Acc423 Intermediate Accounting Week 5 Final Exam: 51 MCQs (2012 Version)

Acc423 Intermediate Accounting

Week 5 Final Exam: 51 MCQs [2012 version]
1) Proceeds from an issue of debt securities having stock warrants should NOT be allocated between debt and equity features when
A. exercise of the warrants within the next few fiscal periods seems remote.
B. the market value of the warrants is NOT readily available.
C. the warrants issued with the debt securities are nondetachable.
D. the allocation would result in a discount on the debt security.
2) A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably
A. calculated by the excess of the proceeds over the face amount of the bonds.
B. zero.
C. based on the relative market values of the two securities involved.
D. equal to the market value of the warrants.
3) The conversion of preferred stock may be recorded by the
A. book value method.
B. incremental method.
C. par value method.
D. market value method.
4) Total stockholders' equity represents
A. the maximum amount that can be borrowed by the enterprise.
B. a claim to specific assets contributed by the owners.
C. only the amount of earnings that have been retained in the business.
D. a claim against a portion of the total assets of an enterprise.
5) Stockholders' equity is generally classified into two major categories:
A. appropriated capital and retained earnings.
B. contributed capital and appropriated capital.
C. earned capital and contributed capital.
D. retained earnings and unappropriated capital.
6) The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. An acceptable method of allocation is the
A. proportional method.
B. pro forma method.
C. either the proportional method or the incremental method.
D. incremental method.
7) Treasury shares are
A. shares held as an investment of the corporation.
B. shares held as an investment by the treasurer of the corporation.
C. issued but NOT outstanding shares.
D. issued and outstanding shares.
8) How should a "gain" from the sale of treasury stock be reflected when using the cost method of recording treasury stock transactions?
A. As an increase in the amount shown for common stock.
B. As paid-in capital from treasury stock transactions.
C. As an extraordinary item shown on the income statement.
D. As ordinary earnings shown on the income statement.
9) When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited?
A. Treasury stock for the purchase price.
B. Paid-in capital in excess of par for the purchase price.
C. Treasury stock for the par value and retained earnings for the excess of the purchase price over the par value.
D. Treasury stock for the par value and paid-in capital in excess of par for the excess of the purchase price over the par value.
10) Antidilutive securities
A. include stock options and warrants whose exercise price is less than the average market price of common stock.
B. are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share.
C. should be ignored in all earnings per share calculations.
D. should be included in the computation of diluted earnings per share but NOT basic earnings per share.
11) In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?
A. Annual preferred dividend times the income tax rate
B. Annual preferred dividend times (one minus the income tax rate)
C. Annual preferred dividend divided by the income tax rate
D. Annual preferred dividend
12) In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are
A. considered outstanding at the beginning of the year.
B. weighted by the number of months outstanding.
C. considered outstanding at the beginning of the earliest year reported.
D. weighted by the number of days outstanding.
13) On December 31, 2006, the stockholders' equity section of Clark, Inc., was as follows: Common stock, par value $10; authorized 30,000 shares.
Issued and outstanding 9,000 shares $ 90,000
Additional paid-in capital 116,000
Retained earnings 174,000
Total stockholders' equity $380,000
On March 31, 2007,Clarkdeclared a 10% stock dividend, and accordingly 900 additional shares were issued, when the fair market value of the stock was $18 per share. For the three months ended March 31, 2007,Clarksustained a net loss of $32,000. The balance ofClark’s retained earnings as of March 31, 2007, should be
A. $134,800.
B. $133,000.
C. $142,000.
D. $125,800.
14) On May 1, 2007, Kent Corp. declared and issued a 10% common stock dividend. Prior to this dividend,Kenthad 100,000 shares of $1 par value common stock issued and outstanding. The fair value ofKent's common stock was $20 per share on May 1, 2007. As a result of this stock dividend,Kent's total stockholders' equity
A. decreased by $10,000.
B. decreased by $200,000.
C. did NOT change.
D. increased by $200,000.
15) At its date of incorporation, Wilson, Inc. issued 100,000 shares of its $10 par common stock at $11 per share. During the current year,Wilsonacquired 20,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. There have been no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts?
Retained Earnings | Additional Paid-in Capital
A. Decrease | No effect
B. No effect | Decrease
C. No effect | No effect
D. Decrease | Decrease
16) When investments in debt securities are purchased between interest payment dates, preferably the
A. accrued interest is debited to Interest Revenue.
B. accrued interest is debited to Interest Expense.
C. accrued interest is debited to Interest Receivable.
D. securities account should include accrued interest.
17) An unrealized holding gain on a company's available-for-sale securities should be reflected in the current financial statements as
A. a note or parenthetical disclosure only.
B. a current gain resulting from holding securities.
C. other comprehensive income and included in the equity section of the balance sheet.
D. an extraordinary item shown as a direct increase to retained earnings.
18) Which of the following is NOT generally correct about recording a sale of a debt security before maturity date?
A. The entry to amortize a premium to the date of sale includes a credit to the Premium on Investments in Debt Securities.
B. A gain or loss on the sale is NOT extraordinary.
C. An entry must be made to amortize a discount to the date of sale.
D. Accrued interest will be received by the seller even though it is NOT an interest payment date.
19) Investments in debt securities are generally recorded at
A. cost including brokerage and other fees.
B. maturity value with a separate discount or premium account.
C. maturity value.
D. cost including accrued interest.
20) When an investor's accounting period ends on a date that does NOT coincide with an interest receipt date for bonds held as an investment, the investor must
A. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of interest to be received at the next interest receipt date.
B. do nothing special and ignore the fact that the accounting period does NOT coincide with the bond's interest period.
C. notify the issuer and request that a special payment be made for the appropriate portion of the interest period.
D. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date.
21) Investments in debt securities should be recorded on the date of acquisition at
A. market value plus brokerage fees and other costs incident to the purchase.
B. face value plus brokerage fees and other costs incident to the purchase.
C. market value.
D. lower of cost or market.
22) Bista Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods?
Fair Value Method | Equity Method
A. No Effect | No Effect
B. Decrease | No Effect
C. Increase | Decrease
D. No Effect | Decrease
23) An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as
Fair Value Method | Equity Method
A. Income | A reduction of the investment
B. A reduction of the investment | Income
C. A reduction of the investment | A reduction of the investment
D. Income | Income
24) Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the
A. investee pays a dividend.
B. earnings are reported by the investee in its financial statements.
C. investee declares a dividend.
D. investor sells the investment.
25) Held-to-maturity securities are reported at
A. acquisition cost plus amortization of a premium.
B. fair value.
C. acquisition cost plus amortization of a discount.
D. acquisition cost.
26) Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders' equity are
A. securities where a company has holdings of between 20% and 50%.
B. securities where a company has holdings of more than 50%.
C. trading securities where a company has holdings of less than 20%.
D. available-for-sale securities where a company has holdings of less than 20%.
27) Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses and are included as other comprehensive income and as a separate component of stockholders' equity are
A. available-for-sale debt securities.
B. never-sell debt securities.
C. trading debt securities.
D. held-to-maturity debt securities.
28) Gains or losses on cash flow hedges are
A. reported directly in net income.
B. reported directly in retained earnings.
C. recorded in equity, as part of other comprehensive income.
D. ignored completely.
29) All of the following are characteristics of a derivative financial instrument EXCEPT the instrument
A. requires or permits net settlement.
B. has one or more underlyings and an identified payment provision.
C. All of these are characteristics.
D. requires a large investment at the inception of the contract.
30) An option to convert a convertible bond into shares of common stock is a(n)
A. hybrid security.
B. embedded derivative.
C. fair value hedge.
D. host security.
31) The rationale for interperiod income tax allocation is to
A. reconcile the tax consequences of permanent and temporary differences appearing on the current year's financial statements.
B. recognize a tax asset or liability for the tax consequences of temporary differences that exist at the balance sheet date.
C. adjust income tax expense on the income statement to be in agreement with income taxes payable on the balance sheet.
D. recognize a distribution of earnings to the taxing agency.
32) Interperiod income tax allocation causes
A. tax liability shown in the balance sheet to bear a normal relation to the income before tax reported in the income statement.
B. tax expense shown on the income statement to equal the amount of income taxes payable for the current year plus or minus the change in the deferred tax asset or liability balances for the year.
C. tax expense in the income statement to be presented with the specific revenues causing the tax.
D. tax expense shown in the income statement to bear a normal relation to the tax liability.
33) Which of the following situations would require interperiod income tax allocation procedures?
A. A temporary difference exists at the balance sheet date because the tax basis of an asset or liability and its reported amount in the financial statements differ
B. An excess of percentage depletion over cost depletion
C. Proceeds from a life insurance policy on an officer
D. Interest received on municipal bonds
34) A major distinction between temporary and permanent differences is
A. once an item is determined to be a temporary difference, it maintains that status; however, a permanent difference can change in status with the passage of time.
B. permanent differences are NOT representative of acceptable accounting practice.
C. temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do NOT reverse.
D. temporary differences occur frequently, whereas permanent differences occur only once.
35) Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income?
A. An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes.
B. Subscriptions received in advance.
C. Interest received on a municipal obligation.
D. Prepaid royalty received in advance.
36) Which of the following differences would result in future taxable amounts?
A. Revenues or gains that are recognized in financial income but are never included in taxable income.
B. Expenses or losses that are tax deductible after they are recognized in financial income.
C. Expenses or losses that are tax deductible before they are recognized in financial income.
D. Revenues or gains that are taxable before they are recognized in financial income.
37) In a defined-contribution plan, a formula is used that
A. requires an employer to contribute a certain sum each period based on the formula.
B. defines the benefits that the employee will receive at the time of retirement.
C. ensures that employers are at risk to make sure funds are available at retirement.
D. ensures that pension expense and the cash funding amount will be different.
38) In all pension plans, the accounting problems include all the following EXCEPT
A. allocating the cost of the plan to the proper periods.
B. measuring the amount of pension obligation.
C. determining the level of individual premiums.
D. disclosing the status and effects of the plan in the financial statements.
39) In a defined-benefit plan, the process of funding refers to
A. making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims.
B. determining the projected benefit obligation.
C. determining the amount that might be reported for pension expense.
D. determining the accumulated benefit obligation.

