AC 410 Final Exam A+ Grade

1. Question: When common stock is issued at an amount greater than par value, the difference between the par value and the proceeds from the sale is recorded by

2. Question: On January 1, 2010, Marvel, Inc., grants a compensatory stock option plan to 10 of its executives. The plan allows each executive to buy 1,000 shares of its $1 par common stock at $30 a share after a three-year service period. The value of each option is estimated to be $8. The company estimates it will have an annual 2% employee turnover rate during the service period. What is the compensation expense for the year ended December 31, 2011?

3. Question: Battleground, Inc. had never had a treasury stock transaction prior to 2010. It experienced the following treasury stock transactions during 2010:

4/1/2010: Reacquired 1,000 shares of its own $5 par common stock, originally sold at $12 a share, for $10 a share. This was the first time that Battleground had reacquired its own stock.

4/8/2010: Reissued 400 shares at $8 a share.

5/2/2010: Reissued 500 shares at $13 a share.

5/10/2010: Retired the remaining 100 shares.

Assuming the cost method is used, the entry to record the reissuance of 400 shares on 4/8/2010 would include a

credit to Treasury Stock for $3,200

debit to Additional Paid-in Capital from Treasury Stock for $800

debit to Retained Earnings for $800

credit to Additional Paid-in Capital on Common Stock for $800

4. Question: When calculating earnings per share, dividends declared on noncumulative preferred stock, but not paid, should be

5. Question: Which of the following items would not be included in a basic earnings per share calculation?

undeclared dividends on noncumulative preferred stock

declared dividends on noncumulative preferred stock

undeclared dividends on cumulative preferred stock

declared dividends on cumulative preferred stock

6. Question: On January 1, a corporation had 10,380 shares of common stock outstanding. On August 1, it sold an additional 6,000 shares. During the year, dividends of $4,800 and $56,000 were declared and paid on the common and preferred stock, respectively. Net income for the year was $240,000. The basic earnings per share for the year was

7. Question: Smock Corporation had 30,000 shares of common stock outstanding during the year. In addition, there were compensatory stock options to purchase 3,000 shares of common stock at $20 a share outstanding the entire year. The average market price for the common stock during the year was $36 a share. The unrecognized compensation cost (net of tax) relating to these options was $4 a share. The denominator to compute the diluted earnings per share is

8. Question: When a company is determining its dividend policy, the company must adhere to legal requirements. The legal requirements are determined by the

Financial Accounting Standards Board (FASB)

state in which the company was incorporated

Securities and Exchange Commission (SEC)

Federal Trade Commission (FTC)

AC 410 Final Exam A+ Grade

9. Question: Under the treasury stock method, the number of shares of common stock assumed to be reacquired is determined by using the

ending market price of the stock

average market price of the stock

beginning market price of the stock

par value of the stock

10. Question: On October 1, 2010, Black Company declared a property dividend payable in the form of marketable equity securities classified as “available for sale” for financial accounting purposes. The marketable equity securities will be distributed to the common stockholders on December 1, 2010. The investment in equity securities originally cost Black $410,000 on August 1, 2010. The investment’s fair value on various dates is as follows:

October 1, 2010 $430,000

December 1, 2010 435,000

December 31, 2010 440,000

The amount credited to Realized Gain on Disposal of Investments resulting from this dividend transaction should be

$0

$20,000

$25,000

$30,000

11. Question: Accrual accounting is usually associated with

12. Question: Under the completed-contract method of revenue recognition, the partial billings account is closed out against the

13. Question: In 2010, Alpha Construction began work on a contract with a price of $850,000 and estimated costs of $595,000. Data for each year of the contract are as follows:

2010 2011 2012

Under the percentage-of-completion method of revenue recognition, the balance in Construction in Progress at the end of 2011 would be

14. Question: In 2010, Alpha Construction began work on a contract with a price of $850,000 and estimated costs of $595,000. Data for each year of the contract are as follows:

2010 2011 2012

Under the percentage-of-completion method of revenue recognition, the net amount reported for construction in progress inventory at the end of 2011 would be

