1. ACC 422 Final Exam
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1) Which of the following is NOT considered cash for financial reporting
purposes?
A. Postdated checks and I.O.U.'s
B. Money orders, certified checks, and personal checks
C. Petty cash funds and change funds
D. Coin, currency, and available funds
2) What is the preferable presentation of accounts receivable from officers,
employees, or affiliated companies on a balance sheet?
A. As assets but separately from other receivables.
B. As offsets to capital.
C. As trade notes and accounts receivable if they otherwise qualify as current
assets.
D. By means of footnotes only.
3) Which of the following items should NOT be included in the Cash caption on
the balance sheet?
A. Amounts on deposit in checking account at the bank
B. Coins and currency in the cash register
C. Postage stamps on hand
D. Checks from other parties presently in the cash register
4) The advantage of relating a company's bad debt expense to its outstanding
accounts receivable is that this approach
A. is the only generally accepted method for valuing accounts receivable.
B. gives a reasonably correct statement of receivables in the balance sheet.
C. makes estimates of uncollectible accounts unnecessary.
D. best relates bad debt expense to the period of sale.
2. 5) Which of the following is a generally accepted method of determining the
amount of the adjustment to bad debt expense?
A. A percentage of accounts receivable NOT adjusted for the balance in the
allowance
B. A percentage of sales 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 NOT adjusted for the balance in the allowance
6) Assuming that the ideal measure of short-term receivables in the balance
sheet is the discounted value of the cash to be received in the future, failure to
follow this practice usually does NOT make the balance sheet misleading
because
A. the amount of the discount is NOT material.
B. most short-term receivables are NOT interest-bearing.
C. most receivables can be sold to a bank or factor.
D. the allowance for uncollectible accounts includes a discount element.
7) 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 and current assets were overstated and current liabilities 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 was correct and current assets were understated.
8) 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. understatement, overstatement, overstatement.
B. overstatement, understatement, overstatement.
C. understatement, overstatement, no effect.
3. D. overstatement, understatement, no effect.
9) The accountant for the Orion Sales Company is preparing the income
statement for 2007 and the balance sheet at December 31, 2007. Orion uses the
periodic inventory system. The January 1, 2007 merchandise inventory balance
will appear
A. as a deduction in the cost of goods sold section of the income statement and
as a current asset on the balance sheet.
B. only as an asset on the balance sheet.
C. as an addition in the cost of goods sold section of the income statement and
as a current asset on the balance sheet.
D. only in the cost of goods sold section of the income statement.
10) The use of a Discounts Lost account implies that the recorded cost of a
purchased inventory item is its
A. invoice price less the purchase discount taken.
B. invoice price less the purchase discount allowable whether taken or not.
C. invoice price plus the purchase discount lost.
D. invoice price.
11) When using the periodic inventory system, which of the following generally
would NOT be separately accounted for in the computation of cost of goods
sold?
A. Purchase returns and allowances of merchandise during the period
B. Cost of transportation-in for merchandise purchased during the period
C. Cash (purchase) discounts taken during the period
D. Trade discounts applicable to purchases during the period
12) The use of a Purchase Discounts account implies that the recorded cost of a
purchased inventory item is its
A. invoice price less the purchase discount taken.
B. invoice price less the purchase discount allowable whether taken or not.
C. invoice price plus any purchase discount lost.
4. D. invoice price.
13) In no case can "market" in the lower-of-cost-or-market rule be more than
A. estimated selling price in the ordinary course of business less reasonably
predictable costs of completion and disposal and an allowance for an
approximately normal profit margin.
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.
D. estimated selling price in the ordinary course of business.
14) When the direct method is used to record inventory at market
A. only the portion of the loss attributable to inventory sold during the period is
recorded in the financial statements.
B. the market value figure for ending inventory is substituted for cost and the loss
is buried in cost of goods sold
C. a loss is recorded directly in the inventory account by crediting inventory and
debiting loss on inventory decline.
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.
15) Designated market value
A. may sometimes exceed net realizable value.
B. should always be equal to net realizable value less a normal profit margin.
C. should always be equal to net realizable value.
D. is always the middle value of replacement cost, net realizable value, and net
realizable value less a normal profit margin.