40) A corporation has a defined-benefit plan. An accrued pension cost will result at the end of the first year if the
A. amount of employer contributions exceeds the net periodic pension cost.
B. accumulated benefit obligation exceeds the fair value of the plan assets.
C. amount of net periodic pension cost exceeds the amount of employer contributions.
D. fair value of the plan assets exceeds the accumulated benefit obligation.

41) In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund should be reported as
A. an accrued actuarial liability.
B. accrued or prepaid pension cost.
C. an offset to the liability for prior service cost.
D. a charge or credit to unrealized appreciation and depreciation.

42) The projected benefit obligation is the measure of pension obligation that
A. requires the longest possible period for funding to maximize the tax deduction.
B. requires pension expense to be determined solely on the basis of the plan formula applied to years of service to date and based on existing salary levels.
C. is required to be used for reporting the service cost component of pension expense.
D. is NOT sanctioned under generally accepted accounting principles for reporting the service cost component of pension expense.

43) Effective January 1, 2007, Quayle Co. established a defined-benefit plan with no retro-active benefits. The first of the required equal annual contributions was paid on December 31, 2007. A 10% discount rate was used to calculate service cost and a 10% rate of return was assumed for plan assets. All information on covered employees for 2007 and 2008 is the same. How should the service cost for 2008 compare with 2007, and should the 2007 balance sheet report an accrued or a prepaid pension cost?

Service Cost for 2008 Compared to 2007 | Pension Cost Reported on the 2007 Balance Sheet
A. Greater than | Accrued
B. Equal to | Prepaid
C. Equal to | Accrued
D. Greater than | Prepaid

44) The following information pertains to Mellon Co.'s pension plan:
Actuarial estimate of projected benefit obligation at 1/1/08 $72,000
Assumed discount rate 10%
Service costs for 2008 18,000
Pension benefits paid during 2008 $15,000

If no change in actuarial estimates occurred during 2008, Mellon's projected benefit obligation at December 31, 2008 was
A. $79,200.
B. $75,000.
C. $64,200.
D. $82,200.

45) On January 1, 2008, Pratt Corp. adopted a defined-benefit pension plan. The plan's service cost of $300,000 was fully funded at the end of 2008. Prior service cost was funded by a contribution of $120,000 in 2008. Amortization of prior service cost was $48,000 for 2008. What is the amount of Pratt’s prepaid pension cost at December 31, 2008?
A. $168,000
B. $120,000
C. $72,000
D. $180,000

46) On December 31, 2008, Kean Company changed its method of accounting for inventory from weighted average cost method to the FIFO method. This change caused the 2008 beginning inventory to increase by $420,000. The cumulative effect of this accounting change to be reported for the year ended 12/31/08, assuming a 40% tax rate, is
A. $168,000.
B. $252,000.
C. $420,000.
D. $0.
47) On January 1, 2005, Lynn Corporation acquired equipment at a cost of $600,000.Lynnadopted the double-declining balance method of depreciation for this equipment and had been recording depreciation over an estimated life of eight years, with no residual value. At the beginning of 2008, a decision was made to change to the straight-line method of depreciation for this equipment. Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning retained earnings, net of tax, is
A. $78,750.
B. $0.
C. $121,875.
D. $77,109.
48) On January 1, 2005, Foley Corporation acquired machinery at a cost of $250,000. Foley adopted the double-declining balance method of depreciation for this machinery and had been recording depreciation over an estimated useful life of ten years, with no residual value. At the beginning of 2008, a decision was made to change to the straight-line method of depreciation for the machinery. The depreciation expense to be recorded for the machinery in 2008 is (round to the nearest dollar)
A. $22,857.
B. $18,286.
C. $25,600.
D. $25,000.
49) The estimated life of a building that has been depreciated 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should
A. adjust accumulated depreciation to its appropriate balance, through net income, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.
B. depreciate the remaining book value over the remaining life of the asset.
C. continue to depreciate the building over the original 50-year life.
D. adjust accumulated depreciation to its appropriate balance through retained earnings, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.
50) Equipment was purchased at the beginning of 2005 for $204,000. At the time of its purchase, the equipment was estimated to have a useful life of six years and a salvage value of $24,000. The equipment was depreciated using the straight-line method of depreciation through 2008. At the beginning of 2008, the estimate of useful life was revised to a total life of eight years and the expected salvage value was changed to $15,000. The amount to be recorded for depreciation for 2008, reflecting these changes in estimates, is
A. $22,800.
B. $19,800.
C. $12,375.
D. $23,625.
51) Hannah Company began operations on January 1, 2007, and uses the FIFO method in costing its raw material inventory. Management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed:
Final Inventory 2007 2008
FIFO $320,000 $360,000
LIFO 240,000 300,000
Net Income (computed under the FIFO method) 500,000 600,000
Based upon the above information, a change to the LIFO method in 2008 would result in net income for 2008 of
A. $620,000.
B. $660,000.
C. $540,000.
D. $600,000.
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