ACC423 ACC423 Intermediate Financial Accounting III Final Exam Complete Solution Version 1 & 2 Complete Solution 101 Questions

Question: #5477

1) Proceeds from an issue of debt securities having stock warrants should
NOT be allocated between debt and equity features when
A. the allocation would result in a discount on the debt security
B. the warrants issued with the debt securities are nondetachable
C. exercise of the warrants within the next few fiscal periods seems remote
D. the market value of the warrants is NOT readily available
2) The conversion of preferred stock may be recorded by the
A. market value method
B. par value method
C. book value method
D. incremental method
3) The conversion of preferred stock into common stock requires that any
excess of the par value of the common shares issued over the carrying
amount of the preferred being converted should be
A. treated as a prior period adjustment
B. treated as a direct reduction of retained earnings
C. reflected currently in income as an extraordinary item
D. reflected currently in income, but NOT as an extraordinary item
4) A primary source of stockholders’ equity is
A. contributions by stockholders
B. both income retained by the corporation and contributions by
stockholders
C. appropriated retained earnings
D. income retained by the corporation
5) Stockholders’ equity is generally classified into two major categories:
A. retained earnings and unappropriated capital
B. earned capital and contributed capital
C. appropriated capital and retained earnings
D. contributed capital and appropriated capital
6) When a corporation issues its capital stock in payment for services, the
least appropriate basis for recording the transaction is the
A. market value of the shares issued
B. Any of these provides an appropriate basis for recording the transaction
C. par value of the shares issued
D. market value of the services received
7) Treasury shares are
A. shares held as an investment by the treasurer of the corporation
B. issued but NOT outstanding shares
C. shares held as an investment of the corporation
D. issued and outstanding shares
8) “Gains” on sales of treasury stock (using the cost method) should be
credited to
A. paid-in capital from treasury stock
B. other income
C. capital stock
D. retained earnings
9) 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 an extraordinary item shown on the income statement
C. As paid-in capital from treasury stock transactions
D. As an increase in the amount shown for common stock
10) In computing earnings per share, the equivalent number of shares of
convertible preferred stock are added as an adjustment to the
denominator (number of shares outstanding). If the preferred stock is
cumulative, which amount should then be added as an adjustment to the
numerator (net earnings)?
A. Annual preferred dividend
B. Annual preferred dividend divided by the income tax rate
C. Annual preferred dividend times (one minus the income tax rate)
D. Annual preferred dividend times the income tax rate
11) When computing diluted earnings per share, convertible bonds are
A. ignored
B. assumed converted only if they are dilutive
C. assumed converted whether they are dilutive or antidilutive
D. assumed converted only if they are antidilutive
12) What effect will the acquisition of treasury stock have on stockholders’
equity and earnings per share, respectively?
A. Decrease and no effect
B. Increase and decrease
C. Increase and no effect
D. Decrease and increase
13) On May 1, 2007, Kent Corp. declared and issued a 10% common stock
dividend. Prior to this dividend, Kent had 100,000 shares of $1 par value
common stock issued and outstanding. The fair value of Kent ‘s common
stock was $20 per share on May 1, 2007. As a result of this stock dividend,
Kent’s total stockholders’ equity
A. did NOT change
B. increased by $200,000
C. decreased by $10,000
D. decreased by $200,000
14) How would the declaration and subsequent issuance of a 10% stock
dividend by the issuer affect each of the following when the market value
of the shares exceeds the par value of the stock?
Additional Common Stock | Paid-in Capital
A. Increase | Increase
B. No effect | No effect
C. Increase | No effect
D. No effect | Increase
15) At its date of incorporation, Wilson, Inc. issued 100,000 shares of its
$10 par common stock at $11 per share. During the current year, Wilson
acquired 20,000 shares of its common stock at a price of $16 per share and
accounted for them by the cost method. Subsequently, these shares were
reissued at a price of $12 per share. There have been no other issuances or
acquisitions of its own common stock. What effect does the reissuance of
the stock have on the following accounts?
Retained Earnings | Additional Paid-in Capital
A. No effect | No effect
B. Decrease | Decrease
C. Decrease | No effect
D. No effect | Decrease
16) Which of the following is correct about the effective-interest method of
amortization?
A. The effective-interest method produces a constant rate of return on the
book value of the investment from period to period.