16) The retail inventory method is based on the assumption that the
A. ratio of cost to retail changes at a constant rate.
B. proportions of markups and markdowns to selling price are the same.
5. C. ratio of gross margin to sales is approximately the same each period.
D. final inventory and the total of goods available for sale contain the same
proportion of high-cost and low-cost ratio goods.
17) In 2006, Lucas Manufacturing signed a contract with a supplier to purchase
raw materials in 2007 for $700,000. Before the December 31, 2006 balance sheet
date, the market price for these materials dropped to $510,000. The journal entry
to record this situation at December 31, 2006 will result in a credit that should be
reported
A. as an appropriation of retained earnings.
B. on the income statement.
C. as a current liability.
D. as a valuation account to Inventory on the balance sheet.
18) The gross profit method of inventory valuation is invalid when
A. there is no beginning inventory because it is the first year of operation.
B. there is a substantial increase in inventory during the year.
C. none of these.
D. a portion of the inventory is destroyed.
19) Which of the following is NOT a major characteristic of a plant asset?
A. Acquired for use
B. Acquired for resale
C. Yields services over a number of years
D. Possesses physical substance
20) The cost of land does NOT include
A. costs of improvements with limited lives.
B. costs of removing old buildings.
C. special assessments.
D. costs of grading, filling, draining, and clearing.
6. 21) If a corporation purchases a lot and building and subsequently tears down the
building and uses the property as a parking lot, the proper accounting treatment
of the cost of the building would depend on
A. the contemplated future use of the parking lot.
B. the length of time for which the building was held prior to its demolition.
C. the intention of management for the property when the building was acquired.
D. the significance of the cost allocated to the building in relation to the combined
cost of the lot and building.
22) To be consistent with the historical cost principle, overhead costs incurred by
an enterprise constructing its own building should be
A. allocated on an opportunity cost basis.
B. eliminated completely from the cost of the asset.
C. allocated on a pro rata basis between the asset and normal operations.
D. allocated on the basis of lost production.
23) When computing the amount of interest cost to be capitalized, the concept of
"avoidable interest" refers to
A. that portion of total interest cost which would NOT have been incurred if
expenditures for asset construction had NOT been made.
B. a cost of capital charge for stockholders' equity.
C. that portion of average accumulated expenditures on which no interest cost
was incurred.
D. the total interest cost actually incurred.
24) The period of time during which interest must be capitalized ends when
A. the asset is abandoned, sold, or fully depreciated.
B. no further interest cost is being incurred.
C. the activities that are necessary to get the asset ready for its intended use
have begun.
D. the asset is substantially complete and ready for its intended use.
7. 25) 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. 9/12.
B. 8/12.
C. 11/12.
D. 8/8.
26) When funds are borrowed to pay for construction of assets that qualify for
capitalization of interest, the excess funds NOT needed to pay for construction
may be temporarily invested in interest-bearing securities. Interest earned on
these temporary investments should be
A. multiplied by an appropriate interest rate to determine the amount of interest
to be capitalized.
B. offset against interest cost incurred during construction.
C. used to reduce the cost of assets being constructed.
D. recognized as revenue of the period.
27) When a plant asset is acquired by issuance of common stock, the cost of the
plant asset is properly measured by the
A. book value of the stock.
B. par value of the stock.
C. stated value of the stock.
D. market value of the stock.
28) 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. vary with sales revenue.
B. be constant.
C. vary with unit sales.
D. vary with production.
8. 29) The term "depreciable cost," or "depreciable base," as it is used in
accounting, refers to
A. the estimated market value of the asset at the end of its useful life.
B. the total amount to be charged (debited) to expense over an asset's useful life.
C. the cost of the asset less the related depreciation recorded to date.
D. the acquisition cost of the asset.
30) Which of the following most accurately reflects the concept of depreciation as
used in accounting?
A. A method of allocating asset cost to an expense account in a manner which
closely matches the physical deterioration of the tangible asset involved.
