C. Bonds, for which there is an adequate appropriation of retained earnings, due in 11 months
D. Bonds for which there is an adequate sinking fund properly classified as a long-term investment, due in 3 months
16) A company borrows $10,000 and signs a 90-day nontrade note payable. In preparing a statement of cash flows (indirect method), this event would be reflected as
A. a cash outflow from investing activities.
B. a cash inflow from financing activities.
C. a cash inflow from investing activities.
D. an addition adjustment to net income in the cash flows from operating activities section.
17) An increase in inventory balance would be reported in a statement of cash flows using the indirect method (reconciliation method) as
A. a deduction from net income in arriving at net cash flow from operating activities.
B. a cash outflow from financing activities.
C. a cash outflow from investing activities.
D. an addition to net income in arriving at net cash flow from operating activities.
18) The primary purpose of the statement of cash flows is to provide information
A. that is useful in assessing cash flow prospects.
B. about the entity’s ability to meet its obligations, its ability to pay dividends, and its needs for external financing.
C. about the cash receipts and cash payments of an entity during a period.
D. about the operating, investing, and financing activities of an entity during a period.
19) Eller Co. received merchandise on consignment. As of January 31, Eller included the goods in inventory, but did not record the transaction. What would be the effect of this on its financial statements for January 31?
A. Net income was correct and current assets were understated.
B. Net income, current assets, and retained earnings were understated.
C. Net income and current assets were overstated and current liabilities were understated.
D. Net income, current assets, and retained earnings were overstated.
20) Cross Co. accepted delivery of merchandise that it purchased on account. As of December 31, Cross had recorded the transaction, but did not include the merchandise in its inventory. What would be the effect of this on its financial statements for December 31?
A. Net income was correct and current assets were understated.
B. Net income was overstated and current assets were understated.
C. Net income was understated and current liabilities were overstated.
D. Net income, current assets, and retained earnings were understated.
21) The failure to record a purchase of merchandise on account even though the goods are properly included in the physical inventory results in
A. an understatement of assets and net income.
B. an understatement of cost of goods sold and liabilities and an overstatement of assets.
C. an overstatement of assets and net income.
D. an understatement of liabilities and an overstatement of owners’ equity.
22) Fences and parking lots are reported on the balance sheet as
A. land improvements.
C. current assets.
D. property and equipment.
23) Which of these is not a major characteristic of a plant asset?
A. Acquired for use in operations
B. Yields services over a number of years
C. Possesses physical substance
D. All of these are major characteristics of a plant asset.
24) The debit for a sales tax properly levied and paid on the purchase of machinery preferably would be a charge to
A. a separate deferred charge account.
B. miscellaneous tax expense, which includes all taxes other than those on income.
C. the machinery account.
D. accumulated depreciation—machinery.
25) On November 1, 2007, Little Company purchased 600 of the $1,000 face value, 9% bonds of Player, Incorporated, for $632,000, which includes accrued interest of $9,000. The bonds, which mature on January 1, 2012, pay interest semiannually on March 1 and September 1. Assuming that Little uses the straight-line method of amortization and that the bonds are appropriately classified as available-for-sale, what would the net carrying value of the bonds be shown as on Little’s December 31, 2007, balance sheet?
26) On October 1, 2007, Lyman Co. purchased to hold to maturity, 200 of the $1,000 face value, 9% bonds for $208,000. An additional $6,000 was paid for accrued interest. Interest is paid semiannually on December 1 and June 1 and the bonds mature on December 1, 2011. Lyman uses straight-line amortization. Ignoring income taxes, what was the amount reported in Lyman’s 2007 income statement from this investment?
27) On October 1, 2007, Porter Co. purchased to hold to maturity 1,000 of the $1,000 face value, 9% bonds for $990,000 which includes $15,000 accrued interest. The bonds, which mature on February 1, 2016, pay interest semiannually on February 1 and August 1. Porter uses the straight-line method of amortization. The bonds should be reported in the December 31, 2007 balance sheet at a carrying what value?
28) Although only certain leases are currently accounted for as a sale or purchase, there is theoretic justification for considering all leases to be sales or purchases. The principal reason that supports this idea is that
A. at the end of the lease the property usually can be purchased by the lessee.
B. a lease reflects the purchase or sale of a quantifiable right to the use of property.
C. all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal.
D. during the life of the lease the lessee can effectively treat the property as if it were owned by the lessee.
29) An essential element of a lease conveyance is that the
A. lessee provides a sinking fund equal to one year’s lease payments.
B. property that is the subject of the lease agreement must be held for sale by the lessor prior to the drafting of the lease agreement.