B. The effective interest method applied to investments in debt securities is
different from that applied to bonds payable.
C. Amortization of a premium decreases from period to period.
D. Amortization of a discount decreases from period to period
17) An unrealized holding loss on a company’s available-for-sale securities
should be reflected in the current financial statements as
A. other comprehensive income and deducted in the equity section of the
balance sheet.
B. an extraordinary item shown as a direct reduction from retained earnings
C. a note or parenthetical disclosure only
D. a current loss resulting from holding securities
18) An unrealized holding gain on a company’s available-for-sale
securities should be reflected in the current financial statements as
A. other comprehensive income and included in the equity section of the
balance sheet.
B. an extraordinary item shown as a direct increase to retained earnings
C. a note or parenthetical disclosure only
D. a current gain resulting from holding securities
19) Investments in debt securities should be recorded on the date of
acquisition at
A. face value plus brokerage fees and other costs incident to the purchase
B. lower of cost or market
C. market value plus brokerage fees and other costs incident to the
purchase
D. market value
20) Securities which could be classified as held-to-maturity are
A. warrants
B. redeemable preferred stock
C. municipal bonds
D. treasury stock
21) Which of the following is NOT a debt security?
A. Commercial paper
B. Convertible bonds
C. Loans receivable
D. All of these are debt securities
22) An investor has a long-term investment in stocks. Regular cash
dividends received by the investor are recorded as
Fair Value Method | Equity Method
A. A reduction of the investment | A reduction of the investment
B. Income | Income
C. Income | A reduction of the investment
D. A reduction of the investment | Income
23) When a company holds between 20% and 50% of the outstanding
stock of an investee, which of the following statements applies?
A. 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
B. The investor should always use the equity method to account for its
investment
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
24) Bista Corporation declares and distributes a cash dividend that is a
result of current earnings. How will the receipt of those dividends affect
the investment account of the investor under each of the following
accounting methods?
Fair Value Method | Equity Method
A. Increase | Decrease
B. No Effect | Decrease
C. No Effect | No Effect
D. Decrease | No Effect
25) Debt securities that are accounted for at amortized cost, NOT fair
value, are
A. trading debt securities
B. held-to-maturity debt securities
C. available-for-sale debt securities
D. never-sell debt securities
26) 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. trading securities where a company has holdings of less than 20%
B. available-for-sale 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%
27) Use of the effective-interest method in amortizing bond premiums and
discounts results in
A. a smaller amount of interest income over the life of the bond issue than would
result from use of the straight-line method
B. a greater amount of interest income over the life of the bond issue than would
result from use of the straight-line method
C. a varying amount being recorded as interest income from period to
period
D. a variable rate of return on the book value of the investment
28) All of the following are characteristics of a derivative financial
instrument EXCEPT the instrument
A. All of these are characteristics
B. has one or more underlyings and an identified payment provision
C. requires a large investment at the inception of the contract
D. requires or permits net settlement
29) The accounting for fair value hedges records the derivative at its
A. historical cost
B. amortized cost
C. carrying value
D. fair value
30) All of the following statements regarding accounting for derivatives
are correct EXCEPT that
A. gains and losses resulting from hedge transactions are reported in different
ways, depending upon the type of hedge
B. they should be recognized in the financial statements as assets and liabilities
C. they should be reported at fair value
D. gains and losses resulting from speculation should be deferred
31) Taxable income of a corporation differs from pretax financial income
because of
Permanent Differences | Temporary Differences
A. Yes | No
B. No | No
C. No | Yes
D. Yes | Yes
32) The rationale for interperiod income tax allocation is to
A. adjust income tax expense on the income statement to be in agreement with
income taxes payable on the balance sheet
B. recognize a tax asset or liability for the tax consequences of temporary
differences that exist at the balance sheet date
C. recognize a distribution of earnings to the taxing agency
D. reconcile the tax consequences of permanent and temporary differences
appearing on the current year’s financial statements
33) Interperiod income tax allocation causes
A. tax expense in the income statement to be presented with the specific
revenues causing the tax
B. tax expense shown on the income statement to equal the amount of
income taxes payable for the current year plus or minus the change in the
deferred tax asset or liability balances for the year.
