Accounting information is considered to be relevant when it

Answers to the multiple choice questions must be recorded on the scantron form. 1. At the beginning of 2009, Angel Corporation began offering a 2-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2009 were $180 million. Fifteen percent of the units sold were returned in 2009 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel's 2009 income statement is:

a. $5.3 million.

b. $7.2 million.

c. $1.9 million. d. None of the above.2. Cooper Inc. took a physical inventory count at the end of 2008. Purchases that were acquired FOB destination were in transit, so they were not included in the physical count.

a. Cooper needs to correct an accounting error.

b. Cooper has made a change in accounting principle, requiring retrospective adjustment.

c. Cooper is required to adjust a change in accounting estimate prospectively.

d. Cooper is not required to make any accounting adjustments.

3. The percentage-of-completion method violates the general rule on revenue recognition that:

a. Collectibility is reasonably assured.

b. Costs are known or reasonably estimated.

c. The earnings process is complete or virtually complete.

d. Collections have been received.4. You are reviewing the December 31, 2009 financial statements of Lewis Inc which is considering an initial public offering of their shares. The following items come to your attention: Lewis has U.S. Treasury bonds that mature in March 31, 2010. The bonds were purchased November 20, 2009. Lewis has a parcel of land that cost $40,000. Because of rising land prices, the value of the land has been written up to $60,000. The company has an independent appraisal that attests to this amount.How should these items be reported in the balance sheet?a. The treasury bonds should be classified as short-term investments in the current assets section of the balance sheet. The land should be reported in the property, plant, and equipment category (non-current assets) at $60,000.

b. The treasury bonds should be classified as cash equivalents in the current assets section of the balance sheet. The land should be reported as a long-term investment (non-current assets) at $40,000.

c. The treasury bonds should be classified as short-term investments in the current assets section of the balance sheet. The land should be reported in the property, plant, and equipment category (non-current assets) at $40,000.d. The treasure bonds should be classified as cash equivalents in the current assets section of the balance sheet. The land should be reported in the property, plant, and equipment category (non-current assets) at $40,000.

5. Powell Company had the following errors over the last two years:

2007: Ending inventory was overstated by $30,000 while depreciation expense was overstated by $24,000.2008: Ending inventory was understated by $5,000 while depreciation expense was understated by $4,000.

Powell uses a periodic inventory system and has a December 31 fiscal year-end. If the errors are caught in 2009, what will be the adjustment to correct retained earnings?

a. Increase retained earnings by $15,000.

b. Decrease retained earnings by $25,000.

c. Decrease retained earnings by $6,000.

d. Increase retained earnings by $25,000.

6. C Co. reported a retained earnings balance of $200,000 at December 31, 2008. In September 2009, C determined that insurance premiums of $30,000 for the three-year period beginning January 1, 2008, had been paid and fully expensed in 2008. What amount should C report as adjusted beginning retained earnings in its 2009 statement of retained earnings?Ignore the income tax effects.

a. $210,000.

b. $180,000.

c. $220,000.

d. $221,000.

7. On April 1, 2003, Lane, Inc. acquired equipment for $100,000. Lane estimated a ten year useful life and $10,000 salvage value for the equipment. Lane used the double-declining balance method to depreciate the equipment. On January 1, 2006, Lane switched to the straight-line method of depreciation and also determined that the equipment would have a remaining useful life of four years. In Lanes December 31, 2006, balance sheet, what was the book value of the equipment after depreciation is taken for 2006?

a.$11,100.

b.$43,300.c.$40,900.d.None of the above.

8. Which of the following is not true of depreciation accounting?

a. It is a method of asset valuation.

b. It is part of the matching of expenses and revenues.

c. It must be systematic and rational.

d. None of the above.

9. Which of the following changes should be accounted for using the retrospective approach?

a.A change in the estimated life of a depreciable asset.b.A change from straight-line to declining balance depreciation.c.A change in the estimated salvage value of a depreciable asset.d.A change from the completed-contract method of accounting for long-term construction contracts.

