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ACC 422 Final Exam Guide
1) Which of the following is NOT considered cash for financial reporting purposes?
A. Coin, currency, and available funds
B. Money orders, certified checks, and personal checks
C. Petty cash funds and change funds
D. Postdated checks and I.O.U.’s
2) What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies on a balance sheet?
A. As assets but separately from other receivables.
B. By means of footnotes only.
C. As offsets to capital.
D. As trade notes and accounts receivable if they otherwise qualify as current assets.
3) Which of the following items should NOT be included in the Cash caption on the balance sheet?
A. Amounts on deposit in checking account at the bank
B. Checks from other parties presently in the cash register
C. Coins and currency in the cash register
D. Postage stamps on hand
4) Which of the following is a generally accepted method of determining the amount of the adjustment to bad debt expense?
A. A percentage of accounts receivable NOT adjusted for the balance in the allowance
B. A percentage of sales NOT adjusted for the balance in the allowance
C. A percentage of sales adjusted for the balance in the allowance
D. An amount derived from aging accounts receivable and NOT adjusted for the balance in the allowance
5) Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future, failure to follow this practice usually does NOT make the balance sheet misleading because
A. the amount of the discount is NOT material.
B. the allowance for uncollectible accounts includes a discount element.
C. most short-term receivables are NOT interest-bearing.
D. most receivables can be sold to a bank or factor.
6) Which of the following methods of determining bad debt expense does NOT properly match expense and revenue?
A. Charging bad debts with an amount derived from aging accounts receivable under the allowance method.
B. Charging bad debts with an amount derived from a percentage of accounts receivable under the allowance method.
C. Charging bad debts with a percentage of sales under the allowance method.
D. Charging bad debts as accounts are written off as uncollectible.
7) The accountant for the Orion Sales Company is preparing the income statement for 2007 and the balance sheet at December 31, 2007. Orion uses the periodic inventory system. The January 1, 2007 merchandise inventory balance will appear
A. as a deduction in the cost of goods sold section of the income statement and as a current asset on the balance sheet.
B. only as an asset on the balance sheet.
C. only in the cost of goods sold section of the income statement.
D. as an addition in the cost of goods sold section of the income statement and as a current asset on the balance sheet.
8) Belle Co. received merchandise on consignment. As of March 31, Belle had recorded the transaction as a purchase and included the goods in inventory. The effect of this on its financial statements for March 31 would be
A. net income was correct and current assets and current liabilities were overstated.
B. net income and current liabilities were overstated.
C. no effect.
D. net income, current assets, and current liabilities were overstated.
9) The failure to record a purchase of mer¬chandise on account even though the goods are properly included in the physical inven¬tory results in
A. an understatement of assets and net income.
B. an understatement of liabilities and an overstatement of owners’ equity.
C. an overstatement of assets and net income.
D. an understatement of cost of goods sold and liabilities and an overstatement of assets.
10) The use of a Purchase Discounts account implies that the recorded cost of a purchased inventory item is its
A. invoice price plus any purchase discount lost.
B. invoice price less the purchase discount allowable whether taken or not.
C. invoice price.
D. invoice price less the purchase discount taken.
11) All of the following costs should be charged against revenue in the period in which costs are incurred EXCEPT for
A. costs which will NOT benefit any future period.
B. costs of normal shrinkage and scrap incurred for the manufacture of a product in ending inventory.
C. manufacturing overhead costs for a product manufactured and sold in the same accounting period.
D. costs from idle manufacturing capacity resulting from an unexpected plant shutdown.
12) Which method of inventory pricing best approximates specific identification of the actual flow of costs and units in most manufacturing situations?
A. First-in, first-out
B. Base stock
C. Average cost
D. Last-in, first-out
13) In no case can “market” in the lower-of-cost-or-market rule be more than
A. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.
B. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal, an allowance for an approximately normal profit margin, and an adequate reserve for possible future losses.
C. estimated selling price in the ordinary course of business.
D. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal and an allowance for an approximately normal profit margin.
14) An item of inventory purchased this period for $15.00 has been incorrectly written down to its current replacement cost of $10.00. It sells during the following period for $30.00, its normal selling price, with disposal costs of $3.00 and normal profit of $12.00. Which of the following statements is NOT true?
A. The current year’s income is understated.
B. Income of the following year will be understated.
C. The cost of sales of the following year will be understated.
D. The closing inventory of the current year is understated.
15) When valuing raw materials inventory at lower-of-cost-or-market, what is the meaning of the term “market”?
