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1. If the interest rate is 10%, the factor for the future value
1. If the interest rate is 10%, the factor for the future value of annuity due of 1 for n = 5, i = 10% is equal to the factor for the future value of an ordinary annuity of 1 for n = 5, i = 10% (Points: 6)
multiplied by 1.10.
divided by 1.10.
2. Which statement is false? (Points: 6)
The factor for the future value of an annuity due is found by multiplying the ordinary annuity table value by one plus the interest rate.
The factor for the present value of an annuity due is found by multiplying the ordinary annuity table value by one minus the interest rate.
The factor for the future value of an annuity due is found by subtracting 1.00000 from the ordinary annuity table value for one more period.
The factor for the present value of an annuity due is found by adding 1.00000 to the ordinary annuity table value for one less period.
3. Ed Sloan wants to withdraw $20,000 (including principal) from an investment fund at the end of each year for five years. How should he compute his required initial investment at the beginning of the first year if the fund earns 10% compounded annually? (Points: 6)
$20,000 times the future value of a 5-year, 10% ordinary annuity of 1.
$20,000 divided by the future value of a 5-year, 10% ordinary annuity of 1.
$20,000 times the present value of a 5-year, 10% ordinary annuity of 1.
$20,000 divided by the present value of a 5-year, 10% ordinary annuity of 1.
4. Ann Ruth wants to invest a certain sum of money at the end of each year for five years. The investment will earn 6% compounded annually. At the end of five years, she will need a total of $40,000 accumulated. How should she compute her required annual investment? (Points: 6)
$40,000 times the future value of a 5-year, 6% ordinary annuity of 1.
$40,000 divided by the future value of a 5-year, 6% ordinary annuity of 1.
$40,000 times the present value of a 5-year, 6% ordinary annuity of 1.
$40,000 divided by the present value of a 5-year, 6% ordinary annuity of 1.
5. If an annuity due and an ordinary annuity have the same number of equal payments and the same interest rates, then (Points: 6)
the present value of the annuity due is less than the present value of the ordinary annuity.
the present value of the annuity due is greater than the present value of the ordinary annuity.
the future value of the annuity due is equal to the future value of the ordinary annuity.
the future value of the annuity due is less than the future value of the ordinary annuity.
6. If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information except (Points: 6)
a general description of the financing arrangement.
the terms of the new obligation incurred or to be incurred.
the terms of any equity security issued or to be issued.
the number of financing institutions that refused to refinance the debt, if any.
7. An employee's net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employee's (Points: 6)
portion of FICA taxes, and unemployment taxes.
and employer's portion of FICA taxes, and unemployment taxes.
portion of FICA taxes, unemployment taxes, and any voluntary deductions.
portion of FICA taxes, and any voluntary deductions.
8. Which of these is not included in an employer's payroll tax expense? (Points: 6)
F.I.C.A. (social security) taxes
Federal unemployment taxes
State unemployment taxes
Federal income taxes
9. Which of the following is a condition for accruing a liability for the cost of compensation for future absences? (Points: 6)
The obligation relates to the rights that vest or accumulate.
Payment of the compensation is probable.
The obligation is attributable to employee services already performed.
All of these are conditions for the accrual.
10. The amount of the liability for compensated absences should be based on
1. the current rates of pay in effect when employees earn the right to compensated absences.
2. the future rates of pay expected to be paid when employees use compensated time.
3. the present value of the amount expected to be paid in future periods. (Points: 6)
Either 1 or 2 is acceptable.
11. Which of the following is the proper way to report a gain contingency? (Points: 6)
As an accrued amount.
As deferred revenue.
As an account receivable with additional disclosure explaining the nature of the contingency.
As a disclosure only.
12. Treasury bonds should be shown on the balance sheet as (Points: 6)
a deduction from bonds payable issued to arrive at net bonds payable and outstanding.
a reduction of stockholders' equity.
both an asset and a liability.
13. An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition (Points: 6)
any costs of issuing the bonds must be amortized up to the purchase date.
the premium must be amortized up to the purchase date.
interest must be accrued from the last interest date to the purchase date.
all of these.
14. The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as (Points: 6)
an adjustment to the cost basis of the asset obtained by the debt issue.
an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument.
an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt.
a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption.
15. A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2006. Interest is paid on June 30 and December 31. The proceeds from the bonds are $4,901,036. What is interest expense for 2007, using straight-line amortization? (Points: 6)
16. On January 1, 2007, Foley Co. sold 12% bonds with a face value of $600,000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $646,200 to yield 10%. Using the effective-interest method of amortization, interest expense for 2007 is (Points: 6)
17. On January 2, 2007, a calendar-year corporation sold 8% bonds with a face value of $600,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $553,600 to yield 10%. Using the effective-interest method of computing interest, how much should be charged to interest expense in 2007? (Points: 6)
18. The December 31, 2006, balance sheet of Eddy Corporation includes the following items:
9% bonds payable due December 31, 2015 $1,000,000
Unamortized premium on bonds payable 27,000
The bonds were issued on December 31, 2005, at 103, with interest payable on July 1 and December 31 of each year. Eddy uses straight-line amortization. On March 1, 2007, Eddy retired $400,000 of these bonds at 98 plus accrued interest. What should Eddy record as a gain on retirement of these bonds? Ignore taxes. (Points: 6)
19. On January 1, 2001, Gonzalez Corporation issued $4,500,000 of 10% ten-year bonds at 103. The bonds are callable at the option of Gonzalez at 105. Gonzalez has recorded amortization of the bond premium on the straight-line method (which was not materially different from the effective-interest method).
