acct 302 final review

8/11/2019 ACCT 302 Final Review

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Chapter 11:

MULTIPLE CHOICEConceptual

21. The following is true of depreciation accounting.

a. It is not a matter of valuation.b. It is part of the matching of revenues and expenses.c. It retains funds by reducing income taxes and dividends.d. All of these.

22. Which of the following principles best describes the conceptual rationale forthe methods of matching depreciation expense with revenues?a. Associating cause and effectb. Systematic and rational allocationc. Immediate recognitiond. Partial recognition

23. Depreciation accountinga. provides funds.b. funds replacements.c. retains funds.d. all of these.

S24. Which of the following most accurately reflects the concept of depreciationas used in accounting?a. The process of charging the decline in value of an economic resource to

income in the period in which the benefit occurred.b. The process of allocating the cost of tangible assets to expense in a

systematic and rational manner to those periods expected to benefit from theuse of the asset.c. A method of allocating asset cost to an expense account in a manner which

closely matches the physical deterioration of the tangible asset involved.d. 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 thefair market value of tangible assets.

S25. The major difference between the service life of an asset and its physical lifeis thata. service life refers to the time an asset will be used by a company and

physical life refers to how long the asset will last.

b. physical life is the life of an asset without consideration of salvage value andservice life requires the use of salvage value.

c. physical life is always longer than service life.d. service life refers to the length of time an asset is of use to its original owner,

while physical life refers to how long the asset will be used by all owners.

P26. The term "depreciable base," or "depreciation base," as it is used inaccounting, refers to


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a. the total amount to be charged (debited) to expense over an asset's usefullife.

b. the cost of the asset less the related depreciation recorded to date.c. the estimated market value of the asset at the end of its useful life.d. the acquisition cost of the asset.

27. Economic factors that shorten the service life of an asset includea. obsolescence.b. supersession.c. inadequacy.d. all of these.

28. Which of the following is not one of the basic questions that must beanswered before the amount of depreciation charge can be computed?a. What is the depreciation base to use for the asset?b. What is the asset's useful life?c. What method of cost apportionment is best for this asset?d. What product or service is the asset related to?

S29. Which of the following is a realistic assumption of the straight-line method ofdepreciation?a. The asset's economic usefulness is the same each year.b. The repair and maintenance expense is essentially the same each period.c. The rate of return analysis is enhanced using the straight-line method.d. Depreciation is a function of time rather than a function of usage.

30. The activity method of depreciationa. is a variable charge approach.b. assumes that depreciation is a function of the passage of time.c. conceptually associates cost in terms of input measures.

d. all of these.

31. For income statement purposes, depreciation is a variable expense if thedepreciation method used isa. units-of-production.b. straight-line.c. sum-of-the-years'-digits.d. declining-balance.

32.If an industrial firm uses the units-of-production method for computingdepreciation on its only plant asset, factory machinery, the credit toaccumulated depreciation from period to period during the life of the firmwilla. be constant.b. vary with unit sales.c. vary with sales revenue.d. vary with production.

33. Use of the double-declining balance methoda. results in a decreasing charge to depreciation expense.


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b. means salvage value is not deducted in computing the depreciation base.c. means the book value should not be reduced below salvage value.d. all of these.

34. Use of the sum-of-the-years'-digits methoda. results in salvage value being ignored.

b. means the denominator is the years remaining at the beginning of the year.c. means the book value should not be reduced below salvage value.d. all of these.

35. A graph is set up with "yearly depreciation expense" on the vertical axis and"time" on the horizontal axis. Assuming linear relationships, how would thegraphs for straight-line and sum-of-the-years'-digits depreciation,respectively, be drawn?a. Vertically and sloping down to the rightb. Vertically and sloping up to the rightc. Horizontally and sloping down to the right

d. Horizontally and sloping up to the right

36. A principal objection to the straight-line method of depreciation is that ita. provides for the declining productivity of an aging asset.b. ignores variations in the rate of asset use.c. tends to result in a constant rate of return on a diminishing investment base.d. gives smaller periodic write-offs than decreasing charge methods.

37. Each year a company has been investing an increasingly greater amount inmachinery. Since there is a large number of small items with relativelysimilar useful lives, the company has been applying straight-line depreciationat a uniform rate to the machinery as a group. The ratio of this group's total

accumulated depreciation to the total cost of the machinery has been steadilyincreasing and now stands at .75 to 1.00. The most likely explanation for thisincreasing ratio is thea. company should have been using one of the accelerated methods of

depreciation.b. estimated average life of the machinery is less than the actual average useful

life.c. estimated average life of the machinery is greater than the actual average

useful life.d. company has been retiring fully depreciated machinery that should have

remained in service.

38. For the composite method, the compositea. rate is the total cost divided by the total annual depreciation.b. rate is the total annual depreciation divided by the total depreciable cost.c. life is the total cost divided by the total annual depreciation.d. life is the total depreciable cost divided by the total annual depreciation.

P39. Watkins Truck Rental uses the group depreciation method for its fleet oftrucks. When it retires one of its trucks and receives cash from a salvage


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company, the carrying value of property, plant, and equipment will bedecreased by thea. original cost of the truck.b. original cost of the truck less the cash proceeds.c. cash proceeds received.d. cash proceeds received and original cost of the truck.

S40. Composite or group depreciation is a depreciation system wherebya. the years of useful life of the various assets in the group are added together

and the total divided by the number of items.b. the cost of individual units within an asset group is charged to expense in the

year a unit is retired from service.c. a straight-line rate is computed by dividing the total of the annual depreciation

expense for all assets in the group by the total cost of the assets.d. the original cost of all items in a given group or class of assets is retained in

the asset account and the cost of replacements is charged to expense whenthey are acquired.

S41. When depreciation is computed for partial periods under a decreasingcharge depreciation method, it is necessary toa. charge a full year's depreciation to the year of acquisition.b. determine depreciation expense for the full year and then prorate the

expense between the two periods involved.c. use the straight-line method for the year in which the asset is sold or

otherwise disposed of.d. use a salvage value equal to the first year's partial depreciation charge.

42. Depreciation is normally computed on the basis of the nearesta. full month and to the nearest cent.

b. full month and to the nearest dollar.c. day and to the nearest cent.d. day and to the nearest dollar.

43. Myers Company acquired machinery on January 1, 2005 which it depreciatedunder the straight-line method with an estimated life of fifteen years and nosalvage value. On January 1, 2010, Myers estimated that the remaining life ofthis machinery was six years with no salvage value. How should this changebe accounted for by Myers?a. As a prior period adjustmentb. As the cumulative effect of a change in accounting principle in 2010c. By setting future annual depreciation equal to one-sixth of the book value on

January 1, 2010d. By continuing to depreciate the machinery over the original fifteen year life

44. A change in estimate shoulda. result in restatement of prior period statements.b. be handled in current and future periods.c. be handled in future periods only.d. be handled retroactively.


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45. Lynch Printing Company determines that a printing press used in its

operations has suffered a permanent impairment in value because oftechnological changes. An entry to record the impairment shoulda. recognize an extraordinary loss for the period.

b. include a credit to the equipment accumulated depreciation account.c. include a credit to the equipment account.d. not be made if the equipment is still being used.

46. Which of following is not a similarity in the accounting treatment fordepreciation and cost depletion?a. The estimated life is based on economic or productive life.b. Assets subject to either are reported in the same classification on the balance

sheet.c. The rates may be changed upon revision of the estimated productive life

used in the original rate computations.d. Both depreciation and depletion are based on time.

47. Which of the following is not a difference between the accounting treatmentfor depreciation and cost depletion?a. Depletion applies to natural resources while depreciation applies to plant and

equipment.b. Depletion refers to the physical exhaustion or consumption of the asset while

depreciation refers to the wear, tear, and obsolescence of the asset.c. Many formulas are used in computing depreciation but only one is used to

any extent in computing depletion.d. The cost of the asset is the starting point from which computation of the

amount of the periodic charge is made to operations for depreciation, but thefair value reassessed each year as the starting point for the periodic charge

for depletion.

48. Dividends representing a return of capital to stockholders are not uncommonamong companies whicha. use accelerated depreciation methods.b. use straight-line depreciation methods.c. recognize both functional and physical factors in depreciation.d. none of these.

