ACCT 302 Final Review

Chapter 11:
MULTIPLE CHOICEConceptual

21. The following is true of depreciation accounting.
a. It is not a matter of valuation.
b. It is part of the matching of revenues and expenses.
c. It retains funds by reducing income taxes and dividends.
d. All of these.

22. Which of the following principles best describes the conceptual rationale for
the methods of matching depreciation expense with revenues?
a. Associating cause and effect
b. Systematic and rational allocation
c. Immediate recognition
d. Partial recognition

23. Depreciation accounting
a. provides funds.
b. funds replacements.
c. retains funds.
d. all of these.

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24. Which of the following most accurately reflects the concept of depreciation
as used in accounting?
a. The process of charging the decline in value of an economic resource to
income in the period in which the benefit occurred.
b. The process of allocating the cost of tangible assets to expense in a
systematic and rational manner to those periods expected to benefit from the
use of the asset.
c. A method of allocating asset cost to an expense account in a manner which
closely matches the physical deterioration of the tangible asset involved.
d. An accounting concept that allocates the portion of an asset used up during
the year to the contra asset account for the purpose of properly recording the
fair market value of tangible assets.

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25. The major difference between the service life of an asset and its physical life
is that
a. service life refers to the time an asset will be used by a company and
physical life refers to how long the asset will last.
b. physical life is the life of an asset without consideration of salvage value and
service life requires the use of salvage value.
c. physical life is always longer than service life.
d. service life refers to the length of time an asset is of use to its original owner,
while physical life refers to how long the asset will be used by all owners.

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26. The term "depreciable base," or "depreciation base," as it is used in
accounting, refers to
a. the total amount to be charged (debited) to expense over an asset's useful
life.
b. the cost of the asset less the related depreciation recorded to date.
c. the estimated market value of the asset at the end of its useful life.
d. the acquisition cost of the asset.

27. Economic factors that shorten the service life of an asset include
a. obsolescence.
b. supersession.
c. inadequacy.
d. all of these.

28. Which of the following is not one of the basic questions that must be
answered before the amount of depreciation charge can be computed?
a. What is the depreciation base to use for the asset?
b. What is the asset's useful life?
c. What method of cost apportionment is best for this asset?
d. What product or service is the asset related to?

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29. Which of the following is a realistic assumption of the straight-line method of
depreciation?
a. The asset's economic usefulness is the same each year.
b. The repair and maintenance expense is essentially the same each period.
c. The rate of return analysis is enhanced using the straight-line method.
d. Depreciation is a function of time rather than a function of usage.

30. The activity method of depreciation
a. is a variable charge approach.
b. assumes that depreciation is a function of the passage of time.
c. conceptually associates cost in terms of input measures.
d. all of these.

31. For income statement purposes, depreciation is a variable expense if the
depreciation method used is
a. units-of-production.
b. straight-line.
c. sum-of-the-years'-digits.
d. declining-balance.

32.If an industrial firm uses the units-of-production method for computing
depreciation on its only plant asset, factory machinery, the credit to
accumulated depreciation from period to period during the life of the firm
will
a. be constant.
b. vary with unit sales.
c. vary with sales revenue.
d. vary with production.

33. Use of the double-declining balance method
a. results in a decreasing charge to depreciation expense.
b. means salvage value is not deducted in computing the depreciation base.
c. means the book value should not be reduced below salvage value.
d. all of these.

34. Use of the sum-of-the-years'-digits method
a. results in salvage value being ignored.
b. means the denominator is the years remaining at the beginning of the year.
c. means the book value should not be reduced below salvage value.
d. all of these.

35. A graph is set up with "yearly depreciation expense" on the vertical axis and
"time" on the horizontal axis. Assuming linear relationships, how would the
graphs for straight-line and sum-of-the-years'-digits depreciation,
respectively, be drawn?
a. Vertically and sloping down to the right
b. Vertically and sloping up to the right
c. Horizontally and sloping down to the right
d. Horizontally and sloping up to the right

36. A principal objection to the straight-line method of depreciation is that it
a. provides for the declining productivity of an aging asset.
b. ignores variations in the rate of asset use.
c. tends to result in a constant rate of return on a diminishing investment base.
d. gives smaller periodic write-offs than decreasing charge methods.

37. Each year a company has been investing an increasingly greater amount in
machinery. Since there is a large number of small items with relatively
similar useful lives, the company has been applying straight-line depreciation
at a uniform rate to the machinery as a group. The ratio of this group's total
accumulated depreciation to the total cost of the machinery has been steadily
increasing and now stands at .75 to 1.00. The most likely explanation for this
increasing ratio is the
a. company should have been using one of the accelerated methods of
depreciation.
b. estimated average life of the machinery is less than the actual average useful
life.
c. estimated average life of the machinery is greater than the actual average
useful life.
d. company has been retiring fully depreciated machinery that should have
remained in service.

38. For the composite method, the composite
a. rate is the total cost divided by the total annual depreciation.
b. rate is the total annual depreciation divided by the total depreciable cost.
c. life is the total cost divided by the total annual depreciation.
d. life is the total depreciable cost divided by the total annual depreciation.

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39. Watkins Truck Rental uses the group depreciation method for its fleet of
trucks. When it retires one of its trucks and receives cash from a salvage
company, the carrying value of property, plant, and equipment will be
decreased by the
a. original cost of the truck.
b. original cost of the truck less the cash proceeds.
c. cash proceeds received.
d. cash proceeds received and original cost of the truck.

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40. Composite or group depreciation is a depreciation system whereby
a. the years of useful life of the various assets in the group are added together
and the total divided by the number of items.
b. the cost of individual units within an asset group is charged to expense in the
year a unit is retired from service.
c. a straight-line rate is computed by dividing the total of the annual depreciation
expense for all assets in the group by the total cost of the assets.
d. the original cost of all items in a given group or class of assets is retained in
the asset account and the cost of replacements is charged to expense when
they are acquired.

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41. When depreciation is computed for partial periods under a decreasing
charge depreciation method, it is necessary to
a. charge a full year's depreciation to the year of acquisition.
b. determine depreciation expense for the full year and then prorate the
expense between the two periods involved.
c. use the straight-line method for the year in which the asset is sold or
otherwise disposed of.
d. use a salvage value equal to the first year's partial depreciation charge.

42. Depreciation is normally computed on the basis of the nearest
a. full month and to the nearest cent.
b. full month and to the nearest dollar.
c. day and to the nearest cent.
d. day and to the nearest dollar.

43. Myers Company acquired machinery on January 1, 2005 which it depreciated
under the straight-line method with an estimated life of fifteen years and no
salvage value. On January 1, 2010, Myers estimated that the remaining life of
this machinery was six years with no salvage value. How should this change
be accounted for by Myers?
a. As a prior period adjustment
b. As the cumulative effect of a change in accounting principle in 2010
c. By setting future annual depreciation equal to one-sixth of the book value on
January 1, 2010
d. By continuing to depreciate the machinery over the original fifteen year life

44. A change in estimate should
a. result in restatement of prior period statements.
b. be handled in current and future periods.
c. be handled in future periods only.
d. be handled retroactively.

45. Lynch Printing Company determines that a printing press used in its
operations has suffered a permanent impairment in value because of
technological changes. An entry to record the impairment should
a. recognize an extraordinary loss for the period.
b. include a credit to the equipment accumulated depreciation account.
c. include a credit to the equipment account.
d. not be made if the equipment is still being used.

46. Which of following is not a similarity in the accounting treatment for
depreciation and cost depletion?
a. The estimated life is based on economic or productive life.
b. Assets subject to either are reported in the same classification on the balance
sheet.
c. The rates may be changed upon revision of the estimated productive life
used in the original rate computations.
d. Both depreciation and depletion are based on time.

47. Which of the following is not a difference between the accounting treatment
for depreciation and cost depletion?
a. Depletion applies to natural resources while depreciation applies to plant and
equipment.
b. Depletion refers to the physical exhaustion or consumption of the asset while
depreciation refers to the wear, tear, and obsolescence of the asset.
c. Many formulas are used in computing depreciation but only one is used to
any extent in computing depletion.
d. The cost of the asset is the starting point from which computation of the
amount of the periodic charge is made to operations for depreciation, but the
fair value reassessed each year as the starting point for the periodic charge
for depletion.

48. Dividends representing a return of capital to stockholders are not uncommon
among companies which
a. use accelerated depreciation methods.
b. use straight-line depreciation methods.
c. recognize both functional and physical factors in depreciation.
d. none of these.

49. Depletion expense
a. is usually part of cost of goods sold.
b. includes tangible equipment costs in the depletion base.
c. excludes intangible development costs from the depletion base.
d. excludes restoration costs from the depletion base.

50. The most common method of recording depletion for accounting purposes is
the
a. percentage depletion method.
b. decreasing charge method.
c. straight-line method.
d. units-of-production method.

51. Reserve recognition accounting
a. is presently the generally accepted accounting method for financial reporting
of oil and gas reserves.
b. is a historical cost method similar to the full cost approach and the successful
efforts approach.
c. is used for reporting of oil and gas reserves for federal income tax purposes.
d. requires estimates of future production costs, the appropriate discount rate,
and the expected selling price of oil and gas reserves.

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52. Of the following costs related to the development of natural resources, which
one is not a part of depletion cost?
a. Acquisition cost of the natural resource deposit
b. Exploration costs
c. Tangible equipment costs associated with machinery used to extract the
natural resource
d. Intangible development costs such as drilling costs, tunnels, and shafts

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53. Which of the following disclosures is not required in the financial statements
regarding depreciation?
a. Accumulated depreciation, either by major classes of depreciable assets or in
total.
b. Details demonstrating how depreciation was calculated.
c. Depreciation expense for the period.
d. Balances of major classes of depreciable assets, by nature and function.

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54. The book value of a plant asset is
a. the fair market value of the asset at a balance sheet date.
b. the asset's acquisition cost less the total related depreciation recorded to
date.
c. equal to the balance of the related accumulated depreciation account.
d. the assessed value of the asset for property tax purposes.

55. A general description of the depreciation methods applicable to major
classes of depreciable assets
a. is not a current practice in financial reporting.
b. is not essential to a fair presentation of financial position.
c. is needed in financial reporting when company policy differs from income tax
policy.
d. should be included in corporate financial statements or notes thereto.

56. The asset turnover ratio is computed by dividing
a. net income by ending total assets.
b. net income by average total assets.
c. net sales by ending total assets.
d. net sales by average total assets.

57. The rate of return on total assets is computed by dividing
a. Net income by ending total assets.
b. Net sales by average total assets.
c. Net sales by ending total assets.
d. Net income by average total assets.

*58. A major objective of MACRS for tax depreciation is to
a. reduce the amount of depreciation deduction on business firms' tax returns.
b. assure that the amount of depreciation for tax and book purposes will be the
same.
c. help companies achieve a faster write-off of their capital assets.
d. require companies to use the actual economic lives of assets in calculating
tax depreciation.

*59. Under MACRS, which one of the following is not considered in determining
depreciation for tax purposes?
a. Cost of asset
b. Property recovery class
c. Half-year convention
d. Salvage value

*60. If income tax effects are ignored, accelerated depreciation methods
a. provide funds for the earlier replacement of fixed assets.
b. increase funds provided by operations.
c. tend to offset the effect of steadily increasing repair and maintenance costs
on the income statement.
d. tend to decrease the fixed asset turnover ratio.

Multiple Choice AnswersConceptual
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
21. d 27. d 33. d 39. c 45. b 51. d 57. d
22. b 28. d 34. c 40. c 46. d 52. c *58. c
23. c 29. d 35. c 41. b 47. d 53. b *59. d
24. b 30. a 36. b 42. b 48. d 54. b *60. c
25. a 31. a 37. b 43. c 49. a 55. d
26. a 32. d 38. d 44. b 50. d 56. d

Chapter 12:

21. Which of the following does not describe intangible assets?
a. They lack physical existence.
b. They are financial instruments.
c. They provide long-term benefits.
d. They are classified as long-term assets.

22. Which of the following characteristics do intangible assets possess?
a. Physical existence.
b. Claim to a specific amount of cash in the future.
c. Long-lived.
d. Held for resale.

23. Which characteristic is not possessed by intangible assets?
a. Physical existence.
b. Short-lived.
c. Result in future benefits.
d. Expensed over current and/or future years.

24. Costs incurred internally to create intangibles are
a. capitalized.
b. capitalized if they have an indefinite life.
c. expensed as incurred.
d. expensed only if they have a limited life.

25. Which of the following costs incurred internally to create an intangible asset
is generally expensed?
a. Research and development costs.
b. Filing costs.
c. Legal costs.
d. All of the above.

26. Which of the following methods of amortization is normally used for
intangible assets?
a. Sum-of-the-years'-digits
b. Straight-line
c. Units of production
d. Double-declining-balance

27. The cost of an intangible asset includes all of the following except
a. purchase price.
b. legal fees.
c. other incidental expenses.
d. all of these are included.

28. Factors considered in determining an intangible assets useful life include all
of the following except
a. the expected use of the asset.
b. any legal or contractual provisions that may limit the useful life.
c. any provisions for renewal or extension of the assets legal life.
d. the amortization method used.

29. Under current accounting practice, intangible assets are classified as
a. amortizable or unamortizable.
b. limited-life or indefinite-life.
c. specifically identifiable or goodwill-type.
d. legally restricted or goodwill-type.

30. Companies should test indefinite life intangible assets at least annually for:
a. recoverability.
b. amortization.
c. impairment.
d. estimated useful life.

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31. One factor that is not considered in determining the useful life of an
intangible asset is
a. salvage value.
b. provisions for renewal or extension.
c. legal life.
d. expected actions of competitors.

32. Which intangible assets are amortized?
Limited-Life Indefinite-Life
a. Yes Yes
b. Yes No
c. No Yes
d. No No

33. The cost of purchasing patent rights for a product that might otherwise have
seriously competed with one of the purchaser's patented products should be
a. charged off in the current period.
b. amortized over the legal life of the purchased patent.
c. added to factory overhead and allocated to production of the purchaser's
product.
d. amortized over the remaining estimated life of the original patent covering the
product whose market would have been impaired by competition from the
newly patented product.

34. Broadway Corporation was granted a patent on a product on January 1,
1998. To protect its patent, the corporation purchased on January 1, 2009 a
patent on a competing product which was originally issued on January 10,
2005. Because of its unique plant, Broadway Corporation does not feel the
competing patent can be used in producing a product. The cost of the
competing patent should be
a. amortized over a maximum period of 20 years.
b. amortized over a maximum period of 16 years.
c. amortized over a maximum period of 9 years.
d. expensed in 2009.

35. Wriglee, Inc. went to court this year and successfully defended its patent
from infringe-ment by a competitor. The cost of this defense should be
charged to
a. patents and amortized over the legal life of the patent.
b. legal fees and amortized over 5 years or less.
c. expenses of the period.
d. patents and amortized over the remaining useful life of the patent.
36.Which of the following is not an intangible asset?
a. Trade name
b. Research and development costs
c. Franchise
d. Copyrights

37. Which of the following intangible assets should not be amortized?
a. Copyrights
b. Customer lists
c. Perpetual franchises
d. All of these intangible assets should be amortized.

38. When a patent is amortized, the credit is usually made to
a. the Patent account.
b. an Accumulated Amortization account.
c. a Deferred Credit account.
d. an expense account.

