Acc 422 final exam

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ACC 422 FINAL EXAM
1) Which of the following is NOT considered cash for financial reporting purposes?
A. Coin,currency, and available funds
B. Money orders,certified checks,and personal checks
C. Petty cash funds and change funds
D. Postdated checks and I.O.U.'s
2) What is the preferable presentation ofaccounts receivable from officers,employees,or affiliated companies on a
balance sheet?
A. As assets butseparatelyfrom other receivables.
B. As offsets to capital.
C. As trade notes and accounts receivable if they otherwise qualifyas current assets.
D. By means offootnotes only.
3) Which of the following is considered cash?
A. Money marketsavings certificates
B. Certificates ofdeposit(CDs)
C. Postdated checks
D. Money marketchecking accounts
4) If a companyemploys the gross method ofrecording accounts receivable from customers,then sales discounts
taken should be reported as
A. an item of "other expense"in the income statement
B. a deduction from accounts receivable in determining the netrealizable value of accounts receivable
C. a deduction from sales in the income statement
D. sales discounts forfeited in the cost of goods sold section ofthe income statement
5) Assuming thatthe ideal measure ofshort-term receivables in the balance sheetis the discounted value ofthe cash
to be received in the future, failure to follow this practice usuallydoes NOTmake the balance sheetmisleading
because
A. the allowance for uncollectible accounts includes a discountelement
B. the amountofthe discountis NOT material
C. mostshort-term receivables are NOTinterest-bearing
D. mostreceivables can be sold to a bank or factor
6) Which of the following methods ofdetermining annual bad debtexpense bestachieves the matching concept?
A. Directwrite-off
B. Percentage of average accounts receivable
C. Percentage of ending accounts receivable
D. Percentage of sales
7) The accountantfor the Orion Sales Companyis preparing the income statementfor 2007 and the balance sheetat
December 31,2007.Orion uses the periodic inventory system.The January 1, 2007 merchandise inventorybalance
will appear

2. A. as an addition in the cost of goods sold section ofthe income statementand as a current asseton the balance
sheet
B. only as an asseton the balance sheet
C. only in the cost of goods sold section ofthe income statement
D. as a deduction in the cost of goods sold section ofthe income statementand as a current asseton the balance
sheet
8) Eller Co. received merchandise on consignment.As of January 31, Eller included the goods in inventory, but did
NOT record the transaction.The effect of this on its financial statements for January31 would be
A. net income,currentassets,and retained earnings were understated
B. net income,currentassets,and retained earnings were overstated
C. net income was correctand current assets were understated
D. net income and currentassets were overstated and currentliabilities were understated
9. If the beginning inventory for 2006 is overstated, the effects of this error on cost of goods sold for 2006,net income
for 2006, and assets atDecember 31,2007,respectively, are
A. understatement,overstatement,no effect
B. overstatement,understatement,overstatement
C. overstatement,understatement,no effect
D. understatement,overstatement,overstatement
10) Assuming no beginning inventory,what can be said aboutthe trend of inventory prices if costof goods sold
computed when inventory is valued using the FIFO method exceeds costof goods sold when inventoryis valued
using the LIFO method?
A. Price trend cannotbe determined from information given
B. Prices decreased
C. Prices remained unchanged
D. Prices increased
11) Which method of inventory pricing bestapproximates specific identification ofthe actual flow of costs and units in
mostmanufacturing situations?
A. Base stock
B. Average cost
C. First-in, first-out
D. Last-in,first-out
12) All of the following costs should be charged againstrevenue in the period in which costs are incurred EXCEPT for
A. costs ofnormal shrinkage and scrap incurred for the manufacture ofa product in ending inventory
B. manufacturing overhead costs for a product manufactured and sold in the same accounting period
C. costs which will NOT benefit any future period
D. costs from idle manufacturing capacityresulting from an unexpected plantshutdown
13) In no case can "market" in the lower-of-cost-or-marketrule be more than
A. estimated selling price in the ordinarycourse of business less reasonablypredictable costs ofcompletion and
disposal,an allowance for an approximatelynormal profitmargin,and an adequate reserve for possible fu ture losses
B. estimated selling price in the ordinarycourse of business
C. estimated selling price in the ordinary course of business less reasonablypredictable costs ofcompletion and
disposal
D. estimated selling price in the ordinary course of business less reasonablypredictable costs ofcompletion and
disposal and an allowance for an approximatelynormal profitmargin