49. Depletion expensea. is usually part of cost of goods sold.b. includes tangible equipment costs in the depletion base.

c. excludes intangible development costs from the depletion base.d. excludes restoration costs from the depletion base.

50. The most common method of recording depletion for accounting purposes isthea. percentage depletion method.b. decreasing charge method.c. straight-line method.


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d. units-of-production method.

51. Reserve recognition accountinga. is presently the generally accepted accounting method for financial reporting

of oil and gas reserves.b. is a historical cost method similar to the full cost approach and the successful

efforts approach.c. is used for reporting of oil and gas reserves for federal income tax purposes.d. requires estimates of future production costs, the appropriate discount rate,

and the expected selling price of oil and gas reserves.

S52. Of the following costs related to the development of natural resources, whichone is not a part of depletion cost?a. Acquisition cost of the natural resource depositb. Exploration costsc. Tangible equipment costs associated with machinery used to extract the

natural resource

d. Intangible development costs such as drilling costs, tunnels, and shafts

S53. Which of the following disclosures is not required in the financial statementsregarding depreciation?a. Accumulated depreciation, either by major classes of depreciable assets or in

total.b. Details demonstrating how depreciation was calculated.c. Depreciation expense for the period.d. Balances of major classes of depreciable assets, by nature and function.

P54. The book value of a plant asset isa. the fair market value of the asset at a balance sheet date.

b. the asset's acquisition cost less the total related depreciation recorded todate.

c. equal to the balance of the related accumulated depreciation account.d. the assessed value of the asset for property tax purposes.

55. A general description of the depreciation methods applicable to majorclasses of depreciable assetsa. is not a current practice in financial reporting.b. is not essential to a fair presentation of financial position.c. is needed in financial reporting when company policy differs from income tax

policy.d. should be included in corporate financial statements or notes thereto.

56. The asset turnover ratio is computed by dividinga. net income by ending total assets.b. net income by average total assets.c. net sales by ending total assets.d. net sales by average total assets.

57. The rate of return on total assets is computed by dividing


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a. Net income by ending total assets.b. Net sales by average total assets.c. Net sales by ending total assets.d. Net income by average total assets.

*58. A major objective of MACRS for tax depreciation is to

a. reduce the amount of depreciation deduction on business firms' tax returns.b. assure that the amount of depreciation for tax and book purposes will be the

same.c. help companies achieve a faster write-off of their capital assets.d. require companies to use the actual economic lives of assets in calculating

tax depreciation.

*59. Under MACRS, which one of the following is notconsidered in determiningdepreciation for tax purposes?a. Cost of assetb. Property recovery classc. Half-year conventiond. Salvage value

*60. If income tax effects are ignored, accelerated depreciation methodsa. provide funds for the earlier replacement of fixed assets.b. increase funds provided by operations.c. tend to offset the effect of steadily increasing repair and maintenance costs

on the income statement.d. tend to decrease the fixed asset turnover ratio.

Multiple Choice AnswersConceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

21. d 27. d 33. d 39. c 45. b 51. d 57. d22. b 28. d 34. c 40. c 46. d 52. c *58. c23. c 29. d 35. c 41. b 47. d 53. b *59. d24. b 30. a 36. b 42. b 48. d 54. b *60. c25. a 31. a 37. b 43. c 49. a 55. d26. a 32. d 38. d 44. b 50. d 56. d

Chapter 12:


21. Which of the following does notdescribe intangible assets?a. They lack physical existence.b. They are financial instruments.c. They provide long-term benefits.d. They are classified as long-term assets.

22. Which of the following characteristics do intangible assets possess?


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a. Physical existence.b. Claim to a specific amount of cash in the future.c. Long-lived.d. Held for resale.

23. Which characteristic is notpossessed by intangible assets?

a. Physical existence.b. Short-lived.c. Result in future benefits.d. Expensed over current and/or future years.

24. Costs incurred internally to create intangibles area. capitalized.b. capitalized if they have an indefinite life.c. expensed as incurred.d. expensed only if they have a limited life.

25. Which of the following costs incurred internally to create an intangible assetis generally expensed?a. Research and development costs.b. Filing costs.c. Legal costs.d. All of the above.

26. Which of the following methods of amortization is normally used forintangible assets?a. Sum-of-the-years'-digitsb. Straight-linec. Units of production

d. Double-declining-balance

27. The cost of an intangible asset includes all of the following excepta. purchase price.b. legal fees.c. other incidental expenses.d. all of these are included.

28. Factors considered in determining an intangible assets useful life include allof the following excepta. the expected use of the asset.

b. any legal or contractual provisions that may limit the useful life.c. any provisions for renewal or extension of the assets legal life. d. the amortization method used.

29. Under current accounting practice, intangible assets are classified asa. amortizable or unamortizable.b. limited-life or indefinite-life.c. specifically identifiable or goodwill-type.


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d. legally restricted or goodwill-type.

30. Companies should test indefinite life intangible assets at least annually for:a. recoverability.b. amortization.

c. impairment.d. estimated useful life.

S31. One factor that is not considered in determining the useful life of anintangible asset isa. salvage value.b. provisions for renewal or extension.c. legal life.d. expected actions of competitors.

32. Which intangible assets are amortized?

Limited-Life Indefinite-Lifea. Yes Yesb. Yes Noc. No Yesd. No No

33. The cost of purchasing patent rights for a product that might otherwise haveseriously competed with one of the purchaser's patented products should bea. charged off in the current period.b. amortized over the legal life of the purchased patent.c. added to factory overhead and allocated to production of the purchaser's

product.d. amortized over the remaining estimated life of the original patent covering the

product whose market would have been impaired by competition from thenewly patented product.

34. Broadway Corporation was granted a patent on a product on January 1,1998. To protect its patent, the corporation purchased on January 1, 2009 apatent on a competing product which was originally issued on January 10,2005. Because of its unique plant, Broadway Corporation does not feel thecompeting patent can be used in producing a product. The cost of thecompeting patent should bea. amortized over a maximum period of 20 years.

b. amortized over a maximum period of 16 years.c. amortized over a maximum period of 9 years.d. expensed in 2009.

35. Wriglee, Inc. went to court this year and successfully defended its patentfrom infringe-ment by a competitor. The cost of this defense should becharged toa. patents and amortized over the legal life of the patent.


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b. legal fees and amortized over 5 years or less.c. expenses of the period.d. patents and amortized over the remaining useful life of the patent.

36.Which of the following is notan intangible asset?a. Trade nameb. Research and development costs

c. Franchised. Copyrights

37. Which of the following intangible assets should notbe amortized?a. Copyrightsb. Customer listsc. Perpetual franchisesd. All of these intangible assets should be amortized.

38. When a patent is amortized, the credit is usually made toa. the Patent account.

b. an Accumulated Amortization account.c. a Deferred Credit account.d. an expense account.

39. When a company develops a trademark the costs directly related to securingit should generally be capitalized. Which of the following costs associatedwith a trademark would not be allowed to be capitalized?a. Attorney fees.b. Consulting fees.c. Research and development fees.d. Design costs.

40. In a business combination, companies record identifiable intangible assetsthat they can reliably measure. All other intangible assets, too difficult toidentify or measure, are recorded as:a. other assets.b. indirect costs.c. goodwill.d. direct costs.

41. Goodwill may be recorded when:a. it is identified within a company.b. one company acquires another in a business combination.c. the fair market value of a companys assets exceeds their cost.d. a company has exceptional customer relations.


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47. The intangible asset goodwill may bea. capitalized only when purchased.b. capitalized either when purchased or created internally.c. capitalized only when created internally.d. written off directly to retained earnings.

48. A loss on impairment of an intangible asset is the difference between theassetsa. carrying amount and the expected future net cash flows.b. carrying amount and its fair value.c. fair value and the expected future net cash flows.d. book value and its fair value.

49. The recoverability test is used to determine any impairment loss on which ofthe following types of intangible assets?a. Indefinite life intangibles other than goodwill.b. Indefinite life intangibles.

c. Goodwill.d. Limited life intangibles.

50. Buerhle Company needs to determine if its indefinite-life intangibles otherthan goodwill have been impaired and should be reduced or written off on itsbalance sheet. The impairment test(s) to be used is (are)

Recoverability Test Fair Value Testa. Yes Yesb. Yes Noc No Yesd. No No

51. The carrying amount of an intangible isa. the fair market value of the asset at a balance sheet date.b. the asset's acquisition cost less the total related amortization recorded to

date.c. equal to the balance of the related accumulated amortization account.d. the assessed value of the asset for intangible tax purposes.