15. Question: The percentage-of-completion method does not

recognize profit each period during the life of the contract in proportion to the portion of the contract completed during the period

value the inventory at cost less any partial billings

give precedence to economic substance over legal form

value the inventory at the costs incurred plus the profit recognized to date less any partial billings

16. Question: The Naples Company uses the percentage-of-completion method and the cost-to-cost method for its long-term construction contracts. On one such contract, Naples expects total revenues of $260,000 and total costs of $200,000. During the first year, Naples incurred costs of $50,000 and billed the customer $30,000 under the contract. At what net amount should Naples’ Construction in Progress for this contract be reported at the end of the first year?

$30,000

$35,000

$50,000

$65,000

17. Question: A company may recognize revenue in full at the time of a sale if

the probability of collection is not reasonably assured

there is a very high degree of uncertainty about the collectibility of the sales price

the collection of the sales price is improbable

the collectibility of the sales price is not an issue

18. Question: Which one of the following statements is not true?

The use of the installment method of recognizing revenue is generally unacceptable.

When the installment method of recognizing revenue is in use, operating expenses are not deferred and recognized in the future.

Deferred gross profit should be disclosed as a current liability on the balance sheet.

A company may use the installment method of revenue recognition for a sales transaction that is not an installment sale.

19. Question: On December 31, 2009, Fort Stockton, Inc. had no temporary differences that created deferred income taxes. On January 2, 2010, a new machine was purchased for $30,000. Straight-line depreciation over a four-year life (no residual value) was used for financial accounting. Depreciation expense for tax purposes was $11,000 in 2010, $9,000 in 2011, $6,000 in 2012, and $4,000 in 2013. In each year, the income tax rate was 20% and Fort Stockton had no other items that created differences between pretax financial income and taxable income. Fort Stockton reported the following pretax financial income for 2010 through 2013:

2010 $50,000

2011 40,000

2012 30,000

2013 60,000

The entry to record income taxes on December 31, 2011, would include a

20. Question: Which of the following transactions would typically result in the creation of a deferred tax liability?

21. Question: The Clear Lake Corporation reported the following differences between its taxable income and pretax financial income for the year ended December 31, 2010: $30,000 of additional depreciation for tax purposes, $40,000 of rent collected in advance (taxable when received), and $38,000 of tax-exempt municipal interest revenue. Assuming an income tax rate of 30% for all years and a taxable income of $190,000 for the year ended December 31, 2010, income tax expense for 2010 would be

AC 410 Final Exam A+ Grade

22. Question: Which of the following statements regarding current and deferred income taxes is not correct?

The amount of income tax expense must be allocated to various components of comprehensive income.

The income tax obligation is determined by applying the historical tax rates to the taxable income for the year.

The valuation allowance account is subtracted from the deferred tax asset account on the balance sheet.

Rent received in advance that will be earned within the next 12 months results in the creation of a current deferred tax asset.

23. Question: All of the following involve a temporary difference for purposes of income tax allocation except

interest on municipal bonds

gross profit on installment sales for tax purposes

MACRS depreciation for tax purposes and straight-line for accounting purposes

product warranty expenses

24. Question: Boerne Company received rent in advance of $9,000 on December 31, 2010, which was taxable when received for income tax purposes. The company’s effective tax rate was 30%, and this was the only temporary difference. Which of the following should be reported on the December 31, 2010 balance sheet?

$9,000 as a current deferred tax liability

$2,700 as a current deferred tax liability

$2,700 as a current deferred tax asset

$9,000 as a current deferred tax asset

25. Question: As of December 31, 2010, the Austin Company reported a deferred tax asset of $60,000 related to accrued, unpaid warranty costs. However, since profits have been declining, Austin decides that it is more likely than not that $24,000 of the deferred tax asset will not be realized. The entry to record the valuation allowance would include a

26. Question: Which one of the following statements regarding operating losses is not true?

The tax benefit of an operating loss carryback is recognized in the period of loss as a current receivable on the balance sheet.