39. When a company develops a trademark the costs directly related to securing
it should generally be capitalized. Which of the following costs associated
with a trademark would not be allowed to be capitalized?
a. Attorney fees.
b. Consulting fees.
c. Research and development fees.
d. Design costs.

40. In a business combination, companies record identifiable intangible assets
that they can reliably measure. All other intangible assets, too difficult to
identify or measure, are recorded as:
a. other assets.
b. indirect costs.
c. goodwill.
d. direct costs.

41. Goodwill may be recorded when:
a. it is identified within a company.
b. one company acquires another in a business combination.
c. the fair market value of a companys assets exceeds their cost.
d. a company has exceptional customer relations.

42. When a new company is acquired, which of these intangible assets,
unrecorded on the acquired companys books, might be recorded in addition
to goodwill?
a. A brand name.
b. A patent.
c. A customer list.

43. Which of the following intangible assets could not be sold by a business to
raise needed cash for a capital project?
a. Patent.
b. Copyright.
c. Goodwill.
d. Brand Name.

44. The reason goodwill is sometimes referred to as a master valuation account
is because
a. it represents the purchase price of a business that is about to be sold.
b. it is the difference between the fair market value of the net tangible and
identifiable intangible assets as compared with the purchase price of the
acquired business.
c. the value of a business is computed without consideration of goodwill and
then goodwill is added to arrive at a master valuation.
d. it is the only account in the financial statements that is based on value, all
other accounts are recorded at an amount other than their value.

45. Easton Company and Lofton Company were combined in a purchase
transaction. Easton was able to acquire Lofton at a bargain price. The sum of
the market or appraised values of identifiable assets acquired less the fair
value of liabilities assumed exceeded the cost to Easton. After revaluing
noncurrent assets to zero, there was still some "negative goodwill." Proper
accounting treatment by Easton is to report the amount as
a. a gain.
b. part of current income in the year of combination.
c. a deferred credit and amortize it.
d. paid-in capital.

46. Purchased goodwill should
a. be written off as soon as possible against retained earnings.
b. be written off as soon as possible as an extraordinary item.
c. be written off by systematic charges as a regular operating expense over the
period benefited.
d. not be amortized.

47. The intangible asset goodwill may be
a. capitalized only when purchased.
b. capitalized either when purchased or created internally.
c. capitalized only when created internally.
d. written off directly to retained earnings.

48. A loss on impairment of an intangible asset is the difference between the
assets
a. carrying amount and the expected future net cash flows.
b. carrying amount and its fair value.
c. fair value and the expected future net cash flows.
d. book value and its fair value.

49. The recoverability test is used to determine any impairment loss on which of
the following types of intangible assets?
a. Indefinite life intangibles other than goodwill.
b. Indefinite life intangibles.
c. Goodwill.
d. Limited life intangibles.

50. Buerhle Company needs to determine if its indefinite-life intangibles other
than goodwill have been impaired and should be reduced or written off on its
balance sheet. The impairment test(s) to be used is (are)
Recoverability Test Fair Value Test
a. Yes Yes
b. Yes No
c No Yes
d. No No

51. The carrying amount of an intangible is
a. the fair market value of the asset at a balance sheet date.
b. the asset's acquisition cost less the total related amortization recorded to
date.
c. equal to the balance of the related accumulated amortization account.
d. the assessed value of the asset for intangible tax purposes.

52. Which of the following research and development related costs should be
capitalized and depreciated over current and future periods?
a. Research and development general laboratory building which can be put to
alternative uses in the future
b. Inventory used for a specific research project
c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular
research project currently in process

53. Which of the following principles best describes the current method of
accounting for research and development costs?
a. Associating cause and effect
b. Systematic and rational allocation
c. Income tax minimization
d. Immediate recognition as an expense

54. How should research and development costs be accounted for, according to a
Financial Accounting Standards Board Statement?
a. Must be capitalized when incurred and then amortized over their
estimated useful lives.
b. Must be expensed in the period incurred.
c. May be either capitalized or expensed when incurred, depending upon
the materiality of the amounts involved.
d. Must be expensed in the period incurred unless it can be clearly
demonstrated that the expenditure will have alternative future uses or
unless contractually reimbursable.

55. Which of the following would be considered research and development?
a. Routine efforts to refine an existing product.
b. Periodic alterations to existing production lines.
c. Marketing research to promote a new product.
d. Construction of prototypes.

56. Which of the following costs should be capitalized in the year incurred?
a. Research and development costs.
b. Costs to internally generate goodwill.
c. Organizational costs.
d. Costs to successfully defend a patent.

57. Research and development costs
a. are intangible assets.
b. may result in the development of a patent.
c. are easily identified with specific projects.
d. all of the above.

58. Which of the following is considered research and development costs?
a. Planned search or critical investigation aimed at discovery of new knowledge.
b. Translation of research findings or other knowledge into a plan or design for a
new product or process.
c. Translation of research findings or other knowledge into a significant
improvement of an existing product.
d. all of the above.

59. Which of the following is considered research and development costs?
a. Planned search or critical investigation aimed at discovery of new knowledge.
b. Translation of research findings or other knowledge into a plan or design for a
new product or process.
c. Neither a nor b.
d. Both a and b.

60. Which of the following costs should be excluded from research and
development expense?
a. Modification of the design of a product
b. Acquisition of R & D equipment for use on a current project only
c. Cost of marketing research for a new product
d. Engineering activity required to advance the design of a product to the
manufacturing stage

61. If a company constructs a laboratory building to be used as a research and
development facility, the cost of the laboratory building is matched against
earnings as
a. research and development expense in the period(s) of construction.
b. depreciation deducted as part of research and development costs.
c. depreciation or immediate write-off depending on company policy.
d. an expense at such time as productive research and development has been
obtained from the facility.

62. Operating losses incurred during the start-up years of a new business should
be
a. accounted for and reported like the operating losses of any other business.
b. written off directly against retained earnings.
c. capitalized as a deferred charge and amortized over five years.
d. capitalized as an intangible asset and amortized over a period not to exceed
20 years.

63. The costs of organizing a corporation include legal fees, fees paid to the state
of incorporation, fees paid to promoters, and the costs of meetings for
organizing the promoters. These costs are said to benefit the corporation for
the entity's entire life. These costs should be
a. capitalized and never amortized.
b. capitalized and amortized over 40 years.
c. capitalized and amortized over 5 years.
d. expensed as incurred.

64. Which of the following would not be considered an R & D activity?
a. Adaptation of an existing capability to a particular requirement or customer's
need.
b. Searching for applications of new research findings.
c. Laboratory research aimed at discovery of new knowledge.
d. Conceptual formulation and design of possible product or process
alternatives.

65. Which of the following intangible assets should be shown as a separate item
on the balance sheet?
a. Goodwill
b. Franchise
c. Patent
d. Trademark

66. The notes to the financial statements should include information about
acquired intangible assets, and aggregate amortization expense for how
many succeeding years?
a. 6
b. 5
c. 4
d. 3

67. Which of the following should be reported under the Other Expenses and
Losses section of the income statement?
a. Goodwill impairment losses.
b. Trade name amortization expense.
c. Patent impairment losses
d. None of the above.

68. The total amount of patent cost amortized to date is usually
a. shown in a separate Accumulated Patent Amortization account which is
shown contra to the Patent account.
b. shown in the current income statement.
c. reflected as credits in the Patent account.
d. reflected as a contra property, plant and equipment item.

69. Intangible assets are reported on the balance sheet
a. with an accumulated depreciation account.
b. in the property, plant, and equipment section.
c. separately from other assets.
d. none of the above.

70. Which of the following is often reported as an extraordinary item?
a. Amortization expense.
b. Impairment losses for intangible assets other than goodwill.
c. Impairment losses on goodwill.

71. Which of the following is often reported as an extraordinary item?
a. Amortization expense.
b. Impairment losses for intangible assets.
c. Research and development costs.

*72. Which of the following costs incurred with developing computer software for
internal use should be capitalized?
a. Evaluation of alternatives.
b. Coding.
c. Training.
d. Maintenance.

*73. When developing computer software to be sold, which of the following costs
should be capitalized?
a. Designing.
b. Coding.
c. Testing.

*74. Capitalized costs incurred to develop internal use computer software should
be amortized using the:
a. percent-of-revenue approach.
b. percent-of-completion approach.
c. straight-line approach.
d. accelerated amortization approach.

*75. Capitalized costs incurred while developing computer software to be sold
should be amortized using the:
a. lower of the straight-line method or the percent-of-revenue method.
b. higher of the percent-of-revenue method or the percent-of-completion
method.
c. lower of the percent-of-revenue method or the percent-of-completion method.
d. higher of the straight-line method or the percent-of-revenue method.

21. b 29. b 37. c 45. a 53. d 61. b 69. c
22. c 30. c 38. a 46. d 54. d 62. a 70. d
23. a 31. a 39. c 47. a 55. d 63. d 71. d
24. c 32. b 40. c 48. b 56. d 64. a 72. b
25. a 33. d 41. b 49. d 57. b 65. a 73. d
26. b 34. c 42. d 50. c 58. d 66. b 74. c
27. d 35. d 43. c 51. b 59. d 67. d 75. d
28. d 36. b 44. b 52. a 60. c 68. c

Chapter 13:

21. Liabilities are
a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with
generally accepted accounting principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in
the future.

22. Which of the following is a current liability?
a. A long-term debt maturing currently, which is to be paid with cash in a sinking
fund
b. A long-term debt maturing currently, which is to be retired with proceeds from
a new debt issue
c. A long-term debt maturing currently, which is to be converted into common
stock
d. None of these

23. Which of the following is true about accounts payable?
1. Accounts payable should not be reported at their present value.
2. When accounts payable are recorded at the net amount, a
Purchase Discounts account will be used.
3. When accounts payable are recorded at the gross amount, a
Purchase Discounts Lost account will be used.
a. 1
b. 2
c. 3
d. Both 2 and 3 are true.

24. Among the short-term obligations of Lance Company as of December 31, the
balance sheet date, are notes payable totaling $250,000 with the Madison
National Bank. These are 90-day notes, renewable for another 90-day
period. These notes should be classified on the balance sheet of Lance
Company as
a. current liabilities.
b. deferred charges.
c. long-term liabilities.
d. intermediate debt.

25. Which of the following is not true about the discount on short-term notes
payable?
a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on
the balance sheet.
c. When there is a discount on a note payable, the effective interest rate is
higher than the stated discount rate.
d. All of these are true.

26. Which of the following may be a current liability?
a. Withheld Income Taxes
b. Deposits Received from Customers
c. Deferred Revenue
d. All of these

27. Which of the following items is a current liability?
a. Bonds (for which there is an adequate sinking fund properly classified as
a long-term investment) due in three months.
b. Bonds due in three years.
c. Bonds (for which there is an adequate appropriation of retained
earnings) due in eleven months.
d. Bonds to be refunded when due in eight months, there being no doubt
about the marketability of the refunding issue.

28. Which of the following should not be included in the current liabilities
section of the balance sheet?
a. Trade notes payable
b. Short-term zero-interest-bearing notes payable
c. The discount on short-term notes payable
d. All of these are included

29. Which of the following is a current liability?
a. Preferred dividends in arrears
b. A dividend payable in the form of additional shares of stock
c. A cash dividend payable to preferred stockholders
d. All of these

30. Stock dividends distributable should be classified on the
a. income statement as an expense.
b. balance sheet as an asset.
c. balance sheet as a liability.
d. balance sheet as an item of stockholders' equity.

31. Of the following items, the only one which should not be classified as a
current liability is
a. current maturities of long-term debt.
b. sales taxes payable.
c. short-term obligations expected to be refinanced.
d. unearned revenues.

32. An account which would be classified as a current liability is
a. dividends payable in the company's stock.
b. accounts payabledebit balances.
c. losses expected to be incurred within the next twelve months in excess of the
company's insurance coverage.
d. none of these.

33. Which of the following is a characteristic of a current liability but not a long-
term liability?
a. Unavoidable obligation.
b. Present obligation that entails settlement by probable future transfer or use of
cash, goods, or services.
c. Liquidation is reasonably expected to require use of existing resources
classified as current assets or create other current liabilities.
d. Transaction or other event creating the liability has already occurred.

34. Which of the following is not considered a part of the definition of a liability?
a. Unavoidable obligation.
b. Transaction or other event creating the liability has already occurred.
c. Present obligation that entails settlement by probable future transfer or use of
cash, goods, or services.
d. Liquidation is reasonably expected to require use of existing resources
classified as current assets or create other current liabilities.

35. Why is the liability section of the balance sheet of primary importance to
bankers?
a. To evaluate the entity's credit quality.
b. To assist in understanding the entity's liquidity.
c. To better understand sources of repayment.
d. To evaluate operating efficiency.

36. What is the relationship between current liabilities and a company's
operating cycle?
a. Liquidation of current liabilities is reasonably expected within the company's
operating cycle (or one year if less).
b. Current liabilities are the result of operating transactions.
c. Current liabilities can't exceed the amount incurred in one operating cycle.
d. There is no relationship between the two.

37. What is the relationship between present value and the concept of a liability?
a. Present values are used to measure certain liabilities.
b. Present values are not used to measure liabilities.
c. Present values are used to measure all liabilities.
d. Present values are only used to measure long-term liabilities.

38. What is a discount as it relates to zero-interest-bearing notes payable?
a. The discount represents the lender's costs to underwrite the note.
b. The discount represents the credit quality of the borrower.
c. The discount represents the cost of borrowing.
d. The discount represents the allowance for uncollectible amounts.

39. Where is debt callable by the creditor reported on the debtor's financial
statements?
a. Long-term liability.
b. Current liability if the creditor intends to call the debt within the year,
otherwise a long-term liability.
c. Current liability if it is probable that creditor will call the debt within the year,
otherwise a long-term liability.
d. Current liability.

40. Which of the following is not a condition necessary to exclude a short-term
obligation from current liabilities?
a. Intend to refinance the obligation on a long-term basis.
b. Obligation must be due with one year.
c. Demonstrate the ability to complete the refinancing.
d. Subsequently refinance the obligation on a long-term basis.

41. Which of the following does not demonstrate evidence regarding the ability
to consummate a refinancing of short-term debt?
a. Management indicated that they are going to refinance the obligation.
b. Actually refinance the obligation.
c. Have capacity under existing financing agreements that can be used to
refinance the obligation.
d. Enter into a financing agreement that clearly permits the entity to refinance
the obligation.

42. A company has not declared a dividend on its cumulative preferred stock for
the past three years. What is the required accounting treatment or disclosure
in this situation?
a. Record a liability for cumulative amount of preferred stock dividends not
declared.
b. Disclose the amount of the dividends in arrears.
c. Record a liability for the current year's dividends only.
d. No disclosure or recognition is required.

43. Which of the following situations may give rise to unearned revenue?
a. Providing trade credit to customers.
b. Selling inventory.
c. Selling magazine subscriptions.
d. Providing manufacturer warranties.

44. Which of the following statements is correct?
a. A company may exclude a short-term obligation from current liabilities if the
firm intends to refinance the obligation on a long-term basis.
b. A company may exclude a short-term obligation from current liabilities if the
firm can demonstrate an ability to consummate a refinancing.
c. A company may exclude a short-term obligation from current liabilities if it is
paid off after the balance sheet date and subsequently replaced by long-term
debt before the balance sheet is issued.
d. None of these.
45. The ability to consummate the refinancing of a short-term obligation may
be demonstrated by
a. actually refinancing the obligation by issuing a long-term obligation after the
date of the balance sheet but before it is issued.
b. entering into a financing agreement that permits the enterprise to refinance
the debt on a long-term basis.
c. actually refinancing the obligation by issuing equity securities after the date of
the balance sheet but before it is issued.
d. all of these.