52. Which of the following research and development related costs should becapitalized and depreciated over current and future periods?a. Research and development general laboratory building which can be put to

alternative uses in the futureb. Inventory used for a specific research projectc. Administrative salaries allocated to research and developmentd. Research findings purchased from another company to aid a particular

research project currently in process


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53. Which of the following principles best describes the current method ofaccounting for research and development costs?a. Associating cause and effectb. Systematic and rational allocationc. Income tax minimizationd. Immediate recognition as an expense

54. How should research and development costs be accounted for, according to aFinancial Accounting Standards Board Statement?a. Must be capitalized when incurred and then amortized over their

estimated useful lives.b. Must be expensed in the period incurred.c. May be either capitalized or expensed when incurred, depending upon

the materiality of the amounts involved.d. Must be expensed in the period incurred unless it can be clearly

demonstrated that the expenditure will have alternative future uses or

unless contractually reimbursable.

55. Which of the following would be considered research and development?a. Routine efforts to refine an existing product.b. Periodic alterations to existing production lines.c. Marketing research to promote a new product.d. Construction of prototypes.

56. Which of the following costs should be capitalized in the year incurred?a. Research and development costs.b. Costs to internally generate goodwill.c. Organizational costs.d. Costs to successfully defend a patent.

57. Research and development costsa. are intangible assets.b. may result in the development of a patent.c. are easily identified with specific projects.d. all of the above.

58. Which of the following is considered research and development costs?a. Planned search or critical investigation aimed at discovery of new knowledge.b. Translation of research findings or other knowledge into a plan or design for a

new product or process.c. Translation of research findings or other knowledge into a significant

improvement of an existing product.d. all of the above.


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59. Which of the following is considered research and development costs?a. Planned search or critical investigation aimed at discovery of new knowledge.b. Translation of research findings or other knowledge into a plan or design for a

new product or process.c. Neither a nor b.d. Both a and b.

60. Which of the following costs should be excluded from research anddevelopment expense?a. Modification of the design of a productb. Acquisition of R & D equipment for use on a current project onlyc. Cost of marketing research for a new productd. Engineering activity required to advance the design of a product to the

manufacturing stage

61. If a company constructs a laboratory building to be used as a research anddevelopment facility, the cost of the laboratory building is matched against

earnings asa. research and development expense in the period(s) of construction.b. depreciation deducted as part of research and development costs.c. depreciation or immediate write-off depending on company policy.d. an expense at such time as productive research and development has been

obtained from the facility.

62. Operating losses incurred during the start-up years of a new business shouldbea. accounted for and reported like the operating losses of any other business.b. written off directly against retained earnings.

c. capitalized as a deferred charge and amortized over five years.d. capitalized as an intangible asset and amortized over a period not to exceed20 years.

63. The costs of organizing a corporation include legal fees, fees paid to the stateof incorporation, fees paid to promoters, and the costs of meetings fororganizing the promoters. These costs are said to benefit the corporation forthe entity's entire life. These costs should bea. capitalized and never amortized.b. capitalized and amortized over 40 years.c. capitalized and amortized over 5 years.d. expensed as incurred.


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64. Which of the following would not be considered an R & D activity?a. Adaptation of an existing capability to a particular requirement or customer's

need.b. Searching for applications of new research findings.c. Laboratory research aimed at discovery of new knowledge.d. Conceptual formulation and design of possible product or process

alternatives.

65. Which of the following intangible assets should be shown as a separate itemon the balance sheet?a. Goodwillb. Franchisec. Patentd. Trademark

66. The notes to the financial statements should include information aboutacquired intangible assets, and aggregate amortization expense for how

many succeeding years?a. 6b. 5c. 4d. 3

67. Which of the following should be reported under the Other Expenses andLosses section of the income statement?a. Goodwill impairment losses.b. Trade name amortization expense.c. Patent impairment losses

d. None of the above.

68. The total amount of patent cost amortized to date is usuallya. shown in a separate Accumulated Patent Amortization account which is

shown contra to the Patent account.b. shown in the current income statement.c. reflected as credits in the Patent account.d. reflected as a contra property, plant and equipment item.

69. Intangible assets are reported on the balance sheeta. with an accumulated depreciation account.b. in the property, plant, and equipment section.c. separately from other assets.d. none of the above.


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70. Which of the following is often reported as an extraordinary item?a. Amortization expense.b. Impairment losses for intangible assets other than goodwill.c. Impairment losses on goodwill.d. None of the above.

71. Which of the following is often reported as an extraordinary item?a. Amortization expense.b. Impairment losses for intangible assets.c. Research and development costs.d. None of the above.

*72. Which of the following costs incurred with developing computer software forinternal use should be capitalized?a. Evaluation of alternatives.b. Coding.c. Training.

d. Maintenance.

*73. When developing computer software to be sold, which of the following costsshould be capitalized?a. Designing.b. Coding.c. Testing.d. None of the above.

*74. Capitalized costs incurred to develop internal use computer software shouldbe amortized using the:

a. percent-of-revenue approach.b. percent-of-completion approach.c. straight-line approach.d. accelerated amortization approach.

*75. Capitalized costs incurred while developing computer software to be soldshould be amortized using the:a. lower of the straight-line method or the percent-of-revenue method.b. higher of the percent-of-revenue method or the percent-of-completion

method.c. lower of the percent-of-revenue method or the percent-of-completion method.d. higher of the straight-line method or the percent-of-revenue method.


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21. b 29. b 37. c 45. a 53. d 61. b 69. c22. c 30. c 38. a 46. d 54. d 62. a 70. d23. a 31. a 39. c 47. a 55. d 63. d 71. d

24. c 32. b 40. c 48. b 56. d 64. a 72. b25. a 33. d 41. b 49. d 57. b 65. a 73. d26. b 34. c 42. d 50. c 58. d 66. b 74. c27. d 35. d 43. c 51. b 59. d 67. d 75. d28. d 36. b 44. b 52. a 60. c 68. c

Chapter 13:


21. Liabilities are

a. any accounts having credit balances after closing entries are made.b. deferred credits that are recognized and measured in conformity withgenerally accepted accounting principles.

c. obligations to transfer ownership shares to other entities in the future.d. obligations arising from past transactions and payable in assets or services in

the future.

22. Which of the following is a current liability?a. A long-term debt maturing currently, which is to be paid with cash in a sinking

fundb. A long-term debt maturing currently, which is to be retired with proceeds from

a new debt issue

c. A long-term debt maturing currently, which is to be converted into commonstock

d. None of these

23. Which of the following is true about accounts payable?

1. Accounts payable should not be reported at their present value.2. When accounts payable are recorded at the net amount, a

Purchase Discounts account will be used.3. When accounts payable are recorded at the gross amount, a

Purchase Discounts Lost account will be used.a. 1

b. 2c. 3d. Both 2 and 3 are true.

24. Among the short-term obligations of Lance Company as of December 31, thebalance sheet date, are notes payable totaling $250,000 with the MadisonNational Bank. These are 90-day notes, renewable for another 90-day


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period. These notes should be classified on the balance sheet of LanceCompany asa. current liabilities.b. deferred charges.c. long-term liabilities.d. intermediate debt.

25. Which of the following is not true about the discount on short-term notespayable?a. The Discount on Notes Payable account has a debit balance.b. The Discount on Notes Payable account should be reported as an asset on

the balance sheet.c. When there is a discount on a note payable, the effective interest rate is

higher than the stated discount rate.d. All of these are true.

26. Which of the following may be a current liability?

a. Withheld Income Taxesb. Deposits Received from Customersc. Deferred Revenued. All of these

27. 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 (for which there is an adequate appropriation of retained

earnings) due in eleven months.

d. Bonds to be refunded when due in eight months, there being no doubtabout the marketability of the refunding issue.

28. Which of the following should not be included in the current liabilitiessection of the balance sheet?a. Trade notes payableb. Short-term zero-interest-bearing notes payablec. The discount on short-term notes payabled. All of these are included

29. Which of the following is a current liability?a. Preferred dividends in arrears

b. A dividend payable in the form of additional shares of stockc. A cash dividend payable to preferred stockholdersd. All of these

30. Stock dividends distributable should be classified on thea. income statement as an expense.b. balance sheet as an asset.c. balance sheet as a liability.


