ACCT340 Exam 2

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

common stockholders

The pre-emptive right of a common stockholder is the right to
a. share proportionately in a corporate asset 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

share proportionately in any new issues of stock of the same class

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

a claim against a portion of the total assets of an enterprise

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

par value of the shares issued

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

1

In January 2012, Finely Corporation, a newly formed company, issued 10,000 shares of its $10 par common stock of $15 per share. On July 1, 2012, Finely 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

decreased total stockholders' equity

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

issued but not outstanding shares

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 part value and paid-in capital in excess of par for the excess of the purchase price over the part 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 reatined earnings for the excess of the purchase price over the par value

treasury stock for the purchase price

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

a footnote

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

purchase of treasury stock

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

date of record

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

liquidating dividend

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. Accumualted Depletion
d. Accumulated Depreciation

a paid-in capital account

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

addition to capital stock

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

that there is no effect on total stockholders' equity

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

Decrease; No effect

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

treasury common stock

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

are not paid or disclosed

Presented below is information related to Hale Corporation
Common stock, $1 par: $4,800,000
Paid-in capital in excess of par---common stock 550,00
Preferred 8 1/2% stock, $50 par 2,000,000
Paid-in capital in excess of par---preferred stock 400,000
Retained Earnings 1,500,000
Treasury common stock (at cost) 150,000

The total stockholders' equity of Hale Corporation is
a. $9,100,000
b. $9,250,000
c. $7,600,000
d. $7,750,000

9,100,000

Presented below is information related to Hale Corporation
Common stock, $1 par: $4,800,000
Paid-in capital in excess of par---common stock 550,00
Preferred 8 1/2% stock, $50 par 2,000,000
Paid-in capital in excess of par---preferred stock 400,000
Retained Earnings 1,500,000
Treasury common stock (at cost) 150,000

The total paid-in capital (cash collected) related to the common stock is
a. $4,800,000
b. $5,350,000
c. %5,750,000
d. $5,200,000

5,350,0000

Gannon Company acquired 8,000 shares of its own common stock at $20 per sahre on February 5, 2012, and sold 4,000 of these shares at $27 per share on August 9, 2013. The fair value of Gannon's common stock was $24 per share at December 31, 2012, and $25 per share at December 31, 2013. The cost method is used to record treasury stock transacations. What account(s) should Gannon credit in 2013 to record the sale of 4,000 shares?
a. treasury stock for $108,000
b. treasury stock for $80,000 and Paid-in capital and treasury stock for $28,000
c. treasury stock for $80,000 and retained earnings for $28,000
d. treasury stock for $96,000 and retained earnings for $12,000

treasury stock for $80,000 and paid-in capital and treasury stock for $28,000

The stockholders' equity section of Gunkel Corporation as of December 31, 2012, was a follows:

Comon stock, par value $2; authorized 20,000 shares; issued and outstanding 10,000 shares $20,000
Paid-in capital in excess of par 30,000
Retained earnings 95,000
=145,000

On march 1, 2013, the board of directors declared a 15% stock dividend, and accordingly 1,5000 additional shares were issued. On March 1, 2011 the fair value of the stock was $6 per share. For the two months ended February 28, 2013, Gunkel sustained a net loss of $10,000.

What amount should Gunkel report as retained earnings as of March 1, 2013?
a. $76,000
b. $82,000
c. $86,000
d. $92,000

76,000

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

a capital expenditure is charged to expense

Which of the following represents the total number of shares that a corporation may issued under the terms of its charter?
a. authorized shares
b. issued shares
c. unissued shares
d. outstanding shares

authorized shares

Stinson Corporation owned 30,000 shares of Matile Corporation. These shares were purhcased in 2009 for $270,000. On November 15, 2013, Stinson declared a property dividend of one share of Matile for every ten shares of Stinson held by a stockholders. On that date, when the market price of Matile was $21 per share, there were 270,000 shares of Stinson outstanding. What gain and net reduction in retained earnings would result from this property dividend?
Gain Net reduction in retained earnings
a. 0 243,000
a. 0 567,000
a. 324,000 81,000
a. 324,000 243,000

