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ACC 206 Week 7 Quiz – Strayer
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Quiz 5 Chapter 15
CHAPTER15
LONG-TERMLIABILITIES
CHAPTERSTUDYOBJECTIVES
1.Explainwhybondsareissued.
2.Preparetheentriesfortheissuanceofbondsandinterestexpense.
3.Describetheentrieswhenbondsareredeemedorconverted.
4.Describetheaccountingforlong-termnotespayable.
5.Contrasttheaccountingforoperatingandcapitalleases.
6.Identifythemethodsforthepresentationandanalysisoflong-termliabilities.
7.Computethemarketpriceofabond.
8.Applytheeffective-interestmethodofamortizingbonddiscountandbondpremium.
a9.Applythestraight-linemethodofamortizingbonddiscountandbondpremium.
TRUE-FALSESTATEMENTS
1. Eachbondholdermayvotefortheboardofdirectorsinproportiontothenumberofbonds held.
2. Bondinterestpaidbyacorporationisanexpense,whereasdividendspaidarenotan expense of thecorporation.
3. RegisteredbondsarebondsthataredeliveredtoownersbyU.S.registeredmailservice.
4. Adebenturebondisanunsecuredbondwhichisissuedagainstthegeneralcreditofthe borrower.
5. Bondsareaform of interest-bearingnotespayable.
6. Neithercorporatebond interestnordividendsaredeductiblefor taxpurposes.
7. A10%stockdividendistheequivalentofa$1,000parvaluebondpayingannualinterest of10%.
8. Theholderofaconvertiblebondcanconvertaninterestpaymentreceivedintoacash dividend paidoncommonstock if thedividendisgreaterthantheinterestpayment.
9. Theboardof directorsmayauthorizemorebondsthanare issued.
10. Thecontractualinterestrateisalwaysequaltothemarketinterestrateonthedatethat bonds areissued.
11. If$150,000face valuebondsareissuedat 102,theproceedsreceivedwill be$102,000.
12. Discountonbondsisanadditionalcostofborrowingandshouldberecordedasinterest expense overthe lifeofthebonds.
13. Ifacorporationissuedbondsatanamountlessthanfacevalue,itindicatesthatthe corporation hasaweakcreditrating.
Long-TermLiabilities 15-5
14. Acorporationthatissuesbondsatadiscountwillrecognizeinterestexpenseatarate which is greaterthanthemarketinterestrate.
15. Ifbondsareissuedatadiscount,theissuingcorporationwillpayaprincipalamountless thantheface amountof thebondsonthematuritydate.
16. Ifbondsareissuedatapremium, thecarryingvalueofthebondswillbegreaterthanthe facevalueof thebondsfor allperiodspriortothebondmaturitydate.
17. Ifthemarketinterestrateisgreaterthanthecontractualinterestrate,bondswillsellata discount.
18. If$800,000,8%bondsareissuedonJanuary1,andpayinterestsemiannually,the amount of interestpaidon July1 willbe$32,000.
19. Ifbonds sell atapremium, theinterestexpenserecognizedeach yearwillbegreaterthan thecontractualinterestrate.
20. The carryingvalue ofbondsiscalculatedbyadding thebalanceoftheDiscountonBonds Payableaccountto thebalance intheBondsPayableaccount.
21. Thelossonbondredemptionisthedifferencebetweenthecashpaidandthecarrying value of thebonds.
22. If$200,000parvalue bondswithacarrying value of$190,400 areredeemedat97,aloss on redemptionwill berecorded.
23. Gainsandlossesarenotrecognizedwhenconvertiblebondsareconvertedintocommon stock.
24. Generally,convertiblebondsdonotpayinterest.
25. Eachpaymentonamortgagenotepayableconsistsofinterestontheoriginalbalanceof theloan andareductionoftheloanprincipal.
26. Along-term notethatpledgestitletospecificpropertyassecurityforaloanisknown asa mortgagepayable.
27. A capitalleaserequiresthelesseetorecordthe leaseasapurchaseof anasset.
28. Thetimesinterestearnedratiois computed bydividingnetincome byinterestexpense.
a29. Thepresentvalueofabondisafunctionoftwovariables:(1)thepaymentamountsand (2)theinterest(discount)rate.
a30. Theeffective-interestmethodofamortizationresultsinvaryingamountsofamortization and interestexpenseperperiodbut aconstantinterestrate.
Additional True-FalseQuestions
31. Bondsthatmatureat asinglespecifiedfuturedatearecalledtermbonds.
15-6
32. Thetermsofthebondissuearesetforthinaformallegaldocumentcalledabond indenture.
33. Thecarryingvalueof bondsatmaturityshouldbe equaltotheface valueof thebonds.
34. PremiumonBondsPayableisacontraaccounttoBondsPayable.
35. Whenbondsareconvertedintocommonstock,thecarryingvalueofthebondsis transferredto paid-incapital accounts.
36. Operatingleasesareleasesthatthelesseemustcapitalizeonitsbalancesheetasan asset.
37. Underacapitallease,thelease/assetisreportedonthebalancesheetunderplant assets.
38. Long-termliabilitiesarereportedinaseparatesectionofthebalancesheetimmediately followingcurrent liabilities.
MULTIPLECHOICEQUESTIONS
39. Eachof thefollowingiscorrectregarding bondsexcepttheyare a.aformofinterest-bearingnotespayable.
b.attractivetomanyinvestors.
c.issuedbycorporations andgovernmentalagencies. d.soldin largedenominations.
40. Fromthestandpointoftheissuingcompany,adisadvantageofusingbondsasameans oflong-termfinancingisthat
a.bondinterestis deductiblefortaxpurposes.
b.interestmustbepaidonaperiodicbasisregardlessofearnings.
c.incometo stockholdersmayincreaseasaresultof tradingonthe equity. d.thebondholdersdonothavevotingrights.
41. Ifacorporationissued$2,000,000inbondswhichpay10%annualinterest,whatisthe annual netcashcostof thisborrowingif theincometaxrateis30%?
a.$2,000,000 b.$60,000
c.$200,000 d.$140,000
Long-TermLiabilities 15-7
42. Securedbondsarebondsthat
a.areinthepossessionof abank.
b.areregisteredinthenameof theowner.
c.havespecificassetsof the issuerpledged ascollateral. d.havedetachableinterestcoupons.
43. Alegaldocumentwhichsummarizestherightsandprivilegesofbondholdersaswellas theobligationsandcommitmentsof theissuingcompanyiscalled
a.a bondindenture. b.abonddebenture.
c.tradingonthe equity. d.atermbond.
44. Stockholdersofacompanymaybereluctanttofinanceexpansionthroughissuingmore equitybecause
a.leveragingwithdebtisalwaysa betteridea. b.theirearningspersharemaydecrease.
c.thepriceofthestockwillautomaticallydecrease. d.dividendsmust bepaidonaperiodicbasis.
45. Whichofthefollowingisnot anadvantageof issuingbondsinsteadof commonstock? a.Stockholdercontrolisnot affected.
b.Earningsper shareoncommonstockmaybelower. c.Incometocommonshareholdersmayincrease.
d.Taxsavingsresult.
46. Bondsthataresecuredbyrealestate aretermed a.mortgagebonds.
b.serialbonds.c.debentures.d.bearerbonds.
47. Bondsthatmatureat asinglespecifiedfuturedate arecalled a.couponbonds.
b.termbonds. c.serialbonds. d.debentures.
48. Bondsthatmaybeexchangedforcommonstockattheoptionofthebondholdersare called
a.options.
b.stockbonds.
c.convertiblebonds. d.callablebonds.
49. Bondsthataresubjecttoretirementatastateddollaramountpriortomaturityatthe option of theissuerarecalled
a.callablebonds.
b.earlyretirementbonds. c.options.
d.debentures.
15-8
50. Investorswhoreceivechecksintheirnamesfor interestearnedonbondsmusthold a.registeredbonds.
b.couponbonds. c.bearerbonds. d.directbonds.
51. A bondholderthatsendsina coupontoreceiveinterestpaymentsmusthavea(n) a.unsecuredbond.
b.bearerbond.
c.mortgagebond. d.serialbond.
52. Bondsthatmaybedirectlytransferredtoanotherpartybydeliveryare a.couponbonds.
b.debentures.
c.registeredbonds.
d.transportablebonds.
53. Bondsthatmustbecancelledandreissuedasnewbondsinordertohaveownership interest transferred are
a.couponbonds. b.bearerbonds. c.serialbonds.
d.registeredbonds.
54. Corporationsaregrantedthepowertoissuebondsthrough a.taxlaws.
b.statelaws.
c.federalsecuritylaws. d.bonddebentures.
55. Thepartywhohastherighttoexerciseacalloptionon bondsisthe a.investmentbanker.
b.bondholder. c.bearer.
d.issuer.
56. A majordisadvantageresultingfromtheuseofbonds isthat a.earningspersharemaybe lowered.
b.interestmustbepaidonaperiodicbasis. c.bondholdershave votingrights.
d.taxesmayincrease.
57. Bondswillalwaysfall intoallbut which oneof thefollowingcategories? a.Callableorconvertible
b.Termor serial
c.Registeredor bearerd.Securedor unsecured
Long-TermLiabilities 15-9
58. Whichof thefollowingstatements concerningbonds is notatruestatement? a.Bondsaregenerallysoldthroughaninvestmentcompany.
b.Thebondindentureispreparedafterthebondsare printed.
c.Thebondindenture and bondcertificateare separatedocuments. d.Thetrusteekeepsrecords of eachbondholder.
59. A bondtrusteedoesnot a.issuethebonds.
b.keeparecord of eachbondholder.
c.holdconditionaltitletopledgedproperty. d.maintaincustody of unsoldbonds.
60. Thecontractualinterestrate is alwaysstatedasa(n) a.monthlyrate.
b.dailyrate.
c.semiannualrate. d.annualrate.
61. Whenauthorizingbondsto be issued,theboardof directorsdoesnotspecifythe a.totalnumberof bondsauthorizedtobe sold.
b.contractualinterestrate. c.sellingprice.
d.totalfacevalueof thebonds.
Usethefollowing exhibitforquestions62–63.
Bonds Close Kmart83/8 17 100¼
Yield Volume 8.4 35
NetChange +7/8
62. Thecontractualinterestrateof theKmartbonds is a.greaterthanthemarketinterestrate.
b.lessthanthemarketinterestrate. c.equaltothemarketinterestrate. d.notdeterminable.
63. Onthedayof tradingreferred toabove, a.noKmartbondsweretraded.
b.bondswithmarketpricesof $3,500weretraded.
c.at closing,thesellingpriceof thebondwashigherthanthe previousday'sprice. d.thebondsoldfor $100.25
64. A $1,000face valuebondwitha quotedpriceof98issellingfor a.$1,000.
b.$980. c.$908. d.$98.
65. A bondwithafacevalueof$100,000andaquotedpriceof102¼ hasasellingpriceof a.$120,225.
b.$102,025. c.$100,225. d.$102,250.
15-10
66. PremiumonBondsPayable a.hasadebitbalance.
b.isacontraaccount.
c.isconsideredto beareduction inthecostofborrowing. d.is deductedfrombondspayableon thebalancesheet.
67. If themarketinterestrateisgreaterthanthecontractualinterestrate,bondswillsell a.at apremium.
b.atfacevalue. c.at adiscount.
d.onlyafterthestatedinterestrate is increased.
68. OnJanuary1,2008,GrantCorporationissued$3,000,000,10-year,8%bondsat102. InterestispayablesemiannuallyonJanuary1andJuly1.Thejournalentrytorecordthis transactiononJanuary1, 2008is
a.Cash....................................................................................3,000,000
BondsPayable............................................................ 3,000,000
b.Cash.................................................................................... BondsPayable............................................................
c.PremiumonBondsPayable................................................ Cash.................................................................................... BondsPayable............................................................
d.Cash.................................................................................... BondsPayable............................................................ PremiumonBondsPayable.......................................
3,060,000
60,000 3,000,000
3,060,000
3,060,000
3,060,000
3,000,000 60,000
69. Thetotalcost of borrowingis increasedonlyifthe a.bondswereissuedatapremium.
b.bondswereissuedatadiscount. c.bondsweresoldatface value.
d.marketinterestrateislessthanthecontractualinterestrateonthat date.
70. Ifthemarketinterestrateis10%,a$10,000,12%,10-yearbond,thatpaysinterest semiannually wouldsellat anamount
a.lessthanfacevalue. b.equaltofacevalue.
c.greaterthanfacevalue.
d.thatcannotbedetermined.
71. Thepresentvalueofa$10,000,5-yearbond,willbelessthan$10,000if the a.contractualinterestrate is lessthanthemarketinterestrate.
b.contractualinterestrate isgreaterthanthemarketinterestrate. c.bondis convertible.
d.contractualinterestrate isequaltothemarket interestrate.
72. GomezCorporationissues1,000,10-year,8%,$1,000bondsdatedJanuary1,2008,at 98.Thejournalentryto recordtheissuancewillshowa
a.debitto Cashof$1,000,000.
b.creditto DiscountonBondsPayablefor $20,000. c.creditto BondsPayablefor$980,000.
d.debitto Cashfor $980,000.
Long-TermLiabilities 15-11
73. Themarketinterestrate isoftencalledthe a.statedrate.
b.effectiverate. c.couponrate.
d.contractualrate.
74. Ifbonds areissuedat adiscount,itmeansthatthe a.financialstrengthof theissuerissuspect.
b.marketinterestrateishigher thanthecontractualinterestrate. c.marketinterestrateis lower thanthecontractualinterestrate.
d.bondholderwillreceiveeffectivelylessinterestthanthecontractualinterestrate.
75. Eachof thefollowingaccountsis reportedas long-term liabilitiesexcept a.BondInterestPayable.
b.BondsPayable.
c.Discounton BondsPayable. d.Premiumon BondsPayable.
76. Thestatementthat"Bondpricesvaryinverselywithchangesinthemarketinterestrate" meansthatif the
a.marketinterestrateincreases,thecontractualinterest rate willdecrease. b.contractualinterest rate increases, thenbondpriceswillgo down.
c.marketinterestratedecreases,thenbond priceswillgo up.
d.contractualinterestrate increases,themarketinterestratewilldecrease.
77. Thecarryingvalueofbondswillequalthemarketprice a.at thecloseof everytrading day.
b.attheendofthefiscalperiod. c.onthedateof issuance.
d.everysixmonthsonthedateinterestispaid.
78. Thesaleof bondsabovefacevalue a.isa rareoccurrence.
b.willcausethetotalcostof borrowingto belessthanthebondinterestpaid.c.will causethe totalcostof borrowingtobemorethanthebondinterestpaid. d.willhaveno net effectonInterestExpensebythetimethebondsmature.
79. Inthebalancesheet,theaccount,Premium on BondsPayable, is a.addedtobondspayable.
b.deductedfrom bondspayable.
c.classifiedasastockholders'equityaccount. d.classifiedasarevenueaccount.
80. Twothousandbondswithafacevalueof$1,000each,aresoldat103.Theentryto record theissuanceis
a.Cash....................................................................................2,060,000
BondsPayable........................................................... 2,060,000
b.Cash....................................................................................2,000,000 PremiumonBondsPayable................................................ 60,000
BondsPayable........................................................... 2,060,000
15-12
c.Cash...................................................................................2,060,000 PremiumonBondsPayable......................................
BondsPayable...........................................................
60,000 2,000,000
d.Cash...................................................................................2,060,000 DiscountonBondsPayable.......................................
BondsPayable...........................................................
60,000 2,000,000
81. Bondinterestpaidis
a.higherwhenbondssellat a discount. b.lower whenbondssellat apremium.
c.thesame whetherbondssellat adiscountorapremium.
d.higherwhenbondssellat a discountandlowerwhenbondssellata premium.
82. MendezCorporationissues2,000,10-year,8%,$1,000bondsdatedJanuary1,2008,at 103.Thejournalentrytorecordtheissuancewillshowa
a.debitto Cashof$2,000,000.
b.creditto Premium onBonds Payablefor $60,000. c.creditto BondsPayablefor$2,030,000.
d.creditto Cashfor$2,060,000.
Usethefollowing informationforquestions83–86.
GoldenCompanyreceivedproceedsof$94,250on10-year,8%bondsissuedonJanuary1, 2007.Thebondshadafacevalueof$100,000,payinterestsemi-annuallyonJune30and December31, andhavea call price of 101.Goldenusesthestraight-linemethodof amortization.
83. Whatisthe amountof interestGoldenmustpaythebondholdersin2007? a.$7,540
b.$8,000 c.$8,575 d.$7,425
a84. WhatistheamountofinterestexpenseGoldenwillshowwithrelationtothesebondsfor theyearendedDecember31,2008?
a.$8,000 b.$7,540 c.$8,575 d.$7,425
a85. Whatisthecarryingvalueof thebonds onJanuary1, 2009? a.$100,000
b.$95,400 c.$98,850 d.$94,825
86. GoldenCompanydecidedtoredeemthebondsonJanuary1, 2009.Whatamountofgain orlosswouldGoldenreportonits2009incomestatement?
a.$4,600gain b.$5,600gain c. $5,600loss d.$4,600loss
Long-TermLiabilities 15-13
87. Bryce Companyhas$500,000ofbondsoutstanding.Theunamortizedpremiumis$7,200. Ifthecompanyredeemedthebondsat101,whatwouldbethegainorlossonthe redemption?
a.$2,200gain b.$2,200loss c.$5,000gain d.$5,000loss
88. ThecurrentcarryingvalueofJensen’s$600,000facevaluebondsis$597,750.Ifthe bonds are retiredat102, what wouldbetheamountJensenwouldpayits bondholders?a.$597,750
b.$600,000 c.$603,000 d.$612,000
89. LaheyCorporationretiresits$500,000facevaluebondsat105onJanuary1,following thepaymentofannual interest.The carryingvalueofthebondsatthe redemptiondateis $518,725.Theentrytorecordtheredemptionwillincludea
a.creditof $18,725toLosson BondRedemption. b.debitof $18,725toPremiumon BondsPayable. c.credit of $6,275toGainon BondRedemption.d.debitof $25,000toPremiumon BondsPayable.
90. A$900,000bondwasretiredat103whenthecarryingvalueofthebondwas$933,000. Theentrytorecordtheretirement wouldincludea
a.gainonbondredemptionof $27,000. b.losson bondredemptionof$6,000.c.lossonbondredemptionof$27,000. d.gainonbondredemptionof $6,000.
91. Ifforty$1,000 convertiblebondswitha carrying value of$46,000areconvertedinto6,000 shares of$5parvaluecommonstock,thejournalentrytorecordtheconversionis
a.BondsPayable.................................................................... 46,000 CommonStock........................................................... 46,000
b.BondsPayable.................................................................... 40,000 PremiumonBondsPayable................................................ 6,000
CommonStock........................................................... 46,000
c.BondsPayable.................................................................... 40,000 PremiumonBondsPayable................................................ 6,000
CommonStock........................................................... 30,000 Paid-inCapitalin Excess ofPar................................. 16,000
d.BondsPayable.................................................................... 46,000
DiscountonBondsPayable....................................... 6,000 CommonStock........................................................... 30,000 Paid-inCapitalin Excess ofPar................................. 10,000
92. A corporationrecognizesagainorloss
a.onlywhenbondsareconverted intocommonstock. b.onlywhenbondsareredeemedbeforematurity.
c.whenbondsareredeemedat orbeforematurity.
d.whenbondsareconvertedintocommonstockandwhentheyareredeemedbefore maturity.
15-14
93. If thereisa lossonbondsredeemedearly,it is a.debiteddirectlyto RetainedEarnings.
b.reportedasan"OtherExpense"onthe incomestatement.
c.reportedas an"ExtraordinaryItem"ontheincomestatement. d.debitedtoInterest Expense,asa cost offinancing.
94. Ifbondscanbeconvertedintocommonstock,
a.theywill sellat a lower pricethancomparablebondswithoutaconversionfeature.
b.theywillcarryahigherinterestratethancomparablebondswithouttheconversion feature.
c.theywillbeconvertedonlyif the issuercallsthem inforconversion.
d.thebondholdermaybenefitifthemarketpriceofthecommonstockincreases substantially.
95. Whenbondsareconvertedintocommonstock,
a.themarketpriceofthestockonthedateofconversioniscreditedtotheCommon Stockaccount.
b.themarketpriceofthebondsonthedateofconversioniscreditedtotheCommon Stockaccount.
c.themarketpriceof thestock andthebondsisignoredwhenrecordingtheconversion. d.gainsor lossesontheconversionarerecognized.
96. Ifbonds withafacevalueof$90,000areconvertedintocommonstockwhenthecarrying value of thebondsis $81,000,theentrytorecordtheconversionwillinclude adebitto
a.BondsPayablefor $90,000. b.BondsPayablefor $81,000.
c.Discounton BondsPayablefor$9,000.
d.BondsPayableequaltothemarketpriceof thebonds onthedateofconversion.
97. A$900,000bondwasretiredat98whenthecarryingvalueofthebondwas$888,000. Theentrytorecordtheretirement wouldincludea
a.gainonbondredemptionof $12,000. b.losson bondredemptionof$6,000.c.lossonbondredemptionof$12,000. d.gainonbondredemptionof $6,000.
98. Twenty$1,000bondswithacarryingvalueof$25,600areconverted into2,000sharesof $5parvaluecommonstock.Thecommonstockhadamarketvalueof$9pershareon thedate of conversion.Theentrytorecordtheconversion is
a.BondsPayable................................................................... 25,600 CommonStock.......................................................... 10,000 Paid-inCapitalin Excess ofPar.................................. 15,600
b.BondsPayable................................................................... 20,000 PremiumonBondsPayable............................................... 5,600
CommonStock.......................................................... 18,000 Paid-inCapitalin Excess ofPar................................. 7,600
c.BondsPayable................................................................... 20,000 Premiumon BondsPayable............................................... 5,600
CommonStock.......................................................... 10,000 Paid-inCapitalin Excess ofPar.................................. 15,600
d.BondsPayable................................................................... 25,600 CommonStock.......................................................... 18,000 Paid-inCapitalin Excess ofPar.................................. 7,600
Long-TermLiabilities 15-15
99. Which oneofthefollowingamounts increaseseachperiod whenaccountingforlong-term notes payable?
a.Cashpaymentb.Interestexpense
c.Principalbalance
d.Reductionofprincipal
100. Inthebalancesheet,mortgagenotespayablearereportedas a.acurrentliability only.
b.a long-termliabilityonly.
c.bothacurrentanda long-term liability.
d.a currentliability exceptfor thereductioninprincipalamount.
101. Amortgagenotepayablewithafixedinterestraterequirestheborrowertomake installmentpaymentsoverthetermoftheloan.Eachinstallmentpaymentincludes interestontheunpaidbalanceoftheloanandapaymentontheprincipal.Witheach installmentpayment,indicatetheeffectontheportionallocatedtointerestexpenseand theportionallocatedtoprincipal.
PortionAllocatedto InterestExpense
a. Increases b. Increases c. Decreases d. Decreases
PortionAllocatedtoPaymentof Principal
Increases Decreases Decreases Increases
102. Theentrytorecordaninstallment paymentona long-term notepayableis a.MortgageNotesPayable
Cash
b.InterestExpense Cash
c.MortgageNotesPayable InterestExpense
Cash
d.BondsPayable Cash
Usethefollowing informationforquestions103–104.
DelmarCompanypurchasedabuildingonJanuary2bysigningalong-term$840,000mortgage with monthlypaymentsof$7,700.Themortgagecarriesan interestrateof 10percent.
103. Theentrytorecordthefirstmonthlypaymentwill includea a.debittotheCashaccountfor$7,700.
b.creditto theCashaccountfor$7,000.
c.debittotheInterestExpenseaccountfor $7,000.d.creditto the MortgagePayableaccountfor$7,700.
104. Theamountowedonthemortgageafterthefirstpayment will be a.$840,000.
b.$839,300. c.$833,000. d.$832,300.
15-16
Usethefollowing informationforquestions105–106.
Diamond Companyborrowed$500,000fromBankTwoonJanuary1,2007inordertoexpandits miningcapabilities.Thefive-yearnoterequiredannualpaymentsof$130,218andcarriedan annual interest rate of 9.5%.
105. Whatisthe amountof expenseDiamondmustrecognizeonits2008income statement? a.$47,500
b.$39,642 c.$35,129 d.$31,037
106. Whatisthebalanceinthenotespayable accountat December31,2008? a.$500,000
b.$326,706 c.$417,282 d.$405,000
107. The lesseehassubstantiallyall of thebenefitsand risksof ownership ina(n) a.apartmentlease.
b.capitallease.
c.operatinglease.
d.operatingleaseandacapitallease.
108. Aleasewheretheintentistemporaryuseofthepropertybythelesseewithcontinued ownership of thepropertybythe lessoris called
a.off-balancesheetfinancing. b.anoperatinglease.
c.acapitallease.
d.a purchaseofproperty.
109. Whichofthefollowingisnotaconditionwhichwouldrequiretherecordingofalease contractasa capitallease?
a.The leasetransfers ownershipof thepropertytothelessee. b.Theleasecontainsabargainpurchaseoption.
c.Theleaseterm islessthan75% oftheeconomiclife oftheleasedproperty.
d.Thepresentvalueoftheleasepaymentsequalsorexceeds90%ofthefairmarket value of theleasedproperty.
110. Inaleasecontract,
a.theowner of thepropertyiscalledthe lessee.
b.thepresenceof abargainpurchaseoptionindicatesthatit is acapitallease. c.therenterof the propertyiscalledthe lessor.
d.thereisalwaysatransferof ownershipat the end oftheleaseterm.
111. Whichofthefollowingstatements concerningleases istrue? a.Capitalleasesarefavoredbylessees.
b.Theappearanceoftheaccount,LeasedAsset,onthebalancesheet,signifiesan operatinglease.
c.Theportionofaleaseliabilityexpectedtobepaidinthenextyearisreportedasa currentliability.
d.Presentvalueisirrelevantinaccountingfor leases.
Long-TermLiabilities 15-17
112. Ifthepresentvalueofleasepaymentsequalsorexceeds90%ofthefairmarketvalueof theleasedproperty, the
a.conditionsaremetfortheleasetobeconsideredacapitallease. b.leaseis uneconomical andshouldnot beenteredinto.
c.leasemaybeclassifiedasanoperatinglease.
d.recordingofaleaseliabilityisoptional—that is,theoff-balancesheet approachcan be elected.
113. Eachof thefollowingmaybe shownin asupportingscheduleinsteadofthe balancesheet exceptthe
a.currentmaturitiesof long-term debt. b.conversionprivileges.
c.interestrates.d.maturitydates.
114. Thetimesinterestearnedratiois computed bydividing a.netincomebyinterestexpense.
b.incomebeforeincometaxesbyinterestexpense.
c.incomebeforeinterestexpensebyinterestexpense.
d.incomebeforeincometaxesandinterestexpensebyinterestexpense.
115. Thediscountonbondspayableorpremiumonbondspayableisshownonthebalance sheetasanadjustmenttobondspayabletoarriveatthecarryingvalueofthebonds. Indicatetheappropriateadditionor subtractiontobondspayable:
Premiumon Bonds Payable
a. Addb. Deduct c. Addd. Deduct
Discounton Bonds Payable AddAddDeductDeduct
116. InarecentyearDartCorporationhadnetincomeof$140,000,interestexpenseof $30,000,andtaxexpenseof$20,000.WhatwasDartCorporation’s timesinterestearned ratiofor theyear?
a.6.33 b.4.66 c.5.33 d.6.00
117. InarecentyearDayCorporationhadnetincomeof$150,000,interestexpenseof $30,000,andatimesinterestearnedratioof9.WhatwasDayCorporation’sincome beforetaxesfortheyear?
a.$300,000 b.$270,000 c.$240,000
d.Noneof theabove.
15-18
118. TheadjustedtrialbalanceforLifesaverCorp.attheendofthecurrentyear,2008, containedthefollowingaccounts.
5-yearBondsPayable8% BondInterestPayable PremiumonBondsPayable NotesPayable(3mo.)NotesPayable(5yr.)
MortgagePayable($15,000duecurrently) SalariesPayable
TaxesPayable(due3/15 of2009)
$1,000,000 50,000 100,000 40,000 165,000 200,000 18,000 25,000
Thetotallong-term liabilitiesreportedonthebalancesheetare a.$1,365,000.
b.$1,350,000. c.$1,465,000. d.$1,450,000.
119. The2008financialstatementsofShadowCo.containthefollowingselecteddata(in millions).
CurrentAssets $75 TotalAssets 120 CurrentLiabilities 40 TotalLiabilities 85 Cash 8
Thedebttototalassetsratiois a.70.8%.
b.53.3%. c.29.2%. d.1.41%.
a120.Thepresentvalueofa bondisalsoknownasits a.facevalue.
b.marketprice.c.futurevalue.d.deferredvalue.
a121.$3million,10%,10-yearbondsareissuedatfacevalue.Interestwillbepaidsemi-annually.Whencalculatingthemarketpriceof the bond,thepresentvalueof
a.$300,000receivedfor10periodsmustbecalculated. b.$3 millionreceived in10periodsmustbecalculated. c.$3millionreceived in 20periodsmustbecalculated. d.$150,000receivedfor 10periodsmustbecalculated.
a122.Eitherthestraight-linemethodortheeffective-interestmethodofamortizationwillalways resultin
a.thesameamountof interestexpensebeingrecognizedovertheterm of thebonds. b.thesameamountof interestexpensebeingrecognizedeachyear.
c.moreinterestexpensebeingrecognizedthanifpremiumordiscountswerenot amortized.
d.thesamecarrying valueeachyearduringtheterm of thebonds.
Long-TermLiabilities 15-19
a123.Acorporationissued$300,000,10%,5-yearbondsonJanuary1,2008for$324,333, whichreflectsaneffective-interestrateof8%.InterestispaidsemiannuallyonJanuary1 andJuly1.Ifthecorporationusestheeffective-interestmethodofamortizationofbond premium, theamountofbondinterestexpensetoberecognizedonJuly1,2008,is
a.$15,000. b.$12,000. c.$16,217. d.$12,973.
a124.A bonddiscountmust
a.alwaysbeamortizedusingstraight-lineamortization.
b.alwaysbeamortizedusingtheeffective-interestmethod.
c.beamortizedusingtheeffective-interestmethodifityieldsannualamountsthatare materiallydifferentthanthe straight-linemethod.
d.beamortizedusingthestraight-linemethodifityieldsannualamountsthatare materiallydifferentthantheeffective-interestmethod.
a125.Whenthe effective-interestmethodof bonddiscountamortizationis used,
a.theapplicableinterestrateusedtocomputeinterestexpenseistheprevailingmarket interest rateonthedateofeachinterestpaymentdate.
b.thecarrying valueof thebondswilldecreaseeachperiod.
c.interestexpensewillnotbeaconstantdollar amountoverthelife ofthebond.
d.interestpaidtobondholderswillbeafunction oftheeffective-interestrateonthedate thebondsare issued.
a126.Whentheeffective-interestmethodofbondpremiumamortizationisused,the a.amountofpremiumamortizedwillgetlargerwithsuccessive amortization. b.carrying valueof thebondswill increasewithsuccessive amortization.
c.interestpaidto bondholderswillincreaseaftereach interestpayment date. d.interestrateusedtocalculate interestexpensewillbethecontractualrate.
Usethefollowing informationforquestions127–129.
SilconCompanyissued$800,000of6%,10-yearbondsononeofitsinterestdatesfor$690,960 toyieldaneffectiveannualrateof8%.Theeffective-interestmethodofamortizationistobe used.
a127.Whatamountofdiscount(tothenearestdollar)shouldbeamortizedforthefirstinterest period?
a.$22,542 b.$10,904 c.$14,554 d.$7,277
a128.Thejournalentryonthe firstinterestpaymentdate,torecordthepaymentofinterestand amortization ofdiscountwillincludea
a.debitto BondInterestExpensefor$48,000. b.creditto Cashfor$55,277.
c.credittoDiscountonBonds Payablefor $7,277. d.debitto BondInterestExpensefor$64,000.
15-20
a129.Howmuchbond interestexpense(tothenearestdollar) should be reported on theincome statementfortheend of thefirst year?
a.$55,422 b.$55,277 c.$55,131 d.$48,000
a130.OnJanuary1,JeanLopteinInc.issued$3,000,000,9%bondsfor$2,817,000.The marketrateofinterest forthesebonds is10%.Interestispayableannually onDecember 31.JeanLopteinusestheeffective-interestmethodofamortizingbonddiscount.Atthe end of thefirst year,JeanLopteinshouldreportunamortizedbonddiscountof
a.$164,700. b.$171,300. c.$154,830. d.$153,000.
a131.OnJanuary1,CleopatraCorporationissued$2,000,000,14%,5-yearbondswithinterest payableonDecember31.Thebondssoldfor$2,144,192.Themarketrateofinterestfor thesebondswas12%.Onthefirstinterestdate,usingtheeffective-interestmethod,the debitentryto BondInterest Expenseisfor
a.$240,000. b.$251,162. c.$257,304. d.$280,000.
a132.OnJanuary1,HurleyCorporationissues$1,000,000,5-year,12%bondsat96with interestpayableonJuly1andJanuary1.TheentryonDecember31torecordaccrued bondinterestandtheamortizationofbonddiscountusingthestraight-linemethodwill include a
a.debitto Interest Expense,$60,000.b.debittoInterest Expense,$120,000.
c.credittoDiscountonBonds Payable,$4,000. d.creditto DiscountonBonds Payable,$8,000.
133. OnJanuary1,2008,$1,000,000,10-year,10%bonds,wereissuedfor$970,000.Interest ispaidannuallyonJanuary1.Iftheissuingcorporationusesthestraight-linemethodto amortize discountonbonds payable,themonthlyamortizationamountis
a.$9,700. b.$3,000. c.$808.d.$250.
134. Acorporationissues$100,000,10%,5-yearbondsonJanuary1,2008,for$95,800. InterestispaidannuallyonJanuary1.Ifthecorporationusesthestraight-linemethodof amortizationofbonddiscount,theamountofbondinterestexpensetoberecognizedin December 31, 2008’sadjusting entryis
a.$10,840. b.$10,000. c.$9,160. d.$840.
Long-TermLiabilities 15-21
a135.RomanCompanyissued $400,000 of6%,5-yearbondsat98,withinterestpaidannually. Assumingstraight-line amortization, whatisthetotalinterestcost ofthe bonds?
a.$120,000 b.$128,000 c.$112,000 d.$116,000
a136.SunwoodCompanyissued$500,000of6%,5-yearbondsat98,withinterestpaid annually.Assumingstraight-line amortization,whatisthecarryingvalueofthebondsafter one year?
a.$490,000 b.$491,000 c.$492,000 d.$494,000
a137.TerranceCompanyissued$200,000of8%,5-yearbondsat106.Assumingstraight-line amortizationandannualinterestpayments,howmuchbondinterestexpenseisrecorded on thenext interestdate?
a.$16,000 b.$18,400 c.$13,600 d.$2,400
a138.GarciaCompanyissued$800,000of8%, 5-yearbondsat106,withinterestpaidannually. Assumingstraight-lineamortization,whatisthecarryingvalueofthebondsafterone year?
a.$848,000 b.$843,200 c.$838,400 d.$852,800
a139.OnJanuary1,2008,$5,000,000,5-year,10%bonds,wereissuedfor$4,850,000.Interest ispaidsemiannuallyonJanuary1andJuly1.Iftheissuingcorporationusesthestraight-line methodtoamortizediscountonbondspayable,themonthlyamortizationamountis
a.$29,040. b.$30,000. c.$2,420. d.$2,500.
a140.Acorporationissues$300,000,10%,5-yearbondsonJanuary1,2008for$287,400. Interest ispaidsemiannuallyonJanuary1andJuly1.Ifthecorporation usesthestraight-linemethodofamortizationofbonddiscount,theamountofbondinterestexpensetobe recognized onJuly1, 2008is
a.$31,260. b.$15,000. c.$16,260. d.$13,740.
a141.Overthetermof thebonds,thebalanceintheDiscountonBonds Payableaccountwill a.fluctuateupanddownif themarketis volatile.
b.decrease. c.increase.
d.be unaffecteduntilthebondsmature.
15-22
a142.Bonddiscountshouldbeamortizedtocomplywith a.thehistoricalcostprinciple.
b.thematchingprinciple.
c.therevenuerecognitionprinciple. d.conservatism.
a143.Ifbondshavebeenissued at adiscount,overthe life of thebonds,the a.carryingvalueof thebondswilldecrease.
b.carryingvalueof thebondswill increase.
c.interestexpensewillincrease,ifthediscountisbeingamortizedonastraight-line basis.
d.unamortizeddiscountwill increase.
Additional MultipleChoiceQuestions
144. Themarketvalue(presentvalue) of abondisafunctionofallof thefollowingexceptthe a.dollaramountstobereceived.
b.lengthoftimeuntiltheamounts arereceived. c.marketrate of interest.
d.lengthoftimeuntilthe bondissold.
145. Onthedateofissue,ChudzickCorporationsells$2millionof5-yearbondsat97.The entry torecordthesale willincludethefollowingdebitsandcredits:
Bonds Payable a.$1,940,000Cr. b.$2,000,000Cr. c.$2,000,000Cr. d.$2,000,000Cr.
Discount onBondsPayable $0 Dr.
$60,000Dr. $500,000Dr. $6,000Dr.
146. Themarketrateofinterestfora bondissue whichsellsformorethanitsfacevalueis a.independentoftheinterestratestatedonthebond.
b.higherthanthe interestrate statedonthebond. c.equaltotheinterestratestatedonthebond.
d.lessthanthe interestratestatedonthebond.
147. Whenacompanyretiresbondsbeforematurity,thegainorlossonredemptionisthe differencebetween thecashpaidandthe
a.carryingvalueof thebonds. b.facevalueof thebonds.
c.originalselling priceofthebonds. d.maturityvalueof thebonds.
148. Hoffman Corporationretiresitsbondsat106onJanuary1,followingthepaymentofsemi-annualinterest.Thefacevalueofthebondsis$400,000.Thecarryingvalueofthebonds at theredemptiondateis$419,800.Theentryto recordtheredemptionwillincludea
a.creditof $19,800to LossonBondRedemption. b.debit of $24,000toPremiumonBondsPayable. c.creditof $4,200toGainon BondRedemption.d.debitof $19,800toPremiumon BondsPayable.
Long-TermLiabilities 15-23
149. Eachpaymentonamortgagenotepayable consistsof a.interestonthe originalbalance of theloan.
b.reductionof loanprincipalonly.
c.interestontheoriginalbalance of the loanandreduction of loanprincipal. d.interestonthe unpaidbalance ofthe loanandreductionof loanprincipal.
150. Whichofthefollowingisnotaconditionunderwhichthelesseemustrecordtheleaseof an asset?
a.The leasecontainsabargainpurchaseoption.
b.The leasetransfers ownershipof thepropertytothelessee.
c.Theleaseterm isequalto 60% of theeconomiclife oftheleaseproperty.
d.Thepresent valueofthelease paymentsis90%ofthefairmarketvalueoftheleased property.
151. Thelesseemustrecorda leaseasanassetifthelease a.transfersownershipof thepropertytothelessor.
b.containsapurchaseoption.
c.termis75%ormoreof theusefullifeoftheleasedproperty.
d.paymentsequalorexceed90% ofthefairmarketvalueof the leasedproperty.
152. BuffonElectronicsCompanyissuesan$800,000,10%,20-yearmortgagenoteon January1.Thetermsprovideforsemiannualinstallmentpayments,exclusiveofreal estatetaxesandinsurance,of$46,621.Afterthefirstinstallmentpayment,theprincipal balance is
a.$800,000. b.$786,427. c.$793,379. d.$779,125.
153. Thedebttototalassetsratioiscomputedbydividing a.long-termliabilities bytotalassets.
b.totaldebtbytotalassets. c.totalassetsbytotal debt.
d.totalassetsbylong-termliabilities.
a154.Themarketpriceof abond isthe
a.presentvalueofitsprincipalamountatmaturityplusthepresentvalueofallfuture interest payments.
b.principalamount plusthepresentvalueofallfutureinterestpayments. c.principalamount plusallfutureinterestpayments.
d.presentvalueof its principalamountonly.
BRIEFEXERCISES
BE155
ShafferInc.isconsideringtwo alternativestofinance itsconstructionofanew$5millionplant. (a)Issuanceof 500,000sharesof commonstockatthemarketpriceof $10 per share.
(b)Issuanceof $5million,8%bondsatpar.
Instructions
Completethefollowingtable.
Incomebeforeinterestandtaxes
Issue Stock $1,400,000
IssueBonds $1,400,000
Interestexpensefrombonds
Incomebeforeincometaxes $ $
Incometaxexpense(30%)
Netincome $ $
Outstandingshares 700,000
Earningspershare
BE156
OnJanuary1,2008,BeltwayEnterprisesissued11%,5-yearbondswithafaceamountof $900,000atpar.Interestis payablesemiannuallyonJune30andDecember31.
Instructions
Preparetheentriestorecordtheissuanceofthebondsandthefirstsemiannualinterest payment.
BE157
OnJanuary1,2008,KentwoodCompany issuedbondswith afacevalue of$500,000.Thebonds carryastatedinterestof7% payableeachJanuary1 andJuly1.
Instructions
a. Preparethejournalentryfortheissuanceassumingthebondsareissuedat 97.b. Preparethejournalentryfortheissuanceassumingthebondsareissuedat 102.
BE158
OnJuly1,2008,FrodoCorporationissued$800,000, 6%, 10-yearbondsatfacevalue. Interestis payable semiannuallyon January1 andJuly1.Frodo Corporationhasacalendaryearend.
Instructions
Prepareallentriesrelatedtothebond issuefor2008.
BE159
OnJanuary1,2008,ZoolandEnterprisessold12%,10-yearbondswithafaceamountof $1,000,000for$970,000.InterestispayablesemiannuallyonJuly1 andJanuary1.
Instructions
Calculatethecarryingvalue of thebondat December31,2008and2009.
BE160
DeltaCompanyissuedbondswithafaceamountof$1,000,000in2003.AsofJanuary1,2008, thebalanceinDiscount onBondsPayableis$4,800.Atthattime,Deltaredeemed thebondsat 102.
Instructions
Assumingthatnointerestispayable,maketheentrytorecordtheredemption.
BE161
NicholsonInc.issuesan$800,000,10%,10-yearmortgagenoteonDecember31,2008,to obtainfinancingforanewbuilding.Thetermsprovideforsemiannualinstallmentpaymentsof $64,194.
Instructions
PreparetheentrytorecordthemortgageloanonDecember31,2008,andthefirstinstallment payment.
BE162
FrancoCorporationreportsthefollowingselectedfinancialstatementinformationatDecember 31,2008:
TotalAssets $89,000 TotalLiabilities 65,000 NetIncome 27,000 InterestIncome 1,600 InterestExpense 900 TaxExpense 300
Instructions
Calculatethe debttototalassetsandtimesinterest earnedratios.
BE163
OnJanuary1,2008,FabianEnterprisesissued9%,10-yearbondswithafaceamountof $700,000at96. InterestispayablesemiannuallyonJune 30and December31.Thebondswere issued foran effectiveinterestrateof 10%.
Instructions
Preparetheentriesto recordthe issuanceofthebonds andthefirst semiannualinterestpayment assumingthatthecompanyuseseffective-interestamortization.
BE164
OnJanuary1,2008,HalstonEnterprisesissued8%,20-yearbondswithafaceamountof $3,000,000at 101.Interest ispayablesemiannuallyonJune30andDecember31.
Instructions
Preparetheentriesto recordthe issuanceofthebonds andthefirst semiannualinterestpayment assumingthatthecompanyusesstraight-line amortization.
EXERCISES
Ex.165
BanksCompanyisconsideringtwoalternativestofinanceitspurchaseofanew$4,000,000 office building.
(a)Issue400,000sharesof commonstockat $10per share. (b)Issue8%,10-year bondsatpar($4,000,000).
Incomebefore interestand taxes isexpectedtobe$2,000,000.Thecompanyhasa30%tax rate and has 600,000sharesofcommonstockoutstanding priortothenewfinancing.
Instructions
Calculateeachofthefollowingforeachalternative: (1)Netincome.
(2)Earningsper share.
Long-TermLiabilities 15-29
Ex.166
The board ofdirectorsofFinleyCorporationisconsideringtwoplans forfinancing thepurchase of newplantequipment.Plan#1wouldrequiretheissuanceof$4,000,000,6%,20-yearbondsat facevalue.Plan#2wouldrequiretheissuanceof100,000sharesof$5parvaluecommonstock whichissellingfor$40pershareontheopenmarket.FinleyCorporationcurrentlyhas100,000 sharesofcommonstockoutstandingandtheincometaxrateisexpectedtobe30%.Assume thatincomebeforeinterestandincometaxesisexpectedtobe$700,000ifthenewfactory equipmentispurchased.
Instructions
Prepareaschedulewhichshowstheexpectednetincomeaftertaxesandtheearningspershare on commonstockundereach of theplansthattheboardof directorsisconsidering.
Ex.167
UnitedHealthisconsideringtwoalternativesforthefinancingofsomehightechnologymedical equipment.Thesetwoalternativesare:
1.Issue50,000sharesof$10par valuecommonstockat $50pershare. 2.Issue$2,500,000,10%,10-yearbondsat par.
15-30
Ex.167 (cont.)
Itisestimatedthatthecompanywillearn$800,000beforeinterestandtaxesasaresultof acquiringthemedicalequipment.Thecompanyhasanestimatedtaxrateof30%andhas 100,000shares of commonstockoutstanding priortothenewfinancing.
Instructions
Determinethe effectonnet incomeandearningsper shareforthesetwomethodsoffinancing.
Ex.168
Threeplansforfinancinga$20,000,000corporationareunderconsiderationbyitsorganizers. Undereachofthe followingplans, thesecurities willbeissuedattheirparorfaceamount andthe incometaxrateisestimated at30%.
Plan1 Plan2 Plan3
9%Bonds — — $10,000,000 6%PreferredStock,$100par — $10,000,000 5,000,000 CommonStock,$10par $20,000,00010,000,000 5,000,000Total $20,000,000$20,000,000 $20,000,000
Itisestimatedthatincomebeforeinterestandtaxes willbe$4,000,000.
Instructions
Determineforeachplan,the expectednet incomeandtheearningspershareoncommonstock.
Long-TermLiabilities 15-31
Ex.169
TaylorCorporationissued$3million,10-year,6%bondsonJanuary1, 2008.
Instructions
Preparetheentrytorecordthesaleof thesebonds, assumingtheywereissuedat (a)98.
(b)103.
Ex.170
OnJanuary1,2008,KohlCorporationissued$700,000,8%,10-yearbondsatfacevalue. InterestispayablesemiannuallyonJuly1andJanuary1.KohlCorporationhasacalendaryear end.
Instructions
Prepareallentriesrelatedtothebond issuefor2008.
Ex.171
OnJanuary1, PorterCorporationissued$800,000,6%, 5-yearbondsatfacevalue.Interestis payable semiannuallyon July1 andJanuary1.
Instructions
Preparejournalentriestorecordthe (a)Issuanceofthebonds.
(b)Paymentof interestonJuly1, assumingnopreviousaccrualofinterest. (c)Accrualof intereston December31.
Ex.172
WoodCompanyretired$300,000facevalue, 9%bondsonJune30,2008at 98.Thecarrying value of thebondsattheredemptiondate was$305,000.
Instructions
Preparethejournalentrytorecordtheredemptionof thebonds.
Ex.173
Presentedbelowarethreeindependentsituations:
(a)HowellCorporationpurchased$250,000ofitsbondsonJune30,2008,at102and immediatelyretiredthem.Thecarryingvalueofthebondsontheretirementdatewas $229,500.ThebondspaysemiannualinterestandtheinterestpaymentdueonJune30, 2008,hasbeenmadeandrecorded.
(b)Justice,Inc.purchased$200,000ofitsbondsat97onJune30,2008,andimmediately retiredthem.Thecarryingvalueofthebondsontheretirementdatewas$196,500.The bondspaysemiannualinterestandtheinterestpaymentdueonJune30,2008,hasbeen made andrecorded.
(c)StarrCompanyhas$80,000,10%,12-yearconvertiblebondsoutstanding.Thesebonds weresoldatfacevalueandpaysemiannualinterestonJune30andDecember31ofeach year.Thebondsareconvertibleinto40sharesofStarr$5parvalue commonstockforeach $1,000parvaluebond.OnDecember31,2008,afterthebondinteresthasbeenpaid, $30,000parvalue ofbonds wereconverted.The marketvalueofStarr'scommonstockwas $38pershare onDecember31,2008.
Instructions
Foreachoftheindependentsituations,preparethejournalentrytorecordtheretirementor conversion ofthebonds.
Ex.174
RileyCompanyissueda$1,500,000,10%,10-yearmortgagenotepayabletofinancethe constructionofabuildingatDecember31,2008.Thetermsprovideforsemiannualinstallment paymentsof$120,365.
Instructions
Preparetheentrytorecord:
(a)themortgageloanonDecember31,2008. (b)thefirst installmentpayment.
