1. Isaac Inc. began operations in January 2013. For certain of its property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments. In 2013, Isaac had $600 million in sales of this type. Scheduled collections for these sales are as follows:    Assume that Isaac has a 30% income tax rate and that there were no other differences in income for financial statement and tax purposes. Ignoring operating expenses, what deferred tax liability would Isaac report in its year-end 2013 balance sheet?    2. Beresford Inc. purchased several investment securities during 2012, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values are not considered permanent.   What balance sheet amount would Beresford report for its total investment securities at 12/31/2012?    3. Hutton Construction specializes in the construction of commercial and industrial buildings. The contractor is experienced in bidding long-term construction projects of this type, with the typical project lasting fifteen to twenty-four months. The contractor uses the percentage-of-completion method of revenue recognition since, given the characteristics of the contractor's business and contracts, it is the most appropriate method. Progress toward completion is measured on a cost to cost basis. Hutton began work on a lump-sum contract at the beginning of 2014. As bid, the statistics were as follows: Lump-sum price (contract price) $4,000,000 Estimated costs Labor $ 850,000 Materials and subcontractor 1,750,000 Indirect costs 400,000 3,000,000 $1,000,000 At the end of the first year, the following was the status of the contract: Billings to date $2,230,000 Costs incurred to date Labor $ 464,000 Materials and subcontractor 1,098,000 Indirect costs 193,000 1,755,000 Latest forecast total cost 3,000,000 It should be noted that included in the above costs incurred to date were standard electrical and mechanical materials stored on the job site, but not yet installed, costing $105,000. These costs should not be considered in the costs incurred to date. Instructions (a) Compute the percentage of completion on the contract at the end of 2014. (b) Indicate the amount of gross profit that would be reported on this contract at the end of 2014. (c) Make the journal entry to record the income (loss) for 2014 on Hutton’s books. 4. Computation of selected ratios. The following data is given: December 31, 2013 2012 Cash $ 66,000 $ 50,000 Accounts receivable (net) 68,000 60,000 Inventories 90,000 110,000 Plant assets (net) 383,000 325,000 Accounts payable 57,000 40,000 Salaries and wages payable 10,000 5,000 Bonds payable 70,000 70,000 10% Preferred stock, $40 par 100,000 100,000 Common stock, ...

1. 1.
Isaac Inc. began operations in January 2013. For certain of its
property sales, Isaac recognizes income in the period of sale for
financial reporting purposes. However, for income tax purposes,
Isaac recognizes income when it collects cash from the buyer's
installment payments.
In 2013, Isaac had $600 million in sales of this type. Scheduled
collections for these sales are as follows:
Assume that Isaac has a 30% income tax rate and that there
were no other differences in income for financial statement and
tax purposes.
Ignoring operating expenses, what deferred tax liability would
Isaac report in its year-end 2013 balance sheet?
2.
Beresford Inc. purchased several investment securities during
2012, its first year of operations. The following information
pertains to these securities. The fluctuations in their fair values
are not considered permanent.
What balance sheet amount would Beresford report for its total
investment securities at 12/31/2012?

2. 3. Hutton Construction specializes in the construction of
commercial and industrial buildings. The contractor is
experienced in bidding long-term construction projects of this
type, with the typical project lasting fifteen to twenty-four
months. The contractor uses the percentage-of-completion
method of revenue recognition since, given the characteristics
of the contractor's business and contracts, it is the most
appropriate method. Progress toward completion is measured on
a cost to cost basis. Hutton began work on a lump-sum contract
at the beginning of 2014. As bid, the statistics were as follows:
Lump-sum price (contract price)
$4,000,000
Estimated costs
Labor
$ 850,000
Materials and subcontractor
1,750,000
Indirect costs
400,000
3,000,000
$1,000,000

3. At the end of the first year, the following was the status of the
contract:
Billings to date
$2,230,000
Costs incurred to date
Labor
$ 464,000
Materials and subcontractor
1,098,000
Indirect costs
193,000
1,755,000
Latest forecast total cost
3,000,000
It should be noted that included in the above costs incurred to
date were standard electrical and mechanical materials stored on
the job site, but not yet installed, costing $105,000. These costs
should not be considered in the costs incurred to date.
Instructions
(a)
Compute the percentage of completion on the contract at the end
of 2014.

