Multiple Choice Questions -
For each of the following questions, select the best answer by circling the corresponding letter choice.
1. Which of the following businesses is most likely to use the specific identification method for determining cost of goods sold?
a. Hardware store.
b. Grocery store.
c. Car dealership.
d. Roofing company.
2. When prices are rising,
a. LIFO will result in lower net income and a lower ending inventory than FIFO.
b. LIFO will result in lower net income and a higher ending inventory than FIFO.
c. LIFO will result in higher net income and a lower ending inventory than FIFO.
d. LIFO will result in higher net income and a higher ending inventory than FIFO.
3. The primary reason for the popularity of LIFO is that it gives
a. better matching of physical flow and cost flow.
b. a lower income tax obligation when inventory costs are rising.
c. simplified recordkeeping.
d. a simpler method to apply.
4. Under U.S. GAAP, a long-term asset is initially recorded at the
a. acquisition cost of the asset only.
b. appraised value of the asset.
c. acquisition cost of the asset, but subsequently adjusted up or down to appraised value.
d. acquisition cost of the asset plus all costs necessary to get the asset ready for its intended use.
5. The carrying value of an asset is equal to the
a. asset's market value less its historical cost.
b. asset's cost less accumulated depreciation.
c. replacement cost of the asset.
d. asset's cost less estimated residual value.
6. The balance in the accumulated depreciation account represents
a. the amount charged to depreciation expense since the acquisition of the asset.
b. a contra-expense account.
c. a cash fund to be used to replace long-term assets.
d. the amount charged to depreciation expense in the current period.
7. For an investment in available-for-sale securities, the receipt of a cash dividend would be reported as
a. a reduction from retained earnings.
b. an increase in the investment account.
c. a reduction in the investment account.
d. dividend revenue on the income statement.
8. Which of the following methods of accounting for investments is appropriate when the investor cannot exercise significant influence over the investee?
a. Equity method.
b. Consolidation.
c. Cost method.
d. Fair value method.
9. U.S. GAAP requires firms holding investments classified as trading securities to report unrealized holding gains and losses on the investments
a. in the income statement.
b. as an adjustment to the Capital stock section of the balance sheet.
c. in the footnotes to the financial statements.
d. as a component of other comprehensive income.
10. The equity method of accounting for an investment in the common stock of another company should be used when the investment
a. is composed of common stock and it is the investor's intent to vote the common stock.
b. ensures a source of supply such as raw materials.
c. enables the investor to exercise significant influence over the investee.
d. gives the investor voting control over the investee.
11. Goodwill may be recorded when
a. it is identified within a company.
b. a company acquires a controlling interest in another company.
c. the fair value of a company's assets exceeds their cost.
d. a company has exceptional customer relations.
12. When a company presents a "Consolidated Statement of Operations" in their Form 10-K, which of the following must be true?
a. The company has investments in trading securities in one or more other companies.
b. The company has a noncontrolling interest in one or more other companies.
c. The company owns greater than 50% of the voting shares in one or more other companies.
d. The company owns 100% of the voting shares in one or more other companies.
13. Outstanding common stock is
a. stock that is performing well on the New York Stock Exchange.
b. stock that has been authorized by the state for issue.
c. stock issued plus treasury stock.
d. stock in the hands of stockholders.
14. Which of the following is an appropriate presentation of treasury stock on the balance sheet?
a. As a marketable security.
b. As a deduction at cost from total stockholders' equity.
c. As a deduction at cost from total contingent liabilities.
d. As a deduction at par from total stockholders' equity.
15. Both cash dividends and stock dividends
a. reduce retained earnings.
b. reduce total assets.
c. reduce total liabilities.
d. reduce total stockholders' equity.
Problems -
Follow the instructions given to complete each of the following problems and show your work.
Problem 1 - Douglas Company had the following beginning inventory and purchases during the current year:
|
Date
|
Transaction
|
Number of Units
|
Unit Cost
|
Total Cost
|
|
Jan. 1
|
Beginning inventory
|
60
|
$31
|
$1,860
|
|
Apr. 7
|
Purchases
|
140
|
34
|
4,760
|
|
Jul. 16
|
Purchases
|
200
|
37
|
7,400
|
|
Oct. 6
|
Purchases
|
100
|
39
|
3,900
|
|
|
|
500
|
|
$17,920
|
During the current year, Douglas Company sold 450 units of its product.