Ex.175
DowneyCorporationissuesa$2,000,000,12%,20-yearmortgagenotepayableonDecember 31,2008,toobtain neededfinancingfortheconstructionofa building addition.The terms provide for semiannualinstallmentpaymentsof $132,924onJune30and December31.
Instructions
(a)Prepare thejournal entries torecord themortgageloanonDecember 31,2008,andthefirst installment payment.
(b)Willtheamountofprincipalreductioninthesecondinstallmentpaymentbemoreorless than with thefirst installment payment?
Ex.176
PresentedbelowarethreedifferentaircraftleasetransactionsthatoccurredforMidwestAirways in2008.AlltheleasesstartonJanuary1,2008.InnocasedoesMidwestreceivetitletothe aircraftduring oratthe end of theleaseperiod;noristhereabargainpurchaseoption.
Lessor
Typeof property Yearlyrental Leaseterm
Estimatedeconomiclife Fairmarketvalueof
leasedasset Presentvalueoflease
rentalpayments
VannoyInsurance
747Aircraft $7,445,064 15years25years
$69,300,000
$63,000,000
MarkLeasing
727Aircraft $5,449,423 15years25years
$54,000,000
$46,000,000
Gregg Leasing
L-1011Aircraft $2,851,861
20years 25years
$32,000,000
$28,000,000
Instructions
(a)Whichoftheaboveleasesareoperatingleasesandwhicharecapitalleases?Explainyour answer.
(b)Howshouldthe leasetransactionwith VannoyInsuranceberecordedin2008? (c)Howshouldthe leasetransactionwith MarkLeasingberecordedin2008?
Ex.177
LeyCorporationenteredintothefollowing transactions:
1.GantCarRentalleasedacartoLeyCorporationforoneyear.Termsoftheoperatinglease callfor monthlypaymentsof$750.
2.OnJanuary1,2008,LeyCorporationenteredintoanagreementtolease20machinesfrom WeissCorporation.Thetermsoftheleaseagreementrequireaninitialpaymentof$300,000 andthenthreeannualrentalpaymentsof$360,000beginningonDecember31,2008.The present valueofthethree rentalpaymentsis$895,265.Theleaseisacapitallease.
Instructions
Prepare theappropriatejournalentriestobemadebyLeyCorporationinJanuaryrelatedtothe lease transactions.
Ex.178
OnJanuary1,2008,RileeInc.enteredintoanagreementtoleaseequipmentfromFinley Corporation.Theleaseagreementrequiresfiveannualrentalpaymentsof$70,000beginning December31,2008.Thepresentvalueoftherentalpaymentsis$265,356.Theleasetransfers substantiallyallthe benefitsandrisksof ownershipto Rilee.
Instructions
Preparetheentrytorecordtheleaseagreementonthebooksof RileeInc.onJanuary1, 2008.
Ex.179
TheadjustedtrialbalanceforPayneCorporationattheendofthecurrentyearcontainedthe followingaccounts:
Bondspayable,10%............................................................. Bondinterestpayable........................................................... Discountonbondspayable.................................................. Leaseliability........................................................................ Mortgagenotespayable,9%,due2011............................... Accountspayable.................................................................
$800,000 20,000 40,000 60,000 80,000 120,000
Instructions
(a)Preparethelong-termliabilitiessectionofthebalancesheet.
(b)Indicatetheproperbalancesheetclassificationfortheaccountslistedabovethatdonot belonginthe long-termliabilitiessection.
Ex.180
OnJanuary1,2008,QuayleCorporationissued$400,000,9%,5-yearbondsfor$384,556.The bondsweresoldtoyieldaneffective-interestrateof10%.InterestispaidsemiannuallyonJune 30andDecember31.Thecompanyusesthe effective-interestmethodofamortization.
Instructions
(a)Prepareabonddiscountamortizationschedulewhichshowstheamortizationofdiscountfor the first twointerestpaymentdates.(Roundtothenearestdollar.)
(b)Prepare the journal entries thatQuayleCorporation wouldmakeonJanuary1,June30,and December31, 2008,relatedtothe bondissue.
Ex.181
On June 30, 2008,Wayne,Inc. sold $2,000,000(face value)ofbonds.Thebondsare datedJune 30,2008,payinterestsemiannuallyonDecember31andJune30,andwillmatureonJune30, 2011.Thefollowingschedulewaspreparedbytheaccountantfor2008.
Semi-Annual Interest Period
1
Interestto
bePaid
$80,000
Interest Expense
$87,750
Amortization
$7,750
Unamortized
Amount
$50,000 42,250
Bond CarryingValue
$1,950,000 1,957,750
Instructions
Onthebasisof theabove information,answerthefollowingquestions.(Round your answerto the nearest dollar or percent.)
1.Whatisthestatedinterestrateforthisbondissue?
2.Whatisthemarketinterestrateforthis bondissue?
3.Whatwasthesellingpriceof thebondsasapercentageof theface value?
4.Preparethejournalentrytorecordthesaleof thebondissueonJune30,2008.
5.Preparethe journalentry torecordthepaymentofinterest and amortizationonDecember31, 2008.
Ex.182
OnJanuary1,2008,LesterCorporationissued$2,000,000,9%,5-yearbondsdatedJanuary1, 2008,at96.Thebonds paysemiannualinterestonJanuary 1andJuly1.Thecompany usesthe straight-linemethodof amortizationandhasacalendaryearend.
Instructions
PrepareallthejournalentriesthatLesterCorporationwouldmakerelatedtothisbondissue throughJanuary1, 2009.Besuretoindicatethe dateonwhichtheentrieswouldbemade.
Ex.183
UnruhCompanyissued$900,000,10%,20-yearbondsonJanuary1,2008,at104.Interestis payablesemiannuallyonJuly1andJanuary1.Unruhusesthestraight-linemethodof amortization and hasa calendaryearend.
Instructions
Preparealljournalentriesmadein2008relatedto thebondissue.
Ex.184
KarlyCompanyissued$250,000,11%,10-yearbondsonDecember31,2008,for$230,000. InterestispayablesemiannuallyonJune30andDecember31.Karlyusesthestraight-line methodofamortizationand hasacalendaryear end.
Instructions
Preparetheappropriatejournalentrieson (a) December31,2008.
(b) June30,2009.
COMPLETIONSTATEMENTS
185.Bondsthatmatureatasinglespecifiedfuturedatearecalled bonds, whereas bondsthatmatureininstallmentsarecalledbonds.
186.Thetermsofabondissuearesetforthinaformallegaldocumentcalledabond
.
187.Unsecuredbondsthatareissuedagainstthegeneralcreditoftheborrowerarecalled
bonds.
188.Ifbondswereissuedatapremium,thenthecontractualinterest ratewas
thanthemarketinterestrate.
189.DiscountonBondsPayableis (from)(to)bondspayableonthe balancesheet.PremiumonBondsPayableis (from)(to)bonds payableonthebalancesheet.
190.Ifbondsareissuedatfacevalue(par),itindicatesthatthe interest rate mustbeequaltothe interestrate.
191.Ifa$1million,10%,10-yearbondissuewassoldat96,thecashproceedsfromthe issuance ofthebondsamountedto$ .
192.Whenbondsareconvertedintocommonstockandtheconversionisrecorded,the
of thebondsis transferredtopaid-incapitalaccounts.
193.Aleasemaybeclassifiedasan leaseorasa
lease.
a194.Themarketpriceofabondisobtainedbydiscountingtoitspresentvaluethe
paidatmaturity,andall paymentstobemadeover thetermof thebond.
a195.Whenthereisa differencebetweenthestraight-lineandeffective-interestmethodsofamortization,the methodisrequiredunder GAAP.
a196.Amethodofamortizingbonddiscountorpremiumthatallocatesanequalamounteach period isthe method.
a197.Thestraight-linemethodofamortizationallocatesthesameamountto
ineachinterestperiod.
MATCHING
198.Matchtheitemsbelowbyenteringtheappropriatecodeletterinthespaceprovided.
A.Serialbonds
B.Debenturebonds C.Bondindenture
D.Premiumonbondspayable E.Discountonbondspayable
F.Effective-interestmethodofamortization
G.Straight-linemethodofamortization H.Bonds
I. Debtto totalassetsratio J. Capitallease
K.OperatingleaseL. Registeredbonds
1.Acontractualarrangementwhichis ineffecta purchaseofproperty.
2.A legaldocumentthat setsforththetermsofa bondissue.
3.Bondsthatmatureininstallments.
a4.Producesaperiodicinterestexpenseequaltoaconstantpercentageofthecarrying value ofthebonds.
5.Bondsissuedin thename oftheowner.
6.Aform ofinterest-bearingnotespayableusedbycorporations.
7.Occurswhenthecontractualinterestrateisgreaterthanthemarketinterestrate.
8.Unsecuredbondsissuedagainstthegeneralcredit oftheborrower.
9.Acontractualarrangementthatgivesthelesseetemporaryuseof property.
10.Asolvencymeasurethatindicatesthepercentageof assetsprovidedbycreditors.
11.Occurswhenthecontractualinterestrateis lessthanthemarketinterestrate.
a12.Producesaperiodicinterest expensethat isthesameamounteachinterest period.
SHORT-ANSWERESSAYQUESTIONS
S-AE199
Bondsarefrequentlyissuedatamounts greaterorlessthanfacevalue.Describehowthemarket interestrate,relativetothecontractualinterestrate,affectsthesellingpriceofbonds.Also explaintherationaleforrequiringaninvestortopayaccruedinterestwhenabondispurchased between interest paymentdates.
S-AE200
Acompanydesirestoreplaceitscurrentplantequipmentwithnewequipmentthatcosts $10,000,000.Onepossibilitywouldbeforthecompanytoissue$10,000,000ofbondsanduse theproceedstopurchasetheequipment.Anotherpossibilityistoacquiretheuseofthe equipmentbysigningalong-termcapitalleasewithaleasingcompany.Describeandcompare the financialstatementeffectsofthesetwoalternatives.
S-AE201
Whenabondsellsatadiscount,whatisprobablytrueaboutthemarketinterestrateversusthe stated interestrate?Discuss.
S-AE202
Bondsmayberedeemed(retired)beforematuritybytheissuingcorporation.Explainwhya companywoulddecidetoretirebondsbeforematurityandthenecessarystepstorecordthe redemption.
S-AE203(Ethics)
JeffWeaver,a26-year-oldentrepreneur,startedBells&Whistles(B&W),Inc.,afirmthat specializesintop-of-the-lineadd-onsforcomputersystems.Thefirmhasacapitalstructureof approximately60%debt.ThiswasnecessitatedbytherapidgrowthofB&W,andMr.Weaver's lackofpersonalfundstosustainthegrowth.The60%debtamountisquitehighforfirmsinthis field,andinfactslightlyexceedsthedebtcovenantsnegotiatedwiththebank.B&Wrecently receivednoticethatthebankconsidersthecompany'sdebttobeexcessive,andthatsome acceleratedrepaymentschedulewillbeadopted.Thenoticecameataparticularlybadtime. B&Wisinthemidstofamajorupgradeofitsowncomputersystem.Thehardwarewastohave been purchasedoutright,financedbytheseller,Mike Bogg,longtimefriendofMr.Weaver.
Mr.BoggreallyneedsMr.Weaver’sbusiness.Bothbelieveinthelong-termstrengthofB&W.He thereforesuggeststoMr.Weaverthattheequipmentbepurchasedbymeansofashort-term lease.Mr.Weaver couldrenewthe leaseannually.
Required:
1.Is Mr.Bogg'ssuggestionethical?Explain.
2.IfMr.Weaveracceptsthesuggestion,is hebehavingethically?Explain.
S-AE204(Communication)
BettyJonesworksforTrendPress,afairlylargebookpublishingfirm.Herbestfriendandrival, Rita,worksforWaldenBooks,asmallerpublisher.Bothcompaniesissue$100,000inbondson July1.Trend'sbondswereissuedatadiscount,whileWalden'swereissuedatapremium.Rita sentBettyafaxthenextday.ShetoldBettythatitwasobviouswhothebetterpublisherwas— themarkethadshownitspreference!SheremindedBettyagainofherrecentincreaseinsalary asfurtherproofofthesuperiority ofWaldenBooks.
Required:
DraftashortnoteforBettytosendto Rita.Explainhowsucharesultcouldoccur.
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Week 7 Quiz 4: Chapter 12
INTANGIBLE ASSETS
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
1. Intangible assets derive their value from the right (claim) to receive cash in the future.
2. Internally created intangibles are recorded at cost.
3. Internally generated intangible assets are initially recorded at fair value.
4. Amortization of limited-life intangible assets should not be impacted by expected residual values.
5. Some intangible assets are not required to be amortized every year.
6. Limited-life intangibles are amortized by systematic charges to expense over their useful life.
7. The cost of acquiring a customer list from another company is recorded as an intangible asset.
8. The cost of purchased patents should be amortized over the remaining legal life of the patent.
9. If a new patent is acquired through modification of an existing patent, the remaining book value of the original patent may be amortized over the life of the new patent.
10. In a business combination, a company assigns the cost, where possible, to the identifiable tangible and intangible assets, with the remainder recorded as goodwill.
11. Internally generated goodwill should not be capitalized in the accounts.
12. Internally generated goodwill associated with a business may be recorded as an asset when a firm offer to purchase that business unit has been received.
13. All intangibles are subject to periodic consideration of impairment with corresponding potential write-downs.
14. If the fair value of an unlimited life intangible other than goodwill is less than its book value, an impairment loss must be recognized.
15. If market value of an impaired asset recovers after an impairment has been recognized, the impairment may be reversed in a subsequent period.
16. The same recoverability test that is used for impairments of property, plant, and equipment is used for impairments of indefinite-life intangibles.
17. Periodic alterations to existing products are an example of research and development costs.
18. Research and development costs that result in patents may be capitalized to the extent of the fair value of the patent.
19. Research and development costs are recorded as an intangible asset if it is felt they will provide economic benefits in future years.
20. Contra accounts must be reported for intangible assets in a manner similar to accumu-lated depreciation and property, plant, and equipment.
True False Answers—Conceptual
MULTIPLE CHOICE—Conceptual
21. Which of the following does not describe 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?
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 not possessed 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 are
a. 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 asset is 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 for intangible assets?
a. Sum-of-the-years'-digits
b. Straight-line
c. Units of production
d. Double-declining-balance
27. The cost of an intangible asset includes all of the following except
a. purchase price.
b. legal fees.
c. other incidental expenses.
d. all of these are included.
28. Factors considered in determining an intangible asset’s useful life include all of the following except
a. 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 asset’s legal life.
d. the amortization method used.
29. Under current accounting practice, intangible assets are classified as
a. amortizable or unamortizable.
b. limited-life or indefinite-life.
c. specifically identifiable or goodwill-type.
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 an intangible asset is
a. 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-Life
a. Yes Yes
b. Yes No
c. No Yes
d. No No
33. 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 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 the newly patented product.
34. Broadway Corporation was granted a patent on a product on January 1, 2001. To protect its patent, the corporation purchased on January 1, 2012 a patent on a competing product which was originally issued on January 10, 2008. Because of its unique plant, Broadway 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 20 years.
b. amortized over a maximum period of 16 years.
c. amortized over a maximum period of 9 years.
d. expensed in 2012.
35. Wriglee, Inc. went to court this year and successfully defended its patent from infringe-ment by a competitor. The cost of this defense should be charged to
a. patents and amortized over the legal life of the patent.
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 not an intangible asset?
a. Trade name
b. Research and development costs
c. Franchise
d. Copyrights
37. Which of the following intangible assets should not be amortized?
a. Copyrights
b. Customer lists
c. Perpetual franchises
d. All of these intangible assets should be amortized.
38. When a patent is amortized, the credit is usually made to
a. 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 securing it should generally be capitalized. Which of the following costs associated with 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 assets that they can reliably measure. All other intangible assets, too difficult to identify 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 value of a company’s assets exceeds their cost.
d. a company has exceptional customer relations.
42. When a new company is acquired, which of these intangible assets, unrecorded on the acquired company’s books, might be recorded in addition to goodwill?
a. A brand name.
b. A patent.
c. A customer list.
d. All of the above.
43. Which of the following intangible assets could not be sold by a business to raise needed cash for a capital project?
a. Patent.
b. Copyright.
c. Goodwill.
d. Brand Name.
44. The reason goodwill is sometimes referred to as a master valuation account is because
a. it represents the purchase price of a business that is about to be sold.
b. it is the difference between the fair value of the net tangible and identifiable intangible assets as compared with the purchase price of the acquired business.
c. the value of a business is computed without consideration of goodwill and then goodwill is added to arrive at a master valuation.
d. 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.
45. 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 fair values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Easton. Proper accounting treatment by Easton is to report the excess amount as
a. a gain.
b. part of current income in the year of combination.
c. a deferred credit and amortize it.
d. paid-in capital.
46. Purchased goodwill should
a. be written off as soon as possible against retained earnings.
b. be written off as soon as possible as an extraordinary item.
c. be written off by systematic charges as a regular operating expense over the period benefited.
d. not be amortized.
47. The intangible asset goodwill may be
a. 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 the asset’s
a. 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 of the 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 other than goodwill have been impaired and should be reduced or written off on its balance sheet. The impairment test(s) to be used is (are)
Recoverability Test Fair Value Test
a. Yes Yes
b. Yes No
c No Yes
d. No No
51. The carrying amount of an intangible is
a. the fair 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 be capitalized and depreciated over current and future periods?
a. Research and development general laboratory building which can be put to alternative uses in the future
b. Inventory used for a specific research project
c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular research project currently in process
53. Which of the following principles best describes the current method of accounting for research and development costs?
a. Associating cause and effect
b. Systematic and rational allocation
c. Income tax minimization
d. Immediate recognition as an expense
54. How should research and development costs be accounted for, according to a Financial 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 costs
a. 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.
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 and development expense?
a. Modification of the design of a product
b. Acquisition of R & D equipment for use on a current project only
c. Cost of marketing research for a new product
d. 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 and development facility, the cost of the laboratory building is matched against earnings as
a. 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 should be
a. 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 exceed 20 years.
63. The costs of organizing a corporation include legal fees, fees paid to the state of incorporation, fees paid to promoters, and the costs of meetings for organizing the promoters. These costs are said to benefit the corporation for the entity's entire life. These costs should be
a. capitalized and never amortized.
b. capitalized and amortized over 40 years.
c. capitalized and amortized over 5 years.
d. expensed as incurred.
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 item on the balance sheet?
a. Goodwill
b. Franchise
c. Patent
d. Trademark
66. The notes to the financial statements should include information about acquired intangible assets, and aggregate amortization expense for how many succeeding years?
a. 6
b. 5
c. 4
d. 3
67. Which of the following should be reported under the “Other Expenses and Losses” 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 usually
a. shown in a separate Accumulated Patent Amortization account which is shown contra to the Patents account.
b. shown in the current income statement.
c. reflected as credits in the Patents account.
d. reflected as a contra property, plant and equipment item.
69. Intangible assets are reported on the balance sheet
a. with an accumulated depreciation account.
b. in the property, plant, and equipment section.
c. separately from other assets.
d. none of the above.
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 for internal 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 costs should be capitalized?
a. Designing.
b. Coding.
c. Testing.
d. None of the above.
*74. Capitalized costs incurred to develop internal use computer software should be 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 sold should 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.
Multiple Choice Answers—Conceptual
Multiple Choice—Computational
76. Lynne Corporation acquired a patent on May 1, 2012. Lynne paid cash of $40,000 to the seller. Legal fees of $1,000 were paid related to the acquisition. What amount should be debited to the patent account?
a. $1,000
b. $39,000
c. $40,000
d. $41,000
77. Contreras Corporation acquired a patent on May 1, 2012. Contreras paid cash of $35,000 to the seller. Legal fees of $900 were paid related to the acquisition. What amount should be debited to the patent account?
a. $900
b. $34,100
c. $35,000
d. $35,900
78. Mini Corp. acquires a patent from Maxi Co. in exchange for 2,500 shares of Mini Corp.’s $5 par value common stock and $90,000 cash. When the patent was initially issued to Maxi Co., Mini Corp.’s stock was selling at $7.50 per share. When Mini Corp. acquired the patent, its stock was selling for $9 a share. Mini Corp. should record the patent at what amount?
a. $102,500
b. $108,750
c. $112,500
d. $90,000
79. Alonzo Co. acquires 3 patents from Shaq Corp. for a total of $300,000. The patents were carried on Shaq’s books as follows: Patent AA: $5,000; Patent BB: $2,000; and Patent CC: $3,000. When Alonzo acquired the patents their fair values were: Patent AA: $20,000; Patent BB: $240,000; and Patent CC: $60,000. At what amount should Alonzo record Patent BB?
a. $100,000
b. $200,000
c. $2,000
d. $225,000
80. Jeff Corporation purchased a limited-life intangible asset for $150,000 on May 1, 2010. It has a useful life of 10 years. What total amount of amortization expense should have been recorded on the intangible asset by December 31, 2012?
a. $ -0-
b. $30,000
c. $40,000
d. $45,000
81. Rich Corporation purchased a limited-life intangible asset for $270,000 on May 1, 2010. It has a useful life of 10 years. What total amount of amortization expense should have been recorded on the intangible asset by December 31, 2012?
a. $ -0-.
b. $54,000
c. $72,000
d. $81,000
82. Thompson Company incurred research and development costs of $100,000 and legal fees of $20,000 to acquire a patent. The patent has a legal life of 20 years and a useful life of 10 years. What amount should Thompson record as Patent Amortization Expense in the first year?
a. $ -0-.
b. $ 2,000.
c. $ 6,000.
d. $12,000.
83. ELO Corporation purchased a patent for $180,000 on September 1, 2010. It had a useful life of 10 years. On January 1, 2012, ELO spent $44,000 to successfully defend the patent in a lawsuit. ELO feels that as of that date, the remaining useful life is 5 years. What amount should be reported for patent amortization expense for 2012?
a. $41,200.
b. $40,000.
c. $37,600.
d. $31,200.
84. Danks Corporation purchased a patent for $900,000 on September 1, 2010. It had a useful life of 10 years. On January 1, 2012, Danks spent $220,000 to successfully defend the patent in a lawsuit. Danks feels that as of that date, the remaining useful life is 5 years. What amount should be reported for patent amortization expense for 2012?
a. $206,000.
b. $200,000.
c. $188,000.
d. $156,000.
85. The general ledger of Vance Corporation as of December 31, 2012, includes the following accounts:
Copyrights $ 30,000
Deposits with advertising agency (will be used to promote goodwill) 27,000
Discount on bonds payable 70,000
Excess of cost over fair value of identifiable net assets of
Acquired subsidiary 440,000
Trademarks 90,000
In the preparation of Vance's balance sheet as of December 31, 2012, what should be reported as total intangible assets?
a. $530,000.
b. $557,000.
c. $560,000.
d. $587,000.
86. In January, 2008, Findley Corporation purchased a patent for a new consumer product for $960,000. At the time of purchase, the patent was valid for fifteen years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only ten years. During 2013 the product was permanently removed from the market under governmental order because of a potential health hazard present in the product. What amount should Findley charge to expense during 2013, assuming amortization is recorded at the end of each year?
a. $640,000.
b. $480,000.
c. $96,000.
d. $64,000.
87. Day Company purchased a patent on January 1, 2012 for $600,000. The patent had a remaining useful life of 10 years at that date. In January of 2013, Day successfully defends the patent at a cost of $270,000, extending the patent’s life to 12/31/24. What amount of amortization expense would Kerr record in 2013?
a. $60,000
b. $67,500
c. $72,500
d. $90,000
88. On January 2, 2012, Klein Co. bought a trademark from Royce, Inc. for $1,200,000. An independent research company estimated that the remaining useful life of the trademark was 10 years. Its unamortized cost on Royce’s books was $900,000. In Klein’s 2012 income statement, what amount should be reported as amortization expense?
a. $120,000.
b. $ 90,000.
c. $ 60,000.
d. $ 45,000.
89. A company acquires a patent for a drug with a remaining legal and useful life of six years on January 1, 2011 for $2,100,000. The company uses straight-line amortization for patents. On January 2, 2013, a new patent is received for a timed-release version of the same drug. The new patent has a legal and useful life of twenty years. The least amount of amortization that could be recorded in 2013 is
a. $350,000.
b. $ 70,000.
c. $ 95,454.
d. $ 80,500.
90. Blue Sky Company’s 12/31/12 balance sheet reports assets of $7,500,000 and liabilities of $3,000,000. All of Blue Sky’s assets’ book values approximate their fair value, except for land, which has a fair value that is $450,000 greater than its book value. On 12/31/12, Horace Wimp Corporation paid $7,650,000 to acquire Blue Sky. What amount of goodwill should Horace Wimp record as a result of this purchase?
a. $ -0-
b. $150,000
c. $2,700,000
d. $3,150,000
91. Dotel Company’s 12/31/12 balance sheet reports assets of $12,000,000 and liabilities of $5,000,000. All of Dotel’s assets’ book values approximate their fair value, except for land, which has a fair value that is $800,000 greater than its book value. On 12/31/12, Egbert Corporation paid $12,200,000 to acquire Dotel. What amount of goodwill should Egbert record as a result of this purchase?
a. $ -0-
b. $ 200,000
c. $4,400,000
d. $5,200,000
92. Floyd Company purchases Haeger Company for $3,200,000 cash on January 1, 2013. The book value of Haeger Company’s net assets, as reflected on its December 31, 2012 balance sheet is $2,480,000. An analysis by Floyd on December 31, 2012 indicates that the fair value of Haeger’s tangible assets exceeded the book value by $240,000, and the fair value of identifiable intangible assets exceeded book value by $180,000. How much goodwill should be recognized by Floyd Company when recording the purchase of Haeger Company?
a. $ -0-
b. $720,000
c. $480,000
d. $300,000
93. General Products Company bought Special Products Division in 2012 and appropriately recorded $500,000 of goodwill related to the purchase. On December 31, 2013, the fair value of Special Products Division is $4,000,000 and it is carried on General Product’s books for a total of $3,400,000, including the goodwill. An analysis of Special Products Division’s assets indicates that goodwill of $400,000 exists on December 31, 2013. What goodwill impairment should be recognized by General Products in 2013?
a. $0.
b. $200,000.
c. $50,000.
d. $300,000.
94. During 2012, Bond Company purchased the net assets of May Corporation for $2,000,000. On the date of the transaction, May had $600,000 of liabilities. The fair value of May's assets when acquired were as follows:
Current assets $ 1,080,000
Noncurrent assets 2,520,000
$3,600,000
How should the $1,000,000 difference between the fair value of the net assets acquired ($3,000,000) and the cost ($2,000,000) be accounted for by Bond?
a. The $1,000,000 difference should be credited to retained earnings.
b. The $1,000,000 difference should be recognized as a gain.
c. The current assets should be recorded at $1,080,000 and the noncurrent assets should be recorded at $1,520,000.
d. A deferred credit of $1,000,000 should be set up and then amortized to income over a period not to exceed forty years.
95. The following information is available for Barkley Company’s patents:
Cost $2,580,000
Carrying amount 1,290,000
Expected future net cash flows 1,200,000
Fair value 975,000
Barkley would record a loss on impairment of
a. $ 90,000.
b. $ 315,000.
c. $1,290,000.
d. $1,380,000.
96. Harrel Company acquired a patent on an oil extraction technique on January 1, 2012 for $7,500,000. It was expected to have a 10 year life and no residual value. Harrel uses straight-line amortization for patents. On December 31, 2013, the expected future cash flows expected from the patent were expected to be $900,000 per year for the next eight years. The present value of these cash flows, discounted at Harrel’s market interest rate, is $4,200,000. At what amount should the patent be carried on the December 31, 2013 balance sheet?
a. $7,500,000
b. $7,200,000
c. $6,000,000
d. $4,200,000
97. Malrom Manufacturing Company acquired a patent on a manufacturing process on January 1, 2012 for $6,250,000. It was expected to have a 10 year life and no residual value. Malrom uses straight-line amortization for patents. On December 31, 2013, the expected future cash flows expected from the patent were expected to be $500,000 per year for the next eight years. The present value of these cash flows, discounted at Malrom’s market interest rate, is $3,000,000. At what amount should the patent be carried on the December 31, 2013 balance sheet?
a. $6,250,000
b. $5,000,000
c. $4,000,000
d. $3,000,000
98. Twilight Corporation acquired End-of-the-World Products on January 1, 2012 for $8,000,000, and recorded goodwill of $1,500,000 as a result of that purchase. At December 31, 2012, the End-of-the-World Products Division had a fair value of $6,800,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $5,800,000 at that time. What amount of loss on impairment of goodwill should Twilight record in 2012?
a. $ -0-
b. $500,000
c. $700,000
d. $1,200,000
99. Jenks Corporation acquired Linebrink Products on January 1, 2012 for $6,000,000, and recorded goodwill of $1,125,000 as a result of that purchase. At December 31, 2012, Linebrink Products had a fair value of $5,100,000. The net identifiable assets of the Linebrink (excluding goodwill) had a fair value of $4,350,000 at that time. What amount of loss on impairment of goodwill should Jenks record in 2012?
a. $ -0-
b. $375,000
c. $525,000
d. $900,000
100. In 2012, Edwards Corporation incurred research and development costs as follows:
Materials and equipment $ 90,000
Personnel 130,000
Indirect costs 150,000
$370,000
These costs relate to a product that will be marketed in 2011. It is estimated that these costs will be recouped by December 31, 2015. The equipment has no alternative future use. What is the amount of research and development costs that should be expensed in 2012?
a. $0.
b. $220,000.
c. $280,000.
d. $370,000.
101. Hall Co. incurred research and development costs in 2013 as follows:
Materials used in research and development projects $ 450,000
Equipment acquired that will have alternate future uses in future research
and development projects 3,000,000
Depreciation for 2013 on above equipment 500,000
Personnel costs of persons involved in research and development projects 750,000
Consulting fees paid to outsiders for research and development projects 300,000
Indirect costs reasonably allocable to research and development projects 225,000
$5,225,000
The amount of research and development costs charged to Hall's 2013 income statement should be
a. $1,700,000.
b. $2,000,000.
c. $2,225,000.
d. $4,700,000.
102. Loazia Inc. incurred the following costs during the year ended December 31, 2013:
Laboratory research aimed at discovery of new knowledge $230,000
Costs of testing prototype and design modifications 45,000
Quality control during commercial production, including routine testing
of products 270,000
Construction of research facilities having an estimated useful life of
6 years but no alternative future use 360,000
The total amount to be classified and expensed as research and development in 2013 is
a. $605,000.
b. $905,000.
c. $635,000.
d. $335,000.
103. MaBelle Corporation incurred the following costs in 2012:
Acquisition of R&D equipment with a useful life of
4 years in R&D projects $600,000
Start-up costs incurred when opening a new plant 140,000
Advertising expense to introduce a new product 700,000
Engineering costs incurred to advance a product to full
production stage 500,000
What amount should MaBelle record as research & development expense in 2012?
a. $ 650,000
b. $ 740,000
c. $1,100,000
d. $1,240,000
104. Leeper Corporation incurred the following costs in 2012:
Acquisition of R&D equipment with a useful life of
4 years in R&D projects $800,000
Cost of making minor modifications to an existing product 140,000
Advertising expense to introduce a new product 700,000
Engineering costs incurred to advance a product to full
production stage 750,000
What amount should Leeper record as research & development expense in 2012?
a. $ 950,000
b. $ 940,000
c. $1,450,000
d. $1,640,000
105. Platteville Corporation has the following account balances at 12/31/12:
Amortization expense $ 30,000
Goodwill 420,000
Patent, net of $90,000 amortization 210,000
What amount should Platteville report for intangible assets on the 12/31/12 balance sheet?
a. $210,000
b. $300,000
c. $630,000
d. $660,000
*106. Shangra-La Company incurred $2,000,000 ($500,000 in 2011 and $1,500,000 in 2012) to develop a computer software product. $600,000 of this amount was expended before technological feasibility was established in early 2012. The product will earn future revenues of $4,000,000 over its 5-year life, as follows: 2012 – $1,000,000; 2013 – $1,000,000; 2014 – $800,000; 2015 – $800,000; and 2016 – $400,000. What portion of the $2,000,000 computer software costs should be expensed in 2012?
a. $350,000
b. $400,000
c. $450,000
d. $1,500,000
*107. Logan Company incurred $4,000,000 ($1,100,000 in 2011 and $2,900,000 in 2012) to develop a computer software product. $1,200,000 of this amount was expended before technological feasibility was established in early 2012. The product will earn future revenues of $8,000,000 over its 5-year life, as follows: 2012 – $2,000,000; 2013 – $2,000,000; 2014 – $1,600,000; 2015 – $1,600,000; and 2016 – $800,000. What portion of the $4,000,000 computer software costs should be expensed in 2012?
a. $700,000.
b. $750,000.
c. $800,000.
d. $2,900,000.
*108. Geller Inc. incurred $700,000 of capitalizable costs to develop computer software during 2012. The software will earn total revenues over its 4-year life as follows: 2012 - $400,000; 2013 - $500,000; 2014 - $600,000; and 2015 - $500,000. What amount of the computer software costs should be expensed in 2012?
a. $700,000
b. $140,000
c. $175,000
d. $245,000
*109. Tripiani Inc. incurred $800,000 of capitalizable costs to develop computer software during 2012. The software will earn total revenues over its 5-year life as follows: 2012 - $500,000; 2013 - $600,000; 2014 - $600,000; 2015 - $200,000; and 2016 - $100,000. What amount of the computer software costs should be expensed in 2012?
a. $200,000
b. $160,000
c. $180,000
d. $266,667
*110. Tripiani Inc. incurred $900,000 of capitalizable costs to develop computer software during 2012. The software will be used internally over its 5-year life. What amount of the computer software costs should be expensed in 2012?
a. $900,000
b. $180,000
c. $202,500
d. $300,000
Multiple Choice Answers—Computational
Multiple Choice—CPA Adapted
111. Lopez Corp. incurred $1,260,000 of research and development costs to develop a product for which a patent was granted on January 2, 2008. Legal fees and other costs associated with registration of the patent totaled $240,000. On March 31, 2013, Lopez paid $450,000 for legal fees in a successful defense of the patent. The total amount capitalized for the patent through March 31, 2013 should be
a. $690,000.
b. $1,500,000.
c. $1,710,000.
d. $1,950,000.
112. On June 30, 2013, Cey, Inc. exchanged 4,000 shares of Seely Corp. $30 par value common stock for a patent owned by Gore Co. The Seely stock was acquired in 2013 at a cost of $110,000. At the exchange date, Seely common stock had a fair value of $46 per share, and the patent had a net carrying value of $220,000 on Gore's books. Cey should record the patent at
a. $110,000.
b. $120,000.
c. $184,000.
d. $220,000.
113. On May 5, 2013, MacDougal Corp. exchanged 6,000 shares of its $25 par value treasury common stock for a patent owned by Masset Co. The treasury shares were acquired in 2012 for $135,000. At May 5, 2013, MacDougal's common stock was quoted at $34 per share, and the patent had a carrying value of $165,000 on Masset's books. MacDougal should record the patent at
a. $135,000.
b. $150,000.
c. $165,000.
d. $204,000.
114. Ely Co. bought a patent from Baden Corp. on January 1, 2013, for $450,000. An independent consultant retained by Ely estimated that the remaining useful life at January 1, 2013 is 15 years. Its unamortized cost on Baden’s accounting records was $225,000; the patent had been amortized for 5 years by Baden. How much should be amortized for the year ended December 31, 2013 by Ely Co.?
a. $0.
b. $22,500.
c. $30,000.
d. $45,000.
115. January 2, 2010, Koll, Inc. purchased a patent for a new consumer product for $450,000. At the time of purchase, the patent was valid for 15 years; however, the patent’s useful life was estimated to be only 10 years due to the competitive nature of the product. On December 31, 2013, the product was permanently withdrawn from the market under governmental order because of a potential health hazard in the product. What amount should Koll charge against income during 2013, assuming amortization is recorded at the end of each year?
a. $ 45,000
b. $270,000
c. $315,000
d. $360,000
116. On January 1, 2009, Russell Company purchased a copyright for $2,000,000, having an estimated useful life of 16 years. In January 2013, Russell paid $300,000 for legal fees in a successful defense of the copyright. Copyright amortization expense for the year ended December 31, 2013, should be
a. $0.
b. $125,000.
c. $143,750.
d. $150,000.
117. Which of the following legal fees should be capitalized?
Legal fees to Legal fees to successfully
obtain a copyright defend a trademark
a. No No
b. No Yes
c. Yes Yes
d. Yes No
118. Which of the following costs of goodwill should be amortized over their estimated useful lives?
Costs of goodwill from a Costs of developing
business combination goodwill internally
a. No No
b. No Yes
c. Yes Yes
d. Yes No
119. During 2013, Leon Co. incurred the following costs:
Testing in search for process alternatives $ 350,000
Costs of marketing research for new product 250,000
Modification of the formulation of a process 560,000
Research and development services performed by Beck Corp. for Leon 425,000
In Leon's 2013 income statement, research and development expense should be
a. $560,000.
b. $985,000.
c. $1,335,000.
d. $1,585,000.
120. Riley Co. incurred the following costs during 2013:
Significant modification to the formulation of a chemical product $160,000
Trouble-shooting in connection with breakdowns during commercial
production 150,000
Cost of exploration of new formulas 200,000
Seasonal or other periodic design changes to existing products 185,000
Laboratory research aimed at discovery of new technology 275,000
In its income statement for the year ended December 31, 2013, Riley should report research and development expense of
a. $635,000.
b. $785,000.
c. $820,000.
d. $970,000.
Multiple Choice Answers—CPA Adapted
IFRS QUESTIONS
True/False Questions
1. As in U.S. GAAP, under IFRS the costs associated with research and development are segregated into two components.
2. Costs in the research phase are expensed under U.S. GAAP, but capitalized under IFRS.
3. Costs in the research phase are always expensed under both IFRS and U.S. GAAP.
4. IFRS differs from U.S. GAAP in the development phase in that costs are capitalized once technological feasibility is achieved.
5. The increased acceptance of IFRS has caused costs associated with internally generated intangible assets to be capitalized under U.S. GAAP.
6. IFRS permits some capitalization of internally generated intangible assets, if it is probable there will be a future benefit and the amount can be readily measured.
7. While IFRS requires an impairment test at each reporting date for long-lived assets, it requires no such test for intangibles once a legal or useful life has been determined.
8. IFRS allows reversal of impairment losses when there has been a change in economic conditions or in the expected use of the asset. Under U.S GAAP, impairment losses cannot be reversed for assets to be held and used.
9. IFRS and U.S. GAAP are similar in the accounting for impairments of assets held for disposal.
10. Under U.S. GAAP, impairment loss is measured as the excess of the carrying amount over the assets discounted cash flow.
Answers to True/False:
Multiple-Choice Questions
1. As in U.S. GAAP, under IFRS the costs associated with research and development are segregated into
a. two components, the research phase and the production phase.
b. two components, the research phase and the development phase.
c. three components, the planning phase, the research phase and the production phase.
d. three components, the analysis phase, the development phase and the production phase.
2. In accounting for internally generated intangible assets, U.S. GAAP requires that
a. all costs, no matter how immaterial, be capitalized.
b. only material costs be capitalized.
c. planned costs be capitalized, while costs in excess of plan be expensed.
d. all costs be expensed.
3. The following costs are incurred during the research and development phases of a laser bone scanner
Laboratory research aimed at discovery of new knowledge
$600,000
Search for application of new research findings
400,000
Salaries of research staff designing new laser bone scanner
1,200,000
Material, labor and overhead costs of prototype laser scanner
850,000
Costs of testing prototype and design modifications
450,000
Engineering costs incurred to advance the laser scanner to full production stage (technological feasibility reached)
700,000
Identify which of these are research phase items and will be immediately expensed under
U.S. GAAP and IFRS.
U.S. GAAP IFRS
a. $1,000,000 $1,000,000
b. 2,200,000 1,200,000
c. 4,200,000 4,200,000
d. 4,200,000 3,500,000
4. The following costs are incurred during the research and development phases of a laser bone scanner
Laboratory research aimed at discovery of new knowledge
$600,000
Search for application of new research findings
400,000
Salaries of research staff designing new laser bone scanner
1,200,000
Material, labor and overhead costs of prototype laser scanner
850,000
Costs of testing prototype and design modifications
450,000
Engineering costs incurred to advance the laser scanner to full
production stage (technological feasibility reached)
700,000
Identify which of these are development phase items and will be immediately expensed under
U.S. GAAP and IFRS.
U.S. GAAP IFRS
a. $1,000,000 $1,000,000
b. 2,200,000 1,200,000
c. 2,200,000 3,200,000
d. 3,200,000 3,200,000
5. The primary IFRS related to intangible assets and impairments is found in
a. IAS 38 and IAS 10.
b. IAS 16 and IAS 36.
c. IAS 1 and IAS 34.
d. IAS 38 and IAS 36.
6. IFRS allows reversal of impairment losses when
a. the reversal is greater than the amount of the original impairment.
b. the reversal falls in a subsequent fiscal year of the company's operations.
c. there has been a change in economic conditions or in the expected use of the asset.
d. reversal of impairment losses is never allowed.
7. Under U.S. GAAP, impairment losses
a. can be reversed but only if the reversal is greater than the amount of the original impairment.
b. can be reversed but only if the reversal falls in a subsequent fiscal year of the company's operations.
c. cannot be reversed for assets to be held and used.
d. none of the above.
8. IFRS and U.S. GAAP
a. are diametrically opposed in their accounting for impairments of assets held for disposal.
b. are similar in the accounting for impairments of assets held for disposal.
c. are moving toward common ground in their accounting for impairments of assets held for disposal.
d. are moving further apart in their accounting for impairments of assets held for disposal.
9. Under IFRS, costs in the development phase are
a. never capitalized, but expensed as they are under U.S. GAAP.
b. capitalized if they exceed development phase costs incurred for previously successful ventures.
c. capitalized once technological feasibility is achieved.
d. capitalized on an interim basis, but then expensed prior to the end of the company's fiscal year.
Answers to Multiple Choice:
Short Answer
1. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with respect to the accounting for intangible assets.
2. Briefly discuss the convergence efforts that are underway in the area of intangible assets.
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ACC 350 Week 7 Quiz – Strayer
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Quiz 5 Chapter 6
Master Budget and Responsibility Accounting
1)
Few businesses plan to fail, but many of those that don't succeed have failed to plan.
2)
The master budget reflects the impact of operating decisions, but not financing decisions.
3)
Budgeted financial statements are also referred to as pro forma statements.
4)
Budgeting includes only the financial aspects of the plan and not any nonfinancial aspects such as the number of physical units manufactured.
5)
Budgeting helps management anticipate and adjust for trouble spots in advance.
Answer:
6)
Budgets can play both planning and control roles for management.
7)
Long-run planning and short-run planning are best performed independently of each other.
8)
Operating decisions deal with how to best use the limited resources of an organization.
9)
Investing decisions deal with how to obtain the funds to acquire resources.
10)
Budgeted financial statements are called pro forma statements.
11)
After a budget is agreed upon and finalized by the management team, the amounts should not be changed for any reason.
12)
Even in the face of changing conditions, attaining the original budget is critical.
13)
Lower-level managers will not actively participate in the budget process if they perceive upper management does not believe in the process.
14)
A four-quarter rolling budget encourages management to be thinking about the next 12 months.
15)
A rolling budget is the same as a continuous budget.
16)
Research has shown that challenging budgets (rather than budgets that can be easily attained) are energizing and improve performance.
17)
The revenue budget and the budgeted income statement are used to prepare the budgeted balance sheet and the budgeted statement of cash flows.
18)
It is best to compare this year's performance with last year's actual performance rather than this year's budget.
19)
When administered wisely, budgets promote communication and coordination among the various subunits of the organization.
20)
Preparation of the budgeted income statement is the final step in preparing the operating budget.
21)
The sales forecast should primarily be based on statistical analysis with secondary input from sales managers and sales representatives.
22)
The usual starting point in budgeting is to forecast net income.
23)
The revenues budget should be based on the production budget.
24)
The operating budget is that part of the master budget that includes the capital expenditures budget, cash budget, budgeted balance sheet, and the budgeted statement of cash flows.
25)
Since fixed manufacturing overhead is fixed, it is not normally included in the operating budget.
26)
The manufacturing labor budget depends on wage rates, production methods, and hiring plans.
27)
The manufacturing labor budget depends on wage rates, production methods, and hiring plans.
28)
If inventoriable costs in the operating budget are going to be in accordance with Generally Accepted Accounting Principles (GAAP), they include only variable manufacturing costs.
29)
Activity-based budgeting provides better decision-making information than budgeting based solely on output-based cost drivers (units produced, units sold, or revenues).
30)
Activity-based costing analysis takes a long-run perspective and treats all activity costs as variable costs.
31)
Activity-based budgeting (ABB) focuses on the budgeting cost of activities necessary to produce and sell products and services.
32)
Activity-based budgeting would permit the use of multiple drivers and multiple cost pools in the budgeting process.
33)
Activity-based budgeting and kaizen budgeting are really equivalent in meaning.
34)
If budgeted amounts change, the kaizen approach can be used to examine changes in the budgeted results.
35)
Computer-based financial planning models are mathematical statements of the interrelationships among operating activities, financial activities, and other factors that affect the budget.
36)
Most computer-based financial planning models have difficulty incorporating sensitivity (what-if) analysis.
37)
Sensitivity analysis is a "what-if" technique that examines how a result will change if the original prediction or assumptions change.
38)
If we increase the selling price of our product, we should probably expect a decline in the number of these products sold.
39)
If we increase the selling price of our product, we can always expect an increase in total revenue.
40)
Sensitivity analysis incorporates continuous improvement into budgeted amounts.
41)
Companies implementing kaizen budgeting believe that employees who actually do the job have the best knowledge of how the job can be done better.
42)
The Japanese use kaizen to mean financing alternatives.
43)
Kaizen budgeting does not make sense for profit centers.
44)
Kaizen budgeting encourages small incremental changes, rather than major improvements.
45)
Kaizen budgeting allows for budgeting of small incremental increases in costs each budgeting period to allow for the effects of normal inflation.
46)
A responsibility center is a part, segment, or subunit of an organization, whose manager is accountable for a specified set of activities.
47)
Each manager, regardless of level, is in charge of a responsibility center.
48)
In a profit center, a manager is responsible for investments, revenues, and costs.
49)
A packaging department is MOST likely a profit center.
50)
Variances between actual and budgeted amounts inform management about performance relative to the budget.
51)
An organization structure is an arrangement of lines of responsibility within the entity.
52)
A responsibility center can be structured to promote better alignment of individual and company goals.
53)
Management will most likely behave the same way if a department is structured as a revenue center or if the same department is structured as a profit center.
54)
Responsibility accounting focuses on control, not on information and knowledge.
55)
The fundamental purpose of responsibility accounting is to fix blame when budgets are not achieved.
56)
Human factors are crucial parts of budgeting.
57)
Budgetary slack provides management with a hedge against unexpected adverse circumstances.
58)
Most costs can be easily controlled because they are under the sole influence of one manager.
59)
Performance reports of responsibility centers may include uncontrollable items to influence behavior that is in alignment with corporate strategy.
60)
When the operating budget is used as a control device, managers are more likely to be motivated to budget higher sales than actually anticipated.
61)
Budgeting slack is most likely to occur when a firm uses the budget only as a planning device and not for control.
62)
If a cost is considered controllable, it indicates that all aspects of the cost are under the control of the manager of the responsibility center to which that cost is assigned.
63)
To create greater commitment to the budget, top-management should create the budget and then share it with lower-level managers.
64)
Budgeting for a multinational company is made more complex due to the possibility of exchange rate fluctuations.
65)
The possibility of exchange rate fluctuations does not influence the budgeting procedures in a multinational corporation.
66)
Because of the possibility of exchange rate fluctuations, managers of multinational corporations should ignore subjective factors in their performance evaluations.
67)
A key use of sensitivity analysis is for cash-flow budgeting.
68)
The self-liquidating cycle is the movement from cash to inventories to receivables and back to cash.
69)
A budget:
A)
is the quantitative expression of a proposed plan of action by management
B)
is an aid to coordinate what needs to be done
C)
generally includes both financial and nonfinancial aspects of the plan
D)
serves as a blueprint for the company to follow in an upcoming period
E)
All of the above are correct.
70)
Examples of nonfinancial budgets include all of the following EXCEPT:
A)
units manufactured
B)
cash collections from customers
C)
units sold
D)
number of new products introduced
71)
Budgeting is used to help companies:
A)
plan to better satisfy customers
B)
anticipate potential problems
C)
focus on opportunities
D)
All of these answers are correct.
