Acc 423 final exam

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ACC 423 Final Exam 100% Correct
1) Proceeds from an issue ofdebt securities having stock warrants should NOTbe allocated between debtand equity
features when
A. the allocation would resultin a discounton the debtsecurity
B. the warrants issued with the debt securities are nondetachable
C. exercise of the warrants within the next few fiscal periods seems remote
D. the marketvalue of the warrants is NOT readily available
2) The conversion of preferred stock may be recorded by the
A. marketvalue method
B. par value method
C. book value method
D. incremental method
3) The conversion of preferred stock into common stock requires thatany excess of the par value of the common
shares issued over the carrying amountof the preferred being converted should be
A. treated as a prior period adjustment
B. treated as a direct reduction of retained earnings
C. reflected currently in income as an extraordinary item
D. reflected currently in income,butNOT as an extraordinary item
4) A primary source ofstockholders'equityis
A. contributions bystockholders
B. both income retained by the corporation and contributions bystockholders
C. appropriated retained earnings
D. income retained by the corporation
5) Stockholders'equityis generallyclassified into two major categories:
A. retained earnings and unappropriated capital
B. earned capital and contributed capital
C. appropriated capital and retained earnings
D. contributed capital and appropriated capital
6) When a corporation issues its capital stock in paymentfor services,the leastappropriate basis for recording the
transaction is the
A. marketvalue of the shares issued
B. Any of these provides an appropriate basis for recording the transaction
C. par value of the shares issued
D. marketvalue of the services received
7) Treasury shares are
A. shares held as an investmentbythe treasurer of the corporation
B. issued butNOToutstanding shares
C. shares held as an investmentofthe corporation
D. issued and outstanding shares
8) "Gains"on sales oftreasurystock (using the costmethod) should be credited to

2. A. paid-in capital from treasurystock
B. other income
C. capital stock
D. retained earnings
9) How should a "gain" from the sale of treasurystock be reflected when using the costmethod of recording treasury
stock transactions?
A. As ordinary earnings shown on the income statement
B. As an extraordinary item shown on the income statement
C. As paid-in capital from treasurystock transactions
D. As an increase in the amountshown for common stock
10) In computing earnings per share,the equivalentnumber ofshares ofconvertible preferred stock are added as an
adjustmentto the denominator (number ofshares outstanding).If the preferred stock is cumulative, which amount
should then be added as an adjustmentto the numerator (netearnings)?
A. Annual preferred dividend
B. Annual preferred dividend divided by the income tax rate
C. Annual preferred dividend times (one minus the income taxrate)
D. Annual preferred dividend times the income tax rate
11) When computing diluted earnings per share,convertible bonds are
A. ignored
B. assumed converted onlyif they are dilutive
C. assumed converted whether they are dilutive or antidilutive
D. assumed converted only if they are antidilutive
12) What effect will the acquisition oftreasurystock have on stockholders'equityand earnings per share,
respectively?
A. Decrease and no effect
B. Increase and decrease
C. Increase and no effect
D. Decrease and increase
13) On May 1, 2007, Kent Corp. declared and issued a 10% common stock dividend.Prior to this dividend,Kent had
100,000 shares of$1 par value common stock issued and outstanding.The fair value of Kent 's common stock was
$20 per share on May 1, 2007. As a resultof this stock dividend,Kent's total stockholders'equity
A. did NOT change
B. increased by$200,000
C. decreased by $10,000
D. decreased by $200,000
14) How would the declaration and subsequentissuance ofa 10% stock dividend by the issuer affecteach of the
following when the marketvalue of the shares exceeds the par value of the stock?
Additional Common Stock | Paid-in Capital
A. Increase | Increase
B. No effect | No effect
C. Increase | No effect
D. No effect | Increase
15) At its date of incorporation,Wilson,Inc.issued 100,000 shares ofits $10 par common stock at$11 per share.
During the currentyear, Wilson acquired 20,000 shares ofits common stock ata price of $16 per share and