324,000 243,000

Winger Corporation owned 300,000 shares of Fegan Corporation stock. On December 31, 2012, when Winger's account "Equity Investment (Fegan Corporation)" had a carrying value of $5 per share, Winger distributed these shares to its stockholders as a dividend. Winger originally paid $8 for each share. Fegan has 1,000,000 shares issued and outstanding, which are traded on a national stock exchange. The quoted market price for Fegan share was $7 on the declaration date and $9 on the distribution date.
What would be the reduction in Winger's stockholders' equity as a result of the above transactions?
a. 1,200,000
b. 1,500,000
c. 2,400,000
d. 2,700,000

1,500,000

Gibbs Corporation owned 20,000 shares of Oliver Corporation's $5 par value common stock. These shares were purchased in 2009 for $180,000. On September 15, 2013, Gibbs declared a property dividend of one share of Oliver for every ten shares of Gibbs held by a stockholder. On that date, when the market price of Oliver was $21 per share, there were 180,000 shares of Gibbs outstanding. What NET reduction in retained earnings would result from this property dividend?
a, 162,000
b. 378,000
c. 108,000
d. 216,000

162,000

Melvern's Corporation has an investment in 10,000 shares of Wallace Company common stock with a cost of $436,000. These shares are used in a property dividend to stockholders of Melvern's. The property dividend is declared on May 25 and scheduled to be distributed on July 31 to stockholders of record on June 15. The fair value per share of Wallace stock is $63 on May 25, $66 on June 15, and $68 on July 31. The net effect of this property dividend on retained earnings is a reduction of.
a. 680,000
b. 660,000
c. 630,000
d. 436,000

436,000

Hernandez Company has 490,000 shares of $10 per value common stock outstanding. During the year, Hernandez declared a 10% stock dividend when the market price of the stock was $30 per share. Four months later Hernandez declared a $.50 per share cash dividend. As a result of the dividends declared during the year, retained earnings decreased by
a. 1,739,500
b. 735,000
c. 269,500
d. 245,000

1,739,500

On June 30,2012 when Ermler Co.'s stock was selling at $65 per share, its capital accounts were as follows:
Capital stock (par value $50; 80,000 shares issued) 4,000,000
Premium on capital stock 600,000
Retained Earnings 4,200,000

If a 100% stock dividend were declared and distributed, capital stock would be
a. 4,000,000
b. 4,600,000
c. 8,000,000
d. 8,800,000

8,000,000

The stockholders' equity of Howell Company at July 31, 2012 is presented below:
Common stock, par value $20 authorized 400,000 shares; issued and outstanding 160,000 shares 3,200,000
Paid-in capital in excess of par 160,000
Retained earnings 650,000

On August 1, 2012 the board of directors of Howell declared a 10% stock dividend on common stock, to be distributed on September 15th. The market price of Howell's common stock was $35 on August 1, 2012, and $38 on Sepetmber 15, 2012. What is the amount of the debit to retained earnings as a result of the declaration and distribution of this stock dividend?
a. 320,000
b. 560,000
c. 608,000
d. 400,000

560,000

On January 1, 2012, Dodd Inc., declared a 15% stock dividend on its common stock when the fair value of common stock was $20 per share. Stockholders' equity before the stock dividend was declared consisted of:
Common stock, $10 part value, authorized 200,000 shares; issued and outstanding 120,000 shares 1,200,000
Additional paid-in capital on common stock 150,000
Retained earnings 700,000
Total stockholders' equity 2,050,000

What was the effect on Dodd's retained earnings as a result of the above transaction?
a. 180,000 decrease
b. 360,000 decrease
c. 600,000 decrease
d. 300,000 decrease