C. tax expense shown in the income statement to bear a normal relation to the
tax liability
D. tax liability shown in the balance sheet to bear a normal relation to the
income before tax reported in the income statement
34) At the December 31, 2007 balance sheet date, Garth Brooks
Corporation reports an accrued receivable for financial reporting
purposes but NOT for tax purposes. When this asset is recovered in 2008, a
future taxable amount will occur and
A. Garth will record a decrease in a deferred tax liability in 2008
B. pretax financial income will exceed taxable income in 2008
C. Garth will record an increase in a deferred tax asset in 2008
D. total income tax expense for 2008 will exceed current tax expense for 2008
35) Which of the following differences would result in future taxable
amounts?
A. Revenues or gains that are taxable before they are recognized in financial
income
B. Expenses or losses that are tax deductible after they are recognized in
financial income
C. Expenses or losses that are tax deductible before they are recognized in
financial income
D. Revenues or gains that are recognized in financial income but are never
included in taxable income
36) 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. Product warranty liabilities
B. Advance rental receipts
C. Fines and expenses resulting from a violation of law
D. Depreciable property
37) In a defined-contribution plan, a formula is used that
A. ensures that pension expense and the cash funding amount will be different
B. defines the benefits that the employee will receive at the time of retirement
C. ensures that employers are at risk to make sure funds are available at
retirement
D. requires an employer to contribute a certain sum each period based on
the formula
38) In accounting for a defined-benefit pension plan
A. the employer’s responsibility is simply to make a contribution each year
based on the formula established in the plan
B. an appropriate funding pattern must be established to ensure that
enough monies will be available at retirement to meet the benefits
promised
C. the liability is determined based upon known variables that reflect future
salary levels promised to employees
D. the expense recognized each period is equal to the cash contribution
39) Which of the following is NOT a characteristic of a defined-contribution
pension plan?
A. The benefits to be received by employees are defined by the terms of the
plan
B. The employer’s contribution each period is based on a formula
C. The benefit of gain or the risk of loss from the assets contributed to the
pension fund are borne by the employee
D. The accounting for a defined-contribution plan is straightforward and
uncomplicated
40) In accounting for a pension plan, any difference between the pension
cost charged to expense and the payments into the fund should be
reported as
A. a charge or credit to unrealized appreciation and depreciation
B. an offset to the liability for prior service cost
C. accrued or prepaid pension cost
D. an accrued actuarial liability
41) The projected benefit obligation is the measure of pension obligation
that
A. is NOT sanctioned under generally accepted accounting principles for
reporting the service cost component of pension expense
B. is required to be used for reporting the service cost component of
pension expense
C. requires pension expense to be determined solely on the basis of the plan
formula applied to years of service to date and based on existing salary levels
D. requires the longest possible period for funding to maximize the tax
deduction
42) The relationship between the amount funded and the amount reported
for pension expense is as follows:
A. pension expense may be greater than, equal to, or less than the amount
funded
B. pension expense must equal the amount funded
C. pension expense will be less than the amount funded
D. pension expense will be more than the amount funded
43) On January 1, 2008, Pratt Corp. adopted a defined-benefit pension
plan. The plan’s service cost of $300,000 was fully funded at the end of
2008. Prior service cost was funded by a contribution of $120,000 in 2008.
Amortization of prior service cost was $48,000 for 2008. What is the
amount of Pratt’s prepaid pension cost at December 31, 2008?
A. $180,000
B. $72,000
C. $120,000
D. $168,000
44) Reser Corp., a company whose stock is publicly traded, provides a
noncontributory defined-benefit pension plan for its employees. The
company’s actuary has provided the following information for the year
ended December 31, 2008:
Projected benefit obligation$600,000
Accumulated benefit obligation525,000
Fair value of plan assets825,000
Service cost240,000
Interest on projected benefit obligation24,000
Amortization of unrecognized prior service cost60,000
Expected and actual return on plan assets82,500
The market-related asset value equals the fair value of plan assets. Prior
contributions to the defined-benefit pension plan equaled the amount of
net periodic pension cost accrued for the previous year end. No
contributions have been made for 2008 pension cost. In its December 31,
2008 balance sheet, Reser should report an accrued pension cost of
A. $217,500
B. $406,500
C. $324,000.
D. $241,500
45) Effective January 1, 2007, Quayle Co. established a defined-benefit plan
with no retro-active benefits. The first of the required equal annual
contributions was paid on December 31, 2007. A 10% discount rate was
used to calculate service cost and a 10% rate of return was assumed for
plan assets. All information on covered employees for 2007 and 2008 is
the same. How should the service cost for 2008 compare with 2007, and
should the 2007 balance sheet report an accrued or a prepaid pension
cost?