3. accounted for them by the cost method.Subsequently,these shares were reissued ata price of $12 per share.There
have been no other issuances or acquisitions ofits own common stock.Whateffect does the reissuance ofthe stock
have on the following accounts?
Retained Earnings | Additional Paid-in Capital
A. No effect | No effect
B. Decrease | Decrease
C. Decrease | No effect
D. No effect | Decrease
16) Which of the following is correctaboutthe effective-interest method ofamortization?
A. The effective-interestmethod produces a constantrate of return on the book value of the investmentfrom period
to period.
B. The effective interestmethod applied to investments in debtsecurities is differentfrom thatapplied to bonds
payable.
C. Amortization of a premium decreases from period to period.
D. Amortization of a discountdecreases from period to period
17) An unrealized holding loss on a company's available-for-sale securities should be reflected in the currentfinancial
statements as
A. other comprehensive income and deducted in the equity section of the balance sheet.
B. an extraordinary item shown as a direct reduction from retained earnings
C. a note or parenthetical disclosure only
D. a current loss resulting from holding securities
18) An unrealized holding gain on a company's available-for-sale securities should be reflected in the current financial
statements as
A. other comprehensive income and included in the equity section ofthe balance sheet.
B. an extraordinary item shown as a direct increase to retained earnings
C. a note or parenthetical disclosure only
D. a current gain resulting from holding securities
19) Investments in debtsecurities should be recorded on the date of acquisition at
A. face value plus brokerage fees and other costs incidentto the purchase
B. lower of costor market
C. marketvalue plus brokerage fees and other costs incidentto the purchase
D. marketvalue
20) Securities which could be classified as held-to-maturityare
A. warrants
B. redeemable preferred stock
C. municipal bonds
D. treasury stock
21) Which of the following is NOTa debtsecurity?
A. Commercial paper
B. Convertible bonds
C. Loans receivable
D. All of these are debtsecurities
22) An investor has a long-term investmentin stocks.Regular cash dividends received bythe investor are recorded
as

4. Fair Value Method | Equity Method
A. A reduction of the investment| A reduction of the investment
B. Income | Income
C. Income | A reduction of the investment
D. A reduction of the investment| Income
23) When a companyholds between 20% and 50% of the outstanding stock ofan investee, which of the following
statements applies?
A. The investor should use the equity method to accountfor its investmentunless circum-stances indicate thatit is
unable to exercise "significantinfluence"over the investee
B. The investor should always use the equity method to accountfor its investment
C. The investor mustuse the fair value method unless itcan clearly demonstrate the abilityto exercise "significant
influence"over the investee
D. The investor should always use the fair value method to accountfor its investment
24) Bista Corporation declares and distributes a cash dividend thatis a resultof current earnings.How will the receipt
of those dividends affect the investmentaccountof the investor under each of the following accounting methods?
Fair Value Method | Equity Method
A. Increase | Decrease
B. No Effect | Decrease
C. No Effect | No Effect
D. Decrease | No Effect
25) Debtsecurities thatare accounted for at amortized cost, NOT fair value, are
A. trading debtsecurities
B. held-to-maturitydebtsecurities
C. available-for-sale debtsecurities
D. never-sell debtsecurities
26) Equity securities acquired bya corporation which are accounted for by recognizing unrealized holding gains or
losses as other comprehensive income and as a separate componentofstockholders'equityare
A. trading securities where a companyhas holdings ofless than 20%
B. available-for-sale securities where a companyhas holdings ofless than 20%
C. securities where a companyhas holdings ofbetween 20% and 50%
D. securities where a companyhas holdings ofmore than 50%
27) Use of the effective-interestmethod in amortizing bond premiums and discounts results in
A. a smaller amountofinterestincome over the life of the bond issue than would resultfrom use ofthe straight-line
method
B. a greater amountof interestincome over the life of the bond issue than would resultfrom us e ofthe straight-line
method
C. a varying amountbeing recorded as interestincome from period to period
D. a variable rate of return on the book value of the investment
28) All of the following are characteristics ofa derivative financial instrumentEXCEPT the instrument
A. All of these are characteristics
B. has one or more underlyings and an identified paymentprovision
C. requires a large investmentat the inception of the contract
D. requires or permits netsettlement
29) The accounting for fair value hedges records the derivative at its