360,000 decrease

At the beginning of 2012, Flaherty Company had retained earnings of $250,000. During the year Flaherty reported net income of $100,000, sold treasury stock at a "gain" of $36,000, declared a cash dividend of $60,000, and declared and issued a small stock dividend of 3,000 shares ($10 par value) when the fair value of the stock was $20 per share. The amount of retained earnings available for dividends at the end of 2013 was
a. 230,000
b. 260,000
c. 266,000
d. 296,000

230,000

Masterson Company has 420,000 shares of $10 par value common stock outstanding. During the year Masterson declared a 10% stock dividend when the market price of the stock was $36 per share. Three months later Masterson declared $.60 per share cash dividend. As a result of the dividends declared during the year, retained earnings decreased by
a. 1,789,000
b. 1,512,000
c. 277,200
d. 264,000

1,789,200

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

as paid-in capital from treasury stock transactions

At the date of the financial statements, common stock shares issued would exceed common stock shares outstanding as the 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

purchase of treasury stock

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. Fair value on the declaration date
d. Fair value on the payment date

Par value

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

decrease no effect

Gannon Company acquired 8,000 shares of its own common stock at $20 per share on February 5, 2012, and sold 4,000 of these shares at $27 per share on August 9, 2013. The fair value of Gannon's common stock was $24 per share at December 31, 2012, and $25 per share at December 31, 2013. The cost method is used to record treasury stock transactions. What account(s) should Gannon credit in 2013 to record the sale of 4,000 shares?
a. Treasury stock for $108,000
b. Treasury Stock for $80,000 and Paid-in Capital from Treasury Stock for $28,000
c. Treasury Stock for $80,000 and Retained Earnings for $28,000
d. Treasury Stock for $96,000 and Retained Earnings for $12,000

Treasury Stock for $80,000 and Paid-in capital from Treasury Stock for $28,000

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

share proportionately in any new issues of stock of the same class

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 risk and uncertainties and receive the benefits of enterprise ownership
d. can negotiate individual contracts on behalf of the enterprise

bear the ultimate risk and uncertainties and receive the benefits of enterprise ownership

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

a claim against a portion of the total assets of an enterprise

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

are not paid or disclosed

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

the amount distributed in any one year can never exceed the net income reported for that year

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 that 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

a varying amount being recorded as interest income from period to period

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%

available for sale securities where a company has holdings of less than 20%

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

all of these are required

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

acquisition cost plus amortization of a discount

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

by using the fair value method

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 account methods?

Fair value method Equity Method
a. no effect decrease
b. increase decrease
c. no effect no effect
d. decrease no effect

no effect decrease

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 amount of the investment
d. dividend income

a reduction of the carrying amount of the investment

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

earnings are reported by the investee in its financial statements

Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2012, 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

understate, understate, understate

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

value its own liabilities at fair value

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

evaluated at each reporting date for every investment

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

its fair value at the date of the transfer

A debt security is transferred from one category to another. Generally accepted accounting principles require that for this particular reclassification (1) the security by transferred by 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 by 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

transfer from available for sale to held to maturity

"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 "gain trading" or "cherry picking"

selling securities whose value has increased since acquisition while holding those whose value has decreased since acquisition

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

recorded in equity, as part of other comprehensive income

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

embedded derivative

Patton Company purchased $600,000 of 10% bonds of Scott Co. on January 1, 2013, paying $564,150. The bonds mature January 1, 2023; interest is payable each July 1 and January 1. THe discount of $35,850 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity.
On July 1, 2013, Patton Company should increase its Debt Investments account for the Scott Co. bonds by
a. 3,588
b. 2,056
c. 1,794
d. 1,028

1,028

Patton Company purchased $600,000 of 10% bonds of Scott Co. on January 1, 2013, paying $564,150. The bonds mature January 1, 2023; interest is payable each July 1 and January 1. THe discount of $35,850 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity.
For the year ended December 31, 2013, Patton Company should report interest revenue from the Scott Co. bonds of:
a. 63,588
b. 62,113
c. 62,052
d. 60,000