Temporary differences and operating loss carryforwards are accounted for similarly.

The journal entry to recognize an operating loss carryback would include a credit to Income Tax Benefit from Operating Loss Carryback.

The tax benefit of an operating loss carryforward is to be recognized in the period of loss as a current receivable.

27. Question: At the end of its first year of operations on December 31, 2010, the Belton Company reported taxable income of $100,000 and had a pretax financial loss of $60,000. Differences between taxable income and pretax financial income included interest revenue received from municipal obligations of $20,000 and warranty expense accruals of $180,000. Warranty expenses of $90,000 are expected to be paid in 2011 and $110,000 in 2012. The enacted income tax rates for 2010, 2011, and 2012 are 30%, 35%, and 40%, respectively. The journal entry to record income tax expense on December 31, 2010, would be

Deferred Tax Asset 75,500

Income Taxes Payable 30,000

Income Tax Benefits from

Operating Loss Carryforward

45,500

Deferred Tax Asset 30,000

Income Taxes Payable 30,000

Income Tax Expense 30,000

Income Taxes Payable 30,000

Deferred Tax Asset

Income Taxes Payable 105,500

30,000

Income Tax Benefit from

Operating Loss Carryforward 75,500

28. Question: Intraperiod tax allocation would be appropriate for

an extraordinary gain

a loss from operations of a discontinued segment

the cumulative effects of changes in accounting principles

all of these

29. Question: Income taxes for financial accounting purposes are apportioned to each of the following items except

extraordinary gains and losses

discontinued operations

other revenues and expenses

prior period adjustments

30. Question: Disclosures for vested benefits

are not required

are related to the projected benefit obligation

are related to the accumulated benefit obligation

are related to the plan assets

31. Question: Which of the following is not a component of the net periodic pension expense to be reported on a company’s income statement?

interest cost

unrecognized past service cost

service cost

expected return on plan assets

32. Question: If a lease qualifies as a capital lease, which of the following combinations of payments would be included?

minimum periodic rental payments plus executory costs

minimum periodic rental payments plus the payment required for a bargain purchase option

minimum periodic rental payments minus any payment required for a guarantee of the residual value

minimum periodic rental payments minus any payments required for failure to renew or extend the lease

33. Question: Which of the following facts would require a lessee to classify a lease as a capital lease?

The lease term is 85% of the estimated economic life of the leased property.

The present value of the minimum lease payments is 85% of the fair market value of the leased property to the lessor, less any investment tax credit accruing to the lessor.

The lease contains a purchase option.

The lease does not transfer ownership of the leased property.

34. Question: On January 1, 2010, Victor Company signed a lease agreement requiring six annual payments of $60,000, beginning December 31, 2010. The lease qualifies as a capital lease. Victor’s incremental borrowing rate was 9% and the lessor’s implicit rate, known by Victor, was 10%. The present value factors of an ordinary annuity of $1 for six periods for interest rates of 9% and 10% are 4.485919 and 4.355261, respectively. The interest expense for 2010 would be (round answers to the nearest dollar)

$21,003

$22,746

$24,225

$26,133

35. Question: For a sales-type lease, cost of goods sold is valued by the lessor at

the recorded cost assigned to the inventory less the present value of the guaranteed residual value of the leased property accruing to the benefit of the lessor

36. Question: In a statement of cash flows, the payment of a cash dividend on common stock outstanding should be classified as cash outflows for

operating activities

investing activities

lending activities

financing activities

37. Question: The Robinson Company reported net income of $90,000 in 2010.

Additional information follows:

Depreciation expense $18,000

Loss on sale of equipment 10,000

Gain on sale of land 17,000

Given just this information, what was the Robinson Company’s net cash provided by operating activities in 2010?

