Part 1 2 3 4
Part 1
1. General Product, Inc., shipped 100 million coupons in products it sold in 2011. The coupons are redeemable for thirty cents each. General anticipates that 70% of the coupons will be redeemed. The coupons expire on December 31, 2012. There were 45 million coupons redeemed in 2011, and 30 million redeemed in 2012.
What was General’s coupon promotion expense in 2011?
A. $7.5 million B. $21.0 million C. $13.5 million D. $30.0 million
2. Which of the following is not true about the fair value option?
A. Electing the fair value option for held-to-maturity investments simply reclassifies those investments as trading securities. B. All of these statements are true. C. The fair value option is irrevocable. D. The fair value option must be elected for all shares of an investment in a particular company.
3. Beresford, Inc., purchased several investment securities during 2008, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values aren’t considered permanent.
Held to maturity securities: Fair Value Fair Value Amortized Amortized
ABC Co. Bonds 12/31/10 12/31/11 Cost 12/31/10 Cost 12/31/11
$375,000 $400,000 $367,500 $360,000
Fair Value Fair Value
Trading securities: 12/31/10 12/31/11 Cost
DEF Co. Stock $48,000 $59,500 $66,000
GEH Inc. Stock $47,000 $77,000 $39,000
IJK Inc. Stock $44,000 $38,500 $32,900
Fair Value Fair Value
Available for Sale Securities 12/31/10 12/31/11 Cost
LMN Co. Stock $130,500 $150,400 $140,000
What would be the balance in Beresford’s accumulated other comprehensive income with respect to these investments in its 12/31/11 balance sheet (ignore taxes)?
A. $26,500 B. $55,100 C. $50,200 D. $10,400
4. Smith buys and sells securities which it typically classifies as available for sale. On December 15, 2011,
Smith purchased $500,000 of Jones shares, and elected the fair value option to account for the Jones investment. As of December 31, 2011, the Jones shares had a fair value of $525,000. In the 2011 financial statements, Smith will show (ignore taxes)
A. investment income of $25,000 in its income statement. B. other comprehensive income of $25,000.
C. an investment in Jones of $500,000. D. accumulated other comprehensive income of $525,000.
5. Goofy, Inc., bought 15,000 shares of Crazy Co.’s stock for $150,000 on May 5, 2010, and classified the stock as available for sale. The market value of the stock declined to $118,000 by December 31, 2010.
Goofy reclassified this investment as trading securities in December of 2011 when the market value had risen to $125,000. What effect on 2011 income should be reported by Goofy for the Crazy Co. shares?
A. $0 B. $32,000 net loss C. $25,000 net loss D. $7,000 net gain
6. On December 31, 2011, L, Inc., had a $1,500,000 note payable outstanding, due July 31, 2012. L borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000 of the note on January 23,
2012. In February 2012, L completed a $3,000,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2012. On March 13, 2012, L issued its 2011 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2011, balance sheet?
A. $500,000 B. $0 C. $1,000,000 D. $1,500,000
7. Hawk Corporation purchased 10,000 shares of Diamond Corporation stock in 2008 for $50 per share and classified the investment as securities available for sale. Diamond’s market value was $60 per share on December 31, 2009 and $65 on December 31, 2010. During 2011, Hawk sold all of its Diamond stock at $70 per share. In its 2011 income statement, Hawk would report a gain of
A. $150,000. B. $200,000. C. $50,000. D. $300,000.
8. Hope Company bought 30% of Faith Corporation in 2011. Hope’s purchase price equaled 30% of the book value of Faith’s net identifiable assets, which also equaled 30% of the fair value of Faith. During 2011, Faith reported net income in the amount of $4,000,000 and declared and paid dividends in the amount of $500,000. Hope mistakenly accounted for the investment as available for sale instead of using the equity method. What effect would this error have on the investment account and net income, respectively, for 2011?
A. Understated by $1,200,000; overstated by $1,050,000 B. Overstated by $1,200,000; overstated by $1,200,000 C. Understated by $1,050,000; understated by $1,050,000 D. Overstated by $1,050,000; understated by $1,050,000
9. If Dinsburry Company concluded that an investment originally classified as a trading security would now more appropriately be classified as held to maturity, Dinsburry would
A. not reclassify the investment, as original classifications are irrevocable.
B. reclassify the investment as held to maturity and immediately recognize in net income all unrealized gains and losses as of the reclassification date.
C. reclassify the investment as held to maturity, but there would be no income effect.
D. reclassify the investment as held to maturity and treat the fair value as of the date of reclassification as the investment’s amortized cost basis for future amortization.
10. On January 1, 2011, Nana Company paid $100,000 for 8,000 shares of Papa Company common stock. These securities were classified as trading securities. The ownership in Papa Company is 10%. Papa reported net income of $52,000 for the year ended December 31, 2011. The fair value of the Papa stock on that date was $45 per share. What amount will be reported in the balance sheet of Nana Company for the investment in Papa at December 31, 2011?
