Final Exam

CHAPTER 6
ACCOUNTING AND THE TIME VALUE OF MONEY

MULTIPLE CHOICEConceptual
21.
Which of the following transactions would require the use of the present value of an
annuity due concept in order to calculate the present value of the asset obtained or liability
owed at the date of incurrence?
a. A capital lease is entered into with the initial lease payment due upon the signing of
the lease agreement.
b. A capital lease is entered into with the initial lease payment due one month subsequent to the signing of the lease agreement.
c. A ten-year 8% bond is issued on January 2 with interest payable semiannually on July
1 and January 1 yielding 7%.
d. A ten-year 8% bond is issued on January 2 with interest payable semiannually on July
1 and January 1 yielding 9%.
22.
What best describes the time value of money?

a. The interest rate charged on a loan.
b. Accounts receivable that are determined uncollectible.
c. An investment in a checking account.
d. The relationship between time and money.
23.
Which of the following situations does NOT base an accounting measure on present
values?
a. Pensions.
b. Prepaid insurance.
c. Leases.
d. Sinking funds.
Accounting and the Time Value of Money
6-2
24.
What is interest?
a. Payment for the use of money.
b. An equity investment.
c. Return on capital.
d. Loan.
25.
What is NOT a variable that is considered in interest computations?

a. Principal.
b. Interest rate.
c. Assets.
d. Time.
26.
If you invest $50,000 to earn 8% interest, which of the following compounding approaches
would return the lowest amount after one year?
a. Daily.
b. Monthly.
c. Quarterly.
d. Annually.
27.
Which factor would be greater the present value of $1 for 10 periods at 8% per period
or the future value of $1 for 10 periods at 8% per period?
a. Present value of $1 for 10 periods at 8% per period.
b. Future value of $1 for 10 periods at 8% per period.
c. The factors are the same.
d. Need more information.
28.
Which of the following tables would show the smallest value for an interest rate of 5% for
six periods?
a. Future value of 1
b. Present value of 1
c. Future value of an ordinary annuity of 1
d. Present value of an ordinary annuity of 1
29.
Which table would you use to determine how much you would need to have deposited
three years ago at 10% compounded annually in order to have $1,000 today?
a. Future value of 1 or present value of 1
b. Future value of an annuity due of 1
30.
Which table would you use to determine how much must be deposited now in order to
provide for 5 annual withdrawals at the beginning of each year, starting one year hence?
a. Future value of an ordinary annuity of 1
b. Future value of an annuity due of 1
c. Present value of an annuity due of 1
d. None of these
31.
Which table has a factor of 1.00000 for 1 period at every interest rate?
b. Present value of 1
6-3
32.
Which table would show the largest factor for an interest rate of 8% for five periods?
b. Present value of an ordinary annuity of 1
c. Future value of an annuity due of 1
d. Present value of an annuity due of 1
33.
Which of the following tables would show the smallest factor for an interest rate of 10% for
six periods?
b. Present value of an ordinary annuity of 1
c. Future value of an annuity due of 1
d. Present value of an annuity due of 1
34.
The figure .94232 is taken from the column marked 2% and the row marked three periods
in a certain interest table. From what interest table is this figure taken?
b. Future value of annuity of 1
c. Present value of 1
d. Present value of annuity of 1
35.
Which of the following tables would show the largest value for an interest rate of 10% for 8
periods?
a. Future amount of 1 table.
b. Present value of 1 table.
c. Future amount of an ordinary annuity of 1 table.
d. Present value of an ordinary annuity of 1 table.
36.
On June 1, 2010, Pitts Company sold some equipment to Gannon Company. The two
companies entered into an installment sales contract at a rate of 8%. The contract
required 8 equal annual payments with the first payment due on June 1, 2010. What type
of compound interest table is appropriate for this situation?
a. Present value of an annuity due of 1 table.
b. Present value of an ordinary annuity of 1 table.
c. Future amount of an ordinary annuity of 1 table.
d. Future amount of 1 table.
37.
Which of the following transactions would best use the present value of an annuity due of
1 table?
a. Fernetti, Inc. rents a truck for 5 years with annual rental payments of $20,000 to be
made at the beginning of each year.
b. Edmiston Co. rents a warehouse for 7 years with annual rental payments of $120,000
to be made at the end of each year.
c. Durant, Inc. borrows $20,000 and has agreed to pay back the principal plus interest in
three years.
d. Babbitt, Inc. wants to deposit a lump sum to accumulate $50,000 for the construction
of a new parking lot in 4 years.
6-4
Test Bank for Intermediate Accounting, Thirteenth Edition
38.
A series of equal receipts at equal intervals of time when each receipt is received at the
beginning of each time period is called an
a. ordinary annuity.
b. annuity in arrears.
c. annuity due.
d. unearned receipt.
39.
In the time diagram below, which concept is being depicted?
1
$1
2
$1
3
$1
4
$1
PV
a.
b.
c.
d.
P
Present value of an ordinary annuity

Present value of an annuity due
Future value of an ordinary annuity
Future value of an annuity due
40.
On December 1, 2010, Richards Company sold some machinery to Fleming Company.

The two companies entered into an installment sales contract at a predetermined interest
rate. The contract required four equal annual payments with the first payment due on
December 1, 2010, the date of the sale. What present value concept is appropriate for this
situation?
a. Future amount of an annuity of 1 for four periods
b. Future amount of 1 for four periods
c. Present value of an ordinary annuity of 1 for four periods
d. Present value of an annuity due of 1 for four periods.
41.
An amount is deposited for eight years at 8%. If compounding occurs quarterly, then the
table value is found at
a. 8% for eight periods.
b. 2% for eight periods.
c. 8% for 32 periods.
d. 2% for 32 periods.
42.
If the number of periods is known, the interest rate is determined by

a. dividing the future value by the present value and looking for the quotient in the future
value of 1 table.
b. dividing the future value by the present value and looking for the quotient in the
present value of 1 table.
c. dividing the present value by the future value and looking for the quotient in the future
value of 1 table.
d. multiplying the present value by the future value and looking for the product in the
present value of 1 table.
6-5
43.
Present value is
a. the value now of a future amount.
b. the amount that must be invested now to produce a known future value.
c. always smaller than the future value.
d. all of these.
44.
Which of the following statements is true?

a. The higher the discount rate, the higher the present value.
b. The process of accumulating interest on interest is referred to as discounting.
c. If money is worth 10% compounded annually, $1,100 due one year from today is
equivalent to $1,000 today.
d. If a single sum is due on December 31, 2010, the present value of that sum decreases
as the date draws closer to December 31, 2010.
45.
What is the primary difference between an ordinary annuity and an annuity due?
a. The timing of the periodic payment.
b. The interest rate.
c. Annuity due only relates to present values.
d. Ordinary annuity only relates to present values.
46.
What is the relationship between the future value of one and the present value of one?
a. The present value of one equals the future value of one plus one.
b. The present value of one equals one plus future value factor for n-1 periods.
c. The present value of one equals one divided by the future value of one.
d. The present value of one equals one plus the future value factor for n+1 value
47.
Peter invests $100,000 in a 3-year certificate of deposit earning 3.5% at his local bank.
Which time value concept would be used to determine the maturity value of the
certificate?
a. Present value of one.
b. Future value of one.
c. Present value of an annuity due.
d. Future value of an ordinary annuity.
48.
Jerry recently was offered a position with a major accounting firm. The firm offered Jerry
either a signing bonus of $23,000 payable on the first day of work or a signing bonus of
$26,000 payable after one year of employment. Assuming that the relevant interest rate is
10%, which option should Jerry choose?
a. The options are equivalent.
b. Insufficient information to determine.
c. The signing bonus of $23,000 payable on the first day of work.
d. The signing bonus of $26,000 payable after one year of employment.
49.
If Jethro wanted to save a set amount each month in order to buy a new pick-up truck
when the new models are next available, which time value concept would be used to
determine the monthly payment?
c. Present value of an annuity due.
6-6
50.
Betty wants to know how much she should begin saving each month to fund her
retirement. What kind of problem is this?
b. Future value of an ordinary annuity.
c. Present value of an ordinary.
d. Future value of one.
51
If the interest rate is 10%, the factor for the future value of annuity due of 1 for n = 5, i =
10% is equal to the factor for the future value of an ordinary annuity of 1 for n = 5, i = 10%
a. plus 1.10.
b. minus 1.10.
c. multiplied by 1.10.
d. divided by 1.10.
52.
Which of the following is true?

a. Rents occur at the beginning of each period of an ordinary annuity.
b. Rents occur at the end of each period of an annuity due.
c. Rents occur at the beginning of each period of an annuity due.
d. None of these.
53.
Which statement is false?

a. The factor for the future value of an annuity due is found by multiplying the ordinary
annuity table value by one plus the interest rate.
b. The factor for the present value of an annuity due is found by multiplying the ordinary
annuity table value by one minus the interest rate.
c. The factor for the future value of an annuity due is found by subtracting 1.00000 from
the ordinary annuity table value for one more period.
d. The factor for the present value of an annuity due is found by adding 1.00000 to the
ordinary annuity table value for one less period.
54.
Al Darby wants to withdraw $20,000 (including principal) from an investment fund at the
end of each year for five years. How should he compute his required initial investment at
the beginning of the first year if the fund earns 10% compounded annually?
a. $20,000 times the future value of a 5-year, 10% ordinary annuity of 1.
b. $20,000 divided by the future value of a 5-year, 10% ordinary annuity of 1.
c. $20,000 times the present value of a 5-year, 10% ordinary annuity of 1.
d. $20,000 divided by the present value of a 5-year, 10% ordinary annuity of 1.
55.
Sue Gray wants to invest a certain sum of money at the end of each year for five years.
The investment will earn 6% compounded annually. At the end of five years, she will need
a total of $40,000 accumulated. How should she compute her required annual investment?
a. $40,000 times the future value of a 5-year, 6% ordinary annuity of 1.
b. $40,000 divided by the future value of a 5-year, 6% ordinary annuity of 1.
c. $40,000 times the present value of a 5-year, 6% ordinary annuity of 1.
d. $40,000 divided by the present value of a 5-year, 6% ordinary annuity of 1.
6-7
56.
An accountant wishes to find the present value of an annuity of $1 payable at the

beginning of each period at 10% for eight periods. The accountant has only one present
value table which shows the present value of an annuity of $1 payable at the end of each
period. To compute the present value, the accountant would use the present value factor
in the 10% column for
a. seven periods.
b. eight periods and multiply by (1 + .10).
c. eight periods.
d. nine periods and multiply by (1 .10).
57.
If an annuity due and an ordinary annuity have the same number of equal payments and
the same interest rates, then
a. the present value of the annuity due is less than the present value of the ordinary
annuity.
b. the present value of the annuity due is greater than the present value of the ordinary
annuity.
c. the future value of the annuity due is equal to the future value of the ordinary annuity.
d. the future value of the annuity due is less than the future value of the ordinary annuity.
58.
What is the relationship between the present value factor of an ordinary annuity and the
present value factor of an annuity due for the same interest rate?
a. The ordinary annuity factor is not related to the annuity due factor.
b. The annuity due factor equals one plus the ordinary annuity factor for n1 periods.
c. The ordinary annuity factor equals one plus the annuity due factor for n+1 periods.
d. The annuity due factor equals the ordinary annuity factor for n+1 periods minus one.
59.
Paula purchased a house for $300,000. After providing a 20% down payment, she
borrowed the balance from the local savings and loan under a 30-year 6% mortgage loan
requiring equal monthly installments at the end of each month. Which time value concept
would be used to determine the monthly payment?
c. Present value of an ordinary annuity.
60.
Stemway requires a new manufacturing facility. Management found three locations; all of
which would provide needed capacity, the only difference is the price. Location A may be
purchased for $500,000. Location B may be acquired with a down payment of $100,000
and annual payments at the end of each of the next twenty years of $50,000. Location C
requires $40,000 payments at the beginning of each of the next twenty-five years.
Assuming Stemway's borrowing costs are 8% per annum, which option is the least costly
to the company?
a. Location A.
b. Location B.
c. Location C.
d. Location A and Location B.
6-8
61.

Which of the following is false?
a. The future value of a deferred annuity is the same as the future value of an annuity not
deferred.
b. A deferred annuity is an annuity in which the rents begin after a specified number of periods.
c. To compute the present value of a deferred annuity, we compute the present value of
an ordinary annuity of 1 for the entire period and subtract the present value of the
rents which were not received during the deferral period.
d. If the first rent is received at the end of the sixth period, it means the ordinary annuity
is deferred for six periods.
CHAPTER 13
CURRENT LIABILITIES AND CONTINGENCIES
21.
Liabilities are
a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with generally
accepted accounting principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in the future.
22.
Which of the following is a current liability?

a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund
b. A long-term debt maturing currently, which is to be retired with proceeds from a new
debt issue
c. A long-term debt maturing currently, which is to be converted into common stock
d. None of these
23.
Which of the following is true about accounts payable?

