Acc 304 week 11 final exam – strayer new

ACC 304 Week 11 Final Exam – Strayer NEW
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Week 11 Final Exam: Chapter 12 Through 16
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.

Intangible Assets 12 - 2
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.
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.
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.
*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.
*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
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
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
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
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.
CHAPTER 13
CURRENT LIABILITIES AND CONTINGENCIES
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
1. A zero-interest-bearing note payable that is issued at a discount will not result in any interest
expense being recognized.
2. Dividends in arrears on cumulative preferred stock should be recorded as a current liability.
3. Magazine subscriptions and airline ticket sales both result in unearned revenues.
4. Discount on Notes Payable is a contra account to Notes Payable on the balance sheet.
5. All long-term debt maturing within the next year must be classified as a current liability on
the balance sheet.
6. A short-term obligation can be excluded from current liabilities if the company intends to
refinance it on a long-term basis.
7. Many companies do not segregate the sales tax collected and the amount of the sale at the
time of the sale.
8. A company must accrue a liability for sick pay that accumulates but does not vest.
9. Companies report the amount of social security taxes withheld from employees as well as the
companies’ matching portion as current liabilities until they are remitted.
10. Accumulated rights exist when an employer has an obligation to make payment to an
employee even after terminating his employment.

11. Companies should recognize the expense and related liability for compensated absences in
the year earned by employees.
12. Companies should accrue an estimated loss from a loss contingency if information available
prior to the issuance of financial statements indicates that it is probable that a liability has
been incurred.
13. A company discloses gain contingencies in the notes only when a high probability exists for
realizing them.
14. The expected profit from a sales type warranty that covers several years should all be
recognized in the period the warranty is sold.
15. The fair value of an asset retirement obligation is recorded as both an increase to the related
asset and a liability.
16. The cause for litigation must have occurred on or before the date of the financial statements
to report a liability in the financial statements.
17. Under the expense warranty approach, companies charge warranty costs only to the period in
which they comply with the warranty.
18. Prepaid insurance should be included in the numerator when computing the acid-test (quick)
ratio.
19. Paying a current liability with cash will always reduce the current ratio.
20. Current liabilities are usually recorded and reported in financial statements at their full
maturity value.
True False Answers—Conceptual
MULTIPLE CHOICE—Conceptual
21. Liabilities are
a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with generally
accepted accounting principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in the future.

22. Which of the following is a current liability?
a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund
b. A long-term debt maturing currently, which is to be retired with proceeds from a new
debt issue
c. A long-term debt maturing currently, which is to be converted into common stock
d. None of these
23. Which of the following is true about accounts payable?
1. Accounts payable should not be reported at their present value.
2. When accounts payable are recorded at the net amount, a Purchase Discounts
account will be used.
3. When accounts payable are recorded at the gross amount, a Purchase Discounts
Lost account will be used.
a. 1
b. 2
c. 3
d. Both 2 and 3 are true.
24. Among the short-term obligations of Lance Company as of December 31, the balance sheet
date, are notes payable totaling $250,000 with the Madison National Bank. These are 90-
day notes, renewable for another 90-day period. These notes should be classified on the
balance sheet of Lance Company as
a. current liabilities.
b. deferred charges.
c. long-term liabilities.
d. intermediate debt.
25. Which of the following is not true about the discount on short-term notes payable?
a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the balance
sheet.
c. When there is a discount on a note payable, the effective interest rate is higher than the
stated discount rate.
d. All of these are true.
26. Which of the following may be a current liability?
a. Withheld Income Taxes
b. Deposits Received from Customers
c. Deferred Revenue
d. All of these
27. Which of the following items is a current liability?
a. Bonds (for which there is an adequate sinking fund properly classified as a long-term
investment) due in three months.
b. Bonds due in three years.
c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven
months.

d. Bonds to be refunded when due in eight months, there being no doubt about the
marketability of the refunding issue.
28. Which of the following should not be included in the current liabilities section of the
balance sheet?
a. Trade notes payable
b. Short-term zero-interest-bearing notes payable
c. The discount on short-term notes payable
d. All of these are included
29. Which of the following is a current liability?
a. Preferred dividends in arrears
b. A dividend payable in the form of additional shares of stock
c. A cash dividend payable to preferred stockholders
d. All of these
30. Stock dividends distributable should be classified on the
a. income statement as an expense.
b. balance sheet as an asset.
c. balance sheet as a liability.
d. balance sheet as an item of stockholders' equity.

31. Of the following items, the only one which should not be classified as a current liability is
a. current maturities of long-term debt.
b. sales taxes payable.
c. short-term obligations expected to be refinanced.
d. unearned revenues.
32. An account which would be classified as a current liability is
a. dividends payable in the company's stock.
b. accounts payable—debit balances.
c. losses expected to be incurred within the next twelve months in excess of the
company's insurance coverage.
d. none of these.
33. Which of the following is a characteristic of a current liability but not a long-term liability?
a. Unavoidable obligation.
b. Present obligation that entails settlement by probable future transfer or use of cash,
goods, or services.
c. Liquidation is reasonably expected to require use of existing resources classified as
current assets or create other current liabilities.
d. Transaction or other event creating the liability has already occurred.
34. Which of the following is not considered a part of the definition of a liability?
a. Unavoidable obligation.
b. Transaction or other event creating the liability has already occurred.
c. Present obligation that entails settlement by probable future transfer or use of cash,
goods, or services.
d. Liquidation is reasonably expected to require use of existing resources classified as
current assets or create other current liabilities.
35. Why is the liability section of the balance sheet of primary importance to bankers?
a. To evaluate the entity's credit quality.
b. To assist in understanding the entity's liquidity.
c. To better understand sources of repayment.
d. To evaluate operating efficiency.
36. What is the relationship between current liabilities and a company's operating cycle?
a. Liquidation of current liabilities is reasonably expected within the company's operating
cycle (or one year if less).
b. Current liabilities are the result of operating transactions.
c. Current liabilities can't exceed the amount incurred in one operating cycle.
d. There is no relationship between the two.
37. What is the relationship between present value and the concept of a liability?
a. Present values are used to measure certain liabilities.
b. Present values are not used to measure liabilities.
c. Present values are used to measure all liabilities.
d. Present values are only used to measure long-term liabilities.