5. A. historical cost
B. amortized cost
C. carrying value
D. fair value
30) All of the following statements regarding accounting for derivatives are correct EXCEPT that
A. gains and losses resulting from hedge transactions are reported in differentways, depending upon the type of
hedge
B. they should be recognized in the financial statements as assets and liabilities
C. they should be reported at fair value
D. gains and losses resulting from speculation should be deferred
31) Taxable income ofa corporation differs from pretax financial income because of
PermanentDifferences | TemporaryDifferences
A. Yes | No
B. No | No
C. No | Yes
D. Yes | Yes
32) The rationale for interperiod income tax allocation is to
A. adjust income taxexpense on the income statementto be in agreementwith income taxes payable on the balance
sheet
B. recognize a tax assetor liability for the tax consequences oftemporarydifferences thatexist at the balance sheet
date
C. recognize a distribution ofearnings to the taxing agency
D. reconcile the tax consequences ofpermanentand temporarydifferences appearing on the current year's financial
statements
33) Interperiod income tax allocation causes
A. tax expense in the income statementto be presented with the specific revenues causing the tax
B. tax expense shown on the income statementto equal the amountofincome taxes payable for the current year
plus or minus the change in the deferred tax assetor liabilitybalances for the year.
C. tax expense shown in the income statementto bear a normal relation to the tax liability
D. tax liabilityshown in the balance sheetto bear a normal relation to the income before tax reported in the income
statement
34) At the December 31,2007 balance sheet date,Garth Brooks Corporation reports an accrued receivable for
financial reporting purposes butNOT for tax purposes.When this assetis recovered in 2008, a future taxable amount
will occur and
A. Garth will record a decrease in a deferred tax liability in 2008
B. pretax financial income will exceed taxable income in 2008
C. Garth will record an increase in a deferred tax assetin 2008
D. total income tax expense for 2008 will exceed current tax expense for 2008
35) Which of the following differences would resultin future taxable amounts?
A. Revenues or gains thatare taxable before they are recognized in financial income
B. Expenses or losses thatare tax deductible after they are recognized in financial income
C. Expenses or losses thatare tax deductible before they are recognized in financial income
D. Revenues or gains thatare recognized in financial income butare never included in taxable income

6. 36) Which of the following are temporarydifferences thatare normallyclassified as expenses or losses thatare
deductible after they are recognized in financial income?
A. Productwarranty liabilities
B. Advance rental receipts
C. Fines and expenses resulting from a violation of law
D. Depreciable property
37) In a defined-contribution plan,a formula is used that
A. ensures thatpension expense and the cash funding amountwill be different
B. defines the benefits that the employee will receive at the time of retirement
C. ensures thatemployers are at risk to make sure funds are available at retirement
D. requires an employer to contribute a certain sum each period based on the formula
38) In accounting for a defined-benefitpension plan
A. the employer's responsibilityis simplyto make a contribution each year based on the formula established in the
plan
B. an appropriate funding pattern mustbe established to ensure thatenough monies will be available atretirementto
meetthe benefits promised
C. the liability is determined based upon known variables thatreflectfuture salarylevels promised to employees
D. the expense recognized each period is equal to the cash contribution
39) Which of the following is NOTa characteristic ofa defined-contribution pension plan?
A. The benefits to be received by employees are defined by the terms ofthe plan
B. The employer's contribution each period is based on a formula
C. The benefit of gain or the risk of loss from the assets contributed to the pension fund are borne by the employee
D. The accounting for a defined-contribution plan is straightforward and uncomplicated
40) In accounting for a pension plan,anydifference between the pension costcharged to expense and the payments
into the fund should be reported as
A. a charge or creditto unrealized appreciation and depreciation
B. an offset to the liability for prior service cost
C. accrued or prepaid pension cost
D. an accrued actuarial liability
41) The projected benefitobligation is the measure ofpension obligation that
A. is NOT sanctioned under generallyaccepted accounting principles for reporting the service costcomponentof
pension expense
B. is required to be used for reporting the service costcomponentofpension expense
C. requires pension expense to be determined solelyon the basis ofthe plan formula applied to years of service to
date and based on existing salarylevels
D. requires the longestpossible period for funding to maximize the tax deduction
42) The relationship between the amountfunded and the amountreported for pension expense is as follows:
A. pension expense maybe greater than, equal to, or less than the amountfunded
B. pension expense mustequal the amountfunded
C. pension expense will be less than the amountfunded
D. pension expense will be more than the amountfunded
43) On January 1, 2008, Pratt Corp.adopted a defined-benefitpension plan.The plan's service costof $300,000 was
fully funded at the end of 2008.Prior service cost was funded by a contribution of $120,000 in 2008. Amortization of
prior service costwas $48,000 for 2008.What is the amountofPratt's prepaid pension costatDecember 31,2008?