4. (b)
Indicate the amount of gross profit that would be reported on
this contract at the end of 2014.
(c)
Make the journal entry to record the income (loss) for 2014 on
Hutton’s books.
4. Computation of selected ratios.
The following data is given:
December 31,
2013
2012
Cash
$ 66,000
$ 50,000
Accounts receivable (net)
68,000
60,000
Inventories
90,000

5. 110,000
Plant assets (net)
383,000
325,000
Accounts payable
57,000
40,000
Salaries and wages payable
10,000
5,000
Bonds payable
70,000
70,000
10% Preferred stock, $40 par
100,000
100,000
Common stock, $10 par
120,000
90,000
Paid-in capital
80,000
65,000

6. Retained earnings
170,000
175,000
Net credit sales
800,000
Cost of goods sold
600,000
Net income
80,000
Instructions
Compute the following ratios:
(a)
Acid-test ratio at 12/31/13
(b)
Receivables turnover in 2013
(c)
Inventory turnover in 2013
(d)
Profit margin on sales in 2013
(e)
Rate of return on common stock equity in 2013

7. (f)
Book value per share of common stock at 12/31/13
5.
a. Prepare a cash flow statement for the following information.
b. Include a cash reconciliation statement.
Balance Sheet ($)
Jan 1
Dec 31
ASSETS:
Current Assets:
Cash
310,000
600,000

8. Marketable Securities
1,200,000
1,000,000
Accounts Receivable, net
290,000
330,000
Inventory
3,000,000
4,000,000
Prepaid Expenses
200,000
300,000
Total Current Assets

9. 5,000,000
6,230,000
Total Fixed Assets, net
2,500,000
2,000,000
Total Assets
7,500,000
8,230,000
LIABILITIES & EQUITIES
Current Liabilities:
Accounts Payable
1,500,000
1,000,000

10. Notes Payable
1,000,000
1,000,000
Accrued Expenses
500,000
800,000
Total Current Liabilities
3,000,000
2,800,000
Total Long-term Liabilities
1,000,000
1,500,000
Total Liabilities
4,000,000

11. 4,300,000
Preferred Stock
500,000
500,000
Common Stock
500,000
500,000
Capital in Excess of Par
1,000,000
1,000,000
Retained Earnings
1,500,000
1,930,000
Total Stockholders Equity

12. 3,500,000
3,930,000
Total Liabilities and Equity
7,500,000
8,230,000
Income Statement (for ques 5)
Sales
10,000,000
COGS
6,000,000
Gross Profit
4,000,000
Administrative expenses

13. 1,200,000
Depreciation
500,000
EBIT
2,300,000
Interest Expense
500,000
EBT
1,800,000
Taxes (40%)
720,000
Net Income
1,080,000

14. 6. An analyst compiled the following information for U Inc. for
the year ended December 31, 2013:
▪ Net income was $1,700,000.
▪ Depreciation expense was $400,000.
▪ Interest paid was $200,000.
▪ Income taxes paid were $100,000.
▪ Common stock was sold for $200,000.
▪ Preferred stock (8% annual dividend) was sold at par value of
$250,000.
▪ Common stock dividends of $50,000 were paid.
▪ Preferred stock dividends of $20,000 were paid.
▪ Equipment with a book value of $100,000 was sold for
$200,000.
Using the indirect method, what was U Inc.'s net cash flow from
operating activities for the year ended December 31, 2013?
Multiple Choice
1. Santo Corporation declares and distributes a cash dividend
that is a result of current earnings. How will the receipt of those
dividends affect the investment account of the investor under
each of the following accounting methods?
Fair Value Method
Equity Method
a.
No Effect
Decrease
b.