38. What is a discount as it relates to zero-interest-bearing notes payable?
a. The discount represents the lender's costs to underwrite the note.
b. The discount represents the credit quality of the borrower.
c. The discount represents the cost of borrowing.
d. The discount represents the allowance for uncollectible amounts.
39. Where is debt callable by the creditor reported on the debtor's financial statements?
a. Long-term liability.
b. Current liability if the creditor intends to call the debt within the year, otherwise a
long-term liability.
c. Current liability if it is probable that creditor will call the debt within the year,
otherwise a long-term liability.
d. Current liability.
40. Which of the following is not a condition necessary to exclude a short-term obligation
from current liabilities?
a. Intend to refinance the obligation on a long-term basis.
b. Obligation must be due with one year.
c. Demonstrate the ability to complete the refinancing.
d. Subsequently refinance the obligation on a long-term basis.
41. Which of the following does not demonstrate evidence regarding the ability to
consummate a refinancing of short-term debt?
a. Management indicated that they are going to refinance the obligation.
b. Actually refinance the obligation.
c. Have capacity under existing financing agreements that can be used to refinance the
obligation.
d. Enter into a financing agreement that clearly permits the entity to refinance the
obligation.
42. A company has not declared a dividend on its cumulative preferred stock for the past three
years. What is the required accounting treatment or disclosure in this situation?
a. Record a liability for cumulative amount of preferred stock dividends not declared.
b. Disclose the amount of the dividends in arrears.
c. Record a liability for the current year's dividends only.
d. No disclosure or recognition is required.
43. Which of the following situations may give rise to unearned revenue?
a. Providing trade credit to customers.
b. Selling inventory.
c. Selling magazine subscriptions.
d. Providing manufacturer warranties.
44. Which of the following statements is correct?
a. A company may exclude a short-term obligation from current liabilities if the firm
intends to refinance the obligation on a long-term basis.

b. A company may exclude a short-term obligation from current liabilities if the firm can
demonstrate an ability to consummate a refinancing.
c. A company may exclude a short-term obligation from current liabilities if it is paid off
after the balance sheet date and subsequently replaced by long-term debt before the
balance sheet is issued.
d. None of these.
45. The ability to consummate the refinancing of a short-term obligation may be
demonstrated by
a. actually refinancing the obligation by issuing a long-term obligation after the date of
the balance sheet but before it is issued.
b. entering into a financing agreement that permits the enterprise to refinance the debt on
a long-term basis.
c. actually refinancing the obligation by issuing equity securities after the date of the
balance sheet but before it is issued.
d. all of these.
46. Which of the following statements is false?
a. A company may exclude a short-term obligation from current liabilities if the firm
intends to refinance the obligation on a long-term basis and demonstrates an ability to
complete the refinancing.
b. Cash dividends should be recorded as a liability when they are declared by the board of
directors.
c. Under the cash basis method, warranty costs are charged to expense as they are paid.
d. FICA taxes withheld from employees' payroll checks should never be recorded as a
liability since the employer will eventually remit the amounts withheld to the
appropriate taxing authority.
47. Which of the following is not a correct statement about sales taxes?
a. Sales taxes are an expense of the seller.
b. Many companies record sales taxes in the sales account.
c. If sales taxes are included in the sales account, the first step to find the amount of sales
taxes is to divide sales by 1 plus the sales tax rate.
d. All of these are true.
S48. If a short-term obligation is excluded from current liabilities because of refinancing, the
footnote to the financial statements describing this event should include all of the
following information except
a. a general description of the financing arrangement.
b. the terms of the new obligation incurred or to be incurred.
c. the terms of any equity security issued or to be issued.
d. the number of financing institutions that refused to refinance the debt, if any.
S49. In accounting for compensated absences, the difference between vested rights and
accumulated rights is
a. vested rights are normally for a longer period of employment than are accumulated
rights.
b. vested rights are not contingent upon an employee's future service.

c. vested rights are a legal and binding obligation on the company, whereas accumulated
rights expire at the end of the accounting period in which they arose.
d. vested rights carry a stipulated dollar amount that is owed to the employee;
accumulated rights do not represent monetary compensation.
P50. An employee's net (or take-home) pay is determined by gross earnings minus amounts for
income tax withholdings and the employee's
a. portion of FICA taxes and unemployment taxes.
b. and employer's portion of FICA taxes, and unemployment taxes.
c. portion of FICA taxes, unemployment taxes, and any voluntary deductions.
d. portion of FICA taxes and any voluntary deductions.
51. Which of these is not included in an employer's payroll tax expense?
a. F.I.C.A. (social security) taxes
b. Federal unemployment taxes
c. State unemployment taxes
d. Federal income taxes
52. Which of the following is a condition for accruing a liability for the cost of compensation
for future absences?
a. The obligation relates to the rights that vest or accumulate.
b. Payment of the compensation is probable.
c. The obligation is attributable to employee services already performed.
d. All of these are conditions for the accrual.
53. A liability for compensated absences such as vacations, for which it is expected that
employees will be paid, should
a. be accrued during the period when the compensated time is expected to be used by
employees.
b. be accrued during the period following vesting.
c. be accrued during the period when earned.
d. not be accrued unless a written contractual obligation exists.
54. 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.
a. 1.
b. 2.
c. 3.
d. Either 1 or 2 is acceptable.
55. What are compensated absences?
a. Unpaid time off.
b. A form of healthcare.
c. Payroll deductions.

d. Paid time off.
56. Which gives rise to the requirement to accrue a liability for the cost of compensated
absences?
a. Payment is probable.
b. Employee rights vest or accumulate.
c. Amount can be reasonably estimated.
57. Under what conditions is an employer required to accrue a liability for sick pay?
a. Sick pay benefits can be reasonably estimated.
b. Sick pay benefits vest.
c. Sick pay benefits equal 100% of the pay.
d. Sick pay benefits accumulate.