B. The process of charging the decline in value of an economic resource to
income in the period in which the benefit occurred.
C. The process of allocating the cost of tangible assets to expense in a
systematic and rational manner to those periods expected to benefit from the use
of the asset.
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 the fair
market value of tangible assets.
31) Prentice Company purchased a depreciable asset for $200,000. The
estimated salvage value is $20,000, and the estimated useful life is 10 years. The
straight-line method will be used for depreciation. What is the depreciation base
of this asset?
A. $180,000
B. $18,000
C. $20,000
D. $200,000
32) Pine Company purchased a depreciable asset for $360,000. The estimated
salvage value is $24,000, and the estimated useful life is 8 years. The double-
declining balance method will be used for depreciation. What is the depreciation
expense for the second year on this asset?
A. $67,500
9. B. $42,000
C. $63,000
D. $90,000
33) 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. $66,000
B. $57,000
C. $62,700
D. $570,000
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. added to factory overhead and allocated to production of the purchaser's
product.
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. charged off in the current period.
D. amortized over the legal life of the purchased patent.
35) Riser Corporation was granted a patent on a product on January 1, 1998. To
protect its patent, the corporation purchased on January 1, 2007 a patent on a
competing product which was originally issued on January 10, 2003. Because of
its unique plant, Riser Corporation does NOT feel the competing patent can be
used in producing a product. The cost of the competing patent should be
A. amortized over a maximum period of 11 years.
B. expensed in 2007.
C. amortized over a maximum period of 20 years.
D. amortized over a maximum period of 16 years.
10. 36) Which of the following methods of amortization is normally used for intangible
assets?
A. Units of production
B. Double-declining-balance
C. Sum-of-the-years'-digits
D. Straight-line
37) 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. $50,000.
B. $300,000.
C. $0.
D. $200,000.
38) Twilight Corporation acquired End-of-the-World Products on January 1, 2008
for $2,000,000, and recorded goodwill of $375,000 as a result of that purchase. At
December 31, 2008, the End-of-the-World Products Division had a fair value of
$1,700,000. The net identifiable assets of the Division (excluding goodwill) had a
fair value of $1,450,000 at that time. What amount of loss on impairment of
goodwill should Twilight record in 2008?
A. $175,000
B. $300,000
C. $ -0-
D. $125,000
39) 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?
11. A. $350,000
B. $600,000
C. $ -0-
D. $250,000
40) When a patent is amortized, the credit is usually made to
A. a Deferred Credit account.
B. an expense account.
C. the Patent account.
D. an Accumulated Amortization account.
41) The reason goodwill is sometimes referred to as a master valuation account
is because
A. the value of a business is computed without consideration of goodwill and
then goodwill is added to arrive at a master valuation.
B. it is the only account in the financial statements that is based on value, all
other accounts are recorded at an amount other than their value.
C. it represents the purchase price of a business that is about to be sold.
D. it is the difference between the fair market value of the net tangible and
identifiable intangible assets as compared with the purchase price of the acquired
business.
42) Easton Company and Lofton Company were combined in a purchase
transaction. Easton was able to acquire Lofton at a bargain price. The sum of the
market or appraised values of identifiable assets acquired less the fair value of
liabilities assumed exceeded the cost to Easton. After revaluing noncurrent
assets to zero, there was still some "negative goodwill." Proper accounting
treatment by Easton is to report the amount as
A. part of current income in the year of combination.
B. a deferred credit and amortize it.
C. an extraordinary gain.
D. paid-in capital.
12. 43) Stock dividends distributable should be classified on the
A. balance sheet as an asset.
B. balance sheet as a liability.
C. income statement as an expense.
D. balance sheet as an item of stockholders' equity.
44) Which of the following statements is false?
A. Cash dividends should be recorded as a liability when they are declared by
the board of directors.
B. Under the cash basis method, warranty costs are charged to expense as they
are paid.
C. 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.
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.
45) Which of the following items is a current liability?
A. Bonds due in three years.
B. Bonds (for which there is an adequate appropriation of retained earnings) due
in eleven months.
C. Bonds (for which there is an adequate sinking fund properly classified as a
long-term investment) due in three months.