46. Which of the following statements is false?
a. A company may exclude a short-term obligation from current liabilities if
the firm intends to refinance the obligation on a long-term basis and
demonstrates an ability to complete the refinancing.
b. Cash dividends should be recorded as a liability when they are declared
by the board of directors.
c. Under the cash basis method, warranty costs are charged to expense as
they are paid.
d. FICA taxes withheld from employees' payroll checks should never be
recorded as a liability since the employer will eventually remit the
amounts withheld to the appropriate taxing authority.

47. Which of the following is not a correct statement about sales taxes?
a. Sales taxes are an expense of the seller.
b. Many companies record sales taxes in the sales account.
c. If sales taxes are included in the sales account, the first step to find the
amount of sales taxes is to divide sales by 1 plus the sales tax rate.
d. All of these are true.

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48. If a short-term obligation is excluded from current liabilities because of
refinancing, the footnote to the financial statements describing this event
should include all of the following information except
a. a general description of the financing arrangement.
b. the terms of the new obligation incurred or to be incurred.
c. the terms of any equity security issued or to be issued.
d. the number of financing institutions that refused to refinance the debt, if any.

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49. In accounting for compensated absences, the difference between vested
rights and accumulated rights is
a. vested rights are normally for a longer period of employment than are
accumulated rights.
b. vested rights are not contingent upon an employee's future service.
c. vested rights are a legal and binding obligation on the company, whereas
accumulated rights expire at the end of the accounting period in which they
arose.
d. vested rights carry a stipulated dollar amount that is owed to the employee;
accumulated rights do not represent monetary compensation.

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50. An employee's net (or take-home) pay is determined by gross earnings
minus amounts for income tax withholdings and the employee's
a. portion of FICA taxes and unemployment taxes.
b. and employer's portion of FICA taxes, and unemployment taxes.
c. portion of FICA taxes, unemployment taxes, and any voluntary deductions.
d. portion of FICA taxes and any voluntary deductions.
51. Which of these is not included in an employer's payroll tax expense?
a. F.I.C.A. (social security) taxes
b. Federal unemployment taxes
c. State unemployment taxes
d. Federal income taxes

52. Which of the following is a condition for accruing a liability for the cost of
compensation for future absences?
a. The obligation relates to the rights that vest or accumulate.
b. Payment of the compensation is probable.
c. The obligation is attributable to employee services already performed.
d. All of these are conditions for the accrual.

53. A liability for compensated absences such as vacations, for which it is
expected that employees will be paid, should
a. be accrued during the period when the compensated time is expected to be
used by employees.
b. be accrued during the period following vesting.
c. be accrued during the period when earned.
d. not be accrued unless a written contractual obligation exists.

54. The amount of the liability for compensated absences should be based on
1. the current rates of pay in effect when employees earn the
right to compensated absences.
2. the future rates of pay expected to be paid when employees
use compensated time.
3. the present value of the amount expected to be paid in future
periods.
a. 1.
b. 2.
c. 3.
d. Either 1 or 2 is acceptable.

55. What are compensated absences?
a. Unpaid time off.
b. A form of healthcare.
c. Payroll deductions.
d. Paid time off.

56. Which gives rise to the requirement to accrue a liability for the cost of
compensated absences?
a. Payment is probable.
b. Employee rights vest or accumulate.
c. Amount can be reasonably estimated.

57. Under what conditions is an employer required to accrue a liability for sick
pay?
a. Sick pay benefits can be reasonably estimated.
b. Sick pay benefits vest.
c. Sick pay benefits equal 100% of the pay.
d. Sick pay benefits accumulate.

58. Which of the following taxes does not represent a payroll deduction a
company may incur?
a. Federal income taxes.
b. FICA taxes.
c. State unemployment taxes.
d. State income taxes.

59. What is a contingency?
a. An existing situation where certainty exists as to a gain or loss that will be
resolved when one or more future events occur or fail to occur.
b. An existing situation where uncertainty exists as to possible loss that will be
resolved when one or more future events occur.
c. An existing situation where uncertainty exists as to possible gain or loss that
will not be resolved in the foreseeable future.
d. An existing situation where uncertainty exists as to possible gain or loss that
will be resolved when one or more future events occur or fail to occur.

60. When is a contingent liability recorded?
a. When the amount can be reasonably estimated.
b. When the future events are probable to occur and the amount can be
reasonably estimated.
c. When the future events are probable to occur.
d. When the future events will possibly occur and the amount can be reasonably
estimated.

61. Which of the following is an example of a contingent liability?
a. Obligations related to product warranties.
b. Possible receipt from a litigation settlement.
c. Pending court case with a probable favorable outcome.
d. Tax loss carryforwards.

62. Which of the following terms is associated with recording a contingent
liability?
a. Possible.
b. Likely.
c. Remote.
d. Probable.

63. Which of the following is the proper way to report a gain contingency?
a. As an accrued amount.
b. As deferred revenue.
c. As an account receivable with additional disclosure explaining the nature of
the contingency.
d. As a disclosure only.

64. Which of the following contingencies need not be disclosed in the financial
statements or the notes thereto?
a. Probable losses not reasonably estimable
b. Environmental liabilities that cannot be reasonably estimated
c. Guarantees of indebtedness of others
d. All of these must be disclosed.

65.Which of the following sets of conditions would give rise to the accrual of a
contingency under current generally accepted accounting principles?
a. Amount of loss is reasonably estimable and event occurs infrequently.
b. Amount of loss is reasonably estimable and occurrence of event is probable.
c. Event is unusual in nature and occurrence of event is probable.
d. Event is unusual in nature and event occurs infrequently.

66. Jeff Beck is a farmer who owns land which borders on the right-of-way of the
Northern Railroad. On August 10, 2010, due to the admitted negligence of the
Railroad, hay on the farm was set on fire and burned. Beck had had a dispute
with the Railroad for several years concerning the ownership of a small
parcel of land. The representative of the Railroad has offered to assign any
rights which the Railroad may have in the land to Beck in exchange for a
release of his right to reimbursement for the loss he has sustained from the
fire. Beck appears inclined to accept the Railroad's offer. The Railroad's 2010
financial statements should include the following related to the incident:
a. recognition of a loss and creation of a liability for the value of the land.
b. recognition of a loss only.
c. creation of a liability only.
d. disclosure in note form only.

67. A contingency can be accrued when
a. it is certain that funds are available to settle the disputed amount.
b. an asset may have been impaired.
c. the amount of the loss can be reasonably estimated and it is probable that an
asset has been impaired or a liability incurred.
d. it is probable that an asset has been impaired or a liability incurred even
though the amount of the loss cannot be reasonably estimated.

68. A contingent liability
a. definitely exists as a liability but its amount and due date are indeterminable.
b. is accrued even though not reasonably estimated.
c. is not disclosed in the financial statements.
d. is the result of a loss contingency.

69. To record an asset retirement obligation (ARO), the cost associated with the
ARO is
a. expensed.
b. included in the carrying amount of the related long-lived asset.
c. included in a separate account.
d. none of these.

70. A company is legally obligated for the costs associated with the retirement of
a long-lived asset
a. only when it hires another party to perform the retirement activities.
b. only if it performs the activities with its own workforce and equipment.
c. whether it hires another party to perform the retirement activities or performs
the activities itself.
d. when it is probable the asset will be retired.
71.Assume that a manufacturing corporation has (1) good quality control, (2) a one-
year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a
continuing policy of guaranteeing new products against defects for three
years that has resulted in material but rather stable warranty repair and
replacement costs. Any liability for the warranty
a. should be reported as long-term.
b. should be reported as current.
c. should be reported as part current and part long-term.
d. need not be disclosed.

72. Ortiz Corporation, a manufacturer of household paints, is preparing annual
financial statements at December 31, 2010. Because of a recently proven
health hazard in one of its paints, the government has clearly indicated its
intention of having Ortiz recall all cans of this paint sold in the last six
months. The management of Ortiz estimates that this recall would cost
$800,000. What accounting recognition, if any, should be accorded this
situation?
a. No recognition
b. Note disclosure only
c. Operating expense of $800,000 and liability of $800,000
d. Appropriation of retained earnings of $800,000

73. Information available prior to the issuance of the financial statements
indicates that it is probable that, at the date of the financial statements, a
liability has been incurred for obligations related to product warranties. The
amount of the loss involved can be reasonably estimated. Based on the above
facts, an estimated loss contingency should be
a. accrued.
b. disclosed but not accrued.
c. neither accrued nor disclosed.
d. classified as an appropriation of retained earnings.

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74. Espinosa Co. has a loss contingency to accrue. The loss amount can only be
reasonably estimated within a range of outcomes. No single amount within
the range is a better estimate than any other amount. The amount of loss
accrual should be
a. zero.
b. the minimum of the range.
c. the mean of the range.
d. the maximum of the range.

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75. Dean Company becomes aware of a lawsuit after the date of the financial
statements, but before they are issued. A loss and related liability should be
reported in the financial statements if the amount can be reasonably
estimated, an unfavorable outcome is highly probable, and
a. the Dean Company admits guilt.
b. the court will decide the case within one year.
c. the damages appear to be material.
d. the cause for action occurred during the accounting period covered by the
financial statements.

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76. Use of the accrual method in accounting for product warranty costs
a. is required for federal income tax purposes.
b. is frequently justified on the basis of expediency when warranty costs are
immaterial.
c. finds the expense account being charged when the seller performs in
compliance with the warranty.
d. represents accepted practice and should be used whenever the warranty is
an integral and inseparable part of the sale.
77. Which of the following best describes the accrual method of accounting for
warranty costs?
a. Expensed when paid.
b. Expensed when warranty claims are certain.
c. Expensed based on estimate in year of sale.
d. Expensed when incurred.

78. Which of the following best describes the cash-basis method of accounting
for warranty costs?
a. Expensed based on estimate in year of sale.
b. Expensed when liability is accrued.
c. Expensed when warranty claims are certain.
d. Expensed when incurred.

79. Which of the following is a characteristic of the expense warranty approach,
but not the sales warranty approach?
a. Estimated liability under warranties.
b. Warranty expense.
c. Unearned warranty revenue.
d. Warranty revenue.

80. An electronics store is running a promotion where for every video game
purchased, the customer receives a coupon upon checkout to purchase a
second game at a 50% discount. The coupons expire in one year. The store
normally recognized a gross profit margin of 40% of the selling price on
video games. How would the store account for a purchase using the discount
coupon?
a. The reduction in sales price attributed to the coupon is recognized as
premium expense.
b. The difference between the cost of the video game and the cash received is
recognized as premium expense.
c. Premium expense is not recognized.
d. The difference between the cost of the video game and the selling price prior
to the coupon is recognized as premium expense.

81. What condition is necessary to recognize an asset retirement obligation?
a. Company has an existing legal obligation and can reasonably estimate the
amount of the liability.
b. Company can reasonably estimate the amount of the liability.
c. Company has an existing legal obligation.
d. Obligation event has occurred.

82. Which of the following are not factors that are considered when evaluating
whether or not to record a liability for pending litigation?
a. Time period in which the underlying cause of action occurred.
b. The type of litigation involved.
c. The probability of an unfavorable outcome.
d. The ability to make a reasonable estimate of the amount of the loss.

83. How do you determine the acid-test ratio?
a. The sum of cash and short-term investments divided by short-term debt.
b. Current assets divided by current liabilities.
c. Current assets divided by short-term debt.
d. The sum of cash, short-term investments and net receivables divided by
current liabilities.

84. What does the current ratio inform you about a company?
a. The extent of slow-moving inventories.
b. The efficient use of assets.
c. The company's liquidity.
d. The company's profitability.

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85. Which of the following is not acceptable treatment for the presentation of
current liabilities?
a. Listing current liabilities in order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied to their
liquidation
d. Showing current liabilities immediately below current assets to obtain a
presentation of working capital

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86. The ratio of current assets to current liabilities is called the
a. current ratio.
b. acid-test ratio.
c. current asset turnover ratio.
d. current liability turnover ratio.

87. Accrued liabilities are disclosed in financial statements by
a. a footnote to the statements.
b. showing the amount among the liabilities but not extending it to the liability
total.
c. an appropriation of retained earnings.
d. appropriately classifying them as regular liabilities in the balance sheet.

88. The numerator of the acid-test ratio consists of
a. total current assets.
b. cash and marketable securities.
c. cash and net receivables.
d. cash, marketable securities, and net receivables.

89. Each of the following are included in both the current ratio and the acid-test
ratio except
a. cash.
b. short-term investments.
c. net receivables.
d. inventory.

21. d 31. c 41. a 51. d 61. a 71. c 81. a
22. d 32. d 42. b 52. d 62. d 72. c 82. b
23. a 33. c 43. c 53. c 63. d 73. a 83. d
24. a 34. d 44. d 54. d 64. d 74. b 84. c
25. b 35. b 45. d 55. d 65. b 75. d 85. c
26. d 36. a 46. d 56. d 66. a 76. d 86. a
27. c 37. a 47. a 57. b 67. c 77. c 87. d
28. d 38. c 48. d 58. c 68. d 78. d 88. d
29. c 39. d 49. b 59. d 69. b 79. a *89. d
30. d 40. d 50. d 60. b 70. c 80. b

Chapter 14:

21. An example of an item which is not a liability is
a. dividends payable in stock.
b. advances from customers on contracts.
c. accrued estimated warranty costs.
d. the portion of long-term debt due within one year.

22. The covenants and other terms of the agreement between the issuer of bonds
and the lender are set forth in the
a. bond indenture.
b. bond debenture.
c. registered bond.
d. bond coupon.

23. The term used for bonds that are unsecured as to principal is
a. junk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.

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24. Bonds for which the owners' names are not registered with the issuing
corporation are called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.

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25. Bonds that pay no interest unless the issuing company is profitable are called
a. collateral trust bonds.
b. debenture bonds.
c. revenue bonds.
d. income bonds.

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26. If bonds are issued initially at a premium and the effective-interest method of
amortization is used, interest expense in the earlier years will be
a. greater than if the straight-line method were used.
b. greater than the amount of the interest payments.
c the same as if the straight-line method were used.
d. less than if the straight-line method were used.

27. The interest rate written in the terms of the bond indenture is known as the
a. coupon rate.
b. nominal rate.
c. stated rate.
d. coupon rate, nominal rate, or stated rate.

28. The rate of interest actually earned by bondholders is called the
a. stated rate.
b. yield rate.
c. effective rate.
d. effective, yield, or market rate.

Use the following information for questions 29 and 30:
Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The
bonds are sold to yield 8%.

29. One step in calculating the issue price of the bonds is to multiply the
principal by the table value for
a. 10 periods and 10% from the present value of 1 table.
b. 20 periods and 5% from the present value of 1 table.
c. 10 periods and 8% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.

30. Another step in calculating the issue price of the bonds is to
a. multiply $10,000 by the table value for 10 periods and 10% from the present
value of an annuity table.
b. multiply $10,000 by the table value for 20 periods and 5% from the present
c. multiply $10,000 by the table value for 20 periods and 4% from the present
d. none of these.

31. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity
ten years from date of issue. If the bonds were issued at a premium, this
indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal)
rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.

