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ACC 422 Final Exam

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Question;1) A cash equivalent is a short-term, highly liquid;investment that is readily convertible into known amounts of cash and;A. has a current market value;that is greater than its original cost.;B. bears an interest rate that;is at least equal to the prime rate of interest at the date of liquidation.;C. is so near its maturity;that it presents insignificant risk of changes in interest rates.;D. is acceptable as a means to;pay current liabilities.;2) Which of the following is NOT considered cash for;financial reporting purposes?;A. Money orders, certified checks;and personal checks;B. Coin, currency, and available;funds;C. Postdated checks and I.O.U.?s;D. Petty cash funds and change;funds;3) Which of the following items should NOT be;included in the Cash caption on the balance sheet?;A. Checks from other parties;presently in the cash register;B. Amounts on deposit in checking;account at the bank;C. Postage stamps on hand;D. Coins and currency in the cash;register;4) If a company employs the gross method of;recording accounts receivable from customers, then sales discounts taken should;be reported as;A. an item of ?other expense? in the;income statement.;B. a deduction from accounts receivable;in determining the net realizable value of accounts receivable.;C. sales discounts forfeited in the;cost of goods sold section of the income statement.;D. a deduction from sales in the;income statement.;5) The advantage of relating a company?s bad debt;expense to its outstanding accounts receivable is that this approach;A. best relates bad debt expense to;the period of sale.;B. is the only generally accepted;method for valuing accounts receivable.;C. makes estimates of uncollectible;accounts unnecessary.;D. gives a reasonably correct;statement of receivables in the balance sheet.;6) Which of the following is a generally accepted;method of determining the amount of the adjustment to bad debt expense?;A. A percentage of sales NOT;adjusted for the balance in the allowance;B. A percentage of accounts;receivable NOT adjusted for the balance in the allowance;C. An amount derived from aging;accounts receivable and NOT adjusted for the balance in the allowance;D. A percentage of sales adjusted;for the balance in the allowance;7) If the beginning inventory for 2006 is;overstated, the effects of this error on cost of goods sold for 2006, net income;for 2006, and assets at December 31, 2007, respectively, are;A. overstatement, understatement, no;effect.;B. overstatement, understatement;overstatement.;C. understatement, overstatement, no;effect.;D. understatement, overstatement;overstatement.;8) Valuation of inventories requires the;deter?mination of all of the following EXCEPT;A. the physical goods to be included;in inventory.;B. the costs to be included in;inventory.;C. the cost flow assumption to be;adopted.;D. the cost of goods held on consignment;from other companies.;9) Eller Co. received merchandise on consignment. As;of January 31, Eller included the goods in inventory, but did NOT record the;transaction. The effect of this on its financial statements for January 31;would be;A. net income was correct and;current assets were understated.;B. net income, current assets, and;retained earnings were overstated.;C. net income, current assets, and;retained earnings were understated.;D. net income and current assets;were overstated and current liabilities were understated.;10) Assuming no beginning inventory, what can be;said about the trend of inventory prices if cost of goods sold computed when;inventory is valued using the FIFO method exceeds cost of goods sold when;inventory is valued using the LIFO method?;A. Prices remained unchanged.;B. Prices decreased.;C. Price trend cannot be determined;from information given.;D. Prices increased.;11) Which method of inventory pricing best;approximates specific identification of the actual flow of costs and units in;most manufacturing situations?;A. First-in, first-out;B. Average cost;C. Base stock;D. Last-in, first-out;12) All of the following costs should be charged;against revenue in the period in which costs are incurred EXCEPT for;A. costs which will NOT benefit any;future period.;B. manufacturing overhead costs for;a product manufactured and sold in the same accounting period.;C. costs of normal shrinkage and;scrap incurred for the manufacture of a product in ending inventory.;D. costs from idle manufacturing;capacity resulting from an unexpected plant shutdown.;13) When the direct method is used to record;inventory at market;A. a loss is recorded directly in;the inventory account by crediting inventory and debiting loss on inventory;decline.;B. the market value figure for;ending inventory is substituted for