62,113

On October 1, 2012, Renfro Co. purchased to hold to maturity 2,000, $1,000, 9% bonds for $1,980,000 which includes $30,000 accrued interest. The bonds which mature on February 1, 2021, pay interest semiannually on February 1, and August 1. Renfro uses the stright line method of amortization. The bonds should be reported in the December 31, 2012 balance sheet at a carrying value of
a. 1,950,000
b. 1,951,500
c. 1,980,000
d. 1,980,500

1,951,500

Instrument Corp. has the following investments which were held throughout 2012-2013:

Fair Value
Cost 12/31/12 12/31/13
Trading 450,000 600,000 570,000
Available for sale 450,000 480,000 540,000

What amount of gain or loss would Instrument Corp. report in its income statement for the year ended December 31, 2013 related to its investments?
a. 30,000 gain
b. 30,000 loss
c. 210,000 gain
d. 120,000 gain

30,000 loss

Instrument Corp. has the following investments which were held throughout 2012-2013:

Fair Value
Cost 12/31/12 12/31/13
Trading 450,000 600,000 570,000
Available for sale 450,000 480,000 540,000

What amount would be reported as accumulated other comprehensive income related to investments in Instrument Corp's balance sheet at December 31, 2012?
a. 60,000 gain
b. 90,000 gain
c. 30,000 agin
d. 180,000 gain

30,000 gain

The summarized balance sheets of Goebel Company and Dobbs Company as of December 31, 2012 are as follows:

Goebel Company
Balance Sheet
December 31, 2012

Assets 1,200,000
Liabilities 150,000
Capital Stock 600,000
Retained Earnings 450,000
Total Equities 1,200,000

Dobbs Company
Balance Sheet
December 31, 2012

Assets 900,000
Liabilities 225,000
Capital Stock 555,000
Retained Earnings 120,000
Total Equities 900,000

If Goebel Company acquired a 20% interest in Dobbs Company on December 31, 2012 for $195,000 and the fair value method of accounting for the investment were used, the amount of the debit to Equity Investments (Dobbs) would have been
a. 135,000
b. 111,000
c. 195,000
d. 180,000

195,000

The summarized balance sheets of Goebel Company and Dobbs Company as of December 31, 2012 are as follows:

Goebel Company
Balance Sheet
December 31, 2012

Assets 1,200,000
Liabilities 150,000
Capital Stock 600,000
Retained Earnings 450,000
Total Equities 1,200,000

Dobbs Company
Balance Sheet
December 31, 2012

Assets 900,000
Liabilities 225,000
Capital Stock 555,000
Retained Earnings 120,000
Total Equities 900,000

If Goebel Company acquired a 30% interest in Dobbs Company on December 31, 2912 for $225,000 and the equity method of accounting for the investment were used, the amount of the debit to Equity Investments (Dobbs) would have been
a. 285,000
b. 225,000
c. 180,000
d. 202,500

225,000

The summarized balance sheets of Goebel Company and Dobbs Company as of December 31, 2012 are as follows:

Goebel Company
Balance Sheet
December 31, 2012

Assets 1,200,000
Liabilities 150,000
Capital Stock 600,000
Retained Earnings 450,000
Total Equities 1,200,000

Dobbs Company
Balance Sheet
December 31, 2012

Assets 900,000
Liabilities 225,000
Capital Stock 555,000
Retained Earnings 120,000
Total Equities 900,000

If Goebel Company acquired a 20% interest in Dobbs Company on December 31, 2011 for $135,000 and during 2013 Dobbs Company had net income of $75,000 and paid a cash dividend of $30,000, applying the fair value method would give a debit balance in the Equity Investments (Dobbs) account at the end of 2013 of
a. 111,000
b. 135,000
c. 150,000
d. 144,000

135,000

The summarized balance sheets of Goebel Company and Dobbs Company as of December 31, 2012 are as follows:

Goebel Company
Balance Sheet
December 31, 2012

Assets 1,200,000
Liabilities 150,000
Capital Stock 600,000
Retained Earnings 450,000
Total Equities 1,200,000