3. 14) When the direct method is used to record inventory at market
A. the marketvalue figure for ending inventory is substituted for costand the loss is buried in costof goods sold
B. there is a direct reduction in the selling price ofthe productthat results in a loss being recorded on the income
statementprior to the sale
C. a loss is recorded directlyin the inventory accountby crediting inventory and debiting loss on inventory decline
D. only the portion of the loss attributable to inventory sold during the period is recorded in the financial statements
15) An item of inventory purchased this period for $15.00 has been incorrectlywritten down to its current replacement
costof $10.00.It sells during the following period for $30.00,its normal selling price,with disposal costs of$3.00 and
normal profitof $12.00. Which of the following statements is NOTtrue?
A. Income of the following year will be understated
B. The costof sales ofthe following year will be understated
C. The current year's income is understated
D. The closing inventory of the current year is understated
16) The retail inventory method is based on the assumption thatthe
A. proportions ofmarkups and markdowns to selling price are the same
B. final inventory and the total of goods available for sale contain the same proportion ofhigh -costand low-costratio
goods
C. ratio of gross margin to sales is approximatelythe same each period
D. ratio of cost to retail changes at a constantrate
17) A major advantage of the retail inventory method is thatit
A. provides a method for inventory control and facilitates determination ofthe periodic inventory for certain types of
companies
B. provides reliable results in cases where the distribution ofitems in the inventory is different from that of items sold
during the period
C. hides costs from competitors and customers
D. gives a more accurate statementofinventory costs than other methods
18) In 2006,Lucas Manufacturing signed a contract with a supplier to purchase raw materials in 2007 for $700,000.
Before the December 31,2006 balance sheetdate,the marketprice for these materials dropped to $510,000.The
journal entry to record this situation at December 31,2006 will resultin a creditthat should be reported
A. on the income statement
B. as a valuation accountto Inventory on the balance sheet
C. as a current liability
D. as an appropriation ofretained earnings
19) The costof land typically includes the purchase price and all of the following costs EXCEPT
A. assumption ofany liens or mortgages on the property
B. grading,filling,draining,and clearing costs
C. street lights,sewers,and drainage systems cost
D. private driveways and parking lots
20) Cotton Hotel Corporation recentlypurchased HolidayHotel and the land on which it is located with the plan to
tear down the HolidayHotel and build a new luxury hotel on the site.The costof the HolidayHotel should be
A. capitalized as part of the cost of the new hotel
B. depreciated over the period from acquisition to the date the hotel is scheduled to be torn down
C. written off as an extraordinary loss in the year the hotel is torn down
D. capitalized as part of the costof the land

4. 21) If a corporation purchases a lotand building and subsequentlytears down the building and uses the property as a
parking lot, the proper accounting treatmentof the costof the building would depend on
A. the intention of managementfor the property when the building was acquired
B. the length of time for which the building was held prior to its demolition
C. the significance ofthe costallocated to the building in relation to the combined costof the lot and building
D. the contemplated future use of the parking lot
22) The period of time during which interestmustbe capitalized ends when
A. the activities that are necessaryto get the assetreadyfor its intended use have begun
B. no further interestcostis being incurred
C. the assetis substantiallycomplete and ready for its intended use
D. the assetis abandoned,sold,or fully depreciated
23) Which of the following assets do NOTqualify for capitalization of interestcosts incurred during construction ofthe
assets?
A. Assets NOT currently undergoing the activities necessaryto prepare them for their intended use
B. Assets intended for sale or lease that are produced as discrete projects
C. Assets under construction for an enterprise's own use
D. Assets financed through the issuance oflong-term debt
24) When computing the amountof interestcostto be capitalized,the concept of "avoidable interest"refers to
A. that portion of average accumulated expenditures on which no interestcostwas incurred
B. a costof capital charge for stockholders'equity
C. the total interestcostactually incurred
D. that portion of total interestcostwhich would NOT have been incurred if expenditures for assetconstruction had
NOT been made
25) The King-Kong Corporation exchanges one plantassetfor a similar plantassetand gives cash in the exchange.
The exchange is NOT expected to cause a material change in the future cash flows for either entity. If a gain on the
disposal ofthe old assetis indicated,the gain will
A. be credited directly to the owner's capital account
B. effectively reduce the amountto be recorded as the costof the new asset
C. be reported in the Other Revenues and Gains section ofthe income statement
D. effectively increase the amountto be recorded as the cost of the new asset
26) When a plant assetis acquired byissuance ofcommon stock,the costof the plantassetis properlymeasured by
the
A. marketvalue of the stock
B. stated value of the stock
C. par value of the stock
D. book value of the stock
27) The costof a nonmonetaryassetacquired in exchange for another nonmonetaryassetand the exchange has
commercial substance is usuallyrecorded at
A. either the fair value of the assetgiven up or the assetreceived,whichever one results in the largestgain (smallest
loss) to the company
B. the fair value of the assetgiven up, and a gain but NOT a loss maybe recognized
C. the fair value of the assetgiven up, and a gain or loss is recognized
D. the fair value of the assetreceived if it is equally reliable as the fair value of the assetgiven up