A. $315,600 B. $300,000 C. $360,000 D. $284,400
11. B Corp. has an employee benefit plan for compensated absences that gives employees 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, 2011, B’s unadjusted balance of liability for compensated absences was $42,000. B estimated that there were 300 vacation days and 150 sick days available at December 31, 2011. B’s employees earn an average of $200 per day. In its December 31, 2011, balance sheet, what amount of liability for compensated absences is B required to report?
A. $90,000 B. $144,000 C. $60,000 D. $84,000
12. On January 1, 2011, G Corporation agreed to grant its employees two weeks vacation each year, with the stipulation that vacations earned each year can be taken the following year. For the year ended December 31, 2011, G’s employees each earned an average of $800 per week. 500 vacation weeks earned in 2011 were not taken during 2011. Wage rates for employees rose by an average of 5 percent by the time vacations actually were taken in 2012. What is the amount of G’s 2012 wages expense related to 2011 vacation time?
A. $420,000 B. $400,000 C. $20,000 D. $0
13. Under IFRS No. 9, which is not a category for accounting for investments?
A. Fair value through profit and loss B. Held-to-maturity C. Fair value through other comprehensive income D. Amortized cost
14. Assume that, on 1/1/11, Sosa Enterprises paid $5,100,000 for its investment in 36,000 shares of Orioles Co. Further, assume that Orioles has 120,000 total shares of stock issued and estimates an 8 year remaining useful life and straight-line depreciation with no residual value for its depreciable assets.
At 1/1/11, the book value of Orioles’ identifiable net assets was $7,000,000, and the fair value of Orioles was $10,000,000. The difference between Orioles’ fair value and the book value of its identifiable net assets is attributable to $1,800,000 of land and the remainder to depreciable assets. Goodwill was not part of this transaction.
The following information pertains to Orioles during 2011:
What amount would Sosa Enterprises report in its year-end 2011 balance sheet for its investment in Orioles Co.?
Net income $600,000
Dividends declared and paid $360,000
Market price of common stock on 12/31/11 $80/share
A. $3,027,000 B. $3,200,000 C. $3,135,000 D. $3,180,000
15. Knique Shoes issued a $100,000, 8-month, noninterest-bearing note. The loan was made by Second Commercial Bank whose stated discount rate is 9%. The effective interest rate on this loan (rounded) is
A. 9.50%. B. 9.49%. C. 9.57%. D. 9.28%.
16. Oklahoma Oil Corp. paid interest of $785,000 during 2011, and the interest payable account decreased by $125,000. What was interest expense for the year?
A. $890,000 B. $555,000 C. $785,000 D. $660,000
End of exam
17. When cash is received from customers in the form of a refundable deposit, the cash account is increased with a corresponding increase in
A. shareholders’ equity. B. paid-in capital. C. revenue. D. a current liability.
18. Which of the following is a contingency that should be accrued?
A. The company deducts life insurance premiums from employees’ paychecks.
B. It’s probable that the company will receive $100,000 in settlement of a lawsuit.
C. The company is being sued and a loss is reasonably possible and reasonably estimable.
D. The company offers a two-year warranty and the expenses can be reasonably estimated.
19. What is the effective interest rate (rounded) on a 3-month, noninterest-bearing note with a stated rate of 12% and a maturity value of $200,000?
A. 12.0 % B. 12.4% C. 11.5% D. 3.0%
20. On January 1, 2011, Green Corporation purchased 20% of the outstanding voting common stock of Gold Company for $300,000. The book value of the acquired shares was $275,000. The excess of cost over book value is attributable to an intangible asset on Gold’s books that was undervalued and had a remaining useful life of five years. For the year ended December 31, 2011, Gold reported net income of $125,000 and paid cash dividends of $25,000. What is the carrying value of Green’s investment in Gold at December 31, 2011?
A. $320,000 B. $295,000 C. $315,000 D. $ 300,000
Part 2
1. On December 31, 2011, B Corp. sold a machine to Royal and simultaneously leased it back for one year. Pertinent information at this date follows: In B’s December 31, 2011, balance sheet, the deferred revenue from the sale of this machine should be
Sales price $720,000
Carrying amount 660,000
Present value of lease rentals 68,200 ($6,000 for 12 months at 12% Estimated remaining useful life 12 years
A. $60,000. B. $68,200. C. $8,200. D. $0
2. C Corp. has a rate of return on assets of 10%. Not including any indirect effects on earnings, the rate of return on assets is immediately increased when C records
A Capital Lease An Operating Lease
a. yes yes b. no no c. yes no d. no yes
A. Option b B. Option c C. Option a D. Option d
Operating leases don’t affect assets, liabilities, or equity. A capital lease increases assets and liabilities the same amount and thus has no effect of equity, which is A – L = Equity. Because assets, the denominator, increase and earnings remain the same, the rate of return decreases.