58. Which of the following taxes does not represent a common payroll deduction?
a. Federal income taxes.
b. FICA taxes.
c. State unemployment taxes.
d. State income taxes.
59. What is a contingency?
a. An existing situation where certainty exists as to a gain or loss that will be resolved
when one or more future events occur or fail to occur.
b. An existing situation where uncertainty exists as to possible loss that will be resolved
when one or more future events occur.
c. An existing situation where uncertainty exists as to possible gain or loss that will not be
resolved in the foreseeable future.
d. An existing situation where uncertainty exists as to possible gain or loss that will be
resolved when one or more future events occur or fail to occur.
60. When is a contingent liability recorded?
a. When the amount can be reasonably estimated.
b. When the future events are probable to occur and the amount can be reasonably
estimated.
c. When the future events are probable to occur.
d. When the future events will possibly occur and the amount can be reasonably
estimated.
61. Which of the following is an example of a contingent liability?
a. Obligations related to product warranties.
b. Possible receipt from a litigation settlement.
c. Pending court case with a probable favorable outcome.
d. Tax loss carryforwards.
62. Which of the following terms is associated with recording a contingent liability?
a. Possible.
b. Likely.
c. Remote.
d. Probable.
63. Which of the following is the proper way to report a gain contingency?
a. As an accrued amount.
b. As deferred revenue.
c. As an account receivable with additional disclosure explaining the nature of the
contingency.
d. As a disclosure only.
64. Which of the following contingencies need not be disclosed in the financial statements or
the notes thereto?
a. Probable losses not reasonably estimable
b. Environmental liabilities that cannot be reasonably estimated

c. Guarantees of indebtedness of others
d. All of these must be disclosed.

65. Which of the following sets of conditions would give rise to the accrual of a contingency
under current generally accepted accounting principles?
a. Amount of loss is reasonably estimable and event occurs infrequently.
b. Amount of loss is reasonably estimable and occurrence of event is probable.
c. Event is unusual in nature and occurrence of event is probable.
d. Event is unusual in nature and event occurs infrequently.
66. Jeff Beck is a farmer who owns land which borders on the right-of-way of the Northern
Railroad. On August 10, 2012, due to the admitted negligence of the Railroad, hay on the
farm was set on fire and burned. Beck had had a dispute with the Railroad for several years
concerning the ownership of a small parcel of land. The representative of the Railroad has
offered to assign any rights which the Railroad may have in the land to Beck in exchange
for a release of his right to reimbursement for the loss he has sustained from the fire. Beck
appears inclined to accept the Railroad's offer. The Railroad's 2012 financial statements
should include the following related to the incident:
a. recognition of a loss and creation of a liability for the value of the land.
b. recognition of a loss only.
c. creation of a liability only.
d. disclosure in note form only.
67. A contingency can be accrued when
a. it is certain that funds are available to settle the disputed amount.
b. an asset may have been impaired.
c. the amount of the loss can be reasonably estimated and it is probable that an asset has
been impaired or a liability incurred.
d. it is probable that an asset has been impaired or a liability incurred even though the
amount of the loss cannot be reasonably estimated.
68. A contingent liability
a. definitely exists as a liability but its amount and due date are indeterminable.
b. is accrued even though not reasonably estimated.
c. is not disclosed in the financial statements.
d. is the result of a loss contingency.
69. To record an asset retirement obligation (ARO), the cost associated with the ARO is
a. expensed.
b. included in the carrying amount of the related long-lived asset.
c. included in a separate account.
d. none of these.
70. A company is legally obligated for the costs associated with the retirement of a long-lived
asset
a. only when it hires another party to perform the retirement activities.
b. only if it performs the activities with its own workforce and equipment.
c. whether it hires another party to perform the retirement activities or performs the
activities itself.
d. when it is probable the asset will be retired.

71. Assume that a manufacturing corporation has (1) good quality control, (2) a one-year
operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy
of guaranteeing new products against defects for three years that has resulted in material
but rather stable warranty repair and replacement costs. Any liability for the warranty
a. should be reported as long-term.
b. should be reported as current.
c. should be reported as part current and part long-term.
d. need not be disclosed.
72. Ortiz Corporation, a manufacturer of household paints, is preparing annual financial
statements at December 31, 2012. Because of a recently proven health hazard in one of its
paints, the government has clearly indicated its intention of having Ortiz recall all cans of
this paint sold in the last six months. The management of Ortiz estimates that this recall
would cost $800,000. What accounting recognition, if any, should be accorded this
situation?
a. No recognition
b. Note disclosure only
c. Operating expense of $800,000 and liability of $800,000
d. Appropriation of retained earnings of $800,000
73. Information available prior to the issuance of the financial statements indicates that it is
probable that, at the date of the financial statements, a liability has been incurred for
obligations related to product warranties. The amount of the loss involved can be reasonably
estimated. Based on the above facts, an estimated loss contingency should be
a. accrued.
b. disclosed but not accrued.
c. neither accrued nor disclosed.
d. classified as an appropriation of retained earnings.
P74. Espinosa Co. has a loss contingency to accrue. The loss amount can only be reasonably
estimated within a range of outcomes. No single amount within the range is a better
estimate than any other amount. The amount of loss accrual should be
a. zero.
b. the minimum of the range.
c. the mean of the range.
d. the maximum of the range.
S75. Dean Company becomes aware of a lawsuit after the date of the financial statements, but
before they are issued. A loss and related liability should be reported in the financial
statements if the amount can be reasonably estimated, an unfavorable outcome is highly
probable, and
a. the Dean Company admits guilt.
b. the court will decide the case within one year.
c. the damages appear to be material.
d. the cause for action occurred during the accounting period covered by the financial
statements.