5. 28) Which of the following principles bestdescribes the conceptual rationale for the methods ofmatching
depreciation expense with revenues?
A. Partial recognition
B. Systematic and rational allocation
C. Associating cause and effect
D. Immediate recognition
29) If an industrial firm uses the units-of-production method for computing depreciation on its onlyplant asset,factory
machinery,the credit to accumulated depreciation from period to period during the life of the firm will
A. vary with production
B. vary with unit sales
C. be constant
D. vary with sales revenue
30) Which of the following mostaccuratelyreflects the concept of depreciation as used in accounting?
A. An accounting conceptthat allocates the portion of an assetused up during the year to the contra assetaccount
for the purpose ofproperly recording the fair marketvalue of tangible assets
B. The process ofallocating the costof tangible assets to expense in a systematic and rational manner to th ose
periods expected to benefit from the use of the asset
C. The process ofcharging the decline in value of an economic resource to income in the period in which the benefit
occurred
D. A method ofallocating assetcostto an expense accountin a manner which closelymatches the physical
deterioration ofthe tangible assetinvolved
31) Prentice Companypurchased a depreciable assetfor $200,000.The estimated salvage value is $20,000,and the
estimated useful life is 10 years.The straight-line method will be used for depreciation.Whatis the depreciation base
of this asset?
A. $200,000
B. $20,000
C. $18,000
D. $180,000
32) Harrison Companypurchased a depreciable assetfor $100,000.The estimated salvage value is $10,000,and the
estimated useful life is 10 years.The straight-line method will be used for depreciation.Whatis the depreciation base
of this asset?
A. $100,000
B. $10,000
C. $9,000
D. $90,000
33) Starr Companypurchased a depreciable assetfor $150,000.The estimated salvage value is $10,000, and the
estimated useful life is 8 years.The double-declining balance method will be used for depreciation.Whatis the
depreciation expense for the second year on this asset?
A. $37,500
B. $26,250
C. $17,500
D. $28,125
34) Costs incurred internallyto create intangibles are
A. capitalized

6. B. expensed onlyif they have a limited life
C. capitalized if they have an indefinite life
D. expensed as incurred
35) Factors considered in determining an intangible asset’s useful life include all ofthe following EXCEPT
A. the expected use of the asset
B. the amortization method used
C. any legal or contractual provisions thatmay limitthe useful life
D. any provisions for renewal or extension of the asset’s legal life
36) The costof purchasing patentrights for a product that mightotherwise have seriouslycompeted with one of the
purchaser's patented products should be
A. charged off in the currentperiod
B. amortized over the remaining estimated life ofthe original patentcovering the product whose marketwould have
been impaired bycompetition from the newly patented product
C. amortized over the legal life of the purchased patent
D. added to factory overhead and allocated to production of the purchaser's product
37) Malrom Manufacturing Companyacquired a patenton a manufacturing process on January1, 2006 for
$10,000,000.It was expected to have a 10 year life and no residual value.Malrom uses straight-line amortization for
patents.On December 31,2007, the expected future cash flows expected from the patent were expected to be
$800,000 per year for the next eight years. The presentvalue of these cash flows,discounted atMalrom’s market
interestrate, is $4,800,000.At whatamountshould the patentbe carried on the December 31,2007 balance sheet?
A. $10,000,000
B. $4,800,000
C. $8,000,000
D. $6,400,000
38) Mining Companyacquired a patenton an oil extraction technique on January 1, 2006 for $5,000,000.It was
expected to have a 10 year life and no residual value.Mining uses straight-line amortization for patents.On
December 31,2007,the expected future cash flows expected from the patent were expected to be $600,000 per year
for the next eight years. The presentvalue of these cash flows,discounted atMining’s marketinterestrate,is
$2,800,000.At what amountshould the patentbe carried on the December 31,2007 balance sheet?
A. $5,000,000
B. $2,800,000
C. $4,800,000
D. $4,000,000
39) General Products CompanyboughtSpecial Products Division in 2006 and appropriatelybooked $250,000 of
goodwill related to the purchase.On December 31,2007,the fair value of Special Products Division is $2,000,000
and it is carried on General Product’s books for a total of $1,700,000,including the goodwill.An analysis ofSpecial
Products Division’s assets indicates thatgoodwill of$200,000 exists on December 31,2007.What goodwill
impairmentshould be recognized by General Products in 2007?
A. $0
B. $300,000
C. $200,000
D. $50,000
40) The intangible assetgoodwill maybe
A. capitalized only when purchased