3. If the lessor retains title to leased property under the terms of the lease,
A. the amount to be recovered through periodic lease payments is increased by the present value of the residual amount.
B. the amount to be recovered through periodic lease payments is reduced by the present value of the residual amount.
C. the amount to be recovered will be the same as if there were no residual value.
D. the lessor will record a greater amount of depreciation due to the residual value.
4. Discount-Mart issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.
Payment Cash Effective Interest Decrease on balance Outstanding balance
$8,640,967
1 $300, 000 345,639 345,639 8,686,606
2 300,000 347,464 347,464 8,734,070
3 300,00 349,363 349,363 8,783,433
4 300,000
What would be the total interest cost of the bonds over their full term?
A. $7,359,033 B. $1,359,033 C. $6,000,000 D. $4,640,967
5. On December 31, 2010, Reagan, Inc., signed a lease for some equipment having a 9-year useful life with Silver Leasing Co. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2016. There’s no bargain purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease.
Reagan’s lease amortization schedule appears below:
Dec. 31 Payments Interest decrease balance Balance
2010 $519,115
2010 $90,000 $90,000 429,115
2011 90,000 $17,165 72,835 356,280
2012 90,000 14,251 75,749 280,531
2013 90,000 11,221 78,779 201,752
2014 90,000 8,070 81,930 119,822
2015 90,000 4,793 85,207 34,615
2016 36,000 1,385 34,615 0
At what amount would Reagan record the leased asset at inception of the agreement?
A. $429,115 B. $540,000 C. $576,000 D. $519,115
6. Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.
What is the carrying value of the bonds as of December 31, 2012?
A. $11,432,379 B. $11,256,109 C. $11,316,611 D. $11,375,350
7. When an equipment dealer receives a long-term note in exchange for equipment, the present value of the future cash flows received on the notes is
A. credited to sales revenue at the exchange date.
B. treated as a current liability at the exchange date.
C. recorded as interest revenue at the exchange date.
D. recorded as interest receivable at the exchange date.
8. On June 30, 2011, Hardy Corporation issued $10 million of its 8% bonds for $9.2 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2011, and mature on June 30, 2018. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the 6 months ended December 31, 2011?
A. $60,000 B. $32,000 C. $46,000 D. $40,000
9. On January 1, 2011, Zebra Corporation issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2021. Zebra paid $50,000 in bond issue costs. Zebra uses the straight-line amortization method. What is the bond carrying value reported in the December 31, 2011, balance sheet?
A. $1,040,000 B. $1,045,000 C. $982,000 D. $987,000
10. Technoid, Inc., sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2011. The manufacturing cost of the computers was $12 million.
This non-cancelable lease had the following terms: * Lease payments: $2,466,754 semiannually; first payment at January 1, 2011; remaining payments at June 30 and December 31 each year through June 30, 2015. * Lease term: 5 years (10 semiannual payments)
* No residual value; no bargain purchase option
* Economic life of equipment: 5 years
* Implicit interest rate and lessee’s incremental borrowing rate: 5% semiannually
* Fair value of the computers at January 1, 2011: $20 million
Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred.
What is the net carrying value of the lease liability in Lone Star’s June 30, 2011 balance sheet? Round your answer to the nearest dollar.
A. $21,000,000 B. $2,466,754 C. $17,533,246 D. $15,943,154
11. Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.
What is the stated annual rate of interest on the bonds?
A. 4% B. 8% C. 6% D. 3%
12. MSG Corporation has $100,000 of 10-year, 6% bonds outstanding on December 31, 2010. The bonds have 3 years remaining to maturity. The unamortized premium remaining on these bonds was $6,000.
MSG uses straight-line amortization. On May 1, 2011, $10,000 of the bonds were retired at 112. How much, and what type of gain or loss, most likely results from this retirement?
A. $667 ordinary gain B. $667 extraordinary loss C. $667 ordinary loss D. $667 extraordinary gain
13. If the residual value of a leased asset turns out to be more than the amount guaranteed by the lessee, the
A. lessee will reduce the last year’s depreciation. B. lessee must pay the lessor the amount of the excess.
C. lessor must compensate the lessee for the excess. D. lessor isn’t obligated to compensate the lessee for the excess.
14. On January 1, 2011, Packard Corporation leased equipment to Hewlitt Company. The lease term is 8 years. The first payment of $450,000 was made on January 1, 2011. Remaining payments are made on December 31 each year, beginning with December 31, 2011. The equipment cost Packard Corporation $2,400,000. The present value of the minimum lease payments is $2,640,000. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, what will be the balance reported as a liability by Hewlitt in the December 31, 2012, balance sheet?
A. $1,509,000 B. $1,950,000 C. $1,704,900 D. $1,959,000
15. On January 1, 2011, Princess Corporation leased equipment to King Company. The lease term is 8 years. The first payment of $675,000 was made on January 1, 2011. The equipment cost Princess Corporation $3,600,000. The present value of the minimum lease payments is $3,960,000. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, how much interest revenue will Princess record in 2012 on this lease?
A. $328,500. B. $293,850. C. $261,000. D. $325,350.
16. S Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1. Not including any indirect effects on earnings, the immediate impact of recording a capital lease on these ratios is a(an) Return on Assets Debt/Equity Ratio
a. increase increase b. decrease decrease c. increase decrease d. decrease increase
A. Option a B. Option d C. Option c D. Option b
17. Technoid, Inc., sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2011. The manufacturing cost of the computers was $12 million.