D. Bonds to be refunded when due in eight months, there being no doubt about
the marketability of the refunding issue.
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 Dayse
Used by Each Employee
13. 2006 $28.50 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. $68,880.
B. $75,600.
C. $0.
D. $72,240.
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; $390,000
B. $390,000; $390,000
C. $600,000; $600,000
D. $210,000; $390,000
48) A company offers a cash rebate of $1 on each $4 package of light bulbs sold
during 2007. Historically, 10% of customers mail in the rebate form. During 2007,
4,000,000 packages of light bulbs are sold, and 140,000 $1 rebates are mailed to
customers. What is the rebate expense and liability, respectively, shown on the
2007 financial statements dated December 31?
A. $400,000; $260,000
B. $260,000; $260,000
C. $400,000; $400,000
D. $140,000; $260,000
49) A contingency can be accrued when
A. an asset may have been impaired.
14. B. the amount of the loss can be reasonably estimated and it is probable that an
asset has been impaired or a liability incurred.
C. it is certain that funds are available to settle the disputed amount.
D. it is probable that an asset has been impaired or a liability incurred even
though the amount of the loss cannot be reasonably estimated.
50) 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 only.
B. recognition of a loss and creation of a liability for the value of the land.
C. creation of a liability only.
D. disclosure in note form only.
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 occurrence of event is probable.
B. Amount of loss is reasonably estimable and event occurs infrequently.
C. Event is unusual in nature and occurrence of event is probable.
D. Event is unusual in nature and event occurs infrequently.
52) If bonds are issued initially at a premium and the effective-interest method of
amortization is used, interest expense in the earlier years will be
A. greater than the amount of the interest payments.
B. greater than if the straight-line method were used.
C. the same as if the straight-line method were used.
D. less than if the straight-line method were used.
15. 53) An example of an item which is NOT a liability is
A. advances from customers on contracts.
B. dividends payable in stock.
C. accrued estimated warranty costs.
D. the portion of long-term debt due within one year.
54) The covenants and other terms of the agreement between the issuer of bonds
and the lender are set forth in the
A. bond debenture.
B. bond indenture.
C. registered bond.
D. bond coupon.
55) Which of the following is a correct statement of one of the capitalization
criteria?
A. The lease contains a purchase option.
B. The lease transfers ownership of the property to the lessor.
C. The lease term is equal to or more than 75% of the estimated economic life of
the leased property.
D. The minimum lease payments (excluding executory costs) equal or exceed
90% of the fair value of the leased property.
56) Which of the following best describes current practice in accounting for
leases?
A. Leases similar to installment purchases are capitalized.
B. Leases are NOT capitalized.
C. All long-term leases are capitalized.
D. All leases are capitalized.
57) While only certain leases are currently accounted for as a sale or purchase,
there is theoretic justification for considering all leases to be sales or purchases.
The principal reason that supports this idea is that
16. A. at the end of the lease the property usually can be purchased by the lessee.
B. [Answer Text]all leases are generally for the economic life of the property and
the residual value of the property at the end of the lease is minimal.
C. a lease reflects the purchase or sale of a quantifiable right to the use of
property.
D. during the life of the lease the lessee can effectively treat the property as if it
were owned by the lessee.
58) The amount to be recorded as the cost of an asset under capital lease is
equal to the
A. present value of the minimum lease payments or the fair value of the asset,
whichever is lower.
B. carrying value of the asset on the lessor's books.
C. present value of the minimum lease payments plus the present value of any
unguaranteed residual value.
D. present value of the minimum lease payments.
59) In the earlier years of a lease, from the lessee's perspective, the use of the
A. capital method will cause debt to increase, 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 enable the lessee to report higher income, compared to the
operating method.
60) If the residual value of a leased asset is guaranteed by a third party
A. the third party is also liable for any lease payments NOT paid by the lessee.
B. it is treated by the lessee as an additional payment and by the lessor as
realized at the end of the lease term.
C. the net investment to be recovered by the lessor is reduced.
D. it is treated by the lessee as no residual value.
ACC 422 Final Exam