S76. Use of the accrual method in accounting for product warranty costs
a. is required for federal income tax purposes.
b. is frequently justified on the basis of expediency when warranty costs are immaterial.
c. finds the expense account being charged when the seller performs in compliance with
the warranty.
d. represents accepted practice and should be used whenever the warranty is an integral
and inseparable part of the sale.
77. Which of the following best describes the accrual method of accounting for warranty
costs?
a. Expensed when paid.
b. Expensed when warranty claims are certain.
c. Expensed based on estimate in year of sale.
d. Expensed when incurred.
78. Which of the following best describes the cash-basis method of accounting for warranty
costs?
a. Expensed based on estimate in year of sale.
b. Expensed when liability is accrued.
c. Expensed when warranty claims are certain.
d. Expensed when incurred.
79. Which of the following is a characteristic of the expense warranty approach, but not the
sales warranty approach?
a. Estimated liability under warranties.
b. Warranty expense.
c. Unearned warranty revenue.
d. Warranty revenue.
80. An electronics store is running a promotion where for every video game purchased, the
customer receives a coupon upon checkout to purchase a second game at a 50% discount.
The coupons expire in one year. The store normally recognized a gross profit margin of
40% of the selling price on video games. How would the store account for a purchase
using the discount coupon?
a. The reduction in sales price attributed to the coupon is recognized as premium expense.
b. The difference between the cost of the video game and the cash received is recognized
as premium expense.
c. Premium expense is not recognized.
d. The difference between the cost of the video game and the selling price prior to the
coupon is recognized as premium expense.
81. What condition is necessary to recognize an asset retirement obligation?
a. Company has an existing legal obligation and can reasonably estimate the amount of
the liability.
b. Company can reasonably estimate the amount of the liability.
c. Company has an existing legal obligation.
d. Obligation event has occurred.

82. Which of the following are not factors that are considered when evaluating whether or not
to record a liability for pending litigation?
a. Time period in which the underlying cause of action occurred.
b. The type of litigation involved.
c. The probability of an unfavorable outcome.
d. The ability to make a reasonable estimate of the amount of the loss.

83. How do you determine the acid-test ratio?
a. The sum of cash and short-term investments divided by short-term debt.
b. Current assets divided by current liabilities.
c. Current assets divided by short-term debt.
d. The sum of cash, short-term investments and net receivables divided by current
liabilities.
84. What does the current ratio inform you about a company?
a. The extent of slow-moving inventories.
b. The efficient use of assets.
c. The company's liquidity.
d. The company's profitability.
S85. Which of the following is not acceptable treatment for the presentation of current
liabilities?
a. Listing current liabilities in order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied to their liquidation
d. Showing current liabilities immediately below current assets to obtain a presentation of
working capital
P86. The ratio of current assets to current liabilities is called the
a. current ratio.
b. acid-test ratio.
c. current asset turnover ratio.
d. current liability turnover ratio.
87. Accrued liabilities are disclosed in financial statements by
a. a footnote to the statements.
b. showing the amount among the liabilities but not extending it to the liability total.
c. an appropriation of retained earnings.
d. appropriately classifying them as regular liabilities in the balance sheet.
88. The numerator of the acid-test ratio consists of
a. total current assets.
b. cash and marketable securities.
c. cash and net receivables.
d. cash, marketable securities, and net receivables.
89. Each of the following are included in both the current ratio and the acid-test ratio except
a. cash.
b. short-term investments.
c. net receivables.
d. inventory.

Multiple Choice Answers—Conceptual
MULTIPLE CHOICE—Computational
90. Glaus Corp. signed a three-month, zero-interest-bearing note on November 1, 2012 for the
purchase of $250,000 of inventory. The face value of the note was $253,675. Assuming
Glaus used a “Discount on Note Payable” account to initially record the note and that the
discount will be amortized equally over the 3-month period, the adjusting entry made at
December 31, 2012 will include a
a. debit to Discount on Note Payable for $1,225.
b. debit to Interest Expense for $2,450.
c. credit to Discount on Note Payable for $1,255.
d. credit to Interest Expense for $2,450.
91. The effective interest on a 12-month, zero-interest-bearing note payable of $300,000,
discounted at the bank at 8% is
a. 8.51%.
b. 8%.
c. 11.49%.
d. 8.70%.