On December 31, 2007, when the fair market value of the bonds was 96, Gonzalez repurchased $1,000,000 of the bonds in the open market at 96. Gonzalez has recorded interest and amortization for 2007. Ignoring income taxes and assuming that the gain is material, Gonzalez should report this reacquisition as (Points: 6)
a loss of $49,000.
a gain of $49,000.
a loss of $61,000.
a gain of $61,000.
20. The 10% bonds payable of Klein Company had a net carrying amount of $570,000 on December 31, 2006. The bonds, which had a face value of $600,000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. On July 2, 2007, several years before their maturity, Klein retired the bonds at 102. The interest payment on July 1, 2007 was made as scheduled. What is the loss that Klein should record on the early retirement of the bonds on July 2, 2007? Ignore taxes. (Points: 6)
21. Pryor Corporation issued a 100% stock dividend of its common stock which had a par value of $10 before and after the dividend. At what amount should retained earnings be capitalized for the additional shares issued? (Points: 6)
There should be no capitalization of retained earnings.
Market value on the declaration date
Market value on the payment date
22. The issuer of a 5% common stock dividend to common stockholders preferably should transfer from retained earnings to contributed capital an amount equal to the (Points: 6)
market value of the shares issued.
book value of the shares issued.
minimum legal requirements.
par or stated value of the shares issued.
23. The balance in Common Stock Dividend Distributable should be reported as a(n) (Points: 6)
deduction from common stock issued.
addition to capital stock.
contra current asset.
24. A feature common to both stock splits and stock dividends is (Points: 6)
a transfer to earned capital of a corporation.
that there is no effect on total stockholders' equity.
an increase in total liabilities of a corporation.
a reduction in the contributed capital of a corporation.
25. What effect does the issuance of a 2-for-1 stock split have on each of the following?
Par Value per Share Retained Earnings
No effect No effect
Increase No effect
Decrease No effect
26. Which one of the following disclosures should be made in the equity section of the balance sheet, rather than in the notes to the financial statements? (Points: 6)
Conversion or exercise prices
27. The payout ratio can be calculated by dividing (Points: 6)
dividends per share by earnings per share.
cash dividends by net income less preferred dividends.
cash dividends by market price per share.
dividends per share by earnings per share and dividing cash dividends by net income less preferred dividends.
28. Windsor Company has outstanding both common stock and nonparticipating, non-cumulative preferred stock. The liquidation value of the preferred is equal to its par value. The book value per share of the common stock is unaffected by (Points: 6)
the declaration of a stock dividend on preferred payable in preferred stock when the market price of the preferred is equal to its par value.
the declaration of a stock dividend on common stock payable in common stock when the market price of the common is equal to its par value.
the payment of a previously declared cash dividend on the common stock.
a 2-for-1 split of the common stock.
29. On July 1, 2007, an interest payment date, $60,000 of Risen Co. bonds were converted into 1,200 shares of Risen Co. common stock each having a par value of $45 and a market value of $54. There is $2,400 unamortized discount on the bonds. Using the book value method, Risen would record (Points: 6)
no change in paid-in capital in excess of par.
a $3,600 increase in paid-in capital in excess of par.
a $7,200 increase in paid-in capital in excess of par.
a $4,800 increase in paid-in capital in excess of par.
30. Quayle Corporation had two issues of securities outstanding: common stock and an 8% convertible bond issue in the face amount of $16,000,000. Interest payment dates of the bond issue are June 30th and December 31st. The conversion clause in the bond indenture entitles the bondholders to receive forty shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2007, the holders of $2,400,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100 per bond and the market price of the common stock was $35. The total unamortized bond discount at the date of conversion was $1,000,000. In applying the book value method, what amount should Quayle credit to the account "paid-in capital in excess of par," as a result of this conversion? (Points: 6)
31. Investments in debt securities should be recorded on the date of acquisition at (Points: 6)
lower of cost or market.
market value plus brokerage fees and other costs incident to the purchase.
face value plus brokerage fees and other costs incident to the purchase.
32. An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a (Points: 6)
debit to Available-for-Sale Securities.
debit to the discount account.
debit to Interest Revenue.
none of these.
33. APB Opinion No. 21 specifies that, regarding the amortization of a premium or discount on a debt security, the (Points: 6)
effective-interest method of allocation must be used.
straight-line method of allocation must be used.
effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained.
par value method must be used and therefore no allocation is necessary.