72)
A master budget:
A)
includes only financial aspects of a plan and excludes nonfinancial aspects
B)
is an aid to coordinating what needs to be done to implement a plan
C)
includes broad expectations and visionary results
D)
should not be altered after it has been agreed upon
73)
Operating decisions PRIMARILY deal with:
A)
the use of scarce resources
B)
how to obtain funds to acquire resources
C)
acquiring equipment and buildings
D)
satisfying stockholders
74)
Financing decisions PRIMARILY deal with:
A)
the use of scarce resources
B)
how to obtain funds to acquire resources
C)
acquiring equipment and buildings
D)
preparing financial statements for stockholders
75)
Budgeting provides all of the following EXCEPT:
A)
a means to communicate the organization's short-term goals to its members
B)
support for the management functions of planning and coordination
C)
a means to anticipate problems
D)
an ethical framework for decision making
76)
If initial budgets prove unacceptable, planners achieve the MOST benefit from:
A)
planning again in light of feedback and current conditions
B)
deciding not to budget this year
C)
accepting an unbalanced budget
D)
using last year's budget
77)
Operating budgets and financial budgets:
A)
combined form the master budget
B)
are prepared before the master budget
C)
are prepared after the master budget
D)
have nothing to do with the master budget
78)
A good budgeting system forces managers to examine the business as they plan, so they can:
A)
detect inaccurate historical records
B)
set specific expectations against which actual results can be compared
C)
complete the budgeting task on time
D)
get promoted for doing a good job
79)
A budget can do all of the following EXCEPT:
A)
promote coordination among subunits
B)
determine actual profitability
C)
motivate managers
D)
motivate employees
80)
A budget should/can do all of the following EXCEPT:
A)
be prepared by managers from different functional areas working independently of each other
B)
be adjusted if new opportunities become available during the year
C)
help management allocate limited resources
D)
become the performance standard against which firms can compare the actual results
81)
A limitation of comparing a company's performance against actual results of last year is that:
A)
it includes adjustments for future conditions
B)
feedback is no longer a possibility
C)
past results can contain inefficiencies of the past year
D)
the budgeting time period is set at one year
82)
Challenging budgets tend to:
A)
decrease line-management participation in attaining corporate goals
B)
increase failure
C)
increase anxiety without motivation
D)
motivate improved performance
83)
Actual results should NOT be compared against past performance because:
A)
past results may contain mistakes and substandard performance
B)
past results will never happen again
C)
past performance is an indicator of future performance
D)
future conditions will be similar to past conditions
84)
A company's actual performance should be compared against budgeted amounts for the same accounting period so that:
A)
adjustments for future conditions can be included
B)
no feedback is possible
C)
inefficiencies of the past year can be included
D)
85)
It is advantageous to coordinate budgets with:
A)
suppliers
B)
customers
C)
the marketing and production departments
D)
All of these answers are correct.
86)
A budget can help implement:
A)
strategic planning
B)
long-run planning
C)
short-run planning
D)
All of these answers are correct.
87)
To gain the benefits of budgeting ________ must understand and support the budget.
A)
management at all levels
B)
customers
C)
suppliers
D)
All of these answers are correct.
88)
Participation of line managers in the budgeting process helps to create:
A)
greater commitment
B)
greater anxiety
C)
more fraud
D)
better past performance
89)
Line managers who feel that top management does not believe in the budget are MOST likely to:
A)
pick up the slack and participate in the budgeting process
B)
be motivated by the budget
C)
spend little time on the budgeting process
D)
convert the budget to a shorter more reasonable time period
90)
The time coverage of a budget should be:
A)
one year
B)
guided by the purpose of the budget
C)
cover design through manufacture and sale of the product
D)
shorter rather than longer
91)
Rolling budgets help management to:
A)
better review the past calendar year
B)
deal with a 5-year time frame
C)
focus on the upcoming budget period
D)
rigidly administer the budget
92)
Budgets should:
A)
be flexible
B)
be administered rigidly
C)
only be developed for short periods of time
D)
include only variable costs
93)
Operating budgets include all of the following EXCEPT:
A)
the revenues budget
B)
the budgeted income statement
C)
the administrative costs budget
D)
the budgeted balance sheet
94)
Operating budgets include the:
A)
budgeted balance sheet
B)
budgeted income statement
C)
capital expenditures budget
D)
budgeted statement of cash flows
95)
The operating budget process generally concludes with the preparation of the:
A)
production budget
B)
distribution budget
C)
research and development budget
D)
budgeted income statement
96)
Which budget is NOT necessary to prepare the budgeted balance sheet?
A)
cash budget
B)
budgeted statement of cash flows
C)
budgeted income statement
D)
revenues budget
97)
Financial budgets include the:
A)
capital expenditures budget
B)
production budget
C)
marketing costs budget
D)
administrative costs budget
98)
________ includes a budgeted statement of cash flows and a budgeted balance sheet.
A)
An annual report
B)
The financial budget
C)
The operating budget
D)
The capital expenditures budget
99)
The order to follow when preparing the operating budget is:
A)
revenues budget, production budget, and direct manufacturing labor costs budget
B)
costs of goods sold budget, production budget, and cash budget
C)
revenues budget, manufacturing overhead costs budget, and production budget
D)
cash expenditures budget, revenues budget, and production budget.
100)
In which order are the following developed? First to last:
A = Production budget
B = Direct materials costs budget
C = Budgeted income statement
D = Revenues budget
A)
ABDC
B)
DABC
C)
DCAB
D)
CABD
101)
The budgeting process is MOST strongly influenced by:
A)
the capital budget
B)
the budgeted statement of cash flows
C)
the sales forecast
D)
the production budget
102)
________ is the usual starting point for budgeting.
A)
The revenues budget
B)
Net income
C)
The production budget
D)
The cash budget
103)
The sales forecast should be PRIMARILY based on:
A)
statistical analysis.
B)
input from sales managers and sales representatives
C)
production capacity
D)
input from the board of directors
104)
The sales forecast is influenced by:
A)
advertising and sales promotions
B)
competition
C)
general economic conditions
D)
All of these answers are correct.
105)
A sales forecast is:
A)
often the outcome of elaborate information gathering and discussions among sales managers
B)
developed primarily to prepare next year's marketing campaign
C)
solely based on sales of the previous year
D)
a summary of product costs that influence pricing decisions
106)
The revenues budget identifies:
A)
expected cash flows for each product
B)
actual sales from last year for each product
C)
the expected level of sales for the company
D)
the variance of sales from actual for each product
107)
The number of units in the sales budget and the production budget may differ because of a change in:
A)
finished goods inventory levels
B)
overhead charges
C)
direct material inventory levels
D)
sales returns and allowances
108)
Production is primarily based on:
A)
projected inventory levels
B)
the revenues budget
C)
the administrative costs budget
D)
the capital expenditures budget
109)
Budgeted production depends on:
A)
the direct materials usage budget and direct material purchases budget
B)
the direct manufacturing labor budget
C)
budgeted sales and expected changes in inventory levels
D)
the manufacturing overhead costs budget
110)
The direct materials usage budget is based on:
A)
the units to be produced during a period
B)
budgeted sales dollars
C)
the predetermined factory overhead rate
D)
the amount of labor-hours worked
111)
Direct material purchases equal:
A)
production needs
B)
production needs plus target ending inventories
C)
production needs plus beginning inventories
D)
production needs plus target ending inventories less beginning inventories
112)
Individual budgeted amounts included in the manufacturing overhead costs budget are based on input from:
A)
operating personnel
B)
costs incurred in prior years
C)
cost changes expected in the future
D)
All of these answers are correct.
113)
The manufacturing overhead costs budget includes budgeted amounts for:
A)
direct materials
B)
direct manufacturing labor
C)
indirect manufacturing labor
D)
All of these answers are correct.
114)
Budgeted manufacturing overhead costs include all types of factory expenses EXCEPT:
A)
fixed items such as depreciation of manufacturing machinery
B)
variable items such as plant supplies
C)
indirect labor such as the salary of the plant supervisor
D)
direct labor and direct materials
115)
The cost of goods sold budget requires all of the following budgets EXCEPT:
A)
direct material cost budget
B)
manufacturing overhead cost budget
C)
distribution cost budget
D)
direct manufacturing labor cost budget
116)
Schultz Company expects to manufacture and sell 30,000 baskets in 20X4 for $6 each. There are 3,000 baskets in beginning finished goods inventory with target ending inventory of 4,000 baskets. The company keeps no work-in-process inventory. What amount of sales revenue will be reported on the 20X4 budgeted income statement?
A)
$174,000
B)
$180,000
C)
$186,000
D)
$204,000
117)
DeArmond Corporation has budgeted sales of 18,000 units, target ending finished goods inventory of 3,000 units, and beginning finished goods inventory of 900 units. How many units should be produced next year?
A)
21,900 units
B)
20,100 units
C)
15,900 units
D)
18,000 units
118)
For next year, Galliart, Inc., has budgeted sales of 60,000 units, target ending finished goods inventory of 3,000 units, and beginning finished goods inventory of 1,800 units. All other inventories are zero. How many units should be produced next year?
A)
58,800 units
B)
60,000 units
C)
61,200 units
D)
64,800 units
119)
Wilgers Company has budgeted sales volume of 30,000 units and budgeted production of 27,000 units, while 5,000 units are in beginning finished goods inventory. How many units are targeted for ending finished goods inventory?
A)
5,000 units
B)
8,000 units
C)
3,000 units
D)
2,000 units
Answer the following questions using the information below:
Marguerite, Inc., expects to sell 20,000 pool cues for $12.00 each. Direct materials costs are $2.00, direct manufacturing labor is $4.00, and manufacturing overhead is $0.80 per pool cue. The following inventory levels apply to 20X4:
Beginning inventory Ending inventory
Direct materials 24,000 units 24,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 2,000 units 2,500 units
120)
On the 20X5 budgeted income statement, what amount will be reported for sales?
A)
$246,000
B)
$240,000
C)
$312,000
D)
$318,000
121)
How many pool cues need to be produced in 20X5?
A)
22,500 cues
B)
22,000 cues
C)
20,500 cues
D)
19,500 cues
122)
On the 20X5 budgeted income statement, what amount will be reported for cost of goods sold?
A)
$139,400
B)
$136,000
C)
$132,600
D)
$153,000
123)
What are the 20X5 budgeted costs for direct materials, direct manufacturing labor, and manufacturing overhead, respectively?
A)
$0; $96,000; $19,200
B)
$39,000; $78,000; $15,600
C)
$80,000; $40,000; $16,000
D)
$41,000; $82,000; $16,400
Answer the following questions using the information below:
Daniel, Inc., expects to sell 6,000 ceramic vases for $20 each. Direct materials costs are $2, direct manufacturing labor is $10, and manufacturing overhead is $3 per vase. The following inventory levels apply to 20X4:
Beginning inventory Ending inventory
Direct materials 1,000 units 1,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 400 units 500 units
124)
On the 20X5 budgeted income statement, what amount will be reported for sales?
A)
$122,000
B)
$118,000
C)
$140,000
D)
$120,000
125)
How many ceramic vases need to be produced in 20X5?
A)
5,900 vases
B)
6,100 vases
C)
7,000 vases
D)
6,000 vases
126)
On the 20X5 budgeted income statement, what amount will be reported for cost of goods sold?
A)
$91,500
B)
$105,000
C)
$90,000
D)
$88,500
127)
What are the 20X5 budgeted costs for direct materials, direct manufacturing labor, and manufacturing overhead, respectively?
A)
$12,200; $61,000; $18,300
B)
$12,000; $60,000; $18,000
C)
$2,000; $10,000; $3,000
D)
$2,000; $0; $18,000
Answer the following questions using the information below:
The following information pertains to the January operating budget for Casey Corporation, a retailer:
Budgeted sales are $200,000 for January
Collections of sales are 50% in the month of sale and 50% the next month
Cost of goods sold averages 70% of sales
Merchandise purchases total $150,000 in January
Marketing costs are $3,000 each month
Distribution costs are $5,000 each month
Administrative costs are $10,000 each month
128)
For January, budgeted gross margin is:
A)
$100,000
B)
$140,000
C)
$60,000
D)
$50,000
129)
For January, the amount budgeted for the nonmanufacturing costs budget is:
A)
$78,000
B)
$10,000
C)
$168,000
D)
$18,000
130)
For January, budgeted net income is:
A)
$42,000
B)
$60,000
C)
$50,000
D)
$52,000
131)
How many uniforms need to be produced in 20X5?
A)
26,000 uniforms
B)
34,000 uniforms
C)
30,000 uniforms
D)
29,000 uniforms
132)
What is the amount budgeted for direct material purchases in 20X5?
A)
$520,000
B)
$600,000
C)
$580,000
D)
$760,000
Answer the following questions using the information below:
Konrade, Inc., expects to sell 30,000 athletic uniforms for $80 each in 20X5. Direct materials costs are $20, direct manufacturing labor is $8, and manufacturing overhead is $6 for each uniform. The following inventory levels apply to 20X4:
Beginning inventory Ending inventory
�� Direct materials 12,000 units 9,000 units
Work-in-process inventory 0 units 0 units
Finished goods inventory 6,000 units 5,000 units
133)
What is the amount budgeted for cost of goods manufactured in 20X5?
A)
$1,020,000
B)
$986,000
C)
$1,156,000
D)
$1,190,000
134)
What is the amount budgeted for cost of goods sold in 20X5?
A)
$1,156,000
B)
$986,000
C)
$1,020,000
D)
$2,400,000
Answer the following questions using the information below:
Furniture, Inc., estimates the following number of mattress sales for the first four months of 20X5:
Month Sales
January 5,000
February 7,000
March 6,500
April 8,000
Finished goods inventory at the end of December is 1,500 units. Target ending finished goods inventory is 30% of the next month's sales.
135)
How many mattresses need to be produced in January 20X5?
A)
4,400 mattresses
B)
5,600 mattresses
C)
6,500 mattresses
D)
7,100 mattresses
136)
How many mattresses need to be produced in the first quarter (January, February, March) of 20X5?
A)
18,500 mattresses
B)
19,400 mattresses
C)
20,900 mattresses
D)
22,400 mattresses
Answer the following questions using the information below:
Wallace Company provides the following data for next year:
Month Budgeted Sales
January $120,000
February 108,000
March 132,000
April 144,000
The gross profit rate is 40% of sales. Inventory at the end of December is $21,600 and target ending inventory levels are 30% of next month's sales, stated at cost.
137)
Purchases budgeted for January total:
A)
$130,800
B)
$72,000
C)
$69,840
D)
$74,160
138)
Purchases budgeted for February total:
A)
$69,120
B)
$60,480
C)
$115,200
D)
$64,800
139)
Shamokin Manufacturing produces two products, Big and Bigger. Shamokin expects to sell 10,000 units of product Bigger and to have an inventory of 2,000 units of Bigger on hand at the end of the period. Currently, Shamokin has 800 units of Bigger on hand. Bigger requires two labor operations, molding and polishing. Each unit of Bigger requires one hour of molding and two hours of polishing. The direct labor rate for molding is $20 per molding hour and the direct labor rate for polishing is $25 per polishing hour. The expected cost of direct labor for Bigger is:
A)
$224,000
B)
$560,000
C)
$616,000
D)
$784,000
140)
Shamokin Manufacturing produces two products, Big and Bigger. Shamokin expects to sell 10,000 units of product Bigger and to have an inventory of 2,000 units of Bigger on hand at the end of the period. Currently, Shamokin has 800 units of Bigger on hand. Bigger requires two labor operations, molding and polishing. Each unit of Bigger requires one hour of molding and two hours of polishing. The direct labor rate for molding is $20 per molding hour and the direct labor rate for polishing is $25 per polishing hour. The expected number of hours of direct labor for Bigger is:
A)
8,800 hours of molding; 17,600 hours of polishing
B)
11,200 hours of molding; 22,400 hours of polishing
C)
17,600 hours of molding; 8,800 hours of polishing
D)
22,400 hours of molding; 11,200 hours of polishing
141)
St. Claire Manufacturing expects to produce and sell 6,000 units of Big, its only product, for $20 each. Direct material cost is $2 per unit, direct labor cost is $8 per unit, and variable manufacturing overhead is $3 per unit. Fixed manufacturing overhead is $24,000 in total. Variable selling and administrative expenses are $1 per unit, and fixed selling and administrative costs are $3,000 in total. According to generally accepted accounting principles, inventoriable cost per unit of Big would be:
A)
$13.00 per unit
B)
$14.00 per unit
C)
$17.00 per unit
D)
$18.50 per unit
142)
Financial planning models:
A)
are not used in the budgeting process
B)
are not useful for sensitivity analysis
C)
are mathematical representations of the relationships affecting the budget process
D)
are used for nonfinancial aspects of budgeting
143)
Financial planning software packages assist management with:
A)
assigning responsibility to various levels of management
B)
identifying the target customer
C)
sensitivity analysis in their planning and budgeting activities
D)
achieving greater commitment from lower management
144)
________ uses a "what-if" technique that examines how results will change if the originally predicted data changes.
A)
A sales forecast
B)
A sensitivity analysis
C)
A pro forma financial statement
D)
The statement of cash flows
145)
When performing a sensitivity analysis, if the selling price per unit is increased, then the:
A)
per unit fixed administrative costs will increase
B)
per unit direct materials purchase price will increase
C)
total volume of sales will increase
D)
total costs for sales commissions and other nonmanufacturing variable costs will increase
146)
Sensitivity analysis is useful for examining all of the following EXCEPT:
A)
changes in employee satisfaction
B)
changes in direct material cost
C)
changes in sales price
D)
changes in direct labor cost
Answer the following questions using the information below:
Ossmann Enterprises reports year-end information from 20X4 as follows:
Sales (80,000 units) $480,000
Cost of goods sold 320,000
Gross margin 160,000
Operating expenses 130,000
Operating income $ 30,000
Ossmann is developing the 20X5 budget. In 20X5 the company would like to increase selling prices by 8%, and as a result expects a decrease in sales volume of 10%. All other operating expenses are expected to remain constant. Assume that COGS is a variable cost and that operating expenses are a fixed cost.
147)
What is budgeted sales for 20X5?
A)
$518,400
B)
$533,333
C)
$466,560
D)
$432,000
148)
What is budgeted cost of goods sold for 20X5?
A)
$311,040
B)
$288,000
C)
$345,600
D)
$320,000
149)
Should Ossmann increase the selling price in 20X5?
A)
Yes, because operating income is increased for 20X5.
B)
Yes, because sales revenue is increased for 20X5.
C)
No, because sales volume decreases for 20X5.
D)
No, because gross margin decreases for 20X5.
Answer the following questions using the information below:
Katie Enterprises reports the year-end information from 20X4 as follows:
Sales (70,000 units) $560,000
Cost of goods sold 210,000
Gross margin 350,000
Operating expenses 200,000
Operating income $ 150,000
Katie is developing the 20X5 budget. In 20X5 the company would like to increase selling prices by 4%, and as a result expects a decrease in sales volume of 10%. All other operating expenses are expected to remain constant. Assume that COGS is a variable cost and that operating expenses are a fixed cost.
150)
What is budgeted sales for 20X5?
A)
$582,400
B)
$524,160
C)
$504,000
D)
$560,000
151)
What is budgeted cost of goods sold for 20X5?
A)
$189,000
B)
$196,560
C)
$218,400
D)
$210,000
152)
Should Katie increase the selling price in 20X5?
A)
Yes, because sales revenue is increased for 20X5.
B)
Yes, because operating income is increased for 20X5.
C)
No, because sales volume decreases for 20X5.
D)
No, because gross margin decreases for 20X5.
153)
The Japanese use the term kaizen when referring to:
A)
scarce resources
B)
pro forma financial statements
C)
continuous improvement
D)
the sales forecast
154)
Kaizen refers to incorporating cost reductions:
A)
in each successive budgeting period
B)
in each successive sales forecast
C)
in all customer service centers
D)
All of these answers are correct.
155)
All of the following are encouraged with kaizen budgeting EXCEPT:
A)
better interactions with suppliers
B)
large discontinuous improvements
C)
cost reductions during manufacturing
D)
systematic monthly cost reductions
156)
Kaizen budgeting involves:
A)
large cost reductions
B)
management directed improvements
C)
continual small cost reductions
D)
continual small revenue increases
157)
Kaizen budgeting is driven by:
A)
management
B)
employees
C)
stockholders
D)
creditors
Answer the following questions using the information below:
Dan and Donna Enterprises are using the kaizen approach to budgeting for 20X5. The budgeted income statement for January 20X5 is as follows:
Sales (84,000 units) $500,000
Less: Cost of goods sold 300,000
Gross margin 200,000
Operating expenses (includes $50,000 of fixed costs) 150,000
Operating income $ 50,000
Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 1% per month.
158)
What is budgeted cost of goods sold for March 20X5?
A)
$294,030
B)
$294,000
C)
$300,000
D)
$297,000
159)
What is budgeted gross margin for March 20X5?
A)
$196,020
B)
$198,000
C)
$204,020
D)
$205,970
160)
The use of activity-based budgeting is growing because of:
A)
the increased use of activity-based costing
B)
the increased use of kaizen costing
C)
increases in work-in-process inventory
D)
increases in direct materials inventory
161)
Activity-based budgeting would separately estimate:
A)
the cost of overhead for a department
B)
a plant-wide cost-driver rate
C)
the cost of a setup activity
D)
All of these answers are correct.
162)
Activity-based-costing analysis makes no distinction between:
A)
direct-materials inventory and work-in-process inventory
B)
short-run variable costs and short-run fixed costs
C)
parts of the supply chain
D)
components of the value chain
163)
Activity-based budgeting makes it easier to:
A)
determine a rolling budget
B)
prepare pro forma financial statements
C)
determine how to reduce costs
D)
execute a financial budget
164)
Activity-based budgeting does NOT require:
A)
knowledge of the organization's activities
B)
specialized expertise in financial management and control
C)
knowledge about how activities affect costs
D)
the ability to see how the organization's different activities fit together
165)
Activity-based budgeting:
A)
uses one cost driver such as direct labor-hours
B)
uses only output-based cost drivers such as units sold
C)
focuses on activities necessary to produce and sell products and services
D)
classifies costs by functional area within the value chain
166)
Activity-based budgeting includes all the following steps EXCEPT:
A)
determining demands for activities from sales and production targets
B)
computing the cost of performing activities
C)
determining a separate cost-driver rate for each department
D)
describing the budget as costs of activities rather than costs of functions
167)
Responsibility accounting:
A)
is a system that measures the plans, budgets, actions, and actual results of a responsibility center
B)
is an arrangement of lines of responsibility within the organization
C)
explicitly incorporates continuous improvement anticipated during the budget period
D)
examines how a result will change if the original plan is not achieved
168)
Responsibility centers include all of the following EXCEPT:
A)
cost
B)
revenue
C)
customers
D)
investment
169)
Variances between actual and budgeted amounts can be used to:
A)
alert managers to potential problems and available opportunities
B)
inform managers about how well the company has implemented its strategies
C)
signal that company strategies are ineffective
D)
All of these answers are correct.
170)
A maintenance manager is MOST likely responsible for a(n):
A)
revenue center
B)
investment center
C)
cost center
D)
profit center
171)
The regional sales office manager of a national firm is MOST likely responsible for a(n):
A)
revenue center
B)
investment center
C)
cost center
D)
profit center
172)
A regional manager of a restaurant chain in charge of finding additional locations for expansion is MOST likely responsible for a(n):
A)
revenue center
B)
investment center
C)
cost center
D)
profit center
173)
The manager of a hobby store that is part of a chain of stores is MOST likely responsible for a(n):
A)
revenue center
B)
investment center
C)
cost center
D)
profit center
174)
A manager of a revenue center is responsible for all of the following EXCEPT:
A)
service quality and units sold
B)
the acquisition cost of the product or service sold
C)
price, product mix, and promotional activities
D)
investments of excess cash
175)
A manager of a profit center is responsible for all of the following EXCEPT:
A)
sales revenue
B)
the cost of merchandise purchased for resale
C)
expanding into new geographic areas
D)
selling and marketing costs
176)
A controllable cost is any cost that can be ________ by a responsibility center manager for a period of time.
A)
controlled
B)
influenced
C)
segregated
D)
excluded
177)
A responsibility accounting system could:
A)
exclude all uncontrollable costs
B)
exclude controllable costs
C)
segregate uncontrollable costs from controllable costs
D)
Both A and C are correct.
178)
Which statement about controllability is NOT true:
A)
few costs are clearly under the sole influence of one manager
B)
holds managers responsible for uncontrollable costs
C)
with a long enough time span, all costs will come under somebody's control
D)
describes the degree of influence that managers have over a particular item
179)
Controllability may be difficult to pinpoint because of all the following EXCEPT:
A)
some costs depend on market conditions
B)
current managers may have inherited inefficiencies of a previous manager
C)
the current use of stretch or challenge targets
D)
few costs are under the sole influence of one manager
180)
Responsibility accounting:
A)
emphasizes controllability
B)
focuses on whom should be asked about the information
C)
attempts to assign blame for problems to a specific manager
D)
All of these answers are correct.
181)
A PRIMARY consideration in assigning a cost to a responsibility center is:
A)
whether the cost is fixed or variable
B)
whether the cost is direct or indirect
C)
who can best explain the change in that cost
D)
where in the organizational structure the cost was incurred
182)
Building in budgetary slack includes:
A)
overestimating budgeted revenues
B)
underestimating budgeted costs
C)
making budgeted targets more easily achievable
D)
All of these answers are correct.
183)
To reduce budgetary slack management may:
A)
incorporate stretch or challenge targets
B)
use external benchmark performance measures
C)
award bonuses for achieving budgeted amounts
D)
reduce projected cost targets by 10% across all areas
184)
A stretch budget is a budget that:
A)
crosses more than one responsibility center
B)
represents a challenging, but achievable level of performance
C)
is impossible to implement in a cost center
D)
is designed to include the effects of exchange rate fluctuations
185)
Multinational budgeting is more complex than budgeting in a domestic environment due to the possibility of:
A)
exchange rate fluctuations
B)
sophisticated techniques used by multinationals such as forward, future, and options contracts
C)
different political, legal, and economic environments faced by multinationals
D)
All of these answers are correct.
186)
Multinational budgeting is useful for everything EXCEPT:
A)
comparing actual to budget in volatile conditions
B)
helping managers learn and adapt to changing conditions
C)
determining the impact of currency fluctuations
D)
determining how well managers adapt to uncertain environments
187)
To prepare the cash budget, all of the following budgets are required EXCEPT:
A)
capital expenditures budget
B)
cost of goods sold budget
C)
budgeted balance sheet
D)
revenue budget
188)
Financial analysts use the projected cash flow statement to do all of the following EXCEPT:
A)
plan for when excess cash is generated
B)
plan for short-term cash investments
C)
project cash shortages and plan a strategy to deal with the shortages
D)
project depreciation expense
189)
The cash flow statement does NOT include:
A)
cash inflows from the collection of receivables
B)
cash outflows paid toward raw material purchases
C)
all sales revenues
D)
interest paid and received
190)
The cash budget is a schedule of expected cash receipts and disbursements that:
A)
requires an aging of accounts receivable and accounts payable
B)
is a self-liquidating cycle
C)
is prepared immediately after the sales forecast
D)
predicts the effect on the cash position at given levels of operations
Answer the following questions using the information below:
The following information pertains to Tiffany Company:
Month Sales Purchases
January $30,000 $16,000
February $40,000 $20,000
March $50,000 $28,000
∙ Cash is collected from customers in the following manner:
Month of sale 30%
Month following the sale 70%
∙ 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month.
∙ Labor costs are 20% of sales. Other operating costs are $15,000 per month (including $4,000 of depreciation). Both of these are paid in the month incurred.
∙ The cash balance on March 1 is $4,000. A minimum cash balance of $3,000 is required at the end of the month. Money can be borrowed in multiples of $1,000.
191)
How much cash will be collected from customers in March?
A)
$47,000
B)
$43,000
C)
$50,000
D)
None of these answers are correct.
192)
How much cash will be paid to suppliers in March?
A)
$23,200
B)
$28,000
C)
$44,000
D)
None of these answers are correct.
193)
How much cash will be disbursed in total in March?
A)
$21,000
B)
$25,000
C)
$44,200
D)
$48,200
194)
What is the ending cash balance for March?
A)
($25,000)
B)
$3,000
C)
$3,200
D)
$3,800
Answer the following questions using the information below:
Fiscal Company has the following sales budget for the last six months of 20X5:
July $100,000 October $ 90,000
August 80,000 November 100,000
September 110,000 December 94,000
Historically, the cash collection of sales has been as follows:
65% of sales collected in the month of sale,
25% of sales collected in the month following the sale,
8% of sales collected in the second month following the sale, and
2% of sales are uncollectible.
195)
Cash collections for September are:
A)
$71,500
B)
$86,700
C)
$99,500
D)
$102,000
196)
What is the ending balance of accounts receivable for September, assuming uncollectible balances are written off during the second month following the sale?
A)
$99,500
B)
$48,500
C)
$44,900
D)
$46,500
197)
Cash collections for October are:
A)
$58,500
B)
$92,400
C)
$99,500
D)
$88,200
Answer the following questions using the information below:
Bear Company has the following information:
Month Budgeted Purchases
January $26,800
February 29,000
March 30,520
April 29,480
May 27,680
Purchases are paid for in the following manner:
10% of the purchase amount in the month of purchase
50% of the purchase amount in the month after purchase
40% of the purchase amount in the month after purchase
198)
What is the expected balance in Accounts Payable as of March 31?
A)
$39,068
B)
$18,312
C)
$2,900
D)
$30,520
199)
What is the expected balance in Accounts Payable as of April 30?
A)
$26,532
B)
$38,740
C)
$12,208
D)
$17,688
200)
What is the expected Accounts Payable balance as of May 31?
A)
$11,792
B)
$24,912
C)
$36,704
D)
$2,948
Answer the following questions using the information below:
The following information pertains to the January operating budget for Casey Corporation.
∙ Budgeted sales for January $100,000 and February $200,000.
∙ Collections for sales are 60% in the month of sale and 40% the next month.
∙ Gross margin is 30% of sales.
∙ Administrative costs are $10,000 each month
∙ Beginning accounts receivable is $20,000.
∙ Beginning inventory is $14,000.
∙ Beginning accounts payable is $60,000. (All from inventory purchases.)
∙ Purchases are paid in full the following month.
∙ Desired ending inventory is 20% of next month's cost of goods sold (COGS).
201)
For January, budgeted cash collections are:
A)
$20,000
B)
$60,000
C)
$80,000
D)
None of these answers are correct.
202)
At the end of January, budgeted accounts receivable is:
A)
$20,000
B)
$40,000
C)
$60,000
D)
None of these answers are correct.
203)
For January, budgeted cost of goods sold is:
A)
$20,000
B)
$30,000
C)
$40,000
D)
None of these answers are correct.
204)
For January, budgeted net income is:
A)
$20,000
B)
$30,000
C)
$40,000
D)
None of these answers are correct.
205)
For January, budgeted cash payments for purchases are:
A)
$14,000
B)
$70,000
C)
$60,000
D)
None of these answers are correct.
206)
At the end of January, budgeted ending inventory is:
A)
$20,000
B)
$28,000
C)
$40,000
D)
None of these answers are correct.
207)
Listed below are elements of the master budget. Determine whether each budget is an operating budget or a financial budget. Place an O for operating budget or F for a financial budget.
1. Capital expenditures budget
2. Cost of goods sold budget
3. Revenues budget
4. Budgeted statement of cash flows
5. Distribution costs budget
6. Marketing costs budget
7. Cash budget
8. Direct materials cost budget
9. Budgeted balance sheet
10. Budgeted income statement
208)
Spirit Company sells three products with the following seasonal sales pattern:
Products
Quarter A B C
1 40% 30% 10%
2 30% 20% 40%
3 20% 20% 40%
4 10% 30% 10%
The annual sales budget shows forecasts for the different products and their expected selling price per unit as follows:
Product Units Selling Price
A 50,000 $ 4
B 125,000 10
C 62,500 6
Required:
Prepare a sales budget, in units and dollars, by quarters for the company for the coming year.
209)
Lubriderm Corporation has the following budgeted sales for the next six-month period:
Month Unit Sales
June 90,000
July 120,000
August 210,000
September 150,000
October 180,000
November 120,000
There were 30,000 units of finished goods in inventory at the beginning of June. Plans are to have an inventory of finished products that equal 20% of the unit sales for the next month.
Five pounds of materials are required for each unit produced. Each pound of material costs $8. Inventory levels for materials are equal to 30% of the needs for the next month. Materials inventory on June 1 was 15,000 pounds.
Required:
a. Prepare production budgets in units for July, August, and September.
b. Prepare a purchases budget in pounds for July, August, and September, and give total purchases in both pounds and dollars for each month.
210)
Gerdie Company has the following information:
Month Budgeted Sales
March $50,000
April 53,000
May 51,000
June 54,500
July 52,500
In addition, the gross profit rate is 40% and the desired inventory level is 30% of next month's cost of sales.
Required:
Prepare a purchases budget for April through June.
211)
Favata Company has the following information:
Month Budgeted Sales
June $60,000
July 51,000
August 40,000
September 70,000
October 72,000
In addition, the cost of goods sold rate is 70% and the desired inventory level is 30% of next month's cost of sales.
Required:
Prepare a purchases budget for July through September.
212)
Picture Pretty manufactures picture frames. Sales for August are expected to be 10,000 units of various sizes. Historically, the average frame requires four feet of framing, one square foot of glass, and two square feet of backing. Beginning inventory includes 1,500 feet of framing, 500 square feet of glass, and 500 square feet of backing. Current prices are $0.30 per foot of framing, $6.00 per square foot of glass, and $2.25 per square foot of backing. Ending inventory should be 150% of beginning inventory. Purchases are paid for in the month acquired.
Required:
a. Determine the quantity of framing, glass, and backing that is to be purchased during August.
b. Determine the total costs of direct materials for August purchases.
213)
Michelle Enterprises reports the year-end information from 20X5 as follows:
Sales (100,000 units) $250,000
Less: Cost of goods sold 150,000
Gross profit 100,000
Operating expenses (includes $10,000 of Depreciation) 60,000
Net income $ 40,000
Michelle is developing the 20X6 budget. In 20X6 the company would like to increase selling prices by 10%, and as a result expects a decrease in sales volume of 5%. Cost of goods sold as a percentage of sales is expected to increase to 62%. Other than depreciation, all operating costs are variable.
Required:
Prepare a budgeted income statement for 20X6.
214)
Brad Corporation is using the kaizen approach to budgeting for 20X5. The budgeted income statement for January 20X5 is as follows:
Sales (240,000 units) $720,000
Less: Cost of goods sold 480,000
Gross margin 240,000
Operating expenses (includes $64,000 of fixed costs) 192,000
Net income $ 48,000
Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 1% per month.
Required:
Prepare a kaizen-based budgeted income statement for March of 20X5.
215)
Allscott Company is developing its budgets for 20X5 and, for the first time, will use the kaizen approach. The initial 20X5 income statement, based on static data from 20X4, is as follows:
Sales (140,000 units) $420,000
Less: Cost of goods sold 280,000
Gross margin 140,000
Operating expenses (includes $28,000 of depreciation) 112,000
Net income $28,000
Selling prices for 20X5 are expected to increase by 8%, and sales volume in units will decrease by 10%. The cost of goods sold as estimated by the kaizen approach will decline by 10% per unit. Other than depreciation, all other operating costs are expected to decline by 5%.
Required:
Prepare a kaizen-based budgeted income statement for 20X5.
216)
Russell Company has the following projected account balances for June 30, 20X5:
Accounts payable $40,000 Sales $800,000
Accounts receivable 100,000 Capital stock 400,000
Depreciation, factory 24,000 Retained earnings ?
Inventories (5/31 & 6/30) 180,000 Cash 56,000
Direct materials used 200,000 Equipment, net 240,000
Office salaries 80,000 Buildings, net 400,000
Insurance, factory 4,000 Utilities, factory 16,000
Plant wages 140,000 Selling expenses 60,000
Bonds payable 160,000 Maintenance, factory 28,000
Required:
a. Prepare a budgeted income statement for June 20X5.
b. Prepare a budgeted balance sheet as of June 30, 20X5.
217)
Shamokin Manufacturing produces two products, Big and Bigger. Shamokin expects to sell 20,000 units of Big and 10,000 units of Bigger. Shamokin plans on having an ending inventory of 4,000 units of Big and 2,000 units of Bigger. Currently, Shamokin has 1,000 units of Big in its inventory and 800 units of Bigger. Each product requires two labor operations: molding and polishing. Product Big requires one hour of molding time and one hour of polishing time. Product Bigger requires one hour of molding time and two hours of polishing time. The direct labor rate for molders is $20 per molding hour, and the direct labor rate for polishers is $25 per polishing hour.
Required:
Prepare a direct labor budget in hours and dollars for each product.
218)
Duffy Corporation has prepared the following sales budget:
Month Cash Sales Credit Sales
May $16,000 $68,000
June 20,000 80,000
July 18,000 74,000
August 24,000 92,000
September 22,000 76,000
Collections are 40% in the month of sale, 45% in the month following the sale, and 10% two months following the sale. The remaining 5% is expected to be uncollectible.
Required:
Prepare a schedule of cash collections for July through September.
219)
The following information pertains to Amigo Corporation:
Month Sales Purchases
July $30,000 $10,000
August 34,000 12,000
September 38,000 14,000
October 42,000 16,000
November 48,000 18,000
December 60,000 20,000
∙ Cash is collected from customers in the following manner:
Month of sale (2% cash discount) 30%
Month following sale 50%
Two months following sale 15%
Amount uncollectible 5%
∙ 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month.
Required:
a. Prepare a summary of cash collections for the 4th quarter.
b. Prepare a summary of cash disbursements for the 4th quarter.
220)
Describe the benefits to an organization of preparing an operating budget.
221)
Bob and Dale have just purchased a small honey manufacturing company that was having financial difficulties. After a brief operating period, they decided that the company's main problem was the lack of any financial planning. The company made a good product and market potential was great.
Required:
Explain why a company needs a good budgeting plan. Specifically address the need for a master budget.
222)
Describe operating and financial budgets and give at least two examples of each discussed in the textbook.
223)
Discuss the importance of the sales forecast and items that influence its accuracy.
224)
Explain what is meant by sensitivity analysis in budgeting, and discuss how managers might use sensitivity analysis in practice.
225)
Describe the concept of kaizen budgeting.
226)
Distinguish between controllable and uncontrollable aspects of revenue and costs. Can a manager totally control all revenue and costs? Why or why not?
227)
Describe some of the drawbacks of using the operating budget as a control device.
228)
What is budget slack? What are the pros and cons of building slack into the budget from the point of view of (a) an employee and (b) a senior manager?
229)
How is budgeting for a multinational corporation different than budgeting for a corporation that is strictly domestic?
b
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ACC 401 Week 7 Quiz – Strayer
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Quiz 6 Chapter 8 and 10
Changes in Ownership Interest
Multiple Choice
1. When the parent company sells a portion of its investment in a subsidiary, the workpaper entry to adjust for the current year’s income sold to noncontrolling stockholders includes a
a. debit to Subsidiary Income Sold.
b. debit to Equity in Subsidiary Income.
c. credit to Equity in Subsidiary Income.
d. credit to Subsidiary Income Sold.
2. A parent company may increase its ownership interest in a subsidiary by
a. buying additional subsidiary shares from third parties.
b. buying additional subsidiary shares from the subsidiary.
c. having the subsidiary purchase its shares from third parties.
d. all of these.
3. If a portion of an investment is sold, the value of the shares sold is determined by using the:
1. first-in, first-out method.
2. average cost method.
3. specific identification method.
a. 1
b. 2
c. 3
d. 1 and 3
4. If a parent company acquires additional shares of its subsidiary’s stock directly from the subsidiary for a price less than their book value:
1. total noncontrolling book value interest increases.
2. the controlling book value interest increases.
3. the controlling book value interest decreases.
a. 1
b. 2
c. 3
d. 1 and 3
5. If a subsidiary issues new shares of its stock to noncontrolling stockholders, the book value of the parent’s interest in the subsidiary may
a. increase.
b. decrease.
c. remain the same.
d. increase, decrease, or remain the same.
6. The purchase by a subsidiary of some of its shares from noncontrolling stockholders results in the parent company’s share of the subsidiary’s net assets
a. increasing.
b. decreasing.
c. remaining unchanged.
d. increasing, decreasing, or remaining unchanged.
7. The computation of noncontrolling interest in net assets is made by multiplying the noncontrolling interest percentage at the
a. beginning of the year times subsidiary stockholders’ equity amounts.
b. beginning of the year times consolidated stockholders’ equity amounts.
c. end of the year times subsidiary stockholders’ equity amounts.
d. end of the year times consolidated stockholders’ equity amounts.
8. Under the partial equity method, the workpaper entry that reverses the effect of subsidiary income for the year includes a:
1. credit to Equity in Subsidiary Income.
2. debit to Subsidiary Income Sold.
3. debit to Equity in Subsidiary Income.
a. 1
b. 2
c. 3
d. both 1 and 2
9. Polk Company owned 24,000 of the 30,000 outstanding common shares of Sloan Company on January 1, 2010. Polk’s shares were purchased at book value when the fair values of Sloan’s assets and liabilities were equal to their book values. The stockholders’ equity of Sloan Company on January 1, 2010, consisted of the following:
Common stock, $15 par value $ 450,000
Other contributed capital 337,500
Retained earnings 712,500
Total $1,500,000
Sloan Company sold 7,500 additional shares of common stock for $90 per share on January 2, 2010. If Polk Company purchased all 7,500 shares, the book entry to record the purchase should increase the Investment in Sloan Company account by
a. $562,500.
b. $590,625.
c. $675,000.
d. $150,000.
e. Some other account.
10. Polk Company owned 24,000 of the 30,000 outstanding common shares of Sloan Company on January 1, 2010. Polk’s shares were purchased at book value when the fair values of Sloan’s assets and liabilities were equal to their book values. The stockholders’ equity of Sloan Company on January 1, 2010, consisted of the following:
Common stock, $15 par value $ 450,000
Other contributed capital 337,500
Retained earnings 712,500
Total $1,500,000
Sloan Company sold 7,500 additional shares of common stock for $90 per share on January 2, 2010. If all 7,500 shares were sold to noncontrolling stockholders, the workpaper adjustment needed each time a workpaper is prepared should increase (decrease) the Investment in Sloan Company by
a. ($140,625).
b. $140,625.
c. ($112,500).
d. $192,000.
e. None of these.
11. On January 1, 2006, Parent Company purchased 32,000 of the 40,000 outstanding common shares of Sims Company for $1,520,000. On January 1, 2010, Parent Company sold 4,000 of its shares of Sims Company on the open market for $90 per share. Sims Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $400,000 $ 400,000
Other contributed capital 400,000 400,000
Retained earnings 800,000 1,400,000
$1,600,000 $2,200,000
The difference between implied and book value is assigned to Sims Company’s land. The amount of the gain on sale of the 4,000 shares that should be recorded on the books of Parent Company is
a. $68,000.
b. $170,000.
c. $96,000.
d. $200,000.
e. None of these.
12. On January 1, 2006, Patterson Corporation purchased 24,000 of the 30,000 outstanding common shares of Stewart Company for $1,140,000. On January 1, 2010, Patterson Corporation sold 3,000 of its shares of Stewart Company on the open market for $90 per share. Stewart Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $ 300,000 $ 300,000
Other contributed capital 300,000 300,000
Retained earnings 600,000 1,050,000
$1,200,000 $1,650,000
The difference between implied and book value is assigned to Stewart Company’s land. As a result of the sale, Patterson Corporation’s Investment in Stewart account should be credited for
a. $165,000.
b. $206,250.
c. $120,000.
d. $142,500.
e. None of these.
13. On January 1, 2006, Peterson Company purchased 16,000 of the 20,000 outstanding common shares of Swift Company for $760,000. On January 1, 2010, Peterson Company sold 2,000 of its shares of Swift Company on the open market for $90 per share. Swift Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $200,000 $ 200,000
Other contributed capital 200,000 200,000
Retained earnings 400,000 700,000
$800,000 $1,100,000
The difference between implied and book value is assigned to Swift Company’s land. Assuming no other equity transactions, the amount of the difference between implied and book value that would be added to land on a workpaper for the preparation of consolidated statements on December 31, 2010, would be
a. $120,000.
b. $115,000.
c. $105,000.
d. $84,000.
e. None of these.
14. On January 1 2010, Paulson Company purchased 75% of Shields Corporation for $500,000. Shields’ stockholders’ equity on that date was equal to $600,000 and Shields had 60,000 shares issued and outstanding on that date. Shields Corporation sold an additional 15,000 shares of previously unissued stock on December 31, 2010.
Assume that Paulson Company purchased the additional shares what would be their current percentage ownership on December 31, 2010?
a. 92%
b. 87%
c. 80%
d. 100%
15. On January 1 2010, Powder Mill Company purchased 75% of Selfine Company for $500,000. Selfine Company’s stockholders’ equity on that date was equal to $600,000 and Selfine Company had 60,000 shares issued and outstanding on that date. Selfine Company Corporation sold an additional 15,000 shares of previously unissued stock on December 31, 2010.
Assume Selfine Company sold the 15,000 shares to outside interests, Powder Mill Company’s percent ownership would be:
a. 33 1/3%
b. 60%
c. 75%
d. 80%
16. P Corporation purchased an 80% interest in S Corporation on January 1, 2010, at book value for $300,000. S’s net income for 2010 was $90,000 and no dividends were declared. On May 1, 2010, P reduced its interest in S by selling a 20% interest, or one-fourth of its investment for $90,000. What will be the Consolidated Gain on Sale and Subsidiary Income Sold for 2010?
Consolidated Gain on Sale Subsidiary Income Sold
a. $9,000 $6,000
b. $9,000 $15,000
c. $15,000 $6,000
d. $15,000 $15,000
17. P Corporation purchased an 80% interest in S Corporation on January 1, 2010, at book value for $300,000. S’s net income for 2010 was $90,000 and no dividends were declared. On May 1, 2010, P reduced its interest in S by selling a 20% interest, or one-fourth of its investment for $90,000. What would be the balance in the Investment of S Corporation account on December 31, 2010?
a. $300,000.
b. $225,000.
c. $279,000.
d. $261,000.
18. The purchase by a subsidiary of some of its shares from the noncontrolling stockholders results in an increase in the parent’s percentage interest in the subsidiary. The parent company’s share of the subsidiary’s net assets will increase if the shares are purchased:
a. at a price equal to book value.
b. at a price below book value.
c. at a price above book value.
d. will not show an increase.
Use the following information for Questions 19-21.
On January 1, 2006, Perk Company purchased 16,000 of the 20,000 outstanding common shares of Self Company for $760,000. On January 1, 2010, Perk Company sold 2,000 of its shares of Self Company on the open market for $90 per share. Self Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $ 200,000 $ 200,000
Other contributed capital 200,000 200,000
Retained earnings 400,000 700,000
$800,000 $1,100,000
The difference between implied and book value is assigned to Self Company’s land.
19. The amount of the gain on sale of the 2,000 shares that should be recorded on the books of Perk Company is
a. $34,000.
b. $85,000.
c. $48,000.
d. $100,000.
e. None of these.
20. As a result of the sale, Perk Company’s Investment in Self account should be credited for
a. $110,000.
b. $137,500.
c. $80,000.
d. $95,000.
e. None of these.
21. Assuming no other equity transactions, the amount of the difference between implied and book value that would be added to land on a work paper for the preparation of consolidated statements on December 31, 2010 would be
a. $120,000.
b. $115,000.
c. $105,000.
d. $84,000.
22. On January 1, 2010, P Corporation purchased 75% of S Corporation for $500,000. S’s stockholders’ equity on that date was equal to $600,000 and S had 40,000 shares issued and outstanding on that date. S Corporation sold an additional 8,000 shares of previously unissued stock on December 31, 2010.
Assume that P Corporation purchased the additional shares what would be their current percentage ownership on December 31, 2010?
a. 62 1/2%.
b. 75%
c. 79 1/6%
d. 100%
23. On January 1, 2010, P Corporation purchased 75% of S Corporation for $500,000. S’s stockholders’ equity on that date was equal to $600,000 and S had 40,000 shares issued and outstanding on that date. S Corporation sold an additional 8,000 shares of previously unissued stock on December 31, 2010.
Assume S sold the 8,000 shares to outside interests, P’s percent ownership would be:
a. 56 1/4%
b. 62 1/2%
c. 75%
d. 79 1/6%
Problems
8-1 Piper Company purchased Snead Company common stock through open-market purchases as follows:
Acquired
Date Shares Cost
1/1/09 1,500 $ 50,000
1/1/10 3,300 $ 90,000
1/1/11 6,600 $250,000
Snead Company had 12,000 shares of $20 par value common stock outstanding during the entire period. Snead had the following retained earnings balances on the relevant dates:
January 1, 2009 $ 90,000
January 1, 2010 30,000
January 1, 2011 150,000
December 31, 2011 300,000
Snead Company declared no dividends in 2009 or 2010 but did declare $60,000 of dividends in 2011. Any difference between cost and book value is assigned to subsidiary land. Piper uses the equity method to account for its investment in Snead.
Required:
A. Prepare the journal entries Piper Company will make during 2010 and 2011 to account for its investment in Snead Company.