32. If bonds are initially sold at a discount and the straight-line method of
amortization is used, interest expense in the earlier years will
a. exceed what it would have been had the effective-interest method of
amortization been used.
b. be less than what it would have been had the effective-interest method of
amortization been used.
c. be the same as what it would have been had the effective-interest method of
amortiza-tion been used.
d. be less than the stated (nominal) rate of interest.

33. Under the effective-interest method of bond discount or premium
amortization, the periodic interest expense is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the
bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the
bonds.

34. When the effective-interest method is used to amortize bond premium or
discount, the periodic amortization will
a. increase if the bonds were issued at a discount.
b. decrease if the bonds were issued at a premium.
c. increase if the bonds were issued at a premium.
d. increase if the bonds were issued at either a discount or a premium.

35. If bonds are issued between interest dates, the entry on the books of the
issuing corporation could include a
a. debit to Interest Payable.
b. credit to Interest Receivable.
c. credit to Interest Expense.
d. credit to Unearned Interest.

36. When the interest payment dates of a bond are May 1 and November 1, and a
bond issue is sold on June 1, the amount of cash received by the issuer will be
a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.
d. increased by accrued interest from May 1 to June 1.

37. Theoretically, the costs of issuing bonds could be
a. expensed when incurred.
b. reported as a reduction of the bond liability.
c. debited to a deferred charge account and amortized over the life of the
bonds.
d. any of these.

38. The printing costs and legal fees associated with the issuance of bonds
should
a. be expensed when incurred.
b. be reported as a deduction from the face amount of bonds payable.
c. be accumulated in a deferred charge account and amortized over the life of
the bonds.
d. not be reported as an expense until the period the bonds mature or are
retired.

39. Treasury bonds should be shown on the balance sheet as
a. an asset.
b. a deduction from bonds payable issued to arrive at net bonds payable and
outstanding.
c. a reduction of stockholders' equity.
d. both an asset and a liability.

40. An early extinguishment of bonds payable, which were originally issued at a
premium, is made by purchase of the bonds between interest dates. At the
time of reacquisition
a. any costs of issuing the bonds must be amortized up to the purchase date.
b. the premium must be amortized up to the purchase date.
c. interest must be accrued from the last interest date to the purchase date.
d. all of these.

41. The generally accepted method of accounting for gains or losses from the
early extinguishment of debt treats any gain or loss as
a. an adjustment to the cost basis of the asset obtained by the debt issue.
b. 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.
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.

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42. "In-substance defeasance" is a term used to refer to an arrangement whereby
a. a company gets another company to cover its payments due on long-term
debt.
b. a governmental unit issues debt instruments to corporations.
c. a company provides for the future repayment of a long-term debt by placing
purchased securities in an irrevocable trust.
d. a company legally extinguishes debt before its due date.

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43. 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 at a given balance sheet date will be
reported as a long-term liability.
b. The balance of mortgage payable will remain a constant amount over the 10-
year period.
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.

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44. A debt instrument with no ready market is exchanged for property whose
fair market value is currently indeterminable. When such a transaction takes
place
a. the present value of the debt instrument must be approximated using an
imputed interest rate.
b. it should not be recorded on the books of either party until the fair market
value of the property becomes evident.
c. the board of directors of the entity receiving the property should estimate a
value for the property that will serve as a basis for the transaction.
d. the directors of both entities involved in the transaction should negotiate a
value to be assigned to the property.
45. When a note payable is issued for property, goods, or services, the present
value of the note is measured by
a. the fair value of the property, goods, or services.
b. the market value of the note.
c. using an imputed interest rate to discount all future payments on the note.
d. any of these.

46. When a note payable is exchanged for property, goods, or services, the stated
interest rate is presumed to be fair unless
a. no interest rate is stated.
b. the stated interest rate is unreasonable.
c. the stated face amount of the note is materially different from the current cash
sales price for similar items or from current market value of the note.
d. any of these.

47. Discount on Notes Payable is charged to interest expense
a. equally over the life of the note.
b. only in the year the note is issued.
c. using the effective-interest method.
d. only in the year the note matures.

48. Which of the following is an example of "off-balance-sheet financing"?
1. Non-consolidated subsidiary.
2. Special purpose entity.
3. Operating leases.
a. 1
b. 2
c. 3
d. All of these are examples of "off-balance-sheet financing."

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49. When a business enterprise enters into what is referred to as off-balance-
sheet financing, the company
a. is attempting to conceal the debt from shareholders by having no information
about the debt included in the balance sheet.
b. wishes to confine all information related to the debt to the income statement
and the statement of cash flow.
c. can enhance the quality of its financial position and perhaps permit credit to
be obtained more readily and at less cost.
d. is in violation of generally accepted accounting principles.

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50. Long-term debt that matures within one year and is to be converted into
stock should be reported
a. as a current liability.
b. in a special section between liabilities and stockholders equity.
c. as noncurrent.
d. as noncurrent and accompanied with a note explaining the method to be
used in its liquidation.

51. Which of the following must be disclosed relative to long-term debt
maturities and sinking fund requirements?
a. The present value of future payments for sinking fund requirements and long-
term debt maturities during each of the next five years.
b. The present value of scheduled interest payments on long-term debt during
each of the next five years.
c. The amount of scheduled interest payments on long-term debt during each of
the next five years.
d. The amount of future payments for sinking fund requirements and long-term
debt maturities during each of the next five years.

52. Note disclosures for long-term debt generally include all of the following
except
a. assets pledged as security.
b. call provisions and conversion privileges.
c. restrictions imposed by the creditor.
d. names of specific creditors.

53. The times interest earned ratio is computed by dividing
a. net income by interest expense.
b. income before taxes by interest expense.
c. income before income taxes and interest expense by interest expense.
d. net income and interest expense by interest expense.

54. The debt to total assets ratio is computed by dividing
a. current liabilities by total assets.
b. long-term liabilities by total assets.
c. total liabilities by total assets.
d. total assets by total liabilities.

*55. In a troubled debt restructuring in which the debt is continued with modified
terms and the carrying amount of the debt is less than the total future cash
flows,
a. a loss should be recognized by the debtor.
b. a gain should be recognized by the debtor.
c. a new effective-interest rate must be computed.
d. no interest expense or revenue should be recognized in the future.

*56. A troubled debt restructuring will generally result in a
a. loss by the debtor and a gain by the creditor.
b. loss by both the debtor and the creditor.
c. gain by both the debtor and the creditor.
d. gain by the debtor and a loss by the creditor.

*57. In a troubled debt restructuring in which the debt is settled by a transfer of
assets with a fair market value less than the carrying amount of the debt, the
debtor would recognize
a. no gain or loss on the settlement.
b. a gain on the settlement.
c. a loss on the settlement.
d. none of these.

terms, a gain should be recognized at the date of restructure, but no interest
expense should be recognized over the remaining life of the debt, whenever
the
a. carrying amount of the pre-restructure debt is less than the total future cash
flows.
b. carrying amount of the pre-restructure debt is greater than the total future
cash flows.
c. present value of the pre-restructure debt is less than the present value of the
future cash flows.
d. present value of the pre-restructure debt is greater than the present value of
the future cash flows.

terms and the carrying amount of the debt is less than the total future cash
flows, the creditor should
a. compute a new effective-interest rate.
b. not recognize a loss.
c. calculate its loss using the historical effective rate of the loan.
d. calculate its loss using the current effective rate of the loan.

21. a 27. d 33. d 39. b 45. d 51. d *57. b
22. a 28. d 34. d 40. d 46. d 52. d *58. b
23. b 29. d 35. c 41. d 47. c 53. c *59. c
24. a 30. d 36. d 42. c 48. d 54. c
25. d 31. b 37. d 43. c 49. c *55. c
26. a 32. a 38. c 44. a 50. d *56. d

Chapter 15:
21. The residual interest in a corporation belongs to the
a. management.
b. creditors.
c. common stockholders.
d. preferred stockholders.

22. The pre-emptive right of a common stockholder is the right to
a. share proportionately in corporate assets upon liquidation.
b. share proportionately in any new issues of stock of the same class.
c. receive cash dividends before they are distributed to preferred stockholders.
d. exclude preferred stockholders from voting rights.

23. The pre-emptive right enables a stockholder to
a. share proportionately in any new issues of stock of the same class.
b. receive cash dividends before other classes of stock without the pre-emptive
right.
c. sell capital stock back to the corporation at the option of the stockholder.
d. receive the same amount of dividends on a percentage basis as the preferred
stockholders.

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24. In a corporate form of business organization, legal capital is best defined as
a. the amount of capital the state of incorporation allows the company to
accumulate over its existence.
b. the par value of all capital stock issued.
c. the amount of capital the federal government allows a corporation to
generate.
d. the total capital raised by a corporation within the limits set by the Securities
and Exchange Commission.

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25. Stockholders of a business enterprise are said to be the residual owners. The
term residual owner means that shareholders
a. are entitled to a dividend every year in which the business earns a profit.
b. have the rights to specific assets of the business.
c. bear the ultimate risks and uncertainties and receive the benefits of
enterprise ownership.
d. can negotiate individual contracts on behalf of the enterprise.

26. Total stockholders' equity represents
a. a claim to specific assets contributed by the owners.
b. the maximum amount that can be borrowed by the enterprise.
c. a claim against a portion of the total assets of an enterprise.
d. only the amount of earnings that have been retained in the business.

27. A primary source of stockholders' equity is
a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by stockholders.
d. both income retained by the corporation and contributions by stockholders.

28. Stockholders' equity is generally classified into two major categories:
a. contributed capital and appropriated capital.
b. appropriated capital and retained earnings.
c. retained earnings and unappropriated capital.
d. earned capital and contributed capital.

29. The accounting problem in a lump sum issuance is the allocation of proceeds
between the classes of securities. An acceptable method of allocation is the
a. pro forma method.
b. proportional method.
c. incremental method.
d. either the proportional method or the incremental method.

30. When a corporation issues its capital stock in payment for services, the least
appropriate basis for recording the transaction is the
a. market value of the services received.
b. par value of the shares issued.
c. market value of the shares issued.
d. Any of these provides an appropriate basis for recording the transaction.

31. Direct costs incurred to sell stock such as underwriting costs should be
accounted for as
1. a reduction of additional paid-in capital.
2. an expense of the period in which the stock is issued.
3. an intangible asset.
a. 1
b. 2
c. 3
d. 1 or 3

32. A "secret reserve" will be created if
a. inadequate depreciation is charged to income.
b. a capital expenditure is charged to expense.
c. liabilities are understated.
d. stockholders' equity is overstated.

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33. 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. issued shares
c. unissued shares
d. outstanding shares

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34. Stock that has a fixed per-share amount printed on each stock certificate is
called
a. stated value stock.
b. fixed value stock.
c. uniform value stock.
d. par value stock.

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35. Which of the following is not a legal restriction related to profit distributions
by a corporation?
a. The amount distributed to owners must be in compliance with the state laws
governing corporations.
b. The amount distributed in any one year can never exceed the net income
reported for that year.
c. Profit distributions must be formally approved by the board of directors.
d. Dividends must be in full agreement with the capital stock contracts as to
preferences and participation.

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36. In January 2010, Finley Corporation, a newly formed company, issued 10,000
shares of its $10 par common stock for $15 per share. On July 1, 2010, Finley
Corporation reacquired 1,000 shares of its outstanding stock for $12 per
share. The acquisition of these treasury shares
a. decreased total stockholders' equity.
b. increased total stockholders' equity.
c. did not change total stockholders' equity.
d. decreased the number of issued shares.

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37. Treasury shares are
a. shares held as an investment by the treasurer of the corporation.
b. shares held as an investment of the corporation.
c. issued and outstanding shares.
d. issued but not outstanding shares.

38. 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. Paid-in capital in excess of par for the purchase price.
c. Treasury stock 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.
39. Gains" on sales of treasury stock (using the cost method) should be credited
to
a. paid-in capital from treasury stock.
b. capital stock.
c. retained earnings.
d. other income.

40. Porter Corp. purchased its own par value stock on January 1, 2010 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. 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.
c. retained earnings.
d. net income.

41. How should a "gain" from the sale of treasury stock be reflected when using
the cost method of recording treasury stock transactions?
a. As ordinary earnings shown on the income statement.
b. As paid-in capital from treasury stock transactions.
c. As an increase in the amount shown for common stock.
d. As an extraordinary item shown on the income statement.

42. Which of the following best describes a possible result of treasury stock
transactions by a corporation?
a. May increase but not decrease retained earnings.
b. May increase net income if the cost method is used.
c. May decrease but not increase retained earnings.
d. May decrease but not increase net income.

43. Which of the following features of preferred stock makes the security more
like debt than an equity instrument?
a. Participating
b. Voting
c. Redeemable
d. Noncumulative

44. The cumulative feature of preferred stock
a. limits the amount of cumulative dividends to the par value of the preferred
stock.
b. requires that dividends not paid in any year must be made up in a later year
before dividends are distributed to common shareholders.
c. means that the shareholder can accumulate preferred stock until it is equal to
the par value of common stock at which time it can be converted into
common stock.
d. enables a preferred stockholder to accumulate dividends until they equal the
par value of the stock and receive the stock in place of the cash dividends.

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45. According to the FASB, redeemable preferred stock should be
a. included with common stock.
b. included as a liability.
c. excluded from the stockholders equity heading.
d. included as a contra item in stockholders' equity.

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46. Cumulative preferred dividends in arrears should be shown in a
corporation's balance sheet as
a. an increase in current liabilities.
b. an increase in stockholders' equity.
c. a footnote.
d. an increase in current liabilities for the current portion and long-term liabilities
for the long-term portion.

47. At the date of the financial statements, common stock shares issued would
exceed common stock shares outstanding as a result of the
a. declaration of a stock split.
b. declaration of a stock dividend.
c. purchase of treasury stock.
d. payment in full of subscribed stock.

48. An entry is not made on the
a. date of declaration.
b. date of record.
c. date of payment.
d. An entry is made on all of these dates.

49. Cash dividends are paid on the basis of the number of shares
a. authorized.
b. issued.
c. outstanding.
d. outstanding less the number of treasury shares.

50. Which of the following statements about property dividends is not true?
a. A property dividend is usually in the form of securities of other companies.
b. A property dividend is also called a dividend in kind.
c. The accounting for a property dividend should be based on the carrying value
(book value) of the nonmonetary assets transferred.
d. All of these statements are true.

51. Houser Corporation owns 4,000,000 shares of stock in Baha Corporation. On
December 31, 2010, Houser distributed these shares of stock as a dividend to
its stockholders. This is an example of a
a. property dividend.
b. stock dividend.
c. liquidating dividend.
d. cash dividend.

52. A dividend which is a return to stockholders of a portion of their original
investments is a
a. liquidating dividend.
b. property dividend.
c. liability dividend.
d. participating dividend.

53. A mining company declared a liquidating dividend. The journal entry to
record the declaration must include a debit to
a. Retained Earnings.
b. a paid-in capital account.
c. Accumulated Depletion.
d. Accumulated Depreciation.

54. If management wishes to "capitalize" part of the earnings, it may issue a
a. cash dividend.
b. stock dividend.
c. property dividend.
d. liquidating dividend.

55. Which dividends do not reduce stockholders' equity?
a. Cash dividends
b. Stock dividends
c. Property dividends
d. Liquidating dividends

56. The declaration and issuance of a stock dividend larger than 25% of the
shares previously outstanding
a. increases common stock outstanding and increases total stockholders'
equity.
b. decreases retained earnings but does not change total stockholders' equity.
c. may increase or decrease paid-in capital in excess of par but does not
change total stockholders' equity.
d. increases retained earnings and increases total stockholders' equity.