Service Cost for 2008 Compared to 2007 | Pension Cost Reported on the
2007 Balance Sheet
A. Greater than | Prepaid
B. Equal to | Accrued
C. Equal to | Prepaid
D. Greater than | Accrued
46) On January 1, 2005, Foley Corporation acquired machinery at a cost of
$250,000. Foley adopted the double-declining balance method of
depreciation for this machinery and had been recording depreciation over
an estimated useful life of ten years, with no residual value. At the
beginning of 2008, a decision was made to change to the straight-line
method of depreciation for the machinery. The depreciation expense to be
recorded for the machinery in 2008 is (round to the nearest dollar)
A. $25,000
B. $25,600
C. $18,286
D. $22,857
47) During 2008, a construction company changed from the completedcontract method to the percentage-of-completion method for accounting
purposes but NOT for tax purposes. Gross profit figures under both
methods for the past three years appear below:
Completed-ContractPercentage-of-Completion
2006$ 475,000$ 800,000
2007625,000950,000
2008700,0001,050,000
$1,800,000$2,800,000
Assuming an income tax rate of 40% for all years, the effect of this
accounting change on prior periods should be reported by a credit of
A. $390,000 on the 2008 income statement
B. $600,000 on the 2008 income statement
C. $390,000 on the 2008 retained earnings statement
D. $600,000 on the 2008 retained earnings statement
48) Accrued salaries payable of $51,000 were NOT recorded at December
31, 2007. Office supplies on hand of $24,000 at December 31, 2008 were
erroneously treated as expense instead of supplies inventory. Neither of
these errors was discovered nor corrected. The effect of these two errors
would cause
A. 2007 net income and December 31, 2007 retained earnings to be understated
$51,000 each
B. 2008 net income to be understated $75,000 and December 31, 2008
retained earnings to be understated $24,000
C. 2008 net income and December 31, 2008 retained earnings to be understated
$24,000 each
D. 2007 net income to be overstated $27,000 and 2008 net income to be
understated $24,000
49) The estimated life of a building that has been depreciated 30 years of
an originally estimated life of 50 years has been revised to a remaining life
of 10 years. Based on this information, the accountant should
A. depreciate the remaining book value over the remaining life of the asset
B. continue to depreciate the building over the original 50-year life
C. adjust accumulated depreciation to its appropriate balance through retained
earnings, based on a 40-year life, and then depreciate the adjusted book value as
though the estimated life had always been 40 years
D. adjust accumulated depreciation to its appropriate balance, through net
income, based on a 40-year life, and then depreciate the adjusted book value as
though the estimated life had always been 40 years
50) Which type of accounting change should always be accounted for in
current and future periods?
A. Change in reporting entity
B. Change in accounting principle
C. Correction of an error
D. Change in accounting estimate
51) When a company decides to switch from the double-declining balance
method to the straight-line method, this change should be handled as a
A. change in accounting estimate
B. change in accounting principle
C. correction of an error
D. prior period adjustment

ACC 423 Final Exam Version 1

1) 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. a liability account.
B. retained earnings.
C. premium on bonds payable.
D. additional paid-in capital from stock warrants.
2) The conversion of preferred stock into common stock requires that any excess of the
par value of the common shares issued over the carrying amount of the preferred being
converted should be
A. treated as a prior period adjustment.
B. reflected currently in income as an extraordinary item.
C. treated as a direct reduction of retained earnings.
D. reflected currently in income, but NOT as an extraordinary item
3) 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. treated as a prior period adjustment.
B. reflected currently in income as an extraordinary item.
C. treated as an adjustment of additional paid-in capital.
D. reflected currently in income, but NOT as an extraordinary item
4) 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 shares issued.
B. par value of the shares issued.
C. Any of these provides an appropriate basis for recording the transaction.
D. market value of the services received.
5) 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. incremental method.
B. proportional method.
C. either the proportional method or the incremental method.
D. pro forma method.
6) Which of the following represents the total number of shares that a corporation may
issue under the terms of its charter?
A. unissued shares
B. issued shares
C. outstanding shares
D. authorized shares
7) How should a “gain” from the sale of treasury stock be reflected when using the cost
method of recording treasury stock transactions?