34. Which of the following is correct about the effective-interest method of amortization? (Points: 6)
The effective interest method applied to investments in debt securities is different from that applied to bonds payable.
Amortization of a discount decreases from period to period.
Amortization of a premium decreases from period to period.
The effective-interest method produces a constant rate of return on the book value of the investment from period to period.
35. Which of the following is not generally correct about recording a sale of a debt security before maturity date? (Points: 6)
Accrued interest will be received by the seller even though it is not an interest payment date.
An entry must be made to amortize a discount to the date of sale.
The entry to amortize a premium to the date of sale includes a credit to the Premium on Investments in Debt Securities.
A gain or loss on the sale is not extraordinary.
36. The method most commonly used to report defaults and repossessions is (Points: 6)
provide no basis for the repossessed asset thereby recognizing a loss.
record the repossessed merchandise at fair value, recording a gain or loss if appropriate.
record the repossessed merchandise at book value, recording no gain or loss.
none of these.
37. Under the installment-sales method, (Points: 6)
revenue, costs, and gross profit are recognized proportionate to the cash that is received from the sale of the product.
gross profit is deferred proportionate to cash uncollected from sale of the product, but total revenues and costs are recognized at the point of sale.
gross profit is not recognized until the amount of cash received exceeds the cost of the item sold.
revenues and costs are recognized proportionate to the cash received from the sale of the product, but gross profit is deferred until all cash is received.
38. The realization of income on installment sales transactions involves (Points: 6)
recognition of the difference between the cash collected on installment sales and the cash expenses incurred.
deferring the net income related to installment sales and recognizing the income as cash is collected.
deferring gross profit while recognizing operating or financial expenses in the period incurred.
deferring gross profit and all additional expenses related to installment sales until cash is ultimately collected.
39. A manufacturer of large equipment sells on an installment basis to customers with questionable credit ratings. Which of the following methods of revenue recognition is least likely to overstate the amount of gross profit reported? (Points: 6)
At the time of completion of the equipment (completion of production method)
At the date of delivery (sales method)
The installment-sales method
The cost-recovery method
40. A seller is properly using the cost-recovery method for a sale. Interest will be earned on the future payments. Which of the following statements is not correct? (Points: 6)
After all costs have been recovered, any additional cash collections are included in income.
Interest revenue may be recognized before all costs have been recovered.
The deferred gross profit is offset against the related receivable on the balance sheet.
Subsequent income statements report the gross profit as a separate item of revenue when it is recognized as earned.
41. According to the FASB, immediate recognition of a liability (referred to as the minimum liability) is required when the accumulated benefit obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan assets exceeds the accumulated benefit obligation, the Board (Points: 6)
requires recognition of an asset.
requires recognition of an asset if the excess fair value of plan assets exceeds the corridor amount.
recommends recognition of an asset but does not require such recognition.
does not permit recognition of an asset.
42. Which of the following disclosures of pension plan information would not normally be required by Statement of Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits"? (Points: 6)
The major components of pension expense
The amount paid from the pension fund to retirees during the period
The funded status of the plan and the amounts recognized in the financial statements
The rates used in measuring the benefit amounts
43. The main purpose of the Pension Benefit Guaranty Corporation is to ____________. (Points: 6)
require minimum funding of pensions
require plan administrators to publish a comprehensive description and summary of their plans
administer terminated plans and to impose liens on the employer's assets for certain unfunded pension liabilities
all of these
44. A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the (Points: 6)
asset's remaining economic life.
term of the lease.
life of the asset or the term of the lease, whichever is shorter.
life of the asset or the term of the lease, whichever is longer.
45. If the lease were nonrenewable, there was no purchase option, title to the building does not pass to the lessee at termination of the lease and the lease were only for eight years, what type of lease would this be for the lessee? (Points: 6)
46. Huffman Company leases a machine from Lincoln Corp. under an agreement which meets the criteria to be a capital lease for Huffman. The six-year lease requires payment of $102,000 at the beginning of each year, including $15,000 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1 for six years at 10% is 4.79079. The present value of an annuity due of 1 for six years at 8% is 4.99271. Huffman should record the leased asset at (Points: 6)
47. Which type of accounting change should always be accounted for in current and future periods? (Points: 6)
Change in accounting principle
Change in reporting entity
Change in accounting estimate
Correction of an error
48. Which of the following is (are) the proper time period(s) to record the effects of a change in accounting estimate? (Points: 6)
Current period and prospectively
Current period and retrospectively
Current period only
49. When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as a (Points: 6)
change in accounting principle.
change in accounting estimate.
prior period adjustment.
correction of an error.
50. The estimated life of a building that has been depreciated 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should _______________. (Points: 6)
continue to depreciate the building over the original 50-year life
depreciate the remaining book value over the remaining life of the asset
adjust accumulated depreciation to its appropriate balance, through net income, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years
adjust accumulated depreciation to its appropriate balance through retained earnings, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years
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