10. In 2008, Antle Inc. acquired Demski Co. and recorded goodwill of $245 million as a result. The net assets (including goodwill) from Antle's acquisition of Demski Co. had a 2009 year-end book value of $580 million. Antle assessed the fair value of Demski at this date to be $700 million, while the fair value of all of Demski's identifiable tangible and intangible assets (excluding goodwill) was $550 million. The amount of the impairment loss that Antle would record for goodwill at the end of 2009 is:

a. $0.

b. $95 million

c. $150 million.

d. None of the above.

11. Gain contingencies usually are recognized in a company's income statement when:

a. The amount of the gain can be reasonably estimated.

b. The gain is reasonably possible and the amount can be reasonably estimated.

c. The gain is probable and the amount can be reasonably estimated.

d. None of the above.

12. All but one of the following represent collections for third parties. Which one of the following is not a collection for a third party?

a.Sales taxes.b.Customer deposits.c.Employee insurance deductions.d.Social security taxes deductions.

13. Hawthorne Company purchased three machines for a lump-sum price of $80,000. The market values of Machine A, B, and C were $15,000, $60,000, and $45,000, respectively. Determine the amounts Fullerton should capitalize for Machines A and B.A. $10,000 for A; $40,000 for B.

B. $15,000 for A; $60,000 for B.

C. $12,000 for A; $48,000 for B.

D. None of the above.

14. Bloomington Inc. exchanged land for equipment and $3,000 in cash. The book value and the fair value of the land given up were $104,000 and $90,000, respectively. The equipment received from Harold Inc. had a book value of $110,000 and a fair value of $87,000. Assuming the exchange had commercial substance, Bloomington would record the equipment at _______and would record a gain/(loss) of ______:

Equipment

Gain (loss)

A.$87,000

$3,000.

B. $104,000

$5,000.

C. $87,000

$(14,000).

D. None of the above.15. Holiday Laboratories purchased a high speed industrial centrifuge for $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. Routine maintenance costs during the first year of use totaled $8,000. The capitalized cost is:a. $455,000.

b. $446,000.

c. $463,000.

d. None of the above.16. In a recent annual report, Wiley Computer reported the following in one of its disclosure notes: "Warranty Expense: The Company recognizes the estimated cost for product warranties at the time the related revenue is recognized." This note exemplifies Wileys use of the:

a.Going concern assumption.b.Matching principle.c.Realization principle.d.Economic entity assumption.17. On January 1, 2006, Lewis Inc. purchased a machine for $120,000. They estimated that the machine would have an eight year useful life. They depreciate the equipment using the sum-of-the-years digits method. They record depreciation expense of $18,000 for the fiscal year ending on December 31, 2008. What was the estimated salvage value on the equipment? a. $25,000. b. $10,000. c. $15,000. d. None of the above.

18. Short Corporation purchased Hathaway, Inc. for $52,000,000. The fair value of all Hathaway's net assets was $48,000,000. Short will amortize any goodwill over the maximum number of years allowed. What is the annual amortization of goodwill for this acquisition?

a. $0.

b. $100,000.

c. $200,000.

d. $400,000.19. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is:

a. FIFO.

b. LIFO.

c. Weighted-average.

d. All of the above.20. Laurens Design Inc. purchased equipment on March 1, 2006. The equipment had a useful life of 20 years and a salvage value of $20,000. Laurens Design depreciates the equipment using the 150% declining balance method. If Lauren recorded $11,875 of depreciation expense for the year ended December 31, 2006, what was the original cost of the equipment? a. $158,333.

b. $210,000.

c. $190,000.

d. None of the above.21. On March 31, 2009, M. Belotti purchased the right to remove gravel from an old rock quarry. The gravel is to be sold as roadbed for highway construction. The cost of the quarry rights was $164,000, with estimated salable rock of 20,000 tons. During 2009, Belotti removed 4,000 tons of gravel and sold 2,000 tons. What was the total depletion of the rock quarry in 2009?

a. $41,000.

b. $32,800.

c. $16,400.

d. None of the above.