$79,000

$100,000

$101,000

$115,000

38. Question: Which of the following events would not result in a cash inflow?

sale of preferred stock

common stock issued as a stock dividend

reissuance of treasury stock

loss of building destroyed by fire but partially reimbursed by insurance

39. Question: Which statement is not true?

Salaries expense + Decrease in salaries payable = Cash payments to employees

Other revenues + Increase in unearned revenues – Gains on disposal of assets – Equity investment income = Other operating cash receipts

Sales revenue – Increase in accounts receivable = Cash collections from customers

Other expenses + Decrease in prepaid expenses – Depreciation expense + Losses on disposal of assets – Equity investment loss = Other operating cash payments

40. Question: Which of the following items would be deducted from net income to determine net cash provided by operating activities using the indirect method?

loss on sale of plant assets and amortization of bond payable discount

amortization of bond payable premium and gain on sale of equipment

amortization expense and gain on sale of equipment

decrease in income taxes payable and amortization of goodwill

41. Question: Bertrand, Inc. prepares a statement of cash flows. In 2010, Bertrand had net income of $45,000. In addition, the following information is available:

Gain on sale of land $16,000

Decrease in inventories 10,000

Amortization of patents 4,000

Increase in prepaid expenses 3,000

What net cash provided by operating activities should Bertrand report in 2010?

$46,000

$72,000

$40,000

$50,000

42. Question: When preparing a statement of cash flows under the indirect method, an increase in ending accounts receivable over beginning accounts receivable will result in an adjustment to net income in the operating activities section because

cash was increased since accounts receivable is a current asset

the accounts receivable increase was a revenue included in net income, but it was not a source of cash

the net increase in accounts receivable decreases net sales and represents an assumed use of cash

all changes in noncash accounts must be disclosed on the cash flow statement

43. Question: The accounting changes identified by current GAAP include all of the following except

correction of an error

change in accounting principle

change in accounting estimate

change in reporting entity

44. Question: A change in accounting principle from one that is not generally accepted to one that is generally accepted should be treated as

an error and corrected by prior period adjustment

a change in accounting principle and the cumulative effect included in net income

a change in accounting principle and prior period financial statements are restated

a change in accounting principle and adjustments made prospectively

45. Question: Disclosure of a retrospective adjustment should include

why the new principle is preferable

the net impact on assets of the retrospective adjustment

the retrospective computation of earnings per share only for the current period

ending balance in Retained Earnings before and after the retrospective adjustment

46. Question: Which of the following statements does not properly state a basic principle for reporting an accounting change?

retrospectively apply a change in accounting principle

prospectively account for a change in accounting estimate

retrospectively adjust for a change in reporting entity

retrospectively apply a change in accounting estimate

47. Question: An item that would not be accounted for under current GAAP as a change in estimate would be

an increase in the expected life of a piece of manufacturing equipment

a decrease in the estimated residual value of a delivery van

a change from FIFO to LIFO for a small subsidiary

an increase in defective items for the best selling video game

48. Question: A company changes from capitalizing and amortizing preproduction costs to recording them as an expense when incurred, because future benefits associated with those costs have become doubtful. This accounting change should be recognized as a

change in accounting estimate

change in accounting principle

change in reporting entity

correction of an error

49. Question: Which of the following statements is not an example of a correction of an error in previously issued financial statements?

adopting the allowance method for bad debts when the direct write-off method had been used because direct write-off was used for tax purposes

recording depreciation on plant assets that were not depreciated last year because of a computer problem

adopting straight-line depreciation for newly acquired assets and continuing to use the double-declining-balance method for existing assets

correcting the ending inventory amount from last year because inventory in transit was missed

50. Question: During a year-end evaluation of the financial records of the Gretchen Company for the year ended December 31, 2010, the following was discovered:

• Inventory on January 1, 2010, was understated by $6,000.

• Inventory on December 31, 2010, was understated by $18,000.

• Rent of $20,000 collected in advance on December 29, 2010, was included in income for 2010.

• A probable, reasonably estimated contingent liability of $30,000 was not recorded as of December 31, 2010.

Net income for 2010 (before any of the above items) was $100,000. The corrected net income, ignoring income taxes, for 2010 should be

$50,000

$58,000

$62,000

$68,000

AC 410 Final Exam A+ Grade

AC 410 Final Exam A+ Grade