cost and the loss is buried in cost of;goods sold;C. only the portion of the loss;attributable to inventory sold during the period is recorded in the financial;statements.;D. there is a direct reduction in;the selling price of the product that results in a loss being recorded on the;income statement prior to the sale.;14) An item of inventory purchased this period for;$15.00 has been incorrectly written down to its current replacement cost of;$10.00. It sells during the following period for $30.00, its normal selling;price, with disposal costs of $3.00 and normal profit of $12.00. Which of the;following statements is NOT true?;A. The current;year?s income is understated.;B. Income of the;following year will be understated.;C. The closing;inventory of the current year is understated.;D. The cost of;sales of the following year will be understated.;15) In no case can ?market? in the;lower-of-cost-or-market rule be more than;A. estimated;selling price in the ordinary course of business less reasonably predictable;costs of completion and disposal.;B. estimated selling;price in the ordinary course of business less reasonably predictable costs of;completion and disposal, an allowance for an approximately normal profit;margin, and an adequate reserve for possible future losses.;C. estimated;selling price in the ordinary course of business less reasonably predictable;costs of completion and disposal and an allowance for an approximately normal;profit margin.;D. estimated;selling p;rice in the ordinary course of business.;16) The gross profit method of inventory valuation;is invalid when;A. there is a;substantial increase in inventory during the year.;B. none of these.;C. there is no;beginning inventory because it is the first year of operation.;D. a portion of;the inventory is destroyed.;17) Which of the following is NOT a basic assumption;of the gross profit method?;A. Goods NOT sold;must be on hand.;B. The total;amount of purchases and the total amount of sales remain relatively unchanged;from the comparable previous period.;C. If the sales;reduced to the cost basis, are deducted from the sum of the opening inventory;plus purchases, the result is the amount of inventory on hand.;D. The beginning;inventory plus the purchases equal total goods to be accounted for.;18) In 2006, Lucas Manufacturing signed a contract;with a supplier to purchase raw materials in 2007 for $700,000. Before the;December 31, 2006 balance sheet date, the market price for these materials;dropped to $510,000. The journal entry to record this situation at December 31;2006 will result in a credit that should be reported;A. as a current;liability.;B. on the income;statement.;C. as an;appropriation of retained earnings.;D. as a valuation;account to Inventory on the balance sheet.;19) The cost of land typically includes the purchase;price and all of the following costs EXCEPT;A. street lights;sewers, and drainage systems cost.;B. assumption of;any liens or mortgages on the property.;C. private;driveways and parking lots.;D. grading;filling, draining, and clearing costs.;20) The cost of land does NOT include;A. costs of;removing old buildings.;B. costs of;improvements with limited lives.;C. costs of;grading, filling, draining, and clearing.;D. special;assessments.;21) Cotton Hotel Corporation recently purchased;Holiday Hotel and the land on which it is located with the plan to tear down;the Holiday Hotel and build a new luxury hotel on the site. The cost of the;Holiday Hotel should be;A. written off as;an extraordinary loss in the year the hotel is torn down.;B. capitalized as;part of the cost of the land.;C. depreciated;over the period from acquisition to the date the hotel is scheduled to be torn;down.;D. capitalized as;part of the cost of the new hotel.;22) To be consistent with the historical cost;principle, overhead costs incurred by an enterprise constructing its own;building should be;A. eliminated;completely from the cost of the asset.;B. allocated on;an opportunity cost basis.;C. allocated on;the basis of lost production.;D. allocated on a;pro rata basis between the asset and normal operations.;23) Which of the following costs are capitalized for;self-constructed assets?;A. Labor and;overhead only;B. Materials and;overhead only;C. Materials and;labor only;D. Materials;labor, and overhead;24) Which of the following assets do NOT qualify for;capitalization of interest costs incurred during construction of the assets?;A. Assets;intended for sale or lease that are produced as discrete projects.;B. Assets;financed through the issuance of long-term debt.;C. Assets under;construction for an enterprise?s own use.;D. Assets NOT;currently undergoing the activities necessary to prepare them for their;intended use.;25) The cost of a nonmonetary asset acquired in;exchange for another nonmonetary asset and