in accounting estimate
D. Change in reporting entity
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 principle.
B. correction of an error.
C. prior period adjustment.
D. change in accounting estimate.
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