1. Accounts payable should not be reported at their present value.
2. When accounts payable are recorded at the net amount, a Purchase Discounts
account will be used.
3. When accounts payable are recorded at the gross amount, a Purchase
Discounts Lost account will be used.
a.
b.
c.
d.
24.
1
2
3
Both 2 and 3 are true.
Among the short-term obligations of Lance Company as of December 31, the balance
sheet date, are notes payable totaling $250,000 with the Madison National Bank. These
6-9
are 90-day notes, renewable for another 90-day period. These notes should be classified
on the balance sheet of Lance Company as
a. current liabilities.
b. deferred charges.
c. long-term liabilities.
d. intermediate debt.
25.
Which of the following is not true about the discount on short-term notes payable?
a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the
balance sheet.
c. When there is a discount on a note payable, the effective interest rate is higher than
the stated discount rate.
d. All of these are true.
26.
Which of the following may be a current liability?

a. Withheld Income Taxes
b. Deposits Received from Customers
c. Deferred Revenue
d. All of these
27.
Which of the following items is a current liability?

a. Bonds (for which there is an adequate sinking fund properly classified as a long-term
investment) due in three months.
b. Bonds due in three years.
c. Bonds (for which there is an adequate appropriation of retained earnings) due in
eleven months.
d. Bonds to be refunded when due in eight months, there being no doubt about the
marketability of the refunding issue.
28.
Which of the following should not be included in the current liabilities section of the
balance sheet?
a. Trade notes payable
b. Short-term zero-interest-bearing notes payable
c. The discount on short-term notes payable
d. All of these are included
29.
Which of the following is a current liability?

a. Preferred dividends in arrears
b. A dividend payable in the form of additional shares of stock
c. A cash dividend payable to preferred stockholders
d. All of these
30.
Stock dividends distributable should be classified on the

a. income statement as an expense.
b. balance sheet as an asset.
c. balance sheet as a liability.
d. balance sheet as an item of stockholders' equity.
6 - 10
31.
Of the following items, the only one which should not be classified as a current liability is
a. current maturities of long-term debt.
b. sales taxes payable.
c. short-term obligations expected to be refinanced.
d. unearned revenues.
32.
An account which would be classified as a current liability is

a. dividends payable in the company's stock.
b. accounts payabledebit balances.
c. losses expected to be incurred within the next twelve months in excess of the
company's insurance coverage.
d. none of these.
33.
Which of the following is a characteristic of a current liability but not a long-term liability?
a. Unavoidable obligation.
b. Present obligation that entails settlement by probable future transfer or use of cash,
goods, or services.
c. Liquidation is reasonably expected to require use of existing resources classified as
current assets or create other current liabilities.
d. Transaction or other event creating the liability has already occurred.
34.
Which of the following is not considered a part of the definition of a liability?

a. Unavoidable obligation.
b. Transaction or other event creating the liability has already occurred.
c. Present obligation that entails settlement by probable future transfer or use of cash,
goods, or services.
d. Liquidation is reasonably expected to require use of existing resources classified as
current assets or create other current liabilities.
35.
Why is the liability section of the balance sheet of primary importance to bankers?
a. To evaluate the entity's credit quality.
b. To assist in understanding the entity's liquidity.
c. To better understand sources of repayment.
d. To evaluate operating efficiency.
36.
What is the relationship between current liabilities and a company's operating cycle?
a. Liquidation of current liabilities is reasonably expected within the company's operating
cycle (or one year if less).
b. Current liabilities are the result of operating transactions.
c. Current liabilities can't exceed the amount incurred in one operating cycle.
d. There is no relationship between the two.
37.
What is the relationship between present value and the concept of a liability?
a. Present values are used to measure certain liabilities.
b. Present values are not used to measure liabilities.
c. Present values are used to measure all liabilities.
d. Present values are only used to measure long-term liabilities.
6 - 11
38.
What is a discount as it relates to zero-interest-bearing notes payable?

a. The discount represents the lender's costs to underwrite the note.
b. The discount represents the credit quality of the borrower.
c. The discount represents the cost of borrowing.
d. The discount represents the allowance for uncollectible amounts.
39.
Where is debt callable by the creditor reported on the debtor's financial statements?
a. Long-term liability.
b. Current liability if the creditor intends to call the debt within the year, otherwise a longterm liability.
c. Current liability if it is probable that creditor will call the debt within the year, otherwise
a long-term liability.
d. Current liability.
40.
Which of the following is not a condition necessary to exclude a short-term obligation from
current liabilities?
a. Intend to refinance the obligation on a long-term basis.
b. Obligation must be due with one year.
c. Demonstrate the ability to complete the refinancing.
d. Subsequently refinance the obligation on a long-term basis.
41.
Which of the following does not demonstrate evidence regarding the ability to
consummate a refinancing of short-term debt?
a. Management indicated that they are going to refinance the obligation.
b. Actually refinance the obligation.
c. Have capacity under existing financing agreements that can be used to refinance the
obligation.
d. Enter into a financing agreement that clearly permits the entity to refinance the
obligation.
42.
A company has not declared a dividend on its cumulative preferred stock for the past
three years. What is the required accounting treatment or disclosure in this situation?
a. Record a liability for cumulative amount of preferred stock dividends not declared.
b. Disclose the amount of the dividends in arrears.
c. Record a liability for the current year's dividends only.
d. No disclosure or recognition is required.
43.
Which of the following situations may give rise to unearned revenue?

a. Providing trade credit to customers.
b. Selling inventory.
c. Selling magazine subscriptions.
d. Providing manufacturer warranties.
44.
Which of the following statements is correct?

a. A company may exclude a short-term obligation from current liabilities if the firm
intends to refinance the obligation on a long-term basis.
b. A company may exclude a short-term obligation from current liabilities if the firm can
demonstrate an ability to consummate a refinancing.
c. A company may exclude a short-term obligation from current liabilities if it is paid off
after the balance sheet date and subsequently replaced by long-term debt before the
balance sheet is issued.
d. None of these.
6 - 12
45.
The ability to consummate the refinancing of a short-term obligation may be
demon- strated by
a. actually refinancing the obligation by issuing a long-term obligation after the date of
the balance sheet but before it is issued.
b. entering into a financing agreement that permits the enterprise to refinance the debt
on a long-term basis.
c. actually refinancing the obligation by issuing equity securities after the date of the
balance sheet but before it is issued.
d. all of these.
46.
Which of the following statements is false?

a. A company may exclude a short-term obligation from current liabilities if the firm
intends to refinance the obligation on a long-term basis and demonstrates an ability to
complete the refinancing.
b. Cash dividends should be recorded as a liability when they are declared by the board
of directors.
c. Under the cash basis method, warranty costs are charged to expense as they are paid.
d. FICA taxes withheld from employees' payroll checks should never be recorded as a
liability since the employer will eventually remit the amounts withheld to the
appropriate taxing authority.
47.
Which of the following is not a correct statement about sales taxes?

a. Sales taxes are an expense of the seller.
b. Many companies record sales taxes in the sales account.
c. If sales taxes are included in the sales account, the first step to find the amount of
sales taxes is to divide sales by 1 plus the sales tax rate.
d. All of these are true.
48.
If a short-term obligation is excluded from current liabilities because of refinancing, the

footnote to the financial statements describing this event should include all of the following
information except
a. a general description of the financing arrangement.
b. the terms of the new obligation incurred or to be incurred.
c. the terms of any equity security issued or to be issued.
d. the number of financing institutions that refused to refinance the debt, if any.
49.
In accounting for compensated absences, the difference between vested rights and
accumulated rights is
a. vested rights are normally for a longer period of employment than are accumulated
rights.
b. vested rights are not contingent upon an employee's future service.
c. vested rights are a legal and binding obligation on the company, whereas accumulated
rights expire at the end of the accounting period in which they arose.
d. vested rights carry a stipulated dollar amount that is owed to the employee;
accumulated rights do not represent monetary compensation.
50.
An employee's net (or take-home) pay is determined by gross earnings minus amounts for
income tax withholdings and the employee's
a. portion of FICA taxes and unemployment taxes.
b. and employer's portion of FICA taxes, and unemployment taxes.
c. portion of FICA taxes, unemployment taxes, and any voluntary deductions.
d. portion of FICA taxes and any voluntary deductions.
6 - 13
51.
Which of these is not included in an employer's payroll tax expense?

a. F.I.C.A. (social security) taxes
b. Federal unemployment taxes
c. State unemployment taxes
d. Federal income taxes
52.
Which of the following is a condition for accruing a liability for the cost of compensation for
future absences?
a. The obligation relates to the rights that vest or accumulate.
b. Payment of the compensation is probable.
c. The obligation is attributable to employee services already performed.
d. All of these are conditions for the accrual.
53.
A liability for compensated absences such as vacations, for which it is expected that
employees will be paid, should
a. be accrued during the period when the compensated time is expected to be used by
employees.
b. be accrued during the period following vesting.
c. be accrued during the period when earned.
d. not be accrued unless a written contractual obligation exists.
54.
The amount of the liability for compensated absences should be based on

1. the current rates of pay in effect when employees earn the right to
compensated absences.
2. the future rates of pay expected to be paid when employees use
compensated time.
3. the present value of the amount expected to be paid in future periods.
a.
b.
c.
d.
1.
2.
3.
Either 1 or 2 is acceptable.
55.
What are compensated absences?

a. Unpaid time off.
b. A form of healthcare.
c. Payroll deductions.
d. Paid time off.
56.
Which gives rise to the requirement to accrue a liability for the cost of compensated
absences?
a. Payment is probable.
b. Employee rights vest or accumulate.
c. Amount can be reasonably estimated.
d. All of the above.
57.
Under what conditions is an employer required to accrue a liability for sick pay?
a. Sick pay benefits can be reasonably estimated.
b. Sick pay benefits vest.
c. Sick pay benefits equal 100% of the pay.
d. Sick pay benefits accumulate.
6 - 14
58.
Which of the following taxes does not represent a payroll deduction a company may
incur?
a. Federal income taxes.
b. FICA taxes.
c. State unemployment taxes.
d. State income taxes.
59.
What is a contingency?
a. An existing situation where certainty exists as to a gain or loss that will be resolved
when one or more future events occur or fail to occur.
b. An existing situation where uncertainty exists as to possible loss that will be resolved
when one or more future events occur.
c. An existing situation where uncertainty exists as to possible gain or loss that will not
be resolved in the foreseeable future.
d. An existing situation where uncertainty exists as to possible gain or loss that will be
resolved when one or more future events occur or fail to occur.
60.
When is a contingent liability recorded?

a. When the amount can be reasonably estimated.
b. When the future events are probable to occur and the amount can be reasonably
estimated.
c. When the future events are probable to occur.
d. When the future events will possibly occur and the amount can be reasonably
estimated.
61.
Which of the following is an example of a contingent liability?

a. Obligations related to product warranties.
b. Possible receipt from a litigation settlement.
c. Pending court case with a probable favorable outcome.
d. Tax loss carryforwards.
62.
Which of the following terms is associated with recording a contingent liability?

a. Possible.
b. Likely.
c. Remote.
d. Probable.
63.
Which of the following is the proper way to report a gain contingency?

a. As an accrued amount.
b. As deferred revenue.
c. As an account receivable with additional disclosure explaining the nature of the
contingency.
d. As a disclosure only.
64.
Which of the following contingencies need not be disclosed in the financial statements or
the notes thereto?
a. Probable losses not reasonably estimable
b. Environmental liabilities that cannot be reasonably estimated
c. Guarantees of indebtedness of others
d. All of these must be disclosed.
6 - 15
65.
Which of the following sets of conditions would give rise to the accrual of a contingency
under current generally accepted accounting principles?
a. Amount of loss is reasonably estimable and event occurs infrequently.
b. Amount of loss is reasonably estimable and occurrence of event is probable.
c. Event is unusual in nature and occurrence of event is probable.
d. Event is unusual in nature and event occurs infrequently.
66.
Jeff Beck is a farmer who owns land which borders on the right-of-way of the Northern
Railroad. On August 10, 2010, due to the admitted negligence of the Railroad, hay on the
farm was set on fire and burned. Beck had had a dispute with the Railroad for several
years concerning the ownership of a small parcel of land. The representative of the
Railroad has offered to assign any rights which the Railroad may have in the land to Beck
in exchange for a release of his right to reimbursement for the loss he has sustained from
the fire. Beck appears inclined to accept the Railroad's offer. The Railroad's 2010 financial
statements should include the following related to the incident:
a. recognition of a loss and creation of a liability for the value of the land.
b. recognition of a loss only.
c. creation of a liability only.
d. disclosure in note form only.
67.
A contingency can be accrued when

a. it is certain that funds are available to settle the disputed amount.
b. an asset may have been impaired.
c. the amount of the loss can be reasonably estimated and it is probable that an asset
has been impaired or a liability incurred.
d. it is probable that an asset has been impaired or a liability incurred even though the
amount of the loss cannot be reasonably estimated.
68.
A contingent liability
a. definitely exists as a liability but its amount and due date are indeterminable.
b. is accrued even though not reasonably estimated.
c. is not disclosed in the financial statements.
d. is the result of a loss contingency.
69.
To record an asset retirement obligation (ARO), the cost associated with the ARO is
a. expensed.
b. included in the carrying amount of the related long-lived asset.
c. included in a separate account.
d. none of these.
70.
A company is legally obligated for the costs associated with the retirement of a long-lived
asset
a. only when it hires another party to perform the retirement activities.
b. only if it performs the activities with its own workforce and equipment.
c. whether it hires another party to perform the retirement activities or performs the
activities itself.
d. when it is probable the asset will be retired.
6 - 16
71.
Assume that a manufacturing corporation has (1) good quality control, (2) a one-year
operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy
of guaranteeing new products against defects for three years that has resulted in material
but rather stable warranty repair and replacement costs. Any liability for the warranty
a. should be reported as long-term.
b. should be reported as current.
c. should be reported as part current and part long-term.
d. need not be disclosed.
72.
Ortiz Corporation, a manufacturer of household paints, is preparing annual financial

statements at December 31, 2010. Because of a recently proven health hazard in one of
its paints, the government has clearly indicated its intention of having Ortiz recall all cans
of this paint sold in the last six months. The management of Ortiz estimates that this recall
would cost $800,000. What accounting recognition, if any, should be accorded this
situation?
a. No recognition
b. Note disclosure only
c. Operating expense of $800,000 and liability of $800,000
d. Appropriation of retained earnings of $800,000
73.
Information available prior to the issuance of the financial statements indicates that it is
probable that, at the date of the financial statements, a liability has been incurred for
obligations related to product warranties. The amount of the loss involved can be
reasonably estimated. Based on the above facts, an estimated loss contingency should be
a. accrued.
b. disclosed but not accrued.
c. neither accrued nor disclosed.
d. classified as an appropriation of retained earnings.
74.
Espinosa Co. has a loss contingency to accrue. The loss amount can only be reasonably
estimated within a range of outcomes. No single amount within the range is a better
estimate than any other amount. The amount of loss accrual should be
a. zero.
b. the minimum of the range.
c. the mean of the range.
d. the maximum of the range.
75.
Dean Company becomes aware of a lawsuit after the date of the financial statements, but
before they are issued. A loss and related liability should be reported in the financial
statements if the amount can be reasonably estimated, an unfavorable outcome is highly
probable, and
a. the Dean Company admits guilt.
b. the court will decide the case within one year.
c. the damages appear to be material.
d. the cause for action occurred during the accounting period covered by the financial
statements.
76.
Use of the accrual method in accounting for product warranty costs

a. is required for federal income tax purposes.
b. is frequently justified on the basis of expediency when warranty costs are immaterial.
c. finds the expense account being charged when the seller performs in compliance with
the warranty.
d. represents accepted practice and should be used whenever the warranty is an integral
and inseparable part of the sale.
6 - 17
77.
Which of the following best describes the accrual method of accounting for warranty
costs?
a. Expensed when paid.
b. Expensed when warranty claims are certain.
c. Expensed based on estimate in year of sale.
d. Expensed when incurred.
78.
Which of the following best describes the cash-basis method of accounting for warranty
costs?
a. Expensed based on estimate in year of sale.
b. Expensed when liability is accrued.
c. Expensed when warranty claims are certain.
d. Expensed when incurred.
79.
Which of the following is a characteristic of the expense warranty approach, but not the
sales warranty approach?
a. Estimated liability under warranties.
b. Warranty expense.
c. Unearned warranty revenue.
d. Warranty revenue.
80.
An electronics store is running a promotion where for every video game purchased, the
customer receives a coupon upon checkout to purchase a second game at a 50%
discount. The coupons expire in one year. The store normally recognized a gross profit
margin of 40% of the selling price on video games. How would the store account for a
purchase using the discount coupon?
a. The reduction in sales price attributed to the coupon is recognized as premium
expense.
b. The difference between the cost of the video game and the cash received is
recognized as premium expense.
c. Premium expense is not recognized.
d. The difference between the cost of the video game and the selling price prior to the
coupon is recognized as premium expense.
81.
What condition is necessary to recognize an asset retirement obligation?