the exchange has commercial;substance is usually recorded at;A. the fair value;of the asset given up, and a gain but NOT a loss may be recognized.;B. the fair value;of the asset received if it is equally reliable as the fair value of the asset;given up.;C. the fair value;of the asset given up, and a gain or loss is recognized.;D. either the;fair value of the asset given up or the asset received, whichever one results;in the largest gain (smallest loss) to the company.;26) Construction of a qualifying asset is started on;April 1 and finished on December 1. The fraction used to multiply an;expenditure made on April 1 to find weighted-average accumulated expenditures;is;A. 8/12.;B. 9/12.;C. 8/8.;D. 11/12.;27) When a plant asset is acquired by issuance of common;stock, the cost of the plant asset is properly measured by the;A. par value of;the stock.;B. stated value;of the stock.;C. book value of;the stock.;D. market value;of the stock.;28) Which of the following principles best describes;the conceptual rationale for the methods of matching depreciation expense with;revenues?;A. Associating;cause and effect;B. Systematic and;rational allocation;C. Immediate;recognition;D. Partial;recognition;29) For income statement purposes, depreciation is a;variable expense if the depreciation method used is;A.;units-of-production.;B. straight-line.;C.;sum-of-the-years?-digits.;D. declining-balance.;30) If an industrial firm uses the;units-of-production method for computing depreciation on its only plant asset;factory machinery, the credit to accumulated depreciation from period to period;during the life of the firm will;A. be constant.;B. vary with unit;sales.;C. vary with;sales revenue.;D. vary with;production.;31) Lennon Company purchased a depreciable asset for;$200,000. The estimated salvage value is $10,000, and the estimated useful life;is 10,000 hours. Lennon used the asset for 1,100 hours in the current year. The;activity method will be used for depreciation. What is the depreciation expense;on this asset?;A. $19,000;B. $20,900;C. $22,000;D. $190,000;[$200,000 ? $10,000) ? 10,000] ? 1,100 = $20,900;32) Bigbie Company purchased a depreciable asset for $600,000. The estimated;salvage value is $30,000, and the estimated useful life is 10,000 hours. Bigbie;used the asset for 1,100 hours in the current year. The activity method will be;used for depreciation. What is the depreciation expense on this asset?;A. $57,000;B. $62,700;C. $66,000;D. $570,000;[($600,000 ? $30,000) ? 10,000] ? 1,100 = $62,700;33) Starr Company purchased a depreciable asset for $150,000. The estimated;salvage value is $10,000, and the estimated useful life is 8 years. The;double-decli;ning balance method will be used for depreciation.;What is the depreciation expense for the second year on this asset?;A. $17,500;B. $26,250;C. $28,125;D. $37,500;$150,000 ? [(1 ? 8) ? 2] = $37,500;($150,000 ? $37,500) ? [(1 ? 8) ? 2] = $28,125;34) The cost of purchasing patent rights for a product that might otherwise;have seriously competed with one of the purchaser?s patented products should be;A. charged off in;the current period.;B. amortized over;the remaining estimated life of the original patent covering the product whose;market would have been impaired by competition from the newly patented product.;C. amortized over;the legal life of the purchased patent.;D. added to;factory overhead and allocated to production of the purchaser?s product.;35) Costs incurred internally to create intangibles;are;A. capitalized.;B. expensed only;if they have a limited life.;C. capitalized if;they have an indefinite life.;D. expensed as;incurred.;36) Factors considered in determining an intangible;asset?s useful life include all of the following EXCEPT;A. the expected;use of the asset.;B. the;amortization method used.;C. any legal or;contractual provisions that may limit the useful life.;D. any provisions;for renewal or extension of the asset?s legal life;37) Fleming Corporation acquired Out-of-Sight;Products on January 1, 2008 for $4,000,000, and recorded goodwill of $750,000;as a result of that purchase. At December 31, 2008, the Out-of-Sight Products;Division had a fair value of $3,400,000. The net identifiable assets of the;Division (excluding goodwill) had a fair value of $2,900,000 at that time. What;amount of loss on impairment of goodwill should Fleming record in 2008?;A. $ -0-;B. $600,000;C. $250,000;D. $350,000;$3,400,000 ? $2,900,000 = $500,000;$750,000 ? $500,000 = $250,000.;38) Mining Company acquired a patent on an oil extraction technique on January;1, 2006 for $5,000,000. It was expected to have a 10 year life and no residual;value. Mining uses straight-line amortization for patents. On December 31;2007, the expected future cash flows expected from the patent were expected to;be $600,000 per year for the next eight years. The present value of these cash;flows, discounted at Mining?s market interest rate, is $2,800,000. At what;amount should the patent be carried on the December 31, 2007 balance sheet?;A. $5,000,000;B. $2,800,000;C. $4,800,000;D. $4,000,000;$5,000,000 ? [($5,000,000 ? 