7. B. written off directly to retained earnings
C. capitalized either when purchased or created internally
D. capitalized only when created internally
41) The reason goodwill is sometimes referred to as a master valuation accountis because
A. it represents the purchase price ofa business thatis aboutto be sold
B. it is the only account in the financial statements thatis based on value,all other accounts are recorded at an
amountother than their value
C. it is the difference between the fair marketvalue of the net tangible and identifiable intangible assets as compared
with the purchase price ofthe acquired business
D. the value of a business is computed withoutconsideration ofgoodwill and then goodwill is added to arrive at a
master valuation
42) Goodwill
A. generated internallyshould NOTbe capitalized unless itis measured byan individual independentofthe
enterprise involved
B. exists in any companythat has earnings thatdiffer from those of a competitor
C. is easilycomputed by assigning a value to the individual attributes thatcomprise its existence
D. represents a unique assetin that its value can be identified onlywith the business as a whole
43) If a short-term obligation is excluded from currentliabilities because ofrefinancing,the footnote to the financial
statements describing this eventshould include all ofthe following information EXCEPT
A. a general description ofthe financing arrangement
B. the number offinancing institutions thatrefused to refinance the debt, if any
C. the terms of the new obligation incurred or to be incurred
D. the terms of any equity security issued or to be issued
44) Stock dividends distributable should be classified on the
A. income statementas an expense
B. balance sheetas an item of stockholders' equity
C. balance sheetas an asset
D. balance sheetas a liability
45) Which of the following items is a currentliability?
A. Bonds (for which there is an adequate sinking fund properlyclassified as a long-term investment) due in three
months
B. Bonds to be refunded when due in eightmonths,there being no doubt aboutthe marketabilityof the refunding
issue
C. Bonds due in three years
D. Bonds (for which there is an adequate appropriation ofretained earnings) due in eleven months.
46) A companyoffers a cash rebate of $1 on each $4 package of light bulbs sold during 2007.Historically,10% of
customers mail in the rebate form. During 2007,4,000,000 packages oflightbulbs are sold,and 140,000 $1 rebates
are mailed to customers.Whatis the rebate expense and liability,respectively, shown on the 2007 financial
statements dated December 31?
A. $400,000;$400,000
B. $140,000;$260,000
C. $400,000;$260,000
D. $260,000;$260,000