a. Company has an existing legal obligation and can reasonably estimate the amount of
the liability.
b. Company can reasonably estimate the amount of the liability.
c. Company has an existing legal obligation.
d. Obligation event has occurred.
82.
Which of the following are not factors that are considered when evaluating whether or not
to record a liability for pending litigation?
a. Time period in which the underlying cause of action occurred.
b. The type of litigation involved.
c. The probability of an unfavorable outcome.
d. The ability to make a reasonable estimate of the amount of the loss.
6 - 18
83.
How do you determine the acid-test ratio?

a. The sum of cash and short-term investments divided by short-term debt.
b. Current assets divided by current liabilities.
c. Current assets divided by short-term debt.
d. The sum of cash, short-term investments and net receivables divided by current
liabilities.
84.
What does the current ratio inform you about a company?

a. The extent of slow-moving inventories.
b. The efficient use of assets.
c. The company's liquidity.
d. The company's profitability.
85.
Which of the following is not acceptable treatment for the presentation of current
liabilities?
a. Listing current liabilities in order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied to their liquidation
d. Showing current liabilities immediately below current assets to obtain a presentation of
working capital
86.
The ratio of current assets to current liabilities is called the

a. current ratio.
b. acid-test ratio.
c. current asset turnover ratio.
d. current liability turnover ratio.
87.
Accrued liabilities are disclosed in financial statements by

a. a footnote to the statements.
b. showing the amount among the liabilities but not extending it to the liability total.
c. an appropriation of retained earnings.
d. appropriately classifying them as regular liabilities in the balance sheet.
88.
The numerator of the acid-test ratio consists of

a. total current assets.
b. cash and marketable securities.
c. cash and net receivables.
d. cash, marketable securities, and net receivables.
89.
Each of the following are included in both the current ratio and the acid-test ratio except
a. cash.
b. short-term investments.
c. net receivables.
d. inventory.
6 - 19
CHAPTER 14
LONG-TERM LIABILITIES
21.
An example of an item which is not a liability is

a. dividends payable in stock.
b. advances from customers on contracts.
c. accrued estimated warranty costs.
d. the portion of long-term debt due within one year.
22.
The covenants and other terms of the agreement between the issuer of bonds and the
lender are set forth in the
a. bond indenture.
b. bond debenture.
c. registered bond.
d. bond coupon.
23.
The term used for bonds that are unsecured as to principal is

a. junk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.
24.
Bonds for which the owners' names are not registered with the issuing corporation are
called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.
25.
Bonds that pay no interest unless the issuing company is profitable are called
a. collateral trust bonds.
b. debenture bonds.
c. revenue bonds.
d. income bonds.
26.
If bonds are issued initially at a premium and the effective-interest method of amortization
is used, interest expense in the earlier years will be
a. greater than if the straight-line method were used.
b. greater than the amount of the interest payments.
c the same as if the straight-line method were used.
d. less than if the straight-line method were used.
27.
The interest rate written in the terms of the bond indenture is known as the
a. coupon rate.
b. nominal rate.
c. stated rate.
d. coupon rate, nominal rate, or stated rate.
28.
The rate of interest actually earned by bondholders is called the

a. stated rate.
6 - 20

b. yield rate.
c. effective rate.
d. effective, yield, or market rate.
Use the following information for questions 29 and 30:

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are
sold to yield 8%.
29.
One step in calculating the issue price of the bonds is to multiply the principal by the table
value for
a. 10 periods and 10% from the present value of 1 table.
b. 20 periods and 5% from the present value of 1 table.
c. 10 periods and 8% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.
30.
Another step in calculating the issue price of the bonds is to

a. multiply $10,000 by the table value for 10 periods and 10% from the present value of
an annuity table.
b. multiply $10,000 by the table value for 20 periods and 5% from the present value of an
annuity table.
c. multiply $10,000 by the table value for 20 periods and 4% from the present value of an
annuity table.
d. none of these.
31.
Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years
from date of issue. If the bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.
6 - 21
32.
If bonds are initially sold at a discount and the straight-line method of amortization is used,
interest expense in the earlier years will
a. exceed what it would have been had the effective-interest method of amortization
been used.
b. be less than what it would have been had the effective-interest method of amortization
been used.
c. be the same as what it would have been had the effective-interest method of amortization been used.
d. be less than the stated (nominal) rate of interest.
33.
Under the effective-interest method of bond discount or premium amortization, the

periodic interest expense is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.
34.
When the effective-interest method is used to amortize bond premium or discount, the
periodic amortization will
a. increase if the bonds were issued at a discount.
b. decrease if the bonds were issued at a premium.
c. increase if the bonds were issued at a premium.
d. increase if the bonds were issued at either a discount or a premium.
35.
If bonds are issued between interest dates, the entry on the books of the issuing
corporation could include a
a. debit to Interest Payable.
b. credit to Interest Receivable.
c. credit to Interest Expense.
d. credit to Unearned Interest.
36.
When the interest payment dates of a bond are May 1 and November 1, and a bond issue
is sold on June 1, the amount of cash received by the issuer will be
a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.
d. increased by accrued interest from May 1 to June 1.
37.
Theoretically, the costs of issuing bonds could be

a. expensed when incurred.
b. reported as a reduction of the bond liability.
c. debited to a deferred charge account and amortized over the life of the bonds.
d. any of these.
38.
The printing costs and legal fees associated with the issuance of bonds should
a. be expensed when incurred.
b. be reported as a deduction from the face amount of bonds payable.
c. be accumulated in a deferred charge account and amortized over the life of the bonds.
d. not be reported as an expense until the period the bonds mature or are retired.
6 - 22
39.
Treasury bonds should be shown on the balance sheet as

a. an asset.
b. a deduction from bonds payable issued to arrive at net bonds payable and outstanding.
c. a reduction of stockholders' equity.
d. both an asset and a liability.
40.
An early extinguishment of bonds payable, which were originally issued at a premium, is

made by purchase of the bonds between interest dates. At the time of reacquisition
a. any costs of issuing the bonds must be amortized up to the purchase date.
b. the premium must be amortized up to the purchase date.
c. interest must be accrued from the last interest date to the purchase date.
d. all of these.
41.
The generally accepted method of accounting for gains or losses from the early
extinguishment of debt treats any gain or loss as
a. an adjustment to the cost basis of the asset obtained by the debt issue.
b. an amount that should be considered a cash adjustment to the cost of any other debt
issued over the remaining life of the old debt instrument.
c. an amount received or paid to obtain a new debt instrument and, as such, should be
amortized over the life of the new debt.
d. a difference between the reacquisition price and the net carrying amount of the debt
which should be recognized in the period of redemption.
42.
"In-substance defeasance" is a term used to refer to an arrangement whereby

a. a company gets another company to cover its payments due on long-term debt.
b. a governmental unit issues debt instruments to corporations.
c. a company provides for the future repayment of a long-term debt by placing
purchased securities in an irrevocable trust.
d. a company legally extinguishes debt before its due date.
43.
A corporation borrowed money from a bank to build a building. The long-term note signed
by the corporation is secured by a mortgage that pledges title to the building as security
for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay
the loan. Which of the following relationships can you expect to apply to the situation?
a. The balance of mortgage payable at a given balance sheet date will be reported as a
long-term liability.
b. The balance of mortgage payable will remain a constant amount over the 10-year
period.
c. The amount of interest expense will decrease each period the loan is outstanding, while
the portion of the annual payment applied to the loan principal will increase each period.
d. The amount of interest expense will remain constant over the 10-year period.
44.
A debt instrument with no ready market is exchanged for property whose fair market value
is currently indeterminable. When such a transaction takes place
a. the present value of the debt instrument must be approximated using an imputed
interest rate.
b. it should not be recorded on the books of either party until the fair market value of the
property becomes evident.
c. the board of directors of the entity receiving the property should estimate a value for
the property that will serve as a basis for the transaction.
d. the directors of both entities involved in the transaction should negotiate a value to be
assigned to the property.
6 - 23
45.
When a note payable is issued for property, goods, or services, the present value of the
note is measured by
a. the fair value of the property, goods, or services.
b. the market value of the note.
c. using an imputed interest rate to discount all future payments on the note.
d. any of these.
46.
When a note payable is exchanged for property, goods, or services, the stated interest
rate is presumed to be fair unless
a. no interest rate is stated.
b. the stated interest rate is unreasonable.
c. the stated face amount of the note is materially different from the current cash sales
price for similar items or from current market value of the note.
d. any of these.
47.
Discount on Notes Payable is charged to interest expense

a. equally over the life of the note.
b. only in the year the note is issued.
c. using the effective-interest method.
d. only in the year the note matures.
48.
Which of the following is an example of "off-balance-sheet financing"?

1. Non-consolidated subsidiary.
2. Special purpose entity.
3. Operating leases.
a. 1
b. 2
c. 3
d. All of these are examples of "off-balance-sheet financing."
49.
When a business enterprise enters into what is referred to as off-balance-sheet financing,

the company
a. is attempting to conceal the debt from shareholders by having no information about
the debt included in the balance sheet.
b. wishes to confine all information related to the debt to the income statement and the
statement of cash flow.
c. can enhance the quality of its financial position and perhaps permit credit to be
obtained more readily and at less cost.
d. is in violation of generally accepted accounting principles.
50.
Long-term debt that matures within one year and is to be converted into stock should be
reported
a. as a current liability.
b. in a special section between liabilities and stockholders equity.
c. as noncurrent.
d. as noncurrent and accompanied with a note explaining the method to be used in its
liquidation.
6 - 24
51.
Which of the following must be disclosed relative to long-term debt maturities and sinking
fund requirements?
a. The present value of future payments for sinking fund requirements and long-term
debt maturities during each of the next five years.
b. The present value of scheduled interest payments on long-term debt during each of
the next five years.
c. The amount of scheduled interest payments on long-term debt during each of the next
five years.
d. The amount of future payments for sinking fund requirements and long-term debt
maturities during each of the next five years.
52.
Note disclosures for long-term debt generally include all of the following except
a. assets pledged as security.
b. call provisions and conversion privileges.
c. restrictions imposed by the creditor.
d. names of specific creditors.
53.
The times interest earned ratio is computed by dividing

a. net income by interest expense.
b. income before taxes by interest expense.
c. income before income taxes and interest expense by interest expense.
d. net income and interest expense by interest expense.
54.
The debt to total assets ratio is computed by dividing

a. current liabilities by total assets.
b. long-term liabilities by total assets.
c. total liabilities by total assets.
d. total assets by total liabilities.
*55.
In a troubled debt restructuring in which the debt is continued with modified terms and the
carrying amount of the debt is less than the total future cash flows,
a. a loss should be recognized by the debtor.
b. a gain should be recognized by the debtor.
c. a new effective-interest rate must be computed.
d. no interest expense or revenue should be recognized in the future.
*56.
A troubled debt restructuring will generally result in a

a. loss by the debtor and a gain by the creditor.
b. loss by both the debtor and the creditor.
c. gain by both the debtor and the creditor.
d. gain by the debtor and a loss by the creditor.
*57.
In a troubled debt restructuring in which the debt is settled by a transfer of assets with a
fair market value less than the carrying amount of the debt, the debtor would recognize
a. no gain or loss on the settlement.
b. a gain on the settlement.
c. a loss on the settlement.
d. none of these.
6 - 25
*58.
In a troubled debt restructuring in which the debt is continued with modified terms, a gain
should be recognized at the date of restructure, but no interest expense should be
recognized over the remaining life of the debt, whenever the
a. carrying amount of the pre-restructure debt is less than the total future cash flows.
b. carrying amount of the pre-restructure debt is greater than the total future cash flows.
c. present value of the pre-restructure debt is less than the present value of the future
cash flows.
d. present value of the pre-restructure debt is greater than the present value of the future
cash flows.
*59.
In a troubled debt restructuring in which the debt is continued with modified terms and the
carrying amount of the debt is less than the total future cash flows, the creditor should
a. compute a new effective-interest rate.
b. not recognize a loss.
c. calculate its loss using the historical effective rate of the loan.
d. calculate its loss using the current effective rate of the loan.
CHAPTER 15
STOCKHOLDERS EQUITY
21.
The residual interest in a corporation belongs to the