Dobbs Company
Balance Sheet
December 31, 2012

Assets 900,000
Liabilities 225,000
Capital Stock 555,000
Retained Earnings 120,000
Total Equities 900,000

If Goebel Company acquired a 30% interest in Dobbs Company on December 31, 2012 for $210,000 and during 2013 Dobbs Company had net income of $75,000 and paid a cash dividend of $30,000, applying the equity method would give a debit balance in the Equity Investments (Dobbs) account at the end of 2013 of
a. 210,000
b. 223,500
c. 232,500
d. 201,000

223,500

On its December 31, 2012 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment (available for sale) account. There was no change during 2013 in the composition of Calhoun's portfolio of equity investments held as available for sale securities. The following information pertains to that portfolio:

Security Cost Fair Value at 12/31/13
X 125,000 160,000
Y 100,000 85,000
Z 175,000 125,000
400,000 370,000
What amount of unrealized loss on these securities should be included in Calhoun's stockholders; equity section of the balance sheet at December 31, 2013?
a. 40,000
b. 30,000
c. 10,000
d. 0

30,000

On its December 31, 2012 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment (available for sale) account. There was no change during 2013 in the composition of Calhoun's portfolio of equity investments held as available for sale securities. The following information pertains to that portfolio:

Security Cost Fair Value at 12/31/13
X 125,000 160,000
Y 100,000 85,000
Z 175,000 125,000
400,000 370,000

The amount of unrealized loss to appear as a component of comprehensive incmoe fo the year ending December 31, 2013 is
a. 40,000
b. 30,000
c. 10,000
d. 0

40,000

On January 2, 2013 Pod Company purchased 25% of the outstanding common stock of Jobs, Inc. and subsequentyly used the equity method to accoutn for the investment. During 2013, Jobs, Inc. reported net income of $630,000 and distributed dividends of $270,000. The ending balance in the Investment in Pod Company account at December 31, 2013 was $480,000 after applying the equity method during 2013. What was the purchase price Pod Company paid for its investment in Jobs, Inc?
a. 255,000
b. 390,000
c. 570,000
d. 705,000

390,000

Zieglar Corporation purhcased 25,000 shares of common stock of the Sherman Corporation for $40 per share on January 2, 2010. Sharman Corporation had 100,000 shares of common stock outstanding during 2013, paid cash dividends of $120,000 during 2013, and reported net income of $400,000 for 2013. Ziegler Corproation should report revenue from investment for 2013 in the amoutn of
a. 30,000
b. 70,000
c. 100,000
d. 110,000

100,000

On August 1, 2012, Dambro Co. acquired 400, $1,000, 9% bonds at 97 plus accrued interest. The bonds were dated May 1, 2012 and mature on April 30, 2018, with interest paid each October 31 and April 30. The bonds will be added to Dambro's available for sale portfolio. The preferred entry to record the pruchase of the bonds on August 1, 2012 is
a. Debt Investments 397,000
Cash 397,000
b. Debt Investments 388,000
Interest Receivable 9,000
Cash 397,000
c. Debt Investments 388,000
Interest Revenue 9,000
Cash 397,000
d. Debt Investments 400,000
Interest Revenue 9,000
Discount on Debt Investments 12,000
Cash 397,000

Debt Investments 388,000
Interest Revenue 9,000
Cash 397,000

Kern Company purchased bonds with a face amount of $600,000 between interest payment dates. Kern purcahsed the bonds at 102, paid brokerage costs of $9,000 and paid accrued interest for three months of $15,000. The amount to record as the cost of this long-term investment in bonds is
a. 636,000
b. 621,000
c. 612,000
d. 600,000

621,000

At April 1, 2013, Landis Co. sold the ritter bonds for $1,030,000. After accruing for interest, the carrying value of the Ritter bonds on April 1, 2013 was $1,033,750. Assuming Landis Co. has a portfolio of Available for Sale Debt Securities, what should Landis Co. report as a gain or loss on the bonds?
a. (29,370)
b. (21,870)
c. (3,750)
d. 0