This non-cancelable lease had the following terms:
* Lease payments: $2,466,754 semiannually; first payment at January 1, 2011; remaining payments at June 30 and December 31 each year through June 30, 2015.
* Lease term: 5 years (10 semiannual payments)
* No residual value; no bargain purchase option
* Economic life of equipment: 5 years
* Implicit interest rate and lessee’s incremental borrowing rate: 5% semiannually
* Fair value of the computers at January 1, 2011: $20 million
Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred. Lone Star Company would account for this as a(an)
A. capital lease. B. sales-type lease. C. direct financing lease. D. operating lease.
18. Technoid, Inc., sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2011. The manufacturing cost of the computers was $12 million.
This non-cancelable lease had the following terms:
* Lease payments: $2,466,754 semiannually; first payment at January 1, 2011; remaining payments at June 30 and December 31 each year through June 30, 2015.
* Lease term: 5 years (10 semi-annual payments)
* No residual value; no bargain purchase option
* Economic life of equipment: 5 years
* Implicit interest rate and lessee’s incremental borrowing rate: 5% semi-annually
* Fair value of the computers at January 1, 2011: $20 million
Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred. Technoid would account for this as a(an)
A. capital lease. B. direct financing lease. C. sales-type lease. D. operating lease.
19. On December 31, 2010, Reagan, Inc., signed a lease for some equipment having a 9-year useful life with Silver Leasing Co. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2016.
There’s no bargain purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease.
Reagan’s lease amortization schedule appears below:
What is the carrying value of the lease liability on Reagan’s December 31, 2012 balance sheet (after the third lease payment is made)?
A. $266,280 B. $356,280 C. $280,531 D. $190,530
20. Francisco leased equipment from Julio on December 31, 2011. The lease is a 10-year lease with annual payments of $150,000 due on December 31 of each year. The present value of the lease is $1,020,000.
Francisco’s incremental borrowing rate is 12% for this type of lease. The implicit rate of 10% is known by the lessee. What should be the balance in Francisco lease liability at December 31, 2012?
A. $824,400. B. $792,000. C. $807,000. D. $806,400.
Part 3
1. Information for Hobson International Corp. for the current year ($ in millions):
Income from continuing operations before tax $150
Extraordinary loss (pretax) 30
Temporary differences (all related to operating income):
Accrued warranty expense in excess of write-offs included in operating income 10
Depreciation deducted on tax return in excess of depreciated expense 25
Permanent differences (all related to operating income):
Nondeductible portion of travel & entertainment expense 5
The applicable enacted tax rate for all periods is 40%
What should Hobson International report as income from continuing operations?
A. $94 million B. $150 million C. $88 million D. $90 million
2. Giada Foods reported $940 million in income before income taxes for 2011, its first year of operations. Tax depreciation exceeded depreciation for financial reporting purposes by $100 million. The company also had non-tax-deductible expenses of $80 million relating to permanent differences. The income tax rate for
2011 was 35%, but the enacted rate for years after 2011 is 40%. The balance in the deferred tax liability in the December 31, 2011, balance sheet is
A. $40 million. B. $35 million. C. $56 million. D. $16 million.
3. Bumble Bee Co. had taxable income of $7,000, MACRS depreciation of $5,000, book depreciation of $2,000, and accrued warranty expense of $400 on the books although no warranty work was performed.
What is Bumble Bee’s pretax accounting income?
A. $4,400. B. $3,600. C. $2,600. D. $9,600.
4. Woody Corp. had taxable income of $8,000 in the current year. The amount of MACRS depreciation was $3,000 while the amount of depreciation reported in the income statement was $1,000. Assuming no other differences between tax and accounting income, Woody’s pretax accounting income was
A. $10,000. B. $5,000. C. $6,000. D. $11,000.
5. Alamo, Inc., had $300 million in taxable income for the current year. Alamo also had a decrease in deferred tax assets of $30 million and an increase in deferred tax liabilities of $60 million. The company is subject to a tax rate of 40%. The total income tax expense for the year was
A. $ 390 million. B. $180 million. C. $150 million. D. $210 million.
6. The EPBO for a particular employee on January 1, 2011, was $150,000. The APBO at the beginning of the year was $30,000. The appropriate discount rate for this postretirement plan is 5%. The employee is expected to serve the company for a total of twenty-five years, with five of those years already served as of January 1, 2011. What is the APBO at December 31, 2011?
A. $30,000. B. $42,800. C. $31,500. D. $37,800.
7. The changes in account balances for Allen Inc. for 2011 are as follows:
Assets $225,000 debit
Common stock 125,000 credit
Liabilities 80,000 credit
Paid-in capital–excess of par 15,000 credit
Assuming the only changes in retained earnings in 2011 were for net income and a $25,000 dividend, what was net income for 2011?
A. $20,000 B. $30,000 C. $15,000 D. $5,000
8. Pug Corporation has 10,000 shares of $10 par common stock outstanding and 20,000 shares of $100 par, 6% noncumulative, nonparticipating preferred stock outstanding. Dividends have not been paid for the past two years. This year, a $150,000 dividend will be paid. What are the dividends per share for preferred and common, respectively?