A. Net realizable value less a normal profit margin
B. Discounted present value
C. Net realizable value
D. Current replacement cost
16) The retail inventory method is based on the assumption that the
A. ratio of gross margin to sales is approximately the same each period.
B. ratio of cost to retail changes at a constant rate.
C. final inventory and the total of goods available for sale contain the same proportion of high-cost and low-cost ratio goods.
D. proportions of markups and markdowns to selling price are the same.
17) In 2006, Lucas Manufacturing signed a contract with a supplier to purchase raw materials in 2007 for $700,000. Before the December 31, 2006 balance sheet date, the market price for these materials dropped to $510,000. The journal entry to record this situation at December 31, 2006 will result in a credit that should be reported
A. as a current liability.
B. as an appropriation of retained earnings.
C. as a valuation account to Inventory on the balance sheet.
D. on the income statement.
18) When the conventional retail inventory method is used, markdowns are commonly ignored in the computation of the cost to retail ratio because
A. this tends to give a better approximation of the lower of cost or market.
B. markups are also ignored.
C. there may be no markdowns in a given year.
D. this tends to result in the showing of a normal profit margin in a period when no markdown goods have been sold.
19) Which of the following is NOT a major characteristic of a plant asset?
A. Acquired for resale
B. Acquired for use
C. Possesses physical substance
D. Yields services over a number of years
20) If a corporation purchases a lot and building and subsequently tears down the building and uses the property as a parking lot, the proper accounting treatment of the cost of the building would depend on
A. the length of time for which the building was held prior to its demolition.
B. the contemplated future use of the parking lot.
C. the significance of the cost allocated to the building in relation to the combined cost of the lot and building.
D. the intention of management for the property when the building was acquired.
21) The debit for a sales tax properly levied and paid on the purchase of machinery preferably would be a charge to
A. a separate deferred charge account.
B. miscellaneous tax expense (which includes all taxes other than those on income).
C. the machinery account.
D. accumulated depreciation–machinery.
22) The period of time during which interest must be capitalized ends when
A. no further interest cost is being incurred.
B. the asset is abandoned, sold, or fully depreciated.
C. the asset is substantially complete and ready for its intended use.
D. the activities that are necessary to get the asset ready for its intended use have begun.
23) Which of the following costs are capitalized for self-constructed assets?
A. Labor and overhead only
B. Materials and overhead only
C. Materials and labor only
D. Materials, labor, and overhead
24) When computing the amount of interest cost to be capitalized, the concept of “avoidable interest” refers to
A. a cost of capital charge for stockholders’ equity.
B. that portion of total interest cost which would NOT have been incurred if expenditures for asset construction had NOT been made.
C. the total interest cost actually incurred.
D. that portion of average accumulated expenditures on which no interest cost was incurred.
25) When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly measured by the
A. stated value of the stock.
B. par value of the stock.
C. market value of the stock.
D. book value of the stock.
26) When funds are borrowed to pay for construction of assets that qualify for capitalization of interest, the excess funds NOT needed to pay for construction may be temporarily invested in interest-bearing securities. Interest earned on these temporary investments should be
A. used to reduce the cost of assets being constructed.
B. offset against interest cost incurred during construction.
C. recognized as revenue of the period.
D. multiplied by an appropriate interest rate to determine the amount of interest to be capitalized.
27) Construction of a qualifying asset is started on April 1 and finished on December 1. The fraction used to multiply an expenditure made on April 1 to find weighted-average accumulated expenditures is
28) Which of the following most accurately reflects the concept of depreciation as used in accounting?
A. The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.
B. The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred.
C. An accounting concept that allocates the portion of an asset used up during the year to the contra asset account for the purpose of properly recording the fair market value of tangible assets.
D. A method of allocating asset cost to an expense account in a manner which closely matches the physical deterioration of the tangible asset involved.
29) Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues?
A. Systematic and rational allocation
B. Associating cause and effect
C. Partial recognition
D. Immediate recognition
30) The term “depreciable cost,” or “depreciable base,” as it is used in accounting, refers to
A. the cost of the asset less the related depreciation recorded to date.
B. the total amount to be charged (debited) to expense over an asset’s useful life.
C. the acquisition cost of the asset.
D. the estimated market value of the asset at the end of its useful life.
Explanation: depreciable cost is total acquisition cost less salvage value
31) Lennon Company purchased a depreciable asset for $200,000. The estimated salvage value is $10,000, and the estimated useful life is 10,000 hours. Lennon used the asset for 1,100 hours in the current year. The activity method will be used for depreciation. What is the depreciation expense on this asset?