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d. balance sheet as an item of stockholders' equity.

31. Of the following items, the only one which should not be classified as acurrent liability isa. current maturities of long-term debt.b. sales taxes payable.c. short-term obligations expected to be refinanced.d. unearned revenues.

32. An account which would be classified as a current liability isa. dividends payable in the company's stock.b. accounts payabledebit balances.c. losses expected to be incurred within the next twelve months in excess of the

company's insurance coverage.d. none of these.

33. Which of the following is a characteristic of a current liability but not a long-

term liability?a. Unavoidable obligation.b. Present obligation that entails settlement by probable future transfer or use of

cash, goods, or services.c. Liquidation is reasonably expected to require use of existing resources

classified as current assets or create other current liabilities.d. Transaction or other event creating the liability has already occurred.

34. Which of the following is not considered a part of the definition of a liability?a. Unavoidable obligation.b. Transaction or other event creating the liability has already occurred.c. Present obligation that entails settlement by probable future transfer or use of

cash, goods, or services.d. Liquidation is reasonably expected to require use of existing resources

classified as current assets or create other current liabilities.

35. Why is the liability section of the balance sheet of primary importance tobankers?a. To evaluate the entity's credit quality.b. To assist in understanding the entity's liquidity.c. To better understand sources of repayment.d. To evaluate operating efficiency.

36. What is the relationship between current liabilities and a company'soperating cycle?a. Liquidation of current liabilities is reasonably expected within the company's

operating cycle (or one year if less).b. Current liabilities are the result of operating transactions.c. Current liabilities can't exceed the amount incurred in one operating cycle.d. There is no relationship between the two.

37. What is the relationship between present value and the concept of a liability?


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a. Present values are used to measure certain liabilities.b. Present values are not used to measure liabilities.c. Present values are used to measure all liabilities.d. Present values are only used to measure long-term liabilities.

38. What is a discount as it relates to zero-interest-bearing notes payable?a. The discount represents the lender's costs to underwrite the note.b. The discount represents the credit quality of the borrower.c. The discount represents the cost of borrowing.d. The discount represents the allowance for uncollectible amounts.

39. Where is debt callable by the creditor reported on the debtor's financialstatements?a. Long-term liability.b. Current liability if the creditor intends to call the debt within the year,

otherwise a long-term liability.c. Current liability if it is probable that creditor will call the debt within the year,

otherwise a long-term liability.d. Current liability.

40. Which of the following is not a condition necessary to exclude a short-termobligation from current liabilities?a. Intend to refinance the obligation on a long-term basis.b. Obligation must be due with one year.c. Demonstrate the ability to complete the refinancing.d. Subsequently refinance the obligation on a long-term basis.

41. Which of the following does not demonstrate evidence regarding the abilityto consummate a refinancing of short-term debt?

a. Management indicated that they are going to refinance the obligation.b. Actually refinance the obligation.c. Have capacity under existing financing agreements that can be used to

refinance the obligation.d. Enter into a financing agreement that clearly permits the entity to refinance

the obligation.

42. A company has not declared a dividend on its cumulative preferred stock forthe past three years. What is the required accounting treatment or disclosurein this situation?a. Record a liability for cumulative amount of preferred stock dividends not

declared.

b. Disclose the amount of the dividends in arrears.c. Record a liability for the current year's dividends only.d. No disclosure or recognition is required.

43. Which of the following situations may give rise to unearned revenue?a. Providing trade credit to customers.b. Selling inventory.c. Selling magazine subscriptions.


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d. Providing manufacturer warranties.

44. Which of the following statements is correct?a. A company may exclude a short-term obligation from current liabilities if the

firm intends to refinance the obligation on a long-term basis.b. A company may exclude a short-term obligation from current liabilities if the

firm can demonstrate an ability to consummate a refinancing.c. A company may exclude a short-term obligation from current liabilities if it is

paid off after the balance sheet date and subsequently replaced by long-termdebt before the balance sheet is issued.

d. None of these.45. The ability to consummate the refinancing of a short-term obligation maybe demonstrated by

a. actually refinancing the obligation by issuing a long-term obligation after thedate of the balance sheet but before it is issued.

b. entering into a financing agreement that permits the enterprise to refinancethe debt on a long-term basis.

c. actually refinancing the obligation by issuing equity securities after the date of

the balance sheet but before it is issued.d. all of these.

46. Which of the following statements isfalse?a. A company may exclude a short-term obligation from current liabilities if

the firm intends to refinance the obligation on a long-term basis anddemonstrates an ability to complete the refinancing.

b. Cash dividends should be recorded as a liability when they are declaredby the board of directors.

c. Under the cash basis method, warranty costs are charged to expense asthey are paid.

d. FICA taxes withheld from employees' payroll checks should never berecorded as a liability since the employer will eventually remit theamounts withheld to the appropriate taxing authority.

47. Which of the following is nota correct statement about sales taxes?a. Sales taxes are an expense of the seller.b. Many companies record sales taxes in the sales account.c. If sales taxes are included in the sales account, the first step to find the

amount of sales taxes is to divide sales by 1 plus the sales tax rate.d. All of these are true.

S48. If a short-term obligation is excluded from current liabilities because ofrefinancing, the footnote to the financial statements describing this eventshould include all of the following information excepta. a general description of the financing arrangement.b. the terms of the new obligation incurred or to be incurred.c. the terms of any equity security issued or to be issued.d. the number of financing institutions that refused to refinance the debt, if any.


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d. Either 1 or 2 is acceptable.

55. What are compensated absences?a. Unpaid time off.b. A form of healthcare.c. Payroll deductions.d. Paid time off.

56. Which gives rise to the requirement to accrue a liability for the cost ofcompensated absences?a. Payment is probable.b. Employee rights vest or accumulate.c. Amount can be reasonably estimated.d. All of the above.

57. Under what conditions is an employer required to accrue a liability for sickpay?a. Sick pay benefits can be reasonably estimated.b. Sick pay benefits vest.c. Sick pay benefits equal 100% of the pay.d. Sick pay benefits accumulate.

58. Which of the following taxes does not represent a payroll deduction acompany may incur?a. Federal income taxes.b. FICA taxes.c. State unemployment taxes.d. State income taxes.

59. What is a contingency?a. An existing situation where certainty exists as to a gain or loss that will be

resolved when one or more future events occur or fail to occur.b. An existing situation where uncertainty exists as to possible loss that will be

resolved when one or more future events occur.c. An existing situation where uncertainty exists as to possible gain or loss that

will not be resolved in the foreseeable future.d. An existing situation where uncertainty exists as to possible gain or loss that

will be resolved when one or more future events occur or fail to occur.

60. When is a contingent liability recorded?a. When the amount can be reasonably estimated.b. When the future events are probable to occur and the amount can be

reasonably estimated.c. When the future events are probable to occur.d. When the future events will possibly occur and the amount can be reasonably

estimated.

61. Which of the following is an example of a contingent liability?a. Obligations related to product warranties.b. Possible receipt from a litigation settlement.


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c. Pending court case with a probable favorable outcome.d. Tax loss carryforwards.

62. Which of the following terms is associated with recording a contingentliability?a. Possible.

b. Likely.c. Remote.d. Probable.

63. Which of the following is the proper way to report a gain contingency?a. As an accrued amount.b. As deferred revenue.c. As an account receivable with additional disclosure explaining the nature of

the contingency.d. As a disclosure only.

64. Which of the following contingencies need notbe disclosed in the financial

statements or the notes thereto?a. Probable losses not reasonably estimableb. Environmental liabilities that cannot be reasonably estimatedc. Guarantees of indebtedness of othersd. All of these must be disclosed.

65.Which of the following sets of conditions would give rise to the accrual of acontingency under current generally accepted accounting principles?a. Amount of loss is reasonably estimable and event occurs infrequently.b. Amount of loss is reasonably estimable and occurrence of event is probable.c. Event is unusual in nature and occurrence of event is probable.d. Event is unusual in nature and event occurs infrequently.

66. Jeff Beck is a farmer who owns land which borders on the right-of-way of theNorthern Railroad. On August 10, 2010, due to the admitted negligence of theRailroad, hay on the farm was set on fire and burned. Beck had had a disputewith the Railroad for several years concerning the ownership of a smallparcel of land. The representative of the Railroad has offered to assign anyrights which the Railroad may have in the land to Beck in exchange for arelease of his right to reimbursement for the loss he has sustained from thefire. Beck appears inclined to accept the Railroad's offer. The Railroad's 2010financial 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. recognition of a loss only.c. creation of a liability only.d. disclosure in note form only.