57. Quirk Corporation issued a 100% stock dividend of its common stock which
had a par value of $10 before and after the dividend. At what amount should
retained earnings be capitalized for the additional shares issued?
a. There should be no capitalization of retained earnings.
b. Par value
c. Market value on the declaration date
d. Market value on the payment date

58. The issuer of a 5% common stock dividend to common stockholders
preferably should transfer from retained earnings to contributed capital an
amount equal to the
a. market value of the shares issued.
b. book value of the shares issued.
c. minimum legal requirements.
d. par or stated value of the shares issued.

59. At the date of declaration of a small common stock dividend, the entry should
not include
a. a credit to Common Stock Dividend Payable.
b. a credit to Paid-in Capital in Excess of Par.
c. a debit to Retained Earnings.
d. All of these are acceptable.

60. The balance in Common Stock Dividend Distributable should be reported as
a(n)
a. deduction from common stock issued.
b. addition to capital stock.
c. current liability.
d. contra current asset.

61. A feature common to both stock splits and stock dividends is
a. a transfer to earned capital of a corporation.
b. that there is no effect on total stockholders' equity.
c. an increase in total liabilities of a corporation.
d. a reduction in the contributed capital of a corporation.

62. What effect does the issuance of a 2-for-1 stock split have on each of the
following?
Par Value per Share Retained Earnings
a. No effect No effect
b. Increase No effect
c. Decrease No effect
d. Decrease Decrease

63. Which one of the following disclosures should be made in the equity section
of the balance sheet, rather than in the notes to the financial statements?
a. Dividend preferences
b. Liquidation preferences
c. Call prices
d. Conversion or exercise prices

64. The rate of return on common stock equity is calculated by dividing
a. net income less preferred dividends by average common stockholders
equity.
b. net income by average common stockholders equity.
c. net income less preferred dividends by ending common stockholders equity.
d. net income by ending common stockholders equity.

65. The payout ratio can be calculated by dividing
a. dividends per share by earnings per share.
b. cash dividends by net income less preferred dividends.
c. cash dividends by market price per share.
d. dividends per share by earnings per share and dividing cash dividends by net
income less preferred dividends.

66. Younger Company has outstanding both common stock and nonparticipating,
non-cumulative 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 preferred payable in preferred stock
when the market price of the preferred is equal to its par value.
b. 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.
c. the payment of a previously declared cash dividend on the common stock.
d. a 2-for-1 split of the common stock.

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67. Assume common stock is the only class of stock outstanding in the Manley
Corporation. Total stockholders' equity divided by the number of common
stock shares outstanding is called
a. book value per share.
b. par value per share.
c. stated value per share.
d. market value per share.

*68. Dividends are not paid on
a. noncumulative preferred stock.
b. nonparticipating preferred stock.
c. treasury common stock.
d. Dividends are paid on all of these.

*69. Noncumulative preferred dividends in arrears
a. are not paid or disclosed.
b. must be paid before any other cash dividends can be distributed.
c. are disclosed as a liability until paid.
d. are paid to preferred stockholders if sufficient funds remain after payment of
the current preferred dividend.

*70. How should cumulative preferred dividends in arrears be shown in a
corporation's statement of financial position?
a. Note disclosure
b. Increase in stockholders' equity
c. Increase in current liabilities
d. Increase in current liabilities for the amount expected to be declared within
the year or operating cycle, and increase in long-term liabilities for the
balance

21. c 29. d 37. d 45. b 53. b 61. b *69. a
22. b 30. b 38. c 46. c 54. b 62. c *70. a
23. a 31. a 39. a 47. c 55. b 63. b
24. b 32. b 40. a 48. b 56. b 64. a
25. c 33. a 41. b 49. c 57. b 65. b
26. c 34. d 42. c 50. c 58. a 66. c
27. d 35. b 43. c 51. a 59. a 67. a
28. d 36. a 44. b 52. a 60. b *68. c

Chapter 16:

MULTIPLE CHOICEDilutive Securities, Conceptual

21. Convertible bonds
a. have priority over other indebtedness.
b. are usually secured by a first or second mortgage.
c. pay interest only in the event earnings are sufficient to cover the interest.
d. may be exchanged for equity securities.

22. The conversion of bonds is most commonly recorded by the
a. incremental method.
b. proportional method.
c. market value method.
d. book value method.

23. When a bond issuer offers some form of additional consideration (a
sweetener) to induce conversion, the sweetener is accounted for as a(n)
a. extraordinary item.
b. expense.
c. loss.
d. none of these.

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24. Corporations issue convertible debt for two main reasons. One is the desire
to raise equity capital that, assuming conversion, will arise when the original
debt is converted. The other is
a. the ease with which convertible debt is sold even if the company has a poor
credit rating.
b. the fact that equity capital has issue costs that convertible debt does not.
c. that many corporations can obtain financing at lower rates.
d. that convertible bonds will always sell at a premium.

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25. When convertible debt is retired by the issuer, any material difference
between the cash acquisition price and the carrying amount of the debt
should be
a. reflected currently in income, but not as an extraordinary item.
b. reflected currently in income as an extraordinary item.
c. treated as a prior period adjustment.
d. treated as an adjustment of additional paid-in capital.

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26. The conversion of preferred stock into common 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. reflected currently in income as an extraordinary item.
c. treated as a prior period adjustment.
d. treated as a direct reduction of retained earnings.

27. The conversion of preferred stock may be recorded by the
a. incremental method.
b. book value method.
c. market value method.
d. par value method.

28. When the cash proceeds from a bond issued with detachable stock warrants
exceed the sum of the par value of the bonds and the fair market value of the
warrants, the excess should be credited to
a. additional paid-in capital from stock warrants.
b. retained earnings.
c. a liability account.
d. premium on bonds payable.

29. Proceeds from an issue of debt securities having stock warrants should not
be allocated between debt and equity features when
a. the market value of the warrants is not readily available.
b. exercise of the warrants within the next few fiscal periods seems remote.
c. the allocation would result in a discount on the debt security.
d. the warrants issued with the debt securities are nondetachable.

30. Stock warrants outstanding should be classified as
a. liabilities.
b. reductions of capital contributed in excess of par value.
c. assets.
d. none of these.

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31. A corporation issues bonds with detachable warrants. The amount to be
recorded as paid-in capital is preferably
a. zero.
b. calculated by the excess of the proceeds over the face amount of the bonds.
c. equal to the market value of the warrants.
d. based on the relative market values of the two securities involved.

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32. The distribution of stock rights to existing common stockholders will
increase paid-in capital at the
Date of Issuance Date of Exercise
of the Rights of the Rights
a. Yes Yes
b. Yes No
c. No Yes
d. No No

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33. The major difference between convertible debt and stock warrants is that
upon exercise of the warrants
a. the stock is held by the company for a defined period of time before they are
issued to the warrant holder.
b. the holder has to pay a certain amount of cash to obtain the shares.
c. the stock involved is restricted and can only be sold by the recipient after a
set period of time.
d. no paid-in capital in excess of par can be a part of the transaction.

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34. Which of the following is not a characteristic of a noncompensatory stock
option plan?
a. Substantially all full-time employees may participate on an equitable basis.
b. The plan offers no substantive option feature.
c. Unlimited time period permitted for exercise of an option as long as the holder
is still employed by the company.
d. Discount from the market price of the stock no greater than would be
reasonable in an offer of stock to stockholders or others.

35. The date on which to measure the compensation element in a stock option
granted to a corporate employee ordinarily is the date on which the
employee
a. is granted the option.
b. has performed all conditions precedent to exercising the option.
c. may first exercise the option.
d. exercises the option.

36. Compensation expense resulting from a compensatory stock option plan is
generally
a. recognized in the period of exercise.
b. recognized in the period of the grant.
c. allocated to the periods benefited by the employee's required service.
d. allocated over the periods of the employee's service life to retirement.

37. The date on which total compensation expense is computed in a stock option
plan is the date
a. of grant.
b. of exercise.
c. that the market price coincides with the option price.
c. that the market price exceeds the option price.

38. Which of the following is not a characteristic of a noncompensatory stock
purchase plan?
a. It is open to almost all full-time employees.
b. The discount from market price is small.
c. The plan offers no substantive option feature.
d. All of these are characteristics.

*39. Under the intrinsic value method, compensation expense resulting from an
incentive stock option is generally
a. not recognized because no excess of market price over the option price
exists at the date of grant.
b. recognized in the period of the grant.
c. allocated to the periods benefited by the employee's required service.
d. recognized in the period of exercise.

*40. For stock appreciation rights, the measurement date for computing
compensation is the date
a. the rights mature.
b. the stocks price reaches a predetermined amount.
c. of grant.
d. of exercise.

*41. An executive pays no taxes at time of exercise in a(an)
a. stock appreciation rights plan.
b. incentive stock option plan.
c. nonqualified stock option plan.
d. Taxes would be paid in all of these.

*42. A company estimates the fair value of SARs, using an option-pricing model,
for
a. share-based equity awards.
b. share-based liability awards.
c. both equity awards and liability awards.
d. neither equity awards or liability awards.

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
21. d 25. a 29. d 33. b 37. a *41. b
22. d 26. d 30. d 34. c 38. d *42. b
23. b 27. b 31. d 35. a *39. c
24. c 28. d 32. c 36. c *40. d

82. With respect to the computation of earnings per share, which of the following
would be most indicative of a simple capital structure?
a. Common stock, preferred stock, and convertible securities outstanding in lots
of even thousands
b. Earnings derived from one primary line of business
c. Ownership interest consisting solely of common stock
d. None of these

83. In computing earnings per share for a simple capital structure, if the
preferred stock is cumulative, the amount that should be deducted as an
adjustment to the numerator (earnings) is the
a. preferred dividends in arrears.
b. preferred dividends in arrears times (one minus the income tax rate).
c. annual preferred dividend times (one minus the income tax rate).
d. none of these.

84. In computations of weighted average of shares outstanding, when a stock
dividend or stock split occurs, the additional shares are
a. weighted by the number of days outstanding.
b. weighted by the number of months outstanding.
c. considered outstanding at the beginning of the year.
d. considered outstanding at the beginning of the earliest year reported.

85. What effect will the acquisition of treasury stock have on stockholders'
equity and earnings per share, respectively?
a. Decrease and no effect
b. Increase and no effect
c. Decrease and increase
d. Increase and decrease

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86. Due to the importance of earnings per share information, it is required to be
reported by all
Public Companies Nonpublic Companies
a. Yes Yes
b. Yes No
c. No No
d. No Yes

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87. A convertible bond issue should be included in the diluted earnings per share
computation as if the bonds had been converted into common stock, if the
effect of its inclusion is
Dilutive Antidilutive
a. Yes Yes
b. Yes No
c. No Yes
d. No No

88. When computing diluted earnings per share, convertible bonds are
a. ignored.
b. assumed converted whether they are dilutive or antidilutive.
c. assumed converted only if they are antidilutive.
d. assumed converted only if they are dilutive.

89. Dilutive convertible securities must be used in the computation of
a. basic earnings per share only.
b. diluted earnings per share only.
c. diluted and basic earnings per share.
d. none of these.

90. 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 (one minus the income tax rate)
c. Annual preferred dividend times the income tax rate
d. Annual preferred dividend divided by the income tax rate

91. In the diluted earnings per share computation, the treasury stock method is
used for options and warrants to reflect assumed reacquisition of common
stock at the average market price during the period. If the exercise price of
the options or warrants exceeds the average market price, the computation
would
a. fairly present diluted earnings per share on a prospective basis.
b. fairly present the maximum potential dilution of diluted earnings per share on
a prospective basis.
c. reflect the excess of the number of shares assumed issued over the number
of shares assumed reacquired as the potential dilution of earnings per share.
d. be antidilutive.

92. In applying the treasury stock method to determine the dilutive effect of
stock options and warrants, the proceeds assumed to be received upon
exercise of the options and warrants
a. are used to calculate the number of common shares repurchased at the
average market price, when computing diluted earnings per share.
b. are added, net of tax, to the numerator of the calculation for diluted earnings
per share.
c. are disregarded in the computation of earnings per share if the exercise price
of the options and warrants is less than the ending market price of common
stock.
d. none of these.

93. When applying the treasury stock method for diluted earnings per share, the
market price of the common stock used for the repurchase is the
a. price at the end of the year.
b. average market price.
c. price at the beginning of the year.
d. none of these.

94. Antidilutive securities
a. should be included in the computation of diluted earnings per share but not
basic earnings per share.
b. are those whose inclusion in earnings per share computations would cause
basic earnings per share to exceed diluted earnings per share.
c. include stock options and warrants whose exercise price is less than the
average market price of common stock.
d. should be ignored in all earnings per share calculations.

*95. Assume there are two dilutive convertible securities. The one that should be
used first to recalculate earnings per share is the security with the
a. greater earnings adjustment.
b. greater earnings per share adjustment.
c. smaller earnings adjustment.
d. smaller earnings per share adjustment.

Multiple Choice AnswersEarnings Per ShareConceptual
82. c 84. d 86. b 88. d 90. a 92. a 94. d
83. d 85. c 87. b 89. b 91. d 93. b *95. d

Chapter 17:

21. Which of the following is not a debt security?
a. Convertible bonds
b. Commercial paper
c. Loans receivable
d. All of these are debt securities.

22. A correct valuation is
a. available-for-sale at amortized cost.
b. held-to-maturity at amortized cost.
c. held-to-maturity at fair value.
d. none of these.
23. Securities which could be classified as held-to-maturity are
a. redeemable preferred stock.
b. warrants.
c. municipal bonds.
d. treasury stock.

24. Unrealized holding gains or losses which are recognized in income are from
securities classified as
a. held-to-maturity.
b. available-for-sale.
c. trading.
d. none of these.

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25. When an investor's accounting period ends on a date that does not coincide
with an interest receipt date for bonds held as an investment, the investor
must
a. make an adjusting entry to debit Interest Receivable and to credit Interest
Revenue for the amount of interest accrued since the last interest receipt
date.
b. notify the issuer and request that a special payment be made for the
appropriate portion of the interest period.
c. make an adjusting entry to debit Interest Receivable and to credit Interest
Revenue for the total amount of interest to be received at the next interest
receipt date.
d. do nothing special and ignore the fact that the accounting period does not
coincide with the bond's interest period.

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26. Debt securities that are accounted for at amortized cost, not fair value, are
a. held-to-maturity debt securities.
b. trading debt securities.
c. available-for-sale debt securities.
d. never-sell debt securities.

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27. 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. held-to-maturity debt securities.
b. trading debt securities.
c. available-for-sale debt securities.
d. never-sell debt securities.

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28. Use of the effective-interest method in amortizing bond premiums and
discounts results in
a. a greater amount of interest income over the life of the bond issue than would
result from use of the straight-line method.
b. a varying amount being recorded as interest income from period to period.
c. a variable rate of return on the book value of the investment.
d. a smaller amount of interest income over the life of the bond issue than would
result from use of the straight-line method.

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29. Equity securities acquired by a corporation which are accounted for by
recognizing unrealized holding gains or losses as other comprehensive
income and as a separate component of stockholders' equity are
a. available-for-sale securities where a company has holdings of less than 20%.
b. trading securities where a company has holdings of less than 20%.
c securities where a company has holdings of between 20% and 50%.
d. securities where a company has holdings of more than 50%.
30. 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.