7. A. $180,000
B. $72,000
C. $120,000
D. $168,000
44) Reser Corp.,a companywhose stock is publiclytraded, provides a noncontributorydefined-benefitpension plan
for its employees.The company's actuaryhas provided the following information for the year ended December 31,
2008:
Projected benefitobligation$600,000
Accumulated benefitobligation525,000
Fair value of plan assets825,000
Service cost240,000
Intereston projected benefitobligation24,000
Amortization of unrecognized prior service cost60,000
Expected and actual return on plan assets82,500
The market-related assetvalue equals the fair value of plan assets.Prior contributions to the defined-benefitpension
plan equaled the amountof net periodic pension costaccrued for the previous year end. No contributions have been
made for 2008 pension cost.In its December 31,2008 balance sheet,Reser should reportan accrued pension cost
of
A. $217,500
B. $406,500
C. $324,000.
D. $241,500
45) Effective January 1, 2007, Quayle Co. established a defined-benefitplan with no retro-active benefits.The firstof
the required equal annual contributions was paid on December 31,2007.A 10% discountrate was used to calculate
service cost and a 10% rate of return was assumed for plan assets.All information on covered employees for 2007
and 2008 is the same.How should the service costfor 2008 compare with 2007,and should the 2007 balance sheet
report an accrued or a prepaid pension cost?
Service Costfor 2008 Compared to 2007 | Pension CostReported on the 2007 Balance Sheet
A. Greater than | Prepaid
B. Equal to | Accrued
C. Equal to | Prepaid
D. Greater than | Accrued
46) On January 1, 2005, Foley Corporation acquired machineryat a costof $250,000.Foley adopted the double-
declining balance method ofdepreciation for this machineryand had been recording depreciation over an estimated
useful life of ten years, with no residual value.At the beginning of2008,a decision was made to change to the
straight-line method ofdepreciation for the machinery.The depreciation expense to be recorded for the machineryin
2008 is (round to the nearestdollar)
A. $25,000
B. $25,600
C. $18,286
D. $22,857
47) During 2008,a construction companychanged from the completed-contractmethod to the percentage-of-
completion method for accounting purposes butNOT for tax purposes.Gross profitfigures under both methods for
the pastthree years appear below:

8. Completed-ContractPercentage-of-Completion
2006$ 475,000$ 800,000
2007625,000950,000
2008700,0001,050,000
$1,800,000$2,800,000
Assuming an income taxrate of 40% for all years, the effect of this accounting change on prior periods should be
reported by a credit of
A. $390,000 on the 2008 income statement
B. $600,000 on the 2008 income statement
C. $390,000 on the 2008 retained earnings statement
D. $600,000 on the 2008 retained earnings statement
48) Accrued salaries payable of$51,000 were NOT recorded at December 31,2007.Office supplies on hand of
$24,000 at December 31,2008 were erroneouslytreated as expense instead ofsupplies inventory.Neither of these
errors was discovered nor corrected.The effect of these two errors would cause
A. 2007 net income and December 31,2007 retained earnings to be understated $51,000 each
B. 2008 net income to be understated $75,000 and December 31,2008 retained earnings to be understated $24,000
C. 2008 net income and December 31,2008 retained earnings to be understated $24,000 each
D. 2007 net income to be overstated $27,000 and 2008 net income to be understated $24,000
49) The estimated life ofa building thathas been depreciated 30 years of an originallyestimated life of 50 years has
been revised to a remaining life of 10 years. Based on this information,the accountantshould
A. depreciate the remaining book value over the remaining life ofthe asset
B. continue to depreciate the building over the original 50-year life
C. adjustaccumulated depreciation to its appropriate balance through retained earnings,based on a 40 -year life, and
then depreciate the adjusted book value as though the estimated life had always been 40 years
D. adjustaccumulated depreciation to its appropriate balance,through netincome,based on a 40 -year life, and then
depreciate the adjusted book value as though the es timated life had always been 40 years
50) Which type of accounting change should always be accounted for in current and future periods?
A. Change in reporting entity
B. Change in accounting principle
C. Correction of an error
D. Change in accounting estimate
51) When a companydecides to switch from the double-declining balance method to the straight-line method,this
change should be handled as a
A. change in accounting estimate
B. change in accounting principle
C. correction of an error
D. prior period adjustment