67. A contingency can be accrued whena. it is certain that funds are available to settle the disputed amount.b. an asset may have been impaired.c. the amount of the loss can be reasonably estimated and it is probable that an

asset has been impaired or a liability incurred.


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d. it is probable that an asset has been impaired or a liability incurred eventhough the amount of the loss cannot be reasonably estimated.

68. A contingent liabilitya. definitely exists as a liability but its amount and due date are indeterminable.b. is accrued even though not reasonably estimated.c. is not disclosed in the financial statements.d. is the result of a loss contingency.

69. To record an asset retirement obligation (ARO), the cost associated with theARO isa. expensed.b. included in the carrying amount of the related long-lived asset.c. included in a separate account.d. none of these.

70. A company is legally obligated for the costs associated with the retirement of

a long-lived asseta. only when it hires another party to perform the retirement activities.b. only if it performs the activities with its own workforce and equipment.c. whether it hires another party to perform the retirement activities or performs

the activities itself.d. when it is probable the asset will be retired.

71.Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) acontinuing policy of guaranteeing new products against defects for threeyears that has resulted in material but rather stable warranty repair andreplacement costs. Any liability for the warrantya. should be reported as long-term.b. should be reported as current.c. should be reported as part current and part long-term.d. need not be disclosed.

72. Ortiz Corporation, a manufacturer of household paints, is preparing annualfinancial statements at December 31, 2010. Because of a recently provenhealth hazard in one of its paints, the government has clearly indicated itsintention of having Ortiz recall all cans of this paint sold in the last sixmonths. The management of Ortiz estimates that this recall would cost$800,000. What accounting recognition, if any, should be accorded thissituation?

a. No recognitionb. Note disclosure onlyc. Operating expense of $800,000 and liability of $800,000d. Appropriation of retained earnings of $800,000

73. Information available prior to the issuance of the financial statementsindicates that it is probable that, at the date of the financial statements, aliability has been incurred for obligations related to product warranties. The


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amount of the loss involved can be reasonably estimated. Based on the abovefacts, an estimated loss contingency should bea. accrued.b. disclosed but notaccrued.c. neitheraccrued nordisclosed.d. classified as an appropriation of retained earnings.

P74. Espinosa Co. has a loss contingency to accrue. The loss amount can only bereasonably estimated within a range of outcomes. No single amount withinthe range is a better estimate than any other amount. The amount of lossaccrual should bea. zero.b. the minimum of the range.c. the mean of the range.d. the maximum of the range.

S75. Dean Company becomes aware of a lawsuit after the date of the financialstatements, but before they are issued. A loss and related liability should be

reported in the financial statements if the amount can be reasonablyestimated, an unfavorable outcome is highly probable, anda. the Dean Company admits guilt.b. the court will decide the case within one year.c. the damages appear to be material.d. the cause for action occurred during the accounting period covered by the

financial statements.

S76. Use of the accrual method in accounting for product warranty costsa. is required for federal income tax purposes.b. is frequently justified on the basis of expediency when warranty costs are

immaterial.

c. finds the expense account being charged when the seller performs incompliance with the warranty.

d. represents accepted practice and should be used whenever the warranty isan integral and inseparable part of the sale.

77. Which of the following best describes the accrual method of accounting forwarranty costs?a. Expensed when paid.b. Expensed when warranty claims are certain.c. Expensed based on estimate in year of sale.d. Expensed when incurred.

78. Which of the following best describes the cash-basis method of accounting

for warranty costs?a. Expensed based on estimate in year of sale.b. Expensed when liability is accrued.c. Expensed when warranty claims are certain.d. Expensed when incurred.

79. Which of the following is a characteristic of the expense warranty approach,but not the sales warranty approach?


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a. Estimated liability under warranties.b. Warranty expense.c. Unearned warranty revenue.d. Warranty revenue.

80. An electronics store is running a promotion where for every video game

purchased, the customer receives a coupon upon checkout to purchase asecond game at a 50% discount. The coupons expire in one year. The storenormally recognized a gross profit margin of 40% of the selling price onvideo games. How would the store account for a purchase using the discountcoupon?a. The reduction in sales price attributed to the coupon is recognized as

premium expense.b. The difference between the cost of the video game and the cash received is

recognized as premium expense.c. Premium expense is not recognized.d. The difference between the cost of the video game and the selling price prior

to the coupon is recognized as premium expense.

81. What condition is necessary to recognize an asset retirement obligation?a. Company has an existing legal obligation and can reasonably estimate the

amount of the liability.b. Company can reasonably estimate the amount of the liability.c. Company has an existing legal obligation.d. Obligation event has occurred.

82. Which of the following are not factors that are considered when evaluatingwhether or not to record a liability for pending litigation?a. Time period in which the underlying cause of action occurred.b. The type of litigation involved.c. The probability of an unfavorable outcome.d. The ability to make a reasonable estimate of the amount of the loss.

83. How do you determine the acid-test ratio?a. The sum of cash and short-term investments divided by short-term debt.b. Current assets divided by current liabilities.c. Current assets divided by short-term debt.d. The sum of cash, short-term investments and net receivables divided by

current liabilities.

84. What does the current ratio inform you about a company?a. The extent of slow-moving inventories.

b. The efficient use of assets.c. The company's liquidity.d. The company's profitability.

S85. Which of the following is not acceptable treatment for the presentation ofcurrent liabilities?a. Listing current liabilities in order of maturityb. Listing current liabilities according to amount


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c. Offsetting current liabilities against assets that are to be applied to theirliquidation

d. Showing current liabilities immediately below current assets to obtain apresentation of working capital

P86. The ratio of current assets to current liabilities is called thea. current ratio.b. acid-test ratio.c. current asset turnover ratio.d. current liability turnover ratio.

87. Accrued liabilities are disclosed in financial statements bya. a footnote to the statements.b. showing the amount among the liabilities but not extending it to the liability

total.c. an appropriation of retained earnings.d. appropriately classifying them as regular liabilities in the balance sheet.

88. The numerator of the acid-test ratio consists ofa. total current assets.b. cash and marketable securities.c. cash and net receivables.d. cash, marketable securities, and net receivables.

89. Each of the following are included in both the current ratio and the acid-testratio excepta. cash.b. short-term investments.c. net receivables.

d. inventory.


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S26. If bonds are issued initially at a premium and the effective-interest method of

amortization is used, interest expense in the earlier years will bea. greater than if the straight-line method were used.b. greater than the amount of the interest payments.c the same as if the straight-line method were used.d. less than if the straight-line method were used.

27. The interest rate written in the terms of the bond indenture is known as thea. coupon rate.b. nominal rate.c. stated rate.d. coupon rate, nominal rate, or stated rate.

28. The rate of interest actually earned by bondholders is called thea. stated rate.b. yield rate.

c. effective rate.d. effective, yield, or market rate.

Use the following information for questions 29 and 30:

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. Thebonds are sold to yield 8%.

29. One step in calculating the issue price of the bonds is to multiply theprincipal by the table value fora. 10 periods and 10% from the present value of 1 table.b. 20 periods and 5% from the present value of 1 table.

c. 10 periods and 8% from the present value of 1 table.d. 20 periods and 4% from the present value of 1 table.

30. Another step in calculating the issue price of the bonds is toa. multiply $10,000 by the table value for 10 periods and 10% from the present

value of an annuity table.b. multiply $10,000 by the table value for 20 periods and 5% from the present

value of an annuity table.c. multiply $10,000 by the table value for 20 periods and 4% from the present

value of an annuity table.d. none of these.

31. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturityten years from date of issue. If the bonds were issued at a premium, thisindicates thata. the effective yield or market rate of interest exceeded the stated (nominal)

rate.b. the nominal rate of interest exceeded the market rate.c. the market and nominal rates coincided.d. no necessary relationship exists between the two rates.


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32. If bonds are initially sold at a discount and the straight-line method ofamortization is used, interest expense in the earlier years willa. exceed what it would have been had the effective-interest method of

amortization been used.b. be less than what it would have been had the effective-interest method of

amortization been used.c. be the same as what it would have been had the effective-interest method of

amortiza-tion been used.d. be less than the stated (nominal) rate of interest.