92. On September 1, Hydra purchased $13,300 of inventory items on credit with the terms
1/15, net 30, FOB destination. Freight charges were $280. Payment for the purchase was
made on September 18. Assuming Hydra uses the perpetual inventory system and the net
method of accounting for purchase discounts, what amount is recorded as inventory from
this purchase?
a. $13,167.
b. $13,447.
c. $13,580.
d. $13,300.
93. Sodium Inc. borrowed $280,000 on April 1. The note requires interest at 12% and principal
to be paid in one year. How much interest is recognized for the period from April 1 to
December 31?
a. $0.
b. $33,600.
c. $8,400.
d. $25,200.
94. Collier borrowed $350,000 on October 1 and is required to pay $360,000 on March 1.
What amount is the note payable recorded at on October 1 and how much interest is
recognized from October 1 to December 31?
a. $350,000 and $0.
b. $350,000 and $6,000.
c. $360,000 and $0.
d. $350,000 and $10,000.
95. Purest owes $2 million that is due on February 28. The company borrows $1,600,000 on
February 25 (5-year note) and uses the proceeds to pay down the $2 million note and uses
other cash to pay the balance. How much of the $2 million note is classified as long-term
in the December 31 financial statements.
a. $2,000,000.
b. $0.
c. $1,600,000.
d. $400,000.
96. Vista newspapers sold 6,000 of annual subscriptions at $125 each on September 1. How
much unearned revenue will exist as of December 31?
a. $0.
b. $500,000.
c. $250,000.
d. $750,000.
97. Purchase Retailer made cash sales during the month of October of $221,000. The sales are
subject to a 6% sales tax that was also collected. Which of the following would be included
in the summary journal entry to reflect the sale transactions?
a. Debit Cash for $221,000.
b. Credit Sales Taxes Payable for $12,510.

c. Credit Sales Revenue for $208,490.
d. Credit Sales Taxes Payable for $13,260.

98. On February 10, 2012, after issuance of its financial statements for 2011, House Company
entered into a financing agreement with Lebo Bank, allowing House Company to borrow
up to $6,000,000 at any time through 2014. Amounts borrowed under the agreement bear
interest at 2% above the bank's prime interest rate and mature two years from the date of
loan. House Company presently has $2,250,000 of notes payable with First National Bank
maturing March 15, 2012. The company intends to borrow $3,750,000 under the
agreement with Lebo and liquidate the notes payable to First National. The agreement with
Lebo also requires House to maintain a working capital level of $9,000,000 and prohibits
the payment of dividends on common stock without prior approval by Lebo Bank. From
the above information only, the total short-term debt of House Company as of the
December 31, 2012 balance sheet date is
a. $0.
b. $2,250,000.
c. $3,000,000.
d. $6,000,000.
99. On December 31, 2012, Irey Co. has $4,000,000 of short-term notes payable due on
February 14, 2013. On January 10, 2013, Irey arranged a line of credit with County Bank
which allows Irey to borrow up to $3,000,000 at one percent above the prime rate for three
years. On February 2, 2013, Irey borrowed $2,400,000 from County Bank and used
$1,000,000 additional cash to liquidate $3,400,000 of the short-term notes payable. The
amount of the short-term notes payable that should be reported as current liabilities on the
December 31, 2012 balance sheet which is issued on March 5, 2013 is
a. $0.
b. $600,000.
c. $1,000,000.
d. $1,600,000.
Use the following information for questions 100 and 101.
Stine Co. is a retail store operating in a state with a 6% retail sales tax. The retailer may keep 2%
of the sales tax collected. Stine Co. records the sales tax in the Sales Revenue account. The
amount recorded in the Sales Revenue account during May was $222,600.
100. The amount of sales taxes (to the nearest dollar) for May is
a. $13,089.
b. $12,600.
c. $13,356.
d. $14,157.
101. The amount of sales taxes payable (to the nearest dollar) to the state for the month of May
is
a. $12,826.
b. $12,348.
c. $13,089.
d. $13,873.

102. Vopat, Inc., is a retail store operating in a state with a 5% retail sales tax. The state law
provides that the retail sales tax collected during the month must be remitted to the state
during the following month. If the amount collected is remitted to the state on or before
the twentieth of the following month, the retailer may keep 3% of the sales tax collected.
On April 10, 2012, Vopat remitted $135,800 tax to the state tax division for March 2012
retail sales. What was Vopat 's March 2012 retail sales subject to sales tax?
a. $2,716,000.
b. $2,660,000.
c. $2,800,000.
d. $2,741,667.
103. Jenkins Corporation has $2,500,000 of short-term debt it expects to retire with proceeds
from the sale of 90,000 shares of common stock. If the stock is sold for $20 per share
subsequent to the balance sheet date, but before the balance sheet is issued, what amount of
short-term debt could be excluded from current liabilities?
a. $1,800,000
b. $2,500,000
c. $700,000
d. $0
104. Ermler Corporation has $1,800,000 of short-term debt it expects to retire with proceeds
from the sale of 50,000 shares of common stock. If the stock is sold for $20 per share
subsequent to the balance sheet date, but before the balance sheet is issued, what amount of
short-term debt could be excluded from current liabilities?
a. $1,000,000
b. $1,800,000
c. $800,000
d. $0
105. Preston Co., which has a taxable payroll of $700,000, is subject to FUTA tax of 6.2% and
a state contribution rate of 5.4%. However, because of stable employment experience, the
company’s state rate has been reduced to 2%. What is the total amount of federal and state
unemployment tax for Preston Co.?
a. $81,900
b. $57,400
c. $28,000
d. $19,600
106. Roark Co., which has a taxable payroll of $600,000, is subject to FUTA tax of 6.2% and a
state contribution rate of 5.4%. However, because of stable employment experience, the
company’s state rate has been reduced to 2%. What is the total amount of federal and state
unemployment tax for Roark Co.?
a. $70,200
b. $49,200
c. $24,000
d. $16,800