B. Prepare workpaper eliminating entries necessary to prepare a consolidated statements workpaper on December 31, 2011.
8-2 On January 1, 2008, Patel Company acquired 90% of the common stock of Seng Company for $650,000. At that time, Seng had common stock ($5 par) of $500,000 and retained earnings of $200,000.
On January 1, 2010, Seng issued 20,000 shares of its unissued common stock, with a market value of $7 per share, to noncontrolling stockholders. Seng’s retained earnings balance on this date was $300,000. Any difference between cost and book value relates to Seng’s land. No dividends were declared in 2010.
Required:
A. Prepare the entry on Patel’s books to record the effect of the issuance assuming the cost method.
B. Prepare the elimination entries for the preparation of a consolidated statements workpaper on December 31, 2010 assuming the cost method.
8-3 Pratt Company purchased 40,000 shares of Silas Company’s common stock for $860,000 on January 1, 2010. At that time Silas Company had $500,000 of $10 par value common stock and $300,000 of retained earnings. Silas Company’s income earned and increase in retained earnings during 2010 and 2011 were:
2010 2011
Income earned $260,000 $360,000
Increase in Retained Earnings 200,000 300,000
Silas Company income is earned evenly throughout the year.
On September 1, 2011, Pratt Company sold on the open market, 12,000 shares of its Silas Company stock for $460,000. Any difference between cost and book value relates to Silas Company land. Pratt Company uses the cost method to account for its investment in Silas Company.
Required:
A. Compute Pratt Company’s reported gain (loss) on the sale.
B. Prepare all consolidated statements workpaper eliminating entries for a workpaper on December 31, 2011.
8-4 Pelky made the following purchases of Stark Company common stock:
Date Shares Cost
1/1/10 70,000 (70%) $1,000,000
1/1/11 10,000 (10%) 160,000
Stockholders’ equity information for Stark Company for 2010 and 2011 follows:
2010 2011
Common stock, $10 par value $1,000,000 $1,000,000
1/1 Retained earnings 300,000 380,000
Net income 110,000 140,000
Dividends declared, 12/15 (30,000) (40,000)
Retained earnings, 12/31 380,000 480,000
Total stockholders’ equity, 12/31 $1,380,000 $1,480,000
On July 1, 2011, Pelky sold 14,000 shares of Stark Company common stock on the open market for $22 per share. The shares sold were purchased on January 1, 2010. Stark notified Pelky that its net income for the first six months was $70,000. Any difference between cost and book value relates to subsidiary land. Pelky uses the cost method to account for its investment in Stark Company.
Required:
A. Prepare the journal entry made by Pelky to record the sale of the 14,000 shares on July 1, 2011.
B. Prepare the workpaper eliminating entries needed for a consolidated statements workpaper on December 31, 2011.
C. Compute the amount of noncontrolling interest that would be reported on the consolidated balance sheet on December 31, 2011.
8-5 P Company purchased 96,000 shares of the common stock of S Company for $1,200,000 on January 1, 2007, when S’s stockholders’ equity consisted of $5 par value, Common Stock at $600,000 and Retained Earnings of $800,000. The difference between cost and book value relates to goodwill.
On January 2, 2010, S Company purchased 20,000 of its own shares from noncontrolling interests for cash of $300,000 to be held as treasury stock. S Company’s retained earnings had increased to $1,000,000 by January 2, 2010. S Company uses the cost method in regards to its treasury stock and P Company uses the equity method to account for its investment in S Company.
Required:
Prepare all determinable workpaper entries for the preparation of consolidated statements on December 31, 2010.
8-6 Penner Company acquired 80% of the outstanding common stock of Solk Company on January 1, 2008, for $396,000. At the date of purchase, Solk Company had a balance in its $2 par value common stock account of $360,000 and retained earnings of $90,000. On January 1, 2010, Solk Company issued 45,000 shares of its previously unissued stock to noncontrolling stockholders for $3 per share. On this date, Solk Company had a retained earnings balance of $152,000. The difference between cost and book value relates to subsidiary land. No dividends were paid in 2010. Solk Company reported income of $30,000 in 2010.
Required:
A. Prepare the journal entry on Penner’s books to record the effect of the issuance assuming the equity method.
B. Prepare the eliminating entries needed for the preparation of a consolidated statements workpaper on December 31, 2010, assuming the equity method.
8-7 Petty Company acquired 85% of the common stock of Selmon Company in two separate cash transactions. The first purchase of 108,000 shares (60%) on January 1, 2009, cost $735,000. The second purchase, one year later, of 45,000 shares (25%) cost $330,000. Selmon Company’s stockholders’ equity was as follows:
December 31 December 31
2009 2010
Common Stock, $5 par $ 900,000 $ 900,000
Retained Earnings, 1/1 262,000 302,000
Net Income 69,000 90,000
Dividends Declared, 9/30 (30,000) (38,000)
Retained Earnings, 12/31 301,000 354,000
Total Stockholders’ Equity, 12/31 $1,201,000 $1,254,000
On April 1, 2010, after a significant rise in the market price of Selmon Company’s stock, Petty Company sold 32,400 of its Selmon Company shares for $390,000. Selmon Company notified Petty Company that its net income for the first three months was $22,000. The shares sold were identified as those obtained in the first purchase. Any difference between cost and book value relates to goodwill. Petty uses the partial equity method to account for its investment in Selmon Company.
Required:
A. Prepare the journal entries Petty Company will make on its books during 2009 and 2010 to account for its investment in Selmon Company.
B. Prepare the workpaper eliminating entries needed for a consolidated statements workpaper on December 31, 2010.
Short Answer
1. A parent’s ownership percentage in a subsidiary may change for several reasons. Identify three reasons the ownership percentage may change.
2. A parent company’s equity interest in a subsidiary may change as the result of the issuance of additional shares of stock by the subsidiary. Describe the affect on the parent’s investment account when the new shares are (a) purchased ratably by the parent and noncontrolling shareholders or (b) entirely by the noncontrolling shareholders.
Short Answer Question from the Textbook
1. Identify three types of transactions that result in a change in a parent company’s ownership interest in its subsidiary.
2. Why is the date of acquisition of subsidiary stock important under the purchase method?
3. When a parent company has obtained control of a subsidiary through several purchases and subsequently sells a portion of its shares in the subsidiary, how is the carrying value of the shares sold determined?
4. When a parent company that records its investment using the cost method during a fiscal year sells a portion of its investment, explain the correct accounting for any differences between selling price and recorded values.
5. ABC Corporation purchased 10,000 shares(80%) of EZ Company at $35 per share and sold them several years later for $35 per share. The consolidated income statement reports a loss on the sale of this investment. Explain.
6. Explain how a parent company that owns less than100% of a subsidiary can purchase an entire new is-sue of common stock directly from the subsidiary.
7. When a subsidiary issues additional shares of stock to noncontrolling stockholders and such issuance results in an increase in the book value of the parent’s share of the subsidiary’s equity, how should the increase be reflected in the financial statements? What if it results in a decrease?
8. P Company holds an 80% interest in S Company. Determine the effect (that is, increase, decrease, no change, not determinable) on both the total book value of the noncontrolling interest and the noncontrolling interest’s percentage of ownership in the net assets of S Company for each of the following situations:
a. P Company acquires additional shares directly from S Company at a price equal to the book value per share of the S Company stock immediately prior to the issuance.
b. S Company acquires its own shares on the open market. The cost of these shares is less than their book value.
c. Assume the same situation as in (b) except that the cost of the shares is greater than their book value.
d. P Company and a noncontrolling stockholder each acquire 100 shares directly from S Com-pany at a price below the book value per share.
Business Ethics Question from Textbook
During a recent review of the quarterly financial statements and supporting ledgers, you noticed several un-usual journal entries. While the dollar amounts of the journal entries were not large, there did not appear to be supporting documentation. You decide to bring the matter to the attention of your immediate supervisor. After you mentioned the issue, the supervisor calmly stated that the matter would be looked into and that you should not worry about it.1.You feel a bit uncomfortable about the situation. What is your responsibility and what action, if any, should you take?
Chapter 10
Insolvency – Liquidation and Reorganization
Multiple Choice
1. A corporation that is unable to pay its debts as they become due is:
a. bankrupt.
b. overdrawn.
c. insolvent.
d. liquidating.
2. When a business becomes insolvent, it generally has three possible courses of action. Which of the following is not one of the three possible courses of action?
a. The debtor and its creditors may enter into a contractual agreement, outside of formal bankruptcy proceedings.
b. The debtor continues operating the business in the normal course of the day-to-day operations.
c. The debtor or its creditors may file a bankruptcy petition, after which the debtor is liquidated under Chapter 7.
d. The debtor or its creditors may file a petition for reorganization under Chapter 11.
3. Assets transferred by the debtor to a creditor to settle a debt are transferred at:
a. book value of the debt.
b. book value of the transferred assets.
c. fair market value of the debt.
d. fair market value of the transferred assets.
4. A composition agreement is an agreement between the debtor and its creditors whereby the creditors agree to:
a. accept less than the full amount of their claims.
b. delay settlement of the claim until a latter date.
c. force the debtor into a liquidation.
d. accrue interest at a higher rate.
5. In a troubled debt restructuring involving a modification of terms, the debtor’s gain on restructuring:
a. will equal the creditor’s gain on restructuring.
b. will equal the creditor’s loss on restructuring.
c. may not equal the creditor’s gain on restructuring.
d. may not equal the creditor’s loss on restructuring.
6. A bankruptcy petition filed by a firm is a:
a. chapter petition.
b. involuntary petition.
c. voluntary petition.
d. chapter 11 petition.
7. When a bankruptcy court enters an “order for relief” it has:
a. accepted the petition.
b. dismissed the petition.
c. appointed a trustee.
d. started legal action against the debtor by its creditors.
8. An involuntary petition filed by a firm’s creditors whereby there are twelve or more creditors must be signed by at least:
a. two creditors.
b. three creditors.
c. five creditors.
d. six creditors.
9. The duties of the trustee include:
a. appointing creditors’ committees in liquidation cases.
b. approving all payments for debts incurred before the bankruptcy filing.
c. examining claims and disallowing any that are improper.
d. calling a meeting of the debtor’s creditors.
10. Which of the following items is not a specified priority for unsecured creditors in a bankruptcy petition?
a. Administration fees incurred in administering the bankrupt’s estate.
b. Unsecured claims for wages earned within 90 days and are less than $4,650 per employee.
c. Unsecured claims of governmental units for unpaid taxes.
d. Unsecured claims on credit card charges that do not exceed $3,000.
11. Which statement with respect to gains and losses on troubled debt restructuring is correct?
a. Creditors losses on restructuring are extraordinary.
b. Debtor’s gains and losses on asset transfers and debtor’s gains on restructuring are combined and treated as extraordinary.
c. Debtor gains and creditor losses on restructuring are extraordinary, if material in amount.
d. Debtor losses on asset transfers and debtor gains on restructuring are reported as a component of net income.
12. When fresh-start reporting is used according to Statement of Position (SOP) 90-7, the implication is that a new firm exists. Which of the following statements is not correct about fresh-start accounting?
a. Assets are reported at fair values.
b. Beginning retained earnings is reported at zero.
c. The fair value of the assets must be less than the post liabilities and allowed claims.
d. The original owners must own less than 50% of the voting stock after reorganization.
13. A Statement of Affairs is a report designed to show:
a. an estimated amount that would be received by each class of creditor’s claims in the event of liquidation.
b. a balance sheet prepared on the going-concern assumption.
c. assets and liabilities classified as current and noncurrent.
d. assets and liabilities reported at their current book values.
14. When a secured claim is not fully settled by the selling of the underlying collateral, the remaining portion:
a. of the claim cannot be collected by the creditor.
b. remains as a secured claim.
c. is classified as an unsecured priority claim.
d. is classified as an unsecured nonpriority claim.
15. Layne Corporation entered into a troubled debt restructuring agreement with their local bank. The bank agreed to accept land with a carrying amount of $360,000 and a fair value of $540,000 in exchange for a note with a carrying amount of $765,000. Ignoring income taxes, what amount should Layne report as a gain on its income statement?
a. $0.
b. $180,000.
c. $225,000.
d. $405,000.
16. The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by Nen Co. to Baker Co. in full settlement of Nen’s liability to Baker:
Carrying amount of liability settled $450,000
Carrying amount of real estate transferred $300,000
Fair value of real estate transferred $330,000
What amount should Nen report as ordinary gain (loss) on transfer of real estate?
a. $(30,000).
b. $30,000.
c. $120,000.
d. $150,000.
17. The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by Nen Co. to Baker Co. in full settlement of Nen’s liability to Baker:
Carrying amount of liability settled $450,000
Carrying amount of real estate transferred $300,000
Fair value of real estate transferred $330,000
What amount should Baker report as a gain or (loss) on restructuring?
a. $120,000 ordinary loss.
b. $120,000 extraordinary loss.
c. $150,000 ordinary loss.
d. $150,000 extraordinary loss.
18. Dobler Corporation was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured claims will be paid at the rate of thirty cents on the dollar. Carson holds a note receivable from Dobler for $75,000 collateralized by an asset with a book value of $50,000 and a liquidation value of $25,000. The amount to be realized by Carson on this note is:
a. $25,000.
b. $40,000.
c. $50,000.
d. $75,000.
19. Bad Company filed a voluntary bankruptcy petition, and the statement of affairs reflected the following amounts:
Estimated
Assets Book Value Current Value
Assets pledged with fully secured creditors $ 900,000 $ 1,110,000
Assets pledged partially secured creditors 540,000 360,000
Free assets 1,260,000 960,000
$2,700,000 $2,430,000
Liabilities
Liabilities with priority $ 210,000
Fully secured creditors 780,000
Partially secured creditors 600,000
Unsecured creditors 1,620,000
$3,210,000
Assume the assets are converted to cash at their estimated current values. What amount of cash will be available to pay unsecured nonpriority claims?
a. $720,000.
b. $840,000.
c. $960,000.
d. $1,080,000.
20. The final settlement with unsecured creditors is computed by dividing:
a. total net realizable value by total unsecured creditor claims.
b. net free assets by total secured creditor claims.
c. total net realizable value by total secured creditor claims.
d. net free assets by total unsecured creditor claims.
21. Dodge Corporation entered into a troubled debt restructuring agreement with their local bank. The bank agreed to accept land with a carrying value of $200,000 and a fair value of $300,000 in exchange for a note with a carrying amount of $425,000. Ignoring income taxes, what amount should Dodge report as a gain on its income statement?
a. $0.
b. $100,000.
c. $125,000.
d. $225,000.
22. The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by Drier Co. to Cole Co. in full settlement of Drier’s liability to Cole:
Carrying amount of liability settled $375,000
Carrying amount of real estate transferred $250,000
Fair value of real estate transferred $275,000
What amount should Drier report as ordinary gain (loss) on transfer of real estate?
a. $(25,000).
b. $25,000.
c. $100,000.
d. $125,000.
23. The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by Drier Co. to Cole Co. in full settlement of Drier’s liability to Cole:
Carrying amount of liability settled $375,000
Carrying amount of real estate transferred $250,000
Fair value of real estate transferred $275,000
What amount should Cole report as a gain or (loss) on restructuring?
a. $100,000 ordinary loss.
b. $100,000 extraordinary loss.
c. $125,000 ordinary loss.
d. $125,000 extraordinary loss.
24. Poor Company filed a voluntary bankruptcy petition, and the settlement of affairs reflected the following amounts:
Estimated
Assets Book Value Current Value
Assets pledged with fully secured creditors $ 450,000 $ 555,000
Assets pledged partially secured creditors 270,000 180,000
Free assets 630,000 480,000
$1,350,000 $1,215,000
Liabilities
Liabilities with priority $ 105,000
Fully secured creditors 390,000
Partially secured creditors 300,000
Unsecured creditors 810,000
$1,605,000
Assume the assets are converted to cash to their estimated current values. What amount of cash will be available to pay unsecured nonpriority claims?
a. $360,000.
b. $420,000.
c. $480,000.
d. $540,000.
25. Dooley Corporation was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured claims will be paid at the rate of thirty cents on the dollar. Cerner holds a note receivable from Dooley for $90,000 collateralized by an asset with a book value of $60,000 and a liquidation value of $30,000. The amount to be realized by Cerner on this note is:
a. $30,000.
b. $48,000.
c. $60,000.
d. $90,000.
Problems
10-1 On January 1, 2011, Bargain Mart owed City Bank $1,600,000, under an 8% note with three years remaining to maturity. Due to financial difficulties, Bargain Mart was unable to pay the previous year’s interest. City Bank agreed to settle Bargain Mart’s debt in exchange for land having a fair market value of $1,310,000. Bargain Mart purchased the land in 2003 for $1,000,000.
Required:
Prepare the journal entries to record the restructuring of the debt by Bargain Mart.
10-2 On January 1, 2010, Gannon, Inc. owed BancCorp $12 million on a 10% note due December 31, 2011. Interest was last paid on December 31, 2008. Gannon was experiencing severe financial difficulties and asked BancCorp to modify the terms of the debt agreement. After negotiation BancCorp agreed to:
- Forgive the interest accrued for the year just ended,
- Reduce the remaining two years interest payments to $900,000 each and delay the first payment until December 31, 2011, and
- Reduce the unpaid principal amount to $9,600,000.
Required:
Prepare the journal entries for Gannon, Inc. necessitated by the restructuring of the debt at (1) January 1, 2010, (2) December 31, 2011, and (3) December 31, 2012.
10-3 On January 2, 2011 Stevens, Inc. was indebted to First Bank under a $12 million, 10% unsecured note. The note was signed January 2, 2005, and was due December 31, 2014. Annual interest was last paid on December 31, 2009. Stevens negotiated a restructuring of the terms of the debt agreement due to financial difficulties.
Required:
Prepare all journal entries for Stevens, Inc. to record the restructuring and any remaining transactions relating to the debt under each independent assumption.
A. First Bank agreed to settle the debt in exchange for land which cost Stevens $8,500,000 and has a fair market value of $10,000,000.
B. First Bank agreed to (1) forgive the accrued interest from last year (2) reduce the remaining four interest payments to $600,000 each, and (3) reduce the principal to $9,000,000.
10-4 On December 31, 2011, Community Bank agreed to restructure a $900,000, 8% loan receivable from Neer Corporation because of Neer’s financial problems. At December 31 there was $36,000 of accrued interest for a six-month period. Terms of the restructuring agreement are as follows:
- Reduce the loan from $900,000 to $600,000;
- Extend the maturity date by 2 years from December 31, 2011 to December 31, 2013;
- Reduce the interest rate on the loan from 8% to 6%.
Present value assumptions:
Present value of $1 for 2 years at 6% = 0.8900
Present value of $1 for 2 years at 8% = 0.8573
Present value of an ordinary annuity of $1 for 2 years at 6% = 1.8334
Present value of an ordinary annuity of $1 for 2 years at 8% = 1.7833
Required:
Compute the gain or loss that will be reported by Community Bank.
Donnelly Corporation incurred major losses in 2010 and entered into voluntary Chapter 7 bankruptcy in the early part of 2011. By June 1, all assets were converted into cash, the secured creditors were paid, and $150,000 in cash was left to pay the remaining claims as follows.
Accounts payable $ 48,000
Claims prior to the trustee’s appointment 21,000
Property taxes payable 18,000
Wages payable (all under $4,650 per employee) 54,000
Unsecured note payable 60,000
Accrued interest on the note payable 6,000
Administrative expenses of the trustee 30,000
Total $237,000
Required:
Classify the claims by their Chapter 7 priority ranking, and analyze which amounts will be paid and which amounts will be written off.
10-5 Davis Corporation filed a petition under Chapter 7 of the U.S. Bankruptcy Act on June 30, 2011. Data relevant to its financial position as of this date are:
Estimated Net
Book Value Realizable Values
Cash $ 3,000 $ 3,000
Accounts receivable-net 72,000 48,000
Inventories 60,000 72,000
Equipment-net 165,000 87,000
Total assets $300,000 $210,000
Accounts payable $ 72,000
Rent payable 21,000
Wages payable 45,000
Note payable plus accrued interest 96,000
Capital stock 180,000
Retained earnings (deficit) (120,000)
Total liabilities and equity $300,000
Required:
A. Prepare a statement of affairs assuming that the note payable and interest are secured by
a mortgage on the equipment and that wages are less than $4,650 per employee.
B. Estimate the amount that will be paid to each class of claims if priority liquidation expenses including trustee fees are $24,000 and estimated net realizable values are actually realized.
10-6 The following data are taken from the statement of affairs of Mitchell Company.
Assets pledged with fully secured creditors
(Realizable value, $635,000) $800,000
Assets pledged with partially secured creditors
(realizable value, $300,000) 365,000
Free assets (Realizable value, $340,000) 535,000
Fully secured creditor claims 316,000
Partially secured creditor claims 400,000
Unsecured creditor claims with priority 100,000
General unsecured creditor claims 1,165,000
Required:
Compute the amount that will be paid to each class of creditor.
10-8 On February 1, 2011, Hilton Company filed a petition for reorganization under the bankruptcy statutes. The court approved the plan on September 1, 2011, including the following provisions:
1. Accrued expenses of $21,930, representing priority items, are to be paid in full.
2. Hilton Company is to exchange accounts receivable in the face amount of $138,000 and an allowance for uncollectible accounts of $29,200 for the full settlement of $198,600 owed on open account to one of its major unsecured creditors. The estimated fair value of the receivables is $104,000.
3. Unsecured creditors of open accounts amounting to $91,600 and paid 40 cents on the dollar in full settlement.
4. Hilton Company’s only other major unsecured creditor agreed to a five-year extension of the $500,000 principal owed him on a 10% note payable. Accrued interest on the note on September 1, 2011, amounts to $45,000, one-third of which is to be paid in cash and the remainder canceled. In addition, no interest is to be charged during the remaining five years to maturity of the note.
Required:
Prepare journal entries on the books of Hilton Company to give effect to the preceding provisions.
Short Answer
1. The Bankruptcy Reform Act assigns priorities to certain unsecured claims, and each rank must be satisfied in full before the next–lower rank is paid. Identify the five categories of unsecured creditor claims.
2. Creditors are classified by law as either secured or unsecured. Distinguish among fully secured, partially secured, and unsecured creditors.
Short Answer Questions from the Textbook
1. List the primary types of contractual agreements between a debtor company and its creditors and briefly explain what is involved in each of them.
2. Distinguish between a voluntary and involuntary bankruptcy petition.
3. Distinguish among fully secured, partially se-cured, and unsecured claims of creditors.
4. Five priority categories of unsecured claims must be paid before general unsecured creditors are paid. Briefly describe what makes up each category.
5. What are “dividends” in a bankruptcy proceeding?
6. For each of the following debt restructurings, indicate whether a gain is recognized and, if so, how the gain is measured and reported. (a)Transfer of assets by the debtor to the creditor.(b)Grant of an equity interest by the debtor to the creditor.(c)Modification of the terms of the payable.
7. What is the purpose of a Statement of Affairs?
8. One of the officers of a corporation that had just received a discharge in bankruptcy said, “Good, now we don’t owe anyone.” Is he correct?
9. What are the duties of a trustee in a liquidation proceeding?
10. What is the purpose of a combining work paper prepared by a trustee?
11. What is the purpose of a realization and liquidation account?
Business Ethics Question from Textbook
From an ethical perspective, some believe that it is never justifiable for an individual or business to declare bankruptcy. Others believe that some actions are appropriate only in extreme circumstances. Without question, as stated in the Journal of Accountancy, November 2005,page 51, “the ease with which debtors have been able to walk away from debt has frustrated creditors for years.”
1. Describe the differences between Chapter 7 (liquidations) and Chapter 11 (reorganizations)from an ethical standpoint. Who is most likely to be hurt by a Chapter 7 bankruptcy?
2. Discuss the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Do you believe the changes wrought by this act will serve to protect creditors?
3. The Protection Act of 2005 requires individuals, but not businesses, to undergo a “means” test before they can seek Chapter 7 relief. Do you believe this change should be applied to businesses as well? Why or why not?
4. Do you think that you would ever resort to filing for bankruptcy relief yourself? Why or why not?
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ACC 410 Week 7 Quiz – Strayer
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Quiz 5 Chapter 8 and 9
Governmental Activities - Long-Term Obligations
TRUE/FALSE (CHAPTER 8)
1. Unlike individuals and businesses, governments cannot seek protection under the Federal Bankruptcy Code.
2. General obligation debt is the obligation of the government at large and is thereby backed by the government’s general credit and revenue-raising powers.
3. Revenue debt is secured only by designated revenue streams.
4. When the proceeds of general long-term debt are received by a governmental fund, rather than reporting a liability on the balance sheet, the inflow of resources is treated as another financing source on the operating statement.
5. Per GASB Statement No. 34, governments generally should report their bonds, notes, and comparable long-term obligations at present value.
6. A government is prohibited from ever recognizing bond anticipation notes (BANs) as long-term obligations.
7. Tax anticipation notes (TANs) must be reported as current liabilities of the governmental funds in which the related revenues will be reported, as well as in the government-wide statements.
8. Governments may enter into operating leases, but may not enter into capital leases.
9. In accounting for operating leases, the rental payments should be recognized in a governmental fund and as expenses in the government-wide statement of activities in the periods in which they apply.
10. Because they are not obligations of the government at large, revenue bonds are usually not subject to voter approvals or other forms of voter oversight.
11. Although governments may elect to report conduit obligations in their government-wide and proprietary fund statements, the GASB has ruled that note disclosure is sufficient.
MULTIPLE CHOICE (CHAPTER 8)
1. A governmental entity that is unable to satisfy claims against it
a) Is prohibited from filing bankruptcy.
b) May not seek protection under the Federal Bankruptcy Code.
c) May seek protection under the Federal Bankruptcy Code, using a special section directed to governments.
d) Is automatically placed under the jurisdiction of a higher level of government.
2. To seek protection under the Federal Bankruptcy Code, a governmental entity must
a) Be unable to provide the level of services it has provided in the recent past.
b) Be unable to pay its debt in its current year.
c) Have budgeted expenditures in excess of revenues.
d) Both (b) and (c).
3. General long-term debt of a governmental entity includes
a) All future financial obligations.
b) All future financial obligations that result from past transactions.
c) All future financial obligations that result from past transactions for which the government has already received a benefit.
d) All future financial obligations that are backed by the government’s general credit and revenue raising power and that result from past transactions for which the government has already received a benefit.
4. In governmental fund-type financial statements, the assets acquired under a capital lease would be reported at
a) They are not reported in the fund financial statements.
b) The present value of the required lease payments.
c) The undiscounted total of required lease payments.
d) The total of all payments required under the lease.
5. In the government-wide financial statements, the assets acquired under a capital lease would be reported at
a) They are not reported in the fund financial statements.
b) The present value of the required lease payments.
c) The undiscounted total of required lease payments.
d) The total of all payments required under the lease.
6. In the government-wide financial statements, long-term liabilities of governmental entities are generally reported at
a) Face value.
b) Face value plus (minus) unamortized premium (discount).
c) Present value.
d) Market value of the obligation.
7. Pulling County has a December 31 fiscal year-end. In November, the County borrowed $8 million from a local bank, due in six months at 6% interest, to finance general government operations. The county pledges property tax revenues to secure the loan. At year-end, how should the bank note be displayed in the fund financial statements?
a) Nothing in the General Fund; Nothing in a Schedule of Changes in Long-Term Obligations.
b) General Fund--$8 million in Other Financing Sources; Nothing in a Schedule of Changes in Long-Term Obligations.
c) General Fund--$8 million in Other Financing Sources; $8 million in a Schedule of Changes in Long-Term Obligations.
d) General Fund--$8 million in Notes Payable; Nothing in a Schedule of Changes in Long-Term Obligations.
8. Governmental entities enter into capital leases, rather than conventional buy and borrow arrangements for which of the following reasons? Capital leases
a) May be an effective means of circumventing debt limitations.
b) Are less expensive overall than buy and borrow arrangements.
c) Reduce the cash outflows related to the asset acquisition.
d) Have less impact on fund balance than buy and borrow arrangements.
9. New City entered into a lease agreement for several new dump trucks to be used in general government activities. Assuming the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, acquisition of these dump trucks would require entries in which of the following funds and/or schedules?
a) General Fund only.
b) General Fund AND Schedule of Changes in Long-Term Debt Obligations.
c) General Fund AND Schedule of General Fixed Assets.
d) General Fund, Schedule of General Fixed Assets AND Schedule of General Long-Term Debt Obligations.
10. Southwest City enters into a lease agreement that contains a nonappropriation clause. The clause
a) Has been held by courts in 26 states to effectively cancel the lease.
b) Stipulates that the yearly lease payment must be appropriated by the City Council each year.
c) Prohibits the city from replacing leased property with similar property.
d) Permits the city to lease at lower rates than would be possible without the presence of the clause.
11. Why would a government issue revenue bonds (which generally are issued at a higher rate of interest than general obligation bonds) even though the government knows that if revenues from the project are not sufficient to cover principal and interest payments, the government will use resources from general government activities to fund the principal and interest payments?
a) Revenue bonds may not require approval of the voters.
b) Revenue bonds may not be considered in legal debt limitations.
c) Revenue bonds may permit the interest costs to be passed on to the users.
d) All of the above.
12. Which of the following funds is most likely to receive the proceeds of revenue bonds?
a) General Fund.
b) Capital Project Fund.
c) City Utility Enterprise Fund.
d) Highway Department Special Revenue Fund.
13. Sun City is located in Hailey County. Sun Valley School District encompasses all of Sun City and some of Hailey County. Property in Sun City is assessed at $400 million; property in Hailey County is assessed at $800 million; property in Sun Valley School District is assessed at $600 million. The total debt outstanding for Sun City is $30 million; Hailey County is $50 million; Sun Valley School District is $45 million. Compute the amount of direct and overlapping debt for Sun City.
a) $ 30 million.
b) $ 75 million.
c) $ 85 million.
d) $125 million.
14. Obligations of property owners within a particular government for their proportionate share of debts of other governments with whom they share boundaries is
a) Overlapping debt.
b) Conduit debt.
c) Committed debt.
d) Moral obligation debt.
15. Overlapping debt should be reported in which of the following ways?
a) It should be reported in the Schedule of Changes in Long-Term Obligations.
b) It should be disclosed as a note to the financial statements.
c) It should be reported in a schedule in the statistical section of the annual report.
d) It should not be reported in the financial statements of the reporting entity.
16. An obligation issued in the name of a government on behalf of a nongovernmental entity is called
a) Overlapping debt.
b) Conduit debt.
c) Committed debt.
d) Moral obligation debt.
17. The City of Pocahontas issued $20 million in general obligation bonds at par. The City loaned the proceeds to Domsee Fish Processors to expand the size of their facility, which would allow Domsee to hire additional workers. The loan payments from Domsee to the City are established to match the principal and interest payments on the bond issue. The bonds are payable exclusively from the loan repayments by Domsee. The bonds are secured by the additional plant facilities built by Domsee. Where should the City report the bonds on the annual financial report?
a) In the government-wide financial statements.
b) In the notes to the financial statements.
c) In the proprietary fund financial statements.
d) In any of the above ways.
18. Industrial development bonds are issued in the name of a government with the proceeds used to attract private businesses to a community. Which of the following is a true statement about industrial development bonds?
a) The proceeds are used by the private corporations and principal and interest payments are made by the private corporation. The government backs the bonds in the event of default by the private corporation.
b) The proceeds are used by the private corporations and principal and interest payments are made by the private corporation. The government does not back the bonds in the event of default by the private corporation.
c) The proceeds are used by the government to build infrastructure to service private corporations with principal and interest payments made by the government out of the additional tax revenues received from the private corporation.
d) The proceeds are used by the government to build infrastructure to service private corporations with principal and interest payments made by the private corporation in lieu of property taxes.
19. The Southside City has $95 million of debt recorded in its Schedule of Changes in Long-Term Obligations, made up of $60 million of general obligation debt, $2 million of compensated absences payable, $8 million claims and judgments, and $25 million of obligations under capital leases. The State limits the amount of general obligation debt that can be issued by a City to 20% of the assessed value of taxable property. The assessed value of property in Southside City is $500 million. The amount of legal debt margin for Southside City is
a) $ 5 million.
b) $ 40 million.
c) $ 60 million.
d) $100 million.
20. A state created a Housing Authority to provide financing for low-income housing. The Authority issues bonds and uses the proceeds for that purpose. Currently the Authority has outstanding $200 million in bonds backed by the State’s promise to cover debt service shortages should they arise. The State Constitution specifically limits the State to no more than $2 million in general obligation debt. How can the state officials defend the $200 million in debt outstanding?
a) The debt is not general obligation debt.
b) The State is only morally obligated on the debt.
c) The debt is the debt of the Authority not the State.
d) All of the above.
21. Debt that is issued by one entity but backed by the promise of another entity to make up any debt service deficiency is
a) Committed debt.
b) Overlapping debt.
c) Conduit debt.
d) Moral obligation debt.
22. A City entered into a long-term capital lease for some office equipment. Assuming the city maintains its books and records in a manner to facilitate preparation of fund financial statements, what entry would be made in the General Fund to record this event?
a) Debit Expenditures; Credit Other Financing Sources—Leases.
b) Debit Equipment; Credit Other Financing Sources—Leases.
c) Debit Equipment; Credit Leases Payable.
d) No entry since it this event had no impact on financial resources.
23. Which of the following is likely to be used by a bond-rating agency to rate the general obligation bonds of a governmental entity?
a) A review of the Basic Financial Statements.
b) Consideration of economic statistics such as unemployment rates.
c) Consideration of legal debt margin.
d) All of the above.
PROBLEMS (CHAPTER 8)
1. During the fiscal year ended 6/30/02 the City of Hartsville engaged in the following transactions. Assuming the city maintains its books and records in a manner that facilitates the preparation of its fund financial statement, prepare all necessary journal entries that the City should make for each transaction. Clearly indicate in which fund the entry is being made. If no entry is required, write ‘No Entry Required’.
a) In July 2001, the City issued $20 million in 6% general obligation term bonds to finance construction of a new building to house City offices. The bonds were issued at a premium of $200,000.
b) In September, 2001 the City transferred $1 million from the General Fund to cover the $.6 million principal and $.4 million interest payments due that month on debt issued in previous years.
c) In September, 2001 the City paid the principal and interest due from (b).
d) In June 2002, the City transferred $2 million from the General Fund to cover the $1.2 million interest payment and the $.8 million principal payment due in July on the bonds issued in July 2001.
2. A city enters into the following transactions during the current year. Assuming that the City maintains its books and records in a manner that facilitates the preparation of its fund financial statements, prepare entries to record the following transactions. Indicate the fund in which the entry is being made.
a) The City issues $5 million of tax anticipation notes, backed by property taxes that will be recorded in the General Fund.
b) The City issues $2 million of 90-day bond anticipation notes that it expects to roll over into long-term bonds.
c) The City repays the $5 million in (a)
d) The City successfully issues $20 million in long-term bonds and uses some of the proceeds to repay the notes in (c).
3. Young County engaged in the following debt-related transactions during the year. Assuming that Young County maintains its books and records in a manner that facilitates the preparation of its government-wide financial statement, prepare the necessary journal entries to record these transactions. Clearly indicate if debt is long-term or short-term (current). If no entry is required, write ‘No Entry Required’.
a) The County issued $5 million in 6%, 20-year bonds for $5,117,466 to yield 5.8 % to the investor.
b) The County made the first semi-annual interest payment on the bonds in (a). Assume an amount of $1,594 for amortization of the premium.
c) The County issues $3 million in 6% demand bonds for which it does not enter into a take-out agreement.
d) In anticipation of property tax revenues being received several months after fiscal year-end, the County borrows $2 million from a local bank payable in nine months.
e) The County leased a new machine for its County Highway Department in an arrangement that qualified as a capital lease. The present value of the minimum lease payments is $150,000, which approximates the fair value of the machine.
ESSAYS (CHAPTER 8)
1. Identify and define ‘conduit debt.’ What is/are the current reporting standards for conduit debt issued by governmental entities. Do you approve or disapprove of the use of conduit debt by governmental entities? Justify your answer. Do you approve or disapprove of the current reporting standards related to conduit debt? Why?
2. Generally accepted accounting principles require many assets to be reported at market values. However, few liabilities are reported at market value. What are the arguments for and against reporting liabilities at market value?
3. Why is information about long-term debt important to financial statement users?
Chapter 9
Business-Type Activities and Internal Services
TRUE/FALSE (CHAPTER 9)
1. In both the fund statements and the government-wide statements, business-type activities and internal services are on a full accrual basis, and their measurement focus is on all economic resources.
2. The operating statement required as one of the three basic financial statements for proprietary funds is called the statement of revenues, expenditures, and changes in fund net assets.
3. The amounts reported in proprietary fund statements are generally the same as those reported in the government-wide statements because both sets of statements are on a full accrual basis of accounting.
4. Governments are required to prepare a statement of cash flows for proprietary funds, but not for governmental funds.
5. GASB Statement No. 34 mandates that governments report their cash flows from operations using the indirect method.
6. The FASB mandates entities report their cash flows from operations using the direct method.
7. Governments generally do not have to get formal legislative approval for enterprise fund budgets or incorporate them into their accounting systems.
8. In accounting for closure and postclosure landfill costs in an enterprise fund, a government does not necessarily have to “fund” the costs during the landfill’s useful life; it merely has to report both an expense and a liability for them.
9. The revenues of an internal service fund are the expenditures and expenses of other funds of that government.
10. The proprietary fund statements do not include a total column for all proprietary funds.
MULTIPLE CHOICE (CHAPTER 9)
1. The appropriate measurement focus for the business-type activities of the City of Rockford is
a) Current financial resources.
b) Economic resources.
c) Both (a) and (b).
d) None of the above.
2. Which of the following is not a proprietary fund?
a) City Water Enterprise Fund.
b) City Motor Pool Internal Service Fund.
c) City Hall Capital Project Fund.
d) None of the above. They are all proprietary funds.
3. The appropriate basis of accounting for the proprietary funds of a governmental entity is
a) Cash basis.
b) Modified accrual.
c) Full accrual.
d) None of the above.
4. Which of the following is NOT a valid reason for governmental entities to engage in business-type activities?
a) The activities provide resources that would otherwise have to be raised in other ways.
b) The entity can provide the services more cheaply or efficiently than can a private firm.
c) The entity wants to subsidize the activity.
d) All of the above are valid reasons for governments to engage in business-type activities.
5. Which of the following is NOT a budget typically prepared for an activity accounted for in a proprietary fund?
a) Appropriation budget.
b) Cash budget.
c) Capital budget.
d) Flexible budget.
6. A proprietary fund of a governmental entity has donor-restricted assets on its balance sheet. Which of the following best describes where and how those assets will generally be displayed?
a) In a separate restricted asset category on the balance sheet.
b) Intermingled with other assets on the balance sheet.
c) Intermingled with other assets on the balance sheet but footnoted.
d) In a separate restricted fund.
Use the following information to answer #7 and #8.
The City of Brockton voted to establish an internal service fund to account for its printing services. The City transferred $500,000 cash from the General Fund to the newly created internal service fund.
7. The appropriate entry in the General Fund to account for this transfer would be a credit to cash for $500,000 and a debit for $500,000 to
a) Operating Transfer Out.
b) Nonreciprocal Transfer Out.
c) Expenditures.
d) Investment in Internal Service Fund.
8. The appropriate entry in the proprietary fund is a debit to cash for $500,000 and a credit for $500,000 to
a) Operating transfer in.
b) Nonreciprocal Transfer In.
c) Capital Contribution (Revenues).
d) Investment provided by the General Fund.
9. The City issued $2 million in general obligation bonds to acquire a fleet of vehicles for the Central Motor Pool Internal Service Fund At the date of issue, the appropriate entry in the proprietary fund is a $ 2 million debit to cash and a $2 million credit to
a) Bonds Payable.
b) Contribution Capital (Revenues).
c) Contributed Capital (Revenues) AND show $2 million as an addition to the Schedule of Changes in Long-Term Obligations.
d) No entry in the proprietary fund. Show $2 million as an addition to the Schedule of Changes in Long-Term Obligations.
10. Which of the following is NOT a rationale/justification for reporting the business-type activities of a government in a separate fund?
a) Legally restricted resources should be reported apart from those that are unrestricted.
b) Separate funds facilitate budgeting, planning, and controlling.
c) Separate funds facilitate the assessment of performance of the activity.
d) Separate funds facilitate the assessment of fiscal status of the activity.
11. Which of the following are required basic statements of a proprietary fund?
a) Balance Sheet, Income Statement, Statement of Cash Flows.
b) Balance Sheet, Statement of Revenues, Expenses, and Changes in Equity, and a Statement of Cash Flows.
c) Statement of Net Assets, Statement of Revenues, Expenses, and Changes in Fund Net Assets.
d) Statement of Net Assets, Statement of Revenues, Expenses, and Changes in Fund Net Assets, and Statement of Cash Flows.
12. Franklin County operates a solid waste landfill that is accounted for in an enterprise fund. The County calculated this year’s portion of the total closure and postclosure costs associated with the landfill to be $300,000. The entry(ies) to record this cost should be
a) Debit Landfill Expense $300,000; Credit Liability for Landfill Costs $300,000.
b) Debit Landfill Expense $300,000; Credit Liability for Landfill Costs $300,000 AND include an addition of $300,000 on the Schedule of Changes in Long-Term Obligations.
c) Show only an addition of $300,000 on the Schedule of Changes in Long-Term Obligations.
d) No entry in any fund; No entry in the Schedule of Changes in Long-Term Liabilities.
13. Marsh Lake County operates a solid waste landfill that is accounted for in a governmental fund. The County calculated this year’s portion of the total closure and postclosure costs associated with the landfill to be $600,000. The entry to record this cost should be
a) Debit Landfill Expenditure $600,000; Credit Liability for Landfill Costs $600,000.
b) Debit Landfill Expenditure $600,000; Credit Liability for Landfill Costs $600,000 AND include $600,000 as an addition on the Schedule of Changes in Long-Term Obligations.
c) No entry in the fund; include $600,000 on the Schedule of Changes in Long-Term Obligations.
d) No entry in any fund or Schedule.
14. Over the long run, governmental internal service funds are intended to
a) Generate revenues sufficient to cover the full costs of providing services.
b) Generate revenues sufficient to cover the full costs of providing services and to earn a profit.
c) Generate revenues sufficient to cover the current operating costs of providing services.
d) Generate revenues sufficient to cover the current operating costs of providing services and to earn an operating profit.
15. Which of the following is NOT true about internal service funds as reported in the fund financial statements?
a) Costs reported by internal service funds are reported twice within the same set of financial statements.
b) Billing rates must be set to cover the full cost of providing the goods or services.
c) Depreciation can be charged to governmental funds through the billing rates established by the internal service fund.
d) Deficits or surpluses in the general fund can be transferred to the internal service fund by adjusting the billing rates.
16. In the Statement of Net Assets, the net assets of a proprietary fund should be displayed in which of the following categories?
a) Unrestricted Fund Balance, Restricted Fund Balance, Invested in Capital Assets.
b) Unrestricted Net Assets, Restricted Net Assets, Invested in Capital Assets Net of Related Debt.
c) Unrestricted Net Assets, Restricted Net Assets, Net Assets Available for Use.
d) Net Assets Available for Use.
17. A Statement of Revenues, Expenses, and Changes in Fund Net Assets should include which of the following in addition to operating revenues and operating expenses and ending Net Assets?
a) Nonoperating revenues and expenses.
b) Nonoperating revenues and expenses, and Other changes in Net Assets.
c) Nonoperating revenues and expenses, Capital Contribution and Other changes in Net Assets, and Beginning Net Assets.
d) None of the above.
18. In which of the following circumstances must an enterprise fund be used to account for the activity?
a) A newly created electric utility fund will finance its operations by a charge to users based on kilowatt hours used.
b) To finance the acquisition of plant facilities a newly created electric utility issues general obligation debt.
c) To finance the acquisition of plant facilities a newly created electric utility issues revenue bonds which will be repaid from operations of the electric utility.
d) To acquire needed plant facilities a newly created electric utility enters into long-term lease agreements.
19. Washington County has designated the general fund as the single fund to account for its self-insurance activities. What is the maximum amount that can be charged to expenditure in the general fund related to the self-insurance activities?
a) The amount of ‘premium’ charged to the other funds.
b) The amount of actual claims expenditures.
c) The actuarially-determined amount necessary to cover claims, expenditures, and catastrophic losses.
d) The amount transferred from other funds and activities to the general fund for self-insurance purposes.
20. Lehi City has designated an internal service fund as the single fund to account for its self-insurance activities. Most of the insured activities such as the police department, fire department, and general government functions are accounted for in the General Fund. What is the maximum amount that can be charged to expenditure in the General Fund related to the self-insurance activities?
a) The amount of ‘premium’ charged to the General Fund by the internal service fund.
b) The amount of actual losses incurred by the insurance activity.
c) The actuarially-determined amount necessary to cover claims, expenditures, and catastrophic losses.
d) The amount transferred from the General Fund to the internal service fund for self-insurance purposes.
Use the following information to answer questions #21 and #22.
During the year the City’s Self-Insurance Internal Service Fund billed the General Fund $300,000 for ‘premiums,’ of which $30,000 was for catastrophic losses and the balance was the premium computed on an actuarially-determined basis. During the year the City incurred $250,000 in claims losses. The total amount transferred to the Self-Insurance Fund by the General Fund was $310,000.
21. The amount the City Self-Insurance Fund can recognize as revenue is
a) $310,000
b) $300,000.
c) $270,000.
d) $250,000.
22. The amount the City General Fund can recognize as expenditure is
a) $310,000.
b) $300,000.
c) $270,000.
d) $250,000.
23. When a governmental enterprise fund has restricted assets on its balance sheet which of the following is a true statement?
a) The total of the restricted assets in the asset section will be equal to the “Restricted Net Assets” amount in the equity section.
b) The total of the restricted assets will be offset by a liability of an equal amount.
c) The total of the restricted assets less related liabilities will be equal to the “Restricted Net Assets” amount in the equity section.
d) None of the above statements is true.
24. Any internal service fund balances that are not eliminated in the consolidation process should generally be presented on the government-wide financial statements
a) Should not be presented on the government-wide financial statements.
b) In the internal service fund column.
c) In the governmental activities column.
d) In the business-type activities column.
25. On the fund financial statements, internal service activities should be presented
a) In the Propriety Fund statements, net of interfund eliminations.
b) In the Governmental Fund statements, net of interfund eliminations.
c) In the Proprietary fund statements, without any interfund eliminations.
d) In the Governmental Fund statements, without any interfund eliminations.
26. Cash flows from Operating Activities does NOT include which of the following as cash inflows?
a) Cash collection of receivable for sale of services.
b) Grants for operating activities.
c) Interest and dividends earned.
d) Receipts for services performed for other funds.
27. Cash flows from Operating Activities does NOT include which of the following as cash outflows?
a) Grants to other governments for operating activities.
b) Grants to other governments for capital asset acquisitions.
c) Payments for services performed by other funds.
d) Payments in lieu of taxes.
PROBLEMS (CHAPTER 9)
1. Benton County voted to establish an internal service fund to account for printing and copying for all its department and agencies. The County engaged in the following activities related to the new fund. Prepare transactions to record these events in the internal service fund. If no entry is required, write “No Entry Required.”
a) The County Commission voted to transfer $200,000 from the General Fund to the internal service fund to establish the new fund.
b) Leased equipment to be used in printing activities. The total lease obligation is $600,000.
c) Issued $1 million in general obligation bonds at 101. The bonds were issued to acquire additional equipment. The bonds are to be serviced from the internal service fund.
d) Purchased equipment at a cost of $980,000. The equipment has an estimated useful life of nine years and an estimated salvage value of $80,000.
e) Billed the General Fund for 1998 copying and printing charges, $70,000.
f) Paid salaries to printing employees, $50,000.
2. The City of Petersburg has operated a City Utility Enterprise Fund for a number of years. The fund accounts for the activities of the City-owned electric, water and sewer systems. During the current year, the City engaged in the following transactions related to the City Utility Fund. Prepare the appropriate journal entries. If none is required, write “No Entry Required.”
a) The City billed its customers $1 million for services provided during the year.
b) The City received $260,000 from a developer to connect new houses to the existing utility lines.
c) Depreciation on existing physical plant was $700,000.
d) Revenue bonds in the amount of $2 million were issued at par to finance new construction. The bond agreement requires that the City retain $200,000 of the bond proceeds for purposes of servicing the debt if revenues are not sufficient to do so.
3. The City of San Dominguez received a $500,000 federal grant to acquire several buses to be used in its public transit system. The City paid $400,000 to acquire several buses. At year-end, $100,000 of the grant had not yet been used. During the year total depreciation on the buses was $40,000. Revenues for the public system were $600,000, operating expenses (other than depreciation) were $470,000. Assuming the Public Transit Proprietary Fund began the year with Unrestricted NetAssets of $420,000, prepare the following for the Public Transit Enterprise Fund.
a) Statement of Revenues, Expenses, and Changes in Fund Net Assets.
b) Net Asset section of the Balance Sheet.