33. Under the effective-interest method of bond discount or premiumamortization, the periodic interest expense is equal toa. the stated (nominal) rate of interest multiplied by the face value of the bonds.b. the market rate of interest multiplied by the face value of the bonds.c. the stated rate multiplied by the beginning-of-period carrying amount of the

bonds.d. the market rate multiplied by the beginning-of-period carrying amount of the

bonds.

34. When the effective-interest method is used to amortize bond premium ordiscount, the periodic amortization willa. increase if the bonds were issued at a discount.b. decrease if the bonds were issued at a premium.c. increase if the bonds were issued at a premium.d. increase if the bonds were issued at either a discount or a premium.

35. If bonds are issued between interest dates, the entry on the books of theissuing corporation could include aa. debit to Interest Payable.

b. credit to Interest Receivable.c. credit to Interest Expense.d. credit to Unearned Interest.

36. When the interest payment dates of a bond are May 1 and November 1, and abond issue is sold on June 1, the amount of cash received by the issuer will bea. decreased by accrued interest from June 1 to November 1.b. decreased by accrued interest from May 1 to June 1.c. increased by accrued interest from June 1 to November 1.d. increased by accrued interest from May 1 to June 1.

37. Theoretically, the costs of issuing bonds could bea. expensed when incurred.b. reported as a reduction of the bond liability.c. debited to a deferred charge account and amortized over the life of the

bonds.d. any of these.

38. The printing costs and legal fees associated with the issuance of bondsshould


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a. be expensed when incurred.b. be reported as a deduction from the face amount of bonds payable.c. be accumulated in a deferred charge account and amortized over the life of

the bonds.d. not be reported as an expense until the period the bonds mature or are

retired.


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39. Treasury bonds should be shown on the balance sheet asa. an asset.b. a deduction from bonds payable issued to arrive at net bonds payable and

outstanding.c. a reduction of stockholders' equity.d. both an asset and a liability.

40. An early extinguishment of bonds payable, which were originally issued at apremium, is made by purchase of the bonds between interest dates. At thetime of reacquisitiona. any costs of issuing the bonds must be amortized up to the purchase date.b. the premium must be amortized up to the purchase date.c. interest must be accrued from the last interest date to the purchase date.d. all of these.

41. The generally accepted method of accounting for gains or losses from theearly extinguishment of debt treats any gain or loss as

a. an adjustment to the cost basis of the asset obtained by the debt issue.b. an amount that should be considered a cash adjustment to the cost of any

other debt issued over the remaining life of the old debt instrument.c. an amount received or paid to obtain a new debt instrument and, as such,

should be amortized over the life of the new debt.d. a difference between the reacquisition price and the net carrying amount of

the debt which should be recognized in the period of redemption.

P42. "In-substance defeasance" is a term used to refer to an arrangement wherebya. a company gets another company to cover its payments due on long-term

debt.b. a governmental unit issues debt instruments to corporations.

c. a company provides for the future repayment of a long-term debt by placingpurchased securities in an irrevocable trust.

d. a company legally extinguishes debt before its due date.

P43. A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledgestitle to the building as security for the loan. The corporation is to pay thebank $80,000 each year for 10 years to repay the loan. Which of the followingrelationships can you expect to apply to the situation?a. The balance of mortgage payable at a given balance sheet date will be

reported as a long-term liability.

b. The balance of mortgage payable will remain a constant amount over the 10-year period.c. The amount of interest expense will decrease each period the loan is

outstanding, while the portion of the annual payment applied to the loanprincipal will increase each period.

d. The amount of interest expense will remain constant over the 10-year period.


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S44. A debt instrument with no ready market is exchanged for property whosefair market value is currently indeterminable. When such a transaction takesplacea. the present value of the debt instrument must be approximated using an

imputed interest rate.b. it should not be recorded on the books of either party until the fair market

value of the property becomes evident.c. the board of directors of the entity receiving the property should estimate a

value for the property that will serve as a basis for the transaction.d. the directors of both entities involved in the transaction should negotiate a

value to be assigned to the property.

45. When a note payable is issued for property, goods, or services, the presentvalue of the note is measured bya. the fair value of the property, goods, or services.b. the market value of the note.c. using an imputed interest rate to discount all future payments on the note.d. any of these.

46. When a note payable is exchanged for property, goods, or services, the statedinterest rate is presumed to be fair unlessa. no interest rate is stated.b. the stated interest rate is unreasonable.c. the stated face amount of the note is materially different from the current cash

sales price for similar items or from current market value of the note.d. any of these.

47. Discount on Notes Payable is charged to interest expensea. equally over the life of the note.b. only in the year the note is issued.

c. using the effective-interest method.d. only in the year the note matures.

48. Which of the following is an example of "off-balance-sheet financing"?

1. Non-consolidated subsidiary.2. Special purpose entity.3. Operating leases.

a. 1b. 2c. 3d. All of these are examples of "off-balance-sheet financing."

S49. When a business enterprise enters into what is referred to as off-balance-sheet financing, the companya. is attempting to conceal the debt from shareholders by having no information

about the debt included in the balance sheet.b. wishes to confine all information related to the debt to the income statement

and the statement of cash flow.c. can enhance the quality of its financial position and perhaps permit credit to

be obtained more readily and at less cost.


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d. is in violation of generally accepted accounting principles.

S50. Long-term debt that matures within one year and is to be converted intostock should be reporteda. as a current liability.b. in a special section between liabilities and stockholders equity.c. as noncurrent.d. as noncurrent and accompanied with a note explaining the method to be

used in its liquidation.

51. Which of the following must be disclosed relative to long-term debtmaturities and sinking fund requirements?a. The present value of future payments for sinking fund requirements and long-

term debt maturities during each of the next five years.b. The present value of scheduled interest payments on long-term debt during

each of the next five years.c. The amount of scheduled interest payments on long-term debt during each of

the next five years.d. The amount of future payments for sinking fund requirements and long-termdebt maturities during each of the next five years.

52. Note disclosures for long-term debt generally include all of the followingexcepta. assets pledged as security.b. call provisions and conversion privileges.c. restrictions imposed by the creditor.d. names of specific creditors.

53. The times interest earned ratio is computed by dividing

a. net income by interest expense.b. income before taxes by interest expense.c. income before income taxes and interest expense by interest expense.d. net income and interest expense by interest expense.

54. The debt to total assets ratio is computed by dividinga. current liabilities by total assets.b. long-term liabilities by total assets.c. total liabilities by total assets.d. total assets by total liabilities.

*55. In a troubled debt restructuring in which the debt is continued with modifiedterms and the carrying amount of the debt is less than the total future cashflows,a. a loss should be recognized by the debtor.b. a gain should be recognized by the debtor.c. a new effective-interest rate must be computed.d. no interest expense or revenue should be recognized in the future.

*56. A troubled debt restructuring will generally result in a


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a. loss by the debtor and a gain by the creditor.b. loss by both the debtor and the creditor.c. gain by both the debtor and the creditor.d. gain by the debtor and a loss by the creditor.

*57. In a troubled debt restructuring in which the debt is settled by a transfer ofassets with a fair market value less than the carrying amount of the debt, thedebtor would recognizea. no gain or loss on the settlement.b. a gain on the settlement.c. a loss on the settlement.d. none of these.

*58. In a troubled debt restructuring in which the debt is continued with modifiedterms, a gain should be recognized at the date of restructure, but no interestexpense should be recognized over the remaining life of the debt, wheneverthe

a. carrying amount of the pre-restructure debt is less than the total future cashflows.

b. carrying amount of the pre-restructure debt is greater than the total futurecash flows.

c. present value of the pre-restructure debt is less than the present value of thefuture cash flows.

d. present value of the pre-restructure debt is greater than the present value ofthe future cash flows.

*59. In a troubled debt restructuring in which the debt is continued with modifiedterms and the carrying amount of the debt is less than the total future cashflows, the creditor shoulda. compute a new effective-interest rate.b. not recognize a loss.c. calculate its loss using the historical effective rate of the loan.d. calculate its loss using the current effective rate of the loan.