(3,750)

On August 1, 2012 Fowler Company acquired $600,000 face value 10% bodns of Kasnic Corporation at 104 plus accrued interest. The bonds were dated May 1, 2012, and mature on April 30, 2017, with interest payable each October 31 and April 30. The bonds will be held to maturity. What entry should Fowler make to record the purchase of the bonds on August 1, 2012?

a. Debt Investments 624,000
Interest Revenue 15,000
Cash 639,000
b. Debt Investments 639,000
Cash 639,000
c. Debt Investments 639,000
Interest Revenue 15,000
Cash 624,000
d. Debt Investments 600,000
Premium on Bonds 39,000
Cash 639,000

Debt Investments 624,000
Interest Revenue 15,000
Cash 639,000

At December 31, 2013, Atlanta Co. has a stock portfolio values at $120,000. Its cost was 499,000. If the Securities Fair Value Adjustment (Available for sale) has a debit balance of $6,000. which of the following journal entries is required at December 31, 2013?

a. Fair Value Adjustment (A-F-S) 21,000
Unrealized Holding Gain or loss--Equity 21,000
b. Fair Value Adjustment (A-F-S) 15,000
Unrealized Holding Gain or loss--Equity 15,000
c. Unrealized holding gain or loss--equity 21,000
Fair Value Adjustmetn (A-F-S) 21,000
d. Unrealized holding gain or loss--equity 15,000
Fair Value Adjustmetn (A-F-S) 15,000

Fair Value Adjustment (A-F-S) 15,000
Unrealized Holding Gain or loss--Equity 15,000

Kramer Company's trading securities portfolio which is appropriately included in current assets is as follows:

December 31, 2012
Cost Fair Value Unrealized Gain
Catlett Corp 250,000 205,000 (45,000)
Lyman Inc. 245,000 265,000 20,000
495,000 470,000 (25,000)

Ignoring income taxes, what amount should be reported as a charge against income in Kramer's 2012 income statement if 2012 is Kramer's first year of operation?
a. 0
b. 20,000
c. 25,000
d. 45,000

25,000

On its December 31, 2012, balance sheet, Trump Co. reported its investment in available-for-sale securities, which had cost $600,000, at fair value of $550,000. At December 31, 2013, the fair value of the securities was $585,000. What should Trump report on its 2013 income statement as a result of the increase in fair value of teh investments in 2013?
a. 0
b. unrealized loss of $15,000
c. realized gain of $35,000
d. unrealized gain of $35,000

0

During 2012, Woods Company purchased 40,000 shares of Holmes Corp. common stock for $630,000 as an available for sale investment. The fair value of these shares was $600,000 at December 31, 2012. Woods sold all of the Holmes stock for $17 per share on December 3, 2013, incurring $28,000 in brokerage commissios. Woods Company should report a realized gain on the sale of stock in 2013 of
a. 22,000
b. 50,000
c. 52,000
d. 80,000

22,000

When the entity has substantially accomplished waht 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

earned

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. Revenues from disposing of assets other than products is recognized at the date of sale

Revenue from services rendered is recognized when cash is received or when services have been performed

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

recognition

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. Colletions received for service constracts should be recorded as
a. service revenue
b. deferred service revenue
c. a reduction in installment accounts receivable
d. a direct addtion to retained earnings

deferred service revenue

Which of the following is not a reason why revenue is recognized at time of sale?
a. realization has occured
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

all of these are reasons to recognize revenue at time of sale

An alternative availabe when the seller is exposed to continued risk 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. recordning the sale, but reducing sales by an estimate of future returns
d. all of these

all of these

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

the buyer has a right to return the product and the amount of future returns cannot be reasonably estimated

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

the buyer is obligated to pay the seller upon resale of the product

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 construction contracts
d. the inherent nature of the contractor's technical facilities used in construction

the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable

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

the buyer can be expected to satisfy some of the obligations under the contract

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

percentage of completion method

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

net, as a current asset if debit balance, and current liability if credit balance