10) ? 2] = $4,000,000;39) General Products Company bought Special Products Division in 2006 and;appropriately booked $250,000 of goodwill related to the purchase. On December;31, 2007, the fair value of Special Products Division is $2,000,000 and it is;carried on General Product?s books for a total of $1,700,000, including the;goodwill. An analysis of Special Products Division?s assets indicates that;goodwill of $200,000 exists on December 31, 2007. What goodwill impairment;should be recognized by General Products in 2007?;A. $0.;B. $300,000.;C. $200,000.;D. $50,000.;Since $2,000,000 > $1,700,000, $0 impairment;40) Easton Company and Lofton Company were combined in a purchase transaction.;Easton was able to acquire Lofton at a bargain price. The sum of the market or;appraised values of identifiable assets acquired less the fair value of;liabilities assumed exceeded the cost to Easton. After revaluing noncurrent;assets to zero, there was still some ?negative goodwill.? Proper accounting;treatment by Easton is to report the amount as;A. an;extraordinary gain.;B. paid-in;capital.;C. part of;current income in the year of combination.;D. a deferred;credit and amortize it.;41) Purchased goodwill should;A. be written off;as soon as possible against retained earnings.;B. be written off;by systematic charges as a regular operating expense over the period benefited.;C. be written off;as soon as possible as an extraordinary item.;D. not be;amortized.;42) The intangible asset goodwill may be;A. capitalized;only when purchased.;B. capitalized;only when created internally.;C. capitalized;either when purchased or created internally.;D. written off;directly to retained earnings.;43) If a short-term obligation is excluded from;current liabilities because of refinancing, the footnote to the financial;statements describing this event should include all of the following;information EXCEPT;A. a general;description of the financing arrangement.;B. the terms of;any equity security issued or to be issued.;C. the terms of;the new obligation incurred or to be incurred.;D. the number of;financing institutions that refused to refinance the debt, if any.;44) 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 (for;which there is an adequate appropriation of retained earnings) due in eleven;months.;C. Bonds due in;three years.;D. Bonds to be;refunded when due in eight months, there being no doubt about the marketability;of the refunding issue.;45) Which of the following statements is false?;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 and demonstrates an ability to;complete the refinancing.;B. Under the cash;basis method, warranty costs are charged to expense as they are paid.;C. Cash dividends;should be recorded as a liability when they are declared by the board of;directors.;D. FICA taxes;withheld from employees? payroll checks should never be recorded as a liability;since the employer will eventually remit the amounts withheld to the;appropriate taxing authority.;46) Simson Company has 35 employees who work 8-hour;days and are paid hourly. On January 1, 2006 the company began a program of;granting its employees 10 days of paid vacation each year. Vacation days earned;in 2006 may first be taken on January 1, 2007. Information relative to these;employees is as follows;Year Hourly Wages Vacation Days Earned by;Each Employee Vacation Days Used by Each Employee;2006 $25.80 10 0;2007 27.00 10 8;2008 $28.50 10 10;What is the amount of expense relative to compensated absences that should be;reported on Simson?s income statement for 2006?;A. $0.;B. $75,600.;C. $68,880.;D. $72,240.;$25.80 ? 8 ? 10 ? 35 = $72,2;40.;47) A company offers a cash rebate of $1 on each $4 package of batteries sold;during 2007. Historically, 10% of customers mail in the rebate form. During;2007, 6,000,000 packages of batteries are sold, and 210,000 $1 rebates are;mailed to customers. What is the rebate expense and liability, respectively;shown on the 2007 financial statements dated December 31?;A. $600,000;$600,000;B. $390,000;$390,000;C. $600,000;$390,000;D. $210,000;$390,000;6,000,000 ?.10 ? $1 = $600,000, $600,000 ? $210,000;= $390,000;48) Wellman Company self insures its property for;fire and storm damage. If the company were to obtain insurance on the property;it would cost them $1,000,000 per year. The company estimates that on average;it will incur losses of $800,000 per year. During 2007, $350,000 worth of;losses were sustained. How much total expense and/or loss should be recognized;by Wellman Company for 2007?;A. $350,000 in;losses and