C. lessor conveys less than his or her total interest in the property.
D. term of the lease is substantially equal to the economic life of the leased property.
30) Which of the following is a correct statement of one of the capitalization criteria?
A. The lease contains a purchase option.
B. The lease transfers ownership of the property to the lessor.
C. The lease term is equal to or more than 75% of the estimated economic life of the leased property.
D. The minimum lease payments, excluding executory costs, equal or exceed 90% of the fair value of the leased property.
31) Discount on notes payable is charged to interest expense
A. only in the year the note is issued.
B. equally over the life of the note.
C. using the effective-interest method.
D. only in the year the note matures.
32) The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as
A. an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument.
B. an adjustment to the cost basis of the asset obtained by the debt issue.
C. an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt.
D. a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption.
33) A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation?
A. The balance of mortgage payable will remain a constant amount over the 10-year period.
B. The balance of mortgage payable at a given balance sheet date will be reported as a long-term liability.
C. The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period.
D. The amount of interest expense will remain constant over the 10-year period.
34) Benton Company issues $10,000,000 of 10-year, 9% bonds on March 1, 2007, at 97 plus accrued interest. The bonds are dated January 1, 2007, and pay interest on June 30 and December 31. What is the total cash received on the issue date?
35) Limeway Company issues $5,000,000, 6%, 5-year bonds dated January 1, 2007, on January 1, 2007. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?
Present value of a single sum for 5 periods
Present value of a single sum for 10 periods
Present value of an annuity for 5 periods
Present value of an annuity for 10 periods
36) A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2007. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,145. Using effective-interest amortization, how much interest expense will be recognized in 2007?
37) Which of the following is not a characteristic of a defined-contribution pension plan?
A. The benefits to be received by employees are defined by the terms of the plan.
B. The employer’s contribution each period is based on a formula.
C. The accounting for a defined-contribution plan is straightforward and uncomplicated.
D. The benefit of gain or the risk of loss from the assets contributed to the pension fund are borne by the employee.
38) In accounting for a defined-benefit pension plan
A. the employer’s responsibility is simply to make a contribution each year based on the formula established in the plan.
B. an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised.
C. the expense recognized each period is equal to the cash contribution.
D. the liability is determined based upon known variables that reflect future salary levels promised to employees.
39) The interest on the projected benefit obligation component of pension expense
A. reflects the rates at which pension benefits could be effectively settled.
B. reflects the incremental borrowing rate of the employer.
C. is the same as the expected return on plan assets.
D. may be stated implicitly or explicitly when reported.
40) Windsor Company has outstanding both common stock and nonparticipating, noncumulative preferred stock. The liquidation value of the preferred is equal to its par value. The book value per share of the common stock is unaffected by
A. the declaration of a stock dividend on common stock payable in common stock when the market price of the common is equal to its par value.
B. a 2-for-1 split of the common stock.
C. the declaration of a stock dividend on preferred payable in preferred stock when the market price of the preferred is equal to its par value.
D. the payment of a previously declared cash dividend on the common stock.
41) Dividends are not paid on
A. nonparticipating preferred stock.
B. Dividends are paid on all of these.
C. noncumulative preferred stock.
D. treasury common stock.
42) Assume common stock is the only class of stock outstanding in the B-Bar-B Corporation. Total stockholders’ equity divided by the number of common stock shares outstanding is called
A. par value per share.
B. market value per share.
C. book value per share.
D. stated value per share.
43) Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the
A. relevance characteristic.
B. neutrality characteristic.
C. economic entity assumption.
D. comparability characteristic.
44) In presenting segment information, which of the following items must be reconciled to the entity’s consolidated financial statements?
Identifiable Profit (Loss)
A. Option 2
B. Option 4
C. Option 1
D. Option 3
45) Presenting consolidated financial statements this year when statements of individual companies were presented last year is
A. an accounting change that should be reported prospectively.
B. NOT an accounting change.
C. a correction of an error.
D. an accounting change that should be reported by restating the financial statements of all prior periods presented.
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