31. Held-to-maturity securities are reported at
a. acquisition cost.
b. acquisition cost plus amortization of a discount.
c. acquisition cost plus amortization of a premium.
d. fair value.

32. Watt Co. purchased $300,000 of bonds for $315,000. If Watt intends to hold
the securities to maturity, the entry to record the investment includes
a. a debit to Held-to-Maturity Securities at $300,000.
b. a credit to Premium on Investments of $15,000.
c. a debit to Held-to-Maturity Securities at $315,000.
d. none of these.

33. Which of the following is not correct in regard to trading securities?
a. They are held with the intention of selling them in a short period of time.
b. Unrealized holding gains and losses are reported as part of net income.
c. Any discount or premium is not amortized.
d. All of these are correct.

34. In accounting for investments in debt securities that are classified as trading
securities,
a. a discount is reported separately.
b. a premium is reported separately.
c. any discount or premium is not amortized.
d. none of these.

35. Investments in debt securities are generally recorded at
a. cost including accrued interest.
b. maturity value.
c. cost including brokerage and other fees.
d. maturity value with a separate discount or premium account.

36. Jordan 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. 10 periods and 10% from the present value of 1 table.
b. 10 periods and 8% from the present value of 1 table.
c. 20 periods and 5% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.

37. Investments in debt securities should be recorded on the date of acquisition
at
a. lower of cost or market.
b. market value.
c. market value plus brokerage fees and other costs incident to the purchase.
d. face value plus brokerage fees and other costs incident to the purchase.

38. An available-for-sale debt security is purchased at a discount. The entry to
record the amortization of the discount includes a
a. debit to Available-for-Sale Securities.
b. debit to the discount account.
c. debit to Interest Revenue.
d. none of these.

39. APB Opinion No. 21 specifies that, regarding the amortization of a premium
or discount on a debt security, the
a. effective-interest method of allocation must be used.
b. straight-line method of allocation must be used.
c. effective-interest method of allocation should be used but other methods can
be applied if there is no material difference in the results obtained.
d. par value method must be used and therefore no allocation is necessary.

40. Which of the following is correct about the effective-interest method of
amortization?
a. The effective interest method applied to investments in debt securities is
different from that applied to bonds payable.
b. Amortization of a discount decreases from period to period.
c. Amortization of a premium decreases from period to period.
d. The effective-interest method produces a constant rate of return on the
book value of the investment from period to period.

41. When investments in debt securities are purchased between interest
payment dates, preferably the
a. securities account should include accrued interest.
b. accrued interest is debited to Interest Expense.
c. accrued interest is debited to Interest Revenue.
d. accrued interest is debited to Interest Receivable.

42. Which of the following is not generally correct about recording a sale of a
debt security before maturity date?
a. Accrued interest will be received by the seller even though it is not an interest
payment date.
b. An entry must be made to amortize a discount to the date of sale.
c. The entry to amortize a premium to the date of sale includes a credit to the
Premium on Investments in Debt Securities.
d. A gain or loss on the sale is not extraordinary.

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43. When a company has acquired a "passive interest" in another corporation,
the acquiring company should account for the investment
a. by using the equity method.
b. by using the fair value method.
c. by using the effective interest method.
d. by consolidation.

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44. Santo 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. No Effect Decrease
b. Increase Decrease
c. No Effect No Effect
d. Decrease No Effect

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45. 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. Income Income
b. A reduction of the investment A reduction of the investment
c. Income A reduction of the investment
d. A reduction of the investment Income

46. When a company holds between 20% and 50% of the outstanding stock of an
investee, which of the following statements applies?
a. The investor should always use the equity method to account for its
investment.
b. The investor should use the equity method to account for its investment unless
circum-stances indicate that it is unable to exercise "significant influence" over
the investee.
c. The investor must use the fair value method unless it can clearly demonstrate
the ability to exercise "significant influence" over the investee.
d. The investor should always use the fair value method to account for its
investment.

47. If the parent company owns 90% of the subsidiary company's outstanding
common stock, the company should generally account for the income of the
subsidiary under the
a. cost method.
b. fair value method.
c. divesture method.
d. equity method.

48. Koehn Corporation accounts for its investment in the common stock of Sells
Company under the equity method. Koehn Corporation should ordinarily
record a cash dividend received from Sells as
a. a reduction of the carrying value of the investment.
b. additional paid-in capital.
c. an addition to the carrying value of the investment.
d. dividend income.

49. Under the equity method of accounting for investments, an investor
recognizes its share of the earnings in the period in which the
a. investor sells the investment.
b. investee declares a dividend.
c. investee pays a dividend.
d. earnings are reported by the investee in its financial statements.
50. Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2010,
Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd
mistakenly recorded these transactions using the fair value method rather
than the equity method of accounting. What effect would this have on the
investment account, net income, and retained earnings, respectively?
a. Understate, overstate, overstate
b. Overstate, understate, understate
c. Overstate, overstate, overstate
d. Understate, understate, understate

51. Dublin Co. holds a 30% stake in Club Co. which was purchased in 2011 at a
cost of $3,000,000. After applying the equity method, the Investment in Club
Co. account has a balance of $3,040,000. At December 31, 2011 the fair value
of the investment is $3,120,000. Which of the following values is acceptable
for Dublin to use in its balance sheet at December 31, 2011?
I. $3,000,000
II. $3,040,000
III. $3,120,000
a. I, II, or III.
b. I or II only.
c. II only.
d. II or III only.

52. The fair value option allows a company to
a. value its own liabilities at fair value.
b. record income when the fair value of its bonds increases.
c. report most financial instruments at fair value by recording gains and losses
as a separate component of stockholders equity.
d. All of the above are true of the fair value option.

53. Impairments are
a. based on discounted cash flows for securities.
b. recognized as a realized loss if the impairment is judged to be temporary.
c. based on fair value for available-for-sale investments and on negotiated
values for held-to-maturity investments.
d. evaluated at each reporting date for every investment.

54. A reclassification adjustment is reported in the
a. income statement as an Other Revenue or Expense.
b. stockholders equity section of the balance sheet.
c. statement of comprehensive income as other comprehensive income.
d. statement of stockholders equity.

55. When an investment in a held-to-maturity security is transferred to an
available-for-sale security, the carrying value assigned to the available-for-
sale security should be
a. its original cost.
b. its fair value at the date of the transfer.
c. the lower of its original cost or its fair value at the date of the transfer.
d. the higher of its original cost or its fair value at the date of the transfer.

56. When an investment in an available-for-sale security is transferred to trading
because the company anticipates selling the stock in the near future, the
carrying value assigned to the investment upon entering it in the trading
portfolio should be
a. its original cost.
b. its fair value at the date of the transfer.
c. the higher of its original cost or its fair value at the date of the transfer.
d. the lower of its original cost or its fair value at the date of the transfer.

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57. A debt security is transferred from one category to another. Generally
acceptable accounting principles require that for this particular
reclassification (1) the security be transferred at fair value at the date of
transfer, and (2) the unrealized gain or loss at the date of transfer currently
carried as a separate component of stockholders' equity be amortized over
the remaining life of the security. What type of transfer is being described?
a. Transfer from trading to available-for-sale
b. Transfer from available-for-sale to trading
c. Transfer from held-to-maturity to available-for-sale
d. Transfer from available-for-sale to held-to-maturity

58. Gains trading or cherry picking involves
a. moving securities whose value has decreased since acquisition from
available-for-sale to held-to-maturity in order to avoid reporting losses.
b. reporting investment securities at fair value but liabilities at amortized cost.
c. selling securities whose value has increased since acquisition while holding
those whose value has decreased since acquisition.
d. All of the above are considered methods of gains trading or cherry picking.

59. Transfers between categories
a. result in companies omitting recognition of fair value in the year of the
transfer.
b. are accounted for at fair value for all transfers.
c. are considered unrealized and unrecognized if transferred out of held-to-
maturity into trading.
d. will always result in an impact on net income.

*60. Companies that attempt to exploit inefficiencies in various derivative
markets by attempting to lock in profits by simultaneously entering into
transactions in two or more markets are called
a. arbitrageurs.
b. gamblers.
c. hedgers.
d. speculators.

*61. All of the following statements regarding accounting for derivatives are
correct except that
a. they should be recognized in the financial statements as assets and liabilities.
b. they should be reported at fair value.
c. gains and losses resulting from speculation should be deferred.
d. gains and losses resulting from hedge transactions are reported in different
ways, depending upon the type of hedge.

*62. All of the following are characteristics of a derivative financial instrument except
the instrument
a. has one or more underlyings and an identified payment provision.
b. requires a large investment at the inception of the contract.
c. requires or permits net settlement.
d. All of these are characteristics.

63. Which of the following are considered equity securities?
I. Convertible debt.
II. Redeemable preferred stock.
III. Call or put options.
a. I and II only.
b. I and III only.
c. II only.
d. III only.

*64. The accounting for fair value hedges records the derivative at its
a. amortized cost.
b. carrying value.
c. fair value.
d. historical cost.

*65. Gains or losses on cash flow hedges are
a. ignored completely.
b. recorded in equity, as part of other comprehensive income.
c. reported directly in net income.
d. reported directly in retained earnings.

*66. An option to convert a convertible bond into shares of common stock is a(n)
a. embedded derivative.
b. host security.
c. hybrid security.
d. fair value hedge.

*67. All of the following are requirements for disclosures related to financial
instruments except
a. disclosing the fair value and related carrying value of the instruments.
b. distinguishing between financial instruments held or issued for purposes
other than trading.
c. combining or netting the fair value of separate financial instruments.
d. displaying as a separate classification of other comprehensive income the
net gain/loss on derivative instruments designated in cash flow hedges.

68. A variable-interest entity has
a. insufficient equity investment at risk.
b. stockholders who have decision-making rights.
c. stockholders who absorb the losses or receive the benefits of a normal
stockholder.
d. All of the above are characteristics of a variable-interest entity.

69.Under U.S. GAAP, which of the following models may be used to determine if an
investment is consolidated?
Risk-and-reward model Voting-interest approach
a. Yes No
b. No Yes
c. No No
d. Yes Yes

21. c 28. b 35. c 42. c 49. d 56. b *63. d
22. b 29. a 36. d 43. b 50. d 57. d *64. c
23. c 30. d 37. c 44. a 51. d 58. c *65. b
24. c 31. b 38. a 45. c 52. a 59. b *66. a
25. a 32. c 39. c 46. b 53. d *60. a *67. c
26. a 33. d 40. d 47. d 54. c *61. c *68. a
27. c 34. c 41. c 48. a 55. b *62. b *69. d

Chapter 18:


21. The revenue recognition principle provides that revenue is recognized when
a. it is realized.
b. it is realizable.
c. it is realized or realizable and it is earned.
d. none of these.

22. When goods or services are exchanged for cash or claims to cash
(receivables), revenues are
a. earned.
b. realized.
c. recognized.
d. all of these.

23. When the entity has substantially accomplished what it must do to be
entitled to the benefits represented by the revenues, revenues are
a. earned.
b. realized.
c. recognized.
d. all of these.

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24. Which of the following is not an accurate representation concerning revenue
recognition?
a. Revenue from selling products is recognized at the date of sale, usually
interpreted to mean the date of delivery to customers.
b. Revenue from services rendered is recognized when cash is received or
when services have been performed.
c. Revenue from permitting others to use enterprise assets is recognized as
time passes or as the assets are used.
d. Revenue from disposing of assets other than products is recognized at the
date of sale.

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25. The process of formally recording or incorporating an item in the financial
statements of an entity is
a. allocation.
b. articulation.
c. realization.
d. recognition.

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26. Dot Point, Inc. is a retailer of washers and dryers and offers a three-year
service contract on each appliance sold. Although Dot Point sells the
appliances on an installment basis, all service contracts are cash sales at the
time of purchase by the buyer. Collections received for service contracts
should be recorded as
a. service revenue.
b. deferred service revenue.
c. a reduction in installment accounts receivable.
d. a direct addition to retained earnings.

27. Which of the following is not a reason why revenue is recognized at time of
sale?
a. Realization has occurred.
b. The sale is the critical event.
c. Title legally passes from seller to buyer.
d. All of these are reasons to recognize revenue at time of sale.

28. An alternative available when the seller is exposed to continued risks of
ownership through return of the product is
a. recording the sale, and accounting for returns as they occur in future periods.
b. not recording a sale until all return privileges have expired.
c. recording the sale, but reducing sales by an estimate of future returns.
d. all of these.

29. A sale should not be recognized as revenue by the seller at the time of sale if
a. payment was made by check.
b. the selling price is less than the normal selling price.
c. the buyer has a right to return the product and the amount of future returns
cannot be reasonably estimated.
d. none of these.

30. The FASB concluded that if a company sells its product but gives the buyer
the right to return the product, revenue from the sales transaction shall be
recognized at the time of sale only if all of six conditions have been met.
Which of the following is not one of these six conditions?
a. The amount of future returns can be reasonably estimated.
b. The seller's price is substantially fixed or determinable at time of sale.
c. The buyer's obligation to the seller would not be changed in the event of theft
or damage of the product.
d. The buyer is obligated to pay the seller upon resale of the product.

31. In selecting an accounting method for a newly contracted long-term
construction project, the principal factor to be considered should be
a. the terms of payment in the contract.
b. the degree to which a reliable estimate of the costs to complete and extent of
progress toward completion is practicable.
c. the method commonly used by the contractor to account for other long-term
construc-tion contracts.
d. the inherent nature of the contractor's technical facilities used in construction.

32. The percentage-of-completion method must be used when certain conditions
exist. Which of the following is not one of those necessary conditions?
a. Estimates of progress toward completion, revenues, and costs are
reasonably dependable.
b. The contractor can be expected to perform the contractual obligation.
c. The buyer can be expected to satisfy some of the obligations under the
contract.
d. The contract clearly specifies the enforceable rights of the parties, the
consideration to be exchanged, and the manner and terms of settlement.

33. When work to be done and costs to be incurred on a long-term contract can
be estimated dependably, which of the following methods of revenue
recognition is preferable?
a. Installment-sales method
b. Percentage-of-completion method
c. Completed-contract method
d. None of these

34. How should the balances of progress billings and construction in process be
shown at reporting dates prior to the completion of a long-term contract?
a. Progress billings as deferred income, construction in progress as a deferred
expense.
b. Progress billings as income, construction in process as inventory.
c. Net, as a current asset if debit balance, and current liability if credit balance.
d. Net, as income from construction if credit balance, and loss from construction
if debit balance.

35. In accounting for a long-term construction-type contract using the
percentage-of-completion method, the gross profit recognized during the
first year would be the estimated total gross profit from the contract,
multiplied by the percentage of the costs incurred during the year to the
a. total costs incurred to date.
b. total estimated cost.
c. unbilled portion of the contract price.
d. total contract price.
36. How should earned but unbilled revenues at the balance sheet date on a
long-term construction contract be disclosed if the percentage-of-completion
method of revenue recognition is used?
a. As construction in process in the current asset section of the balance sheet.
b. As construction in process in the noncurrent asset section of the balance
sheet.
c. As a receivable in the noncurrent asset section of the balance sheet.
d. In a note to the financial statements until the customer is formally billed for
the portion of work completed.

37. The principal disadvantage of using the percentage-of-completion method of
recognizing revenue from long-term contracts is that it
a. is unacceptable for income tax purposes.
b. gives results based upon estimates which may be subject to considerable
uncertainty.
c. is likely to assign a small amount of revenue to a period during which much
revenue was actually earned.
d. none of these.