4. Greene County operates a solid waste landfill that is accounted for as an enterprise fund. At the end of 1999, the Landfill Enterprise Fund had a Liability for Landfill Costs of $50,000. The County estimated the costs associated with closing monitoring the landfill as follows. Calculate the total costs as of year-end 2000 and 2001 and the current period costs. Prepare the required journal entry(ies) at year-end 2000 and 2001. Be sure to show all of your work.
2000 2001
Costs
Equipment to be installed $2.5 million $3.0 million
Final cover $ .5 million $1.0 million
Monitoring and maintaining $4.0 million $4.0 million
Capacity used in total 30,000 58,000
Estimated total capacity 600,000 580,000
ESSAYS (CHAPTER 9)
1. Internal service funds are used by many governmental entities to account for activities that provide services to the entity itself. What are the ramifications of such an accounting arrangement? What are the effects on the entity’s financial statements?
2. Governmental entities may elect to account for their landfill activities in either of two different funds. Explain the differences that would result if one government elected to account for its landfill activities in its general fund and another government elected to account for its landfill activities in an enterprise fund.
3. Because of the rising cost of commercial insurance, many governments have elected to be ‘self-insured.’ Explain what is meant by being ‘self-insured.’ Explain the difference in the accounting for self-insurance activities between a governmental fund and a proprietary fund.
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ACC 557 Week 7 Assignment 1 – Strayer
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Assignment 1: You Are an Entrepreneur!
Due Week 7 and worth 240 points
Student life does not generally afford a great deal of free time to pursue your personal interests; however, at one point, you may have considered turning a personal interest or hobby into an official enterprise. Today, you have finally decided to turn that hobby into a business but have realized that you need start-up capital from a lender or investor.
To obtain funding, you need to convince a lender / investor that your business is more than a hobby. You need to demonstrate that you have a firm grasp of your business, the accounting practices that impact your business, the controls needed to safeguard assets, and which accounting system will produce accurate and relevant financial information.
Write a six to eight (6-8) page business plan in which you:
1. Describe the type of business you have created including:
a. The product or service, and general staffing plan. Provide a rationale for your plan.
b. The form of your business and the benefits it offers your particular business,
c. A chart of accounts specific to your business, including a rationale as to the selection of each account. (Note: The chart of accounts is a blueprint of your business for the lender/investor. It should report the expected resources that you will consume in your business (assets), the sources of those resources (liabilities and equity), the sources of revenue, and expenditures that you expect to incur to earn those revenues. You may build a detailed chart that includes business units, divisions, product lines, etc.)
2. Based on the form of your business, analyze whether or not you will be required to use Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) accounting methods and how the IFRS / GAAP convergence will impact your business. Suggest how you will incorporate any changes into your books and records. (Note: You need to demonstrate to the lender/investor that you have recognized possible changes to GAAP that may impact the accounting and reporting of your accounting events.)
3. Prepare a pro forma balance sheet and income statement providing the assumptions made and support the valuations assigned.
4. Considering the value of assets (assigned per your balance sheet) used within your business, recommend two (2) specific internal controls that you will implement to protect your company’s assets and resources, justifying how each will provide assurances to management. (NOTE: Safeguarding assets and protecting personal data are paramount to ensuring the viability of a business. Demonstrate to the lender/investor that your assets will be safeguarded and customer information (if applicable) will be protected.)
5. Based on the internal control recommendations that you made, suggest how you will implement each within your business environment, indicating how challenges or resistances will be overcome.
6. Evaluate the impact of the regulatory environment, including the Sarbanes-Oxley Act and other regulatory requirements, on your business venture, giving considering to how you intend to comply with the requirements and the general impact to decision making within your business.
7. Use at least four (4) quality academic resources in this assignment. Note: Wikipedia and other Websites do not qualify as academic resources.
Your assignment must follow these formatting requirements:
· Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
· Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.
The specific course learning outcomes associated with this assignment are:
· Examine accounting principles and concepts used in businesses.
· Assess appropriate internal controls, regulatory requirements according to the Sarbanes-Oxley Act, and fraud prevention and detection.
· Use technology and information resources to research issues in financial accounting.
· Write clearly and concisely about financial accounting using proper writing mechanics.
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ACC 557 Week 7 Homework Problems – Strayer
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Chapter 11
Exercise 11-7
Your answer is correct.
Fallow Co. had the following transactions during the current period.
Mar. 2
Issued 5,000 shares of $1 par value common stock to attorneys in payment of a bill for $38,000 for services provided in helping the company to incorporate.
June 12
Issued 60,000 shares of $1 par value common stock for cash of $475,000.
July 11
Issued 1,000 shares of $100 par value preferred stock for cash at $110 per share.
Nov. 28
Purchased 2,000 shares of treasury stock for $18,000.
Journalize the transactions. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Exercise 11-13
Your answer is correct.
On January 1, Chevon Corporation had 98,000 shares of no-par common stock issued and outstanding. The stock has a stated value of $4 per share. During the year, the following occurred.
Apr. 1
Issued 25,000 additional shares of common stock for $17 per share.
June 15
Declared a cash dividend of $1 per share to stockholders of record on June 30.
July 10
Paid the $1 cash dividend.
Dec. 1
Issued 2,000 additional shares of common stock for $19 per share.
15
Declared a cash dividend on outstanding shares of $1.20 per share to stockholders of record on December 31.
Prepare the entries, if any, on each of the three dividend dates. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Exercise 11-17
Your answer is correct.
On January 1, 2014, Richard Corporation had retained earnings of $550,000. During the year, Richard had the following selected transactions.
1.
Declared cash dividends $96,000.
2.
Corrected overstatement of 2013 net income because of depreciation error $40,000.
3.
Earned net income $350,000.
4.
Declared stock dividends $80,000.
Prepare a retained earnings statement for the year. (List items that increase retained earnings first.)
Problem 11-3A
The stockholders’ equity accounts of Terrell Corporation on January 1, 2014, were as follows.
Preferred Stock (9%, $50 par, cumulative, 10,000 shares authorized)
$ 400,000
Common Stock ($1 stated value, 2,000,000 shares authorized)
1,000,000
Paid-in Capital in Excess of Par—Preferred Stock
100,000
Paid-in Capital in Excess of Stated Value—Common Stock
1,450,000
Retained Earnings
1,816,000
Treasury Stock (20,000 common shares)
50,000
During 2014, the corporation had the following transactions and events pertaining to its stockholders’ equity.
Feb. 1
Issued 25,000 shares of common stock for $120,000.
Apr. 14
Sold 9,000 shares of treasury stock—common for $46,000.
Sept. 3
Issued 7,000 shares of common stock for a patent valued at $42,000.
Nov. 10
Purchased 1,000 shares of common stock for the treasury at a cost of $6,000.
Dec. 31
Determined that net income for the year was $452,000.
No dividends were declared during the year.
a) Journalize the transactions and the closing entry for net income. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)
b) Enter the beginning balances in the accounts, and post the journal entries to the stockholders’ equity accounts. (Use J5 for the posting reference.) (Post entries in the order of journal entries presented in the previous part.)
c) Prepare a stockholders’ equity section at December 31, 2014.
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ACC 557 Week 7 Discussion Question – Strayer New
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Week 7 Discussion
"Retained Earnings" Please respond to the following:
• The items contained in the Retained Earnings section of a balance sheet are often complex and confusing. Suggest an improvement for the reporting on this information that will help the users of the statement to have a better understanding of the activity. Provide support for your suggestion.
• Evaluate what a cumulative loss in the retained earnings section of a company’s balance sheet might indicate about the financial performance in the future, indicating how this may influence decisions made about the company. Provide support for your answer.
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ACC 557 Week 7 Quiz – Strayer NEW
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All possible questions with answers
TRUE-FALSE STATEMENTS
All plant assets (fixed assets) must be depreciated for accounting purposes.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
When purchasing delivery equipment, sales taxes and motor vehicle licenses should be charged to Delivery Equipment.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Land improvements are generally charged to the Land account.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Once cost is established for a plant asset, it becomes the basis of accounting for the asset unless the asset appreciates in value, in which case, market value becomes the basis for accountability.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The book value of a plant asset is always equal to its fair market value.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Recording depreciation on plant assets affects the balance sheet and the income statement.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The depreciable cost of a plant asset is its original cost minus obsolescence.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Recording depreciation each period is an application of the expense recognition principle.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
The Accumulated Depreciation account represents a cash fund available to replace plant assets.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
In calculating depreciation, both plant asset cost and useful life are based on estimates.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Using the units-of-activity method of depreciating factory equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straight-line method had been used.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Salvage value is not subtracted from plant asset cost in determining depreciation expense under the declining-balance method of depreciation.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
The declining-balance method of depreciation is called an accelerated depreciation method because it depreciates an asset in a shorter period of time than the asset's useful life.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Under the double-declining-balance method, the depreciation rate used each year remains constant.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
The IRS does not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A change in the estimated useful life of a plant asset may cause a change in the amount of depreciation recognized in the current and future periods, but not to prior periods.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A change in the estimated salvage value of a plant asset requires a restatement of prior years' depreciation.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
To determine a new depreciation amount after a change in estimate of a plant asset's useful life, the asset's remaining depreciable cost is divided by its remaining useful life.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Additions and improvements to a plant asset that increase the asset's operating efficiency, productive capacity, or expected useful life are generally expensed in the period incurred.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Capital expenditures are expenditures that increase the company's investment in productive facilities.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Ordinary repairs should be recognized when incurred as revenue expenditures.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A characteristic of capital expenditures is that the expenditures occur frequently during the period of ownership.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Once an asset is fully depreciated, no additional depreciation can be taken even though the asset is still being used by the business.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The fair market value of a plant asset is always the same as its book value.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A loss on disposal of a plant asset can only occur if the cash proceeds received from the asset sale is less than the asset's book value.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The book value of a plant asset is the amount originally paid for the asset less anticipated salvage value.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the same way.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
A plant asset must be fully depreciated before it can be removed from the books.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold section of the income statement.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Depletion cost per unit is computed by dividing the total cost of a natural resource by the estimated number of units in the resource.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The Accumulated Depletion account is deducted from the cost of the natural resource in the balance sheet.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Depletion expense for a period is only recognized on natural resources that have been extracted and sold during the period.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Natural resources are long-lived productive assets that are extracted in operations and are replaceable only by an act of nature.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The cost of natural resources is not allocated to expense because the natural resources are replaceable only by an act of nature.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Conceptually, the cost allocation procedures for natural resources parallels that of plant assets.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Natural resources include standing timber and underground deposits of oil, gas, and minerals.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
If an acquired franchise or license has an indefinite life, the cost of the asset is not amortized.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
When an entire business is purchased, goodwill is the excess of cost over the book value of the net assets acquired.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Research and development costs which result in a successful product which is patentable are charged to the Patent account.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
The cost of a patent must be amortized over a 20-year period.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
The cost of a patent should be amortized over its legal life or useful life, whichever is shorter.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
The balances of the major classes of plant assets and accumulated depreciation by major classes should be disclosed in the balance sheet or notes.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The asset turnover ratio is calculated as total sales divided by ending total assets.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Research and development costs can be classified as a property, plant, and equipment item or as an intangible asset.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Usually, companies combine plant assets and intangibles under "Property, plant, and equipment in the balance sheet.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The asset turnover ratio analyzes the productivity of a company's assets.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Accounting for exchanges of plant assets is easier if the transaction does not have commercial substance.
Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
An exchange of plant assets has commercial substance if the future cash flows change as a result of the exchange.
Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
a51. Companies record a gain or loss on the exchange of plant assets because most exchanges have commercial substance.
Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
a52. When plant assets are exchanged with commercial substance, the cost of the new asset is the book value of the old asset plus any cash paid.
Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
When constructing a building, a company is permitted to include in the acquisition cost and certain interest costs incurred in financing the project.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Recognition of depreciation provides for the accumulation of cash for the replacement of the asset.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
When an asset is purchased during the year, it is not necessary to record depreciation expense in the first year under the declining-balance depreciation method.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Depletion expense is reported in the income statement as an operating expense.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Goodwill is not recognized in accounting unless it is acquired from another business enterprise.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Research and development costs should be charged to expense when incurred.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
a59. A loss on the exchange of plant assets occurs when the fair market value of the old asset is less than its book value.
Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
MULTIPLE CHOICE QUESTIONS
The cost of a purchased building includes all of the following except
closing costs.
real estate broker's commission.
remodeling costs.
All of these are included.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A company purchased land for $80,000 cash. Real estate brokers' commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the cost principle, the cost of land would be recorded at
$97,000.
$80,000.
$85,000.
$92,000.
Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Which one of the following items is not considered a part of the cost of a truck purchased for business use?
Sales tax
Truck license
Freight charges
Cost of lettering on side of truck
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Which of the following assets does not decline in service potential over the course of its useful life?
Equipment
Furnishings
Land
Fixtures
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
The four subdivisions for plant assets are
land, land improvements, buildings, and equipment.
intangibles, land, buildings, and equipment.
furnishings and fixtures, land, buildings, and equipment.
property, plant, equipment, and land.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The cost of land does not include
real estate brokers' commission.
annual property taxes.
accrued property taxes assumed by the purchaser.
title fees.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Gagner Clinic purchases land for $150,000 cash. The clinic assumes $1,500 in property taxes due on the land. The title and attorney fees totaled $1,000. The clinic has the land graded for $2,200. What amount does Gagner Clinic record as the cost for the land?
$132,200
$150,000
$154,700
$132,500
Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Carey Company buys land for $50,000 on 12/31/12. As of 3/31/13, the land has appreciated in value to $50,700. On 12/31/13, the land has an appraised value of $51,800. By what amount should the Land account be increased in 2013?
$0
$700
$1,100
$1,800
Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Hull Company acquires land for $96,000 cash. Additional costs are as follows:
Removal of shed $ 300
Filling and grading 1,500
Salvage value of lumber of shed 120
Broker commission 1,130
Paving of parking lot 10,000
Closing costs 560
MC. 68 (Cont.)
Hull will record the acquisition cost of the land as
$86,000.
$97,690.
$99,610.
$99,370.
Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Wesley Hospital installs a new parking lot. The paving cost $40,000 and the lights to illuminate the new parking area cost $20,000. Which of the following statements is true with respect to these additions?
$40,000 should be debited to the Land account.
$20,000 should be debited to Land Improvements.
$60,000 should be debited to the Land account.
$60,000 should be debited to Land Improvements.
Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Land improvements should be depreciated over the useful life of the
land.
buildings on the land.
land or land improvements, whichever is longer.
land improvements.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Mattox Company is building a new plant that will take three years to construct. The construction will be financed in part by funds borrowed during the construction period. There are significant architect fees, excavation fees, and building permit fees. Which of the following statements is true?
Excavation fees are capitalized but building permit fees are not.
Architect fees are capitalized but building permit fees are not.
Interest is capitalized during the construction as part of the cost of the building.
The capitalized cost is equal to the contract price to build the plant less any interest on borrowed funds.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
A company purchases a remote site building for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and recarpeted and there will also be some plumbing work done. Which of the following statements is true?
The cost of the building will not include the repainting and recarpeting costs.
The cost of the building will include the cost of replacing the roof.
The cost of the building is the purchase price of the building, while the additional expenditures are all capitalized as Building Improvements.
The wiring is part of the computer costs, not the building cost.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Engler Company purchases a new delivery truck for $60,000. The sales taxes are $4,000. The logo of the company is painted on the side of the truck for $1,600. The truck license is $160. The truck undergoes safety testing for $290. What does Engler record as the cost of the new truck?
$66,050
$65,890
$64,000
$65,600
Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
All of the following factors in computing depreciation are estimates except
cost.
residual value.
salvage value.
useful life.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Presto Company purchased equipment and these costs were incurred:
Cash price $45,000
Sales taxes 3,600
Insurance during transit 640
Installation and testing 860
Total costs $50,100
Presto will record the acquisition cost of the equipment as
$45,000.
$48,600.
$49,240.
$50,100.
Ans: LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Angie’s Blooms purchased a delivery van with a list price of $30,000. The company was given a $3,000 cash discount by the dealer, and paid $1,500 sales tax. Annual insurance on the van is $750. As a result of the purchase, by how much will Angie’s Blooms increase its van account?
$30,000
$27,000
$29,250
$28,500
Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Yocum Company purchased equipment on January 1 at a list price of $100,000, with credit terms 2/10, n/30. Payment was made within the discount period and Yocum was given a $2,000 cash discount. Yocum paid $5,000 sales tax on the equipment, and paid installation charges of $1,760. Prior to installation, Yocum paid $4,000 to pour a concrete slab on which to place the equipment. What is the total cost of the new equipment?
$104,760
$108,760
$110,760
$101,000
Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
New equipment was purchased by Tignor Corporation at a list price of $98,000, with credit terms of 2/10, n/30. Payment was made within the discount period and included $7,840 sales tax, in addition to the net purchase price. The company also paid delivery charges of $990 and labor costs of $1,500 for installing the new equipment at the appropriate location. During installation, an inexperienced employee punctured several containers with a forklift, causing damage to the equipment. Cost to repair the damage was $2,460. What is the total cost of Tignor's equipment?
$106,370.
$103,910.
$108,830.
$108,330.
Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Berger Company purchased equipment having an invoice price of $22,500. The terms of sale were 3/10, n/60, and Berger paid within the discount period. In addition, Berger paid a $235 delivery charge, $615 installation charge, and $1,528 sales tax. Berger paid for optional accident insurance for transport of the equipment amounting to $35. The amount recorded as the cost of this equipment is:
$24,913.
$24,878.
$24,238.
$24,203.
Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Tempest Company purchased land for $464,000. Additional costs include a $30,200 fee to a real estate broker, a survey fee of $4,500, $2,750 to construct a fence, and a legal fee of $11,800. What should Tempest record as the cost of the land?
$464,000.
$461,250.
$513,250.
$510,500.
Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Newton Manufacturing acquired new machinery on January 1 at a cost of $90,000. It is estimated to have a useful life of 10 years and a salvage value of $30,000. Straight-line depreciation was used. On January 1, following six full years of use of the machinery, management decided that the original estimate of useful life had been too long and that the machinery would have to be retired after two more years (at the end of the eighth year of service). Under this revised, the depreciation expense for the seventh year of would be:
$18,000.
$11,250.
$12,000.
$27,000.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Interest may be included in the acquisition cost of a plant asset
during the construction period of a self-constructed asset.
if the asset is purchased on credit.
if the asset acquisition is financed by a long-term note payable.
if it is a part of a lump-sum purchase.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
The balance in the Accumulated Depreciation account represents the
cash fund to be used to replace plant assets.
amount to be deducted from the cost of the plant asset to arrive at its fair market value.
amount charged to expense in the current period.
amount charged to expense since the acquisition of the plant asset.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Which one of the following items is not a consideration when recording periodic depreciation expense on plant assets?
Salvage value
Estimated useful life
Cash needed to replace the plant asset
Cost
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Depreciation is the process of allocating the cost of a plant asset over its service life in
an equal and equitable manner.
an accelerated and accurate manner.
a systematic and rational manner.
a conservative market-based manner.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
The book value of an asset is equal to the
asset's fair value less its historical cost.
blue book value relied on by secondary markets.
replacement cost of the asset.
asset's cost less accumulated depreciation.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Accountants do not attempt to measure the change in a plant asset's market value during ownership because
the assets are not held for resale.
plant assets cannot be sold.
losses would have to be recognized.
it is management's responsibility to determine fair values.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Depreciation is a process of
asset devaluation.
cost accumulation.
cost allocation.
asset valuation.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Recording depreciation each period is necessary in accordance with the
going concern principle.
cost principle.
expense recognition principle.
asset valuation principle.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
In computing depreciation, salvage value is
the fair value of a plant asset on the date of acquisition.
subtracted from accumulated depreciation to determine the plant asset's depreciable cost.
an estimate of a plant asset's value at the end of its useful life.
ignored in all the depreciation methods.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
When estimating the useful life of an asset, accountants do not consider
the cost to replace the asset at the end of its useful life.
obsolescence factors.
expected repairs and maintenance.
the intended use of the asset.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Useful life is expressed in terms of use expected from the asset under the
declining-balance method.
straight-line method.
units-of-activity method.
none of these.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Equipment was purchased for $150,000. Freight charges amounted to $7,000 and there was a cost of $20,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $30,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be
$35,400.
$29,400.
$24,600.
$24,000.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
A truck was purchased for $120,000 and it was estimated to have a $24,000 salvage value at the end of its useful life. Monthly depreciation expense of $2,000 was recorded using the straight-line method. The annual depreciation rate is
20%.
2%.
8%.
25%.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
A company purchased factory equipment on April 1, 2013 for $80,000. It is estimated that the equipment will have an $10,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2013 is
$8,000.
$7,000.
$5,250.
$6,000.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
A company purchased office equipment for $40,000 and estimated a salvage value of $8,000 at the end of its 4-year useful life. The constant percentage to be applied against book value each year if the double-declining-balance method is used is
20%.
25%.
50%.
5%.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
The declining-balance method of depreciation produces
a decreasing depreciation expense each period.
an increasing depreciation expense each period.
a declining percentage rate each period.
a constant amount of depreciation expense each period.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
A company purchased factory equipment for $350,000. It is estimated that the equipment will have a $35,000 salvage value at the end of its estimated 5-year useful life. If the company uses the double-declining-balance method of depreciation, the amount of annual depreciation recorded for the second year after purchase would be
$140,000.
$84,000.
$126,000.
$60,480.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
The units-of-activity method is generally not suitable for
airplanes.
buildings.
delivery equipment.
factory machinery.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
A plant asset cost $192,000 and is estimated to have an $24,000 salvage value at the end of its 8-year useful life. The annual depreciation expense recorded for the third year using the double-declining-balance method would be
$16,080.
$27,000.
$23,624.
$18,380.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
A factory machine was purchased for $125,000 on January 1, 2013. It was estimated that it would have a $25,000 salvage value at the end of its 5-year useful life. It was also estimated that the machine would be run 40,000 hours in the 5 years. The company ran the machine for 4,000 actual hours in 2013. If the company uses the units-of-activity method of depreciation, the amount of depreciation expense for 2013 would be
$12,500.
$20,000.
$25,000.
$10,000.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method which
is used for tax purposes.
must be used for financial statement purposes.
is required by the SEC.
expenses an asset over a single year because capital acquisitions must be expensed in the year purchased.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Which of the following methods of computing depreciation is production based?
Straight-line
Declining-balance
Units-of-activity
None of these
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Management should select the depreciation method that
is easiest to apply.
best measures the plant asset's market value over its useful life.
best measures the plant asset's contribution to revenue over its useful life.
has been used most often in the past by the company.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
The depreciation method that applies a constant percentage to depreciable cost in calculating depreciation is
straight-line.
units-of-activity.
declining-balance.
none of these.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
On October 1, 2013, Holt Company places a new asset into service. The cost of the asset is $80,000 with an estimated 5-year life and $20,000 salvage value at the end of its useful life. What is the depreciation expense for 2013 if Holt Company uses the straight-line method of depreciation?
$3,000
$16,000
$4,000
$8,000
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
On October 1, 2013, Holt Company places a new asset into service. The cost of the asset is $80,000 with an estimated 5-year life and $20,000 salvage value at the end of its useful life. What is the book value of the plant asset on the December 31, 2013, balance sheet assuming that Holt Company uses the double-declining-balance method of depreciation?
$52,000
$60,000
$72,000
$76,000
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Which depreciation method is most frequently used in businesses today?
Straight-line
Declining-balance
Units-of-activity
Double-declining-balance
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Mott Company uses the units-of-activity method in computing depreciation. A new plant asset is purchased for $36,000 that will produce an estimated 100,000 units over its useful life. Estimated salvage value at the end of its useful life is $3,000. What is the depreciation cost per unit?
$3.30
$3.60
$.33
$.36
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Units-of-activity is an appropriate depreciation method to use when
it is impossible to determine the productivity of the asset.
the asset's use will be constant over its useful life.
the productivity of the asset varies significantly from one period to another.
the company is a manufacturing company.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
The calculation of depreciation using the declining balance method,
ignores salvage value in determining the amount to which a constant rate is applied.
multiplies a constant percentage times the previous year's depreciation expense.
yields an increasing depreciation expense each period.
multiplies a declining percentage times a constant book value.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Farr Company purchased a new van for floral deliveries on January 1, 2013. The van cost $48,000 with an estimated life of 5 years and $12,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the depreciation expense for 2013?
$9,600
$7,200
$14,400
$19,200
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Farr Company purchased a new van for floral deliveries on January 1, 2013. The van cost $48,000 with an estimated life of 5 years and $12,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the balance of the Accumulated Depreciation account at the end of 2014?
$7,680
$23,040
$30,720
$11,520
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Moreno Company purchased equipment for $675,000 on January 1, 2012, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 3-year life and a $30,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2014 will be
$75,000.
$45,000.
$81,660.
$51,660.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
A plant asset was purchased on January 1 for $50,000 with an estimated salvage value of $10,000 at the end of its useful life. The current year's Depreciation Expense is $5,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $25,000. The remaining useful life of the plant asset is
10 years.
8 years.
5 years.
3 years.
Ans: LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Equipment was purchased for $90,000. Freight charges amounted to $4,200 and there was a cost of $12,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $18,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be
$21,240.
$17,640.
$14,760.
$14,400.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Equipment was purchased for $51,000 on January 1, 2012. Freight charges amounted to $2,100 and there was a cost of $6,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $9,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2013, if the straight-line method of depreciation is used?
$20,040
$10,020
$8,580
$17,160
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
A company purchased factory equipment on June 1, 2013, for $80,000. It is estimated that the equipment will have a $5,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2013, is
$7,500.
$4,375.
$3,750.
$3,125.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
A plant asset was purchased on January 1 for $40,000 with an estimated salvage value of $8,000 at the end of its useful life. The current year's Depreciation Expense is $4,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $20,000. The remaining useful life of the plant asset is
10 years.
8 years.
5 years.
3 years.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Sargent Corporation bought equipment on January 1, 2013. The equipment cost $180,000 and had an expected salvage value of $30,000. The life of the equipment was estimated to be 6 years. The depreciable cost of the equipment is
$180,000.
$150,000.
$100,000.
$25,000.
Ans: LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Sargent Corporation bought equipment on January 1, 2013. The equipment cost $180,000 and had an expected salvage value of $30,000. The life of the equipment was estimated to be 6 years. The depreciation expense using the straight-line method of depreciation is
$35,000.
$36,000.
$25,000.
none of the above.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Sargent Corporation bought equipment on January 1, 2013. The equipment cost $180,000 and had an expected salvage value of $30,000. The life of the equipment was estimated to be 6 years. The book value of the equipment at the beginning of the third year using straight-line depreciation would be
$180,000.
$150,000.
$130,000.
$50,000.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Tomko Company purchased machinery with a list price of $32,000. They were given a 10% discount by the manufacturer. They paid $200 for shipping and sales tax of $1,500. Tomko estimates that the machinery will have a useful life of 10 years and a residual value of $10,000. If Tomko uses straight-line depreciation, annual depreciation will be
$2,050.
$2,036.
$3,050.
$1,880.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Drago Company purchased equipment on January 1, 2012, at a total invoice cost of $800,000. The equipment has an estimated salvage value of $20,000 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at December 31, 2013, if the straight-line method of depreciation is used?
$160,000
$320,000
$156,000
$312,000
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
On January 1, a machine with a useful life of five years and a residual value of $25,000 was purchased for $75,000. What is the depreciation expense for year 2 under the double-declining-balance method of depreciation?
$18,000
$30,000
$24,000
$14,400
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
A machine with a cost of $240,000 has an estimated salvage value of $15,000 and an estimated useful life of 5 years or 15,000 hours. It is to be depreciated using the units-of-activity method of depreciation. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours?
$75,000
$45,000
$65,000
$80,000
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Equipment with a cost of $240,000 has an estimated salvage value of $15,000 and an estimated life of 4 years or 15,000 hours. It is to be depreciated using the units-of-activity method. What is the amount of depreciation for the first full year, during which the equipment was used 3,300 hours?
$60,000
$67,800
$49,500
$56,250
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Eckman Company purchased equipment for $80,000 on January 1, 2011, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 5-year life and a $4,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2013 will be
$11,520.
$18,240.
$19,200.
$10,944.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Grimwood Trucking purchased a tractor trailer for $147,000. Grimwood uses the units-of-activity method for depreciating its trucks and expects to drive the truck 1,000,000 miles over its 12-year useful life. Salvage value is estimated to be $21,000. If the truck is driven 90,000 miles in its first year, how much depreciation expense should Grimwood record?
$10,500
$13,230
$11,340
$12,250
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
On May 1, 2013, Pinkley Company sells office furniture for $150,000 cash. The office furniture originally cost $375,000 when purchased on January 1, 2006. Depreciation is recorded by the straight-line method over 10 years with a salvage value of $37,500. What depreciation expense should be recorded on this asset in 2013?
$11,250.
$12,500.
$16,875.
$33,750.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
On May 1, 2013, Pinkley Company sells office furniture for $150,000 cash. The office furniture originally cost $375,000 when purchased on January 1, 2006. Depreciation is recorded by the straight-line method over 10 years with a salvage value of $37,500. What gain should be recognized on the sale?
$11,250.
$22,500.
$23,750.
$45,000.
Ans: LO: 4, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Mather Company purchased equipment on January 1, 2012 at a total invoice cost of $224,000; additional costs of $4,000 for freight and $20,000 for installation were incurred. The equipment has an estimated salvage value of $8,000 and an estimated useful life of five years. The amount of accumulated depreciation at December 31, 2013 if the straight-line method of depreciation is used is:
$86,400.
$88,000.
$96,000.
$99,200.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Kingston Company purchased a piece of equipment on January 1, 2012. The equipment cost $120,000 and had an estimated life of 8 years and a salvage value of $15,000. What was the depreciation expense for the asset for 2013 under the double-declining-balance method?
$13,000.
$22,500.
$30,000.
$23,438.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Able Towing Company purchased a tow truck for $90,000 on January 1, 2012. It was originally depreciated on a straight-line basis over 10 years with an assumed salvage value of $18,000. On December 31, 2014, before adjusting entries had been made, the company decided to change the remaining estimated life to 4 years (including 2014) and the salvage value to $2,500. What was the depreciation expense for 2014?
$9,000.
$7,200.
$22,500.
$18,275.
Ans: LO: 2, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Nicholson Company purchased equipment on January 1, 2011, for $40,000 with an estimated salvage value of $10,000 and estimated useful life of 8 years. On January 1, 2013, Nicholson decided the equipment will last 12 years from the date of purchase. The salvage value is still estimated at $10,000. Using the straight-line method the new annual depreciation will be:
$2,250.
$2,500.
$3,000.
$3,333.
Ans: LO: 2, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
An asset was purchased for $150,000. It had an estimated salvage value of $30,000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $24,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in year 6 would be
$18,000.
$13,200.
$9,000.
$12,600.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Equipment costing $40,000 with a salvage value of $8,000 and an estimated life of 8 years has been depreciated using the straight-line method for 2 years. Assuming a revised estimated total life of 5 years and no change in the salvage value, the depreciation expense for year 3 would be
$4,800.
$10,667.
$8,000.
$6,400.
Ans: LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Ron's Quik Shop bought machinery for $50,000 on January 1, 2012. Ron estimated the useful life to be 5 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2013, Ron decides that the business will use the machinery for a total of 6 years. What is the revised depreciation expense for 2013?
$8,000
$4,000
$6,667
d $10,000
Ans: LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Each of the following is used in computing revised annual depreciation for a change in estimate except
book value.
cost.
depreciable cost.
remaining useful life.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
A change in the estimated useful life of equipment requires
a retroactive change in the amount of periodic depreciation recognized in previous years.
that no change be made in the periodic depreciation so that depreciation amounts are comparable over the life of the asset.
that the amount of periodic depreciation be changed in the current year and in future years.
that income for the current year be increased.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Enos Company has decided to change the estimate of the useful life of an asset that has been in service for 2 years. Which of the following statements describes the proper way to revise a useful life estimate?
Revisions in useful life are permitted if approved by the IRS.
Retroactive changes must be made to correct previously recorded depreciation.
Only future years will be affected by the revision.
Both current and future years will be affected by the revision.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Don's Copy Shop bought equipment for $150,000 on January 1, 2012. Don estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2013, Don decides that the business will use the equipment for 5 years. What is the revised depreciation expense for 2013?
$50,000
$20,000
$25,000
$37,500
Ans: LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Costs incurred to increase the operating efficiency or useful life of a plant asset are referred to as
capital expenditures.
expense expenditures.
ordinary repairs.
revenue expenditures.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Expenditures that maintain the operating efficiency and expected productive life of a plant asset are generally
expensed when incurred.
capitalized as a part of the cost of the asset.
debited to the Accumulated Depreciation account.
not recorded until they become material in amount.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Which of the following is not true of ordinary repairs?
They primarily benefit the current accounting period.
They can be referred to as revenue expenditures.
They maintain the expected productive life of the asset.
They increase the productive capacity of the asset.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The addition of shelving to a delivery truck would be classified as a(n)
revenue expenditure.
addition.
improvement.
ordinary repair.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Additions and improvements
occur frequently during the ownership of a plant asset.
normally involve immaterial expenditures.
increase the book value of plant assets when incurred.
typically only benefit the current accounting period.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
If a plant asset is retired before it is fully depreciated and no salvage value is received,
a gain on disposal occurs.
a loss on disposal occurs.
either a gain or a loss can occur.
neither a gain nor a loss occurs.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A gain or loss on disposal of a plant asset is determined by comparing the
replacement cost of the asset with the asset's original cost.
book value of the asset with the asset's original cost.
original cost of the asset with the proceeds received from its sale.
book value of the asset with the proceeds received from its sale.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The book value of a plant asset is the difference between the
replacement cost of the asset and its historical cost.
cost of the asset and the amount of depreciation expense for the year.
cost of the asset and the accumulated depreciation to date.
proceeds received from the sale of the asset and its original cost.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
If a plant asset is sold before it is fully depreciated,
only a gain on disposal can occur.
only a loss on disposal can occur.
either a gain or a loss can occur.
neither a gain nor a loss can occur.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
If a plant asset is sold before it is fully depreciated, and the salvage value received is less than the asset's book value,
a gain on disposal occurs.
a loss on disposal occurs.
there is no gain or loss on disposal.
additional depreciation expense must be recorded.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A company sells a plant asset which originally cost $240,000 for $80,000 on December 31, 2013. The Accumulated Depreciation account had a balance of $96,000 after the current year's depreciation of $24,000 had been recorded. The company should recognize a
$160,000 loss on disposal.
$64,000 gain on disposal.
$64,000 loss on disposal.
$40,000 loss on disposal.
Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
If disposal of a plant asset occurs during the year, depreciation is
not recorded for the year.
recorded for the whole year.
recorded for the fraction of the year to the date of the disposal.
not recorded if the asset is scrapped.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
If a fully depreciated plant asset is still used by a company, the
estimated remaining useful life must be revised to calculate the correct revised depreciation.
asset is removed from the books.
accumulated depreciation account is removed from the books but the asset account remains.
asset and the accumulated depreciation continue to be reported on the balance sheet without adjustment until the asset is retired.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Which of the following statements is never true when a fully depreciated plant asset is retired?
The plant asset's book value is equal to its estimated salvage value.
The accumulated depreciation account is debited.
The asset account is credited.
The plant asset's original cost equals its book value.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
If a plant asset is retired before it is fully depreciated, and no salvage or scrap value is received,
a gain on disposal will be recorded.
phantom depreciation must be taken as though the asset were still on the books.
a loss on disposal will be recorded.
no gain or loss on disposal will be recorded.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The book value of an asset will equal its fair value at the date of sale if
a gain on disposal is recorded.
no gain or loss on disposal is recorded.
the plant asset is fully depreciated.
a loss on disposal is recorded.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A truck costing $88,000 was destroyed when its engine caught fire. At the date of the fire, the accumulated depreciation on the truck was $40,000. An insurance check for $100,000 was received based on the replacement cost of the truck. The entry to record the insurance proceeds and the disposition of the truck will include a
Gain on Disposal of $12,000.
credit to the Truck account of $48,000.
credit to the Accumulated Depreciation account for $40,000.
Gain on Disposal of $52,000.
Ans: LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
On July 1, 2013, Hale Kennels sells equipment for $110,000. The equipment originally cost $300,000, had an estimated 5-year life and an expected salvage value of $50,000. The accumulated depreciation account had a balance of $175,000 on January 1, 2013, using the straight-line method. The gain or loss on disposal is
$15,000 gain.
$10,000 loss.
$15,000 loss.
$10,000 gain.
Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
A loss on disposal of a plant asset is reported in the financial statements
in the Other Revenues and Gains section of the income statement.
in the Other Expenses and Losses section of the income statement.
as a direct increase to the capital account on the balance sheet.
as a direct decrease to the capital account on the balance sheet.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Yanik Company's delivery truck, which originally cost $70,000, was destroyed by fire. At the time of the fire, the balance of the Accumulated Depreciation account amounted to $47,500. The company received $40,000 reimbursement from its insurance company. The gain or loss as a result of the fire was
$30,000 loss.
$17,500 loss.
$30,000 gain.
$17,500 gain.
Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Equipment that cost $210,000 and on which $100,000 of accumulated depreciation has been recorded was disposed of for $90,000 cash. The entry to record this event would include a
gain of $20,000.
loss of $20,000.
credit to the Equipment account for $110,000.
credit to Accumulated Depreciation for $100,000.
Ans: LO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
A truck that cost $48,000 and on which $40,000 of accumulated depreciation has been recorded was disposed of for $12,000 cash. The entry to record this event would include a
gain of $4,000.
loss of $4,000.
credit to the Truck account for $8,000.
credit to Accumulated Depreciation for $40,000.
Ans: LO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Orr Corporation sold equipment for $18,000. The equipment had an original cost of $54,000 and accumulated depreciation of $27,000. As a result of the sale,
net income will increase $18,000.
net income will increase $9,000.
net income will decrease $9,000.
net income will decrease $18,000.
Ans: LO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Powell’s Courier Service recorded a loss of $6,000 when it sold a van that originally cost $56,000 for $10,000. Accumulated depreciation on the van must have been
$52,000.
$16,000.
$50,000.
$40,000.
Ans: LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
A plant asset cost $45,000 when it was purchased on January 1, 2006. It was depreciated by the straight-line method based on a 9-year life with no salvage value. On June 30, 2013, the asset was discarded with no cash proceeds. What gain or loss should be recognized on the retirement?
No gain or loss.
$10,000 loss.
$7,500 loss.
$5,000 gain.
Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Nicklaus Company has decided to sell one of its old machines on June 30, 2013. The machine was purchased for $160,000 on January 1, 2009, and was depreciated on a straight-line basis for 10 years with no salvage value. If the machine was sold for $52,000, what was the amount of the gain or loss recorded at the time of the sale?
$36,000.
$108,000.
$44,000.
$92,000.
Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Titusville Delivery sold a delivery truck for cash of $10,200. If the original cost of truck was $39,600 and a loss of $8,400 was recognized on the sale, the accumulated depreciation at the date of sale must have been
$24,920.
$14,560.
$3,360.
$21,000.
Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
An asset which costs $29,800 and has accumulated depreciation of $8,000 is sold for $21,600. What amount of gain of loss will be recognized when the asset is sold?
A gain of $200.
A loss of $200.
A loss of $8,200.
A gain of $8,200.
Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Shocker Associates sold office equipment for cash of $162,000. The accumulated depreciation at date of sale amounted to $123,000, and a gain of $16,000 was recognized on the sale. The original cost of the asset must have been:
$285,000.
$269,000.
$262,000.
$301,000.
Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Baines Aircraft sold a depreciable asset for cash of $195,000. The original cost of the asset was $525,000. Baines recognized a gain of $28,500 on the sale. What was the amount of accumulated depreciation on the asset at the time of its sale?
$496,500.
$330,000.
$361,500.
$358,500.
Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
In April 2013, Sparkle Enterprises purchased the Crimson Mine at a cost of $18,000,000. The mine is estimated to contain 500,000 tons of ore with a residual value of $2,000,000 after mining operations are completed. During 2013, 120,000 tons of ore were removed from the mine and sold. In this situation:
The book value of the mine is $16,000,000 at the end of 2013.
The amount of depletion deducted from revenue during 2013 is $3,840,000.
The amount of depletion deducted from revenue during 2013 is $2,000,000.
The mine is classified as an intangible asset with in indefinite life and is not amortized.
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
In January of the current year, Allegro Co. purchased the Exbar Mine at a cost of $25,000,000. The mine was estimated to contain 1,000,000 tons of the ore have a residual value of $2,500,000 after mining operations are completed. During the year, 315,000 tons of ore were removed from the mine. At year-end, the book value of the mine is
$25,000,000.
$7,087,500.
$17,125,000.
$17,912,500.
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
On a balance sheet, natural resources may be described more specifically as all of the following except
land improvements.
mineral deposits.
oil reserves.
timberlands.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Natural resources are
depreciated using the units-of-activity method.
physically extracted in operations and are replaceable only by an act of nature.
reported at their market value.
amortized over a period no longer than 40 years.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Depletion is
a decrease in market value of natural resources.
the amount of spoilage that occurs when natural resources are extracted.
the allocation of the cost of natural resources to expense.
the method used to record unsuccessful patents.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
To qualify as natural resources in the accounting sense, assets must be
underground.
replaceable.
of a mineral nature.
physically extracted in operations.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The method most commonly used to compute depletion is the
straight-line method.
double-declining-balance method.
units-of-activity method.
effective interest method.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
In computing depletion, salvage value is
always immaterial.
ignored.
impossible to estimate.
included in the calculation.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
If a mining company extracts 1,500,000 tons in a period but only sells 1,200,000 tons,
total depletion on the mine is based on the 1,200,000 tons.
depletion expense is recognized on the 1,500,000 tons extracted.
depletion expense is recognized on the 1,200,000 tons extracted and sold.
a separate accumulated depletion account is set up to record depletion on the 300,000 tons extracted but not sold.
Ans: LO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
A coal company invests $12 million in a mine estimated to have 20 million tons of coal and no salvage value. It is expected that the mine will be in operation for 5 years. In the first year, 1,000,000 tons of coal are extracted and sold. What is the depletion expense for the first year?
$600,000
$240,000
$60,000
Cannot be determined from the information provided.
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Accumulated Depletion
is used by all companies with natural resources.
has a normal debit balance.
is a contra-asset account.
is never shown on the balance sheet.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
On July 4, 2013, Wyoming Mining Company purchased the mineral rights to a granite deposit for $1,200,000. It is estimated that the recoverable granite will be 400,000 tons. During 2013, 100,000 tons of granite was extracted and 60,000 tons were sold. The amount of the Depletion Expense recognized for 2013 would be
$150,000.
$90,000.
$180,000.
$300,000.
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Depletion expense is computed by multiplying the depletion cost per unit by the
total estimated units.
total actual units.
number of units extracted.
number of units sold.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Intangible assets are the rights and privileges that result from ownership of long-lived assets that
must be generated internally.
are depletable natural resources.
have been exchanged at a gain.
do not have physical substance.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Identify the item below where the terms are not related.
Equipment—depreciation
Franchise—depreciation
Copyright—amortization
Oil well—depletion
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
A patent should
be amortized over a period of 20 years.
not be amortized if it has an indefinite life.
be amortized over its useful life or 20 years, whichever is longer.
be amortized over its useful life or 20 years, whichever is shorter.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
The entry to record patent amortization usually includes a credit to
Amortization Expense.
Accumulated Amortization.
Accumulated Depreciation.
Patents.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
The cost of successfully defending a patent in an infringement suit should be
charged to Legal Expenses.
deducted from the book value of the patent.
added to the cost of the patent.
recognized as a loss in the current period.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
An asset that cannot be sold individually in the market place is
a patent.
goodwill.
a copyright.
a trade name.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Goodwill can be recorded
when customers keep returning because they are satisfied with the company's products.
when the company acquires a good location for its business.
when the company has exceptional management.
only when there is an exchange transaction involving the purchase of an entire business.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
On July 1, 2013, Jenks Company purchased the copyright to Jackson Computer Tutorials for $216,000. It is estimated that the copyright will have a useful life of 5 years with an estimated salvage value of $16,000. The amount of Amortization Expense recognized for the year 2013 would be
$43,200.
$20,000.
$40,000.
$21,600.
Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
All of the following intangible assets are amortized except
copyrights.
limited-life franchises.
patents.
trademarks.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Which of the following is not an intangible asset arising from a government grant?
Goodwill
Patent
Trademark
Trade name
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The amortization period for a patent cannot exceed
50 years.
40 years.
20 years.
10 years.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Cost allocation of an intangible asset is referred to as
amortization.
depletion.
accretion.
capitalization.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A patent
has a legal life of 40 years.
is nonrenewable.
can be renewed indefinitely.
is rarely subject to litigation because it is an exclusive right.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
If a company incurs legal costs in successfully defending its patent, these costs are recorded by debiting
Legal Expense.
an Intangible Loss account.
the Patent account.
a revenue expenditure account.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Copyrights are granted by the federal government
for the life of the creator or 70 years, whichever is longer.
for the life of the creator plus 70 years.
for the life of the creator or 70 years, whichever is shorter.
and therefore cannot be amortized.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Goodwill
is only recorded when generated internally.
can be subdivided and sold in parts.
can only be identified with the business as a whole.
can be defined as normal earnings less accumulated amortization.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
In recording the acquisition cost of an entire business,
goodwill is recorded as the excess of cost over the fair value of identifiable net assets.
assets are recorded at the seller's book values.
goodwill, if it exists, is never recorded.
goodwill is recorded as the excess of cost over the book value of identifiable net assets.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Research and development costs
are classified as intangible assets.
must be expensed when incurred under generally accepted accounting principles.
should be included in the cost of the patent they relate to.
are capitalized and then amortized over a period not to exceed 40 years.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A computer company has $2,500,000 in research and development costs. Before accounting for these costs, the net income of the company is $2,000,000. What is the amount of net income or loss after these R & D costs are accounted for?
$500,000 loss
$2,000,000 net income
$0
Cannot be determined from the information provided.
Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Henson Company incurred $600,000 of research and development costs in its laboratory to develop a new product. It spent $80,000 in legal fees for a patent granted on January 2, 2013. On July 31, 2013, Henson paid $60,000 for legal fees in a successful defense of the patent. What is the total amount that should be debited to Patents through July 31, 2013?
$600,000
$140,000
$740,000
Some other amount
Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Given the following account balances at year end, compute the total intangible assets on the balance sheet of Kepler Enterprises.
Cash $1,500,000
Accounts Receivable 4,000,000
Trademarks 1,000,000
Goodwill 2,500,000
Research & Development Costs 2,000,000
$9,500,000
$5,500,000
$3,500,000
$7,500,000
Ans: LO: 6, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Rooney Company incurred $420,000 of research and development cost in its laboratory to develop a patent granted on January 1, 2013. On July 31, 2013, Rooney paid $63,000 for legal fees in a successful defense of the patent. The total amount debited to Patents through July 31, 2013, should be:
$420,000.
$63,000.
$483,000.
$357,000.
Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Mehring Company reported net sales of $360,000, net income of $72,000, beginning total assets of $240,000, and ending total assets of $360,000. What was the company's asset turnover ratio?
50
24
1.20
0.83
Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
During 2013, Rathke Corporation reported net sales of $2,000,000, net income of $1,200,000, and depreciation expense of $100,000. Rathke also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and accumulated depreciation of $500,000. Rathke’s asset turnover ratio is
2 times.
1.6 times.
1.3 times.
.96 times.
Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
During 2013, Stein Corporation reported net sales of $3,500,000 and net income of $2,100,000. Stein also reported beginning total assets of $1,000,000 and ending total assets of $1,500,000. Stein’s asset turnover ratio is
3.5 times.
2.8 times.
2.3 times.
1.7 times.
Ans: LO: 7, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Natural resources are generally shown on the balance sheet under
Intangibles.
Investments.
Property, Plant, and Equipment.
Owner's Equity.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Which of the following statements concerning financial statement presentation is not a true statement?
Intangibles are reported separately under Intangible Assets.
The balances of major classes of assets may be disclosed in the footnotes.
The balances of the accumulated depreciation of major classes of assets may be disclosed in the footnotes.
The balances of all individual assets, as they appear in the subsidiary plant ledger, should be disclosed in the footnotes.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Intangible assets
should be reported under the heading Property, Plant, and Equipment.
are not reported on the balance sheet because they lack physical substance.
should be reported as Current Assets on the balance sheet.
should be reported as a separate classification on the balance sheet.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A company has the following assets:
Buildings and Equipment, less accumulated depreciation of $2,000,000 $7,600,000
Copyrights 960,000
Patents 4,000,000
Timberlands, less accumulated depletion of $2,800,000 4,800,000
The total amount reported under Property, Plant, and Equipment would be
$17,360,000.
$12,400,000.
$16,400,000.
$13,360,000.
Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
A company decides to exchange its old machine and $154,000 cash for a new machine. The old machine has a book value of $126,000 and a fair value of $140,000 on the date of the exchange. The cost of the new machine would be recorded at
$280,000.
$294,000.
$266,000.
cannot be determined.
Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
A company exchanges its old office equipment and $60,000 for new office equipment. The old office equipment has a book value of $42,000 and a fair value of $30,000 on the date of the exchange. The cost of the new office equipment would be recorded at
$102,000.