A. $6; $1.50. B. $7.50; $0. C. $6; $3. D. $7.50; $1.50.
9. Persoff Industries International has a defined benefit pension plan. The company revised its estimate of future salary levels causing its defined benefit obligation to increase by $16 million. Also, Persoff’s $25 million actual return on plan assets exceeded the $22 million expected return. Persoff prepares its financial statements in accordance with International Financial Reporting Standards. The company will
A. record a $16 million gain-OCI.
B. report an unrecognized net loss as an offset to the net pension liability in the liability section of the balance sheet.
C. report an unrecognized net gain as an increase in the net pension asset in the liability section of the balance sheet.
D. record a $3 million decrease in its plan assets.
10. The following information pertains to Havana Corporation’s defined benefit pension plan:
($ in 000s) 2011 2012
Beginning Beginning
Balances balances
Projected benefit obligation ($6,000) ($6,504)
Plan assets 5,760 6,336
Prior service cost–AOCI 600 552
Net loss–AOCI 720 786
At the end of 2011, Havana contributed $696 thousand to the pension fund and benefit payments of $624 thousand were made to retirees. The expected rate of return on plan assets was 10%, and the actuary’s discount rate is 8%. There were no changes in actuarial estimates and assumptions regarding the PBO.
What is Havana’s 2011 actual return on plan assets?
A. $6,336 thousand B. $504 thousand C. $618 thousand D. $1,128 thousand
11. JL Health Services reported a net loss-AOCI in last year’s balance sheet. This year, the company revised its estimate of future salary levels causing its PBO estimate to decline by $24. Also, the $48 million actual return on plan assets was less than the $54 million expected return. As a result,
A. the net pension liability will decrease by $24 million.
B. the statement of comprehensive income will report a $6 million gain and a $24 million loss.
C. the net pension liability will increase by $18 million.
D. accumulated other comprehensive income will increase by $18 million.
12. Information for Hobson International Corp. for the current year ($ in millions):
Income from continuing operations before tax $150
Extraordinary loss (pretax) 30
Temporary differences (all related to operating income):
Accrued warranty expense in excess of write-offs included in operating income 10
Depreciation deducted on tax return in excess of depreciated expense 25
Permanent differences (all related to operating income):
Nondeductible portion of travel & entertainment expense 5
The applicable enacted tax rate for all periods is 40%.
What is Hobson’s income tax payable for the current year?
A. $50 million B. $48 million C. $52 million D. $44 million
13. The EPBO for a particular employee on January 1, 2011, was $30,000. The APBO at the beginning of the year was $6,000. The appropriate discount rate for this postretirement plan is 5%. The employee is expected to serve the company for a total of twenty-five years with five of those years already served as of January 1, 2011. What is the APBO at December 31, 2011?
A. $6,300 B. $7,200 C. $7,500 D. $7,560
14. Giada Foods reported $940 million in income before income taxes for 2011, its first year of operations. Tax depreciation exceeded depreciation for financial reporting purposes by $100 million. The company also had non-tax-deductible expenses of $80 million relating to permanent differences. The income tax rate for 2011 was 35%, but the enacted rate for years after 2011 is 40%. The balance in the deferred tax liability in the December 31, 2011, balance sheet is
A. $16 million. B. $56 million. C. $35 million. D. $40 million.
15. Lucid Company declared a property dividend of 20,000 shares of $1 par Polk Company common stock. The Polk stock was purchased for $5 per share. Market value was $10 per share on the declaration date and $11 per share on the distribution date. What is the amount of the dividend?
A. $300,000. B. $100,000. C. $200,000 D. $220,000.
16. Boxer Company owned 20,000 shares of King Company that were purchased in 2009 for $500,000.
On May 1, 2011, Boxer declared a property dividend of 1 share of King for every 10 shares of Boxer stock. On that date, there were 50,000 shares of Boxer stock outstanding. The market value of the King stock was $30 per share on the date of declaration and $32 per share on the date of distribution. By how much is retained earnings reduced by the property dividend?
A. $300,000 B. $150,000 C. $0 D. $160,000
17. Castillo Company has a defined benefit pension plan. At the end of the reporting year, the following data were available: beginning PBO, $75,000; service cost, $18,000; interest cost, $5,000; benefits paid for the year, $9,000; ending PBO, $89,000; the expected return on plan assets, $10,000; and cash deposited with pension trustee, $17,000. There were no other pension related costs. The journal entry to record the annual pension costs will include a credit to the PBO for
A. $23,000. B. $13,000. C. $18,000. D. $17,000.
18. As of December 31, 2011, Warner Corporation reported the following:
Dividends payable 20,000
Treasury stock 600,000
Paid-in capital–share repurchase 20,000
Other paid-in capital accounts 4,000,000
Retained earnings 3,000,000
During 2012, half of the treasury stock was resold for $240,000; net income was $600,000; cash dividends declared were $1,500,000; and stock dividends declared were $500,000. 40. What would shareholders’ equity be as of December 31, 2012?
