1) A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably
B. based on the relative market values of the two securities involved.
C. calculated by the excess of the proceeds over the face amount of the bonds.
D. equal to the market value of the warrants.
2) The conversion of preferred stock into common stock requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be
A. reflected currently in income, but NOT as an extraordinary item.
B. treated as a direct reduction of retained earnings.
C. reflected currently in income as an extraordinary item.
D. treated as a prior period adjustment.
3) The conversion of preferred stock may be recorded by the
A. incremental method.
B. par value method.
C. book value method.
D. market value method.
4) Total stockholders’ equity represents
A. a claim to specific assets contributed by the owners.
B. only the amount of earnings that have been retained in the business.
C. the maximum amount that can be borrowed by the enterprise.
D. a claim against a portion of the total assets of an enterprise.
5) Which of the following represents the total number of shares that a corporation may issue under the terms of its charter?
A. authorized shares
B. outstanding shares
C. issued shares
D. unissued shares
6) Stockholders’ equity is generally classified into two major categories:
A. contributed capital and appropriated capital.
B. earned capital and contributed capital.
C. appropriated capital and retained earnings.
D. retained earnings and unappropriated capital.
7) Wilson Corp. purchased its own par value stock on January 1, 2007 for $20,000 and debited the treasury stock account for the purchase price. The stock was subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a deduction from
A. additional paid-in capital to the extent that previous net “gains” from sales of the same class of stock are included therein; otherwise, from retained earnings.
B. net income.
C. additional paid-in capital without regard as to whether or NOT there have been previous net “gains” from sales of the same class of stock included therein.
D. retained earnings.
8) When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited?
A. Treasury stock for the par value and paid-in capital in excess of par for the excess of the purchase price over the par value.
B. Treasury stock for the purchase price.
C. Paid-in capital in excess of par for the purchase price.
D. Treasury stock for the par value and retained earnings for the excess of the purchase price over the par value.
9) “Gains” on sales of treasury stock (using the cost method) should be credited to
A. paid-in capital from treasury stock.
B. retained earnings.
C. capital stock.
D. other income.
10) In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?
A. Annual preferred dividend
B. Annual preferred dividend times the income tax rate
C. Annual preferred dividend times (one minus the income tax rate)
D. Annual preferred dividend divided by the income tax rate
11) Antidilutive securities
A. should be included in the computation of diluted earnings per share but NOT basic earnings per share.
B. include stock options and warrants whose exercise price is less than the average market price of common stock.
C. are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share.
D. should be ignored in all earnings per share calculations.
12) When computing diluted earnings per share, convertible bonds are
B. assumed converted only if they are antidilutive.
C. assumed converted whether they are dilutive or antidilutive.
D. assumed converted only if they are dilutive.
13) At its date of incorporation, Wilson, Inc. issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Wilson acquired 20,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. There have been no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts?
Retained Earnings | Additional Paid-in Capital
A. Decrease | Decrease
B. Decrease | No effect
C. No effect | Decrease
D. No effect | No effect
14) On December 31, 2006, the stockholders’ equity section of Clark, Inc., was as follows: Common stock, par value $10; authorized 30,000 shares.
Issued and outstanding 9,000 shares $ 90,000
Additional paid-in capital 116,000
Retained earnings 174,000
Total stockholders’ equity $380,000
On March 31, 2007, Clark declared a 10% stock dividend, and accordingly 900 additional shares were issued, when the fair market value of the stock was $18 per share. For the three months ended March 31, 2007, Clark sustained a net loss of $32,000. The balance of Clark’s retained earnings as of March 31, 2007, should be
15) How would the declaration and subsequent issuance of a 10% stock dividend by the issuer affect each of the following when the market value 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
16) Which of the following is correct about the effective-interest method of amortization?
A. The effective-interest method produces a constant rate of return on the book value of the investment from period to period.
B. The effective interest method applied to investments in debt securities is different from that applied to bonds payable.
C. Amortization of a premium decreases from period to period.
D. Amortization of a discount decreases from period to period.
17) When investments in debt securities are purchased between interest payment dates, preferably the
A. accrued interest is debited to Interest Receivable.
B. securities account should include accrued interest.
C. accrued interest is debited to Interest Revenue.
D. accrued interest is debited to Interest Expense.
18) A reclassification adjustment is reported in the
A. statement of stockholders’ equity.
B. income statement as an Other Revenue or Expense.
C. statement of comprehensive income as other comprehensive income.
D. stockholders’ equity section of the balance sheet.
19) Which of the following is NOT a debt security?