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 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

total estimated cost

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

as construction in process in the current asset section of the balance sheet

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

gives results based upon estimates which may be subject to considerable uncertainty

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

cost to cost basis

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

reported revenue is based on final results rather than estimates of unperformed work

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

revenue, cost and gross profit are recognized at the time the contract is completed

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

recognized in the current period, regardless of whether the percentage of completion or completed contract method is employed

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

under the completed contract method, when the billings exceed the accumulated costs, the amount of the estimated loss is reported as a current liability

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

all of these

Seasons construction is constructing an office building under contract for Cannon Company. The contract calls for progress billings and payments of $930,000 each quarter. The total contract price is $11,160,000 and Seasons estimates total costs of $10,650,000. Seasons estimates that the building will take 3 years to complete, and commences construction on January 2, 2012.

At December 31, 2012, Seasons estimates that it is 30% complete with the construction, based on costs incurred. What is the total amount of Revenue from Long-Term Contracts recognized for 2012 and what is the balance in the Accounts Receivable account assuming Cannon Cage has not yet made its last quarterly payment?
Revenue Accounts Receivable
a. 3,720,000 3,720,000
b. 3,195,000 930,000
c. 3,348,000 930,000
d. 3,195,000 3,720,000

3,348,000 930,000

Seasons construction is constructing an office building under contract for Cannon Company. The contract calls for progress billings and payments of $930,000 each quarter. The total contract price is $11,160,000 and Seasons estimates total costs of $10,650,000. Seasons estimates that the building will take 3 years to complete, and commences construction on January 2, 2012.

At December 31, 2013 Seasons Construction estimates that it is 75% complete with the building; however, the estimate of total costs to be incurred has risen to $10,800,000 due to unanticipated price increases. What is the total amount of Construction Expenses that Seasons will recognized for the year ended December 31, 2013?
a. 8,100,000
b. 4,725,000
c. 4,792,500
d. 4,905,000

4,905,000

Seasons construction is constructing an office building under contract for Cannon Company. The contract calls for progress billings and payments of $930,000 each quarter. The total contract price is $11,160,000 and Seasons estimates total costs of $10,650,000. Seasons estimates that the building will take 3 years to complete, and commences construction on January 2, 2012.

At December 31, 2013, Seasons Construction estimates that it is 75% complete with the building; however, the estimate of total costs to be incurred has risen to $10,900,000 due to unanticipated price increases. What is reported int he balance sheet at December 31, 2013 for Seasons as the difference between the Construction in Process and the Billings on Construction in Process accounts, and is it debit or a credit?
Difference between the accounts Debit/Credit
a. 2,535,000 Credit
b. 930,000 Debit
c. 660,000 Debit
d. 930,000 Credit

930,000 Debit

Seasons construction is constructing an office building under contract for Cannon Company. The contract calls for progress billings and payments of $930,000 each quarter. The total contract price is $11,160,000 and Seasons estimates total costs of $10,650,000. Seasons estimates that the building will take 3 years to complete, and commences construction on January 2, 2012

Seasons Construction completes the remaining 25% of the building construction on December 31, 2014, as scheduled. At that time the total costs of construction are $11,250,000. What is the total amount of Revenue from Long-Term Contracts and Construction Expenses that Seasons will recognize for the year ended December 31, 2014?
Revenue Expenses
a. 11,160,000 11,250,000
b. 2,790,000 2,812,000
c. 2,790,000 3,150,000
d. 2,812,500 2,812,500

2,790,000 3,150,000

Cooper Construction Company had a contract starting April 2013, to construct a $12,000,000 building that is expected to be completed in September 2015, at an estimated cost of $11,000,000. At the end of 2013, the costs to date were $5,060,000 and the estimated total costs to complete had not changed. The progress billings during 2013 were $2,400,000 and the cash collected during 2013 was 1,600,000

For the year ended December 31, 2013, Cooper would recognized gross profit on building of
a. 421,667
b. 460,000
c. 540,000
d. 0