22. Before year-end adjusting entries, Bass Company's account balances at December 31, 2004, for accounts receivable and the related allowance for uncollectible accounts were $700,000 and $45,000, respectively. An aging of accounts receivable indicated that $62,500 of the December 31 receivables are expected to be uncollectible. What is the net realizable value of accounts receivable on December 31, 2004 after the adjusting entry has been recorded?

a. $682,500.

b. $637,500.

c. $592,500.

d. $655,000.

23. When a deposit on returnable containers is forfeited, the firm holding the deposit will experience:

a. A decrease in cost of goods sold.

b. An increase in revenue.

c. An increase in current liabilities.

d. An increase in accounts receivable.24. Inventory records for Herb's Chemicals revealed the following:March 1, 2011, inventory: 1,000 gallons @ $7.20 = $7,200

Ending inventory assuming LIFO in a periodic inventory system would be: a.$5,040. b.$5,055. c.$5,075. d.$5,135.

25. In 2009, due to a change in marketing forecasts, Barney Corporation reduced the projected life of its patent for producing round dice. The cumulative patent amortization prior to 2009 would have been $10 million higher had the new life been used. Barney should do a prior period adjustment to retained earnings to:

a. Increase by $7 million.

b. Decrease $10 million.

c. Increase $10 million.

d. No adjustment is necessary.26. An accounting change that is reported by the prospective approach is reflected in the financial statements of:a.Prior years only.b.Prior years plus the current year.c.The current year only.d.Current and future years.Use the following information to answer questions 27 and 28:

An audit of a company has revealed the following four errors that have occurred but not yet been corrected:

Inventory at December 31, 2007: $40,000 understated.

Inventory at December 31, 2008: $15,000 overstated.

Depreciation for 2007: $7,000 understated.

Accrued expenses at December 31, 2008: $10,000 understated.

The company uses a periodic inventory system and has a December 31 fiscal year-end.27. The errors cause reported net income for the year ending December 31, 2008 to be:

a. Overstated by $72,000.

b. Overstated by $65,000.

c. Understated by $28,000.

d. Understated by $45,000.

28. The errors cause reported retained earnings at December 31, 2008 to be:

a. Overstated by $65,000.

b. Overstated by $32,000.

c. Overstated by $25,000.

d. Understated by $18,000.

29. In performing an audit, you encounter an adjusting journal entry recorded at year-end that contains a debit to rental revenue and a credit to unearned rental revenue. The purpose of this journal entry is to record:

a. An accrued revenue.

b. An advance payment from a customer.

c. A deferred revenue.

d. None of the above.30. Factors considered in determining an intangible asset's useful life include all of the following except: a. the expected use of the asset.

b. any legal or contractual provisions that may limit the useful life.

c. any provisions for renewal or extension of the asset's legal life.

d. the amortization method used.

Use the following information to answer questions 31 and 32:

Larson Inc. maintains its records on a cash basis. At the end of each year the company's accountant obtains the necessary information to prepare accrual basis financial statements. The following cash flows occurred during the year ended December 31, 2008:

Cash receipts:

From customers $635,000

Issuance of stock 90,000

Borrowing from bank 210,000

Cash disbursements:

Payment of salaries

165,000

Purchase of inventory

188,000

Annual rent payment

30,000Annual insurance payment 2,000

Payment of dividends

6,000All sales are on credit. Selected balance sheet information is below:

12/31/07 12/31/08

Accounts receivable

$88,000

$70,000

Prepaid insurance

6,000

3,000

Prepaid rent

17,000

24,000

Inventory

30,000

55,000

Salaries payable 40,000

18,000

Interest payable

0

2,000

31. What is Raintrees salaries expense (on an accrual basis) for 2008?

a. $165,000.

b. $143,000.

c. $187,000.

d. None of the above.