no insurance expense;B. $350,000 in;losses and $450,000 in insurance expense;C. $0 in losses;and $1,000,000 in insurance expense;D. $0 in losses;and $800,000 in insurance expense;49) Mark Ward is a farmer who owns land which;borders on the right-of-way of the Northern Railroad. On August 10, 2007, due;to the admitted negligence of the Railroad, hay on the farm was set on fire and;burned. Ward had had a dispute with the Railroad for several years concerning the;ownership of a small parcel of land. The representative of the Railroad has;offered to assign any rights which the Railroad may have in the land to Ward in;exchange for a release of his right to reimbursement for the loss he has;sustained from the fire. Ward appears inclined to accept the Railroad?s offer.;The Railroad?s 2007 financial statements should include the following related;to the incident;A. recognition of;a loss and creation of a liability for the value of the land.;B. recognition of;a loss only.;C. disclosure in;note form only.;D. creation of a;liability only.;50) Which of the following contingencies need NOT be;disclosed in the financial statements or the notes thereto?;A. Probable losses;NOT reasonably estimable;B. Environmental;liabilities that cannot be reasonably estimated;C. All of these;must be disclosed.;D. Guarantees of;indebtedness of others;51) Which of the following sets of conditions would;give rise to the accrual of a contingency 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 event occurs infrequently.;D. Event is;unusual in nature and occurrence of event is probable.;52) Bonds for which the owners? names are NOT;registered with the issuing corporation are called;A. bearer bonds.;B. term bonds.;C. secured bonds.;D. debenture;bonds.;53) An example of an item which is NOT a liability;is;A. dividends;payable in stock.;B. advances from;customers on contracts.;C. the portion of;long-term debt due within one year.;D. accrued;estimated warranty costs.;54) If bonds are issued initially at a premium and;the effective-interest method of amortization is used, interest expense in the;earlier years will be;A. greater than;if the straight-line method were used.;B. greater than;the amount of the interest payments.;C. less than if;the straight-line method were used.;D. the same as if;the straight-line method were used.;55) What impact does a bargain purchase option have;on the present value of the minimum lease payments computed by the lessee?;A. No impact as;the option does NOT enter into the transaction until the end of the lease term.;B. The minimum;lease payments would be increased by the present value of the option price if;at the time of the lease agreement, it appeared certain that the lessee would;exercise the option at the end of the lease and purchase the asset at the;option price.;C. The lessee;must decrease the present value of the minimum lease payments by the present;value of the option price.;D. The lessee;must increase the present value of the minimum lease payments by the present;value of the option price.;56) Minimum lease payments may include a;A. penalty for;failure to renew.;B. any of these.;C. guaranteed;residual value.;D. bargain;purchase option.;57) Which of the following best describes current;practice in accounting for leases?;A. Leases are NOT;capitalized.;B. All leases are;capitalized.;C. All long-term;leases are capitalized.;D. Leases similar;to installment purchases are capitalized.;58) In order to properly record a direct-financing;lease, the lessor needs to know how to calculate the lease receivable. The;lease receivable in a direct-financing lease is best defined as;A. the amount of;funds the lessor has tied up in the asset which is the subject of the;direct-financing lease.;B. the total book;value of the asset less any accumulated depreciation recorded by the lessor;prior to the lease agreement.;C. the present;value of minimum lease payments.;D. the difference;between the lease payments receivable and the fair market value of the leased;property.;59) In the earlier years of a lease, from the;lessee?s perspective, the use of the;A. capital method;will enable the lessee to report higher income, compared to the operating;method.;B. operating;method will cause debt to increase, compared to the capital method.;C. operating;method will cause income to decrease, compared to the capital method.;D. capital method;will cause debt to increase, compared to the operating method.;60) In a lease that is appropriately recorded as a;direct-financing lease by the lessor, unearned income;A. should be;amortized over the period of the lease using the interest method.;B. should be;recognized at the lease?s expiration.;C. does NOT;arise.;D. should be;amortized over the period of the lease using the straight-line method.

 

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