15. Increase
Decrease
c.
No Effect
No Effect
d.
Decrease
No Effect
2. An investor has a long-term investment in stocks. Regular
cash dividends received by the investor are recorded as
Fair Value Method
Equity Method
a.
Income
Income
b.
A reduction of the investment
A reduction of the investment
c.
Income
A reduction of the investment

16. d.
A reduction of the investment
Income
3.
Koehn Corporation accounts for its investment in the common
stock of Sells Company under the equity method. Koehn
Corporation should ordinarily record a cash dividend received
from Sells as
a.
a reduction of the carrying value of the investment.
b.
additional paid-in capital.
c.
an addition to the carrying value of the investment.
d.
dividend income.
4.
Under the equity method of accounting for investments, an
investor recognizes its share of the earnings in the period in
which the
a.
investor sells the investment.
b.
investee declares a dividend.

17. c.
investee pays a dividend.
d.
earnings are reported by the investee in its financial statements.
5. Judd, Inc., owns 35% of Cosby Corporation. During the
calendar year 2010, Cosby had net earnings of $300,000 and
paid dividends of $30,000. Judd mistakenly recorded these
transactions using the fair value method rather than the equity
method of accounting. What effect would this have on the
investment account, net income, and retained earnings,
respectively?
a.
Understate, overstate, overstate
b.
Overstate, understate, understate
c.
Overstate, overstate, overstate
d.
Understate, understate, understate
6. Dublin Co. holds a 30% stake in Club Co. which was
purchased in 2011 at a cost of $3,000,000. After applying the
equity method, the Investment in Club Co. account has a
balance of $3,040,000. At December 31, 2011 the fair value of
the investment is $3,120,000. Which of the following values is
acceptable for Dublin to use in its balance sheet at December
31, 2011?

18. I.
$3,000,000
II.
$3,040,000
III.
$3,120,000
a.
I, II, or III.
b.
I or II only.
c.
II only.
d.
II or III only.
7.
A sale should not be recognized as revenue by the seller at the
time of sale if
a.
payment was made by check.
b.
the selling price is less than the normal selling price.
c.
the buyer has a right to return the product and the amount of
future returns cannot be reasonably estimated.

19. d.
none of these.
8.
The FASB concluded that if a company sells its product but
gives the buyer the right to return the product, revenue from the
sales transaction shall be recognized at the time of sale only if
all of six conditions have been met. Which of the following is
not one of these six conditions?
a.
The amount of future returns can be reasonably estimated.
b.
The seller's price is substantially fixed or determinable at time
of sale.
c.
The buyer's obligation to the seller would not be changed in the
event of theft or damage of the product.
d.
The buyer is obligated to pay the seller upon resale of the
product.
9.
In selecting an accounting method for a newly contracted long-
term construction project, the principal factor to be considered
should be
a.
the terms of payment in the contract.

20. b.
the degree to which a reliable estimate of the costs to complete
and extent of progress toward completion is practicable.
c.
the method commonly used by the contractor to account for
other long-term construc-tion contracts.
d.
the inherent nature of the contractor's technical facilities used
in construction.
10.
The percentage-of-completion method must be used when
certain conditions exist. Which of the following is not one of
those necessary conditions?
a.
Estimates of progress toward completion, revenues, and costs
are reasonably dependable.
b.
The contractor can be expected to perform the contractual
obligation.
c.
The buyer can be expected to satisfy some of the obligations
under the contract.
d.
The contract clearly specifies the enforceable rights of the
parties, the consideration to be exchanged, and the manner and
terms of settlement.
11.

