Problem 1: Use of the effective-interest method in amortizing bond premiums and discounts results in
a) a greater amount of interest income over the life of the bond issue than would result from the use of the straight-line method
b) a varying amount being recorded as interest income from period to period
c) a variable rate of return on the book value of the investment
d) a smaller amount of interest income over the life of the bond issue than would result from use of the straight-line method
Problem 2: Unruh Corp. began operations in 2007. An anlysis of Unruh's equity securities portfolio acquired in 2007 shows the following totals at December 31, 2007 for trading and available-for-sale securities:
Trading Securities Available-for-Sale Securities
Aggregate Cost $90,000 $110,000
Aggregate Fair Value 65,000 95,000
Amount should Unruh report in its 2007 income statement for unrealized holding loss?
a) $40,000
b) $10,000
c) $15,000
d) $25,000
Problem 3: When an investment in a held-to-maturity security is transferred to an available-for-sale security, the carrying value assigned to the available-for-sale security should be
a) its original cost
b) its fair value at the date of transfer
c) the lower of its original cost or its fair value at the date of transfer
d) the higher of its original cost or its fair value at the date of transfer
Problem 4: In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be
a) the terms of payment in the contract
b) the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable
c) the method commonly used by the contractor to account for other long-term construction contracts
d) the inherent nature of the contractor's technical facilities used in construction
Problem 5: Jett Corp. had 600,000 shares of common stock outstanding on January 1, issued 900,000 shares on July 1, and had income applicable to common stock of $1,050,000 for the year ending December 31, 2007. Earnings per share of common stock for 2007 would be
a.) $1.75
b.) $0.83
c.) $1.00
d.) $1.17
Problem 6: If Elston Company acquired a 30% interest in Alley Company on December 31, 2007 for $202,500 and during 2008 Alley Company had net income of $75,000 and paid a cash dividend of $30,000, applying the equity method would give a debit balance in the Investment in Alley Company Stock account at the end of 2008 of
a.) $202,500
b.) $216,000
c.) $225,000
d.) $217,500
Problem 7: 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.) pretax financial income will always exceed taxable income in 2008
b.) Garth will record a decrease in a deferred tax liability in 2008
c.) total income tax expense for 2008 will always exceed current tax expense for 2008
d.) Garth will record an increase in a deferred tax asset in 2008
Problem 8: Which of the following differences would result in future taxable amounts?
a.) Expenses of losses that are tax deductible after they are recognized in financial income.
b.) Revenues or gains that are taxable before they are recognized in financial income
c.) Revenues or gains that are recognized in financial income but are never included in taxable income
d.) Expenses or losses that are tax deductible before they are recognized in financial income
Problem 9: Cromwell Company began 2008 with $960,000 in cumulative taxable temporary differences and ended 2008 with $1,350,000. The tax rate enacted for 2008 is 40%, while the tax rate enacted for future years is 30%. Taxable income for 2008 is $2,400,000 and there are no permanent differences. Cromwell's pre-tax financial income for 2008 is
a.) $3,750,000
b.) $2,790,000
c.) $2,010,000
d.) $1,050,000
Problem 10: Deferred taxes should be presented on the balance sheet
a.) as one net debit or credit amount
b.) in two amounts: one for the net current amount and one for the net noncurrent amount
c.) in two amounts: one for the net debit amount and one for the net credit amount
d.) as reductions of the related asset or liability accounts
Problem 11: Tanner, Inc. incurred a financial and taxable loss for 2007. Tanner therefore decided to use the carryback provisions as it has been profitable up to this year. How should the amounts related to the carryback be reported in the 2007 financial statements?
a.) the reduction of the loss should be reported as a prior period adjustment
b.) the refund claimed should be reported as a deferred charge and amortized over five years
c.) the refund claimed should be reported as revenue in the current year
d.) the refund claimed should be shown as a reduction of the loss in 2007
Problem 12: On December 31, 2004 Tannon, Inc. leased machinery with a fair value of $630,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of $120,000 beginning December 31, 2004. The lease is appropriately accounted for by Tannon as a capital lease. Tannon's incremental borrowing rate is 11%. Tannon knows the interest rate implicit in the lease payments is 10%.