21. a 27. d 33. d 39. b 45. d 51. d *57. b

22. a 28. d 34. d 40. d 46. d 52. d *58. b23. b 29. d 35. c 41. d 47. c 53. c *59. c24. a 30. d 36. d 42. c 48. d 54. c25. d 31. b 37. d 43. c 49. c *55. c26. a 32. a 38. c 44. a 50. d *56. d

Chapter 15:



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21. The residual interest in a corporation belongs to thea. management.b. creditors.c. common stockholders.d. preferred stockholders.

22. The pre-emptive right of a common stockholder is the right toa. share proportionately in corporate assets upon liquidation.b. share proportionately in any new issues of stock of the same class.c. receive cash dividends before they are distributed to preferred stockholders.d. exclude preferred stockholders from voting rights.

23. The pre-emptive right enables a stockholder toa. share proportionately in any new issues of stock of the same class.b. receive cash dividends before other classes of stock without the pre-emptive

right.c. sell capital stock back to the corporation at the option of the stockholder.

d. receive the same amount of dividends on a percentage basis as the preferredstockholders.

S24. In a corporate form of business organization, legal capital is best defined asa. the amount of capital the state of incorporation allows the company to

accumulate over its existence.b. the par value of all capital stock issued.c. the amount of capital the federal government allows a corporation to

generate.d. the total capital raised by a corporation within the limits set by the Securities

and Exchange Commission.

S25. Stockholders of a business enterprise are said to be the residual owners. Theterm residual owner means that shareholdersa. are entitled to a dividend every year in which the business earns a profit.b. have the rights to specific assets of the business.c. bear the ultimate risks and uncertainties and receive the benefits of

enterprise ownership.d. can negotiate individual contracts on behalf of the enterprise.

26. Total stockholders' equity representsa. a claim to specific assets contributed by the owners.b. the maximum amount that can be borrowed by the enterprise.c. a claim against a portion of the total assets of an enterprise.

d. only the amount of earnings that have been retained in the business.

27. A primary source of stockholders' equity isa. income retained by the corporation.b. appropriated retained earnings.c. contributions by stockholders.d. both income retained by the corporation andcontributions by stockholders.


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32. A "secret reserve" will be created ifa. inadequate depreciation is charged to income.b. a capital expenditure is charged to expense.c. liabilities are understated.d. stockholders' equity is overstated.

P33. Which of the following represents the total number of shares that acorporation may issue under the terms of its charter?a. authorized sharesb. issued sharesc. unissued sharesd. outstanding shares

S34. Stock that has a fixed per-share amount printed on each stock certificate iscalleda. stated value stock.b. fixed value stock.

c. uniform value stock.d. par value stock.

S35. Which of the following is not a legal restriction related to profit distributionsby a corporation?a. The amount distributed to owners must be in compliance with the state laws

governing corporations.b. The amount distributed in any one year can never exceed the net income

reported for that year.c. Profit distributions must be formally approved by the board of directors.d. Dividends must be in full agreement with the capital stock contracts as to

preferences and participation.

S36. In January 2010, Finley Corporation, a newly formed company, issued 10,000shares of its $10 par common stock for $15 per share. On July 1, 2010, FinleyCorporation reacquired 1,000 shares of its outstanding stock for $12 pershare. The acquisition of these treasury sharesa. decreased total stockholders' equity.b. increased total stockholders' equity.c. did not change total stockholders' equity.d. decreased the number of issued shares.

P37. Treasury shares are

a. shares held as an investment by the treasurer of the corporation.b. shares held as an investment of the corporation.c. issued and outstanding shares.d. issued but not outstanding shares.

38. When treasury stock is purchased for more than the par value of the stockand the cost method is used to account for treasury stock, what account(s)should be debited?


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a. Treasury stock for the par value and paid-in capital in excess of par for theexcess of the purchase price over the par value.

b. Paid-in capital in excess of par for the purchase price.c. Treasury stock for the purchase price.d. Treasury stock for the par value and retained earnings for the excess of the

purchase price over the par value.

39. Gains" on sales of treasury stock (using the cost method) should be creditedtoa. paid-in capital from treasury stock.b. capital stock.c. retained earnings.d. other income.

40. Porter Corp. purchased its own par value stock on January 1, 2010 for$20,000 and debited the treasury stock account for the purchase price. Thestock was subsequently sold for $12,000. The $8,000 difference between thecost and sales price should be recorded as a deduction from

a. additional paid-in capital to the extent that previous net "gains" from sales ofthe same class of stock are included therein; otherwise, from retainedearnings.

b. additional paid-in capital without regard as to whether or not there have beenprevious net "gains" from sales of the same class of stock included therein.

c. retained earnings.d. net income.

41. How should a "gain" from the sale of treasury stock be reflected when usingthe cost method of recording treasury stock transactions?a. As ordinary earnings shown on the income statement.b. As paid-in capital from treasury stock transactions.

c. As an increase in the amount shown for common stock.d. As an extraordinary item shown on the income statement.

42. Which of the following best describes a possible result of treasury stocktransactions by a corporation?a. May increase but not decrease retained earnings.b. May increase net income if the cost method is used.c. May decrease but not increase retained earnings.d. May decrease but not increase net income.

43. Which of the following features of preferred stock makes the security more

like debt than an equity instrument?a. Participatingb. Votingc. Redeemabled. Noncumulative

44. The cumulative feature of preferred stocka. limits the amount of cumulative dividends to the par value of the preferred

stock.


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b. requires that dividends not paid in any year must be made up in a later yearbefore dividends are distributed to common shareholders.

c. means that the shareholder can accumulate preferred stock until it is equal tothe par value of common stock at which time it can be converted intocommon stock.

d. enables a preferred stockholder to accumulate dividends until they equal the

par value of the stock and receive the stock in place of the cash dividends.

P45. According to the FASB, redeemable preferred stock should bea. included with common stock.b. included as a liability.c. excluded from the stockholders equity heading.d. included as a contra item in stockholders' equity.

S46. Cumulative preferred dividends in arrears should be shown in acorporation's balance sheet asa. an increase in current liabilities.b. an increase in stockholders' equity.c. a footnote.d. an increase in current liabilities for the current portion and long-term liabilities

for the long-term portion.

47. At the date of the financial statements, common stock shares issued wouldexceed common stock shares outstanding as a result of thea. declaration of a stock split.b. declaration of a stock dividend.c. purchase of treasury stock.d. payment in full of subscribed stock.

48. An entry is notmade on the

a. date of declaration.b. date of record.c. date of payment.d. An entry is made on all of these dates.

49. Cash dividends are paid on the basis of the number of sharesa. authorized.b. issued.c. outstanding.d. outstanding less the number of treasury shares.

50. Which of the following statements about property dividends is nottrue?a. A property dividend is usually in the form of securities of other companies.b. A property dividend is also called a dividend in kind.c. The accounting for a property dividend should be based on the carrying value

(book value) of the nonmonetary assets transferred.d. All of these statements are true.


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c. Market value on the declaration dated. Market value on the payment date

58. The issuer of a 5% common stock dividend to common stockholderspreferably should transfer from retained earnings to contributed capital an

amount equal to thea. market value of the shares issued.b. book value of the shares issued.c. minimum legal requirements.d. par or stated value of the shares issued.

59. At the date of declaration of a small common stock dividend, the entry shouldnotincludea. a credit to Common Stock Dividend Payable.b. a credit to Paid-in Capital in Excess of Par.c. a debit to Retained Earnings.d. All of these are acceptable.


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60. The balance in Common Stock Dividend Distributable should be reported asa(n)

a. deduction from common stock issued.b. addition to capital stock.c. current liability.d. contra current asset.

61. A feature common to both stock splits and stock dividends isa. a transfer to earned capital of a corporation.b. that there is no effect on total stockholders' equity.c. an increase in total liabilities of a corporation.d. a reduction in the contributed capital of a corporation.

62. What effect does the issuance of a 2-for-1 stock split have on each of thefollowing?

Par Value per Share Retained Earnings

a. No effect No effectb. Increase No effectc. Decrease No effectd. Decrease Decrease

63. Which one of the following disclosures should be made in the equity sectionof the balance sheet, rather than in the notes to the financial statements?a. Dividend preferencesb. Liquidation preferencesc. Call pricesd. Conversion or exercise prices

64. The rate of return on common stock equity is calculated by dividinga. net income less preferred dividends by average common stockholders

equity.b. net income by average common stockholders equity.c. net income less preferred dividends by ending common stockholders equity.d. net income by ending common stockholders equity.