A. All of these are debt securities.
B. Convertible bonds
C. Loans receivable
D. Commercial paper
20) Pippen Co. purchased ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for
A. 20 periods and 4% from the present value of 1 table.
B. 10 periods and 10% from the present value of 1 table.
C. 20 periods and 5% from the present value of 1 table.
D. 10 periods and 8% from the present value of 1 table.
21) Investments in debt securities are generally recorded at
A. maturity value with a separate discount or premium account.
B. cost including accrued interest.
C. cost including brokerage and other fees.
D. maturity value.
22) Bista 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. Decrease | No Effect
B. No Effect | No Effect
C. Increase | Decrease
D. No Effect | Decrease
23) Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the
A. earnings are reported by the investee in its financial statements.
B. investee pays a dividend.
C. investee declares a dividend.
D. investor sells the investment.
24) 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. A reduction of the investment | Income
B. Income | A reduction of the investment
C. A reduction of the investment | A reduction of the investment
D. Income | Income
25) Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses and are included as other comprehensive income and as a separate component of stockholders’ equity are
A. never-sell debt securities.
B. available-for-sale debt securities.
C. trading debt securities.
D. held-to-maturity debt securities.
26) Held-to-maturity securities are reported at
A. fair value.
B. acquisition cost plus amortization of a premium.
C. acquisition cost plus amortization of a discount.
D. acquisition cost.
27) A requirement for a security to be classified as held-to-maturity is
A. ability to hold the security to maturity.
B. positive intent.
C. the security must be a debt security.
D. All of these are required.
28) All of the following statements regarding accounting for derivatives are correct EXCEPT that
A. gains and losses resulting from hedge transactions are reported in different ways, depending upon the type of hedge.
B. gains and losses resulting from speculation should be deferred.
C. they should be reported at fair value.
D. they should be recognized in the financial statements as assets and liabilities.
29) All of the following are requirements for disclosures related to financial instruments EXCEPT
A. displaying as a separate classification of other comprehensive income the net gain/loss on derivative instruments designated in cash flow hedges.
B. combining or netting the fair value of separate financial instruments.
C. distinguishing between financial instruments held or issued for purposes other than trading.
D. disclosing the fair value and related carrying value of the instruments.
30) Gains or losses on cash flow hedges are
A. reported directly in retained earnings.
B. reported directly in net income.
C. recorded in equity, as part of other comprehensive income.
D. ignored completely.
31) The rationale for interperiod income tax allocation is to
A. adjust income tax expense on the income statement to be in agreement with income taxes payable on the balance sheet.
B. recognize a tax asset or liability for the tax consequences of temporary differences that exist at the balance sheet date.
C. reconcile the tax consequences of permanent and temporary differences appearing on the current year’s financial statements.
D. recognize a distribution of earnings to the taxing agency.
32) Interperiod income tax allocation causes
A. tax expense in the income statement to be presented with the specific revenues causing the tax.
B. tax expense shown on the income statement to equal the amount of income taxes payable for the current year plus or minus the change in the deferred tax asset or liability balances for the year.
C. tax liability shown in the balance sheet to bear a normal relation to the income before tax reported in the income statement.
D. tax expense shown in the income statement to bear a normal relation to the tax liability.
33) Which of the following situations would require interperiod income tax allocation procedures?
A. Proceeds from a life insurance policy on an officer
B. An excess of percentage depletion over cost depletion
C. A temporary difference exists at the balance sheet date because the tax basis of an asset or liability and its reported amount in the financial statements differ
D. Interest received on municipal bonds
34) At the December 31, 2007 balance sheet date, Garth Brooks Corporation reports an accrued receivable for financial reporting purposes but NOT for tax purposes. When this asset is recovered in 2008, a future taxable amount will occur and
A. Garth will record an increase in a deferred tax asset in 2008.
B. pretax financial income will exceed taxable income in 2008.
C. total income tax expense for 2008 will exceed current tax expense for 2008.
D. Garth will record a decrease in a deferred tax liability in 2008.
35) Which of the following differences would result in future taxable amounts?
A. Expenses or losses that are tax deductible before they are recognized in financial income.
B. Expenses or losses that are tax deductible after they are recognized in financial income.
C. Revenues or gains that are recognized in financial income but are never included in taxable income.
D. Revenues or gains that are taxable before they are recognized in financial income.
36) A major distinction between temporary and permanent differences is
A. temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do NOT reverse.
B. permanent differences are NOT representative of acceptable accounting practice.
C. once an item is determined to be a temporary difference, it maintains that status; however, a permanent difference can change in status with the passage of time.
D. temporary differences occur frequently, whereas permanent differences occur only once.
37) In a defined-benefit plan, a formula is used that
A. defines the contribution the employer is to make; no promise is made concerning the ultimate benefits to be paid out to the employees.
B. requires that pension expense and the cash funding amount be the same.
C. defines the benefits that the employee will receive at the time of retirement.
D. requires that the benefit of gain or the risk of loss from the assets contributed to the pension plan be borne by the employee.