a. management.
b. creditors.
c. common stockholders.
d. preferred stockholders.
22.
The pre-emptive right of a common stockholder is the right to

a. share proportionately in corporate assets upon liquidation.
b. share proportionately in any new issues of stock of the same class.
c. receive cash dividends before they are distributed to preferred stockholders.
d. exclude preferred stockholders from voting rights.
23.
The pre-emptive right enables a stockholder to

a. share proportionately in any new issues of stock of the same class.
b. receive cash dividends before other classes of stock without the pre-emptive right.
c. sell capital stock back to the corporation at the option of the stockholder.
d. receive the same amount of dividends on a percentage basis as the preferred
stockholders.
24.
In a corporate form of business organization, legal capital is best defined as

a. the amount of capital the state of incorporation allows the company to accumulate
over its existence.
b. the par value of all capital stock issued.
c. the amount of capital the federal government allows a corporation to generate.
d. the total capital raised by a corporation within the limits set by the Securities and
Exchange Commission.
6 - 26
S
25.
Stockholders of a business enterprise are said to be the residual owners. The term
residual owner means that shareholders
a. are entitled to a dividend every year in which the business earns a profit.
b. have the rights to specific assets of the business.
c. bear the ultimate risks and uncertainties and receive the benefits of enterprise
ownership.
d. can negotiate individual contracts on behalf of the enterprise.
26.
Total stockholders' equity represents

a. a claim to specific assets contributed by the owners.
b. the maximum amount that can be borrowed by the enterprise.
c. a claim against a portion of the total assets of an enterprise.
d. only the amount of earnings that have been retained in the business.
27.
A primary source of stockholders' equity is

a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by stockholders.
d. both income retained by the corporation and contributions by stockholders.
28.
Stockholders' equity is generally classified into two major categories:

a. contributed capital and appropriated capital.
b. appropriated capital and retained earnings.
c. retained earnings and unappropriated capital.
d. earned capital and contributed capital.
29.
The accounting problem in a lump sum issuance is the allocation of proceeds between the
classes of securities. An acceptable method of allocation is the
a. pro forma method.
b. proportional method.
c. incremental method.
d. either the proportional method or the incremental method.
30.
When a corporation issues its capital stock in payment for services, the least appropriate
basis for recording the transaction is the
a. market value of the services received.
b. par value of the shares issued.
c. market value of the shares issued.
d. Any of these provides an appropriate basis for recording the transaction.
31.
Direct costs incurred to sell stock such as underwriting costs should be accounted for as
1. a reduction of additional paid-in capital.
2. an expense of the period in which the stock is issued.
3. an intangible asset.
a.
b.
c.
d.
1
2
3
1 or 3
6 - 27
32.
A "secret reserve" will be created if

a. inadequate depreciation is charged to income.
b. a capital expenditure is charged to expense.
c. liabilities are understated.
d. stockholders' equity is overstated.
33.
Which of the following represents the total number of shares that a corporation may issue
under the terms of its charter?
a. authorized shares
b. issued shares
c. unissued shares
d. outstanding shares
34.
Stock that has a fixed per-share amount printed on each stock certificate is called
a. stated value stock.
b. fixed value stock.
c. uniform value stock.
d. par value stock.
35.
Which of the following is not a legal restriction related to profit distributions by a

corporation?
a. The amount distributed to owners must be in compliance with the state laws governing
corporations.
b. The amount distributed in any one year can never exceed the net income reported for
that year.
c. Profit distributions must be formally approved by the board of directors.
d. Dividends must be in full agreement with the capital stock contracts as to preferences
and participation.
36.
In January 2010, Finley Corporation, a newly formed company, issued 10,000 shares of
its $10 par common stock for $15 per share. On July 1, 2010, Finley Corporation
reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of
these treasury shares
a. decreased total stockholders' equity.
b. increased total stockholders' equity.
c. did not change total stockholders' equity.
d. decreased the number of issued shares.
37.
Treasury shares are

a. shares held as an investment by the treasurer of the corporation.
b. shares held as an investment of the corporation.
c. issued and outstanding shares.
d. issued but not outstanding shares.
38.
When treasury stock is purchased for more than the par value of the stock and the cost
method is used to account for treasury stock, what account(s) should be debited?
a. Treasury stock for the par value and paid-in capital in excess of par for the excess of
the purchase price over the par value.
b. Paid-in capital in excess of par for the purchase price.
c. Treasury stock for the purchase price.
d. Treasury stock for the par value and retained earnings for the excess of the purchase
price over the par value.
6 - 28
39.
Gains" on sales of treasury stock (using the cost method) should be credited to
a. paid-in capital from treasury stock.
b. capital stock.
c. retained earnings.
d. other income.
40.
Porter Corp. purchased its own par value stock on January 1, 2010 for $20,000 and
debited the treasury stock account for the purchase price. The stock was subsequently
sold for $12,000. The $8,000 difference between the cost and sales price should be
recorded as a deduction from
a. additional paid-in capital to the extent that previous net "gains" from sales of the same
class of stock are included therein; otherwise, from retained earnings.
b. additional paid-in capital without regard as to whether or not there have been previous
net "gains" from sales of the same class of stock included therein.
c. retained earnings.
d. net income.
41.
How should a "gain" from the sale of treasury stock be reflected when using the cost
method of recording treasury stock transactions?
a. As ordinary earnings shown on the income statement.
b. As paid-in capital from treasury stock transactions.
c. As an increase in the amount shown for common stock.
d. As an extraordinary item shown on the income statement.
42.
Which of the following best describes a possible result of treasury stock transactions by a
corporation?
a. May increase but not decrease retained earnings.
b. May increase net income if the cost method is used.
c. May decrease but not increase retained earnings.
d. May decrease but not increase net income.
43.
Which of the following features of preferred stock makes the security more like debt than
an equity instrument?
a. Participating
b. Voting
c. Redeemable
d. Noncumulative
44.
The cumulative feature of preferred stock

a. limits the amount of cumulative dividends to the par value of the preferred stock.
b. requires that dividends not paid in any year must be made up in a later year before
dividends are distributed to common shareholders.
c. means that the shareholder can accumulate preferred stock until it is equal to the par
value of common stock at which time it can be converted into common stock.
d. enables a preferred stockholder to accumulate dividends until they equal the par value
of the stock and receive the stock in place of the cash dividends.
45.
According to the FASB, redeemable preferred stock should be

a. included with common stock.
b. included as a liability.
c. excluded from the stockholders equity heading.
d. included as a contra item in stockholders' equity.

S
6 - 29
46.
Cumulative preferred dividends in arrears should be shown in a corporation's balance

sheet as
a. an increase in current liabilities.
b. an increase in stockholders' equity.
c. a footnote.
d. an increase in current liabilities for the current portion and long-term liabilities for the
long-term portion.
47.
At the date of the financial statements, common stock shares issued would exceed
common stock shares outstanding as a result of the
a. declaration of a stock split.
b. declaration of a stock dividend.
c. purchase of treasury stock.
d. payment in full of subscribed stock.
48.
An entry is not made on the

a. date of declaration.
b. date of record.
c. date of payment.
d. An entry is made on all of these dates.
49.
Cash dividends are paid on the basis of the number of shares

a. authorized.
b. issued.
c. outstanding.
d. outstanding less the number of treasury shares.
50.
Which of the following statements about property dividends is not true?

a. A property dividend is usually in the form of securities of other companies.
b. A property dividend is also called a dividend in kind.
c. The accounting for a property dividend should be based on the carrying value (book
value) of the nonmonetary assets transferred.
d. All of these statements are true.
51.
Houser Corporation owns 4,000,000 shares of stock in Baha Corporation. On December

31, 2010, Houser distributed these shares of stock as a dividend to its stockholders. This
is an example of a
a. property dividend.
b. stock dividend.
c. liquidating dividend.
d. cash dividend.
52.
A dividend which is a return to stockholders of a portion of their original investments is a

a. liquidating dividend.
b. property dividend.
c. liability dividend.
d. participating dividend.
6 - 30
53.
A mining company declared a liquidating dividend. The journal entry to record the
declaration must include a debit to
a. Retained Earnings.
b. a paid-in capital account.
c. Accumulated Depletion.
d. Accumulated Depreciation.
54.
If management wishes to "capitalize" part of the earnings, it may issue a

a. cash dividend.
b. stock dividend.
c. property dividend.
d. liquidating dividend.
55.
Which dividends do not reduce stockholders' equity?

a. Cash dividends
b. Stock dividends
c. Property dividends
d. Liquidating dividends
56.
The declaration and issuance of a stock dividend larger than 25% of the shares previously
outstanding
a. increases common stock outstanding and increases total stockholders' equity.
b. decreases retained earnings but does not change total stockholders' equity.
c. may increase or decrease paid-in capital in excess of par but does not change total
stockholders' equity.
d. increases retained earnings and increases total stockholders' equity.
57.
Quirk Corporation issued a 100% stock dividend of its common stock which had a par
value of $10 before and after the dividend. At what amount should retained earnings be
capitalized for the additional shares issued?
a. There should be no capitalization of retained earnings.
b. Par value
c. Market value on the declaration date
d. Market value on the payment date
58.
The issuer of a 5% common stock dividend to common stockholders preferably should

transfer from retained earnings to contributed capital an amount equal to the
a. market value of the shares issued.
b. book value of the shares issued.
c. minimum legal requirements.
d. par or stated value of the shares issued.
59.
At the date of declaration of a small common stock dividend, the entry should not include
a. a credit to Common Stock Dividend Payable.
b. a credit to Paid-in Capital in Excess of Par.
c. a debit to Retained Earnings.
d. All of these are acceptable.

60.
The balance in Common Stock Dividend Distributable should be reported as a(n)

a. deduction from common stock issued.
b. addition to capital stock.
c. current liability.
d. contra current asset.
61.
A feature common to both stock splits and stock dividends is

a. a transfer to earned capital of a corporation.
b. that there is no effect on total stockholders' equity.
c. an increase in total liabilities of a corporation.
d. a reduction in the contributed capital of a corporation.
62.
What effect does the issuance of a 2-for-1 stock split have on each of the following?
a.
b.
c.
d.
Par Value per Share

No effect
Increase
Decrease
Decrease
6 - 31
Retained Earnings
No effect
No effect
No effect
Decrease
63.
Which one of the following disclosures should be made in the equity section of the
balance sheet, rather than in the notes to the financial statements?
a. Dividend preferences
b. Liquidation preferences
c. Call prices
d. Conversion or exercise prices
64.
The rate of return on common stock equity is calculated by dividing

a. net income less preferred dividends by average common stockholders equity.
b. net income by average common stockholders equity.
c. net income less preferred dividends by ending common stockholders equity.
d. net income by ending common stockholders equity.
65.
The payout ratio can be calculated by dividing

a. dividends per share by earnings per share.
b. cash dividends by net income less preferred dividends.
c. cash dividends by market price per share.
d. dividends per share by earnings per share and dividing cash dividends by net income
less preferred dividends.
66.
Younger Company has outstanding both common stock and nonparticipating, noncumulative preferred stock. The liquidation value of the preferred is equal to its par value.
The book value per share of the common stock is unaffected by
a. the declaration of a stock dividend on preferred payable in preferred stock when the
market price of the preferred is equal to its par value.
b. the declaration of a stock dividend on common stock payable in common stock when
the market price of the common is equal to its par value.
c. the payment of a previously declared cash dividend on the common stock.
d. a 2-for-1 split of the common stock.
6 - 32
P
67.

Assume common stock is the only class of stock outstanding in the Manley Corporation.
Total stockholders' equity divided by the number of common stock shares outstanding is
called
a. book value per share.
b. par value per share.
c. stated value per share.
d. market value per share.
*68.
Dividends are not paid on

a. noncumulative preferred stock.
b. nonparticipating preferred stock.
c. treasury common stock.
d. Dividends are paid on all of these.
*69.
Noncumulative preferred dividends in arrears

a. are not paid or disclosed.
b. must be paid before any other cash dividends can be distributed.
c. are disclosed as a liability until paid.
d. are paid to preferred stockholders if sufficient funds remain after payment of the
current preferred dividend.
*70.
How should cumulative preferred dividends in arrears be shown in a corporation's

statement of financial position?
a. Note disclosure
b. Increase in stockholders' equity
c. Increase in current liabilities
d. Increase in current liabilities for the amount expected to be declared within the year or
operating cycle, and increase in long-term liabilities for the balance
CHAPTER 16
DILUTIVE SECURITIES AND EARNINGS PER SHARE
MULTIPLE CHOICEDilutive Securities, Conceptual
21.
Convertible bonds
a. have priority over other indebtedness.
b. are usually secured by a first or second mortgage.
c. pay interest only in the event earnings are sufficient to cover the interest.
d. may be exchanged for equity securities.
22.
The conversion of bonds is most commonly recorded by the

a. incremental method.
b. proportional method.
c. market value method.
6 - 33
d. book value method.