107. A company gives each of its 50 employees (assume they were all employed continuously
through 2012 and 2013) 12 days of vacation a year if they are employed at the end of the
year. The vacation accumulates and may be taken starting January 1 of the next year. The
employees work 8 hours per day. In 2012, they made $21 per hour and in 2013 they made
$24 per hour. During 2013, they took an average of 9 days of vacation each. The
company’s policy is to record the liability existing at the end of each year at the wage rate
for that year. What amount of vacation liability would be reflected on the 2012 and 2013
balance sheets, respectively?
a. $100,800; $140,400
b. $115,200; $144,000
c. $100,800; $144,000
d. $115,200; $140,400
108. A company gives each of its 50 employees (assume they were all employed continuously
through 2012 and 2013) 12 days of vacation a year if they are employed at the end of the
year. The vacation accumulates and may be taken starting January 1 of the next year. The
employees work 8 hours per day. In 2012, they made $24.50 per hour and in 2013 they
made $28 per hour. During 2013, they took an average of 9 days of vacation each. The
company’s policy is to record the liability existing at the end of each year at the wage rate
for that year. What amount of vacation liability would be reflected on the 2012 and 2013
balance sheets, respectively?
a. $117,600; $163,800
b. $134,400; $168,000
c. $117,600; $168,000
d. $134,400; $163,800
109. The total payroll of Teeter Company for the month of October, 2012 was $600,000, of
which $150,000 represented amounts paid in excess of $106,800 to certain employees.
$500,000 represented amounts paid to employees in excess of the $7,000 maximum
subject to unemployment taxes. $150,000 of federal income taxes and $15,000 of union
dues were withheld. The state unemployment tax is 1%, the federal unemployment tax is
.8%, and the current F.I.C.A. tax is 7.65% on an employee’s wages to $106,800 and 1.45%
in excess of $106,800. What amount should Teeter record as payroll tax expense?
a. $197,700.
b. $188,400.
c. $38,400.
d. $47,400.
Use the following information for questions 110 and 111.
Vargas Company has 35 employees who work 8-hour days and are paid hourly. On January 1,
2011, the company began a program of granting its employees 10 days of paid vacation each year.
Vacation days earned in 2011 may first be taken on January 1, 2012. Information relative to these
employees is as follows:
Hourly Vacation Days Earned Vacation Days Used
Year Wages by Each Employee by Each Employee
2011 $21.50 10 0

2012 22.50 10 8
2013 23.75 10 10
Vargas has chosen to accrue the liability for compensated absences at the current rates of pay in
effect when the compensated time is earned.
110. What is the amount of expense relative to compensated absences that should be reported on
Vargas’s income statement for 2011?
a. $0.
b. $57,400.
c. $63,000.
d. $60,200.
111. What is the amount of the accrued liability for compensated absences that should be
reported at December 31, 2013?
a. $79,100.
b. $75,600.
c. $66,500.
d. $79,800.
112. CalCount pays a weekly payroll of $170,000 that includes federal taxes withheld of
$25,400, FICA taxes withheld of $15,780, and 401(k) withholdings of $18,000. What is
the effect of assets and liabilities from this transaction?
a. Assets decrease $170,000 and liabilities do not change.
b. Assets decrease $128,820 and liabilities increase $41,180.
c. Assets decrease $128,820 and liabilities decrease $41,180.
d. Assets decrease $110,820 and liabilities increase $59,180.
113. CalCount provides its employees two weeks of paid vacation per year. As of December 31,
65 employees have earned two weeks of vacation time to be taken the following year. If
the average weekly salary for these employees is $1,140, what is the required journal
entry?
a. Debit Salaries and Wages Expense for $148,200 and credit Salaries and Wages Payable
for $148,200.
b. No journal entry required.
c. Debit Salaries and Wages Payable for $147,600 and credit Salaries and Wages Expense
for $147,600.
d. Debit Salaries and Wages Expense for $74,100 and credit Salaries and Wages Payable
for $74,100.
114. Tender Foot Inc. is involved in litigation regarding a faulty product sold in a prior year.
The company has consulted with its attorney and determined that it is possible that they
may lose the case. The attorneys estimated that there is a 40% chance of losing. If this is
the case, their attorney estimated that the amount of any payment would be $500,000.
What is the required journal entry as a result of this litigation?
a. Debit Litigation Expense for $500,000 and credit Litigation liability for $500,000.
b. No journal entry is required.
c. Debit Litigation Expense for $200,000 and credit Litigation Liability for $200,000.

d. Debit Litigation Expense for $300,000 and credit Litigation Liability for $300,000.
115. Recycle Exploration is involved with innovative approaches to finding energy reserves.
Recycle recently built a facility to extract natural gas at a cost of $15 million. However,
Recycle is also legally responsible to remove the facility at the end of its useful life of
twenty years. This cost is estimated to be $21 million (the present value of which is $8
million). What is the journal entry required to record the asset retirement obligation?
a. No journal entry required.
b. Debit Natural Gas Facility for $21,000,000 and credit Asset Retirement Obligation for
$21,000,000
c. Debit Natural Gas Facility for $6,000,000 and credit Asset Retirement Obligation for
$6,000,000.
d. Debit Natural Gas Facility for $8,000,000 and credit Asset Retirement Obligation for
$8,000,000.
116. Warranty4U provides extended service contracts on electronic equipment sold through
major retailers. The standard contract is for three years. During the current year,
Warranty4U provided 42,000 such warranty contracts at an average price of $81 each.
Related to these contracts, the company spent $400,000 servicing the contracts during the
current year and expects to spend $2,100,000 more in the future. What is the net profit that
the company will recognize in the current year related to these contracts?
a. $902,000.
b. $3,002,000.
c. $300,667.
d. $734,000.
117. Electronics4U manufactures high-end whole home electronic systems. The company
provides a one-year warranty for all products sold. The company estimates that the
warranty cost is $200 per unit sold and reported a liability for estimated warranty costs
$7.8 million at the beginning of this year. If during the current year, the company sold
60,000 units for a total of $243 million and paid warranty claims of $9,000,000 on current
and prior year sales, what amount of liability would the company report on its balance
sheet at the end of the current year?
a. $3,000,000.
b. $4,200,000.
c. $10,800,000.
d. $12,000,000.
118. A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2012.
Historically, 10% of customers mail in the rebate form. During 2012, 3,000,000 packages
of light bulbs are sold, and 160,000 $1 rebates are mailed to customers. What is the rebate
expense and liability, respectively, shown on the 2012 financial statements dated
December 31?
a. $300,000; $300,000
b. $300,000; $140,000
c. $140,000; $140,000
d. $160,000; $140,000