A. As an increase in the amount shown for common stock.
B. As paid-in capital from treasury stock transactions.
C. As an extraordinary item shown on the income statement.
D. As ordinary earnings shown on the income statement.
8) Treasury shares are
A. issued and outstanding shares.
B. shares held as an investment by the treasurer of the corporation.
C. issued but NOT outstanding shares.
D. shares held as an investment of the corporation.
9) 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 purchase price.
B. 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.
C. Treasury stock for the par value and retained earnings for the excess of the purchase price
over the par value.
D. Paid-in capital in excess of par for the purchase price.
10) When computing diluted earnings per share, convertible bonds are
A. assumed converted only if they are antidilutive.
B. ignored.
C. assumed converted only if they are dilutive.
D. assumed converted whether they are dilutive or antidilutive.
11) 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 times the income tax rate
B. Annual preferred dividend
C. Annual preferred dividend divided by the income tax rate
D. Annual preferred dividend times (one minus the income tax rate)
12) Antidilutive securities
A. include stock options and warrants whose exercise price is less than the average market
price of common stock.
B. should be included in the computation of diluted earnings per share but NOT basic earnings
per share.
C. should be ignored in all earnings per share calculations.
D. are those whose inclusion in earnings per share computations would cause basic earnings
per share to exceed diluted earnings per share
13) At its date of incorporation, Wilson, Inc issued 100,000 shares of its $10 par
common stock at $11 per share During the current year, Wilson acquired 20,000 shares
of its common stock at a price of $16 per share and accounted for them by the cost
method Subsequently, these shares were reissued at a price of $12 per share There
have been no other issuances or acquisitions of its own common stock What effect does
the reissuance of the stock have on the following accounts?
Retained Earnings |Additional Paid-in Capital
A. Decrease | No effect
B. Decrease |Decrease
C. No effect | No effect
D. No effect |Decrease
14) A corporation declared a dividend, a portion of which was liquidatingHow would
this distribution affect each of the following?
Additional Paid-inCapital | Retained Earnings
A. No effect |Decrease
B. Decrease | No effect
C. No effect | No effect
D. Decrease |Decrease
15) How would the declaration and subsequent issuance of a 10% stock dividend by
the issuer affect each of the following when the market value of the shares exceeds the
par value of the stock?
Additional Common Stock | Paid-in Capital
A. Increase | No effect
B. No effect | No effect
C. Increase | Increase
D. No effect | Increase
16) A reclassification adjustment is reported in the
A. statement of comprehensive income as other comprehensive income.
B. income statement as an Other Revenue or Expense.
C. statement of stockholders’ equity.
D. stockholders’ equity section of the balance sheet.
17) Which of the following is correct about the effective-interest method of
amortization?
A. Amortization of a premium decreases from period to period.
B. The effective interest method applied to investments in debt securities is different from
that applied to bonds payable.
C. The effective-interest method produces a constant rate of return on the book value of
the investment from period to period.
D. Amortization of a discount decreases from period to period.
18) When investments in debt securities are purchased between interest payment
dates, preferably the
A. accrued interest is debited to Interest Revenue.
B. securities account should include accrued interest.
C. accrued interest is debited to Interest Receivable.
D. accrued interest is debited to Interest Expense.
19) 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
total amount of interest to be received at the next interest receipt date.
B. 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.
C. do nothing special and ignore the fact that the accounting period does NOT coincide with
the bond’s interest period.
D. notify the issuer and request that a special payment be made for the appropriate portion of
the interest period.
20) Which of the following is NOT a debt security?
A. Loans receivable
B. Convertible bonds
C. All of these are debt securities.
D. Commercial paper
21) Investments in debt securities should be recorded on the date of acquisition at
A. market value.
B. face value plus brokerage fees and other costs incident to the purchase.
C. lower of cost or market.
D. market value plus brokerage fees and other costs incident to the purchase.
22) 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 use the equity method to account for its investment unless
circum-stances indicate that it is unable to exercise “significant influence” over the