23.
When a bond issuer offers some form of additional consideration (a sweetener) to

induce conversion, the sweetener is accounted for as a(n)
a. extraordinary item.
b. expense.
c. loss.
d. none of these.
24.
25.
Corporations issue convertible debt for two main reasons. One is the desire to raise equity
capital that, assuming conversion, will arise when the original debt is converted. The other
is
a. the ease with which convertible debt is sold even if the company has a poor credit
rating.
b. the fact that equity capital has issue costs that convertible debt does not.
c. that many corporations can obtain financing at lower rates.
d. that convertible bonds will always sell at a premium.
When convertible debt is retired by the issuer, any material difference between the cash
acquisition price and the carrying amount of the debt should be
a. reflected currently in income, but not as an extraordinary item.
b. reflected currently in income as an extraordinary item.
c. treated as a prior period adjustment.
d. treated as an adjustment of additional paid-in capital.
26.
The conversion of preferred stock into common requires that any excess of the par value
of the common shares issued over the carrying amount of the preferred being converted
should be
a. reflected currently in income, but not as an extraordinary item.
b. reflected currently in income as an extraordinary item.
c. treated as a prior period adjustment.
d. treated as a direct reduction of retained earnings.
27.
The conversion of preferred stock may be recorded by the

a. incremental method.
b. book value method.
c. market value method.
d. par value method.
28.
When the cash proceeds from a bond issued with detachable stock warrants exceed the
sum of the par value of the bonds and the fair market value of the warrants, the excess
should be credited to
a. additional paid-in capital from stock warrants.
b. retained earnings.
c. a liability account.
d. premium on bonds payable.
29.
Proceeds from an issue of debt securities having stock warrants should not be allocated
between debt and equity features when
a. the market value of the warrants is not readily available.
b. exercise of the warrants within the next few fiscal periods seems remote.
c. the allocation would result in a discount on the debt security.
d. the warrants issued with the debt securities are nondetachable.
6 - 34
30.
Stock warrants outstanding should be classified as

a. liabilities.
b. reductions of capital contributed in excess of par value.
c. assets.
d. none of these.
31.
A corporation issues bonds with detachable warrants. The amount to be recorded as paidin capital is preferably
a. zero.
b. calculated by the excess of the proceeds over the face amount of the bonds.
c. equal to the market value of the warrants.
d. based on the relative market values of the two securities involved.

P
32.
6 - 35
The distribution of stock rights to existing common stockholders will increase paid-in
capital at the
a.
b.
c.
d.
Date of Issuance
of the Rights
Yes
Yes
No
No
Date of Exercise
of the Rights
Yes
No
Yes
No
33.
The major difference between convertible debt and stock warrants is that upon exercise of
the warrants
a. the stock is held by the company for a defined period of time before they are issued to
the warrant holder.
b. the holder has to pay a certain amount of cash to obtain the shares.
c. the stock involved is restricted and can only be sold by the recipient after a set period
of time.
d. no paid-in capital in excess of par can be a part of the transaction.
34.
Which of the following is not a characteristic of a noncompensatory stock option plan?

a. Substantially all full-time employees may participate on an equitable basis.
b. The plan offers no substantive option feature.
c. Unlimited time period permitted for exercise of an option as long as the holder is still
employed by the company.
d. Discount from the market price of the stock no greater than would be reasonable in an
offer of stock to stockholders or others.
35.
The date on which to measure the compensation element in a stock option granted to a
corporate employee ordinarily is the date on which the employee
a. is granted the option.
b. has performed all conditions precedent to exercising the option.
c. may first exercise the option.
d. exercises the option.
36.
Compensation expense resulting from a compensatory stock option plan is generally

a. recognized in the period of exercise.
b. recognized in the period of the grant.
c. allocated to the periods benefited by the employee's required service.
d. allocated over the periods of the employee's service life to retirement.
37.
The date on which total compensation expense is computed in a stock option plan is the date
a. of grant.
b. of exercise.
c. that the market price coincides with the option price.
c. that the market price exceeds the option price.
38.
Which of the following is not a characteristic of a noncompensatory stock purchase plan?

a. It is open to almost all full-time employees.
b. The discount from market price is small.
c. The plan offers no substantive option feature.
d. All of these are characteristics.
6 - 36
*39.
Under the intrinsic value method, compensation expense resulting from an incentive stock
option is generally
a. not recognized because no excess of market price over the option price exists at the
date of grant.
b. recognized in the period of the grant.
c. allocated to the periods benefited by the employee's required service.
d. recognized in the period of exercise.
*40.
For stock appreciation rights, the measurement date for computing compensation is the
date
a. the rights mature.
b. the stocks price reaches a predetermined amount.
c. of grant.
d. of exercise.
*41.
An executive pays no taxes at time of exercise in a(an)

a. stock appreciation rights plan.
b. incentive stock option plan.
c. nonqualified stock option plan.
d. Taxes would be paid in all of these.
*42.
A company estimates the fair value of SARs, using an option-pricing model, for
a. share-based equity awards.
b. share-based liability awards.
c. both equity awards and liability awards.
d. neither equity awards or liability awards.
CHAPTER 17
INVESTMENTS
21.Which of the following is not a debt security?
a. Convertible bonds
b. Commercial paper
c. Loans receivable
d. All of these are debt securities.
22.
23.
A correct valuation is
a. available-for-sale at amortized cost.
b. held-to-maturity at amortized cost.
c. held-to-maturity at fair value.
d. none of these.
Securities which could be classified as held-to-maturity are
a. redeemable preferred stock.
b. warrants.
c. municipal bonds.
d. treasury stock.

24.
6 - 37
Unrealized holding gains or losses which are recognized in income are from securities
classified as
a. held-to-maturity.
b. available-for-sale.
c. trading.
d. none of these.
25. When an investor's accounting period ends on a date that does not coincide with an
interest receipt date for bonds held as an investment, the investor must
a. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for
the amount of interest accrued since the last interest receipt date.
b. notify the issuer and request that a special payment be made for the appropriate
portion of the interest period.
c. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for
the total amount of interest to be received at the next interest receipt date.
d. do nothing special and ignore the fact that the accounting period does not coincide
with the bond's interest period.
26. Debt securities that are accounted for at amortized cost, not fair value, are
a. held-to-maturity debt securities.
b. trading debt securities.
c. available-for-sale debt securities.
d. never-sell debt securities.
27. Debt securities acquired by a corporation which are accounted for by recognizing
unrealized holding gains or losses and are included as other comprehensive income and
as a separate component of stockholders' equity are
a. held-to-maturity debt securities.
b. trading debt securities.
c. available-for-sale debt securities.
d. never-sell debt securities.
28. Use of the effective-interest method in amortizing bond premiums and discounts results in
a. a greater amount of interest income over the life of the bond issue than would result
from use of the straight-line method.
b. a varying amount being recorded as interest income from period to period.
c. a variable rate of return on the book value of the investment.
d. a smaller amount of interest income over the life of the bond issue than would result
from use of the straight-line method.
29. Equity securities acquired by a corporation which are accounted for by recognizing
unrealized holding gains or losses as other comprehensive income and as a separate
component of stockholders' equity are
a. available-for-sale securities where a company has holdings of less than 20%.
b. trading securities where a company has holdings of less than 20%.
c securities where a company has holdings of between 20% and 50%.
d. securities where a company has holdings of more than 50%.
30. A requirement for a security to be classified as held-to-maturity is
a. ability to hold the security to maturity.
b. positive intent.
c. the security must be a debt security.
d. All of these are required.
6 - 38
31.
Held-to-maturity securities are reported at

a. acquisition cost.
b. acquisition cost plus amortization of a discount.
c. acquisition cost plus amortization of a premium.
d. fair value.
32.
Watt Co. purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities
to maturity, the entry to record the investment includes
a. a debit to Held-to-Maturity Securities at $300,000.
b. a credit to Premium on Investments of $15,000.
c. a debit to Held-to-Maturity Securities at $315,000.
d. none of these.
33.
Which of the following is not correct in regard to trading securities?

a. They are held with the intention of selling them in a short period of time.
b. Unrealized holding gains and losses are reported as part of net income.
c. Any discount or premium is not amortized.
d. All of these are correct.
34.
In accounting for investments in debt securities that are classified as trading securities,
a. a discount is reported separately.
b. a premium is reported separately.
c. any discount or premium is not amortized.
d. none of these.
35.
Investments in debt securities are generally recorded at

a. cost including accrued interest.
b. maturity value.
c. cost including brokerage and other fees.
d. maturity value with a separate discount or premium account.
36.
Jordan Co. purchased ten-year, 10% bonds that pay interest semiannually. The bonds are
sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the
principal by the table value for
a. 10 periods and 10% from the present value of 1 table.
b. 10 periods and 8% from the present value of 1 table.
c. 20 periods and 5% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.
37.
Investments in debt securities should be recorded on the date of acquisition at

a. lower of cost or market.
b. market value.
c. market value plus brokerage fees and other costs incident to the purchase.
d. face value plus brokerage fees and other costs incident to the purchase.
6 - 39
38.
An available-for-sale debt security is purchased at a discount. The entry to record the

amortization of the discount includes a
a. debit to Available-for-Sale Securities.
b. debit to the discount account.
c. debit to Interest Revenue.
d. none of these.
39.
APB Opinion No. 21 specifies that, regarding the amortization of a premium or discount on
a debt security, the
a. effective-interest method of allocation must be used.
b. straight-line method of allocation must be used.
c. effective-interest method of allocation should be used but other methods can be
applied if there is no material difference in the results obtained.
d. par value method must be used and therefore no allocation is necessary.
40.
Which of the following is correct about the effective-interest method of amortization?

a. The effective interest method applied to investments in debt securities is different from
that applied to bonds payable.
b. Amortization of a discount decreases from period to period.
c. Amortization of a premium decreases from period to period.
d. The effective-interest method produces a constant rate of return on the book value of
the investment from period to period.
41.
When investments in debt securities are purchased between interest payment dates,
preferably the
a. securities account should include accrued interest.
b. accrued interest is debited to Interest Expense.
c. accrued interest is debited to Interest Revenue.
d. accrued interest is debited to Interest Receivable.
42. Which of the following is not generally correct about recording a sale of a debt security
before maturity date?
a. Accrued interest will be received by the seller even though it is not an interest
payment date.
b. An entry must be made to amortize a discount to the date of sale.
c. The entry to amortize a premium to the date of sale includes a credit to the Premium
on Investments in Debt Securities.
d. A gain or loss on the sale is not extraordinary.
S
43. When a company has acquired a "passive interest" in another corporation, the acquiring
company should account for the investment
a. by using the equity method.
b. by using the fair value method.
c. by using the effective interest method.
d. by consolidation.
6 - 40
44. Santo Corporation declares and distributes a cash dividend that is a result of current
earnings. How will the receipt of those dividends affect the investment account of the
investor under each of the following accounting methods?
a.
b.
c.
d.
Fair Value Method

No Effect
Increase
No Effect
Decrease
Equity Method
Decrease
Decrease
No Effect
No Effect
45. An investor has a long-term investment in stocks. Regular cash dividends received by the
investor are recorded as
Fair Value Method
a.
Income
b. A reduction of the investment
c.
Income
d. A reduction of the investment
Equity Method
Income
A reduction of the investment
A reduction of the investment
Income
46.
When a company holds between 20% and 50% of the outstanding stock of an investee,
which of the following statements applies?
a. The investor should always use the equity method to account for its investment.
b. The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee.
c. The investor must use the fair value method unless it can clearly demonstrate the
ability to exercise "significant influence" over the investee.
d. The investor should always use the fair value method to account for its investment.
47.
If the parent company owns 90% of the subsidiary company's outstanding common stock,
the company should generally account for the income of the subsidiary under the
a. cost method.
b. fair value method.
c. divesture method.
d. equity method.
48.
Koehn Corporation accounts for its investment in the common stock of Sells Company
under the equity method. Koehn Corporation should ordinarily record a cash dividend
received from Sells as
a. a reduction of the carrying value of the investment.
b. additional paid-in capital.
c. an addition to the carrying value of the investment.
d. dividend income.
49.
Under the equity method of accounting for investments, an investor recognizes its share
of the earnings in the period in which the
a. investor sells the investment.
b. investee declares a dividend.
c. investee pays a dividend.
d. earnings are reported by the investee in its financial statements.
6 - 41
50.
Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2010, Cosby had
net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these
transactions using the fair value method rather than the equity method of accounting.
What effect would this have on the investment account, net income, and retained
earnings, respectively?
a. Understate, overstate, overstate
b. Overstate, understate, understate
c. Overstate, overstate, overstate
d. Understate, understate, understate
51.
Dublin Co. holds a 30% stake in Club Co. which was purchased in 2011 at a cost of
$3,000,000. After applying the equity method, the Investment in Club Co. account has a
balance of $3,040,000. At December 31, 2011 the fair value of the investment is
$3,120,000. Which of the following values is acceptable for Dublin to use in its balance
sheet at December 31, 2011?
I. $3,000,000
II. $3,040,000
III. $3,120,000
a. I, II, or III.
b. I or II only.
c. II only.
d. II or III only.
52.
The fair value option allows a company to

a. value its own liabilities at fair value.
b. record income when the fair value of its bonds increases.
c. report most financial instruments at fair value by recording gains and losses as a
separate component of stockholders equity.
d. All of the above are true of the fair value option.
53.
Impairments are
a. based on discounted cash flows for securities.
b. recognized as a realized loss if the impairment is judged to be temporary.
c. based on fair value for available-for-sale investments and on negotiated values for
held-to-maturity investments.
d. evaluated at each reporting date for every investment.
54.
A reclassification adjustment is reported in the

a. income statement as an Other Revenue or Expense.
b. stockholders equity section of the balance sheet.
c. statement of comprehensive income as other comprehensive income.
d. statement of stockholders equity.
55.
When an investment in a held-to-maturity security is transferred to an available-for-sale

security, the carrying value assigned to the available-for-sale security should be
a. its original cost.
b. its fair value at the date of the transfer.
c. the lower of its original cost or its fair value at the date of the transfer.
d. the higher of its original cost or its fair value at the date of the transfer.
6 - 42
56.
When an investment in an available-for-sale security is transferred to trading because the

company anticipates selling the stock in the near future, the carrying value assigned to the
investment upon entering it in the trading portfolio should be
a. its original cost.
b. its fair value at the date of the transfer.
c. the higher of its original cost or its fair value at the date of the transfer.
d. the lower of its original cost or its fair value at the date of the transfer.
57.
A debt security is transferred from one category to another. Generally acceptable

accounting principles require that for this particular reclassification (1) the security be
transferred at fair value at the date of transfer, and (2) the unrealized gain or loss at the
date of transfer currently carried as a separate component of stockholders' equity be
amortized over the remaining life of the security. What type of transfer is being described?
a. Transfer from trading to available-for-sale
b. Transfer from available-for-sale to trading
c. Transfer from held-to-maturity to available-for-sale
d. Transfer from available-for-sale to held-to-maturity
58.
Gains trading or cherry picking involves

a. moving securities whose value has decreased since acquisition from available-for-sale
to held-to-maturity in order to avoid reporting losses.
b. reporting investment securities at fair value but liabilities at amortized cost.
c. selling securities whose value has increased since acquisition while holding those
whose value has decreased since acquisition.
d. All of the above are considered methods of gains trading or cherry picking.
59.
Transfers between categories

a. result in companies omitting recognition of fair value in the year of the transfer.
b. are accounted for at fair value for all transfers.
c. are considered unrealized and unrecognized if transferred out of held-to-maturity into
trading.
d. will always result in an impact on net income.
*60.
Companies that attempt to exploit inefficiencies in various derivative markets by

attempting to lock in profits by simultaneously entering into transactions in two or more
markets are called
a. arbitrageurs.
b. gamblers.
c. hedgers.
d. speculators.
*61.
All of the following statements regarding accounting for derivatives are correct except that
a. they should be recognized in the financial statements as assets and liabilities.
b. they should be reported at fair value.
c. gains and losses resulting from speculation should be deferred.
d. gains and losses resulting from hedge transactions are reported in different ways,
depending upon the type of hedge.