119. A company buys an oil rig for $2,000,000 on January 1, 2012. The life of the rig is 10
years and the expected cost to dismantle the rig at the end of 10 years is $400,000 (present
value at 10% is $154,220). 10% is an appropriate interest rate for this company. What
expense should be recorded for 2012 as a result of these events?
a. Depreciation expense of $240,000
b. Depreciation expense of $200,000 and interest expense of $15,422
c. Depreciation expense of $200,000 and interest expense of $40,000
d. Depreciation expense of $215,420 and interest expense of $15,422
120. Ziegler Company self insures its property for fire and storm damage. If the company were
to obtain insurance on the property, it would cost them $1,500,000 per year. The company
estimates that on average it will incur losses of $1,200,000 per year. During 2012,
$525,000 worth of losses were sustained. How much total expense and/or loss should be
recognized by Ziegler Company for 2012?
a. $525,000 in losses and no insurance expense
b. $525,000 in losses and $675,000 in insurance expense
c. $0 in losses and $1,200,000 in insurance expense
d. $0 in losses and $1,500,000 in insurance expense
121. A company offers a cash rebate of $2 on each $6 package of batteries sold during 2012.
Historically, 10% of customers mail in the rebate form. During 2012, 6,000,000 packages
of batteries are sold, and 210,000 $2 rebates are mailed to customers. What is the rebate
expense and liability, respectively, shown on the 2012 financial statements dated
December 31?
a. $1,200,000; $1,200,000
b. $1,200,000; $780,000
c. $780,000; $780,000
d. $420,000; $780,000
122. A company buys an oil rig for $3,000,000 on January 1, 2012. The life of the rig is 10
years and the expected cost to dismantle the rig at the end of 10 years is $600,000 (present
value at 10% is $231,330). 10% is an appropriate interest rate for this company. What
expense should be recorded for 2012 as a result of these events?
a. Depreciation expense of $360,000
b. Depreciation expense of $300,000 and interest expense of $23,133
c. Depreciation expense of $300,000 and interest expense of $60,000
d. Depreciation expense of $323,133 and interest expense of $23,133
123. During 2011, Vanpelt Co. introduced a new line of machines that carry a three-year
warranty against manufacturer’s defects. Based on industry experience, warranty costs are
estimated at 2% of sales in the year of sale, 3% in the year after sale, and 4% in the second
year after sale. Sales and actual warranty expenditures for the first three-year period were
as follows:
Sales Actual Warranty Expenditures
2011 $ 600,000 $ 9,000
2012 1,500,000 65,000
2013 2,100,000 135,000

$4,200,000 $209,000
What amount should Vanpelt report as a liability at December 31, 2013?
a. $0
b. $12,000
c. $54,000
d. $169,000
124. Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3
boxtops from Palmer Frosted Flakes boxes and $1. The company estimates that 60% of the
boxtops will be redeemed. In 2012, the company sold 675,000 boxes of Frosted Flakes and
customers redeemed 330,000 boxtops receiving 110,000 bowls. If the bowls cost Palmer
Company $3 each, how much liability for outstanding premiums should be recorded at the
end of 2012?
a. $270,000
b. $50,000
c. $75,000
d. $138,000

125. During 2011, Stabler Co. introduced a new line of machines that carry a three-year
warranty against manufacturer’s defects. Based on industry experience, warranty costs are
estimated at 2% of sales in the year of sale, 3% in the year after sale, and 4% in the second
year after sale. Sales and actual warranty expenditures for the first three-year period were
as follows:
Sales Actual Warranty Expenditures
2011 $ 400,000 $ 6,000
2012 1,000,000 40,000
2013 1,400,000 90,000
$2,800,000 $136,000
What amount should Stabler report as a liability at December 31, 2013?
a. $0
b. $28,000
c. $36,000
d. $116,000
126. LeMay Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 4
boxtops from LeMay Frosted Flakes boxes and $1. The company estimates that 60% of the
boxtops will be redeemed. In 2012, the company sold 500,000 boxes of Frosted Flakes and
customers redeemed 220,000 boxtops receiving 55,000 bowls. If the bowls cost LeMay
Company $3 each, how much liability for outstanding premiums should be recorded at the
end of 2012?
a. $150,000
b. $40,000
c. $60,000
d. $84,000
Use the following information for questions 127, 128, and 129.
Mott Co. includes one coupon in each bag of dog food it sells. In return for eight coupons,
customers receive a leash. The leashes cost Mott $3 each. Mott estimates that 40 percent of the
coupons will be redeemed. Data for 2012 and 2013 are as follows:
2012 2013
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000
127. The premium expense for 2012 is
a. $37,500.
b. $45,000.
c. $52,500.
d. $75,000.
128. The premium liability at December 31, 2012 is
a. $11,250.
b. $15,000.
c. $26,250.

d. $30,000.