A. The amount isn’t shown. B. $5,820,000 C. $5,760,000 D. $6,760,000
19. In its first four years of operations Peridot Jewelers reported the following operating income (loss) amounts:
2008 $150,000 2009 100,000 2010 (425,000) 2011 450,000
There were no other deferred income taxes in any year. In 2010, Peridot elected to carry back its operating loss. The enacted income tax rate was 40%. In its 2011 income statement, what amount should Peridot report as income tax expense?
A. $180,000 B. $170,000 C. $110,000 D. $80,000
20. The shareholders’ equity of Red Corporation includes $200,000 of $1 par common stock and $400,000 of 6% cumulative preferred stock. The board of directors of Green declared cash dividends of $50,000 in 2011 after paying $20,000 cash dividends in 2010 and $40,000 in 2009. What is the amount of dividends common shareholders will receive in 2011?
A. $28,000 B. $22,000 C. $26,000 D. $18,000
21. Information for Hobson International Corp. for the current year ($ in millions):
Income from continuing operations before tax $150
Extraordinary loss (pretax) 30
Temporary differences (all related to operating income):
Accrued warranty expense in excess of write-offs included in operating income 10
Depreciation deducted on tax return in excess of depreciated expense 25
Permanent differences (all related to operating income):
Nondeductible portion of travel & entertainment expense 5
The applicable enacted tax rate for all periods is 40%.
What should Hobson International report as net income?
A. $72 million B. $88 million C. $75 million D. $70 million
22. The following refers to the pension spreadsheet (columns have missing amounts) for the current year for Pancho Villa Enterprises (PVE).
What was PVE’s pension expense for the year?
A. $260 B. $68 C. $50 D. $62
23. F Co. declares a 5% stock dividend. If the market price at declaration is $12 per share, a shareholder with 110 shares likely would receive
A. 5 additional shares and a fractional share right for 2 ½ shares. B. 5 additional shares. C. fractional share rights for 5 ½ shares. D. 5 additional shares and $6 in cash.
24. Montgomery & Co., a well established law firm, provided 500 hours of its time to Fink Corporation in exchange for 1,000 shares of Fink’s $5 par common stock. Mitchell’s usual billing rate is $700 per hour, and Fink’s stock has a book value of $250 per share. By what amount will Fink’s Paid-in capital – excess of par increase for this transaction?
A. $345,000 B. $300,000 C. $295,000 D. $350,000
25. Information for Hobson International Corp. for the current year ($ in millions):
Income from continuing operations before tax $150
Extraordinary loss (pretax) 30
Temporary differences (all related to operating income):
Accrued warranty expense in excess of write-offs included in operating income 10
Depreciation deducted on tax return in excess of depreciated expense 25
Permanent differences (all related to operating income):
Nondeductible portion of travel & entertainment expense 5
The applicable enacted tax rate for all periods is 40%.
How much tax on income from continuing operations would be reported in Hobson’s income statement?
A. $60 million B. $62 million C. $56 million D. $50 million
Part 4
1. Burnet Company had 30,000 shares of common stock outstanding on January 1, 2011. On April 1, 2011, the company issued 15,000 shares of common stock. The company had outstanding fully vested incentive stock options for 5,000 shares exercisable at $10 that had not been exercised by its executives.
The average market price of common stock was $9. The company reported net income in the amount of $189,374 for 2011. What is the effect of the options?
A. The options will dilute EPS by $.09 per share. B. The options will dilute EPS by $.33 per share.
C. The options are anti-dilutive. D. The options will dilute EPS by $.17 per share.
2. Due to an error in computing depreciation expense, Prewitt Corporation overstated accumulated depreciation by $20 million as of December 31, 2011. Prewitt has a tax rate of 30%. Prewitt’s retained earnings as of December 31, 2011, would be
A. understated by $6 million. B. overstated by $14 million. C. overstated by $6 million. D. understated by $14 million
3. Rampart, Inc., recorded the following transaction:
Land 15 million
Notes Payable 12 million
Cash 3 million
In the statement of cash flows, this would be reported as a
A. $3 million outflow from investing activities and $12 million noncash investing and financing activity.
B. $15 million outflow from investing activities. C. $3 million outflow from investing activities. D. $3 million noncash investing and financing activity.
4. In its 2011 income statement, WME reported $58,000 for insurance expense. WME paid $72,000 in insurance premiums during 2011. In its reconciliation schedule, WME should show a
A. $14,000 negative adjustment to net income under the indirect method for the decrease in prepaid insurance.
B. $14,000 positive adjustment to net income under the indirect method for the increase in prepaid insurance.
C. $14,000 negative adjustment to net income under the indirect method for the increase in prepaid insurance.
D. $14,000 positive adjustment to net income under the indirect method for the decrease in prepaid insurance.
5. During 2011, Angel Corporation had 900,000 shares of common stock and 50,000 shares of 6% preferred stock outstanding. The preferred stock does not have cumulative or convertible features. Angel declared and paid cash dividends of $300,000 and $150,000 to common and preferred shareholders, respectively, during 2011.