*62.
63.
6 - 43
All of the following are characteristics of a derivative financial instrument except the
instrument
a. has one or more underlyings and an identified payment provision.
b. requires a large investment at the inception of the contract.
c. requires or permits net settlement.
d. All of these are characteristics.
Which of the following are considered equity securities?
I. Convertible debt.
II. Redeemable preferred stock.
III. Call or put options.
a. I and II only.
b. I and III only.
c. II only.
d. III only.
*64.
The accounting for fair value hedges records the derivative at its
a. amortized cost.
b. carrying value.
c. fair value.
d. historical cost.
*65.
Gains or losses on cash flow hedges are

a. ignored completely.
b. recorded in equity, as part of other comprehensive income.
c. reported directly in net income.
d. reported directly in retained earnings.
*66.
An option to convert a convertible bond into shares of common stock is a(n)

a. embedded derivative.
b. host security.
c. hybrid security.
d. fair value hedge.
*67.
All of the following are requirements for disclosures related to financial instruments except
a. disclosing the fair value and related carrying value of the instruments.
b. distinguishing between financial instruments held or issued for purposes other than
trading.
c. combining or netting the fair value of separate financial instruments.
d. displaying as a separate classification of other comprehensive income the net
gain/loss on derivative instruments designated in cash flow hedges.
68.
A variable-interest entity has

a. insufficient equity investment at risk.
b. stockholders who have decision-making rights.
c. stockholders who absorb the losses or receive the benefits of a normal stockholder.
d. All of the above are characteristics of a variable-interest entity.
6 - 44
69.

Under U.S. GAAP, which of the following models may be used to determine if an
investment is consolidated?
Risk-and-reward model
Voting-interest approach
a.
Yes
No
b.
No
Yes
c.
No
No
d.
Yes
Yes
CHAPTER 18
REVENUE RECOGNITION
21.
The revenue recognition principle provides that revenue is recognized when

a. it is realized.
b. it is realizable.
c. it is realized or realizable and it is earned.
d. none of these.
22.
When goods or services are exchanged for cash or claims to cash (receivables), revenues
are
a. earned.
b. realized.
c. recognized.
d. all of these.
23.
When the entity has substantially accomplished what it must do to be entitled to the
benefits represented by the revenues, revenues are
a. earned.
b. realized.
c. recognized.
d. all of these.
6 - 45
24.
Which of the following is not an accurate representation concerning revenue recognition?

a. Revenue from selling products is recognized at the date of sale, usually interpreted to
mean the date of delivery to customers.
b. Revenue from services rendered is recognized when cash is received or when
services have been performed.
c. Revenue from permitting others to use enterprise assets is recognized as time passes
or as the assets are used.
d. Revenue from disposing of assets other than products is recognized at the date of
sale.
25.
The process of formally recording or incorporating an item in the financial statements of

an entity is
a. allocation.
b. articulation.
c. realization.
d. recognition.
26.
Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract
on each appliance sold. Although Dot Point sells the appliances on an installment basis,
all service contracts are cash sales at the time of purchase by the buyer. Collections
received for service contracts should be recorded as
a. service revenue.
b. deferred service revenue.
c. a reduction in installment accounts receivable.
d. a direct addition to retained earnings.
27.
Which of the following is not a reason why revenue is recognized at time of sale?
a. Realization has occurred.
b. The sale is the critical event.
c. Title legally passes from seller to buyer.
d. All of these are reasons to recognize revenue at time of sale.
28.
An alternative available when the seller is exposed to continued risks of ownership

through return of the product is
a. recording the sale, and accounting for returns as they occur in future periods.
b. not recording a sale until all return privileges have expired.
c. recording the sale, but reducing sales by an estimate of future returns.
d. all of these.
29.
A sale should not be recognized as revenue by the seller at the time of sale if
a. payment was made by check.
b. the selling price is less than the normal selling price.
c. the buyer has a right to return the product and the amount of future returns cannot be
reasonably estimated.
d. none of these.
6 - 46
30.
The FASB concluded that if a company sells its product but gives the buyer the right to
return the product, revenue from the sales transaction shall be recognized at the time of
sale only if all of six conditions have been met. Which of the following is not one of these
six conditions?
a. The amount of future returns can be reasonably estimated.
b. The seller's price is substantially fixed or determinable at time of sale.
c. The buyer's obligation to the seller would not be changed in the event of theft or
damage of the product.
d. The buyer is obligated to pay the seller upon resale of the product.
31.
In selecting an accounting method for a newly contracted long-term construction project,

the principal factor to be considered should be
a. the terms of payment in the contract.
b. the degree to which a reliable estimate of the costs to complete and extent of progress
toward completion is practicable.
c. the method commonly used by the contractor to account for other long-term construction contracts.
d. the inherent nature of the contractor's technical facilities used in construction.
32.
The percentage-of-completion method must be used when certain conditions exist. Which
of the following is not one of those necessary conditions?
a. Estimates of progress toward completion, revenues, and costs are reasonably
dependable.
b. The contractor can be expected to perform the contractual obligation.
c. The buyer can be expected to satisfy some of the obligations under the contract.
d. The contract clearly specifies the enforceable rights of the parties, the consideration to
be exchanged, and the manner and terms of settlement.
33.
When work to be done and costs to be incurred on a long-term contract can be estimated
dependably, which of the following methods of revenue recognition is preferable?
a. Installment-sales method
b. Percentage-of-completion method
c. Completed-contract method
d. None of these
34.
How should the balances of progress billings and construction in process be shown at
reporting dates prior to the completion of a long-term contract?
a. Progress billings as deferred income, construction in progress as a deferred expense.
b. Progress billings as income, construction in process as inventory.
c. Net, as a current asset if debit balance, and current liability if credit balance.
d. Net, as income from construction if credit balance, and loss from construction if debit
balance.
35.
In accounting for a long-term construction-type contract using the percentage-ofcompletion method, the gross profit recognized during the first year would be the
estimated total gross profit from the contract, multiplied by the percentage of the costs
incurred during the year to the
a. total costs incurred to date.
b. total estimated cost.
c. unbilled portion of the contract price.
d. total contract price.
6 - 47
36.
How should earned but unbilled revenues at the balance sheet date on a long-term
construction contract be disclosed if the percentage-of-completion method of revenue
recognition is used?
a. As construction in process in the current asset section of the balance sheet.
b. As construction in process in the noncurrent asset section of the balance sheet.
c. As a receivable in the noncurrent asset section of the balance sheet.
d. In a note to the financial statements until the customer is formally billed for the portion
of work completed.
37.
The principal disadvantage of using the percentage-of-completion method of recognizing

revenue from long-term contracts is that it
a. is unacceptable for income tax purposes.
b. gives results based upon estimates which may be subject to considerable uncertainty.
c. is likely to assign a small amount of revenue to a period during which much revenue
was actually earned.
d. none of these.
38.
One of the more popular input measures used to determine the progress toward
completion in the percentage-of-completion method is
a. revenue-percentage basis.
b. cost-percentage basis.
c. progress completion basis.
d. cost-to-cost basis.
39.
The principal advantage of the completed-contract method is that

a. reported revenue is based on final results rather than estimates of unperformed work.
b. it reflects current performance when the period of a contract extends into more than
one accounting period.
c. it is not necessary to recognize revenue at the point of sale.
d. a greater amount of gross profit and net income is reported than is the case when the
percentage-of-completion method is used.
40.
Under the completed-contract method

a. revenue, cost, and gross profit are recognized during the production cycle.
b. revenue and cost are recognized during the production cycle, but gross profit
recognition is deferred until the contract is completed.
c. revenue, cost, and gross profit are recognized at the time the contract is completed.
d. none of these.
41.
Cost estimates on a long-term contract may indicate that a loss will result on completion of
the entire contract. In this case, the entire expected loss should be
a. recognized in the current period, regardless of whether the percentage-of-completion
or completed-contract method is employed.
b. recognized in the current period under the percentage-of-completion method, but the
completed-contract method should defer recognition of the loss to the time when the
contract is completed.
c. recognized in the current period under the completed-contract method, but the
percentage-of-completion method should defer the loss until the contract is completed.
d. deferred and recognized when the contract is completed, regardless of whether the
percentage-of-completion or completed-contract method is employed.
6 - 48
42.
Cost estimates at the end of the second year indicate a loss will result on completion of
the entire contract. Which of the following statements is correct?
a. Under the completed-contract method, the loss is not recognized until the year the
construction is completed.
b. Under the percentage-of-completion method, the gross profit recognized in the first
year must not be changed.
c. Under the completed-contract method, when the billings exceed the accumulated
costs, the amount of the estimated loss is reported as a current liability.
d. Under the completed-contract method, when the Construction in Process balance
exceeds the billings, the estimated loss is added to the accumulated costs.
43.
The criteria for recognition of revenue at the completion of production of precious metals
and farm products include
a. an established market with quoted prices.
b. low additional costs of completion and selling.
c. units are interchangeable.
d. all of these.
44.
In certain cases, revenue is recognized at the completion of production even though no

sale has been made. Which of the following statements is not true?
a. Examples involve precious metals or farm equipment.
b. The products possess immediate marketability at quoted prices.
c. No significant costs are involved in selling the product.
d. All of these statements are true.
45.
For which of the following products is it appropriate to recognize revenue at the

completion of production even though no sale has been made?
a. Automobiles
b. Large appliances
c. Single family residential units
d. Precious metals
46.
When there is a significant increase in the estimated total contract costs but the increase
does not eliminate all profit on the contract, which of the following is correct?
a. Under both the percentage-of-completion and the completed-contract methods, the
estimated cost increase requires a current period adjustment of excess gross profit
recognized on the project in prior periods.
b. Under the percentage-of-completion method only, the estimated cost increase requires
a current period adjustment of excess gross profit recognized on the project in prior
periods.
c. Under the completed-contract method only, the estimated cost increase requires a
current period adjustment of excess gross profit recognized on the project in prior
periods.
d. No current period adjustment is required.
47.
Deferred gross profit on installment sales is generally treated as a(n)

a. deduction from installment accounts receivable.
b. deduction from installment sales.
c. unearned revenue and classified as a current liability.
d. deduction from gross profit on sales.
6 - 49
48.
The installment-sales method of recognizing profit for accounting purposes is acceptable if

a. collections in the year of sale do not exceed 30% of the total sales price.
b. an unrealized profit account is credited.
c. collection of the sales price is not reasonably assured.
d. the method is consistently used for all sales of similar merchandise.
49.
The method most commonly used to report defaults and repossessions is

a. provide no basis for the repossessed asset thereby recognizing a loss.
b. record the repossessed merchandise at fair value, recording a gain or loss if appropriate.
c. record the repossessed merchandise at book value, recording no gain or loss.
d. none of these.
50.
Under the installment-sales method,

a. revenue, costs, and gross profit are recognized proportionate to the cash that is
received from the sale of the product.
b. gross profit is deferred proportionate to cash uncollected from sale of the product, but
total revenues and costs are recognized at the point of sale.
c. gross profit is not recognized until the amount of cash received exceeds the cost of
the item sold.
d. revenues and costs are recognized proportionate to the cash received from the sale of
the product, but gross profit is deferred until all cash is received.
51.
The realization of income on installment sales transactions involves

a. recognition of the difference between the cash collected on installment sales and the
cash expenses incurred.
b. deferring the net income related to installment sales and recognizing the income as
cash is collected.
c. deferring gross profit while recognizing operating or financial expenses in the period
incurred.
d. deferring gross profit and all additional expenses related to installment sales until cash
is ultimately collected.
52.
A manufacturer of large equipment sells on an installment basis to customers with

questionable credit ratings. Which of the following methods of revenue recognition is least
likely to overstate the amount of gross profit reported?
a. At the time of completion of the equipment (completion of production method)
b. At the date of delivery (sales method)
c. The installment-sales method
d. The costrecovery method
53.
A seller is properly using the cost-recovery method for a sale. Interest will be earned on
the future payments. Which of the following statements is not correct?
a. After all costs have been recovered, any additional cash collections are included in
income.
b. Interest revenue may be recognized before all costs have been recovered.
c. The deferred gross profit is offset against the related receivable on the balance sheet.
d. Subsequent income statements report the gross profit as a separate item of revenue
when it is recognized as earned.
6 - 50
54.
Under the cost-recovery method of revenue recognition,

a. income is recognized on a proportionate basis as the cash is received on the sale of
the product.
b. income is recognized when the cash received from the sale of the product is greater
than the cost of the product.
c. income is recognized immediately.
d. none of these.
55.
Winser, Inc. is engaged in extensive exploration for water in Utah. If, upon discovery of
water, Winser does not recognize any revenue from water sales until the sales exceed the
costs of exploration, the basis of revenue recognition being employed is the
a. production basis.
b. cash (or collection) basis.
c. sales (or accrual) basis.
d. cost recovery basis.
56.
The deposit method of revenue recognition is used when