$90,000.
$72,000.
Cannot be determined.
Ans: LO: 8, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
In an exchange of plant assets that has commercial substance, any difference between the fair value and the book value of the old plant asset is
recorded as a gain or loss.
recorded if a gain but is deferred if a loss.
recorded if a loss but is deferred if a gain.
deferred if either a gain or loss.
Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Gains on an exchange of plant assets that has commercial substance are
deducted from the cost of the new asset acquired.
deferred.
not possible.
recognized immediately.
Ans: LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Losses on an exchange of plant assets that has commercial substance are
not possible.
deferred.
recognized immediately.
deducted from the cost of the new asset acquired.
Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
The cost of a new asset acquired in an exchange that has commercial substance is the cash paid plus the
book value of the old asset.
fair value of the old asset.
book value of the asset acquired.
fair value of the new asset.
Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
The cost of land includes all of the following except
real estate brokers’ commissions.
closing costs.
accrued property taxes.
parking lots.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
A term that is not synonymous with property, plant, and equipment is
plant assets.
fixed assets.
intangible assets.
long-lived tangible assets.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The factor that is not relevant in computing depreciation is
replacement value.
cost.
salvage value.
useful life.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Depreciable cost is the
book value of an asset less its salvage value.
cost of an asset less its salvage value.
cost of an asset less accumulated depreciation.
book value of an asset.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Santayana Company purchased a machine on January 1, 2011, for $20,000 with an estimated salvage value of $5,000 and an estimated useful life of 8 years. On January 1, 2013, Santayana decides the machine will last 12 years from the date of purchase. The salvage value is still estimated at $5,000. Using the straight-line method, the new annual depreciation will be
$1,125.
$1,250.
$1,500.
$1,667.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Ordinary repairs are expenditures to maintain the operating efficiency of a plant asset and are referred to as
capital expenditures.
expense expenditures.
improvements.
revenue expenditures.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Improvements are
revenue expenditures.
debited to an appropriate asset account when they increase useful life.
debited to accumulated depreciation when they do not increase useful life.
debited to an appropriate asset account when they do not increase useful life.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A gain on sale of a plant asset occurs when the proceeds of the sale are greater than the
salvage value of the asset sold.
market value of the asset sold.
book value of the asset sold.
accumulated depreciation on the asset sold.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
The entry to record depletion expense
decreases owner's equity and assets.
decreases net income and increases liabilities.
decreases assets and liabilities.
decreases assets and increases liabilities.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
All of the following are intangible assets except
copyrights.
goodwill.
patents.
research and development costs.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A purchased patent has a legal life of 20 years. It should be
expensed in the year of acquisition.
amortized over 20 years regardless of its useful life.
amortized over its useful life if less than 20 years.
not amortized.
Ans: LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The asset turnover ratio is computed by dividing
net income by average total assets.
net sales by average total assets.
net income by ending total assets.
net sales by ending total assets.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
In an exchange of plant assets that has commercial substance
neither gains nor losses are recognized immediately.
gains, but not losses, are recognized immediately.
losses, but not gains, are recognized immediately.
both gains and losses are recognized immediately.
Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
TRUE-FALSE STATEMENTS
A current liability must be paid out of current earnings.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
The relationship between current liabilities and current assets is important in evaluating a company's ability to pay off its long-term debt.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
A company whose current liabilities exceed its current assets may have a liquidity problem.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Notes payable usually require the borrower to pay interest.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Notes payable are often used instead of accounts payable.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
A note payable must always be paid before an account payable.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
A $60,000, 8%, 9-month note payable requires an interest payment of $3,600 at maturity.
Ans: LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Most notes are not interest bearing.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
With an interest-bearing note, the amount of cash received upon issuance of the note generally exceeds the note's face value.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Interest expense on a note payable is only recorded at maturity.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Interest expense is reported under Other Expenses and Losses in the income statement.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Unearned revenues should be classified as Other Revenues and Gains on the Income Statement.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The higher the sales tax rate, the more profit a retailer can earn.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Metropolitan Symphony sells 200 season tickets for $50,000 that represents a five concert season. The amount of Unearned Ticket Revenue after the second concert is $20,000.
Ans: LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
During the month, a company sells goods for a total of $108,000, which includes sales taxes of $8,000; therefore, the company should recognize $100,000 in Sales Revenues and $8,000 in Sales Tax Expense.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA
Current maturities of long-term debt refers to the amount of interest on a note payable that must be paid in the current year.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The current ratio permits analysts to compare the liquidity of different sized companies.
Ans: LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Working capital is current assets divided by current liabilities.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FICA taxes withheld and federal income taxes withheld are mandatory payroll deductions.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Each bondholder may vote for the board of directors in proportion to the number of bonds held.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Registered bonds are bonds that are delivered to owners by U.S. registered mail service.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A debenture bonds is an unsecured bond which is issued against the general credit of the borrower.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Bonds are a form of interest-bearing notes payable.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Neither corporate bond interest nor dividends are deductible for tax purposes.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
A 10% stock dividend is the equivalent of a $1,000 par value bond paying annual interest of 10%.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
The holder of a convertible bond can convert an interest payment received into a cash dividend paid on common stock if the dividend is greater than the interest payment.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: None, AICPA PC: None, IMA: Business Economics
The board of directors may authorize more bonds than are issued.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA
The contractual interest rate is always equal to the market interest rate on the date that bonds are issued.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
If $150,000 face value bonds are issued at 103, the proceeds received will be $103,000.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Discount on bonds is an additional cost of borrowing and should be recorded as interest expense over the life of the bonds.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a weak credit rating.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
A corporation that issues bonds at a discount will recognize interest expense at a rate which is greater than the market interest rate.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
If bonds are issued at a premium, the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
If the market interest rate is greater than the contractual interest rate, bonds will sell at a discount.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
If $800,000, 6% bonds are issued on January 1, and pay interest semiannually, the amount of interest paid on July 1 will be $24,000.
Ans: LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
If bonds sell at a premium, the interest expense recognized each year will be greater than the contractual interest rate.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
The carrying value of bonds is calculated by adding the balance of the Discount on Bonds Payable account to the balance in the Bonds Payable account.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The loss on bond redemption is the difference between the cash paid and the carrying value of the bonds.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
If $500,000 par value bonds with a carrying value of $476,000 are redeemed at 97, a loss on redemption will be recorded.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Gains and losses are not recognized when convertible bonds are converted into common stock.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Generally, convertible bonds do not pay interest.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Each payment on a mortgage note payable consists of interest on the original balance of the loan and a reduction of the loan principal.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
A long-term note that pledges title to specific property as security for a loan is known as a mortgage payable.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
The times interest earned ratio is computed by dividing net income by interest expense.
Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
a 48. The present value of a bond is a function of two variables: (1) the payment amounts and (2) the interest (discount) rate.
Ans: LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
a 49. The effective-interest method of amortization results in varying amounts of amortization and interest expense per period but a constant interest rate.
Ans: LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
A debt that is expected to be paid within one year through the creation of long-term debt is a current liability.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Notes payable usually are issued to meet long-term financing needs.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Current maturities of long-term debt are often identified as long-term debt due within one year on the balance sheet.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Bonds that mature at a single specified future date are called term bonds.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The terms of the bond issue are set forth in a formal legal document called a bond indenture.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The carrying value of bonds at maturity should be equal to the face value of the bonds.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Premium on Bonds Payable is a contra account to Bonds Payable.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
When bonds are converted into common stock, the carrying value of the bonds is transferred to paid-in capital accounts.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Long-term liabilities are reported in a separate section of the balance sheet immediately following current liabilities.
Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
MULTIPLE CHOICE QUESTIONS
All of the following are reported as current liabilities except
accounts payable.
bonds payable.
notes payable.
unearned revenues.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The relationship between current liabilities and current assets is
useful in determining income.
useful in evaluating a company's liquidity.
called the matching principle.
useful in determining the amount of a company's long-term debt.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Most companies pay current liabilities
out of current assets.
by issuing interest-bearing notes payable.
by issuing stock.
by creating long-term liabilities.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
A current liability is a debt that can reasonably be expected to be paid
within one year or the operating cycle, whichever is longer.
between 6 months and 18 months.
out of currently recognized revenues.
out of cash currently on hand.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Liabilities are classified on the balance sheet as current or
deferred.
unearned.
long-term.
accrued.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
From a liquidity standpoint, it is more desirable for a company to have current
assets equal current liabilities.
liabilities exceed current assets.
assets exceed current liabilities.
liabilities exceed long-term liabilities.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
The relationship of current assets to current liabilities is used in evaluating a company's
operating cycle.
revenue-producing ability.
short-term debt paying ability.
long-range solvency.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Which of the following is usually not an accrued liability?
Interest payable
Wages payable
Taxes payable
Notes payable
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
In most companies, current liabilities are paid within
one year through the creation of other current liabilities.
the operating cycle through the creation of other current liabilities.
one year or the operating cycle out of current assets.
the operating cycle out of current assets.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
The entry to record the issuance of an interest-bearing note credits Notes Payable for the note's
maturity value.
market value.
face value.
cash realizable value.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
With an interest-bearing note, the amount of assets received upon issuance of the note is generally
equal to the note's face value.
greater than the note's face value.
less than the note's face value.
equal to the note's maturity value.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
A note payable is in the form of
a contingency that is reasonably likely to occur.
a written promissory note.
an oral agreement.
a standing agreement.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
The entry to record the proceeds upon issuing an interest-bearing note is
Interest Expense
Cash
Notes Payable
Cash
Notes Payable
Notes Payable
Cash
Cash
Notes Payable
Interest Payable
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Admire County Bank agrees to lend Givens Brick Company $300,000 on January 1. Givens Brick Company signs a $300,000, 8%, 9-month note. The entry made by Givens Brick Company on January 1 to record the proceeds and issuance of the note is
Interest Expense.................................................................... 18,000
Cash....................................................................................... 282,000
Notes Payable............................................................... 300,000
Cash....................................................................................... 300,000
Notes Payable............................................................... 300,000
Cash....................................................................................... 300,000
Interest Expense.................................................................... 18,000
Notes Payable............................................................... 318,000
Cash....................................................................................... 300,000
Interest Expense.................................................................... 18,000
Notes Payable............................................................... 300,000
Interest Payable............................................................ 18,000
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Admire County Bank agrees to lend Givens Brick Company $300,000 on January 1. Givens Brick Company signs a $300,000, 8%, 9-month note. What is the adjusting entry required if Givens Brick Company prepares financial statements on June 30?
Interest Expense.................................................................... 12,000
Interest Payable............................................................ 12,000
Interest Expense.................................................................... 12,000
Cash.............................................................................. 12,000
Interest Payable..................................................................... 12,000
Cash.............................................................................. 12,000
Interest Payable..................................................................... 12,000
Interest Expense........................................................... 12,000
Ans: LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Admire County Bank agrees to lend Givens Brick Company $300,000 on January 1. Givens Brick Company signs a $300,000, 8%, 9-month note. What entry will Givens Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30?
Notes Payable........................................................................ 318,000
Cash.............................................................................. 318,000
Notes Payable........................................................................ 300,000
Interest Payable..................................................................... 18,000
Cash.............................................................................. 318,000
Interest Expense.................................................................... 18,000
Notes Payable........................................................................ 300,000
Cash.............................................................................. 318,000
Interest Payable..................................................................... 12,000
Notes Payable........................................................................ 300,000
Interest Expense.................................................................... 6,000
Cash.............................................................................. 318,000
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
As interest is recorded on an interest-bearing note, the Interest Expense account is
increased; the Notes Payable account is increased.
increased; the Notes Payable account is decreased.
increased; the Interest Payable account is increased.
decreased; the Interest Payable account is increased.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
When an interest-bearing note matures, the balance in the Notes Payable account is
less than the total amount repaid by the borrower.
the difference between the maturity value of the note and the face value of the note.
equal to the total amount repaid by the borrower.
greater than the total amount repaid by the borrower.
On October 1, Steve's Carpet Service borrows $250,000 from First National Bank on a 3-month, $250,000, 8% note. What entry must Steve's Carpet Service make on December 31 before financial statements are prepared?
Interest Payable..................................................................... 5,000
Interest Expense........................................................... 5,000
Interest Expense.................................................................... 20,000
Interest Payable............................................................ 20,000
Interest Expense.................................................................... 5,000
Interest Payable............................................................ 5,000
Interest Expense.................................................................... 5,000
Notes Payable............................................................... 5,000
Ans: LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
On October 1, Steve's Carpet Service borrows $250,000 from First National Bank on a 3-month, $250,000, 8% note. The entry by Steve's Carpet Service to record payment of the note and accrued interest on January 1 is
Notes Payable........................................................................ 255,000
Cash.............................................................................. 255,000
Notes Payable........................................................................ 250,000
Interest Payable..................................................................... 5,000
Cash.............................................................................. 255,000
Notes Payable........................................................................ 250,000
Interest Payable..................................................................... 20,000
Cash.............................................................................. 270,000
Notes Payable........................................................................ 250,000
Interest Expense.................................................................... 5,000
Cash.............................................................................. 255,000
Ans: LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Interest expense on an interest-bearing note is
always equal to zero.
accrued over the life of the note.
only recorded at the time the note is issued.
only recorded at maturity when the note is paid.
Ans: LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
The entry to record the payment of an interest-bearing note at maturity after all interest expense has been recognized is
Notes Payable
Interest Payable
Cash
Notes Payable
Interest Expense
Cash
Notes Payable
Cash
MC. 80 (Cont.)
Notes Payable
Cash
Interest Payable
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Sales taxes collected by a retailer are recorded by
crediting Sales Taxes Revenue.
debiting Sales Taxes Expense.
crediting Sales Taxes Payable.
debiting Sales Taxes Payable.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Unearned Rent Revenue is
a contra account to Rent Revenue.
a revenue account.
reported as a current liability.
debited when rent is received in advance.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Sales taxes collected by the retailer are recorded as a(n)
revenue.
liability.
expense.
asset.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
On September 1, Joe's Painting Service borrows $100,000 from National Bank on a 4-month, $100,000, 6% note. What entry must Joe's Painting Service make on December 31 before financial statements are prepared?
Interest Payable..................................................................... 2,000
Interest Expense........................................................... 2,000
Interest Expense.................................................................... 6,000
Interest Payable............................................................ 6,000
Interest Expense.................................................................... 2,000
Interest Payable............................................................ 2,000
Interest Expense.................................................................... 2,000
Notes Payable............................................................... 2,000
Ans: LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
On September 1, Joe's Painting Service borrows $100,000 from National Bank on a 4-month, $100,000, 6% note. The entry by Joe's Painting Service to record payment of the note and accrued interest on January 1 is
Notes Payable........................................................................ 102,000
Cash.............................................................................. 102,000
Notes Payable........................................................................ 100,000
Interest Payable..................................................................... 2,000
Cash.............................................................................. 102,000
MC. 85 (Cont.)
Notes Payable........................................................................ 100,000
Interest Payable..................................................................... 6,000
Cash.............................................................................. 106,000
Notes Payable........................................................................ 100,000
Interest Expense.................................................................... 2,000
Cash.............................................................................. 102,000
Ans: LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
The interest charged on a $200,000 note payable, at the rate of 8%, on a 90-day note would be
$16,000.
$8,888.
$4,000.
$1,333.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
The interest charged on a $100,000 note payable, at the rate of 6%, on a 60-day note would be
$6,000.
$3,333.
$1,500.
$1,000.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
The interest charged on a $75,000 note payable, at the rate of 8%, on a 3-month note would be
$6,000.
$3,000.
$1,500.
$1,000.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
The interest charged on a $50,000 note payable, at the rate of 6%, on a 2-month note would be
$3,000.
$1,500.
$750.
$500.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
On October 1, 2013, Pennington Company issued an $80,000, 10%, nine-month interest-bearing note. If the Pennington Company is preparing financial statements at December 31, 2013, the adjusting entry for accrued interest will include a:
credit to Notes Payable of $2,000.
debit to Interest Expense of $2,000
credit to Interest Payable of $4,000.
debit to Interest Expense of $3,000.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
On October 1, 2013, Pennington Company issued an $80,000, 10%, nine-month interest-bearing note. Assuming interest was accrued in June 30, 2014, the entry to record the payment of the note on July 1, 2014, will include a:
debit to Interest Expense of $2,000.
credit to Cash of $80,000
debit to Interest Payable of $6,000.
debit to Notes Payable of $86,000.
Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Crawford Company has total proceeds (before segregation of sales taxes) from sales of $4,770. If the sales tax is 6%, the amount to be credited to the account Sales Revenue is:
$4,770.
$4,484.
$5,056.
$4,500.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Reliable Insurance Company collected a premium of $30,000 for a 1-year insurance policy on May 1. What amount should Reliable report as a current liability for Unearned Insurance Revene at December 31?
$0.
$10,000.
$20,000.
$30,000.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
A company receives $198, of which $18 is for sales tax. The journal entry to record the sale would include a
debit to Sales Tax Expense for $18.
credit to Sales Taxes Payable for $18.
debit to Sales Revenue for $198.
debit to Cash for $180.
Ans: LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
A company receives $348, of which $28 is for sales tax. The journal entry to record the sale would include a
a debit to Sales Tax Expense for $28.
debit to Sales Taxes Payable for $28.
debit to Sales Revenue for $348.
debit to Cash for $348.
Ans: LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
A retail store credited the Sales Revenue account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales Revenue account amounted to $525,000, what is the amount of the sales taxes owed to the taxing agency?
$500,000
$525,000
$26,250
$25,000
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
On January 1, 2013, Howard Company, a calendar-year company, issued $800,000 of notes payable, of which $200,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2013, is
Current Liabilities, $800,000.
Long-term Debt, $800,000.
Current Liabilities, $400,000; Long-term Debt, $400,000.
Current Liabilities, $200,000; Long-term Debt, $600,000.
Ans: LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
On January 1, 2013, Donahue Company, a calendar-year company, issued $500,000 of notes payable, of which $125,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2013, is
Current Liabilities, $500,000.
Long-term Debt , $500,000.
Current Liabilities, $125,000; Long-term Debt, $375,000.
Current Liabilities, $375,000; Long-term Debt, $125,000.
Ans: LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
A cash register tape shows cash sales of $1,500 and sales taxes of $120. The journal entry to record this information is
Cash....................................................................................... 1,620
Sales Revenue.............................................................. 1,620
Cash....................................................................................... 1,620
Sales Taxes Payable.................................................... 120
Sales Revenue.............................................................. 1,500
Cash....................................................................................... 1,500
Sales Tax Expense................................................................ 120
Sales Revenue.............................................................. 1,620
Cash....................................................................................... 1,620
Sales Revenue.............................................................. 1,500
Sales Taxes Revenue................................................... 120
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Ed’s Bookstore has collected $750 in sales taxes during April. If sales taxes must be remitted to the state government monthly, what entry will Ed's Bookstore make to show the April remittance?
Sales Taxes Payable............................................................. 750
Cash.............................................................................. 750
Sales Tax Expense................................................................ 750
MC. 100 (Cont.)
Cash.............................................................................. 750
Sales Tax Expense................................................................ 750
Sales Taxes Payable.................................................... 750
No entry required.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Layton Company does not ring up sales taxes separately on the cash register. Total receipts for October amounted to $27,300. If the sales tax rate is 5%, what amount must be remitted to the state for October's sales taxes?
$1,300
$1,365
$65
It cannot be determined.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Valerie's Salon has total receipts for the month of $18,550 including sales taxes. If the sales tax rate is 6%, what are Valerie's sales for the month?
$17,437
$19,663
$17,500
It cannot be determined.
Ans: LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
The amount of sales tax collected by a retail store when making sales is
a miscellaneous revenue for the store.
a current liability.
not recorded because it is a tax paid by the customer.
recorded as an operating expense.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A retail store credited the Sales Revenue account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales Revenue account amounted to $273,000, what is the amount of the sales taxes owed to the taxing agency?
$260,000
$273,000
$13,650
$13,000
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Advances from customers are classified as a(n)
revenue.
expense.
current asset.
current liability.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The current portion of long-term debt should
be paid immediately.
be reclassified as a current liability.
be classified as a long-term liability.
not be separated from the long-term portion of debt.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Sales taxes collected by a retailer are expenses
of the retailer.
of the customers.
of the government.
that are not recognized by the retailer until they are submitted to the government.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Sales taxes collected by a retailer are reported as
contingent liabilities.
revenues.
expenses.
current liabilities.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Julie's Boutique has total receipts for the month of $30,660 including sales taxes. If the sales tax rate is 5%, what are Julie's sales for the month?
$29,127
$29,200
$32,193
It cannot be determined.
Ans: LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
A cash register tape shows cash sales of $2,500 and sales taxes of $150. The journal entry to record this information is
Cash....................................................................................... 2,500
Sales Revenue.............................................................. 2,500
Cash....................................................................................... 2,650
Sales Tax Revenue....................................................... 150
Sales Revenue.............................................................. 2,500
Cash....................................................................................... 2,500
Sales Tax Expense................................................................ 150
Sales Revenue.............................................................. 2,650
Cash....................................................................................... 2,650
Sales Revenue.............................................................. 2,500
Sales Taxes Payable.................................................... 150
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Jim's Pharmacy has collected $600 in sales taxes during March. If sales taxes must be remitted to the state government monthly, what entry will Jim's Pharmacy make to show the March remittance?
Sales Tax Expense................................................................ 600
Cash.............................................................................. 600
Sales Taxes Payable............................................................. 600
Cash.............................................................................. 600
Sales Tax Expense................................................................ 600
Sales Taxes Payable.................................................... 600
No entry required.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Oakley Company does not ring up sales taxes separately on the cash register. Total receipts for February amounted to $32,100. If the sales tax rate is 7%, what amount must be remitted to the state for February's sales taxes?
$2,247
$2,100
$3,210
It cannot be determined.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Any balance in an unearned revenue account is reported as a(n)
current liability.
long-term debt.
revenue.
unearned liability.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Pickett Company typically sells subscriptions on an annual basis, and publishes six times a year. The magazine sells 80,000 subscriptions in January at $15 each. What entry is made in January to record the sale of the subscriptions?
Subscriptions Receivable...................................................... 1,200,000
Subscription Revenue................................................... 1,200,000
Cash ...................................................................................... 1,200,000
Unearned Subscription Revenue.................................. 1,200,000
Subscriptions Receivable...................................................... 200,000
Unearned Subscription Revenue.................................. 200,000
Prepaid Subscriptions............................................................ 1,200,000
Cash.............................................................................. 1,200,000
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Hilton Company issued a four-year interest-bearing note payable for $400,000 on January 1, 2012. Each January the company is required to pay $100,000 on the note. How will this note be reported on the December 31, 2013 balance sheet?
Long-term debt, $400,000.
Long-term debt, $300,000.
Long-term debt, $200,000; Long-term debt due within one year, $100,000.
Long-term debt, $300,000; Long-term debt due within one year, $100,000.
Ans: LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Kelly Rice has a large consulting practice. New clients are required to pay one-half of the consulting fees up front. The balance is paid at the conclusion of the consultation. How does Rice account for the cash received at the end of the engagement?
Cash
Unearned Service Revenue
Cash
Service Revenue
Prepaid Service Fees
Service Revenue
No entry is required when the engagement is concluded.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Which one of the following is shown first under current liabilities by many companies as a matter of custom?
Accrued expenses
Current maturities of long-term debt
Sales taxes payable
Notes payable
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Working capital is
current assets plus current liabilities.
current assets minus current liabilities.
current assets divided by current liabilities.
current assets multiplied by current liabilities.
Ans: LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
The current ratio is
current assets plus current liabilities.
current assets minus current liabilities.
current assets divided by current liabilities.
current assets multiplied by current liabilities.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Hardy Company has current assets of $90,000, current liabilities of $100,000, long-term assets of $180,000 and long-term liabilities of $80,000. Hardy Company's working capital and its current ratio are:
$90,000 and .90:1.
-$10,000 and 1.50:1.
$10,000 and .90:1.
-$10,000 and .90:1.
Ans: LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitative Methods
Current liabilities generally appear
after long-term debt on the balance sheet.
in decreasing order of magnitude on the balance sheet.
in order of maturity on the balance sheet.
in increasing order of magnitude on the balance sheet.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Employee payroll deductions include each of the following except
federal unemployment taxes.
federal income taxes.
FICA taxes.
insurance and pensions.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Which one of the following payroll taxes does not result in a payroll tax expense for the employer?
FICA tax
Federal income tax
Federal unemployment tax
State unemployment tax
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Each of the following is correct regarding bonds except they are
a form of interest-bearing notes payable.
attractive to many investors.
issued by corporations and governmental agencies.
sold in large denominations.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that
bond interest is deductible for tax purposes.
interest must be paid on a periodic basis regardless of earnings.
income to stockholders may increase as a result of trading on the equity.
the bondholders do not have voting rights.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
If a corporation issued $3,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?
$3,000,000
$90,000
$300,000
$210,000
Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Secured bonds are bonds that
are in the possession of a bank.
are registered in the name of the owner.
have specific assets of the issuer pledged as collateral.
have detachable interest coupons.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A legal document which summarizes the rights and privileges of bondholders as well as the obligations and commitments of the issuing company is called
a bond indenture.
a bond debenture.
trading on the equity.
a term bond.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Stockholders of a company may be reluctant to finance expansion through issuing more equity because
leveraging with debt is always a better idea.
their earnings per share may decrease.
the price of the stock will automatically decrease.
dividends must be paid on a periodic basis.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Which of the following is not an advantage of issuing bonds instead of common stock?
Stockholder control is not affected.
Earnings per share on common stock may be lower.
Income to common stockholders may increase.
Tax savings result.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Bonds that are secured by real estate are termed
mortgage bonds.
serial bonds.
debentures.
bearer bonds.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Bonds that mature at a single specified future date are called
coupon bonds.
term bonds.
serial bonds.
debentures.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Bonds that may be exchanged for common stock at the option of the bondholders are called
options.
stock bonds.
convertible bonds.
callable bonds.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called
callable bonds.
early retirement bonds.
options.
debentures.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Investors who receive checks in their names for interest paid on bonds must hold
registered bonds.
coupon bonds.
bearer bonds.
direct bonds.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A bondholder that sends in a coupon to receive interest payments must have a(n)
unsecured bond.
bearer bond.
mortgage bond.
serial bond.
Ans: LO: L, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Bonds that are not registered are
bearer bonds.
debentures.
registered bonds.
transportable bonds.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Bonds that are issued in the name of the owner are
coupon bonds.
bearer bonds.
serial bonds.
registered bonds.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Corporations are granted the power to issue bonds through
tax laws.
state laws.
federal security laws.
bond debentures.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The party who has the right to exercise a call option on bonds is the
investment banker.
bondholder.
bearer.
issuer.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
A major disadvantage resulting from the use of bonds is that
earnings per share may be lowered.
interest must be paid on a periodic basis.
bondholders have voting rights.
taxes may increase.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Bonds will always fall into all but which one of the following categories?
Callable or convertible
Term or serial
Registered or bearer
Secured or unsecured
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Which of the following statements concerning bonds is not a true statement?
Bonds are generally sold through an investment company.
The bond indenture is prepared after the bonds are printed.
The bond indenture and bond certificate are separate documents.
The trustee keeps records of each bondholder.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
A bond trustee does not
issue the bonds.
keep a record of each bondholder.
hold conditional title to pledged property.
maintain custody of unsold bonds.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
The contractual interest rate is always stated as a(n)
monthly rate.
daily rate.
semiannual rate.
annual rate.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
When authorizing bonds to be issued, the board of directors does not specify the
total number of bonds authorized to be sold.
contractual interest rate.
selling price.
total face value of the bonds.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The following exhibit is for Kmart bonds.
Bonds Close Yield Volume Net Change
Kmart 8 3/8 17 100¼ 8.4 35 +7/8
The contractual interest rate of the K mart bonds is
greater than the market interest rate.
less than the market interest rate.
equal to the market interest rate.
not determinable.
Ans: LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
The following exhibit is for Kmart bonds.
Bonds Close Yield Volume Net Change
Kmart 8 3/8 17 100¼ 8.4 35 +7/8
On the day of trading referred to above,
no Kmart bonds were traded.
bonds with market prices of $3,500 were traded.
at closing, the selling price of the bond was higher than the previous day's price.
the bond sold for $100.25
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A $1,000 face value bond with a quoted price of 97 is selling for
$1,000.
$970.
$907.
$97.
Ans: LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
A bond with a face value of $200,000 and a quoted price of 102¼ has a selling price of
$240,450.
$204,050.
$200,450.
$204,500.
Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Premium on Bonds Payable
has a debit balance.
is a contra account.
is considered to be a reduction in the cost of borrowing.
is deducted from bonds payable on the balance sheet.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
If the market interest rate is greater than the contractual interest rate, bonds will sell
at a premium.
at face value.
at a discount.
only after the stated interest rate is increased.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
On January 1, 2013, Carter Corporation issued $5,000,000, 10-year, 8% bonds at 103. Interest is payable semiannually on January 1 and July 1. The journal entry to record this transaction on January 1, 2013 is
Cash....................................................................................... 5,000,000
Bonds Payable.............................................................. 5,000,000
Cash....................................................................................... 5,150,000
Bonds Payable.............................................................. 5,150,000
Premium on Bonds Payable.................................................... 150,000
Cash....................................................................................... 5,000,000
Bonds Payable.............................................................. 5,150,000
MC. 153 (Cont.)
Cash....................................................................................... 5,150,000
Bonds Payable.............................................................. 5,000,000
Premium on Bonds Payable........................................... 150,000
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
The total cost of borrowing is increased only if the
bonds were issued at a premium.
bonds were issued at a discount.
bonds were sold at face value.
market interest rate is less than the contractual interest rate on that date.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
If the market interest rate is 10%, a $10,000, 12%, 10-year bond, that pays interest semiannually would sell at an amount
less than face value.
equal to face value.
greater than face value.
that cannot be determined.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
The present value of a $10,000, 5-year bond, will be less than $10,000 if the
contractual interest rate is less than the market interest rate.
contractual interest rate is greater than the market interest rate.
bond is convertible.
contractual interest rate is equal to the market interest rate.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Hernandez Corporation issues 3,000, 10-year, 8%, $1,000 bonds dated January 1, 2013, at 98. The journal entry to record the issuance will show a
debit to Cash of $3,000,000.
credit to Discount on Bonds Payable for $60,000.
credit to Bonds Payable for $3,040,000.
debit to Cash for $2,960,000.
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
The market interest rate is often called the
stated rate.
effective rate.
coupon rate.
contractual rate.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
If bonds are issued at a discount, it means that the
financial strength of the issuer is suspect.
market interest rate is higher than the contractual interest rate.
market interest rate is lower than the contractual interest rate.
bondholder will receive effectively less interest than the contractual interest rate.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Each of the following accounts is reported as long-term liabilities except
Interest Payable.
Bonds Payable.
Discount on Bonds Payable.
Premium on Bonds Payable.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The statement that "Bond prices vary inversely with changes in the market interest rate" means that if the
market interest rate increases, the contractual interest rate will decrease.
contractual interest rate increases, then bond prices will go down.
market interest rate decreases, then bond prices will go up.
contractual interest rate increases, the market interest rate will decrease.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
The carrying value of bonds will equal the market price
at the close of every trading day.
at the end of the fiscal period.
on the date of issuance.
every six months on the date interest is paid.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The sale of bonds above face value
is a rare occurrence.
will cause the total cost of borrowing to be less than the bond interest paid.
will cause the total cost of borrowing to be more than the bond interest paid.
will have no net effect on Interest Expense by the time the bonds mature.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
In the balance sheet, the account, Premium on Bonds Payable, is
added to Bonds Payable.
deducted from Bonds Payable.
classified as a stockholders' equity account.
classified as a revenue account.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Four thousand bonds with a face value of $1,000 each, are sold at 104. The entry to record the issuance is
Cash ...................................................................................... 4,160,000
Bonds Payable ............................................................. 4,160,000
Cash ...................................................................................... 4,000,000
Premium on Bonds Payable ................................................... 160,000
Bonds Payable ............................................................. 4,160,000
Cash ...................................................................................... 4,160,000
Premium on Bonds Payable .......................................... 160,000
Bonds Payable ............................................................. 4,000,000
MC. 165 (Cont.)
Cash ...................................................................................... 4,160,000
Discount on Bonds Payable ......................................... 160,000
Bonds Payable ............................................................. 4,000,000
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Bond interest paid is
higher when bonds sell at a discount.
lower when bonds sell at a premium.
the same whether bonds sell at a discount or a premium.
higher when bonds sell at a discount and lower when bonds sell at a premium.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Ward Corporation issues 5,000, 10-year, 8%, $1,000 bonds dated January 1, 2013, at 104. The journal entry to record the issuance will show a
debit to Cash of $5,000,000.
credit to Premium on Bonds Payable for $200,000.
credit to Bonds Payable for $5,040,000.
credit to Cash for $5,020,000.
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Lake Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2011. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Lake uses the straight-line method of amortization.
What is the amount of interest Lake must pay the bondholders in 2011?
$15,080
$16,000
$17,150
$14,850
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Beonce Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2011. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Beonce uses the straight-line method of amortization.
Beonce Company decided to redeem the bonds on January 1, 2013. What amount of gain or loss would Beonce report on its 2013 income statement?
$9,200 gain
$11,200 gain
$11,200 loss
$9,200 loss
Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Bargain Company has $1,600,000 of bonds outstanding. The unamortized premium is $21,600. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption?
$5,600 gain
$5,600 loss
$16,000 gain
$16,000 loss
MC. 170 (Cont.)
Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
The current carrying value of Kane’s $900,000 face value bonds is $897,000. If the bonds are retired at 103, what would be the amount Kane would pay its bondholders?
$897,000
$900,000
$906,000
$927,000
Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Lark Corporation retires its $800,000 face value bonds at 105 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $829,960. The entry to record the redemption will include a
credit of $10,040 to Loss on Bond Redemption.
debit of $10,040 to Loss on Bond Redemption.
credit of $10,040 to Premium on Bonds Payable.
debit of $40,000 to Premium on Bonds Payable.
Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
A $600,000 bond was retired at 103 when the carrying value of the bond was $622,000. The entry to record the retirement would include a
gain on bond redemption of $18,000.
loss on bond redemption of $12,000.
loss on bond redemption of $18,000.
gain on bond redemption of $4,000.
Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
If sixty $1,000 convertible bonds with a carrying value of $69,000 are converted into 9,000 shares of $5 par value common stock, the journal entry to record the conversion is
Bonds Payable ...................................................................... 69,000
Common Stock ............................................................. 69,000
Bonds Payable ...................................................................... 60,000
Premium on Bonds Payable ................................................... 9,000
Common Stock ............................................................. 69,000
Bonds Payable ...................................................................... 60,000
Premium on Bonds Payable ................................................... 9,000
Common Stock ............................................................. 45,000
Paid-in Capital in Excess of Par ................................... 24,000
Bonds Payable ...................................................................... 69,000
Discount on Bonds Payable ......................................... 9,000
Common Stock ............................................................. 45,000
Paid-in Capital in Excess of Par ................................... 15,000
Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
A corporation recognizes a gain or loss
only when bonds are converted into common stock.
only when bonds are redeemed before maturity.
when bonds are redeemed at or before maturity.
when bonds are converted into common stock and when they are redeemed before maturity.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
If there is a loss on bonds redeemed early, it is
debited directly to Retained Earnings.
reported as an "Other Expense" on the income statement.
reported as an "Extraordinary Item" on the income statement.
debited to Interest Expense, as a cost of financing.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
If bonds can be converted into common stock,
they will sell at a lower price than comparable bonds without a conversion feature.
they will carry a higher interest rate than comparable bonds without the conversion feature.
they will be converted only if the issuer calls them in for conversion.
the bondholder may benefit if the market price of the common stock increases substantially.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
When bonds are converted into common stock,
the market price of the stock on the date of conversion is credited to the Common Stock account.
the market price of the bonds on the date of conversion is credited to the Common Stock account.
the market price of the stock and the bonds is ignored when recording the conversion.
gains or losses on the conversion are recognized.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
If bonds with a face value of $150,000 are converted into common stock when the carrying value of the bonds is $135,000, the entry to record the conversion will include a debit to
Bonds Payable for $150,000.
Bonds Payable for $135,000.
Discount on Bonds Payable for $15,000.
Bonds Payable equal to the market price of the bonds on the date of conversion.
Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
A $600,000 bond was retired at 98 when the carrying value of the bond was $592,000. The entry to record the retirement would include a
gain on bond redemption of $8,000.
loss on bond redemption of $8,000.
loss on bond redemption of $4,000.
gain on bond redemption of $4,000.
Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Thirty $1,000 bonds with a carrying value of $39,600 are converted into 3,000 shares of $5 par value common stock. The common stock had a market value of $9 per share on the date of conversion. The entry to record the conversion is
Bonds Payable ...................................................................... 39,600
Common Stock ............................................................. 15,000
Paid-in Capital in Excess of Par.................................... 24,600
Bonds Payable ...................................................................... 30,000
Premium on Bonds Payable ................................................... 9,600
Common Stock ............................................................. 27,000
Paid-in Capital in Excess of Par ................................... 12,600
Bonds Payable ...................................................................... 30,000
Premium on Bonds Payable ................................................... 9,600
Common Stock ............................................................. 15,000
Paid-in Capital in Excess of Par.................................... 24,600
Bonds Payable ...................................................................... 39,600
Common Stock ............................................................. 27,000
Paid-in Capital in Excess of Par.................................... 12,600
Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
On March 31, 2014, $5,000,000 of 6%, 10-year bonds payable, dated December 31, 2013, are issued. Interest on the bonds is payable semiannually each June 30 and December 31. The total amount received (including accrued interest) by the issuing corporation is $5,060,000. Which of the following is correct?
The bonds were issued at a premium.
The amount of cash paid to bondholders on the next interest date, June 30, 2013, is $300,000.
The amount of cash paid to bondholders on the next interest date, June 30, 3013, is $50,000.
The bonds were issued at a discount.
Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Townson Co. has outstanding $100 million of 7% bonds, due in 7 years, and callable at 104. The bonds were issued at par and are selling today at a market price of 94. If Townson Co. calls $10 million of these bonds it will report:
A $700,000 gain.
A $400,000 loss.
An unrealized gain.
Neither gains nor losses are recognized on early retirements of debt.
Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
On December 1, 2013, Crawley Corporation incurs a 15-year $400,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $4,800, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, 2013. The portion of the second monthly payment made on January 31, 2014, which represents repayment of principal is:
$800.
$808.
$4,800.
$3,992.
MC. 184 (Cont.)
Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Which one of the following amounts increases each period when accounting for long-term notes payable?
Cash payment
Interest expense
Principal balance
Reduction of principal
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
In the balance sheet, mortgage notes payable are reported as
a current liability only.
a long-term liability only.
both a current and a long-term liability.
a current liability except for the reduction in principal amount.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
A mortgage note payable with a fixed interest rate requires the borrower to make installment payments over the term of the loan. Each installment payment includes interest on the unpaid balance of the loan and a payment on the principal. With each installment payment, indicate the effect on the portion allocated to interest expense and the portion allocated to principal.
Portion Allocated Portion Allocated
to Interest Expense to Payment of Principal
Increases Increases
Increases Decreases
Decreases Decreases
Decreases Increases
Ans: LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
The entry to record an installment payment on a long-term note payable is
Mortgage Payable
Cash
Interest Expense
Cash
Mortgage Payable
Interest Expense
Cash
Bonds Payable
Cash
Ans: LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Winter Company purchased a building on January 2 by signing a long-term $600,000 mortgage with monthly payments of $5,400. The mortgage carries an interest rate of 10 percent.
The entry to record the first monthly payment will include a
debit to the Cash account for $5,400.
credit to the Cash account for $5,000.
debit to the Interest Expense account for $5,000.
credit to the Mortgage Payable account for $5,400.
Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Horton Company purchased a building on January 2 by signing a long-term $480,000 mortgage with monthly payments of $4,400. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage after the first payment will be
$480,000.
$479,600.
$476,000.
$475,600.
Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Farris Company borrowed $800,000 from BankTwo on January 1, 2012 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 9.5%. What is the amount of expense Farris must recognize on its 2013 income statement?
$76,000
$63,427
$56,206
$49,659
Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Farris Company borrowed $800,000 from BankTwo on January 1, 2012 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 9.5%. What is the balance in the notes payable account at December 31, 2013?
$800,000
$522,729
$667,651
$648,000
Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Each of the following may be shown on a supporting schedule instead of on the balance sheet except the
current maturities of long-term debt.
conversion privileges.
interest rates.
maturity dates.
Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The times interest earned ratio is computed by dividing
net income by interest expense.
income before income taxes by interest expense.
income before interest expense by interest expense.
income before income taxes and interest expense by interest expense.
Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The discount on bonds payable or premium on bonds payable is shown on the balance sheet as an adjustment to bonds payable to arrive at the carrying value of the bonds. Indicate the appropriate addition or subtraction to bonds payable:
Premium on Discount on
Bonds Payable Bonds Payable
Add Add
Deduct Add
Add Deduct
Deduct Deduct
Ans: LO: 8, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
In a recent year Joey Corporation had net income of $140,000, interest expense of $40,000, and tax expense of $20,000. What was Joey Corporation’s times interest earned ratio for the year?
5.00
4.00
3.50
3.00
Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
In a recent year Cold Corporation had net income of $250,000, interest expense of $50,000, and a times interest earned ratio of 9. What was Cold Corporation’s income before taxes for the year?
$500,000
$450,000
$400,000
None of the above.
Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
The adjusted trial balance for Lamar Corp. at the end of the current year, 2013, contained the following accounts.
5-year Bonds Payable 8% $1,600,000
Interest Payable 50,000
Premium on Bonds Payable 150,000
Notes Payable (3 mo.) 40,000
Notes Payable (5 yr.) 145,000
Mortgage Payable ($15,000 due currently) 300,000
Salaries and Wages Payable 18,000
Taxes Payable (due 3/15 of 2014) 25,000
MC. 198 (Cont.)
The total long-term liabilities reported on the balance sheet are
$2,045,000.
$2,100,000.
$2,195,000.
$2,180,000.
Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
The 2013 financial statements of Marker Co. contain the following selected data (in millions).
Current Assets $ 75
Total Assets 140
Current Liabilities 40
Total Liabilities 95
Cash 8
The debt to total assets ratio is
67.9%.
96.4%.
28.6%.
256%.
Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
The current balance sheet of Greyson Inc. reports total assets of $40 million, total liabilities of $4 million, and stockholders' equity of $36 million. Greyson is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others. What will be the effect on Greyson's debt to total assets ratio if Greyson issues an additional $8 million in stock to finance its expansion?
The debt to total asset ratio will decrease from .1(4/40) to .083 (4/48) after the additional stock sale.
The debt to total asset ratio will decrease from 4/36 before to 4/44 after the additional stock sale.
The debt to total asset ratio will increase from 40 before to 48 after the additional investment.
The additional stock issuance will have no effect on the debt to total asset ratio.
Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
The present value of a bond is also known as its
face value.
market price.
future value.
deferred value.
Ans: LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
$3 million, 8%, 10-year bonds are issued at face value. Interest will be paid semi-annually. When calculating the market price of the bond, the present value of
$240,000 received for 10 periods must be calculated.
$3 million received in 10 periods must be calculated.
$3 million received in 20 periods must be calculated.
$120,000 received for 10 periods must be calculated.
Ans: LO: 9, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
a 203. Either the straight-line method or the effective-interest method of amortization will always result in
the same amount of interest expense being recognized over the term of the bonds.
the same amount of interest expense being recognized each year.
more interest expense being recognized than if premium or discounts were not amortized.
the same carrying value each year during the term of the bonds.
Ans: LO: 10, 11, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
A corporation issued $600,000, 10%, 5-year bonds on January 1, 2013 for $648,666, which reflects an effective-interest rate of 8%. Interest is paid semiannually on January 1 and July 1. If the corporation uses the effective-interest method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1, 2013, is
$30,000.
$24,000.
$32,434.
$25,946.
Ans: LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
A bond discount must
always be amortized using straight-line amortization.
always be amortized using the effective-interest method.
be amortized using the effective-interest method if it yields annual amounts that are materially different than the straight-line method.
be amortized using the straight-line method if it yields annual amounts that are materially different than the effective-interest method.
s
Ans: LO: 10, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
When the effective-interest method of bond discount amortization is used,
the applicable interest rate used to compute interest expense is the prevailing market interest rate on the date of each interest payment date.
the carrying value of the bonds will decrease each period.
interest expense will not be a constant dollar amount over the life of the bond.
interest paid to bondholders will be a function of the effective-interest rate on the date the bonds are issued.
Ans: LO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
When the effective-interest method of bond premium amortization is used, the
amount of premium amortized will get larger with successive amortization.
carrying value of the bonds will increase with successive amortization.
interest paid to bondholders will increase after each interest payment date.
interest rate used to calculate interest expense will be the contractual rate.
Ans: LO: 10, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Silk Company issued $500,000 of 6%, 10-year bonds on one of its interest dates for $431,850 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. Interest is paid annually.
What amount of discount (to the nearest dollar) should be amortized for the first interest period?
$14,089
$6,815
$9,096
$4,548
Ans: LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Silk Company issued $500,000 of 6%, 10-year bonds on one of its interest dates for $431,850 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. Interest is paid annually.
The journal entry on the first interest payment date, to record the payment of interest and amortization of discount will include a
debit to Interest Expense for $30,000.
credit to Cash for $34,548.
credit to Discount on Bonds Payable for $4,548.
debit to Interest Expense for $40,000.
Ans: LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Silk Company issued $500,000 of 6%, 10-year bonds on one of its interest dates for $431,850 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used.
How much bond interest expense (to the nearest dollar) should be reported on the income statement for the end of the first year?
$34,639
$34,548
$34,457
$30,000
Ans: LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
On January 1, Greene Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Greene uses the effective-interest method of amortizing bond discount. At the end of the first year, Greene should report unamortized bond discount of
$274,500.
$285,500.
$258,050.
$255,000.
Ans: LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
a 212. On January 1, Dade Corporation issued $3,000,000, 14%, 5-year bonds with interest payable on December 31. The bonds sold for $3,216,288. The market rate of interest for these bonds was 12%. On the first interest date, using the effective-interest method, the debit entry to Interest Expense is for
$360,000.
$376,473.
$385,955.
$420,000.
Ans: LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
a 213. On January 1, Jorge Inc. issued $3,000,000, 9% bonds for $2,817,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Jorge uses the effective-interest method of amortizing bond discount. At the end of the first year, Jorge should report unamortized bond discount of:
$164,700.
$171,300.
$154,830.
$153,000.
Ans: LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
a 214. On January 1, Runner Corporation issued $2,000,000, 14%, 5-year bonds with interest payable on July 1 and January 1. The bonds sold for $2,197,080. The market rate of interest for these bonds was 12%. On the first interest date, using the effective-interest method, the debit entry to Interest Expense is for:
$120,000.
$153,796.
$131,825.
$263,650.
Ans: LO: 10, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
a 215. Which of the following statements regarding the effective-interest method of accounting for bonds characteristics is false?
GAAP always requires use of the effective interest method.
The amount of periodic interest expense decreases over the life of a discounted bond issue when the effective-interest method is used.
Over the life of the bonds, the carrying value increases for discounted bonds when using the effective-interest method.
The effective-interest method applies a constant percentage to the bond carrying value to compute interest expense.
Ans: LO: 10, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
a 216. On January 1, Gage Corporation issues $1,000,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. The carrying value of the bonds at the end of the third interest period is:
$972,000
$976,000
$944,000
$928,000
Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
a 217. If bonds are originally sold at a discount using the straight-line amortization method:
Interest expense in the earlier years of the bond’s life will be less than the interest to be paid.
Interest expense in the earlier years of the bond’s life will be the same as interest to be paid.
Unamortized discount is subtracted from the face value of the bond to determine its carrying value.
Unamortized discount is added to the face value of the bond to determine its carrying value.
Ans: LO: 11, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
a 218. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $208,000 and uses annual straight-line amortization.
BOND AMORTIZATION SCHEDULE
Interest Period Interest Paid Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value
January 1, 2012 $8,000 $208,000
January 1, 2013 (i) (ii) (iii) (iv) (v)
Which of the following amounts should be shown in cell (i)?
$20,800
$21,600
$20,000
$4,000
Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
a 219. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $208,000 and uses annual straight-line amortization.
BOND AMORTIZATION SCHEDULE
Interest Period Interest Paid Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value
January 1, 2012 $8,000 $208,000
January 1, 2013 (i) (ii) (iii) (iv) (v)
Which of the following amounts should be shown in cell (ii)?
$21,600
$18,400
$20,800
$19,200
Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
a 220. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $212,000 and uses annual straight-line amortization.
BOND AMORTIZATION SCHEDULE
Interest Period Interest Paid Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value
January 1, 2012 $12,000 $212,000
January 1, 2013 (i) (ii) (iii) (iv) (v)
Which of the following amounts should be shown in cell (iii)?
$6,000
$12,000
$2,400
$1,200
Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
a 221. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $212,000 and uses annual straight-line amortization.