On January 1, 2010, Angel issued $2,000,000 of convertible 5% bonds at face value. Each $1,000 bond is convertible into 5 common shares.
Angel’s net income for the year ended December 31, 2011, was $6 million. The income tax rate is 20%.
What will Angel report as diluted earnings per share for 2011, rounded to the nearest cent?
A. $6.43 B. The correct answer isn’t given. C. $6.25 D. $6.22
6. Prior to 2011, Trapper John, Inc., used sum-of-the-years’-digits depreciation for its store equipment. Beginning in 2011, Trapper John decided to use straight-line depreciation for these assets. The equipment cost $3 million when it was purchased at the beginning of 2009, had an estimated useful life of five years and no estimated residual value. To account for the change in 2011, Trapper John
A. would adjust accumulated depreciation and retained earnings for the excess charges made in 2009 and 2010. B. would report depreciation expense of $400,000 in its 2011 income statement. C. would report $3 million in depreciation expense for 2011. D. would retrospectively report $600,000 in depreciation expense annually for 2009 and 2010, and report $600,000 in depreciation expense for 2011.
7. In its 2011 income statement, WME reported $695,000 for service revenue earned from membership fees. WME received $681,000 cash in advance from members during 2011. In its reconciliation schedule, WME should show a
A. $14,000 positive adjustment to net income under the indirect method for the decrease in unearned revenue. B. $14,000 negative adjustment to net income under the indirect method for the decrease in unearned revenue. C. $14,000 positive adjustment to net income under the indirect method for the increase in unearned revenue. D. $14,000 negative adjustment to net income under the indirect method for the increase in unearned revenue.
8. Which of the following statements is true regarding correcting errors in previously issued financial statements prepared in accordance with International Financial Reporting Standards?
A. Retrospective application is required with no exception. B. The error can be reported in the current period if it’s not considered practicable to report it retrospectively. C. The error can be reported prospectively if it’s not considered practicable to report it retrospectively. D. The error can be reported in the current period if it’s not considered practicable to report it prospectively.
9. B Company switched from the sum-of-the-years-digits depreciation method to straight-line depreciation in 2011. The change affects machinery purchased at the beginning of 2009 at a cost of $72,000. The machinery has an estimated life of five years and an estimated residual value of $3,600. What is B’s 2011 depreciation expense?
A. $13,680 B. $15,840 C. $9,120 D. $19,200
10. During 2011, Falwell Inc. had 500,000 shares of common stock and 50,000 shares of 6% cumulative preferred stock outstanding. The preferred stock has a par value of $100 per share. Falwell did not declare or pay any dividends during 2011.
Falwell’s net income for the year ended December 31, 2011, was $2.5 million. The income tax rate is 40%.
Falwell granted 10,000 stock options to its executives on January 1 of this year. Each option gives its holder the right to buy 20 shares of common stock at an exercise price of $29 per share. The options vest after one year. The market price of the common stock averaged $30 per share during 2011. What is Falwell’s diluted earnings per share for 2011, rounded to the nearest cent?
A. $3.14 B. $4.34 C. $4.90 D. The answer can’t be determined from the information given.
11. Blue Cab Company had 50,000 shares of common stock outstanding on January 1, 2011. On April 1, 2011, the company issued 20,000 shares of common stock. The company had outstanding fully vested incentive stock options for 5,000 shares exercisable at $10 that had not been exercised by its executives.
The end-of-year market price of common stock was $13 while the average price for the year was $12. The company reported net income in the amount of $269,915 for 2011. What is the diluted earnings per share (rounded)?
A. $4.10. B. $4.50. C. $3.60. D. $3.81.
12. During 2011, Falwell Inc. had 500,000 shares of common stock and 50,000 shares of 6% cumulative preferred stock outstanding. The preferred stock has a par value of $100 per share. Falwell did not declare or pay any dividends during 2011.
Falwell’s net income for the year ended December 31, 2011, was $2.5 million. The income tax rate is 40%.
Falwell granted 10,000 stock options to its executives on January 1 of this year. Each option gives its holder the right to buy 20 shares of common stock at an exercise price of $29 per share. The options vest after one year. The market price of the common stock averaged $30 per share during 2011.
What is Falwell’s basic earnings per share for 2011, rounded to the nearest cent?
A. The correct answer isn’t given. B. $5.00 C. $3.14 D. $4.40
13. On December 31, 2010, Albacore Company had 300,000 shares of common stock issued and outstanding. Albacore issued a 10% stock dividend on June 30, 2011. On September 30, 2011, 12,000 shares of common stock were reacquired as treasury stock. What is the appropriate number of shares to be used in the basic earnings per share computation for 2011?
A. 303,000 B. 342,000 C. 327,000 D. 312,000
14. During the current year, High Corporation had 3 million shares of common stock outstanding. Five thousand, $1,000, 6% convertible bonds were issued at face amount at the beginning of the year. High reported income before tax of $4 million and net income of $2.4 million for the year. Each bond is convertible into ten shares of common. What is diluted EPS (rounded)?