Calculation: $200,000 – $10,000 = $190,000/10,000 hours = $19/hour x 1,100 hours = $20,900
32) Prentice Company purchased a depreciable asset for $200,000. The estimated salvage value is $20,000, and the estimated useful life is 10 years. The straight-line method will be used for depreciation. What is the depreciation base of this asset?
Calculation: $200,000 – $20,000 = $180,000
33) Pine Company purchased a depreciable asset for $360,000. The estimated salvage value is $24,000, and the estimated useful life is 8 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset?
Calculation: DDB rate = 1/8 x 2 = 25% x $360,000 =
1st year dep $90,000; 2nd year dep = $360,000 – 90,000 x 25% = $67,500
34) Under current accounting practice, intangible assets are classified as
A. limited-life or indefinite-life.
B. specifically identifiable or goodwill-type.
C. legally restricted or goodwill-type.
D. amortizable or unamortizable.
35) Factors considered in determining an intangible asset’s useful life include all of the following EXCEPT
A. any legal or contractual provisions that may limit the useful life.
B. any provisions for renewal or extension of the asset’s legal life
C. the amortization method used.
D. the expected use of the asset.
36) Which of the following methods of amortization is normally used for intangible assets?
B. Units of production
37) Mining Company acquired a patent on an oil extraction technique on January 1, 2006 for $5,000,000. It was expected to have a 10 year life and no residual value. Mining uses straight-line amortization for patents. On December 31, 2007, the expected future cash flows expected from the patent were expected to be $600,000 per year for the next eight years. The present value of these cash flows, discounted at Mining’s market interest rate, is $2,800,000. At what amount should the patent be carried on the December 31, 2007 balance sheet?
Calculation: $5,000,000/10 years = $500,000/year x 2 years = $1,000,000; $5,000,000 – 1,000,000 = $4,000,000
38) Twilight Corporation acquired End-of-the-World Products on January 1, 2008 for $2,000,000, and recorded goodwill of $375,000 as a result of that purchase. At December 31, 2008, the End-of-the-World Products Division had a fair value of $1,700,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $1,450,000 at that time. What amount of loss on impairment of goodwill should Twilight record in 2008?
D. $ -0-
Calculation: $375,000 – ($1,700,000 – $1,450,000) = $125,000
39) General Products Company bought Special Products Division in 2006 and appropriately booked $250,000 of goodwill related to the purchase. On December 31, 2007, the fair value of Special Products Division is $2,000,000 and it is carried on General Product’s books for a total of $1,700,000, including the goodwill. An analysis of Special Products Division’s assets indicates that goodwill of $200,000 exists on December 31, 2007. What goodwill impairment should be recognized by General Products in 2007?
40) Easton Company and Lofton Company were combined in a purchase transaction. Easton was able to acquire Lofton at a bargain price. The sum of the market or appraised values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Easton. After revaluing noncurrent assets to zero, there was still some “negative goodwill.” Proper accounting treatment by Easton is to report the amount as
A. part of current income in the year of combination.
B. a deferred credit and amortize it.
C. paid-in capital.
D. an extraordinary gain.
A. generated internally should NOT be capitalized unless it is measured by an individual independent of the enterprise involved.
B. is easily computed by assigning a value to the individual attributes that comprise its existence.
C. exists in any company that has earnings that differ from those of a competitor.
D. represents a unique asset in that its value can be identified only with the business as a whole.
42) The reason goodwill is sometimes referred to as a master valuation account is because
A. it represents the purchase price of a business that is about to be sold.
B. it is the difference between the fair market value of the net tangible and identifiable intangible assets as compared with the purchase price of the acquired business.
C. it is the only account in the financial statements that is based on value, all other accounts are recorded at an amount other than their value.
D. the value of a business is computed without consideration of goodwill and then goodwill is added to arrive at a master valuation.
43) Which of the following items is a current liability?
A. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months.
B. Bonds due in three years.
C. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.
D. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
44) If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information EXCEPT
A. a general description of the financing arrangement.
B. the terms of the new obligation incurred or to be incurred.
C. the number of financing institutions that refused to refinance the debt, if any.
D. the terms of any equity security issued or to be issued.
45) Stock dividends distributable should be classified on the
A. income statement as an expense.
B. balance sheet as an asset.
C. balance sheet as an item of stockholders’ equity.
D. balance sheet as a liability.
46) A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2007. Historically, 10% of customers mail in the rebate form. During 2007, 4,000,000 packages of light bulbs are sold, and 140,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2007 financial statements dated December 31?