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38. One of the more popular input measures used to determine the progress
toward completion in the percentage-of-completion method is
a. revenue-percentage basis.
b. cost-percentage basis.
c. progress completion basis.
d. cost-to-cost basis.

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39. The principal advantage of the completed-contract method is that
a. reported revenue is based on final results rather than estimates of
unperformed work.
b. it reflects current performance when the period of a contract extends into
more than one accounting period.
c. it is not necessary to recognize revenue at the point of sale.
d. a greater amount of gross profit and net income is reported than is the case
when the percentage-of-completion method is used.

40. Under the completed-contract method
a. revenue, cost, and gross profit are recognized during the production cycle.
b. revenue and cost are recognized during the production cycle, but gross profit
recognition is deferred until the contract is completed.
c. revenue, cost, and gross profit are recognized at the time the contract is
completed.
d. none of these.

41. Cost estimates on a long-term contract may indicate that a loss will result on
completion of the entire contract. In this case, the entire expected loss should
be
a. recognized in the current period, regardless of whether the percentage-of-
completion or completed-contract method is employed.
b. recognized in the current period under the percentage-of-completion method,
but the completed-contract method should defer recognition of the loss to the
time when the contract is completed.
c. recognized in the current period under the completed-contract method, but
the percentage-of-completion method should defer the loss until the contract
is completed.
d. deferred and recognized when the contract is completed, regardless of
whether the percentage-of-completion or completed-contract method is
employed.

42. Cost estimates at the end of the second year indicate a loss will result on
completion of the entire contract. Which of the following statements is
correct?
a. Under the completed-contract method, the loss is not recognized until the
year the construction is completed.
b. Under the percentage-of-completion method, the gross profit recognized in
the first year must not be changed.
c. Under the completed-contract method, when the billings exceed the
accumulated costs, the amount of the estimated loss is reported as a current
liability.
d. Under the completed-contract method, when the Construction in Process
balance exceeds the billings, the estimated loss is added to the accumulated
costs.

43. The criteria for recognition of revenue at the completion of production of
precious metals and farm products include
a. an established market with quoted prices.
b. low additional costs of completion and selling.
c. units are interchangeable.
d. all of these.

44. In certain cases, revenue is recognized at the completion of production even
though no sale has been made. Which of the following statements is not true?
a. Examples involve precious metals or farm equipment.
b. The products possess immediate marketability at quoted prices.
c. No significant costs are involved in selling the product.
d. All of these statements are true.

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45. For which of the following products is it appropriate to recognize revenue at
the completion of production even though no sale has been made?
a. Automobiles
b. Large appliances
c. Single family residential units
d. Precious metals

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46. When there is a significant increase in the estimated total contract costs but
the increase does not eliminate all profit on the contract, which of the
following is correct?
a. Under both the percentage-of-completion and the completed-contract
methods, the estimated cost increase requires a current period adjustment of
excess gross profit recognized on the project in prior periods.
b. Under the percentage-of-completion method only, the estimated cost
increase requires a current period adjustment of excess gross profit
recognized on the project in prior periods.
c. Under the completed-contract method only, the estimated cost increase
requires a current period adjustment of excess gross profit recognized on the
project in prior periods.
d. No current period adjustment is required.

47. Deferred gross profit on installment sales is generally treated as a(n)
a. deduction from installment accounts receivable.
b. deduction from installment sales.
c. unearned revenue and classified as a current liability.
d. deduction from gross profit on sales.

48. The installment-sales method of recognizing profit for accounting purposes
is acceptable if
a. collections in the year of sale do not exceed 30% of the total sales price.
b. an unrealized profit account is credited.
c. collection of the sales price is not reasonably assured.
d. the method is consistently used for all sales of similar merchandise.

49. The method most commonly used to report defaults and repossessions is
a. provide no basis for the repossessed asset thereby recognizing a loss.
b. record the repossessed merchandise at fair value, recording a gain or loss if
appropriate.
c. record the repossessed merchandise at book value, recording no gain or
loss.
d. none of these.

50. Under the installment-sales method,
a. revenue, costs, and gross profit are recognized proportionate to the cash that
is received from the sale of the product.
b. gross profit is deferred proportionate to cash uncollected from sale of the
product, but total revenues and costs are recognized at the point of sale.
c. gross profit is not recognized until the amount of cash received exceeds the
cost of the item sold.
d. revenues and costs are recognized proportionate to the cash received from
the sale of the product, but gross profit is deferred until all cash is received.

S
51. The realization of income on installment sales transactions involves
a. recognition of the difference between the cash collected on installment sales
and the cash expenses incurred.
b. deferring the net income related to installment sales and recognizing the
income as cash is collected.
c. deferring gross profit while recognizing operating or financial expenses in the
period incurred.
d. deferring gross profit and all additional expenses related to installment sales
until cash is ultimately collected.

P
52. A manufacturer of large equipment sells on an installment basis to customers
with questionable credit ratings. Which of the following methods of revenue
recognition is least likely to overstate the amount of gross profit reported?
a. At the time of completion of the equipment (completion of production method)
b. At the date of delivery (sales method)
c. The installment-sales method
d. The costrecovery method

53. A seller is properly using the cost-recovery method for a sale. Interest will be
earned on the future payments. Which of the following statements is not
correct?
a. After all costs have been recovered, any additional cash collections are
included in income.
b. Interest revenue may be recognized before all costs have been recovered.
c. The deferred gross profit is offset against the related receivable on the
balance sheet.
d. Subsequent income statements report the gross profit as a separate item of
revenue when it is recognized as earned.
54. Under the cost-recovery method of revenue recognition,
a. income is recognized on a proportionate basis as the cash is received on the
sale of the product.
b. income is recognized when the cash received from the sale of the product is
greater than the cost of the product.
c. income is recognized immediately.
d. none of these.

55. Winser, Inc. is engaged in extensive exploration for water in Utah. If, upon
discovery of water, Winser does not recognize any revenue from water sales
until the sales exceed the costs of exploration, the basis of revenue
recognition being employed is the
a. production basis.
b. cash (or collection) basis.
c. sales (or accrual) basis.
d. cost recovery basis.

56. The deposit method of revenue recognition is used when
a. the product can be marketed at quoted prices and units are interchangeable.
b. cash is received before the sales transaction is complete.
c. the contract is short-term or the percentage-of-completion method cant be
used.
d. there are no significant costs of distribution.

57. The cost-recovery method
a. is prohibited under current GAAP due to its conservative nature.
b. requires a company to defer profit recognition until all cash payments are
received from the buyer.
c. is used by sellers when there is a reasonable basis for estimating
collectibility.
d. recognizes total revenue and total cost of goods sold in the period of sale.

*58. Types of franchising arrangements include all of the following except
a. service sponsor-retailer.
b. wholesaler-service sponsor.
c. manufacturer-wholesaler.
d. wholesaler-retailer.

*59. In consignment sales, the consignee
a. records the merchandise as an asset on its books.
b. records a liability for the merchandise held on consignment.
c. recognizes revenue when it ships merchandise to the consignor.
d. prepares an account report for the consignor which shows sales, expenses,
and cash receipts.

*60. Some of the initial franchise fee may be allocated to
a. continuing franchise fees.
b. interest revenue on the future installments.
c. options to purchase the franchisee's business.
d. All of these may reduce the amount of the initial franchise fee that is
recognized as revenue.

*61. Continuing franchise fees should be recorded by the franchisor
a. as revenue when earned and receivable from the franchisee.
b. as revenue when received.
c. in accordance with the accounting procedures specified in the franchise
agreement.
d. as revenue only after the balance of the initial franchise fee has been
collected.

*62. Occasionally a franchise agreement grants the franchisee the right to make
future bargain purchases of equipment or supplies. When recording the
initial franchise fee, the franchisor should
a. increase revenue recognized from the initial franchise fee by the amount of
the expected future purchases.
b. record a portion of the initial franchise fee as unearned revenue which will
increase the selling price when the franchisee subsequently makes the
bargain purchases.
c. defer recognition of any revenue from the initial franchise fee until the bargain
purchases are made.
d. None of these.

*63. A franchise agreement grants the franchisor an option to purchase the
franchisee's business. It is probable that the option will be exercised. When
recording the initial franchise fee, the franchisor should
a. record the entire initial franchise fee as a deferred credit which will
reduce the franchisor's investment in the purchased outlet when the
option is exercised.
b. record the entire initial franchise fee as unearned revenue which will
reduce the amount of cash paid when the option is exercised.
c. record the portion of the initial franchise fee which is attributable to the
bargain purchase option as a reduction of the future amounts receivable
from the franchisee.
d. None of these.

*64. Revenue is recognized by the consignor when the
a. goods are shipped to the consignee.
b. consignee receives the goods.
c. consignor receives an advance from the consignee.
d. consignor receives an account sales from the consignee.

21. c 28. d 35. b 42. c 49. b 56. b *63. a
22. b 29. c 36. a 43. d 50. b 57. d *64. d
23. a 30. d 37. b 44. a 51. c *58. b
24. b 31. b 38. d 45. d 52. d *59. d
25. d 32. c 39. a 46. b 53. b *60. d
26. b 33. b 40. c 47. c 54. b *61. a
27. d 34. c 41. a 48. c 55. d *62. b

Chapter 19:


21. Taxable income of a corporation
a. differs from accounting income due to differences in intraperiod allocation
between the two methods of income determination.
b. differs from accounting income due to differences in interperiod allocation and
permanent differences between the two methods of income determination.
c. is based on generally accepted accounting principles.
d. is reported on the corporation's income statement.

22 Taxable income of a corporation differs from pretax financial income because
of
Permanent Temporary
Differences Differences
a. No No
b. No Yes
c. Yes Yes
d. Yes No

23. The deferred tax expense is the
a. increase in balance of deferred tax asset minus the increase in balance of
deferred tax liability.
b. increase in balance of deferred tax liability minus the increase in balance
of deferred tax asset.
c. increase in balance of deferred tax asset plus the increase in balance of
d. decrease in balance of deferred tax asset minus the increase in balance of

24. Machinery was acquired at the beginning of the year. Depreciation recorded
during the life of the machinery could result in
Future Future
Taxable Amounts Deductible Amounts
a. Yes Yes
b. Yes No
c. No Yes
d. No No

P
25. A temporary difference arises when a revenue item is reported for tax
purposes in a period
After it is reported Before it is reported
in financial income in financial income
a. Yes Yes
b. Yes No
c. No Yes
d. No No

S
26. At the December 31, 2010 balance sheet date, Unruh Corporation reports an
accrued receivable for financial reporting purposes but not for tax purposes.
When this asset is recovered in 2011, a future taxable amount will occur and
a. pretax financial income will exceed taxable income in 2011.
b. Unruh will record a decrease in a deferred tax liability in 2011.
c. total income tax expense for 2011 will exceed current tax expense for 2011.
d. Unruh will record an increase in a deferred tax asset in 2011.

P
27. Assuming a 40% statutory tax rate applies to all years involved, which of the
following situations will give rise to reporting a deferred tax liability on the
balance sheet?
I. A revenue is deferred for financial reporting purposes but not for tax
purposes.
II. A revenue is deferred for tax purposes but not for financial reporting
purposes.
III. An expense is deferred for financial reporting purposes but not for
tax purposes.
IV. An expense is deferred for tax purposes but not for financial
reporting purposes.
a. item II only
b. items I and II only
c. items II and III only
d. items I and IV only

S
28. A major distinction between temporary and permanent differences is
a. permanent differences are not representative of acceptable accounting
practice.
b. temporary differences occur frequently, whereas permanent differences occur
only once.
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 reverse themselves in subsequent accounting periods,
whereas permanent differences do not reverse.

S
29. Which of the following are temporary differences that are normally classified
as expenses or losses that are deductible after they are recognized in
financial income?
a. Advance rental receipts.
b. Product warranty liabilities.
c. Depreciable property.
d. Fines and expenses resulting from a violation of law.

S
30. Which of the following is a temporary difference classified as a revenue or
gain that is taxable after it is recognized in financial income?
a. Subscriptions received in advance.
b. Prepaid royalty received in advance.
c. An installment sale accounted for on the accrual basis for financial reporting
purposes and on the installment (cash) basis for tax purposes.
d. Interest received on a municipal obligation.

S
31. Which of the following differences would result in future taxable amounts?
a. Expenses or losses that are tax deductible after they are recognized in
financial income.
b. Revenues or gains that are taxable before they are recognized in financial
income.
c. Revenues or gains that are recognized in financial income but are never
included in taxable income.
d. Expenses or losses that are tax deductible before they are recognized in
financial income.

32. Stuart Corporation's taxable income differed from its accounting income
computed for this past year. An item that would create a permanent
difference in accounting and taxable incomes for Stuart would be
a. a balance in the Unearned Rent account at year end.
b. using accelerated depreciation for tax purposes and straight-line
depreciation for book purposes.
c. a fine resulting from violations of OSHA regulations.
d. making installment sales during the year.

33. An example of a permanent difference is
a. proceeds from life insurance on officers.
b. interest expense on money borrowed to invest in municipal bonds.
c. insurance expense for a life insurance policy on officers.
d. all of these.

34. Which of the following will not result in a temporary difference?
a. Product warranty liabilities
b. Advance rental receipts
c. Installment sales
d. All of these will result in a temporary difference.

35. A company uses the equity method to account for an investment. This would
result in what type of difference and in what type of deferred income tax?
Type of Difference Deferred Tax
a. Permanent Asset
b. Permanent Liability
c. Temporary Asset
d. Temporary Liability
36. A company records an unrealized loss on short-term securities. This would
result in what type of difference and in what type of deferred income tax?
Type of Difference Deferred Tax
a. Temporary Liability
b. Temporary Asset
c. Permanent Liability
d. Permanent Asset

37. Which of the following temporary differences results in a deferred tax asset
in the year the temporary difference originates?
I. Accrual for product warranty liability.
II. Subscriptions received in advance.
III. Prepaid insurance expense.
a. I and II only.
b. II only.
c. III only.
d. I and III only.

38. Which of the following is not considered a permanent difference?
a. Interest received on municipal bonds.
b. Fines resulting from violating the law.
c. Premiums paid for life insurance on a companys CEO when the company is
the beneficiary.
d. Stock-based compensation expense.

S
39. When a change in the tax rate is enacted into law, its effect on existing
deferred income tax accounts should be
a. handled retroactively in accordance with the guidance related to changes in
accounting principles.
b. considered, but it should only be recorded in the accounts if it reduces a
deferred tax liability or increases a deferred tax asset.
c. reported as an adjustment to tax expense in the period of change.
d. applied to all temporary or permanent differences that arise prior to the date
of the enactment of the tax rate change, but not subsequent to the date of the
change.

40. Tax rates other than the current tax rate may be used to calculate the
deferred income tax amount on the balance sheet if
a. it is probable that a future tax rate change will occur.
b. it appears likely that a future tax rate will be greater than the current tax rate.
c. the future tax rates have been enacted into law.
d. it appears likely that a future tax rate will be less than the current tax rate.

41. Recognition of tax benefits in the loss year due to a loss carryforward
requires
a. the establishment of a deferred tax liability.
b. the establishment of a deferred tax asset.
c. the establishment of an income tax refund receivable.
d. only a note to the financial statements.