21. When work to be done and costs to be incurred on a long-term
contract can be estimated dependably, which of the following
methods of revenue recognition is preferable?
a.
Installment-sales method
b.
Percentage-of-completion method
c.
Completed-contract method
d.
None of these
12.
How should the balances of progress billings and construction
in process be shown at reporting dates prior to the completion
of a long-term contract?
a.
Progress billings as deferred income, construction in progress as
a deferred expense.
b.
Progress billings as income, construction in process as
inventory.
c.
Net, as a current asset if debit balance, and current liability if
credit balance.
d.
Net, as income from construction if credit balance, and loss

22. from construction if debit balance.
13.
In accounting for a long-term construction-type contract using
the percentage-of-completion method, the gross profit
recognized during the first year would be the estimated total
gross profit from the contract, multiplied by the percentage of
the costs incurred during the year to the
a.
total costs incurred to date.
b.
total estimated cost.
c.
unbilled portion of the contract price.
d.
total contract price.
14.
How should earned but unbilled revenues at the balance sheet
date on a long-term construction contract be disclosed if the
percentage-of-completion method of revenue recognition is
used?
a.
As construction in process in the current asset section of the
balance sheet.
b.
As construction in process in the noncurrent asset section of the
balance sheet.

23. c.
As a receivable in the noncurrent asset section of the balance
sheet.
d.
In a note to the financial statements until the customer is
formally billed for the portion of work completed.
15.
The principal disadvantage of using the percentage-of-
completion method of recognizing revenue from long-term
contracts is that it
a.
is unacceptable for income tax purposes.
b.
gives results based upon estimates which may be subject to
considerable uncertainty.
c.
is likely to assign a small amount of revenue to a period during
which much revenue was actually earned.
d.
none of these.
16.
Which of the following facts concerning plant assets should be
included in the summary of significant accounting policies?
Depreciation Method
Composition

24. a.
No
Yes
b.
Yes
Yes
c.
Yes
No
d.
No
No
17.
Farr, Inc. is a multidivisional corporation which has both
intersegment sales and sales to unaffiliated customers. Farr
should report segment financial information for each division
meeting which of the following criteria?
a.
Segment profit or loss is 10% or more of consolidated profit or
loss.
b.
Segment profit or loss is 10% or more of combined profit or
loss of all company segments.
c.
Segment revenue is 10% or more of combined revenue of all the
company segments.

25. d.
Segment revenue is 10% or more of consolidated revenue.
18.
Unruh Corp. and its divisions are engaged solely in
manufacturing operations. The following data (consistent with
prior years' data) pertain to the industries in which operations
were conducted for the year ended December 31, 2013.
Assets
Industry
Revenue
Profit
12/31/13
A
$ 8,000,000
$1,320,000
$16,000,000
B
6,400,000
1,120,000
14,000,000

26. C
4,800,000
960,000
10,000,000
D
2,400,000
440,000
5,200,000
E
3,400,000
540,000
5,600,000
F
1,200,000
180,000
2,400,000
$26,200,000
$4,560,000
$53,200,000
In its segment information for 2013, how many reportable
segments does Unruh have?
a.
Three

27. b.
Four
c.
Five
d.
Six
19. The following information pertains to Nixon Corp. and its
divisions for the year ended December 31, 2013.
Sales to unaffiliated customers
$3,500,000
Intersegment sales of products similar to those sold to
unaffiliated customers
1,050,000
Interest earned on loans to other operating segments
70,000
Nixon and all of its divisions are engaged solely in
manufacturing operations. Nixon has a reportable segment if
that segment's revenue exceeds
a.
$462,000.
b.
$455,000.