BOND AMORTIZATION SCHEDULE
Interest Period Interest Paid Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value
January 1, 2012 $12,000 $212,000
January 1, 2013 (i) (ii) (iii) (iv) (v)
Which of the following amounts should be shown in cell (iv)?
$10,800
$7,200
$14,400
$9,600
Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
a 222. Presented here is a partial amortization schedule for Roseland Company who sold $200,000, five year 10% bonds on January 1, 2012 for $208,000 and uses annual straight-line amortization.
BOND AMORTIZATION SCHEDULE
Interest Period Interest Paid Interest Expense Premium Amortization Unamortized Premium Bond Carrying Value
January 1, 2012 $8,000 $208,000
January 1, 2013 (i) (ii) (iii) (iv) (v)
Which of the following amounts should be shown in cell (v)?
$209,600
$208,800
$206,400
$207,200
Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
a 223. On January 1, Health Corporation issues $3,000,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. The entry on December 31 to record accrued bond interest and the amortization of bond discount using the straight-line method will include a
debit to Interest Expense, $180,000.
debit to Interest Expense, $360,000.
credit to Discount on Bonds Payable, $12,000.
credit to Discount on Bonds Payable, $24,000.
Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
224. On January 1, 2013, $2,000,000, 10-year, 10% bonds, were issued for $1,940,000. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the monthly amortization amount is
$19,400.
$6,000.
$1,616.
$500.
Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
A corporation issues $500,000, 10%, 5-year bonds on January 1, 2013, for $479,000. Interest is paid annually on January 1. If the corporation uses the straight-line method of amortization of bond discount, the amount of bond interest expense to be recognized in December 31, 2013’s adjusting entry is
$54,200.
$50,000.
$45,800.
$4,200.
Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
a 226. Stable Company issued $600,000 of 6%, 5-year bonds at 98, with interest paid annually. Assuming straight-line amortization, what is the total interest cost of the bonds?
$180,000
$192,000
$168,000
$174,000
Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
a 227. Pakota Company issued $800,000 of 6%, 5-year bonds at 98, with interest paid annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year?
$784,000
$785,600
$787,200
$790,400
Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
a 228. Trendy Company issued $600,000 of 8%, 5-year bonds at 106. Assuming straight-line amortization and annual interest payments, how much bond interest expense is recorded on the next interest date?
$48,000
$55,200
$40,800
$7,200
Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
a 229. Dart Company issued $600,000 of 8%, 5-year bonds at 106, with interest paid annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year?
$636,000
$632,400
$628,800
$639,600
Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
On January 1, 2013, $3,000,000, 5-year, 10% bonds, were issued for $2,910,000. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the monthly amortization amount is
$17,424.
$18,000.
$1,452.
$1,500.
Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
A corporation issues $500,000, 10%, 5-year bonds on January 1, 2013 for $479,000. Interest is paid semiannually on January 1 and July 1. If the corporation uses the straight- line method of amortization of bond discount, the amount of bond interest expense to be recognized on July 1, 2013 is
$52,100.
$25,000.
$27,100.
$22,900.
Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Over the term of the bonds, the balance in the Discount on Bonds Payable account will
fluctuate up and down if the market is volatile.
decrease.
increase.
be unaffected until the bonds mature.
Ans: LO: 11, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Bond discount should be amortized to comply with
the historical cost principle.
the matching principle.
the revenue recognition principle.
conservatism.
Ans: LO: 11, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
If bonds have been issued at a discount, over the life of the bonds, the
carrying value of the bonds will decrease.
carrying value of the bonds will increase.
interest expense will increase, if the discount is being amortized on a straight-line basis.
unamortized discount will increase.
Ans: LO: 11, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Hooke Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2012. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Hooke uses the straight-line method of amortization.
What is the amount of interest expense Hooke will show with relation to these bonds for the year ended December 31, 2013?
$16,000
$15,080
$17,150
$14,850
Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: FSA
Jarmin Company received proceeds of $188,500 on 10-year, 8% bonds issued on January 1, 2011. The bonds had a face value of $200,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Jarmin uses the straight-line method of amortization.
What is the carrying value of the bonds on January 1, 2013?
$200,000
$190,800
$197,700
$189,650
Ans: LO: 11, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
A current liability is a debt the company reasonably expects to pay from existing current assets within
one year.
the operating cycle.
one year or the operating cycle, whichever is longer.
one year or the operating cycle, whichever is shorter.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Which of the following statements concerning current liabilities is incorrect?
Current liabilities include unearned revenues.
A company that has more current liabilities than current assets is usually the subject of some concern.
Current liabilities include prepaid expenses.
A current liability is a debt that can reasonably be expected to be paid out of existing current assets or result in the creation of other current liabilities.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
On August 1, 2012, a company borrowed cash and signed a one-year interest-bearing note on which both the face value and interest are payable on August 1, 2013. How will the note payable and the related interest be classified in the December 31, 2012, balance sheet?
Note Payable Interest Payable
Current liability Noncurrent liability
Noncurrent liability Current liability
Current liability Current liability
Noncurrent liability Not shown
Ans: LO: 2,3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Companies report current liabilities on the balance sheet in
alphabetical order.
order of maturity.
random order.
order of magnitude.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The market value (present value) of a bond is a function of all of the following except the
dollar amounts to be received.
length of time until the amounts are received.
market rate of interest.
length of time until the bond is sold.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
On the date of issue, Chudzick Corporation sells $5 million of 5-year bonds at 97. The entry to record the sale will include the following debits and credits:
Bonds Payable Discount on Bonds Payable
$4,850,000 Cr. $0 Dr.
$5,000,000 Cr. $150,000 Dr.
$5,000,000 Cr. $1,250,000 Dr.
$5,000,000 Cr. $15,000 Dr.
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
The market rate of interest for a bond issue which sells for more than its face value is
independent of the interest rate stated on the bond.
higher than the interest rate stated on the bond.
equal to the interest rate stated on the bond.
less than the interest rate stated on the bond.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
When a company retires bonds before maturity, the gain or loss on redemption is the difference between the cash paid and the
carrying value of the bonds.
face value of the bonds.
original selling price of the bonds.
maturity value of the bonds.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Aire Corporation retires its bonds at 106 on January 1, following the payment of semi-annual interest. The face value of the bonds is $600,000. The carrying value of the bonds at the redemption date is $631,500. The entry to record the redemption will include a
credit of $31,500 to Loss on Bond Redemption.
debit of $36,000 to Premium on Bonds Payable.
credit of $5,250 to Gain on Bond Redemption.
debit of $31,500 to Premium on Bonds Payable.
Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Each payment on a mortgage note payable consists of
interest on the original balance of the loan.
reduction of loan principal only.
interest on the original balance of the loan and reduction of loan principal.
interest on the unpaid balance of the loan and reduction of loan principal.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
The debt to total assets ratio is computed by dividing
long-term liabilities by total assets.
total debt by total assets.
total assets by total debt.
total assets by long-term liabilities.
Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The market price of a bond is the
present value of its principal amount at maturity plus the present value of all future interest payments.
principal amount plus the present value of all future interest payments.
principal amount plus all future interest payments.
present value of its principal amount only.
Ans: LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
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Week 7 Quiz 6: Chapters 9 and 10
Chapter 9
TRUE-FALSE STATEMENTS
1. Budgets are statements of management's plans stated in financial terms.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
2. A benefit of budgeting is that it provides definite objectives for evaluating performance.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
3. A budget can be a means of communicating a company's objectives to external parties.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
4. A budget can be used as a basis for evaluating performance.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
5. A well-developed budget can operate and enforce itself.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
6. The budget itself and the administration of the budget are the responsibility of the accounting department.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
7. Effective budgeting requires clearly defined lines of authority and responsibility.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
8. The flow of input data for budgeting should be from the highest levels of responsibility to the lowest.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
9. Budgets can have a positive or negative effect on human behavior depending on the manner in which the budget is developed and administered.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Management, AICPA PC: Interaction, IMA: Performance Measurement
10. A budget can facilitate the coordination of activities among the segments of a large company.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
11. The longer the budget period, the more reliable the estimates of future outcomes.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
12. The budget committee has the responsibility for coordinating the preparation of the budget.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
13. The budget is developed within the framework of a sales forecast.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
14. Budgeting and long-range planning are two terms that describe the same process.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
15. Long-range plans are used more as a review of progress toward long-term goals rather than an evaluation of specific results to be achieved.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
16. The master budget reflects management's long-term plans encompassing five years or more.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
17. The master budget consists of operating and financial budgets.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
18. Financial budgets must be completed before the operating budgets can be prepared.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
19. The direct materials budget must be completed before the production budget because the quantity of materials available for production must be known.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
20. The number of direct labor hours needed for production is obtained from the production budget.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
21. A manufacturing overhead budget is not needed if the company develops a predeter-mined overhead rate to apply overhead.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
22. The manufacturing overhead budget generally has separate sections for variable, mixed, and fixed costs.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
23. A production budget should be prepared before the sales budget.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
24. The direct materials budget contains both quantity and cost data.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
25. The budgeted income statement indicates the expected profitability of operations for the next year.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
26. If a monthly cash budget is prepared properly, there will never be a cash deficiency at the end of any month.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
27. The budgeted balance sheet is prepared entirely from the budgets for the current year.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
28. The starting point when budgeting for a not-for-profit organization is generally to budget expenditures first.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
29. A merchandiser has a merchandise purchases budget rather than a production budget.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
30. A critical factor in budgeting for a service firm is to determine the amount of products to purchase.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
31. The budget itself and the administration of the budget are entirely accounting responsibilities.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
32. Financial planning models and statistical and mathematical techniques may be used in forecasting sales.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
33. The direct materials budget is derived from the direct materials units required for production plus desired ending direct materials units less beginning direct materials units.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
34. The manufacturing overhead budget shows the expected manufacturing overhead costs.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
35. In order to develop a budgeted balance sheet, the previous year's balance sheet is needed.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
36. In service enterprises, the critical factor in budgeting is coordinating materials and equipment with anticipated services.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
MULTIPLE CHOICE QUESTIONS
37. Why are budgets useful in the planning process?
a. They provide management with information about the company's past performance.
b. They help communicate goals and provide a basis for evaluation.
c. They guarantee the company will be profitable if it meets its objectives.
d. They enable the budget committee to earn their paycheck.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
38. A budget
a. is a substitute for management.
b. is an aid to management.
c. can operate or enforce itself.
d. is the responsibility of the accounting department.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
39. Accounting generally has the responsibility for
a. setting company goals.
b. expressing the budget in financial terms.
c. enforcing the budget.
d. administration of the budget.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
40. Which one of the following is not a benefit of budgeting?
a. It facilitates the coordination of activities.
b. It provides definite objectives for evaluating performance.
c. It provides assurance that the company will achieve its objectives.
d. It requires all levels of management to plan ahead on a recurring basis.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
41. Budgeting is usually most closely associated with which management function?
a. Planning
b. Directing
c. Motivating
d. Controlling
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
42. Which of the following items does not follow from the adoption of a budget?
a. Promote efficiency
b. Deterrent to waste
c. Basis for performance evaluation
d. Guarantee of accomplishing the profit objective
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
43. Which is true of budgets?
a. They are voted on and approved by stockholders.
b. They are used in the planning, but not in the control, process.
c. There is a standard form and structure for budgets.
d. They are used in performance evaluation.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
44. A common starting point in the budgeting process is
a. expected future net income.
b. past performance.
c. to motivate the sales force.
d. a clean slate, with no expectations.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
45. If budgets are to be effective, all of the following must be present except
a. acceptance at all levels of management.
b. research and analysis in setting realistic goals.
c. stockholders' approval of the budget.
d. sound organizational structure.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
46. If budgets are to be effective, there must be
a. a history of successful operations.
b. independent verification of budget goals.
c. an organizational structure with clearly defined lines of authority and responsibility.
d. excess plant capacity.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
47. It is important that budgets be accepted by
a. division managers.
b. department heads.
c. supervisors.
d. All of these.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
48. Which of the following statements about budget acceptance in an organization is true?
a. The most widely accepted budget by the organization is the one prepared by top management.
b. The most widely accepted budget by the organization is the one prepared by the department heads.
c. Budgets are hardly ever accepted by anyone except top management.
d. Budgets have a greater chance of acceptance if all levels of management have provided input into the budgeting process.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
49. Top management notices a variation from budget and an investigation of the difference reveals that the department manager could not be expected to have controlled the variation. Which of the following statements is applicable?
a. Department managers should be held accountable for all variances from budgets for their departments.
b. Department managers should only be held accountable for controllable variances for their departments.
c. Department managers should be credited for favorable variances even if they are beyond their control.
d. Department managers' performances should not be evaluated based on actual results to budgeted results.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Business Economics
50. An unrealistic budget is more likely to result when it
a. has been developed in a top down fashion.
b. has been developed in a bottom up fashion.
c. has been developed by all levels of management.
d. is developed with performance appraisal usages in mind.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Business Economics
51. A budget is most likely to be effective if
a. it is used to assess blame when things do not occur according to plans.
b. it is not used to evaluate a manager's performance.
c. employees and managers at the lower levels do not get involved in the budgeting process.
d. it has top management support.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
52. In many companies, responsibility for coordinating the preparation of the budget is assigned to
a. the company's independent certified public accountants.
b. the company's internal auditors.
c. the company's board of directors.
d. a budget committee.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
53. A budget period should be
a. monthly.
b. for a year or more.
c. long-term.
d. long enough to provide an obtainable goal under normal business conditions.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
54. If a company has adopted continuous budgeting, the budget will show plans for
a. every day.
b. a full year ahead.
c. the current year and the next year.
d. at least five years.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
55. The most common budget period is
a. one month.
b. three months.
c. six months.
d. one year.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
56. Budget development for the coming year usually starts
a. a year in advance.
b. the first month of the year to be budgeted.
c. several months before the end of the current year.
d. the last month of the previous year.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
57. The budget committee would not normally include the
a. research director.
b. treasurer.
c. sales manager.
d. external auditor.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
58. The budget committee in a company is often headed by the
a. president.
b. controller.
c. treasurer.
d. budget director.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Budget Preparation
59. Long-range planning
a. generally presents more detailed information than an annual budget.
b. generally encompasses a longer period of time than an annual budget.
c. is usually more accurate than an annual budget.
d. is prepared on a quarterly basis if the budget is prepared on a quarterly basis.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
60. Long-range planning usually encompasses a period of at least
a. six months.
b. 1 year.
c. 5 years.
d. 10 years.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
61. Which of the following is not a proper match-up?
a. Long range planning Strategies
b. Budgeting Short-term goals
c. Long-range planning 5 years
d. Budgeting Long-term goals
Ans: LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
62. Which is the last step in developing the master budget?
a. Preparing the budgeted balance sheet
b. Preparing the cost of goods manufactured budget
c. Preparing the budgeted income statement
d. Preparing the cash budget
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
63. If there were 60,000 pounds of raw materials on hand on January 1, 120,000 pounds are desired for inventory at January 31, and 410,000 pounds are required for January production, how many pounds of raw materials should be purchased in January?
a. 350,000 pounds
b. 530,000 pounds
c. 290,000 pounds
d. 470,000 pounds
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
64. The total direct labor hours required in preparing a direct labor budget are calculated using the
a. sales forecast.
b. production budget.
c. direct materials budget.
d. sales budget.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
65. The direct materials and direct labor budgets provide information for preparing the
a. sales budget.
b. production budget.
c. manufacturing overhead budget.
d. cash budget.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
66. A sales forecast
a. shows a forecast for the firm only.
b. shows a forecast for the industry only.
c. shows forecasts for the industry and for the firm.
d. plays a minor role in the development of the master budget.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
67. Which of the following is not an operating budget?
a. Direct labor budget
b. Sales budget
c. Production budget
d. Cash budget
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
68. Which of the following is not a financial budget?
a. Capital expenditure budget
b. Cash budget
c. Manufacturing overhead budget
d. Budgeted balance sheet
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
69. Which of the following is done to improve the reliability of the sales forecast?
a. Employ financial planning models
b. Lengthen the planning horizon to more than a year
c. Rely solely on outside consultants
d. Use the sales forecasts from the previous year
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
70. The financial budgets include the
a. cash budget and the selling and administrative expense budget.
b. cash budget and the budgeted balance sheet.
c. budgeted balance sheet and the budgeted income statement.
d. cash budget and the production budget.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
71. The culmination of preparing operating budgets is the
a. budgeted balance sheet.
b. production budget.
c. cash budget.
d. budgeted income statement.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
72. The following information is taken from the production budget for the first quarter:
Beginning inventory in units 1,200
Sales budgeted for the quarter 426,000
Capacity in units of production facility 472,000
How many finished goods units should be produced during the quarter if the company desires 3,200 units available to start the next quarter?
a. 428,000
b. 424,000
c. 474,000
d. 429,200
Ans: LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
73. An overly optimistic sales budget may result in
a. increases in selling prices late in the year.
b. insufficient inventories.
c. increased sales during the year.
d. excessive inventories.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation
74. In a production budget, total required production units are the budgeted sales units plus
a. beginning finished goods units.
b. desired ending finished goods units.
c. desired ending finished goods units plus beginning finished goods units.
d. desired ending finished goods units minus beginning finished goods units.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
75. The direct materials budget details
1. the quantity of direct materials to be purchased.
2. the cost of direct materials to be purchased.
a. 1
b. 2
c. both 1 and 2
d. neither 1 nor 2
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
76. The production budget shows expected unit sales of 32,000. Beginning finished goods units are 3,600. Required production units are 33,600. What are the desired ending finished goods units?
a. 2,000
b. 3,600
c. 6,400
d. 5,200
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
77. The production budget shows expected unit sales are 100,000. The required production units are 104,000. What are the beginning and desired ending finished goods units, respectively?
Beginning Units Ending Units
a. 10,000 6,000
b. 6,000 10,000
c. 4,000 10,000
d. 10,000 4,000
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
78. The production budget shows that expected unit sales are 48,000. The total required units are 54,000. What are the required production units?
a. 6,000
b. 9,000
c. 12,000
d. Cannot be determined from the data provided.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
79. The direct materials budget shows:
Units to be produced 3,000
Total pounds needed for production 9,000
Total materials required 9,900
What are the direct materials per unit?
a. .33 pounds
b. 3.0 pounds
c. 3.3 pounds
d. Cannot be determined from the data provided.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
80. The direct materials budget shows:
Desired ending direct materials 48,000 pounds
Total materials required 69,000 pounds
Direct materials purchases 63,200 pounds
The total direct materials needed for production is
a. 21,000 pounds.
b. 5,800 pounds.
c. 15,200 pounds.
d. 132,200 pounds.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
81. If the required direct materials purchases are 24,000 pounds, the direct materials required for production is three times the direct materials purchases, and the beginning direct materials are three and a half times the direct materials purchases, what are the desired ending direct materials in pounds?
a. 60,000
b. 12,000
c. 36,000
d. 24,000
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
82. Dart, Inc. makes and sells umbrellas. The company is in the process of preparing its Selling and Administrative Expense Budget for the last half of the year. The following budget data are available:
Variable Cost Per Unit Sold Monthly Fixed Cost
Sales commissions $0.60 $ 6,000
Shipping 1.20
Advertising 0.30
Executive salaries 40,000
Depreciation on office equipment 8,000
Other 0.35 28,000
Expenses are paid in the month incurred. If the company has budgeted to sell 8,000 umbrellas in October, how much is the total budgeted variable selling and administrative expenses for October?
a. $16,800
b. $18,400
c. $101,600
d. $19,600
Ans: LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
83. Which of the following expenses would not appear on a selling and administrative expense budget?
a. Sales commissions
b. Depreciation
c. Property taxes
d. Indirect labor
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
84. Which of the following would not appear as a fixed expense on a selling and administrative expense budget?
a. Freight-out
b. Office salaries
c. Property taxes
d. Depreciation
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
85. A master budget consists of
a. an interrelated long-term plan and operating budgets.
b. financial budgets and a long-term plan.
c. interrelated financial budgets and operating budgets.
d. all the accounting journals and ledgers used by a company.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
86. The starting point in preparing a master budget is the preparation of the
a. production budget.
b. sales budget.
c. purchasing budget.
d. personnel budget.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
87. Which one of the following is not needed in preparing a production budget?
a. Budgeted unit sales
b. Budgeted raw materials
c. Beginning finished goods units
d. Ending finished goods units
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
88. A company budgeted unit sales of 204,000 units for January, 2013 and 240,000 units for February 2013. The company has a policy of having an inventory of units on hand at the end of each month equal to 30% of next month's budgeted unit sales. If there were 61,200 units of inventory on hand on December 31, 2012, how many units should be produced in January, 2013 in order for the company to meet its goals?
a. 214,800 units
b. 204,000 units
c. 193,200 units
d. 276,000 units
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
89. At January 1, 2013, Deer Corp. has beginning inventory of 2,000 surfboards. Deer estimates it will sell 10,000 units during the first quarter of 2013 with a 12% increase in sales each quarter. Deer’s policy is to maintain an ending inventory equal to 25% of the next quarter’s sales. Each surfboard costs $100 and is sold for $150. How much is budgeted sales revenue for the third quarter of 2013?
a. $450,000
b. $1,950,000
c. $1,881,600
d. $12,544
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
90. Doe Manufacturing plans to sell 6,000 purple lawn chairs during May, 5,700 in June, and 6,000 during July. The company keeps 15% of the next month’s sales as ending inventory. How many units should Doe produce during June?
a. 5,745
b. 6,600
c. 5,655
d. Not enough information to determine.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
91. Strand Company is planning to sell 400 buckets and produce 380 buckets during March. Each bucket requires 500 grams of plastic and one-half hour of direct labor. Plastic costs $10 per 500 grams and employees of the company are paid $15.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Strand has 300 kilos of plastic in beginning inventory and wants to have 200 kilos in ending inventory. How much is the total amount of budgeted direct labor for March?
a. $3,000
b. $6,000
c. $2,850
d. $5,7000
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
92. Teller Co. is planning to sell 900 boxes of ceramic tile, with production estimated at 870 boxes during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.40 per pound and employees of the company are paid $12.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Teller has 3,900 pounds of clay mix in beginning inventory and wants to have 4,500 pounds in ending inventory.
What is the total amount to be budgeted for manufacturing overhead for the month?
a. $2,871
b. $2,970
c. $11,484
d. $11,880
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
93. Teller Co. is planning to sell 900 boxes of ceramic tile, with production estimated at 870 boxes during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.40 per pound and employees of the company are paid $12.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Teller has 3,900 pounds of clay mix in beginning inventory and wants to have 4,500 pounds in ending inventory.
What is the total amount to be budgeted for direct labor for the month?
a. $2,610
b. $10,440
c. $2,700
d. $41,760
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
94. Teller Co. is planning to sell 900 boxes of ceramic tile, with production estimated at 870 boxes during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.40 per pound and employees of the company are paid $12.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Teller has 3,900 pounds of clay mix in beginning inventory and wants to have 4,500 pounds in ending inventory.
What is the total amount to be budgeted in pounds for direct materials to be purchased for the month?
a. 38,280
b. 37,680
c. 38,880
d. 40,200
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
95. Lorie Nursery plans to sell 320 potted plants during April and 240 units in May. Lorie Nursery keeps 15% of the next month’s sales as ending inventory. How many units should Lorie Nursery produce during April?
a. 308
b. 332
c. 320
d. 356
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
96. Comma Co. makes and sells widgets. The company is in the process of preparing its selling and administrative expense budget for the month. The following budget data are available:
Item Variable Cost Per Unit Sold Monthly Fixed Cost
Sales commissions $1 $10,000
Shipping $3
Advertising $4
Executive salaries $120,000
Depreciation on office equipment $4,000
Other $2 $6,000
Expenses are paid in the month incurred. If the company has budgeted to sell 80,000 widgets in October, how much is the total budgeted selling and administrative expenses for October?
a. $940,000
b. $140,000
c. $930,000
d. $800,000
Ans: LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
97. Comma Manufacturing budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels are planned for the fiscal year of July 1, 2012 to June 30, 2013:
June 30, 2013 June 30, 2012
Raw Materials 3,000 kilos 2,000 kilos
Three kilos of raw materials are needed to produce each unit of finished product. If Comma Manufacturing plans to produce 560,000 units during the 2012-2013 fiscal year, how many kilos of materials will the company need to purchase for its production during the year?
a. 1,681,000
b. 1,686,000
c. 1,680,000
d. 1,678,000
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
98. The following information is taken from the production budget for the first quarter:
Beginning inventory in units 1,200
Sales budgeted for the quarter 456,000
Production capacity in units 472,000
How many finished goods units should be produced during the quarter if the company desires 3,200 units available to start the next quarter?
a. 458,000
b. 454,000
c. 474,000
d. 459,200
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
99. Off-Line Co. has 9,000 units in beginning finished goods. The sales budget shows expected sales to be 36,000 units. If the production budget shows that 42,000 units are required for production, what was the desired ending finished goods?
a. 3,000.
b. 9,000.
c. 15,000.
d. 27,000.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
100. Lion Industries required production for June is 132,000 units. To make one unit of finished product, three pounds of direct material Z are required. Actual beginning and desired ending inventories of direct material Z are 300,000 and 330,000 pounds, respectively. How many pounds of direct material Z must be purchased?
a. 378,000.
b. 396,000.
c. 408,000.
d. 426,000.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
101. Haft Construction Company determines that 54,000 pounds of direct materials are needed for production in July. There are 3,200 pounds of direct materials on hand at July 1 and the desired ending inventory is 2,800 pounds. If the cost per unit of direct materials is $3, what is the budgeted total cost of direct materials purchases?
a. 158,400.
b. 160,800.
c. 163,200.
d. 165,600.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
102. Pell Manufacturing is preparing its direct labor budget for May. Projections for the month are that 33,400 units are to be produced and that direct labor time is three hours per unit. If the labor cost per hour is $12, what is the total budgeted direct labor cost for May?
a. 1,159,200.
b. 1,180,800.
c. 1,202,400.
d. 1,296,000.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
103. Dolce Co. estimates its sales at 180,000 units in the first quarter and that sales will increase by 18,000 units each quarter over the year. They have, and desire, a 25% ending inventory of finished goods. Each unit sells for $25. 40% of the sales are for cash. 70% of the credit customers pay within the quarter. The remainder is received in the quarter following sale.
Production in units for the third quarter should be budgeted at
a. 220,500.
b. 207,000.
c. 274,500.
d. 216,000.
Ans: LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
104. Dolce Co. estimates its sales at 180,000 units in the first quarter and that sales will increase by 18,000 units each quarter over the year. They have, and desire, a 25% ending inventory of finished goods. Each unit sells for $25. 40% of the sales are for cash. 70% of the credit customers pay within the quarter. The remainder is received in the quarter following sale.
Cash collections for the third quarter are budgeted at
a. $3,051,000.
b. $4,428,000.
c. $5,319,000.
d. $6,156,000.
Ans: LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
105. Bear, Inc. estimates its sales at 200,000 units in the first quarter and that sales will increase by 20,000 units each quarter over the year. They have, and desire, a 25% ending inventory of finished goods. Each unit sells for $35. 40% of the sales are for cash. 70% of the credit customers pay within the quarter. The remainder is received in the quarter following sale.
Production in units for the third quarter should be budgeted at
a. 245,000.
b. 230,000.
c. 305,000.
d. 240,000.
Ans: LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
106. Bear, Inc. estimates its sales at 200,000 units in the first quarter and that sales will increase by 20,000 units each quarter over the year. They have, and desire, a 25% ending inventory of finished goods. Each unit sells for $35. 40% of the sales are for cash. 70% of the credit customers pay within the quarter. The remainder is received in the quarter following sale.
Cash collections for the third quarter are budgeted at
a. $4,746,000.
b. $6,888,000.
c. $8,274,000.
d. $9,576,000.
Ans: LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
107. A company determined that the budgeted cost of producing a product is $30 per unit. On June 1, there were 80,000 units on hand, the sales department budgeted sales of 300,000 units in June, and the company desires to have 120,000 units on hand on June 30. The budgeted cost of goods manufactured for June would be
a. $7,800,000.
b. $11,400,000.
c. $9,000,000.
d. $10,200,000.
Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
108. Of the following items, which one is not obtained from an individual operating budget?
a. Selling and administrative expenses
b. Accounts receivable
c. Cost of goods sold
d. Sales
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
109. Which of the following statements about a budgeted income statement is not true?
a. The budgeted income statement is prepared after the financial budgets are prepared.
b. The budgeted income statement is prepared on the accrual basis of accounting.
c. The budgeted income statement can be prepared in a multiple-step format.
d. The budgeted income statement is prepared using the individual operating budgets.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
110. A company has budgeted direct materials purchases of $300,000 in July and $480,000 in August. Past experience indicates that the company pays for 70% of its purchases in the month of purchase and the remaining 30% in the next month. During August, the following items were budgeted:
Wages Expense $150,000
Purchase of office equipment 72,000
Selling and Administrative Expenses 48,000
Depreciation Expense 36,000
The budgeted cash disbursements for August are
a. $648,000.
b. $426,000.
c. $696,000.
d. $732,000.
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
111. Astor Manufacturing has the following budgeted sales: January $120,000, February $180,000, and March $150,000. 40% of the sales are for cash and 60% are on credit. For the credit sales, 50% are collected in the month of sale, and 50% the next month. The total expected cash receipts during March are:
a. $168,000.
b. $159,000.
c. $157,500.
d. $150,000.
Ans: LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
112. Garnett Co. expects to purchase $180,000 of materials in July and $210,000 of materials in August. Three-fourths of all purchases are paid for in the month of purchase, and the other one-fourth are paid for in the month following the month of purchase. How much will August's cash disbursements for materials purchases be?
a. $135,000
b. $157,500
c. $202,500
d. $210,000
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
113. The single most important output in preparing financial budgets is the
a. sales forecast.
b. determination of the unit cost of the product.
c. cash budget.
d. budgeted income statement.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
114. Which of the following does not appear as a separate section on the cash budget?
a. Cash receipts
b. Cash disbursements
c. Capital expenditures
d. Financing
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
115. The financing section of a cash budget is needed if there is a cash deficiency or if the ending cash balance is less than
a. the prior years.
b. management's minimum required balance.
c. the amount needed to avoid a service charge at the bank.
d. the industry average.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
116. Beginning cash balance plus total receipts
a. equals ending cash balance.
b. must equal total disbursements.
c. equals total available cash.
d. is the excess of available cash over disbursements.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
117. The projection of financial position at the end of the budget period is found on the
a. budgeted income statement.
b. cash budget.
c. budgeted balance sheet.
d. sales budget.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
118. What is the proper preparation sequencing of the following budgets?
1. Budgeted Balance Sheet
2. Sales Budget
3. Selling and Administrative Budget
4. Budgeted Income Statement
a. 1, 2, 3, 4
b. 2, 3, 1, 4
c. 2, 3, 4, 1
d. 2, 4, 1, 3
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
119. Kam Department Store reported the following information for 2013:
October November December
Budgeted sales $1,240,000 $1,160,000 $1,440,000
· All sales are on credit.
· Customer amounts on account are collected 50% in the month of sale and 50% in the following month.
How much cash will Kam receive in November?
a. $580,000
b. $1,300,000
c. $1,200,000
d. $1,160,000
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
120. The following information was taken from Southgate Industry’s cash budget for the month of July:
Beginning cash balance $480,000
Cash receipts 304,000
Cash disbursements 544,000
If the company has a policy of maintaining a minimum end of the month cash balance of $400,000, the amount the company would have to borrow is
a. $160,000.
b. $80,000.
c. $240,000.
d. $96,000.
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
121. The cash budget reflects
a. all revenues and all expenses for a period.
b. expected cash receipts and cash disbursements from all sources.
c. all the items that appear on a budgeted income statement.
d. all the items that appear on a budgeted balance sheet.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
122. The following credit sales are budgeted by Terra Co.:
January $204,000
February 300,000
March 420,000
April 360,000
The company's past experience indicates that 70% of the accounts receivable are collected in the month of sale, 20% in the month following the sale, and 8% in the second month following the sale. The anticipated cash inflow for the month of April is
a. $370,320.
b. $336,000.
c. $360,000.
d. $352,800.
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
123. Hyde Corp.'s cash budget showed total available cash less cash disbursements. What does this amount equal?
a. Ending cash balance
b. Total cash receipts
c. The excess of available cash over cash disbursements
d. The amount of financing required
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
124. Which one of the following sections would not appear on a cash budget?
a. Cash receipts
b. Financing
c. Investing
d. Cash disbursements
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
125. A company's past experience indicates that 60% of its credit sales are collected in the month of sale, 30% in the next month, and 5% in the second month after the sale; the remainder is never collected. Budgeted credit sales were:
January $360,000
February 216,000
March 540,000
The cash inflow in the month of March is expected to be
a. $406,800.
b. $307,800.
c. $324,000.
d. $388,800.
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
126. Which one of the following items would never appear on a cash budget?
a. Office salaries expense
b. Interest expense
c. Depreciation expense
d. Travel expense
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
127. Correy Inc. reported the following information for 2013:
October November December
Budgeted sales $460,000 $440,000 $540,000
Budgeted purchases $240,000 $256,000 $288,000
· All sales are on credit.
· Customer amounts on account are collected 50% in the month of sale and 50% in the following month.
· Cost of goods sold is 35% of sales.
· Correy purchases and pays for merchandise 60% in the month of acquisition and 40% in the following month.
· Accounts payable is used only for inventory acquisitions.
How much cash will Correy receive during November?
a. $220,000
b. $490,000
c. $450,000
d. $440,000
Ans: LO: 5, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
128. Correy Company reported the following information for 2013:
October November December
Budgeted sales $460,000 $440,000 $540,000
Budgeted purchases $240,000 $256,000 $288,000
· Cost of goods sold is 35% of sales.
· Correy purchases and pays for merchandise 60% in the month of acquisition and 40% in the following month.
· Accounts payable is used only for inventory acquisitions.
How much is the budgeted balance for Accounts Payable at October 31, 2013?
a. $96,000
b. $144,000
c. $204,000
d. $102,400
Ans: LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
129. Petal Co. reported the following information for 2013:
October November December
Budgeted sales $930,000 $870,000 $1,080,000
· All sales are on credit.
· Customer amounts on account are collected 50% in the month of sale and 50% in the following month.
How much is the November 30, 2013 budgeted Accounts Receivable?
a. $900,000
b. $540,000
c. $465,000
d. $435,000
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
130. Bean Manufacturing reported the following information for 2013:
October November December
Budgeted purchases $240,000 $256,000 $288,000
· Operating expenses are: Salaries, $100,000; Depreciation, $40,000; Rent, $20,000; Utilities, $28,000
· Operating expenses are paid during the month incurred.
· Accounts payable is used only for inventory acquisitions.
How much is the budgeted amount of cash to be paid for operating expenses in November?
a. $404,000
b. $148,000
c. $188,000
d. $444,000
Ans: LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
131. During September, the capital expenditure budget indicates a $420,000 purchase of equipment. The ending September cash balance from operations is budgeted to be $60,000. The company wants to maintain a minimum cash balance of $30,000. What is the minimum cash loan that must be planned to be borrowed from the bank during September?
a. $330,000
b. $360,000
c. $450,000
d. $390,000
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
132. Young Co. has budgeted its activity for December according to the following information:
1. Sales at $600,000, all for cash.
2. Budgeted depreciation for December is $15,000.
4. The cash balance at December 1 was $15,000.
5. Selling and administrative expenses are budgeted at $60,000 for December and are paid for in cash.
6. The planned merchandise inventory on December 31 and December 1 is $18,000.
7. The invoice cost for merchandise purchases represents 75% of the sales price. All purchases are paid in cash.
How much are the budgeted cash disbursements for December?
a. $345,000
b. $510,000
c. $525,000
d. $492,000
Ans: LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
133. Dex Industries expects to purchase $120,000 of materials in March and $140,000 of materials in April. Three-fourths of all purchases are paid for in the month of purchase, and the other one-fourth are paid for in the month following the month of purchase. In addition, a 2% discount is received for payments made in the month of purchase. How much will April's cash disbursements for materials purchases be?
a. $88,200
b. $108,200
c. $132,900
d. $120,000
Ans: LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
134. On January 1, Witt Company has a beginning cash balance of $126,000. During the year, the company expects cash disbursements of $1,020,000 and cash receipts of $870,000. If Witt requires an ending cash balance of $120,000, Witt Company must borrow
a. $96,000.
b. $120,000.
c. $144,000.
d. $276,000.
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
135. Mapleview, Inc. has the following budgeted sales: July $200,000, August $300,000, and September $250,000. 40% of the sales are for cash and 60% are on credit. For the credit sales, 50% are collected in the month of sale, and 50% the next month. The total expected cash receipts during September are
a. $280,000.
b. $265,000.
c. $262,500.
d. $250,000.
Ans: LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
136. Burr, Inc.'s direct materials budget shows total cost of direct materials purchases for April $400,000, May $480,000 and June $560,000. Cash payments are 60% in the month of purchase and 40% in the following month. The budgeted cash payments for June are
a. $528,000.
b. $512,000.
c. $480,000.
d. $416,000.
Ans: LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
137. Which one of the following budgets would be prepared for a manufacturer but not for a merchandiser?
a. Direct labor budget
b. Cash budget
c. Sales budget
d. Budgeted income statement
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
138. The formula for determining budgeted merchandise purchases is budgeted
a. production + desired ending inventory – beginning inventory.
b. sales + beginning inventory – desired ending inventory.
c. cost of goods sold + desired ending inventory – beginning inventory.
d. cost of goods sold + beginning inventory – desired ending inventory.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
139. Which one of the following is a problem resulting from a service company being overstaffed?
a. Labor costs will be disproportionately low.
b. Profits will be higher because of the additional salaries.
c. Staff turnover may increase.
d. Revenue may be lost.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
140. The master budget for a service enterprise
a. will have the same types of budgets as a merchandiser.
b. may include a sales budget for sales revenue.
c. will not include a budgeted income statement.
d. includes a service revenue budget based on expected client billings.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
141. Budgeting in not-for-profit organizations
a. is not important because they are not profit-oriented.
b. usually starts with budgeting expenditures, rather than receipts.
c. is necessary only if some product is produced and sold.
d. consists entirely of budgeted contributions.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
142. For a merchandiser, the starting point in the development of the master budget is the
a. cash budget.
b. sales budget.
c. selling and administrative expenses budget.
d. budgeted income statement.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
143. Instead of a production budget, a merchandiser will prepare a
a. pseudo-production budget.
b. merchandise purchases budget.
c. master time sheet.
d. sales forecast.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
144. Orange Co. is a manufacturer and Pineapple Company is a merchandiser. What is the difference in the budgets the two entities will prepare?
a. Orange Co. will prepare a production budget, and Pineapple Company will prepare a merchandise purchases budget.
b. Orange Co. will prepare a sales forecast, and Pineapple Company will prepare a sales budget.
c. Pineapple Company will prepare a production budget, and Orange Co. will prepare a merchandise purchases budget.
d. Both companies will prepare the same types of budgets.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
145. An appropriate activity index for a college or university for budgeting faculty positions would be the
a. faculty hours worked.
b. number of administrators.
c. credit hours taught by a department.
d. number of days in the school term.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
146. A critical factor in budgeting for a service firm is to
a. hire professional staff to perform the budgeting work.
b. coordinate professional staff needs with anticipated services.
c. classify all personnel as either variable or fixed.
d. budget expenditures before anticipated receipts.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
147. The primary benefits of budgeting include all of the following except it
a. requires only top management to plan ahead and formalize their future goals.
b. provides definite objectives for evaluating performance.
c. creates an early warning system for potential problems.
d. motivates personnel throughout the organization.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
148. The responsibility for expressing management's budgeting goals in financial terms is performed by the
a. accounting department.
b. top management.
c. lower level of management.
d. budget committee.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
149. Coordinating the preparation of the budget is the responsibility of the
a. treasurer.
b. president.
c. chief accountant.
d. budget committee.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
150. For better management acceptance, the flow of input data for budgeting should begin with the
a. accounting department.
b. top management.
c. lower levels of management.
d. budget committee.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
151. In the direct materials budget, the quantity of direct materials to be purchased is computed by adding direct materials required for production to
a. desired ending direct materials.
b. beginning direct materials.
c. desired ending direct materials less beginning direct materials.
d. beginning direct materials less desired ending direct materials.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
152. Grey Company has 24,000 units in beginning finished goods. If sales are expected to be 120,000 units for the year and Grey desires ending finished goods of 30,000 units, how many units must the company produce?
a. 114,000
b. 120,000
c. 126,000
d. 150,000
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
153. The important end-product of the operating budgets is the
a. budgeted income statement.
b. cash budget.
c. production budget.
d. budgeted balance sheet.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
154. On January 1, Kale Company has a beginning cash balance of $42,000. During the year, the company expects cash disbursements of $340,000 and cash receipts of $290,000. If Kale requires an ending cash balance of $40,000, the company must borrow
a. $32,000.
b. $40,000.
c. $48,000.
d. $92,000.
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
155. The budget that is often considered to be the most important financial budget is the
a. cash budget.
b. capital expenditure budget.
c. budgeted income statement.
d. budgeted balance sheet.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
156. Lark Corp.'s direct materials budget shows total cost of direct materials purchases for January $250,000, February $300,000 and March $350,000. Cash payments are 60% in the month of purchase and 40% in the following month. The budgeted cash payments for March are
a. $330,000.
b. $320,000.
c. $300,000.
d. $260,000.
Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
157. A purchases budget is used instead of a production budget by
a. merchandising companies.
b. service enterprises.
c. not-for-profit organizations.
d. manufacturing companies.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
158. Which of the following statements is incorrect?
a. A continuous twelve-month budget results from dropping the month just ended and adding a future month.
b. The production budget is derived from the direct materials and direct labor budgets.
c. The cash budget shows anticipated cash flows.
d. In the budget process for not-for-profit organizations, the emphasis is on cash flow rather than on revenue and expenses.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Chapter 10:
TRUE-FALSE STATEMENTS
1. Budget reports comparing actual results with planned objectives should be prepared only once a year.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
2. If actual results are different from planned results, the difference must always be investigated by management to achieve effective budgetary control.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
3. Certain budget reports are prepared monthly, whereas others are prepared more frequently depending on the activities being monitored.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
4. The master budget is not used in the budgetary control process.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
5. A master budget is most useful in evaluating a manager's performance in controlling costs.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
6. A static budget is one that is geared to one level of activity.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
7. A static budget is changed only when actual activity is different from the level of activity expected.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
8. A static budget is most useful for evaluating a manager's performance in controlling variable costs.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
9. A flexible budget can be prepared for each of the types of budgets included in the master budget.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
10. A flexible budget is a series of static budgets at different levels of activities.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
11. Flexible budgeting relies on the assumption that unit variable costs will remain constant within the relevant range of activity.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
12. Total budgeted fixed costs appearing on a flexible budget will be the same amount as total fixed costs on the master budget.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
13. A flexible budget is prepared before the master budget.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
14. The activity index used in preparing a flexible budget should not influence the variable costs that are being budgeted.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
15. A formula used in developing a flexible budget is: Total budgeted cost = fixed cost + (total variable cost per unit × activity level).
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
16. Flexible budgets are widely used in production and service departments.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
17. A flexible budget report will show both actual and budget cost based on the actual activity level achieved.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
18. Management by exception means that management will investigate areas where actual results differ from planned results if the items are material and controllable.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Internal Controls.
19. Policies regarding when a difference between actual and planned results should be investigated are generally more restrictive for noncontrollable items than for controllable items.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Internal Controls
20. A distinction should be made between controllable and noncontrollable costs when reporting information under responsibility accounting.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Internal Controls
21. Cost centers, profit centers, and investment centers can all be classified as responsibility centers.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
22. More costs become controllable as one moves down to each lower level of managerial responsibility.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
23. In a responsibility accounting reporting system, as one moves up each level of responsibility in an organization, the responsibility reports become more summarized and show less detailed information.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
24. A cost center incurs costs and generates revenues and cost center managers are evaluated on the profitability of their centers.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
25. The terms "direct fixed costs" and "indirect fixed costs" are synonymous with "traceable costs" and "common costs," respectively.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
26. Controllable margin is subtracted from controllable fixed costs to get net income for a profit center.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
27. The denominator in the formula for calculating the return on investment includes operating and nonoperating assets.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
28. The formula for computing return on investment is controllable margin divided by average operating assets.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
a29. When evaluating residual income, the calculation tells management what percentage return was generated by the particular division being evaluated.
Ans: LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics
a30. Residual income generates a dollar amount which represents the increase in value to the company beyond the cost necessary to pay for the financing of assets.
Ans: LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics
31. Budget reports provide the feedback needed by management to see whether actual operations are on course.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
32. A static budget is an effective means to evaluate a manager's ability to control costs, regardless of the actual activity level.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
33. The flexible budget report evaluates a manager's performance in two areas: (1) production and (2) costs.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
34. The terms controllable costs and noncontrollable costs are synonymous with variable costs and fixed costs, respectively.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
35. Most direct fixed costs are not controllable by the profit center manager.
Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
36. The manager of an investment center can improve ROI by reducing average operating assets.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
a37. Residual income and ROI are used as performance evaluation methods for profit center performance
Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
MULTIPLE CHOICE QUESTIONS
38. What is budgetary control?
a. Another name for a flexible budget
b. The degree to which the CFO controls the budget
c. The use of budgets in controlling operations
d. The process of providing information on budget differences to lower level managers
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
39. A major element in budgetary control is
a. the preparation of long-term plans.
b. the comparison of actual results with planned objectives.
c. the valuation of inventories.
d. approval of the budget by the stockholders.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
40. Budget reports should be prepared
a. daily.
b. monthly.
c. weekly.
d. as frequently as needed.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
41. On the basis of the budget reports,
a. management analyzes differences between actual and planned results.
b. management may take corrective action.
c. management may modify the future plans.
d. All of these.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
42. The purpose of the departmental overhead cost report is to
a. control indirect labor costs.
b. control selling expense.
c. determine the efficient use of materials.
d. control overhead costs.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
43. The purpose of the sales budget report is to
a. control selling expenses.
b. determine whether income objectives are being met.
c. determine whether sales goals are being met.
d. control sales commissions.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
44. The comparison of differences between actual and planned results
a. is done by the external auditors.
b. appears on the company's external financial statements.
c. is usually done orally in departmental meetings.
d. appears on periodic budget reports.
Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
45. A static budget
a. should not be prepared in a company.
b. is useful in evaluating a manager's performance by comparing actual variable costs and planned variable costs.
c. shows planned results at the original budgeted activity level.
d. is changed only if the actual level of activity is different than originally budgeted.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
46. A static budget report
a. shows costs at only 2 or 3 different levels of activity.
b. is appropriate in evaluating a manager's effectiveness in controlling variable costs.
c. should be used when the actual level of activity is materially different from the master budget activity level.
d. may be appropriate in evaluating a manager's effectiveness in controlling costs when the behavior of the costs in response to changes in activity is fixed.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
47. A static budget is appropriate in evaluating a manager's performance if
a. actual activity closely approximates the master budget activity.
b. actual activity is less than the master budget activity.
c. the company prepares reports on an annual basis.
d. the company is a not-for-profit organization.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
48. When budgeted and actual results are not the same amount, there is a budget
a. error.
b. difference.
c. anomaly.
d. by-product.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
49. Top management's reaction to a difference between budgeted and actual sales often depends on
a. whether the difference is favorable or unfavorable.
b. whether management anticipated the difference.
c. the materiality of the difference.
d. the personality of the top managers.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
50. If costs are not responsive to changes in activity level, then these costs can be best described as
a. mixed.
b. flexible.
c. variable.
d. fixed.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
51. Assume that actual sales results exceed the planned results for the second quarter. This favorable difference is greater than the unfavorable difference reported for the first quarter sales. Which of the following statements about the sales budget report on June 30 is true?
a. The year-to-date results will show a favorable difference.
b. The year-to-date results will show an unfavorable difference.
c. The difference for the first quarter can be ignored.
d. The sales report is not useful if it shows a favorable and unfavorable difference for the two quarters.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
52. A static budget is appropriate for
a. variable overhead costs.
b. direct materials costs.
c. fixed overhead costs.
d. None of these.
Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
53. What is the primary difference between a static budget and a flexible budget?
a. The static budget contains only fixed costs, while the flexible budget contains only variable costs.
b. The static budget is prepared for a single level of activity, while a flexible budget is adjusted for different activity levels.
c. The static budget is constructed using input from only upper level management, while a flexible budget obtains input from all levels of management.
d. The static budget is prepared only for units produced, while a flexible budget reflects the number of units sold.