investee
B. The investor should always use the fair value method to account for its investment.
C. The investor should always use the equity method to account for its investment.
D. The investor must use the fair value method unless it can clearly demonstrate the ability to
exercise “significant influence” over the investee
23) An investor has a long-term investment in stocks Regular cash dividends received
by the investor are recorded as
Fair Value Method | Equity Method
A. A reduction of the investment |A reduction of the investment
B. A reduction of the investment | Income
C. Income | Income
D. Income |A reduction of the investment
24) BynerCorporation accounts for its investment in the common stock of
YountCompany under the equity methodBynerCorporation should ordinarily record a
cash dividend received from Yount as
A. additional paid-in capital.
B. dividend income.
C. a reduction of the carrying value of the investment.
D. an addition to the carrying value of the investment
25) Use of the effective-interest method in amortizing bond premiums and discounts
results in
A. a varying amount being recorded as interest income from period to period.
B. a smaller amount of interest income over the life of the bond issue than would result from
use of the straight-line method.
C. a greater amount of interest income over the life of the bond issue than would result from
use of the straight-line method.
D. a variable rate of return on the book value of the investment.
26) Held-to-maturity securities are reported at
A. acquisition cost plus amortization of a discount.
B. fair value.
C. acquisition cost.
D. acquisition cost plus amortization of a premium.
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. trading debt securities.
B. never-sell debt securities.
C. held-to-maturity debt securities
D. available-for-sale debt securities
28) The accounting for fair value hedges records the derivative at its
A. carrying value.
B. historical cost.
C. amortized cost.
D. fair value.
29) Gains or losses on cash flow hedges are
A. recorded in equity, as part of other comprehensive income.
B. reported directly in retained earnings.
C. ignored completely.
D. reported directly in net income.
30) All of the following statements regarding accounting for derivatives are correct
EXCEPT that
A. gains and losses resulting from hedge transactions are reported in different ways,
depending upon the type of hedge
B. they should be recognized in the financial statements as assets and liabilities
C. they should be reported at fair value
D. gains and losses resulting from speculation should be deferred
31) The rationale for interperiod income tax allocation is to
A. recognize a distribution of earnings to the taxing agency
B. adjust income tax expense on the income statement to be in agreement with income taxes
payable on the balance sheet
C. recognize a tax asset or liability for the tax consequences of temporary differences
that exist at the balance sheet date
D. reconcile the tax consequences of permanent and temporary differences appearing on the
current year’s financial statements
32) Taxable income of a corporation differs from pretax financial income because of
Permanent Differences | Temporary Differences
A. No | Yes
B. Yes | No
C. No | No
D. Yes | Yes
33) Which of the following situations would require interperiod income tax allocation
procedures?
A. Interest received on municipal bonds
B. Proceeds from a life insurance policy on an officer
C. An excess of percentage depletion over cost depletion
D. A temporary difference exists at the balance sheet date because the tax basis of an
asset or liability and its reported amount in the financial statements differ
34) 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. Prepaid royalty received in advance
B. An installment sale accounted for on the accrual basis for financial reporting
purposes and on the installment (cash) basis for tax purposes
C. Subscriptions received in advance
D. Interest received on a municipal obligation
35) At the December 31, 2007 balance sheet date, Garth Brooks Corporation reports an
accrued receivable for financial reporting purposes but NOT for tax purposes. When
this asset is recovered in 2008, a future taxable amount will occur and
A. Garth will record a decrease in a deferred tax liability in 2008
B. total income tax expense for 2008 will exceed current tax expense for 2008
C. pretax financial income will exceed taxable income in 2008
D. Garth will record an increase in a deferred tax asset in 2008
36) Which of the following differences would result in future taxable amounts?
A. Revenues or gains that are taxable before they are recognized in financial income
B. Revenues or gains that are recognized in financial income but are never included in
taxable income.
C. Expenses or losses that are tax deductible after they are recognized in financial
income
D. Expenses or losses that are tax deductible before they are recognized in financial
income.
37) 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.