28. c.
$357,000.
d.
$350,000.
20.
Advertising costs may be accrued or deferred to provide an
appropriate expense in each period for
Interim
Year-end
Financial Reporting
Financial Reporting
a.
Yes
No
b.
Yes
Yes
c.
No
No
d.
No
Yes

29. 21.
Mayo Corp. has estimated that total depreciation expense for
the year ending December 31, 2013 will amount to $400,000,
and that 2013 year-end bonuses to employees will total
$800,000. In Mayo's interim income statement for the six
months ended June 30, 2013, what is the total amount of
expense relating to these two items that should be reported?
a.
$0.
b.
$200,000.
c.
$600,000.
d.
$1,200,000.
22. Fina Corp. had the following transactions during the
quarter ended March 31, 2013:
Loss from hurricane damage
$350,000
Payment of fire insurance premium for calendar year 2013
600,000
What amount should be included in Fina's income statement for
the quarter ended
March 31, 2013?
Extraordinary Loss
Insurance Expense

30. a.
$350,000
$600,000
b.
$350,000
$150,000
c.
$87,500
$150,000
d.
$0
$600,000
23.
The required approach for handling extraordinary items in
interim reports is to
a.
prorate them over all four quarters.
b.
prorate them over the current and remaining quarters.
c.
charge or credit the loss or gain in the quarter that it occurs.
d.
disclose them only in the notes.
24.

31. If the financial statements examined by an auditor lead the
auditor to issue an opinion that contains an exception that is not
of sufficient magnitude to invalidate the statement as a whole,
the opinion is said to be
a.
unqualified.
b.
qualified.
c.
adverse.
d.
exceptional.
25.
The MD&A section of a company's annual report is to cover the
following three items:
a.
income statement, balance sheet, and statement of owners'
equity.
b.
income statement, balance sheet, and statement of cash flows.
c.
liquidity, capital resources, and results of operations.
d.
changes in the stock price, mergers, and acquisitions.
26.
How is the amortization of patents reported in a statement of

32. cash flows that is prepared using the direct method?
A.
Not reported.
B.
An increase in cash flows from operating activities.
C.
A decrease in cash flows from operating activities.
D.
A decrease in cash flows from investing activities.
27.
Creditors and investors would generally find the statement of
cash flows least useful for assessing the:
A.
Ability to generate future cash flows.
B. Ability to pay dividdends
C.
Financial position at a point in time.
D.
Quality of earnings.
28.
A firm reported ($ in millions) net cash inflows (outflows) as
follows: operating $75, investing ($200), and financing $350.
The beginning cash balance was $250. What was the ending
cash balance?
A.
$875.

33. B.
$25.
C.
$475.
D.
$125.
29.
Cash equivalents generally would not include short-term
investments in:
A.
Commercial paper.
B.
Certificates of deposit.
C.
Held-to-maturity securities.
D.
Money market funds.
30.
Cash equivalents have each of the following characteristics
except:
A.
Little risk of loss.
B.
Highly liquid.
C.

34. Maturity of at least three months.
D.
Short-term.
31.
When a company purchases a security it considers a cash
equivalent, the cash outflow is:
A.
Reported as an operating activity.
B.
Reported as an investing activity.
C.
Reported as a financing activity.
D.
Not reported on a statement of cash flows.
32.
When preparing a statement of cash flows using the direct
method, accrual of payroll expense is:
A.
Reported as an operating activity.
B.
Reported as an investing activity.
C.
Reported as a financing activity.
D.
None of the above is correct.
33.

35. A firm reported salary expense of $239,000 for the current year.
The beginning and ending balances in salaries payable were
$40,000 and $15,000, respectively. What was the amount of
cash paid for salaries?
A.
$214,000.
B.
$289,000.
C.
$264,000.
D.
$239,000.
34.
In a statement of cash flows in which operating activities are
reported by the direct method, which of the following would
increase reported cash flows from operating activities?
A.
Gain on sale of equipment.
B.
Interest revenue.
C.
Gain on early extinguishment of bonds.
D.
Proceeds from sale of land.
35.
Which of the following is reported as an operating activity in
the statement of cash flows?
A.

36. The payment of dividends.
B.
The sale of office equipment.
C.
The payment of interest on long-term notes.
D.
The issuance of a stock dividend.
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ACCT 311, Ver A, Fall, 2014
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