8. 47) A companyoffers a cash rebate of $1 on each $4 package of batteries sold during 2007.Historically,10% of
customers mail in the rebate form. During 2007,6,000,000 packages ofbatteries are sold,and 210,000 $1 rebates
are mailed to customers.Whatis the rebate expense and liability,respectively, shown on the 2007 financial
statements dated December 31?
A. $600,000;$600,000
B. $210,000;$390,000
C. $600,000;$390,000
D. $390,000;$390,000
48) A companybuys an oil rig for $1,000,000 on January 1, 2007. The life of the rig is 10 years and the expected cost
to dismantle the rig at the end of 10 years is $200,000 (presentvalue at 10% is $77,110).10% is an appropriate
interestrate for this company.What expense should be recorded for 2007 as a resultof these events?
A. Depreciation expense of$120,000
B. Depreciation expense of$100,000 and interestexpense of$7,711
C. Depreciation expense of$100,000 and interestexpense of $20,000
D. Depreciation expense of$107,710 and interestexpense of $7,711
49) A contingencycan be accrued when
A. it is certain that funds are available to settle the disputed amount
B. an assetmayhave been impaired
C. the amountof the loss can be reasonablyestimated and itis probable thatan assethas been impaired or a liability
incurred
D. it is probable thatan assethas been impaired or a liabilityincurred even though the amountof the loss cannotbe
reasonablyestimated
50) Mark Ward is a farmer who owns land which borders on the right-of-way of the Northern Railroad.On August10,
2007,due to the admitted negligence ofthe Railroad, hay on the farm was seton fire and burned.Ward had had a
dispute with the Railroad for several years concerning the ownership ofa small parcel ofland. The representative of
the Railroad has offered to assign anyrights which the Railroad mayhave in the land to Ward in exchange for a
release ofhis rightto reimbursementfor the loss he has sustained from the fire. Ward appears inclined to acceptthe
Railroad's offer.The Railroad's 2007 financial statements should include the following related to the i ncident:
A. recognition ofa loss and creation of a liabilityfor the value of the land
B. recognition ofa loss only
C. creation of a liabilityonly
D. disclosure in note form only
51) Which of the following contingencies need NOTbe disclosed in the financial statements or the notes thereto?
A. Probable losses NOTreasonablyestimable
B. Environmental liabilities thatcannotbe reasonablyestimated
C. Guarantees of indebtedness ofothers
D. All of these mustbe disclosed
52) The covenants and other terms of the agreementbetween the issuer ofbonds and the lender are setforth in the
A. bond indenture
B. bond debenture
C. registered bond
D. bond coupon
53) If bonds are issued initiallyat a premium and the effective-interestmethod of amortization is used, interest
expense in the earlier years will be

9. A. greater than if the straight-line method were used
B. greater than the amountof the interestpayments
C. the same as ifthe straight-line method were used
D. less than if the straight-line method were used
54) Bonds thatpay no interestunless the issuing companyis profitable are called
A. collateral trustbonds
B. debenture bonds
C. revenue bonds
D. income bonds
55) Minimum lease payments mayinclude a
A. penalty for failure to renew
B. bargain purchase option
C. guaranteed residual value
D. any of these
56) An essential elementofa lease conveyance is that the
A. lessor conveys less than his or her total interestin the property
B. lessee provides a sinking fund equal to one year's lease payments
C. property that is the subjectof the lease agreementmustbe held for sale by the lessor prior to the drafting of the
lease agreement
D. term of the lease is substantiallyequal to the economic life ofthe leased property
57) While only certain leases are currentlyaccounted for as a sale or purchase,there is theoretic justification for
considering all leases to be sales or purchases.The principal reason thatsupports this idea is that
A. [Answer Text]all leases are generallyfor the economic life ofthe property and the residual value of the property at
the end of the lease is minimal
B. at the end of the lease the property usuallycan be purchased by the lessee
C. a lease reflects the purchase or sale of a quantifiable rightto the use of property
D. during the life of the lease the lessee can effectively treat the property as if it were owned by the lessee
58) In the earlier years of a lease,from the lessee's perspective,the use of the
A. capital method will enable the lessee to reporthigher income,compared to the operating method.
B. capital method will cause debtto increase,compared to the operating method
C. operating method will cause income to decrease,compared to the capital method
D. operating method will cause debtto increase,compared to the capital method
59) In a lease thatis appropriatelyrecorded as a direct-financing lease bythe lessor,unearned income
A. should be amortized over the period of the lease using the interestmethod
B. should be amortized over the period of the lease using the straight-line method
C. does NOT arise
D. should be recognized at the lease's expiration
60) In order to properlyrecord a direct-financing lease,the lessor needs to know how to calculate the lease
receivable.The lease receivable in a direct-financing lease is bestdefined as
A. the amountoffunds the lessor has tied up in the assetwhich is the subjectof the direct-financing lease
B. the difference between the lease payments receivable and the fair marketvalue of the leased property
C. the presentvalue of minimum lease payments
D. the total book value of the assetless anyaccumulated depreciation recorded bythe lessor prior to the lease
agreement