65. The payout ratio can be calculated by dividinga. dividends per share by earnings per share.b. cash dividends by net income less preferred dividends.c. cash dividends by market price per share.d. dividends per share by earnings per share and dividing cash dividends by net

income less preferred dividends.

66. Younger Company has outstanding both common stock and nonparticipating,non-cumulative preferred stock. The liquidation value of the preferred isequal to its par value. The book value per share of the common stock isunaffectedbya. the declaration of a stock dividend on preferred payable in preferred stock

when the market price of the preferred is equal to its par value.


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b. the declaration of a stock dividend on common stock payable in commonstock when the market price of the common is equal to its par value.

c. the payment of a previously declared cash dividend on the common stock.d. a 2-for-1 split of the common stock.

P67. Assume common stock is the only class of stock outstanding in the ManleyCorporation. Total stockholders' equity divided by the number of commonstock shares outstanding is calleda. book value per share.b. par value per share.c. stated value per share.d. market value per share.

*68. Dividends are not paid ona. noncumulative preferred stock.b. nonparticipating preferred stock.c. treasury common stock.

d. Dividends are paid on all of these.

*69. Noncumulative preferred dividends in arrearsa. are not paid or disclosed.b. must be paid before any other cash dividends can be distributed.c. are disclosed as a liability until paid.d. are paid to preferred stockholders if sufficient funds remain after payment of

the current preferred dividend.

*70. How should cumulative preferred dividends in arrears be shown in acorporation's statement of financial position?a. Note disclosure

b. Increase in stockholders' equityc. Increase in current liabilitiesd. Increase in current liabilities for the amount expected to be declared within

the year or operating cycle, and increase in long-term liabilities for thebalance



21. c 29. d 37. d 45. b 53. b 61. b *69. a

22. b 30. b 38. c 46. c 54. b 62. c *70. a23. a 31. a 39. a 47. c 55. b 63. b24. b 32. b 40. a 48. b 56. b 64. a25. c 33. a 41. b 49. c 57. b 65. b26. c 34. d 42. c 50. c 58. a 66. c27. d 35. b 43. c 51. a 59. a 67. a28. d 36. a 44. b 52. a 60. b *68. c


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Chapter 16:

MULTIPLE CHOICEDilutive Securities, Conceptual

21. Convertible bondsa. have priority over other indebtedness.b. are usually secured by a first or second mortgage.c. pay interest only in the event earnings are sufficient to cover the interest.d. may be exchanged for equity securities.

22. The conversion of bonds is most commonly recorded by thea. incremental method.b. proportional method.c. market value method.d. book value method.

23. When a bond issuer offers some form of additional consideration (asweetener) to induce conversion, the sweetener is accounted for as a(n)a. extraordinary item.b. expense.c. loss.d. none of these.

S24. Corporations issue convertible debt for two main reasons. One is the desireto raise equity capital that, assuming conversion, will arise when the originaldebt is converted. The other is

a. the ease with which convertible debt is sold even if the company has a poorcredit rating.

b. the fact that equity capital has issue costs that convertible debt does not.c. that many corporations can obtain financing at lower rates.d. that convertible bonds will always sell at a premium.

S25. When convertible debt is retired by the issuer, any material differencebetween the cash acquisition price and the carrying amount of the debtshould bea. reflected currently in income, but not as an extraordinary item.b. reflected currently in income as an extraordinary item.c. treated as a prior period adjustment.d. treated as an adjustment of additional paid-in capital.

S26. The conversion of preferred stock into common requires that any excess ofthe par value of the common shares issued over the carrying amount of thepreferred being converted should bea. reflected currently in income, but not as an extraordinary item.b. reflected currently in income as an extraordinary item.c. treated as a prior period adjustment.d. treated as a direct reduction of retained earnings.


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27. The conversion of preferred stock may be recorded by the

a. incremental method.b. book value method.c. market value method.d. par value method.

28. When the cash proceeds from a bond issued with detachable stock warrantsexceed the sum of the par value of the bonds and the fair market value of thewarrants, the excess should be credited toa. additional paid-in capital from stock warrants.b. retained earnings.c. a liability account.d. premium on bonds payable.

29. Proceeds from an issue of debt securities having stock warrants should notbe allocated between debt and equity features when

a. the market value of the warrants is not readily available.b. exercise of the warrants within the next few fiscal periods seems remote.c. the allocation would result in a discount on the debt security.d. the warrants issued with the debt securities are nondetachable.

30. Stock warrants outstanding should be classified asa. liabilities.b. reductions of capital contributed in excess of par value.c. assets.d. none of these.

P31. A corporation issues bonds with detachable warrants. The amount to berecorded as paid-in capital is preferablya. zero.b. calculated by the excess of the proceeds over the face amount of the bonds.c. equal to the market value of the warrants.d. based on the relative market values of the two securities involved.

P32. The distribution of stock rights to existing common stockholders willincrease paid-in capital at the

Date of Issuance Date of Exerciseof the Rights of the Rights

a. Yes Yes

b. Yes Noc. No Yesd. No No

S33. The major difference between convertible debt and stock warrants is thatupon exercise of the warrantsa. the stock is held by the company for a defined period of time before they are

issued to the warrant holder.


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b. the holder has to pay a certain amount of cash to obtain the shares.c. the stock involved is restricted and can only be sold by the recipient after a

set period of time.d. no paid-in capital in excess of par can be a part of the transaction.

S34. Which of the following is not a characteristic of a noncompensatory stockoption plan?a. Substantially all full-time employees may participate on an equitable basis.b. The plan offers no substantive option feature.c. Unlimited time period permitted for exercise of an option as long as the holder

is still employed by the company.d. Discount from the market price of the stock no greater than would be

reasonable in an offer of stock to stockholders or others.

35. The date on which to measure the compensation element in a stock optiongranted to a corporate employee ordinarily is the date on which theemployee

a. is granted the option.b. has performed all conditions precedent to exercising the option.c. may first exercise the option.d. exercises the option.

36. Compensation expense resulting from a compensatory stock option plan isgenerallya. recognized in the period of exercise.b. recognized in the period of the grant.c. allocated to the periods benefited by the employee's required service.d. allocated over the periods of the employee's service life to retirement.

37. The date on which total compensation expense is computed in a stock optionplan is the datea. of grant.b. of exercise.c. that the market price coincides with the option price.c. that the market price exceeds the option price.

38. Which of the following is not a characteristic of a noncompensatory stockpurchase plan?a. It is open to almost all full-time employees.b. The discount from market price is small.

c. The plan offers no substantive option feature.d. All of these are characteristics.

*39. Under the intrinsic value method, compensation expense resulting from anincentive stock option is generallya. not recognized because no excess of market price over the option price

exists at the date of grant.b. recognized in the period of the grant.c. allocated to the periods benefited by the employee's required service.


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d. recognized in the period of exercise.

*40. For stock appreciation rights, the measurement date for computingcompensation is the datea. the rights mature.b. the stocks price reaches a predetermined amount.c. of grant.d. of exercise.

*41. An executive pays no taxes at time of exercise in a(an)a. stock appreciation rights plan.b. incentive stock option plan.c. nonqualified stock option plan.d. Taxes would be paid in all of these.

*42. A company estimates the fair value of SARs, using an option-pricing model,for

a. share-based equity awards.b. share-based liability awards.c. both equity awards and liability awards.d. neither equity awards or liability awards.

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

21. d 25. a 29. d 33. b 37. a *41. b22. d 26. d 30. d 34. c 38. d *42. b23. b 27. b 31. d 35. a *39. c24. c 28. d 32. c 36. c *40. d

82. With respect to the computation of earnings per share, which of the followingwould be most indicative of a simple capital structure?a. Common stock, preferred stock, and convertible securities outstanding in lots

of even thousandsb. Earnings derived from one primary line of businessc. Ownership interest consisting solely of common stockd. None of these

83. In computing earnings per share for a simple capital structure, if thepreferred stock is cumulative, the amount that should be deducted as anadjustment to the numerator (earnings) is the

a. preferred dividends in arrears.b. preferred dividends in arrears times (one minus the income tax rate).c. annual preferred dividend times (one minus the income tax rate).d. none of these.

84. In computations of weighted average of shares outstanding, when a stockdividend or stock split occurs, the additional shares area. weighted by the number of days outstanding.

acct 302 final review

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