Ans: LO: 2,3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
54. Another name for the static budget is
a. master budget.
b. overhead budget.
c. permanent budget.
d. flexible budget.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
55. The master budget of Windy Co. shows that the planned activity level for next year is expected to be 50,000 machine hours. At this level of activity, the following manufacturing overhead costs are expected:
Indirect labor $720,000
Machine supplies 180,000
Indirect materials 210,000
Depreciation on factory building 150,000
Total manufacturing overhead $1,260,000
A flexible budget for a level of activity of 60,000 machine hours would show total manufacturing overhead costs of
a. $1,482,000.
b. $1,260,000.
c. $1,512,000.
d. $1,362,000.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
56. Boland Manufacturing prepared a 2013 budget for 120,000 units of product. Actual production in 2013 was 130,000 units. To be most useful, what amounts should a performance report for this company compare?
a. The actual results for 130,000 units with the original budget for 120,000 units.
b. The actual results for 130,000 units with a new budget for 130,000 units.
c. The actual results for 130,000 units with last year's actual results for 134,000 units.
d. It doesn't matter. All of these choices are equally useful.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
57. A department has budgeted monthly manufacturing overhead cost of $540,000 plus $3 per direct labor hour. If a flexible budget report reflects $1,044,000 for total budgeted manufacturing cost for the month, the actual level of activity achieved during the month was
a. 528,000 direct labor hours.
b. 168,000 direct labor hours.
c. 348,000 direct labor hours.
d. Cannot be determined from the information provided.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
58. Which one of the following would be the same total amount on a flexible budget and a static budget if the activity level is different for the two types of budgets?
a. Direct materials cost
b. Direct labor cost
c. Variable manufacturing overhead
d. Fixed manufacturing overhead
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
59. In developing a flexible budget within a relevant range of activity,
a. only fixed costs are included.
b. it is necessary to relate variable cost data to the activity index chosen.
c. it is necessary to prepare a budget at 1,000 unit increments.
d. variable and fixed costs are combined and are reported as a total cost.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
60. What budgeted amounts appear on the flexible budget?
a. Original budgeted amounts at the static budget activity level
b. Actual costs for the budgeted activity level
c. Budgeted amounts for the actual activity level achieved
d. Actual costs for the estimated activity level
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
61. The flexible budget
a. is prepared before the master budget.
b. is relevant both within and outside the relevant range.
c. eliminates the need for a master budget.
d. is a series of static budgets at different levels of activity.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
62. A flexible budget can be prepared for which of the following budgets comprising the master budget?
a. Sales
b. Overhead
c. Direct materials
d. All of these.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
63. A flexible budget
a. is prepared when management cannot agree on objectives for the company.
b. projects budget data for various levels of activity.
c. is only useful in controlling fixed costs.
d. cannot be used for evaluation purposes because budgeted data are adjusted to reflect actual results.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
64. If a company plans to sell 48,000 units of product but sells 60,000, the most appropriate comparison of the cost data associated with the sales will be by a budget based on
a. the original planned level of activity.
b. 54,000 units of activity.
c. 60,000 units of activity.
d. 48,000 units of activity.
Ans: LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
65. Within the relevant range of activity, the behavior of total costs is assumed to be
a. linear and upward sloping.
b. linear and downward sloping.
c. curvilinear and upward sloping.
d. linear to a point and then level off.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
66. Sales results that are evaluated by a static budget might show
1. favorable differences that are not justified.
2. unfavorable differences that are not justified.
a. 1
b. 2
c. both 1 and 2.
d. neither 1 nor 2.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
67. The selection of levels of activity to depict a flexible budget
1. will be within the relevant range.
2. is largely a matter of expediency.
3. is governed by generally accepted accounting principles.
a. 1
b. 2
c. 3
d. 1 and 2
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
68. Management by exception
a. causes managers to be buried under voluminous paperwork.
b. means that all differences will be investigated.
c. means that only unfavorable differences will be investigated.
d. means that material differences will be investigated.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
69. Under management by exception, which differences between planned and actual results should be investigated?
a. Material and noncontrollable
b. Controllable and noncontrollable
c. Material and controllable
d. All differences should be investigated
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
70. Best Shingle's budgeted manufacturing costs for 50,000 squares of shingles are:
Fixed manufacturing costs $12,000
Variable manufacturing costs $16.00 per square
Best produced 40,000 squares of shingles during March. How much are budgeted total manufacturing costs in March?
a. $640,000
b. $812,000
c. $800,000
d. $652,000
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
71. A flexible budget depicted graphically
a. is identical to a CVP graph.
b. differs from a CVP graph in the way that fixed costs are shown.
c. differs from a CVP graph in the way that variable costs are shown.
d. differs from a CVP graph in that sales revenue is not shown.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
72. The activity index used in preparing the flexible budget
a. is prescribed by generally accepted accounting principles.
b. is only applicable to fixed manufacturing costs.
c. is the same for all departments.
d. should significantly influence the costs that are being budgeted.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
73. A static budget is not appropriate in evaluating a manager's effectiveness if a company has
a. substantial fixed costs.
b. substantial variable costs.
c. planned activity levels that match actual activity levels.
d. no variable costs.
Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
74. Shane Industries prepared a fixed budget of 60,000 direct labor hours, with estimated overhead costs of $300,000 for variable overhead and $90,000 for fixed overhead. Shane then prepared a flexible budget at 57,000 labor hours. How much is total overhead costs at this level of activity?
a. $285,000
b. $375,000
c. $370,500
d. $390,000
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
75. For June, Gold Corp. estimated sales revenue at $600,000. It pays sales commissions that are 4% of sales. The sales manager's salary is $285,000, estimated shipping expenses total 1% of sales, and miscellaneous selling expenses are $15,000. How much are budgeted selling expenses for the month of July if sales are expected to be $540,000?
a. $42,000
b. $327,000
c. $27,000
d. $330,000
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
76. Nikoto Steel Co. budgeted manufacturing costs for 50,000 tons of steel are:
Fixed manufacturing costs $50,000 per month
Variable manufacturing costs $12.00 per ton of steel
Nikoto produced 40,000 tons of steel during March. How much is the flexible budget for total manufacturing costs for March?
a. $520,000
b. $650,000
c. $480,000
d. $530,000
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
77. Smart Manufacturing budgeted costs for 50,000 linear feet of block are:
Fixed manufacturing costs $24,000 per month
Variable manufacturing costs $16.00 per linear foot
Smart installed 40,000 linear feet of block during March. How much is budgeted total manufacturing costs in March?
a. $640,000
b. $824,000
c. $800,000
d. $664,000
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
78. In the Dichter Co., indirect labor is budgeted for $72,000 and factory supervision is budgeted for $24,000 at normal capacity of 160,000 direct labor hours. If 180,000 direct labor hours are worked, flexible budget total for these costs is
a. $96,000.
b. $108,000.
c. $105,000.
d. $99,000.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
79. Stone Industries uses flexible budgets. At normal capacity of 16,000 units, budgeted manufacturing overhead is: $48,000 variable and $270,000 fixed. If Stone had actual overhead costs of $321,000 for 18,000 units produced, what is the difference between actual and budgeted costs?
a. $3,000 unfavorable
b. $3,000 favorable
c. $9,000 unfavorable
d. $12,000 favorable
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
80. A company's planned activity level for next year is expected to be 100,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs:
Variable Fixed
Indirect materials $140,000 Depreciation $60,000
Indirect labor 200,000 Taxes 10,000
Factory supplies 20,000 Supervision 50,000
A flexible budget prepared at the 80,000 machine hours level of activity would show total manufacturing overhead costs of
a. $288,000.
b. $360,000.
c. $384,000.
d. $408,000.
Ans: LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
81. In the Goblette Manufacturing Company, indirect labor is budgeted for $108,000 and factory supervision is budgeted for $36,000 at normal capacity of 160,000 direct labor hours. If 180,000 direct labor hours are worked, flexible budget total for these costs is:
a. $144,000.
b. $162,000.
c. $157,500.
d. $148,500.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
82. Chambers, Inc. uses flexible budgets. At normal capacity of 16,000 units, budgeted manufacturing overhead is: $64,000 variable and $180,000 fixed. If Chambers had actual overhead costs of $250,000 for 18,000 units produced, what is the difference between actual and budgeted costs?
a. $2,000 unfavorable.
b. $2,000 favorable.
c. $6,000 unfavorable.
d. $8,000 favorable.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
83. A company's planned activity level for next year is expected to be 100,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs:
Variable Fixed
Indirect materials $120,000 Depreciation $50,000
Indirect labor 160,000 Taxes 10,000
Factory supplies 20,000 Supervision 40,000
A flexible budget prepared at the 90,000 machine hours level of activity would show total manufacturing overhead costs of
a. $270,000.
b. $360,000.
c. $370,000.
d. $300,000.
Ans: LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
84. Kevin Jarvis Industries produced 192,000 units in 90,000 direct labor hours. Production for the period was estimated at 198,000 units and 99,000 direct labor hours. A flexible budget would compare budgeted costs and actual costs, respectively, at
a. 96,000 hours and 99,000 hours.
b. 99,000 hours and 90,000 hours.
c. 96,000 hours and 90,000 hours.
d. 90,000 hours and 90,000 hours.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
85. A company's planned activity level for next year is expected to be 100,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs:
Variable Fixed
Indirect materials $90,000 Depreciation $37,500
Indirect labor 120,000 Taxes 7,500
Factory supplies 15,000 Supervision 30,000
A flexible budget prepared at the 90,000 machine hours level of activity would show total manufacturing overhead costs of
a. $202,500.
b. $270,000.
c. $277,500.
d. $225,000.
Ans: LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
86. Kathleen Corp. produced 320,000 units in 150,000 direct labor hours. Production for the period was estimated at 330,000 units and 165,000 direct labor hours. A flexible budget would compare budgeted costs and actual costs, respectively, at
a. 160,000 hours and 165,000 hours.
b. 165,000 hours and 150,000 hours.
c. 160,000 hours and 150,000 hours.
d. 150,000 hours and 150,000 hours.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
87. At zero direct labor hours in a flexible budget graph, the total budgeted cost line intersects the vertical axis at $30,000. At 15,000 direct labor hours, a horizontal line drawn from the total budgeted cost line intersects the vertical axis at $90,000. Fixed and variable costs may be expressed as:
a. $30,000 fixed plus $4 per direct labor hour variable.
b. $30,000 fixed plus $6 per direct labor hour variable.
c. $60,000 fixed plus $2 per direct labor hour variable.
d. $60,000 fixed plus $4 per direct labor hour variable.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
88. At 18,000 direct labor hours, the flexible budget for indirect materials is $36,000. If $37,400 are incurred at 18,400 direct labor hours, the flexible budget report should show the following difference for indirect materials:
a. $1,400 unfavorable.
b. $1,400 favorable.
c. $600 favorable.
d. $600 unfavorable.
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
89. The accumulation of accounting data on the basis of the individual manager who has the authority to make day-to-day decisions about activities in an area is called
a. static reporting.
b. flexible accounting.
c. responsibility accounting.
d. master budgeting.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
90. Power Manufacturing recorded operating data for its shoe division for the year.
Sales $1,500,000
Contribution margin 300,000
Controllable fixed costs 180,000
Average total operating assets 600,000
How much is controllable margin for the year?
a. 20%
b. 50%
c. $300,000
d. $120,000
Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
91. A cost is considered controllable at a given level of managerial responsibility if
a. the manager has the power to incur the cost within a given time period.
b. the cost has not exceeded the budget amount in the master budget.
c. it is a variable cost, but it is uncontrollable if it is a fixed cost.
d. it changes in magnitude in a flexible budget.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
92. As one moves up to each higher level of managerial responsibility,
a. fewer costs are controllable.
b. the responsibility for cost incurrence diminishes.
c. a greater number of costs are controllable.
d. performance evaluation becomes less important.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
93. A responsibility report should
a. be prepared in accordance with generally accepted accounting principles.
b. show only those costs that a manager can control.
c. only show variable costs.
d. only be prepared at the highest level of managerial responsibility.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
94. Top management can control
a. only controllable costs.
b. only noncontrollable costs.
c. all costs.
d. some noncontrollable costs and all controllable costs.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
95. Not-for-profit entities
a. do not use responsibility accounting.
b. utilize responsibility accounting in trying to maximize net income.
c. utilize responsibility accounting in trying to minimize the cost of providing services.
d. have only noncontrollable costs.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
96. Which of the following is not a true statement?
a. All costs are controllable at some level within a company.
b. Responsibility accounting applies to both profit and not-for-profit entities.
c. Fewer costs are controllable as one moves up to each higher level of managerial responsibility.
d. The term segment is sometimes used to identify areas of responsibility in decentralized operations.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
97. Costs incurred indirectly and allocated to a responsibility level are considered to be
a. nonmaterial.
b. mixed.
c. controllable.
d. noncontrollable.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
98. Management by exception
a. is most effective at top levels of management.
b. can be implemented at each level of responsibility within an organization.
c. can only be applied when comparing actual results with the master budget.
d. is the opposite of goal congruence.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
99. Which responsibility centers generate both revenues and costs?
a. Investment and profit centers
b. Profit and cost centers
c. Cost and investment centers
d. Only profit centers
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
100. The linens department of a large department store is
a. not a responsibility center.
b. a profit center.
c. a cost center.
d. an investment center.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
101. The foreign subsidiary of a large corporation is
a. not a responsibility center.
b. a profit center.
c. a cost center.
d. an investment center.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
102. The maintenance department of a manufacturing company is a(n)
a. segment.
b. profit center.
c. cost center.
d. investment center.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
103. Which of the following is not a correct match?
1. Incurs costs
2. Generates revenue
3. Controls investment funds
a. Investment Center 1, 2, 3
b. Cost Center 1
c. Profit Center 1, 2, 3
d. All are correct matches.
Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
104. A cost center
a. only incurs costs and does not directly generate revenues.
b. incurs costs and generates revenues.
c. is a responsibility center of a company which incurs losses.
d. is a responsibility center which generates profits and evaluates the investment cost of earning the profit.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
105. A manager of a cost center is evaluated mainly on
a. the profit that the center generates.
b. his or her ability to control costs.
c. the amount of investment it takes to support the cost center.
d. the amount of revenue that can be generated.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
106. Performance reports for cost centers compare actual
a. total costs with static budget data.
b. total costs with flexible budget data.
c. controllable costs with static budget data.
d. controllable costs with flexible budget data.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
107. In the performance report for cost centers,
a. controllable and noncontrollable costs are reported.
b. fixed costs are not reported.
c. no distinction is made between fixed and variable costs.
d. only materials and controllable costs are reported.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
108. Of the following choices, which contain both a traceable fixed cost and a common fixed cost?
a. Profit center manager's salary and timekeeping costs for a responsibility center's employees.
b. Company president's salary and company personnel department costs.
c. Company personnel department costs and timekeeping costs for a responsibility center's employees.
d. Depreciation on a responsibility center's equipment and supervisory salaries for the center.
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
109. Which of the following is not an indirect fixed cost?
a. Company president's salary
b. Depreciation on the company building housing several profit centers
c. Company personnel department costs
d. Profit center supervisory salaries
Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
110. A profit center is
a. a responsibility center that always reports a profit.
b. a responsibility center that incurs costs and generates revenues.
c. evaluated by the rate of return earned on the investment allocated to the center.
d. referred to as a loss center when operations do not meet the company's objectives.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
111. The best measure of the performance of the manager of a profit center is the
a. rate of return on investment.
b. success in meeting budgeted goals for controllable costs.
c. amount of controllable margin generated by the profit center.
d. amount of contribution margin generated by the profit center.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
112. Controllable margin is defined as
a. sales minus variable costs.
b. sales minus contribution margin.
c. contribution margin less controllable fixed costs.
d. contribution margin less noncontrollable fixed costs.
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
113. Controllable margin is most useful for
a. external financial reporting.
b. preparing the master budget.
c. performance evaluation of profit centers.
d. break-even analysis.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
114. Which of the following will not result in an unfavorable controllable margin difference?
a. Sales exceeding budget; costs under budget
b. Sales exceeding budget; costs over budget
c. Sales under budget; costs under budget
d. Sales under budget; costs over budget
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
115. Given below is an excerpt from a management performance report:
Budget Actual Difference
Contribution margin $1,000,000 $1,050,000 $50,000
Controllable fixed costs $ 500,000 $ 450,000 $50,000
The manager's overall performance
a. is 20% below expectations.
b. is 20% above expectations.
c. is equal to expectations.
d. cannot be determined from information given.
Ans: LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
116. Which of the following are financial measures of performance?
1. Controllable margin
2. Product quality
3. Labor productivity
a. 1
b. 2
c. 3
d. 1 and 3
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
117. Given below is an excerpt from a management performance report:
Budget Actual Difference
Contribution margin $600,000 $580,000 $20,000 U
Controllable fixed costs $200,000 $220,000 $20,000 U
The manager's overall performance
a. is 10% above expectations.
b. is 10% below expectations.
c. is equal to expectations.
d. cannot be determined from the information provided.
Ans: LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
118. A responsibility report for a profit center will
a. not show controllable fixed costs.
b. not show indirect fixed costs.
c. show noncontrollable fixed costs.
d. not show cumulative year-to-date results.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
119. The dollar amount of the controllable margin
a. is usually higher than the contribution margin.
b. is usually lower than the contribution margin.
c. is always equal to the contribution margin.
d. cannot be a negative figure.
Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
120. Pippen Co. recorded operating data for its shoe division for the year. The company’s desired return is 5%.
Sales $1,000,000
Contribution margin 200,000
Total direct fixed costs 120,000
Average total operating assets 400,000
Which one of the following reflects the controllable margin for the year?
a. 20%
b. 50%
c. $60,000
d. $80,000
Ans: LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
121. Las Sendas, Inc. had average operating assets of $4,000,000 and sales of $2,000,000 in 2013. If the controllable margin was $600,000, the ROI was
a. 60%
b. 50%
c. 30%
d. 15%
Ans: LO: 7, Bloom: A, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
122. Trails and Paths, Inc. had average operating assets of $6,000,000 and sales of $3,000,000 in 2013. If the controllable margin was $600,000, the ROI was
a. 50%
b. 40%
c. 20%
d. 10%
Ans: LO: 7, Bloom: A, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
123. The area manager of the Red, White, and Brew Restaurants is considering two possible expansion alternatives. The required investments, expected controllable margins, and the ROIs of each are as follows:
Project Investment Controllable Margin ROI
Phoenix $120,000 $30,000 25%
Chicago $540,000 $50,000 9.25%
The Red, White, and Brew segment has currently $2,000,000 in invested capital and a controllable margin of $250,000. Which one of following projects will increase the Red, White, and Brew division’s ROI?
a. Both the Phoenix and Chicago options
b. Only the Phoenix option
c. Only the Chicago option
d. Neither the Phoenix nor the Chicago options
Ans: LO: 7, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
124. Bogey Co. recorded operating data for its Cheap division for the year. Bogey requires its return to be 10%.
Sales $ 1,400,000
Controllable margin 160,000
Total average assets 4,000,000
Fixed costs 100,000
What is the ROI for the year?
a. 4%
b. 35%
c. 6%
d. 1.5%
Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
125. Dingo Division’s operating results include: controllable margin of $150,000, sales totaling $1,200,000, and average operating assets of $500,000. Dingo is considering a project with sales of $100,000, expenses of $86,000, and an investment of average operating assets of $200,000. Dingo’s required rate of return is 9%. Should Dingo accept this project?
a. Yes, ROI will drop by 6.6% which is still above the minimum required rate of return.
b. No, the return is less than the required rate of 9%.
c. Yes, ROI still exceeds the cost of capital.
d. No, ROI will decrease to 7%.
Ans: LO: 7, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
1 26. Grown Industries reported the following items for 2013:
Income tax expense $ 60,000
Contribution margin 200,000
Controllable fixed costs 80,000
Interest expense 40,000
Total operating assets 650,000
How much is controllable margin?
a. $200,000
b. $120,000
c. $60,000
d. $20,000
Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
127. Griffin Corp. is evaluating its Piquette division, an investment center. The division has a $60,000 controllable margin and $400,000 of sales. How much will Griffin’s average operating assets be when its return on investment is 10%?
a. $600,000
b. $660,000
c. $400,000
d. $340,000
Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
128. An investment center generated a contribution margin of $400,000, fixed costs of $200,000 and sales of $2,000,000. The center’s average operating assets were $800,000. How much is the return on investment?
a. 25%
b. 175%
c. 50%
d. 75%
Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
129. Rhein Manufacturing recorded operating data for its auto accessories division for the year.
Sales $750,000
Contribution margin 150,000
Total direct fixed costs 90,000
Average total operating assets 400,000
How much is ROI for the year if management is able to identify a way to improve the contribution margin by $30,000, assuming fixed costs are held constant?
a. 45.0%
b. 22.5%
c. 15.0%
d. 12.0%
Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
130. The current controllable margin for Henry Division is $93,000. Its current operating assets are $300,000. The division is considering purchasing equipment for $90,000 that will increase annual controllable margin by an estimated $15,000. If the equipment is purchased, what will happen to the return on investment for Henry Division?
a. An increase of 16.1%
b. A decrease of 13.3%
c. A decrease of 3.3%
d. A decrease of 7.2%
Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
131. Monte, Inc. recorded operating data for its Sandtrap division for the year. Monte requires its return to be 9%.
Sales $1,000,000
Controllable margin 180,000
Total average assets 600,000
Fixed costs 60,000
How much is ROI for the year?
a. 10%
b. 17%
c. 20%
d. 30%
Ans: LO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
132. Betsy Union is the Pika Division manager and her performance is evaluated by executive management based on Division ROI. The current controllable margin for Pika Division is $46,000. Its current operating assets total $210,000. The division is considering purchasing equipment for $40,000 that will increase sales by an estimated $10,000, with annual depreciation of $10,000. If the equipment is purchased, what will happen to the return on investment for the division?
a. An increase of 0.5%
b. A decrease of 0.5%
c. A decrease of 3.5%
d. It will remain unchanged.
Ans: LO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
133. Benet Division of United Refinery Company’s operating results include: controllable margin, $200,000; sales $2,200,000; and operating assets, $800,000. The Benet Division’s ROI is 25%. Management is considering a project with sales of $100,000, variable expenses of $60,000, fixed costs of $40,000; and an asset investment of $150,000. Should management accept this new project?
a. No, since ROI will be lowered.
b. Yes, since ROI will increase.
c. Yes, since additional sales always mean more customers.
d. No, since a loss will be incurred.
Ans: LO: 7, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
134. The Fulmar Division of Jayne Manufacturing had an ROI of 25% when sales were $3 million and controllable margin was $600,000. What were the average operating assets?
a. $150,000
b. $750,000
c. $2,400,000
d. $12,000
Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
135. Naples, Inc. recorded operating data for its shoe division for the year.
Sales $750,000
Contribution margin 135,000
Total fixed costs 90,000
Average total operating assets 300,000
How much is ROI for the year if management is able to identify a way to improve the contribution margin by $30,000, assuming fixed costs are held constant?
a. 25%
b. 18%
c. 45%
d. 12%
Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
136. A distinguishing characteristic of an investment center is that
a. revenues are generated by selling and buying stocks and bonds.
b. interest revenue is the major source of revenues.
c. the profitability of the center is related to the funds invested in the center.
d. it is a responsibility center which only generates revenues.
Ans: LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Budget Preparation
137. A measure frequently used to evaluate the performance of the manager of an investment center is
a. the amount of profit generated.
b. the rate of return on funds invested in the center.
c. the percentage increase in profit over the previous year.
d. departmental gross profit.
Ans: LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Budget Preparation
138. Return on investment is calculated by dividing
a. contribution margin by sales.
b. controllable margin by sales.
c. contribution margin by average operating assets.
d. controllable margin by average operating assets.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
139. Which one of the following will not increase return on investment?
a. Variable costs are increased
b. An increase in sales
c. Average operating assets are decreased
d. Variable costs are decreased
Ans: LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
140. If an investment center has generated a controllable margin of $150,000 and sales of $600,000, what is the return on investment for the investment center if average operating assets were $1,000,000 during the period?
a. 15%
b. 25%
c. 45%
d. 60%
Ans: LO: 7, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
141. Which statement is true?
a. An investment center is responsible for revenues and expenses, as well as earning a return on assets.
b. An investment center is only responsible for its investments.
c. An investment center is only responsible for revenues and expenses.
d. A profit center is evaluated using contribution margin, while an investment center is evaluated using ROI.
Ans: LO: 7, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Budget Preparation
142. The denominator in the formula for return on investment calculation is
a. investment center controllable margin.
b. dependent on the specific type of profit center.
c. investment center average operating assets.
d. sales for the period.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
143. In the formula for ROI, idle plant assets are
a. included in the calculation of controllable margin.
b. included in the calculation of operating assets.
c. excluded in the calculation of operating assets.
d. excluded from total assets.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
144. In computing ROI, land held for future use
a. will hurt the performance measurement of an investment center's manager.
b. is important in evaluating the performance of a profit center manager.
c. is included in the calculation of operating assets.
d. is considered a nonoperating asset.
Ans: LO: 7, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
145. Le Sud Retailers has a current return on investment of 10% and the company has established an 8% minimum rate of return for the division. The division manager has two investment projects available, for which the following estimates have been made:
Project A - Annual controllable margin = $24,000, operating assets = $400,000
Project B - Annual controllable margin = $60,000, operating assets = $550,000
Which project should be funded?
a. Both projects
b. Project A
c. Project B
d. Neither project
Ans: LO: 7, Bloom: C, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
146. If an investment center has a $90,000 controllable margin and $1,200,000 of sales, what average operating assets are needed to have a return on investment of 10%?
a. $120,000
b. $210,000
c. $900,000
d. $1,200,000
Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
147. Which of the following valuations of operating assets is not readily available from the accounting records?
a. Cost
b. Book value
c. Market value
d. Both cost and market value
Ans: LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
a148. The following information is available for Halle Department Stores:
Average operating assets $600,000
Controllable margin 60,000
Contribution margin 150,000
Minimum rate of return 8%
How much is Halle’s residual income?
a. $102,000
b. $540,000
c. $12,000
d. $48,000
Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting
a149. What is the goal of residual income?
a. To maximize the amount of costs which are controllable
b. To maximize profits
c. To maximize the total amount of residual income
d. To maximize controllable margin
Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting
a150. Which one of the following is a correct statement about residual income?
a. Its goal is to maximize profits of an investment center.
b. It is less effective for evaluating investment centers than ROI.
c. It is the ratio of controllable margin to the minimum rate of return on average operating assets.
d. It evaluates performance by comparing the return of an investment center with the company’s minimum rate of return.
Ans: LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting
a151. Which one of the following does not impact the amount of residual income?
a. Contribution margin
b. Net income
c. Sales
d. Controllable costs
Ans: LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting
a152. For what purpose do companies calculate residual income?
a. To determine whether decentralization is possible or not
b. To motivate managers through possible termination
c. To evaluate management performance
d. To measure company profits
Ans: LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting
a153. Lew Co. had sales of $400,000, variable costs of $200,000, and direct fixed costs totaling $100,000. The company’s operating assets total $800,000, and its required return is 10%. How much is the residual income?
a. $120,000
b. $20,000
c. $80,000
d. $320,000
Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting
a154. Quincy Corp. earned controllable margin of $500,000 on sales of $6,400,000. The division had average operating assets of $5,200,000. The company requires a return on investment of at least 8%. How much is residual income?
a. $416,000
b. $84,000
c. $584,000
d. $512,000
Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting
a155. The performance of the manager of Ottawa Division is measured by residual income. Which of the following would decrease the manager’s performance measure?
a. Decrease in required rate of return
b. Increase in amount of return on investment desired
c. Increase in sales
d. Increase in contribution margin
Ans: LO: 8, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement
156. Which of the following would notbe considered an aspect of budgetary control?
a. It assists in the determination of differences between actual and planned results.
b. It provides feedback value needed by management to see whether actual operations are on course.
c. It assists management in controlling operations.
d. It provides a guarantee for favorable results.
Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
157. A static budget is usually appropriate in evaluating a manager's effectiveness in controlling
a. fixed manufacturing costs and fixed selling and administrative expenses.
b. variable manufacturing costs and variable selling and administrative expenses.
c. fixed manufacturing costs and variable selling and administrative expenses.
d. variable manufacturing costs and fixed selling and administrative expenses.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
158. A static budget report is appropriate for
a. fixed manufacturing costs.
b. fixed selling and administrative expenses.
c. variable selling and administrative expenses.
d. both fixed manufacturing costs and fixed selling and administrative expenses.
Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
159. Sydney, Inc. uses flexible budgets. At normal capacity of 16,000 units, budgeted manufacturing overhead is $128,000 variable and $360,000 fixed. If Sydney had actual overhead costs of $500,000 for 18,000 units produced, what is the difference between actual and budgeted costs?
a. $4,000 unfavorable
b. $4,000 favorable
c. $12,000 unfavorable
d. $16,000 favorable
Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
160. To develop the flexible budget, management takes all of the following steps except identify the
a. activity index and the relevant range of activity.
b. variable costs and determine the budgeted variable cost per unit.
c. fixed costs and determine the budgeted fixed cost per unit.
d. All of these options are steps in developing the flexible budget.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
161. A flexible budget is appropriate for
Direct Labor Costs Manufacturing Overhead Costs
a. No No
b. Yes Yes
c. Yes No
d. No Yes
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
162. All of the following statements are correct about management by exception except it
a. enables top management to focus on problem areas that need attention.
b. means that management has to investigate every budget difference.
c. requires that there must be some guidelines for identifying an exception.
d. means that top management's review of a budget report is focused primarily on differences between actual results and planned objectives.
Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
163. Controllable costs for responsibility accounting purposes are those costs that are directly influenced by
a. a given manager within a given period of time.
b. a change in activity.
c. production volume.
d. sales volume.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
164. All of the following statements are correct about controllable costs except
a. all costs are controllable at some level of responsibility within a company.
b. all costs are controllable by top management.
c. fewer costs are controllable as one moves up to each higher level of managerial responsibility.
d. costs incurred directly by a level of responsibility are controllable at that level.
Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Budget Preparation
165. Which of the following will cause an increase in ROI?
a. An increase in variable costs
b. An increase in average operating assets
c. An increase in sales
d. An increase in controllable fixed costs
Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Budget Preparation
166. Costs that relate specifically to one center and are incurred for the sole benefit of that center are
a. common fixed costs.
b. direct fixed costs.
c. indirect fixed costs.
d. noncontrollable fixed costs.
Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Budget Preparation
167. If controllable margin is $300,000 and the average investment center operating assets are $2,000,000, the return on investment is
a. .67%.
b. 6.66%.
c. 20%.
d. 15%.
Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
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ACC 562 Week 7 Assignment 2 – Strayer
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Assignment 2: Cardillo Travel Systems, Inc.
Due Week 7 and worth 280 points
Review the Cardillo Travel Systems case, located in Chapter 6 of your textbook.
Write a four to five (4-5) page paper in which you:
Explain the Securities and Exchange Commission’s rationale to charge Cardillo executives with each of the following violations:
a. making false representations to outside auditors
b. failing to maintain accurate financial records
c. failing to file prompt financial reports with the SEC
d. violating the insider trading provisions of the federal securities laws
Determine who was in violation or compliance of the AICPA’s Code of Professional Conduct in this case study and analyze the key reasons why they were or were not in compliance. Provide support for the rationale.
Analyze the actions taken by Cardillo’s outside auditors and evaluate the level of efficiency of the audit risk management in this case study. Provide support for the rationale.
Determine whether or not the five (5) components of internal control were being followed. Support the response with at least two (2) examples.
Create an argument for or against whether auditors have a responsibility to assess the judgment of the decisions made by Cardillo’s management. Support the argument.
Use at least two (2) quality academic resources in this assignment. Note: Wikipedia and similar type Websites do not qualify as academic resources.
Your assignment must follow these formatting requirements:
· Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
· Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.
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ACC 563 Week 7 Homework Problems – Strayer NEW
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Week 7
Homework
Chapter 11: Case 11-2, Case 11-4, and Case 11-6
Chapter 12: Case 12-3, Case 12-5, and Case 12-7
ACC 563 Week 1 Homework Problems
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ACC 563 Week 7 Quiz – Strayer NEW
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Week 7 Quiz 5: Chapters 9 and 10
Chapter 9
Multiple Choice
1. When a closely held corporation issues preferred stock for land, the land should be recorded at the
a. Total par value of the stock issued
b. Total book value of the stock issued
c. Appraised value of the land
d. Total liquidating value of the stock issued
Answer
2. A principal objection to the straight-line method of depreciation is that it
a. 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
Answer
3. Property, plant, and equipment are conventionally presented n the balance sheet at
a. Replacement cost less accumulated depreciation
b. Historical cost less salvage value
c. Original cost adjusted for general price level changes
d. Acquisition cost less depreciated portion thereof
Answer
4. As generally used in accounting, depreciation
a. Is a process of asset valuation for balance sheet purposes
b. Applies only to long-lived intangible assets
c. Is used to indicate a decline in market value of a long-lived asset
d. Is an accounting process that allocates long-lived asset cost to accounting periods
Answer
5. Lyle, Inc., purchased certain plant assets under a deferred payment contract on December 31, 2011. The agreement was to pay $20,000 at the time of purchase and $20,000 at the end of each of the next five years. The plant assets should be valued at
a. The present value of a $20,000 ordinary annuity for five years
b. $120,000
c. $120,000 less imputed interest
d. $120,000 plus imputed interest
Answer
6. For income statement purposes, depreciation is a variable expense if the depreciation method used for book purposes is
a. Units of production
b. Straight line
c. Sum-of-the-year’s-digits
d. Declining balance
Answer
7. A method that excludes salvage value from the base for the depreciation calculation is
a. Straight line
b. Sum-of-the-year’s digits
c. Double-declining balance
d. Productive output
Answer
8. When a company purchases land with a building on it and immediately tears down the building so that the land can be used for the construction of a plant, the cost incurred to tear down the building should be
a. Expensed as incurred
b. Added to the cost of the plant
c. Added to the cost of the land
d. Amortized over the estimated time period between the tearing down of the building and the completion of the plant
Answer
9. A machine with a four-year estimated useful life and an estimated 15 percent salvage value was acquired on January 1, 2010. On December 31, 2012, the accumulated depreciation using the sum-of-year’s digits method would be
a. (Original cost less salvage value) multiplied by 9/10
b. Original cost multiplied by 9/10
c. Original cost multiplied by 9/10 less total salvage value
d. (Original cost less salvage value) multiplied by 1/10
Answer
10. The theoretical justification for reporting depreciation expense is
a. Depreciation expense represents a decrease in the value of the asset that has occurred during the accounting period.
b. Depreciation expense represents the impairment of the asset that has occurred during the accounting period.
c. Depreciation expense represents the unrealized loss that has been incurred by using the asset during the accounting period.
d. Depreciation expense represents the allocation of the historical cost of the asset that has been applied to the accounting period.
Answer
11. A company using the group depreciation method for its delivery trucks retired one of its delivery trucks due to damage before the average service life of the group was reached. An insurance recovery was received. The net book value of these group asset accounts would be decreased by the
a. Original cost of the truck
b. Original cost of the truck less the insurance recovery received
c. Original cost of the truck less depreciation on the truck to the date of retirement
d. Insurance recovery received
Answer
12. When equipment is retired, accumulated depreciation is debited for the original cost less any residual recovery under which of the following depreciation methods?
Composite Group
Depreciation Depreciation
a. No No
b. No Yes
c. Yes No
d. Yes Yes
Answer
13. Recognizing depletion expense is an example of the accounting process of
AllocationAmortization
a. No No
b. No Yes
c. Yes Yes
d. Yes No
Answer
14. A donated plant asset for which the fair value has been determined, and for which incidental costs were incurred in acceptance of the asset, should be recorded at an amount equal to its
a. Incidental costs incurred
b. Fair value and incidental costs incurred
c. Book value on books of donor and incidental costs incurred
d. Book value on books of donor
Answer
Essay
1. List the objectives of accounting for property, plant and equipment.
2. Describe how cost is assigned to individual assets when they are acquired in a lump-sum group purchase.
3. Discuss the three approaches to allocating fixed overhead to a self-construction project.
4. Discuss the issue of allocating interest to self construction projects. That is, when should interest be allocated and how much interest should be allocated?
5. Explain the concept of commercial substance originally outlined in SFAS No. 158.
6. How did SFAS No. 116, now FASB ASC 605-10-15-3, change the accounting for donated assets?
7. Discuss the factors comprising the depreciation process.
8. Discuss the distinction between capital and revenue expenditures for long-term assets.
9. Define and discuss accounting for asset retirement obligations under SFAS No. 14FASB ASC 410-20.
10. Discuss the guidelines for accounting for property, plant and equipment outlined in IAS No. 16.
11. How does IAS no. 23 define borrowing costs?
12. Discuss accounting for the impairment of assets as outlined in IAS No. 36.
EXAMPLE TEST QUESTIONS
Chapter 10
Multiple Choice
1. Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the
a. Investor sells the investment
b. Investee declares a dividend
c. Investee pays a dividend
d. Earnings are reported by the investee in its financial statements
Answer
2. Pence Corporation, which accounts for its investments in the common stock of Walsh Company by the equity method, should ordinarily record a dividend received from Walsh as
a. An addition to the carrying value of the investment
b. Dividend revenue
c. A reduction of the carrying value of the investment
d. Revenue from affiliate
Answer
3. On January 15, 2002, a corporation was granted a patent on a product. On January 2, 2010, to protect its patent, the corporation purchased a patent on a competing product the originally was issued on January 10, 2008. Because of its unique plant, the 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 17 years
b. Amortized over a maximum period of 13 years
c. Amortized over a maximum period of 9 years
d. Expensed in 2010
Answer
4. Pacer Company purchased 300 of the 1, 000 outstanding shares of Queen Company’s common stock for $80,000 on January 2, 2008. During 2009, Queen Company declared dividends of $8,000 and reported earnings for the year of $20,000.
If Pacer Company uses the equity method of accounting for its investment in Queen Company, its Investment in Queen Company account at December 31, 2009 should be
a. $100, 000
b. $88,000
c. $83,600
d. $80,000
Answer
5. Refer to the facts in problem (4). If Pacer Company uses the lower of cost or market method of accounting for its investment in Queen Company, and the value of its investment hasn’t changed, its Investment in Queen Company account on December 31, 2009, should be
a. $100, 000
b. $88,000
c. $80,000
d. $73,600
Answer
6. A large, publicly held company developed and registered a trademark during 2010. The cost of developing and registering the trademark should be accounted for by
a. Charging it to an asset account that should not be amortized
b. Expensing it as incurred
c. Amortizing it over 25 years if in accordance with management’s evaluation
d. Amortizing it over its useful life or 17 years, whichever is shorter
Answer
7. Goodwill should be written off
a. As soon as possible against retrained earnings
b. When there is evidence that its carrying value has been impaired
c. By systematic charges against retained earnings over the period benefited, but not more than 40 years
d. By systematic charges to expense over the period benefited, but not more than 40 years
Answer
8. A net unrealized loss on a company’s long-term portfolio of available for sale securities should be reflected in the current financial statements as
a. An extraordinary item shown as a direct reduction from retained earnings
b. A current loss resulting from holding marketable equity securities
c. A footnote or parenthetical disclosure only
d. A component of other comprehensive income
Answer
9. Changes in the fair value of a long-term available for sale equity securities portfolio should be reported as a component of
a. Other comprehensive income
b. Noncurrent assets
c. Noncurrent liabilities
d. Net income
Answer
10. Cash dividends declared out of current earnings are distributed to an investor. How will the investor’s investment account be affected by those dividends under each of the following accounting methods?
Fair Value Method Equity Method
a. Decrease No effect
b. Decrease Decrease
c. No effect Decrease
d. No effect No effect
Answer
11. An activity that would be expensed currently as research and development costs is the
a. Testing in search for or evaluation of product or process alternatives
b. Adaptation of an existing capability to a particular requirement or customer’s need as a part of continuing commercial activity
c. Legal work in connection with patent applications or litigation, and the sale or licensing of patents
d. Engineering follow-through in an early phase of commercial production
Answer
12. Should the following fees associated with the registration of an internally developed patent be capitalized?
Registration
Legal fees fees
a. Yes Yes
b. Yes No
c. No Yes
d. No No
Answer
13. Which of the following assets acquired in 2010 are amortizable?
GoodwillTrademarks
a. No No
b. No Yes
c. Yes No
d. Yes No
Answer
14. A purchased patent has a remaining life of 15 years. It should be
a. Expensed in the year of acquisition
b. Amortized over 15 years regardless of its useful life
c. Amortized over its useful life if less than 15 years
d. Amortized over 40 years
Answer
15. Which of the following amounts incurred in connection with a trademark should be capitalized?
Cost of a Registration
Successful defensefees
a. Yes No
b. Yes Yes
c. No Yes
d. No No
Answer
16. Zink Company owns 32% of Ace Company's outstanding voting stock. Zink Company normally should account for its investment in Ace Company using the
a. Fair value method.
b. Cost method.
c. Consolidation procedure.
d. Equity method.
Answer
1. An investor purchased a bond as a long-term investment on January 1. Annual interest was received on December 31. The investor’s interest income for the year would be lowest if the bond was purchased at
a. A discount
b. A premium
c. Par
d. Face value
Answer
19. The theoretical justification for expensing research and development (R&D) cost as it is incurred is based on which of the following arguments?
a. R&D costs provide no future benefits, thus it does not meet the definition of an asset
b. R&D costs are incurred to generate current period revenue, thus the matching concept requires that it be expensed as incurred.
c. Whether R&D costs that have been incurred will provide future benefit is uncertain, thus it does not meet the definition of an asset.
d. Since R&D costs have been incurred during the current period, they meet the definition of an expense.
Answer
20. When a patent is successfully defended in court, the cost of the lawsuit
a. Should be expensed as incurred because it is a period cost.
b. Should be added to the cost of the patent and depreciated over the remaining useful life of the patent.
c. Should be added to the cost of the patent which is then expensed as a period cost.
d. Has already been expensed so there is no further action to take.
Answer
21. Goodwill is an intangible asset
a. That has a definite life and its cost should be amortized over its useful life.
b. That is recorded when the company has projected earnings in excess of earnings expected for an investment in a similar company in the same industry.
c. That is reviewed for impairment when circumstances indicate that impairment may have occurred.
d. That is reviewed annually to determine whether impairment has occurred.
Answer
22. A trading security is measured at fair value on the balance sheet date and reported as
a. A current asset, and changes in fair value are reported in earnings as unrealized gains and losses.
b. A current asset, and changes in fair value are reported in earnings as realized gains and losses.
c. Either a current or noncurrent asset depending on whether they meet the definition of a current asset.
d. A current asset, and changes in fair value are reported in accumulated other comprehensive income as unrealized gains and losses.
Answer
23. Current accounting for an available-for-sale (AFS) security is consistent with
a. The financial capital maintenance concept of income because AFS security unrealized gains and losses are reported in earnings.
b. The financial capital maintenance concept of income because AFS security unrealized gains and losses are reports in other comprehensive income.
c. The physical capital maintenance concept of income because AFS security unrealized gains and losses are reported in earnings.
d. The physical capital maintenance concept of income because AFS security unrealized gains and losses are reported in other comprehensive income.
Answer
24. The physical capital maintenance concept of income would require that an investment in the common stock of another entity be
a. Reported in the balance sheet at historical cost and that only realized gains and losses be reported in earnings.
b. Reported in the balance sheet at historical cost and that unrealized gains and losses be reported in earnings.
c. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in earnings.
d. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in other comprehensive income.
Answer
25. The economic concept of income would require that an investment in the common stock of another entity be
a. Reported in the balance sheet at historical cost and that only realized gains and losses be reported in earnings.
b. Reported in the balance sheet at historical cost and that unrealized gains and losses be reported in earnings.
c. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in earnings.
d. Reported in the balance sheet at fair value and that unrealized gains and losses be reported in other comprehensive income.
Answer
26. Under the fair value option, an investment in the common stock of another entity will be
a. Reported as a current asset
b. Reported as a noncurrent asset
c. Reported as either a current or noncurrent asset depending on managerial intent.
d. Reported as a current asset only if it was not previously reported as an equity method investment.
Answer
27. When a company reports goodwill in its balance sheet, we know that
a. It was internally generated because the company has earnings in excess of those of other companies in the industry.
b. The company purchased it.
c. The company will be reporting amortization expense for the goodwill.
d. The company will not be reporting an impairment loss for the goodwill.
Answer
Essay
1. How are income and balance sheet values determined under the equity method?
2. Discuss accounting for equity securities under the cost method.
3. Discuss accounting for equity securities under the SFAS No. 115 now contained at FASB ASC 320.
4. Summarize the accounting requirements for investments in equity securities. That is, what methods are available and when is each method appropriate?
5. Discuss the use of the fair value option originally described in SFAS No. 159 now contained at FASB ASC 825-10.
6. Discuss accounting for investments in debt securities.
7. What is an intangible asset? How is the cost of an intangible asset amortized?
8. What is goodwill? How is goodwill written off under the provisions of SFAS No. 142 now FASB ASC 350?
9. Define research and development. How are research and development costs recorded
10. How does IAS No 39 define fair value?
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ACC 564 Week 7 Assignment 3 – Strayer
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Assignment 3: Fraud in the AIS
Due Week 7 and worth 280 points
For this assignment, research the Internet or Strayer databases to locate a firm that was involved in a fraud and / or embezzlement case.
Explain how the firm’s accounting information system (i.e., components and functions) contributed to the fraud and / or embezzlement. You will need to focus on how each component / function of the accounting information system failed, which resulted in the scandal / case.
Write a ten to twelve (10-12) page paper in which you:
Based on the information you researched, assess the failure of the firm’s accounting information system to prevent the related fraud / embezzlement.
Imagine that the company that you researched uses a third-party accounting system. Evaluate the effectiveness of the firm’s stakeholder in the event that a third-party accounting system suffers a breach. Include an assessment of the level of responsibility of the software provider to the business and its clients. Provide support for your rationale.
Determine what advances in accounting and / or information technology could have prevented the event from occurring. Provide support for your argument.
Evaluate what changes should be made to both the Sarbanes-Oxley Act of 2002 and other current laws in order to make them more effective in deterring companies from committing crimes.
Recommend a strategy that the company you indicated may use to prevent future business information failures. Indicate how the company should approach the implementation of your recommended strategy. Provide support for your recommendation.
Use at least three (3) quality resources in this assignment. Note: Wikipedia and similar Websites do not qualify as quality resources.
Your assignment must follow these formatting requirements:
Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.
The specific course learning outcomes associated with this assignment are:
Analyze the business activities that comprise an accounting information system to determine the information needs to support decision-making function.
· Use technology and information resources to research issues in accounting information systems.
Write clearly and concisely about accounting information systems using proper writing mechanics.
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ACC 564 Week 7 Discussion Questions – Strayer NEW
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Week 7 Discussion 1
"Professional Service Organizations" Please respond to the following:
You have been asked by the CFO of the company where you work or previously worked to evaluate the use of a professional service organization for processing the company’s payroll. Identify the top-three issues that should be discussed when considering contracting the services of a payroll service provider. Evaluate the impact, both positive and negative, of each issue on the process in question. Provide specific examples to support your response.
Using the information from the e-Activity, identify the key elements of a plan to outsource your firm’s payroll function. For each element of the plan, describe the impact of each element. Be sure that the elements address the necessary controls needed to safeguard your firm’s personnel data. Provide specific examples to support your rationale.
Week 7 Discussion 2
"General Ledger and Reporting Systems" Please respond to the following:
Your firm is planning to move to International Financial Reporting Standards (IFRS) reporting within the next fiscal year. Analyze the risks and rewards by moving to IFRS and the impact that technology will have on the change. Include the advantages and disadvantages of IRFS compared to the Generally Accepted Accounting Principles (GAAP). Provide specific examples to support your analysis.
Develop a proposal for migrating your firm to IFRS from GAAP. Discuss how you will educate your users in IFRS.
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ACC 571 Week 7 Assignment 3 – Strayer
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Assignment 3: Fraud Schemes and Fraud Investigations
Due Week 7 and worth 280 points
Using the Internet or Strayer databases, identify and research a company with an employee(s) who was involved in corporate fraud. Coordinate an investigation, identify various types of surveillance and covert operations, identify red flags, and recommend a fraud prevention plan.
Write a four to five (4-5) page paper in which you:
1. Based on your research, assume that you are fraud investigator assigned to coordinate an investigation of the fraudster. Determine how you would implement this investigation without the fraudster’s knowledge. Provide support for your rationale.
2. Assuming you are the fraud investigator on this case, assess what types of surveillance and / or covert operations you would use to collect evidence related to the fraud. Analyze technological options for investigating fraud, indicating what you believe to be the most effective option. Provide support for your rationale.
3. During the investigation, assess the most significant red flags which would have been an indication of possible fraud needing corrective action by management.
4. Based on your research, suggest key practices the fraud investigator could have used in conducting interviews with the fraudster and the company’s employees. Assess the various interviews and interrogation questions available to you, and select the type of interview and interrogation questions that would have been most appropriate for this investigation. Provide support for your rationale.
5. Recommend a fraud prevention plan for this organization. Determine the positive or negative consequences that this fraud prevention plan might have on employees’ morale and the public perception of the organization. Provide support for your rationale.
6. Use at least four (4) quality resources in this assignment. Note: Wikipedia and similar Websites do not qualify as quality resources.
Your assignment must follow these formatting requirements:
· Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
· Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.
The specific course learning outcomes associated with this assignment are:
· Examine the basic concepts related to fraud investigations, red flags that are an indication of fraud, and fraud prevention plans.
· Use technology and information resources to research issues in forensic accounting.
· Write clearly and concisely about forensic accounting issues using proper writing mechanics.
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