REQUIRED: Calculate the dollar value of ending inventory and cost of goods sold using the following methods:
1. FIFO
a. Ending inventory $
b. Cost of Goods Sold $
2. LIFO
a. Ending inventory $
b. Cost of Goods Sold $
3. Weighted-Average Cost (calculate weighted-average cost per unit to two decimal places)
a. Ending inventory $
b. Cost of Goods Sold $
4. Which method will result in the highest reported net income?
5. Which method will result in the lowest income tax obligation?
Problem 2 - Anderson Corporation purchased a machine for $180,000 on January 1, 2017. The machine had an estimated useful life of 6 years and a $15,000 estimated salvage value. Anderson uses the straight-line method of depreciation.
On January 1, 2019, Anderson determines that the machine will only last a total of 5 years and have an $8,000 salvage value.
REQUIRED:
a. Calculate the carrying value of the machine on January 1, 2019.
b. Calculate the amount that should be recorded as depreciation expense for 2019.
Problem 3 - On January 1, 2017, Baker Company sold equipment with an original cost of $240,000 and accumulated depreciation of $215,000.
REQUIRED: Prepare the journal entry to record the sale, assuming Baker sold the equipment for $26,000.
Problem 4 - On January 1, 2017, Crawford Corporation purchased marketable securities for $335,000, which it classified as available-for-sale securities. On October 1, 2017, Crawford received dividends of $10,000 on the securities. The fair value of the securities on December 31, 2017 was $330,000. On March 1, 2018, Crawford sold all of the securities for $345,000.
REQUIRED: Prepare journal entries to record:
- The acquisition of the securities.
- The receipt of dividends.
- The re-measurement on December 31.
- The sale of the securities.
Problem 5 - On January 1, 2017, Lakewood Corporation purchased 30% of the voting shares of Baker Company common stock and was able to exercise significant influence. The following information relates to the investment for the year:
a. Lakewood purchased the Baker shares for $300,000.
b. Baker declared and paid dividends of $60,000 during the year.
c. Baker's net income for the year was $200,000.
REQUIRED: Record the necessary journal entries for the Lakewood Corporation using the equity method.
Problem 6 - On January 1, Coburn Company acquired 100 percent of the outstanding voting shares of Parker Company for $400,000 cash. On this date, the carrying value and the fair value of Parker's net assets totaled $365,000. Coburn attributes the excess purchase price to goodwill. On December 31, Coburn's current assets and Parker's liabilities included an intercompany advance from Coburn to Parker in the amount of $30,000.
REQUIRED: Enter the appropriate amounts in the Consolidated column for the consolidated balance sheet at December 31.
|
Coburn Company
|
Parker Company
|
Consolidated
|
|
Current assets
|
$ 700,000
|
$ 80,000
|
|
|
Investment in Parker
|
450,000
|
-
|
|
|
Plant assets, net
|
1,750,000
|
385,000
|
|
|
Goodwill
|
-
|
-
|
|
|
Other assets
|
210,000
|
20,000
|
|
|
Total assets
|
$3,110,000
|
$485,000
|
|
|
|
|
|
|
Liabilities
|
$1,000,000
|
$ 70,000
|
|
|
Common Stock
|
1,600,000
|
330,000
|
|
|
Retained earnings
|
510,000
|
85,000
|
|
|
Total liabilities and equity
|
$3,110,000
|
$485,000
|
|
Problem 7 - Lopez Company reports the following transactions during its first year of operations:
January 2 - Issued 40,000 shares of no-par value common stock at $45 per share.
March 30 - Purchased 7,000 shares of its own common stock at $48 per share. Lopez uses the cost method to account for treasury stock.
June 15 - Sold all of the treasury stock at $53 per share.
August 10 - Declared and issued a 2-for-1 stock split on all outstanding shares of common stock.
December 1 - Declared a cash dividend of $0.85 per share on all outstanding shares of common stock.
December 31 - Paid the dividend.
REQUIRED: Record the journal entries for each of the above transactions. If no entry is required, write "No Entry".