32. What is Raintrees insurance expense (on an accrual basis) for 2008?

a. $5000.

b. $2000.

c. $0.d. None of the above.33. Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles? a. Amount of loss is reasonably estimable and event occurs infrequently.

b. Amount of loss is reasonably estimable and occurrence of event is either probable or reasonably possible.

c. Event is unusual in nature and occurrence of event is probable.

d. Amount of loss is reasonably estimable and occurrence of event is probable.34. Brownsville Company completes repair services and bills the customer for its services. No cash has yet been collected. What is the effect of this transaction on the financial statements?

Assets

LiabilitiesEquity

Net Income

a. DecreaseDecreaseDecreaseDecrease

b. IncreaseNo EffectIncreaseIncrease

c. No EffectNo EffectNo EffectNo Effect

d. IncreaseNo EffectDecreaseIncrease

35. Under which of the following depreciation methods is it possible for depreciation expense to be higher in the later years of the assets useful life? a. Sum-of-the-years-digits method.

b. Units of production method.

c. 175% decling balance method.

d. None of the above.36. On December 31, 2008, Salso Corps balance sheet accounts increased by the following amounts compared withthose at the end of the prior year:

Assets

$178,000

Liabilities

54,000

Capital stock

132,000

Dividends paid during 2008 were $26,000. How much was net income for 2008?

a. $34,000.

b. $26,000.

c. $8,000.

d. None of the above.

37. Orange Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's asset in that country. If expropriation is reasonably possible, a loss contingency should be:

a.Disclosed but not accrued as a liability.b.Disclosed and accrued as a liabilityc.Accrued as liability but not disclosed.d.Neither accrued as a liability nor disclosed.

38. Orange Co. can estimate Captain Cook Cereal includes one coupon in each package of Granola that it sells and offers a puzzle in exchange for $2.00 and 3 coupons. The puzzles cost Captain Cook $3.50 each. Experience indicates that 20% of the coupons eventually will be redeemed. During the last month of 2009, the first month of the offer, Captain Cook sold 6 million boxes of Granola and 900,000 of the coupons were redeemed. What amount should Captain Cook report as a liability for coupons on its December 31, 2009, balance sheet?

a.$ 0.b.$150,000.c.$300,000.d.$450,000.

39. On January 1, 2008, Valley Company traded equipment (which was purchased on January 1, 2006 for $50,000 and depreciated on a straight-line basis assuming an expected useful life of 5 years and zero salvage value) for similar productive equipment. At the time of the exchange, the equipment that Valley gave up had a fair value of $45,000. The equipment received had a book value of $40,000; Valley does not know the fair value of that equipment. The exchange does not have commercial substance. At what value should Valley record the new equipment?a. $30,000.b. $45,000.

c. $40,000.d. None of the above.

40. Corporation purchased all of the outstanding stock of Caldwell Inc., paying $2,700,000 cash. Juliana assumed all of the liabilities of Caldwell. Book values and fair values of acquired assets and liabilities were:

Juliana would record goodwill of:

a. $1,180,000.

b. $600,000.

c. $880,000.

d. None of the above.

41. When selling operational assets for cash:a. The seller recognizes a gain or loss for the difference between the cash received and the fair value of the asset sold.

b. The seller recognizes a gain or loss for the difference between the cash received and the book value of the asset sold.

c. The seller recognizes losses, but not gains.

d. None of these.42. Theoretically, which of the following costs incurred in connection with a machine purchased for use in a company's manufacturing operations would be capitalized?

Insurance onmachine whilein transitTesting and preparation of machine for use

A.YesYes

B.YesNo

C.NoYes

D.NoNo

43. Deal Company traded a delivery van and $10,000 cash for a newer delivery van owned by East Corporation. The following information relates to the values of the vans on the exchange date:

Book value

Fair valueOld van $60,000

$90,000

New van 80,000 100,000What amount should Deal report as a gain or loss on the exchange of vans, assuming the exchange has commercial substance?

A. $30,000 gain.

B. $20,000 gain.

C. $10,000 loss.

D. None of the above.

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