38) In accounting for a defined-benefit pension plan
A. the employer’s responsibility is simply to make a contribution each year based on
the formula established in the plan
B. the expense recognized each period is equal to the cash contribution
C. an appropriate funding pattern must be established to ensure that enough monies
will be available at retirement to meet the benefits promised
D. the liability is determined based upon known variables that reflect future salary
levels promised to employees
39) In a defined-benefit plan, a formula is used that
A. defines the benefits that the employee will receive at the time of retirement
B. requires that pension expense and the cash funding amount be the same
C. requires that the benefit of gain or the risk of loss from the assets contributed to the
pension plan be borne by the employee
D. defines the contribution the employer is to make; no promise is made concerning the
ultimate benefits to be paid out to the employees
40) A corporation has a defined-benefit plan. An accrued pension cost will result at the
end of the first year if the
A. fair value of the plan assets exceeds the accumulated benefit obligation
B. amount of employer contributions exceeds the net periodic pension cost
C. accumulated benefit obligation exceeds the fair value of the plan assets
D. amount of net periodic pension cost exceeds the amount of employer contributions
41) 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. accrued or prepaid pension cost
B. an accrued actuarial liability
C. an offset to the liability for prior service cost
D. a charge or credit to unrealized appreciation and depreciation
42) The interest on the projected benefit obligation component of pension expense
A. reflects the rates at which pension benefits could be effectively settled
B. is the same as the expected return on plan assets
C. reflects the incremental borrowing rate of the employer
D. may be stated implicitly or explicitly when reported
43) Yeager Co. maintains a defined-benefit pension plan for its employees. At each
balance sheet date, Yeager should report a minimum liability at least equal to the
A. projected benefit obligation
B. unfunded accumulated benefit obligation
C. accumulated benefit obligation
D. unfunded projected benefit obligation
44) On January 1, 2008, Pratt Corp. adopted a defined-benefit pension plan. The plan’s
service cost of $300,000 was fully funded at the end of 2008. Prior service cost was
funded by a contribution of $120,000 in 2008. Amortization of prior service cost was
$48,000 for 2008. What is the amount of Pratt’s prepaid pension cost at December 31,
2008?
A. $120,000
B. $168,000
C. $72,000
D. $180,000
45) Interest cost included in the net pension cost recognized for a period by an
employer sponsoring a defined-benefit pension plan represents the
A. increase in the projected benefit obligation due to the passage of time
B. shortage between the expected and actual returns on plan assets
C. increase in the fair value of plan assets due to the passage of time
D. amortization of the discount on unrecognized prior service cost
46) On January 1, 2005, Foley Corporation acquired machinery at a cost of $250,000.
Foley adopted the double-declining balance method of depreciation for this machinery
and had been recording depreciation over an estimated useful life of ten years, with no
residual value. At the beginning of 2008, a decision was made to change to the straightline method of depreciation for the machinery. The depreciation expense to be
recorded for the machinery in 2008 is (round to the nearest dollar)
A. $18,286
B. $25,600
C. $22,857
D. $25,000
47) Accrued salaries payable of $51,000 were NOT recorded at December 31, 2007.
Office supplies on hand of $24,000 at December 31, 2008 were erroneously treated as
expense instead of supplies inventory. Neither of these errors was discovered nor
corrected. The effect of these two errors would cause
A. 2007 net income and December 31, 2007 retained earnings to be understated
$51,000 each
B. 2008 net income to be understated $75,000 and December 31, 2008 retained
earnings to be understated $24,000
C. 2007 net income to be overstated $27,000 and 2008 net income to be understated
$24,000
D. 2008 net income and December 31, 2008 retained earnings to be understated
$24,000 each
48) On January 1, 2005, Lynn Corporation acquired equipment at a cost of $600,000.
Lynn adopted the double-declining balance method of depreciation for this equipment
and had been recording depreciation over an estimated life of eight years, with no
residual value. At the beginning of 2008, a decision was made to change to the straightline method of depreciation for this equipment. Assuming a 30% tax rate, the
cumulative effect of this accounting change on beginning retained earnings, net of tax,
is
A. $0
B. $121,875
C. $78,750
D. $77,109
49) The estimated life of a building that has been depreciated 30 years of an originally
estimated life of 50 years has been revised to a remaining life of 10 years. Based on this
information, the accountant should
A. depreciate the remaining book value over the remaining life of the asset
B. continue to depreciate the building over the original 50-year life
C. adjust accumulated depreciation to its appropriate balance, through net income,
based on a 40-year life, and then depreciate the adjusted book value as though the
estimated life had always been 40 years
D. adjust accumulated depreciation to its appropriate balance through retained
earnings, based on a 40-year life, and then depreciate the adjusted book value as
though the estimated life had always been 40 years
50) Which type of accounting change should always be accounted for in current and
future periods
A. Change in reporting entity
B. Change in accounting principle
C. Correction of an error
D. Change in accounting estimate