42. Recognizing a valuation allowance for a deferred tax asset requires that a
company
a. consider all positive and negative information in determining the need for a
valuation allowance.
b. consider only the positive information in determining the need for a valuation
allowance.
c. take an aggressive approach in its tax planning.
d. pass a recognition threshold, after assuming that it will be audited by taxing
authorities.

43. Uncertain tax positions
I. Are positions for which the tax authorities may disallow a deduction in
whole or
in part.
II. Include instances in which the tax law is clear and in which the company
believes
an audit is likely.
III. Give rise to tax expense by increasing payables or increasing a
deferred
tax liability.
a. I, II, and III.
b. I and III only.
c. II only.
d. I only.

44. With regard to uncertain tax positions, the FASB requires that companies
recognize a tax benefit when
a. it is probable and can be reasonably estimated.
b. there is at least a 51% probability that the uncertain tax position will be
approved by the taxing authorities.
c. it is more likely than not that the tax position will be sustained upon audit.
d. Any of the above exist.

45. Major reasons for disclosure of deferred income tax information is (are)
a. better assessment of quality of earnings.
b. better predictions of future cash flows.
c. that it may be helpful in setting government policy.
d. all of these.

46. Accounting for income taxes can result in the reporting of deferred taxes as
any of the following except
a. a current or long-term asset.
b. a current or long-term liability.
c. a contra-asset account.
d. All of these are acceptable methods of reporting deferred taxes.

47. Deferred taxes should be presented on the balance sheet
a. as one net debit or credit amount.
b. in two amounts: one for the net current amount and one for the net noncurrent
amount.
c. in two amounts: one for the net debit amount and one for the net credit
amount.
d. as reductions of the related asset or liability accounts.

48. Deferred tax amounts that are related to specific assets or liabilities should
be classified as current or noncurrent based on
a. their expected reversal dates.
b. their debit or credit balance.
c. the length of time the deferred tax amounts will generate future tax deferral
benefits.
d. the classification of the related asset or liability.

49. Tanner, Inc. incurred a financial and taxable loss for 2010. Tanner therefore
decided to use the carryback provisions as it had been profitable up to this
year. How should the amounts related to the carryback be reported in the
2010 financial statements?
a. The reduction of the loss should be reported as a prior period adjustment.
b. The refund claimed should be reported as a deferred charge and amortized
over five years.
c. The refund claimed should be reported as revenue in the current year.
d. The refund claimed should be shown as a reduction of the loss in 2010.

S
50. A deferred tax liability is classified on the balance sheet as either a current or
a noncurrent liability. The current amount of a deferred tax liability should
generally be
a. the net deferred tax consequences of temporary differences that will result in
net taxable amounts during the next year.
b. totally eliminated from the financial statements if the amount is related to a
noncurrent asset.
c. based on the classification of the related asset or liability for financial
reporting purposes.
d. the total of all deferred tax consequences that are not expected to reverse in
the operating period or one year, whichever is greater.

51. All of the following are procedures for the computation of deferred income
taxes except to
a. identify the types and amounts of existing temporary differences.
b. measure the total deferred tax liability for taxable temporary differences.
c. measure the total deferred tax asset for deductible temporary differences and
operating loss carrybacks.
d. All of these are procedures in computing deferred income taxes.

21. b 26. b 31. d 36. b 41. b 46. c 51. c
22. c 27. c 32. c 37. a 42. a 47. b
23. b 28. d 33. d 38. d 43. d 48. d
24. a 29. b 34. d 39. c 44. c 49. d
25. a 30. c 35. d 40. c 45. d 50. c

Chapter 20:


21. In determining the present value of the prospective benefits (often referred
to as the projected benefit obligation), the following are considered by the
actuary:
a. retirement and mortality rate.
b. interest rates.
c. benefit provisions of the plan.
d. all of these factors.

22. In a defined-benefit plan, the process of funding refers to
a. determining the projected benefit obligation.
b. determining the accumulated benefit obligation.
c. making the periodic contributions to a funding agency to ensure that funds
are available to meet retirees' claims.
d. determining the amount that might be reported for pension expense.

23. In all pension plans, the accounting problems include all the following except
a. measuring the amount of pension obligation.
b. disclosing the status and effects of the plan in the financial statements.
c. allocating the cost of the plan to the proper periods.
d. determining the level of individual premiums.

24. In a defined-contribution plan, a formula is used that
a. defines the benefits that the employee will receive at the time of retirement.
b. ensures that pension expense and the cash funding amount will be different.
c. requires an employer to contribute a certain sum each period based on the
formula.
d. ensures that employers are at risk to make sure funds are available at
retirement.
25. In a defined-benefit plan, a formula is used that
a. requires that the benefit of gain or the risk of loss from the assets
contributed to the pension plan be borne by the employee.
b. defines the benefits that the employee will receive at the time of
retirement.
c. requires that pension expense and the cash funding amount be the same.
d. defines the contribution the employer is to make; no promise is made
concerning the ultimate benefits to be paid out to the employees.

26. Which of the following is not a characteristic of a defined-contribution
pension plan?
a. The employer's contribution each period is based on a formula.
b. The benefits to be received by employees are usually determined by an
employees three highest years of salary defined by the terms of the plan.
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.

27. In accounting for a defined-benefit pension plan
a. an appropriate funding pattern must be established to ensure that enough
monies will be available at retirement to meet the benefits promised.
b. the employer's responsibility is simply to make a contribution each year
based on the formula established in the plan.
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.

28. Alternative methods exist for the measurement of the pension obligation
(liability). Which measure requires the use of future salaries in its
computation?
a. Vested benefit obligation
b. Accumulated benefit obligation
c. Projected benefit obligation
d. Restructured benefit obligation

29. The accumulated benefit obligation measures
a. the pension obligation on the basis of the plan formula applied to years of
service to date and based on existing salary levels.
b. the pension obligation on the basis of the plan formula applied to years of
service to date and based on future salary levels.
c. an estimated total benefit at retirement and then computes the level cost that
will be sufficient, together with interest expected to accumulate at the
assumed rate, to provide the total benefits at retirement.
d. the shortest possible period for funding to maximize the tax deduction.

30. The projected benefit obligation is the measure of pension obligation that
a. is required to be used for reporting the service cost component of pension
expense.
b. 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.
c. requires the longest possible period for funding to maximize the tax
deduction.
d. is not sanctioned under generally accepted accounting principles for reporting
the service cost component of pension expense.

31. Differing measures of the pension obligation can be based on
a. all years of serviceboth vested and nonvestedusing current salary levels.
b. only the vested benefits using current salary levels.
c. both vested and nonvested service using future salaries.
d. all of these.

32. Vested benefits
a. usually require a certain minimum number of years of service.
b. are those that the employee is entitled to receive even if fired.
c. are not contingent upon additional service under the plan.
d. are defined by all of these.

33. The relationship between the amount funded and the amount reported for
pension expense is as follows:
a. pension expense must equal the amount funded.
b. pension expense will be less than the amount funded.
c. pension expense will be more than the amount funded.
d. pension expense may be greater than, equal to, or less than the amount
funded.

34. The computation of pension expense includes all the following except
a. service cost component measured using current salary levels.
b. interest on projected benefit obligation.
c. expected return on plan assets.
d. All of these are included in the computation.

35. In computing the service cost component of pension expense, the FASB
concluded that
a. the accumulated benefit obligation provides a more realistic measure of the
pension obligation on a going concern basis.
b. a company should employ an actuarial funding method to report pension
expense that best reflects the cost of benefits to employees.
c. the projected benefit obligation using future compensation levels provides a
realistic measure of present pension obligation and expense.
d. all of these.

36. The interest on the projected benefit obligation component of pension
expense
a. reflects the incremental borrowing rate of the employer.
b. reflects the rates at which pension benefits could be effectively settled.
c. is the same as the expected return on plan assets.
d. may be stated implicitly or explicitly when reported.

37. One component of pension expense is expected return on plan assets. Plan
assets include
a. contributions made by the employer and contributions made by the employee
when a contributory plan of some type is involved.
b. plan assets still under the control of the company.
c. only assets reported on the balance sheet of the employer as prepaid
pension cost.
d. none of these.

38. The actual return on plan assets
a. is equal to the change in the fair value of the plan assets during the year.
b. includes interest, dividends, and changes in the market value of the fund
assets.
c. is equal to the expected rate of return times the fair value of the plan
assets at the beginning of the period.
d. all of these.

39. In accounting for a pension plan, any difference between the pension cost
charged to expense and the payments into the fund should be reported as
a. an offset to the liability for prior service cost.
b. pension asset/liability.
c. as other comprehensive income (G/L)
d. as accumulated other comprehensive income (PSC).

40. Which of the following items should be included in pension expense
calculated by an employer who sponsors a defined-benefit pension plan for
its employees?
Amortization of
Fair value prior
of plan assets service cost
a. Yes Yes
b. Yes No
c. No Yes
d. No No

41. A corporation has a defined-benefit plan. A pension liability will result at the
end of the year if the
a. projected benefit obligation exceeds the fair value of the plan assets.
b. fair value of the plan assets exceeds the projected benefit obligation.
c. amount of employer contributions exceeds the pension expense.
d. amount of pension expense exceeds the amount of employer contributions.

42. When a company adopts a pension plan, prior service costs should be
charged to
a. accumulated other comprehensive income (PSC).
b. operations of prior periods.
c. Other comprehensive income (PSC).
d. retained earnings.

43. When a company amends a pension plan, for accounting purposes, prior
service costs should be
a. treated as a prior period adjustment because no future periods are benefited.
b. amortized in accordance with procedures used for income tax purposes.
c. recorded in other comprehensive income (PSC).
d. reported as an expense in the period the plan is amended.

44. Prior service cost is amortized on a
a. straight-line basis over the expected future years of service.
b. years-of-service method or on a straight-line basis over the average
remaining service life of active employees.
c. straight-line basis over 15 years.
d. straight-line basis over the average remaining service life of active employees
or 15 years, whichever is longer.
45. Whenever a defined-benefit plan is amended and credit is given to
employees for years of service provided before the date of amendment
a. both the accumulated benefit obligation and the projected benefit obligation
are usually greater than before.
b. both the accumulated benefit obligation and the projected benefit obligation
are usually less than before.
c. the expense and the liability should be recognized at the time of the plan
change.
d. the expense should be recognized immediately, but the liability may be
deferred until a reasonable basis for its determination has been identified.

46. The actuarial gains or losses that result from changes in the projected benefit
obligation are called
Asset Liability
Gains & Losses Gains & Losses
a. Yes Yes
b. No No
c. Yes No
d. No Yes

47. Gains and losses that relate to the computation of pension expense should be
a. recorded currently as an adjustment to pension expense in the period
incurred.
b. recorded currently and in the future by applying the corridor method which
provides the amount to be amortized.
c. amortized over a 15-year period.
d. recorded only if a loss is determined.

48. The fair value of pension plan assets is used to determine the corridor and to
calculate the expected return on plan assets.
Expected Return
Corridor on Plan Assets
a. Yes Yes
b. Yes No
c. No Yes
d. No No

49. A pension fund gain or loss that is caused by a plant closing should be
a. recognized immediately as a gain or loss on the plant closing.
b. spread over the current year and future years.
c. charged or credited to the current pension expense.
d. recognized as a prior period adjustment.

50. A pension liability is reported when
a. the projected benefit obligation exceeds the fair value of pension plan assets.
b. the accumulated benefit obligation is less than the fair value of pension plan
assets.
c. the pension expense reported for the period is greater than the funding
amount for the same period.
d. accumulated other comprehensive income exceeds the fair value of pension
plan assets.

51. A pension asset is reported when
a. the accumulated benefit obligation exceeds the fair value of pension plan
assets.
b. the accumulated benefit obligation exceeds the fair value of pension plan
assets, but a prior service cost exists.
c. pension plan assets at fair value exceed the accumulated benefit obligation.
d. pension plan assets at fair value exceed the projected benefit obligation.

52. Which of the following statements is correct?
a. There is an account titled Pension Asset / Liability.
b. There is an account titled Accumulated Benefit Obligation.
c. Accumulated Other Comprehensive Income should be reported in the liability
section of the balance sheet.
d. Other comprehensive income (PSC) should be included in net income.

53. According to the FASB, recognition of a liability is required when the
projected benefit obligation exceeds the fair value of plan assets. Conversely,
when the fair value of plan assets exceeds the projected benefit obligation,
the Board
a. requires recognition of an asset.
b. requires recognition of an asset if the excess fair value of plan assets
exceeds the corridor amount.
c. recommends recognition of an asset but does not require such recognition.
d. does not permit recognition of an asset.

54. Which of the following disclosures of pension plan information would not
normally be required?
a. The major components of pension expense
b. The amount of prior service cost changed or credited in previous years.
c. The funded status of the plan and the amounts recognized in the financial
statements
d. The rates used in measuring the benefit amounts

55. The main purpose of the Pension Benefit Guaranty Corporation is to
a. require minimum funding of pensions.
b. require plan administrators to publish a comprehensive description and
summary of their plans.
c. administer terminated plans and to impose liens on the employer's assets for
certain unfunded pension liabilities.
d. all of these.

56. Which of the following statements is true about postretirement health care
benefits?
a. They are generally funded.
b. The benefits are well-defined and level in dollar amount.
c. The beneficiary is the retiree, spouse, and other dependents.
d. The benefit is payable monthly.

*57. Which of the following disclosures of postretirement benefits would not be
required by professional pronouncements?
a. Postretirement expense for the period
b. A schedule showing changes in postretirement benefits and plan assets during
the year
c. The amount of the EPBO
d. The assumptions and rates used in computing the EPBO and APBO

*58. A postretirement asset is computed as the excess of the
a. expected postretirement benefit obligation over the fair value of plan assets.
b. accumulated postretirement benefit obligation over the fair value of plan
assets.
c. fair value of plan assets over the accumulated postretirement benefit
obligation.
d. accumulated postretirement benefit obligation over the fair value of plan
assets, but not vice versa.

*59. Postretirement benefits may include all of the following except
a. severance pay to laid-off employees.
b. dental care.
c. legal and tax services.
d. tuition assistance.

*60. Gains or losses can represent changes in
a. EPBO or the fair value of pension plan assets.
b. EPBO or the book value of pension plan assets.
c. APBO or the fair value of pension plan assets.
d. APBO or the book value of pension plan assets.

*61. Which of the following statements about the expected postretirement benefit
obligation (EPBO) is not correct?
a. The EPBO is an actuarial present value.
b. The EPBO is recorded in the accounts.
c. The EPBO is used in measuring periodic expense.
d. All of these are correct.

*62. Which of the following statements about the recognition of a prior service
cost related to a postretirement obligation is correct?
a. The prior service amount is recognized in the income statement in the current
period.
b. The prior service cost is recognized in the income statement net of tax.
c. Restatement of previously issued annual financial statements is required.
d. The prior service cost amount affects comprehensive income in the current
period.

*63. Which of the following is recognized in the accounts and in the financial
statements?
a. Accumulated postretirement benefit obligation
b. Postretirement asset / liability
c. Expected postretirement benefit obligation
d. All of these.
21. d 28. c 35. c 42. c 49. a 56. c *63. b
22. c 29. a 36. b 43. c 50. a *57. c
23. d 30. a 37. a 44. b 51. d *58. c
24. c 31. d 38. b 45. a 52. a *59. a
25. b 32. d 39. b 46. d 53. a *60. c
26. b 33. d 40. c 47. b 54. b *61. b
27. a 34. a 41. a 48. a 55. c *62. d

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