A. $.86 B. $.85 C. $.80 D. $.79
15. Bowers Corporation reported the following ($ in 000s) for the year:
Balance
Beginning Ending
Account receivable $600 $850
Allowance for bad debt 40 35
Sales on account were $1,900, and bad debt expense was $18 for the year. How much cash was collected from customers on account?
A. $1,638 B. $1,627 C. $2,142 D. $1,642
16. Sneed Corporation reported balances in the following accounts for the current year:
Beginning Ending
Income tax payable $50 $30
Deferred tax liability 80 140
Income tax expense was $230 for the year. What was the amount paid for taxes?
A. $210 B. $190 C. $220 D. $280
17. Under its executive stock option plan, W Corporation granted options on January 1, 2011, that permit executives to purchase 15 million of the company’s $1 par common shares within the next eight years, but not before December 31, 2013 (the vesting date). The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures are anticipated. The options are exercised on April 2, 2014, when the market price is $21 per share. By what amount will W’s shareholder’s equity be increased when the options are exercised?
A. $330 million B. $315 million C. $270 million D. $60 million
18. Selected information from Large Corporation’s accounting records and financial statements for 2011 is as follows ($ in millions):
Cash paid to acquire a patent $28
Treasury stock purchased for cash 25
Proceeds from sale of land and buildings 45
Gain from the sale of land and buildings 26
Investment revenue received 5
Cash paid to acquire office equipment 40
Large prepares its financial statements in accordance with IFRS. In its statements of cash flow Large most likely reports net cash outflows from investing activities of
A. $28 million. B. $68 million. C. $38 million. D. $18 million.
19. Like U.S. GAAP, international standards also require a statement of cash flows. Consistent with U.S
GAAP, cash flows are classified as operating, investing, or financing activities. However, with regard to interest and dividend inflows and outflows, the international standard for cash flow statements
A. allows companies to report cash outflows from interest payments as either operating or investing cash flows. B. designates cash outflows for interest payments and cash inflows from interest and dividends received as operating cash flows. C. allows companies to report cash inflows from interest and dividends as either operating or investing cash flows. D. allows companies to report dividends paid as either investing or operating cash flows
20. Horrocks Company granted 180,000 restricted stock awards of its no par common shares to executives, subject to forfeiture if employment is terminated within three years. Horrocks’ common shares have a market price of $10 per share on January 1, 2010, the grant date, and at December 31, 2011, averaging $10 throughout the year. When calculating diluted EPS at December 31, 2011, the net increase in the denominator of the EPS fraction will be
A. 120,000 shares. B. 60,000 shares. C. 0 shares. D. 180,000 shares.
21. The total compensation for the award is $1,800,000 ($10 market price per share x 180,000 shares).
The stock award vests over three years, it is expensed as $600,000 each year for three years.
At the end of 2011, the second year, $1,200,000 has been expensed and $600,000 remains unexpensed, so $600,000 would be the assumed proceeds in an EPS calculation.
If the market price averages $10, the $600,000 will buy back 60,000 shares and we would add to the denominator of diluted EPS 120,000 common shares:
No adjustment to the numerator
180,000 – 60,000* = 120,000
*Assumed purchase of treasury shares
$600,000 ÷ $10 (average market price)
60,000 shares
Which of the following would not be accounted for using the retrospective approach?
A. A change from the full cost method in the oil industry
B. A change in depreciation methods
C. A change from the completed contract method to the percent-of-completion method for long-term construction contracts
D. A change from LIFO to FIFO inventory costing
22. During 2011, P Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts:
2009 $120,000 understated
2010 $150,000 overstated
P uses the periodic inventory system to ascertain year-end quantities that are converted to dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income taxes, P’s retained earnings at January 1, 2011 would be
A. $30,000 overstated.
B. correct.
C. $150,000 overstated.
D. $150,000 understated.
23. Under IFRS, a deferred tax asset for stock options
A. is the portion of the options’ intrinsic value earned to date times the tax rate. B. is created for the cumulative amount of the fair value of the options the company has recorded for compensation expense.
C. isn’t created if the award is “in the money;” that is, it has intrinsic value. D. is the tax rate times the amount of compensation.
24. On January 1, 2011, G Corp. granted stock options to key employees for the purchase of 80,000 shares of the company’s common stock at $25 per share. The options are intended to compensate employees for the next two years. The options are exercisable within a four-year period beginning January 1, 2013, by the grantees still in the employ of the company. No options were terminated during 2011, but the company does have an experience of 4% forfeitures over the life of the stock options. The market price of the common stock was $31 per share at the date of the grant. G Corp. used the binomial pricing model and estimated the fair value of each of the options at $10. What amount should G charge to compensation expense for the year ended December 31, 2011?
A. $320,000 B. $307,200 C. $384,000 D. $400,000
25. Which of the following is not a change in reporting entity?
A. All are changes in reporting entity B. Reporting using comparative financial statements for the first time C. Changing the companies that comprise a consolidated group D. Presenting consolidated financial statements for the first time