38) In accounting for a defined-benefit pension plan
A. the liability is determined based upon known variables that reflect future salary levels promised to employees.
B. the expense recognized each period is equal to the cash contribution.
C. the employer’s responsibility is simply to make a contribution each year based on the formula established in the plan.
D. an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised.
39) In all pension plans, the accounting problems include all the following EXCEPT
A. determining the level of individual premiums.
B. allocating the cost of the plan to the proper periods.
C. disclosing the status and effects of the plan in the financial statements.
D. measuring the amount of pension obligation.
40) A corporation has a defined-benefit plan. An accrued pension cost will result at the end of the first year if the
A. amount of net periodic pension cost exceeds the amount of employer contributions.
B. amount of employer contributions exceeds the net periodic pension cost.
C. fair value of the plan assets exceeds the accumulated benefit obligation.
D. accumulated benefit obligation exceeds the fair value of the plan assets.
41) The projected benefit obligation is the measure of pension obligation that
A. is NOT sanctioned under generally accepted accounting principles for reporting the service cost component of pension expense.
B. requires the longest possible period for funding to maximize the tax deduction.
C. requires pension expense to be determined solely on the basis of the plan formula applied to years of service to date and based on existing salary levels.
D. is required to be used for reporting the service cost component of pension expense.
42) The interest on the projected benefit obligation component of pension expense
A. may be stated implicitly or explicitly when reported.
B. is the same as the expected return on plan assets.
C. reflects the rates at which pension benefits could be effectively settled.
D. reflects the incremental borrowing rate of the employer.
43) Reser Corp., a company whose stock is publicly traded, provides a noncontributory defined-benefit pension plan for its employees. The company’s actuary has provided the following information for the year ended December 31, 2008:
Projected benefit obligation $600,000
Accumulated benefit obligation 525,000
Fair value of plan assets 825,000
Service cost 240,000
Interest on projected benefit obligation 24,000
Amortization of unrecognized prior service cost 60,000
Expected and actual return on plan assets 82,500
The market-related asset value equals the fair value of plan assets. Prior contributions to the defined-benefit pension plan equaled the amount of net periodic pension cost accrued for the previous year end. No contributions have been made for 2008 pension cost. In its December 31, 2008 balance sheet, Reser should report an accrued pension cost of
44) Yeager Co. maintains a defined-benefit pension plan for its employees. At each balance sheet date, Yeager should report a minimum liability at least equal to the
A. unfunded projected benefit obligation.
B. projected benefit obligation.
C. accumulated benefit obligation.
D. unfunded accumulated benefit obligation.
45) The following information pertains to Mellon Co.’s pension plan:
Actuarial estimate of projected benefit obligation at 1/1/08 $72,000
Assumed discount rate 10%
Service costs for 2008 18,000
Pension benefits paid during 2008 $15,000
If no change in actuarial estimates occurred during 2008, Mellon’s projected benefit obligation at December 31, 2008 was
46) On December 31, 2008, Kean Company changed its method of accounting for inventory from weighted average cost method to the FIFO method. This change caused the 2008 beginning inventory to increase by $420,000. The cumulative effect of this accounting change to be reported for the year ended 12/31/08, assuming a 40% tax rate, is
47) On January 1, 2005, Lynn Corporation acquired equipment at a cost of $600,000. Lynn adopted the double-declining balance method of depreciation for this equipment and had been recording depreciation over an estimated life of eight years, with no residual value. At the beginning of 2008, a decision was made to change to the straight-line method of depreciation for this equipment. Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning retained earnings, net of tax, is
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 erroneously treated as expense instead of supplies inventory. Neither of these errors was discovered nor corrected. The effect of these two errors would cause
A. 2008 net income and December 31, 2008 retained earnings to be understated $24,000 each.
B. 2007 net income and December 31, 2007 retained earnings to be understated $51,000 each.
C. 2008 net income to be understated $75,000 and December 31, 2008 retained earnings to be understated $24,000.
D. 2007 net income to be overstated $27,000 and 2008 net income to be understated $24,000.
49) Hannah Company began operations on January 1, 2007, and uses the FIFO method in costing its raw material inventory. Management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed:
Final Inventory 2007 2008
FIFO $320,000 $360,000
LIFO 240,000 300,000
Net Income (computed under the FIFO method) 500,000 600,000
Based upon the above information, a change to the LIFO method in 2008 would result in net income for 2008 of
50) The estimated life of a building that has been depreciated 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should
A. adjust accumulated depreciation to its appropriate balance through retained earnings, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.
B. depreciate the remaining book value over the remaining life of the asset.
C. continue to depreciate the building over the original 50-year life.
D. adjust accumulated depreciation to its appropriate balance, through net income, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.
51) When a company decides to switch from the double-declining balance method to the straight-line method, this change should be handled as a
A. correction of an error.
B. change in accounting principle.
C. change in accounting estimate.
D. prior period adjustment.
Here’s the SOLUTION