a. the product can be marketed at quoted prices and units are interchangeable.
b. cash is received before the sales transaction is complete.
c. the contract is short-term or the percentage-of-completion method cant be used.
d. there are no significant costs of distribution.
57.
The cost-recovery method

a. is prohibited under current GAAP due to its conservative nature.
b. requires a company to defer profit recognition until all cash payments are received
from the buyer.
c. is used by sellers when there is a reasonable basis for estimating collectibility.
d. recognizes total revenue and total cost of goods sold in the period of sale.
*58.
Types of franchising arrangements include all of the following except

a. service sponsor-retailer.
b. wholesaler-service sponsor.
c. manufacturer-wholesaler.
d. wholesaler-retailer.
*59.
In consignment sales, the consignee

a. records the merchandise as an asset on its books.
b. records a liability for the merchandise held on consignment.
c. recognizes revenue when it ships merchandise to the consignor.
d. prepares an account report for the consignor which shows sales, expenses, and
cash receipts.
*60.
Some of the initial franchise fee may be allocated to

a. continuing franchise fees.
b. interest revenue on the future installments.
c. options to purchase the franchisee's business.
d. All of these may reduce the amount of the initial franchise fee that is recognized as
revenue.
6 - 51
*61.
Continuing franchise fees should be recorded by the franchisor

a. as revenue when earned and receivable from the franchisee.
b. as revenue when received.
c. in accordance with the accounting procedures specified in the franchise agreement.
d. as revenue only after the balance of the initial franchise fee has been collected.
*62.
Occasionally a franchise agreement grants the franchisee the right to make future bargain
purchases of equipment or supplies. When recording the initial franchise fee, the
franchisor should
a. increase revenue recognized from the initial franchise fee by the amount of the
expected future purchases.
b. record a portion of the initial franchise fee as unearned revenue which will increase
the selling price when the franchisee subsequently makes the bargain purchases.
c. defer recognition of any revenue from the initial franchise fee until the bargain
purchases are made.
d. None of these.
*63.
A franchise agreement grants the franchisor an option to purchase the franchisee's

business. It is probable that the option will be exercised. When recording the initial
franchise fee, the franchisor should
a. record the entire initial franchise fee as a deferred credit which will reduce the
franchisor's investment in the purchased outlet when the option is exercised.
b. record the entire initial franchise fee as unearned revenue which will reduce the
amount of cash paid when the option is exercised.
c. record the portion of the initial franchise fee which is attributable to the bargain
purchase option as a reduction of the future amounts receivable from the franchisee.
d. None of these.
*64.
Revenue is recognized by the consignor when the

a. goods are shipped to the consignee.
b. consignee receives the goods.
c. consignor receives an advance from the consignee.
d. consignor receives an account sales from the consignee.
6 - 52
CHAPTER 19
ACCOUNTING FOR INCOME TAXES
21.
Taxable income of a corporation

a. differs from accounting income due to differences in intraperiod allocation between the
two methods of income determination.
b. differs from accounting income due to differences in interperiod allocation and
permanent differences between the two methods of income determination.
c. is based on generally accepted accounting principles.
d. is reported on the corporation's income statement.
22
Taxable income of a corporation differs from pretax financial income because of
a.
b.
c.
d.
23.
Permanent
Differences
No
No
Yes
Yes
Temporary
Differences
No
Yes
Yes
No
The deferred tax expense is the

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

24.
6 - 53
Machinery was acquired at the beginning of the year. Depreciation recorded during the life
of the machinery could result in
Future
Taxable Amounts
Yes
Yes
No
No
a.
b.
c.
d.
Future
Deductible Amounts
Yes
No
Yes
No
25.
A temporary difference arises when a revenue item is reported for tax purposes in a
period
After it is reported
Before it is reported
in financial income
in financial income
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
26.
At the December 31, 2010 balance sheet date, Unruh Corporation reports an accrued
receivable for financial reporting purposes but not for tax purposes. When this asset is
recovered in 2011, a future taxable amount will occur and
a. pretax financial income will exceed taxable income in 2011.
b. Unruh will record a decrease in a deferred tax liability in 2011.
c. total income tax expense for 2011 will exceed current tax expense for 2011.
d. Unruh will record an increase in a deferred tax asset in 2011.
27.
Assuming a 40% statutory tax rate applies to all years involved, which of the following
situations will give rise to reporting a deferred tax liability on the balance sheet?
I.
II.
III.
IV.
a.
b.
c.
d.
28.
A revenue is deferred for financial reporting purposes but not for tax purposes.
A revenue is deferred for tax purposes but not for financial reporting purposes.
An expense is deferred for financial reporting purposes but not for tax purposes.
An expense is deferred for tax purposes but not for financial reporting purposes.
item II only
items I and II only
items II and III only
items I and IV only
A major distinction between temporary and permanent differences is

a. permanent differences are not representative of acceptable accounting practice.
b. temporary differences occur frequently, whereas permanent differences occur only
once.
c. once an item is determined to be a temporary difference, it maintains that status;
however, a permanent difference can change in status with the passage of time.
d. temporary differences reverse themselves in subsequent accounting periods, whereas
permanent differences do not reverse.
6 - 54
29.
Which of the following are temporary differences that are normally classified as expenses
or losses that are deductible after they are recognized in financial income?
a. Advance rental receipts.
b. Product warranty liabilities.
c. Depreciable property.
d. Fines and expenses resulting from a violation of law.
30.
Which of the following is a temporary difference classified as a revenue or gain that is

taxable after it is recognized in financial income?
a. Subscriptions received in advance.
b. Prepaid royalty received in advance.
c. An installment sale accounted for on the accrual basis for financial reporting purposes
and on the installment (cash) basis for tax purposes.
d. Interest received on a municipal obligation.
31.
Which of the following differences would result in future taxable amounts?

a. Expenses or losses that are tax deductible after they are recognized in financial
income.
b. Revenues or gains that are taxable before they are recognized in financial income.
c. Revenues or gains that are recognized in financial income but are never included in
taxable income.
d. Expenses or losses that are tax deductible before they are recognized in financial
income.
32.
Stuart Corporation's taxable income differed from its accounting income computed for this
past year. An item that would create a permanent difference in accounting and taxable
incomes for Stuart would be
a. a balance in the Unearned Rent account at year end.
b. using accelerated depreciation for tax purposes and straight-line depreciation for book
purposes.
c. a fine resulting from violations of OSHA regulations.
d. making installment sales during the year.
33.
An example of a permanent difference is

a. proceeds from life insurance on officers.
b. interest expense on money borrowed to invest in municipal bonds.
c. insurance expense for a life insurance policy on officers.
d. all of these.
34.
Which of the following will not result in a temporary difference?

a. Product warranty liabilities
b. Advance rental receipts
c. Installment sales
d. All of these will result in a temporary difference.
35.
A company uses the equity method to account for an investment. This would result in what
type of difference and in what type of deferred income tax?
a.
b.
c.
d.
Type of Difference
Permanent
Permanent
Temporary
Temporary
Deferred Tax
Asset
Liability
Asset
Liability

36.
A company records an unrealized loss on short-term securities. This would result in what
type of difference and in what type of deferred income tax?
a.
b.
c.
d.
6 - 55
Type of Difference
Temporary
Temporary
Permanent
Permanent
Deferred Tax
Liability
Asset
Liability
Asset
37.
Which of the following temporary differences results in a deferred tax asset in the year the
temporary difference originates?
I. Accrual for product warranty liability.
II. Subscriptions received in advance.
III. Prepaid insurance expense.
a. I and II only.
b. II only.
c. III only.
d. I and III only.
38.
Which of the following is not considered a permanent difference?

a. Interest received on municipal bonds.
b. Fines resulting from violating the law.
c. Premiums paid for life insurance on a companys CEO when the company is the
beneficiary.
d. Stock-based compensation expense.
39.
When a change in the tax rate is enacted into law, its effect on existing deferred income
tax accounts should be
a. handled retroactively in accordance with the guidance related to changes in
accounting principles.
b. considered, but it should only be recorded in the accounts if it reduces a deferred tax
liability or increases a deferred tax asset.
c. reported as an adjustment to tax expense in the period of change.
d. applied to all temporary or permanent differences that arise prior to the date of the
enactment of the tax rate change, but not subsequent to the date of the change.
40.
Tax rates other than the current tax rate may be used to calculate the deferred income tax
amount on the balance sheet if
a. it is probable that a future tax rate change will occur.
b. it appears likely that a future tax rate will be greater than the current tax rate.
c. the future tax rates have been enacted into law.
d. it appears likely that a future tax rate will be less than the current tax rate.
41.
Recognition of tax benefits in the loss year due to a loss carryforward requires
a. the establishment of a deferred tax liability.
b. the establishment of a deferred tax asset.
c. the establishment of an income tax refund receivable.
d. only a note to the financial statements.
6 - 56
42.
Recognizing a valuation allowance for a deferred tax asset requires that a company
a. consider all positive and negative information in determining the need for a valuation
allowance.
b. consider only the positive information in determining the need for a valuation
allowance.
c. take an aggressive approach in its tax planning.
d. pass a recognition threshold, after assuming that it will be audited by taxing
authorities.
43.
Uncertain tax positions

I. Are positions for which the tax authorities may disallow a deduction in whole or
in part.
II. Include instances in which the tax law is clear and in which the company believes
an audit is likely.
III. Give rise to tax expense by increasing payables or increasing a deferred
tax liability.
a. I, II, and III.
b. I and III only.
c. II only.
d. I only.
44.
With regard to uncertain tax positions, the FASB requires that companies recognize a tax
benefit when
a. it is probable and can be reasonably estimated.
b. there is at least a 51% probability that the uncertain tax position will be approved by
the taxing authorities.
c. it is more likely than not that the tax position will be sustained upon audit.
d. Any of the above exist.
45.
Major reasons for disclosure of deferred income tax information is (are)

a. better assessment of quality of earnings.
b. better predictions of future cash flows.
c. that it may be helpful in setting government policy.
d. all of these.
46.
Accounting for income taxes can result in the reporting of deferred taxes as any of the
following except
a. a current or long-term asset.
b. a current or long-term liability.
c. a contra-asset account.
d. All of these are acceptable methods of reporting deferred taxes.
47.
Deferred taxes should be presented on the balance sheet

a. as one net debit or credit amount.
b. in two amounts: one for the net current amount and one for the net noncurrent amount.
c. in two amounts: one for the net debit amount and one for the net credit amount.
d. as reductions of the related asset or liability accounts.
6 - 57
48.
Deferred tax amounts that are related to specific assets or liabilities should be classified
as current or noncurrent based on
a. their expected reversal dates.
b. their debit or credit balance.
c. the length of time the deferred tax amounts will generate future tax deferral benefits.
d. the classification of the related asset or liability.
49.
Tanner, Inc. incurred a financial and taxable loss for 2010. Tanner therefore decided to
use the carryback provisions as it had been profitable up to this year. How should the
amounts related to the carryback be reported in the 2010 financial statements?
a. The reduction of the loss should be reported as a prior period adjustment.
b. The refund claimed should be reported as a deferred charge and amortized over five
years.
c. The refund claimed should be reported as revenue in the current year.
d. The refund claimed should be shown as a reduction of the loss in 2010.
50.
A deferred tax liability is classified on the balance sheet as either a current or a noncurrent
liability. The current amount of a deferred tax liability should generally be
a. the net deferred tax consequences of temporary differences that will result in net
taxable amounts during the next year.
b. totally eliminated from the financial statements if the amount is related to a noncurrent
asset.
c. based on the classification of the related asset or liability for financial reporting
purposes.
d. the total of all deferred tax consequences that are not expected to reverse in the
operating period or one year, whichever is greater.
51.
All of the following are procedures for the computation of deferred income taxes except to
a. identify the types and amounts of existing temporary differences.
b. measure the total deferred tax liability for taxable temporary differences.
c. measure the total deferred tax asset for deductible temporary differences and
operating loss carrybacks.
d. All of these are procedures in computing deferred income taxes.
6 - 58
CHAPTER 20
ACCOUNTING FOR PENSIONS
AND POSTRETIREMENT BENEFITS
21.
In determining the present value of the prospective benefits (often referred to as the
projected benefit obligation), the following are considered by the actuary:
a. retirement and mortality rate.
b. interest rates.
c. benefit provisions of the plan.
d. all of these factors.
22.
In a defined-benefit plan, the process of funding refers to

a. determining the projected benefit obligation.
b. determining the accumulated benefit obligation.
c. making the periodic contributions to a funding agency to ensure that funds are
available to meet retirees' claims.
d. determining the amount that might be reported for pension expense.
23.
In all pension plans, the accounting problems include all the following except
a. measuring the amount of pension obligation.
b. disclosing the status and effects of the plan in the financial statements.
c. allocating the cost of the plan to the proper periods.
d. determining the level of individual premiums.
24.
In a defined-contribution plan, a formula is used that

a. defines the benefits that the employee will receive at the time of retirement.
b. ensures that pension expense and the cash funding amount will be different.
c. requires an employer to contribute a certain sum each period based on the formula.
d. ensures that employers are at risk to make sure funds are available at retirement.
6 - 59
25.
In a defined-benefit plan, a formula is used that

a. requires that the benefit of gain or the risk of loss from the assets contributed to the
pension plan be borne by the employee.
b. defines the benefits that the employee will receive at the time of retirement.
c. requires that pension expense and the cash funding amount be the same.
d. defines the contribution the employer is to make; no promise is made concerning the
ultimate benefits to be paid out to the employees.
26.
Which of the following is not a characteristic of a defined-contribution pension plan?