129. The premium liability at December 31, 2013 is
a. $16,875
b. $31,875.
c. $33,750.
d. $63,750.
130. Winter Co. is being sued for illness caused to local residents as a result of negligence on
the company's part in permitting the local residents to be exposed to highly toxic chemicals
from its plant. Winter's lawyer states that it is probable that Winter will lose the suit and be
found liable for a judgment costing Winter anywhere from $1,600,000 to $8,000,000.
However, the lawyer states that the most probable cost is $4,800,000. As a result of the
above facts, Winter should accrue
a. a loss contingency of $1,600,000 and disclose an additional contingency of up to
$6,400,000.
b. a loss contingency of $4,800,000 and disclose an additional contingency of up to
$3,200,000.
c. a loss contingency of $4,800,000 but not disclose any additional contingency.
d. no loss contingency but disclose a contingency of $1,600,000 to $8,000,000.
131. Nance Company estimates its annual warranty expense as 2% of annual net sales. The
following data relate to the calendar year 2012:
Net sales $1,500,000
Warranty liability account
Balance, Dec. 31, 2012 $10,000 debit before adjustment
Balance, Dec. 31, 2012 50,000 credit after adjustment
Which one of the following entries was made to record the 2012 estimated warranty
expense?
a. Warranty Expense ................................................................. 30,000
Retained Earnings (prior-period adjustment) ............. 5,000
Warranty Liability ...................................................... 25,000
b. Warranty Expense ................................................................. 25,000
Retained Earnings (prior-period adjustment) ........................ 5,000
c. Warranty Expense ................................................................. 20,000
d. Warranty Expense ................................................................. 30,000
132. In 2012, Payton Corporation began selling a new line of products that carry a two-year
warranty against defects. Based upon past experience with other products, the estimated
warranty costs related to dollar sales are as follows:
First year of warranty 2%
Second year of warranty 5%
Sales and actual warranty expenditures for 2012 and 2013 are presented below:
2012 2013

Sales $600,000 $800,000
Actual warranty expenditures 20,000 40,000

What is the estimated warranty liability at the end of 2013?
a. $38,000.
b. $58,000.
c. $98,000.
d. $16,000.
133. On January 3, 2012, Boyer Corp. owned a machine that had cost $300,000. The
accumulated depreciation was $180,000, estimated salvage value was $18,000, and fair
value was $480,000. On January 4, 2012, this machine was irreparably damaged by Pine
Corp. and became worthless. In October 2012, a court awarded damages of $480,000
against Pine in favor of Boyer. At December 31, 2012, the final outcome of this case was
awaiting appeal and was, therefore, uncertain. However, in the opinion of Boyer’s
attorney, Pine’s appeal will be denied. At December 31, 2012, what amount should Boyer
accrue for this gain contingency?
a. $480,000.
b. $390,000.
c. $300,000.
d. $0.
134. Fuller Food Company distributes to consumers coupons which may be presented (on or
before a stated expiration date) to grocers for discounts on certain products of Fuller. The
grocers are reimbursed when they send the coupons to Fuller. In Fuller's experience, 50%
of such coupons are redeemed, and generally one month elapses between the date a grocer
receives a coupon from a consumer and the date Fuller receives it. During 2012 Fuller
issued two separate series of coupons as follows:
Consumer Amount Disbursed
Issued On Total Value Expiration Date as of 12/31/12
1/1/12 $500,000 6/30/12 $236,000
7/1/12 720,000 12/31/12 300,000
The only journal entries to date recorded debits to coupon expense and credits to cash of
$715,000. The December 31, 2012 balance sheet should include a liability for unredeemed
coupons of
a. $0.
b. $60,000.
c. $124,000.
d. $360,000.
135. Presented below is information available for Morton Company.
Current Assets
Cash $ 4,000
Short-term investments 75,000
Accounts receivable 61,000
Inventory 110,000
Prepaid expenses 30,000
Total current assets $280,000
Total current liabilities are $110,000. The acid-test ratio for Morton is

a. 2.55 to 1.
b. 2.27 to 1.
c. 1.27 to 1.
d. 0.72 to 1.
Multiple Choice Answers—Computational

MULTIPLE CHOICE—CPA Adapted
136. Which of the following is generally associated with payables classified as accounts
payable?
Periodic Payment Secured
of Interest by Collateral
a. No No
b. No Yes
c. Yes No
d. Yes Yes
137. On January 1, 2012, Beyer Co. leased a building to Heins Corp. for a ten-year term at an
annual rental of $140,000. At inception of the lease, Beyer received $560,000 covering the
first two years' rent of $280,000 and a security deposit of $280,000. This deposit will not
be returned to Heins upon expiration of the lease but will be applied to payment of rent for
the last two years of the lease. What portion of the $560,000 should be shown as a current
and long-term liability, respectively, in Beyer's December 31, 2012 balance sheet?
Current Liability Long-term Liability
a. $0 $560,000
b. $140,000 $280,000
c. $280,000 $280,000
d. $280,000 $140,000
138. On September 1, 2012, Herman Co. issued a note payable to National Bank in the amount
of $1,800,000, bearing interest at 12%, and payable in three equal annual principal
payments of $600,000. On this date, the bank's prime rate was 11%. The first payment for
interest and principal was made on September 1, 2013. At December 31, 2013, Herman
should record accrued interest payable of
a. $72,000.
b. $66,000.
c. $48,000.
d. $44,000.
139. Included in Vernon Corp.'s liability account balances at December 31, 2012, were the
following:
7% note payable issued October 1, 2012, maturing September 30, 2013 $250,000
8% note payable issued April 1, 2012, payable in six equal annual
installments of $150,000 beginning April 1, 2013 600,000
Vernon's December 31, 2012 financial statements were issued on March 31, 2013. On
January 15, 2013, the entire $600,000 balance of the 8% note was refinanced by issuance
of a long-term obligation payable in a lump sum. In addition, on March 10, 2013, Vernon
consummated a noncancelable agreement with the lender to refinance the 7%, $250,000
note on a long-term basis, on readily determinable terms that have not yet been
implemented. On the December 31, 2012 balance sheet, the amount of the notes payable
that Vernon should classify as short-term obligations is
a. $175,000.

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