460,000

Cooper Construction Company had a contract starting April 2013, to construct a $12,000,000 building that is expected to be completed in September 2015, at an estimated cost of $11,000,000. At the end of 2013, the costs to date were $5,060,000 and the estimated total costs to complete had not changed. The progress billings during 2013 were $2,400,000 and the cash collected during 2013 was 1,600,000

At December 31, 2013 Cooper would report Construction in Process in the amount of
a. 460,000
b. 5,060,000
c. 5,520,000
d. 4,720,000

5,520,000

Oliver Co. uses the installment-sales method. When an account had a balance of $11,200, no further collections could be made and the dining room set was repossessed. At that time, it was estimated that the dining room set could be sold for $3,2000 as repossessed or for $4,000 if the company spent $400 reconditioning it. The gross profit rate on this sale was 70%. The gain or loss on repossession was a
a. 7,840 loss
b. 8,000 loss
c. 800 gain
d. 240 gain

240 gain

Spicer Corporation has a normal gross profit on installment sales of 30%. A 2011 sale resulted in a default early in 2013. At the date of default, the balance of the installment receivable was $40,000, and the repossessed merchandise had a fair value of $22,500. Assuming the repossessed merchandise is to be recorded at fair value, the gain or loss on repossession should be
a. 0
b. a 5,500 loss
c. a 5,500 gain
d. a 12,500 loss

a 5,500 loss

Hayes Construction Corporation contracted to construct a building for $3,000,000. Construtction began in 2012 and was completed in 2013. Data relating to the contract are summarized below:

Year Ended
2012 2013
Costs incurred 1,200,000 900,000
estimated costs to complete 800,000 --------

Hayes uses the percentage of completion method as the basis for income recognition. For the years ended December 31, 2012 and 2013, respectively, Hayes should report gross profit of
a. 540,000 and 360,000
b. 1,800,000 and 1,200,000
c. 600,000 and 300,000
d. 0 and 900,000

600,000 and 300,000

In 2013, Fargo Corporation began construction work under a three year contract. The Contract price is $3,600,000. Fargo uses the percentage of completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2013, follow:

Balance Sheet:
A/Rec--construction contract billings 150,000
Construction in progress 450,000
Less Contract billings 360,000
Costs and recognized profit in excess of billings 90,000

Income Statement
Income(Before tax) on the contract recognized in 2013 90,000

how much cash was collected in 2013 on this contract?
a. 150,000
b. 210,000
c. 30,000
d. 360,000

210,000

Substance over form is similar to (per class discussion)
a. completed projects
b. principles vs. rules
c. gross profit vs. net profit
d. conservatism vs. aggressive accounting

principles vs. rules

Eilert Construction Company had a contract starting April 2013, to construct a $18,000,000 building that is expected to be completed in September 2014, at an estimated cost of $16,500,000. At the end of 2013, the costs to date were $7,590,000 and the estimated total costs to complete had not changed. The progress billings during 2013 were $3,600,000 and the cash collected during 2013 was $2,400,000. Eilert uses the percentage of completion method.

For the year ended, December 31, 2013, Eilert would recognize gross profit on the building of
a. 0
b. 632,500
c. 690,000
d. 810,000

690,000

Eilert Construction Company had a contract starting April 2013, to construct a $18,000,000 building that is expected to be completed in September 2014, at an estimated cost of $16,500,000. At the end of 2013, the costs to date were $7,590,000 and the estimated total costs to complete had not changed. The progress billings during 2013 were $3,600,000 and the cash collected during 2013 was $2,400,000. Eilert uses the percentage of completion method.

At December 31, 2013, Eilert would report Construction in Process in the amount of
a. 8,280,000
b. 7,590,000
c. 7,080,000
d. 690,000

8,280,000

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

unearned revenue and classified as a current liability

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 prices is not reasonably assured
d. the method is consistently used for all sales of similar merchandise

collection of sales prices is not reasonably assured

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 on 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

all of these statements are true

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