A. $400,000; $400,000
B. $400,000; $260,000
C. $140,000; $260,000
D. $260,000; $260,000
Calculation: 4,000,000 x $1 = $4,000,000 x 10% = $400,000 ; $400,000 – (140,000 x $1) = $260,000
47) A company offers a cash rebate of $1 on each $4 package of batteries sold during 2007. Historically, 10% of customers mail in the rebate form. During 2007, 6,000,000 packages of batteries are sold, and 210,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2007 financial statements dated December 31?
A. $600,000; $600,000
B. $600,000; $390,000
C. $210,000; $390,000
D. $390,000; $390,000
Calculation: 4,000,000 x $1 = $6,000,000 x 10% = $600,000 ; $600,000 – (210,000 x $1) = $390,000
48) Wellman Company self insures its property for fire and storm damage. If the company were to obtain insurance on the property, it would cost them $1,000,000 per year. The company estimates that on average it will incur losses of $800,000 per year. During 2007, $350,000 worth of losses were sustained. How much total expense and/or loss should be recognized by Wellman Company for 2007?
A. $350,000 in losses and no insurance expense
B. $350,000 in losses and $450,000 in insurance expense
C. $0 in losses and $1,000,000 in insurance expense
D. $0 in losses and $800,000 in insurance expense
49) A contingency can be accrued when
A. it is certain that funds are available to settle the disputed amount.
B. an asset may have been impaired.
C. it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated.
D. the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred.
50) Which of the following contingencies need NOT be disclosed in the financial statements or the notes thereto?
A. Probable losses NOT reasonably estimable
B. All of these must be disclosed.
C. Environmental liabilities that cannot be reasonably estimated
D. Guarantees of indebtedness of others
51) Mark Ward is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2007, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Ward had had a dispute with the Railroad for several years concerning the ownership of a small parcel of land. The representative of the Railroad has offered to assign any rights which the Railroad may have in the land to Ward in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Ward appears inclined to accept the Railroad’s offer. The Railroad’s 2007 financial statements should include the following related to the incident:
A. recognition of a loss and creation of a liability for the value of the land.
B. disclosure in note form only.
C. recognition of a loss only.
D. creation of a liability only.
52) If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be
A. greater than if the straight-line method were used.
B. less than if the straight-line method were used.
C. greater than the amount of the interest payments.
D. the same as if the straight-line method were used.
53) An example of an item which is NOT a liability is
A. dividends payable in stock.
B. the portion of long-term debt due within one year.
C. advances from customers on contracts.
D. accrued estimated warranty costs.
54) Bonds for which the owners’ names are NOT registered with the issuing corporation are called
A. bearer bonds.
B. secured bonds.
C. term bonds.
D. debenture bonds.
55) Which of the following best describes current practice in accounting for leases?
A. Leases are NOT capitalized.
B. All leases are capitalized.
C. Leases similar to installment purchases are capitalized.
D. All long-term leases are capitalized.
56) Minimum lease payments may include a
A. penalty for failure to renew.
B. any of these.
C. bargain purchase option.
D. guaranteed residual value.
57) Which of the following is a correct statement of one of the capitalization criteria?
A. The lease transfers ownership of the property to the lessor.
B. The lease term is equal to or more than 75% of the estimated economic life of the leased property.
C. The lease contains a purchase option.
D. The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property.
58) In a lease that is appropriately recorded as a direct-financing lease by the lessor, unearned income
A. should be amortized over the period of the lease using the interest method.
B. does NOT arise.
C. should be amortized over the period of the lease using the straight-line method.
D. should be recognized at the lease’s expiration.
59) In order to properly record a direct-financing lease, the lessor needs to know how to calculate the lease receivable. The lease receivable in a direct-financing lease is best defined as
A. the amount of funds the lessor has tied up in the asset which is the subject of the direct-financing lease.
B. the present value of minimum lease payments.
C. the difference between the lease payments receivable and the fair market value of the leased property.
D. the total book value of the asset less any accumulated depreciation recorded by the lessor prior to the lease agreement.
60) The amount to be recorded as the cost of an asset under capital lease is equal to the
A. present value of the minimum lease payments.
B. present value of the minimum lease payments plus the present value of any unguaranteed residual value.
C. present value of the minimum lease payments or the fair value of the asset, whichever is lower.
D. carrying value of the asset on the lessor’s books
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