The present value of an annuity due of 1 for 6 years at 10% is 4.7908
The present value of an annuity due of 1 for 6 years at 11% is 4.6959
In its December 31, 2004 balance sheet, Tannon should report a lease liability of
a.) $454,896
b.) $510,000
c.) $563,508
d.) $574,896
Problem 13: A company borrows $10,000 and signs a 90-day nontrade note payable. In preparing a statement of cash flows (indirect method), this event would be reflected as a(n)
a.) addition adjustment to net income in the cash flows from operating activities section
b.) cash outflow from investing activities
c.) cash inflow from investing activities
d.) cash inflow from financing activities
Problem 14: Lange Co. provided the following information on selected transactions during 2004:
Purchase of land by issuing bonds $150,000
Proceeds from issuing bonds 300,000
Purhcases of inventory 570,000
Purchases of treasury stock 90,000
Loans made to other corporations 210,000
Dividends paid to preferred stockholders 60,000
Proceeds from issuing stock 240,000
Proceeds from sale of equipment 30,000
The net cash provided (used) by investing activities during 2004 is
a.) $30,000
b.) $(180,000)
c.) $(330,000)
d.) $(750,000)
The following information pertains to question below:
A flood damaged a building and contents. Floods are unusual and infrequent in this area. The receipts from insurance companies totalled $500,000, which was $150,000 less than the book values.
Problem 15: On the statement of cash flows(indirect method), the receipts from the insurance companies should
a.) be shown as an addition to net income of $350,000
b.) be shown as an inflow from investing activities of $350,000
c.) be shown as an inflow from investing activities of $500,000
d.) not be shown
Problem 16: On the statement of cash flows(indirect method), the flood loss should
a.) be shown as an addition to net income of $105,000
b.) be shown as an addition to net income of $150,000
c.) be shown as an inflow from investing activities of $105,000
d.) not be shown
Problem 17: Which of the following is not a retrospective-type accounting change?
a.) Completed-contract method to the percentage-of-completion method for long-term contracts
b.) LIFO method to the FIFO method for inventory valuation
c.) Sum-of-the-years'-digits method to the straight-line method
d.) "full cost" method to another method in the extractive industry
Problem 18: Stone Company changed its method of pricing inventories from FIFO to LIFO. What type of accounting change does that represent?
a.) a change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.
b.) a change in accounting principle for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.
c.) a change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be restated.
d.) a change in accounting principle for which the financial statements for prior periods included for comparative purposes should be restated.
Problem 19: 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:
Completed-Contract Percentage-of-Completion
2006 $475,000 $800,000
2007 625,000 950,000
2008 700,000 1,050,000
Totals $1,800,000 $2,800,000
Assuming an income tax rate of 40% for all years, the affect of this accounting change on prior periods should be reported by a credit of
a.) $600,000 on the 2008 income statement
b.) $390,000 on the 2008 income statement
c.) $600,000 on the 2008 retained earnings statement
d.) $600,000 on the 2008 retained earnings statement
Problem 20: Eaton 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 Inventory 2007 2008
FIFO $640,000 $712,000
LIFO 560,000 636,000
Net Income (computed under FIFO method) 980,000 1,080,000
Based on the above information, a change to the LIFO method in 2008 would result in net income for 2008 of
a.) $1,120,000
b.) $1,080,000
c.) $1,004,000
d.) $1,000,000
The Following information pertains to questions below:
Washington Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/08 and 12/31/09 contained the following errors:
2008 2009
Ending Inventory $15,000 overtstatement $24,000 understatement
Depreciation Expense 6,000 understatement 12,000 overstatement
Problem 21: Assume that the 2008 errors were not corrected and that no errors occurred in 2007. By what amount will 2008 income before income taxes be overstated or understated?
a.) $21,000 overstatement
b.) $9,000 overstatement
c.) $21,000 understatement
d.) $9,000 understatement
Problem 22: Assume that no correcting entries were made at 12/31/08, or 12/31/09. Ignoring income taxes, by how much will retained earnings at 12/31/09 be overstated or understated?
a.) $24,000 overtstatement
b.) $21,000 overtstatement
c.) $30,000 understatement
d.) $9,000 understatement