a. The employer's contribution each period is based on a formula.
b. The benefits to be received by employees are usually determined by an employees
three highest years of salary defined by the terms of the plan.
c. The accounting for a defined-contribution plan is straightforward and uncomplicated.
d. The benefit of gain or the risk of loss from the assets contributed to the pension fund
are borne by the employee.
27.
In accounting for a defined-benefit pension plan

a. an appropriate funding pattern must be established to ensure that enough monies will
be available at retirement to meet the benefits promised.
b. the employer's responsibility is simply to make a contribution each year based on the
formula established in the plan.
c. the expense recognized each period is equal to the cash contribution.
d. the liability is determined based upon known variables that reflect future salary levels
promised to employees.
28.
Alternative methods exist for the measurement of the pension obligation (liability). Which
measure requires the use of future salaries in its computation?
a. Vested benefit obligation
b. Accumulated benefit obligation
c. Projected benefit obligation
d. Restructured benefit obligation
29.
The accumulated benefit obligation measures

a. the pension obligation on the basis of the plan formula applied to years of service to
date and based on existing salary levels.
b. the pension obligation on the basis of the plan formula applied to years of service to
date and based on future salary levels.
c. an estimated total benefit at retirement and then computes the level cost that will be
sufficient, together with interest expected to accumulate at the assumed rate, to
provide the total benefits at retirement.
d. the shortest possible period for funding to maximize the tax deduction.
30.
The projected benefit obligation is the measure of pension obligation that

a. is required to be used for reporting the service cost component of pension expense.
b. requires pension expense to be determined solely on the basis of the plan formula
applied to years of service to date and based on existing salary levels.
c. requires the longest possible period for funding to maximize the tax deduction.
d. is not sanctioned under generally accepted accounting principles for reporting the
service cost component of pension expense.
6 - 60
31.
Differing measures of the pension obligation can be based on

a. all years of serviceboth vested and nonvestedusing current salary levels.
b. only the vested benefits using current salary levels.
c. both vested and nonvested service using future salaries.
d. all of these.
32.
Vested benefits
a. usually require a certain minimum number of years of service.
b. are those that the employee is entitled to receive even if fired.
c. are not contingent upon additional service under the plan.
d. are defined by all of these.
33.
The relationship between the amount funded and the amount reported for pension
expense is as follows:
a. pension expense must equal the amount funded.
b. pension expense will be less than the amount funded.
c. pension expense will be more than the amount funded.
d. pension expense may be greater than, equal to, or less than the amount funded.
34.
The computation of pension expense includes all the following except

a. service cost component measured using current salary levels.
b. interest on projected benefit obligation.
c. expected return on plan assets.
d. All of these are included in the computation.
35.
In computing the service cost component of pension expense, the FASB concluded that
a. the accumulated benefit obligation provides a more realistic measure of the pension
obligation on a going concern basis.
b. a company should employ an actuarial funding method to report pension expense that
best reflects the cost of benefits to employees.
c. the projected benefit obligation using future compensation levels provides a realistic
measure of present pension obligation and expense.
d. all of these.
36.
The interest on the projected benefit obligation component of pension expense

a. reflects the incremental borrowing rate of the employer.
b. reflects the rates at which pension benefits could be effectively settled.
c. is the same as the expected return on plan assets.
d. may be stated implicitly or explicitly when reported.
37.
One component of pension expense is expected return on plan assets. Plan assets
include
a. contributions made by the employer and contributions made by the employee when a
contributory plan of some type is involved.
b. plan assets still under the control of the company.
c. only assets reported on the balance sheet of the employer as prepaid pension cost.
d. none of these.
6 - 61
38.
The actual return on plan assets

a. is equal to the change in the fair value of the plan assets during the year.
b. includes interest, dividends, and changes in the market value of the fund assets.
c. is equal to the expected rate of return times the fair value of the plan assets at the
beginning of the period.
d. all of these.
39.
In accounting for a pension plan, any difference between the pension cost charged to
expense and the payments into the fund should be reported as
a. an offset to the liability for prior service cost.
b. pension asset/liability.
c. as other comprehensive income (G/L)
d. as accumulated other comprehensive income (PSC).
40.
Which of the following items should be included in pension expense calculated by an

employer who sponsors a defined-benefit pension plan for its employees?
a.
b.
c.
d.
Fair value
of plan assets
Yes
Yes
No
No
Amortization of
prior
service cost
Yes
No
Yes
No
41.
A corporation has a defined-benefit plan. A pension liability will result at the end of the
year if the
a. projected benefit obligation exceeds the fair value of the plan assets.
b. fair value of the plan assets exceeds the projected benefit obligation.
c. amount of employer contributions exceeds the pension expense.
d. amount of pension expense exceeds the amount of employer contributions.
42.
When a company adopts a pension plan, prior service costs should be charged to
a. accumulated other comprehensive income (PSC).
b. operations of prior periods.
c. Other comprehensive income (PSC).
d. retained earnings.
43.
When a company amends a pension plan, for accounting purposes, prior service costs
should be
a. treated as a prior period adjustment because no future periods are benefited.
b. amortized in accordance with procedures used for income tax purposes.
c. recorded in other comprehensive income (PSC).
d. reported as an expense in the period the plan is amended.
44.
Prior service cost is amortized on a

a. straight-line basis over the expected future years of service.
b. years-of-service method or on a straight-line basis over the average remaining service
life of active employees.
c. straight-line basis over 15 years.
d. straight-line basis over the average remaining service life of active employees or 15
years, whichever is longer.
6 - 62
45.
Whenever a defined-benefit plan is amended and credit is given to employees for years of
service provided before the date of amendment
a. both the accumulated benefit obligation and the projected benefit obligation are
usually greater than before.
b. both the accumulated benefit obligation and the projected benefit obligation are
usually less than before.
c. the expense and the liability should be recognized at the time of the plan change.
d. the expense should be recognized immediately, but the liability may be deferred until a
reasonable basis for its determination has been identified.
46.
The actuarial gains or losses that result from changes in the projected benefit obligation
are called
a.
b.
c.
d.
Asset
Gains & Losses
Yes
No
Yes
No
Liability
Gains & Losses
Yes
No
No
Yes
47.
Gains and losses that relate to the computation of pension expense should be
a. recorded currently as an adjustment to pension expense in the period incurred.
b. recorded currently and in the future by applying the corridor method which provides
the amount to be amortized.
c. amortized over a 15-year period.
d. recorded only if a loss is determined.
48.
The fair value of pension plan assets is used to determine the corridor and to calculate the
expected return on plan assets.
Expected Return
Corridor
on Plan Assets
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
49.
A pension fund gain or loss that is caused by a plant closing should be

a. recognized immediately as a gain or loss on the plant closing.
b. spread over the current year and future years.
c. charged or credited to the current pension expense.
d. recognized as a prior period adjustment.
50.
A pension liability is reported when

a. the projected benefit obligation exceeds the fair value of pension plan assets.
b. the accumulated benefit obligation is less than the fair value of pension plan assets.
c. the pension expense reported for the period is greater than the funding amount for the
same period.
d. accumulated other comprehensive income exceeds the fair value of pension plan
assets.
6 - 63
51.
A pension asset is reported when

a. the accumulated benefit obligation exceeds the fair value of pension plan assets.
b. the accumulated benefit obligation exceeds the fair value of pension plan assets, but a
prior service cost exists.
c. pension plan assets at fair value exceed the accumulated benefit obligation.
d. pension plan assets at fair value exceed the projected benefit obligation.
52.

a. There is an account titled Pension Asset / Liability.
b. There is an account titled Accumulated Benefit Obligation.
c. Accumulated Other Comprehensive Income should be reported in the liability section
of the balance sheet.
d. Other comprehensive income (PSC) should be included in net income.
53.
According to the FASB, recognition of a liability is required when the projected benefit
obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan
assets exceeds the projected benefit obligation, the Board
a. requires recognition of an asset.
b. requires recognition of an asset if the excess fair value of plan assets exceeds the
corridor amount.
c. recommends recognition of an asset but does not require such recognition.
d. does not permit recognition of an asset.
54.
Which of the following disclosures of pension plan information would not normally be
required?
a. The major components of pension expense
b. The amount of prior service cost changed or credited in previous years.
c. The funded status of the plan and the amounts recognized in the financial statements
d. The rates used in measuring the benefit amounts
55.
The main purpose of the Pension Benefit Guaranty Corporation is to

a. require minimum funding of pensions.
b. require plan administrators to publish a comprehensive description and summary of
their plans.
c. administer terminated plans and to impose liens on the employer's assets for certain
unfunded pension liabilities.
d. all of these.
56.
Which of the following statements is true about postretirement health care benefits?
a. They are generally funded.
b. The benefits are well-defined and level in dollar amount.
c. The beneficiary is the retiree, spouse, and other dependents.
d. The benefit is payable monthly.
*57.
Which of the following disclosures of postretirement benefits would not be required by

professional pronouncements?
a. Postretirement expense for the period
b. A schedule showing changes in postretirement benefits and plan assets during the year
c. The amount of the EPBO
d. The assumptions and rates used in computing the EPBO and APBO
6 - 64
*58.
A postretirement asset is computed as the excess of the

a. expected postretirement benefit obligation over the fair value of plan assets.
b. accumulated postretirement benefit obligation over the fair value of plan assets.
c. fair value of plan assets over the accumulated postretirement benefit obligation.
d. accumulated postretirement benefit obligation over the fair value of plan assets, but
not vice versa.
*59.
Postretirement benefits may include all of the following except

a. severance pay to laid-off employees.
b. dental care.
c. legal and tax services.
d. tuition assistance.
*60.
Gains or losses can represent changes in

a. EPBO or the fair value of pension plan assets.
b. EPBO or the book value of pension plan assets.
c. APBO or the fair value of pension plan assets.
d. APBO or the book value of pension plan assets.
*61.
Which of the following statements about the expected postretirement benefit obligation
(EPBO) is not correct?
a. The EPBO is an actuarial present value.
b. The EPBO is recorded in the accounts.
c. The EPBO is used in measuring periodic expense.
d. All of these are correct.
*62.
Which of the following statements about the recognition of a prior service cost related to a
postretirement obligation is correct?
a. The prior service amount is recognized in the income statement in the current period.
b. The prior service cost is recognized in the income statement net of tax.
c. Restatement of previously issued annual financial statements is required.
d. The prior service cost amount affects comprehensive income in the current period.
*63.
Which of the following is recognized in the accounts and in the financial statements?
a. Accumulated postretirement benefit obligation
b. Postretirement asset / liability
c. Expected postretirement benefit obligation
d. All of these.
6 - 65
CHAPTER 21
ACCOUNTING FOR LEASES
21.
Major reasons why a company may become involved in leasing to other companies is
(are)
a. interest revenue.
b. high residual values.
c. tax incentives.
d. all of these.
22.
Which of the following is an advantage of leasing?

a. Off-balance-sheet financing
b. Less costly financing
c. 100% financing at fixed rates
d. All of these
23.
Which of the following best describes current practice in accounting for leases?
a. Leases are not capitalized.
b. Leases similar to installment purchases are capitalized.
c. All long-term leases are capitalized.
d. All leases are capitalized.
24.
While only certain leases are currently accounted for as a sale or purchase, there is
theoretic justification for considering all leases to be sales or purchases. The principal
reason that supports this idea is that
a. all leases are generally for the economic life of the property and the residual value of
the property at the end of the lease is minimal.
b. at the end of the lease the property usually can be purchased by the lessee.
c. a lease reflects the purchase or sale of a quantifiable right to the use of property.
d. during the life of the lease the lessee can effectively treat the property as if it were
owned by the lessee.
6 - 66
25.
An essential element of a lease conveyance is that the

a. lessor conveys less than his or her total interest in the property.
b. lessee provides a sinking fund equal to one year's lease payments.
c. property that is the subject of the lease agreement must be held for sale by the lessor
prior to the drafting of the lease agreement.
d. term of the lease is substantially equal to the economic life of the leased property.
26.
What impact does a bargain purchase option have on the present value of the minimum
lease payments computed by the lessee?
a. No impact as the option does not enter into the transaction until the end of the lease
term.
b. The lessee must increase the present value of the minimum lease payments by the
present value of the option price.
c. The lessee must decrease the present value of the minimum lease payments by the
present value of the option price.
d. The minimum lease payments would be increased by the present value of the option
price if, at the time of the lease agreement, it appeared certain that the lessee would
exercise the option at the end of the lease and purchase the asset at the option price.
27.
The amount to be recorded as the cost of an asset under capital lease is equal to the
a. present value of the minimum lease payments.
b. present value of the minimum lease payments or the fair value of the asset, whichever
is lower.
c. present value of the minimum lease payments plus the present value of any
unguaranteed residual value.
d. carrying value of the asset on the lessor's books.
28.
The methods of accounting for a lease by the lessee are

a. operating and capital lease methods.
b. operating, sales, and capital lease methods.
c. operating and leveraged lease methods.
d. none of these.
29.
Which of the following is a correct statement of one of the capitalization criteria?

a. The lease transfers ownership of the property to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to or more than 75% of the estimated economic life of the
leased property.
d. The minimum lease payments (excluding executory costs) equal or exceed 90% of the
fair value of the leased property.
30.
Minimum lease payments may include a

a. penalty for failure to renew.
b. bargain purchase option.
c. guaranteed residual value.
d. any of these.
31.
Executory costs include

a. maintenance.
b. property taxes.
c. insurance.
d. all of these.
6 - 67
32.
In computing the present value of the minimum lease payments, the lessee should
a. use its incremental borrowing rate in all cases.
b. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is
higher, assuming that the implicit rate is known to the lessee.
c. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is
lower, assuming that the implicit rate is known to the lessee.
d. none of these.
33.
In computing depreciation of a leased asset, the lessee should subtract

a. a guaranteed residual value and depreciate over the term of the lease.
b. an unguaranteed residual value and depreciate over the term of the lease.
c. a guaranteed residual value and depreciate over the life of the asset.
d. an unguaranteed residual value and depreciate over the life of the asset.
34.
In the earlier years of a lease, from the lessee's perspective, the use of the
a. capital method will enable the lessee to report higher income, compared to the
operating method.
b. capital method will cause debt to increase, compared to the operating method.
c. operating method will cause income to decrease, compared to the capital method.
d. operating method will cause debt to increase, compared to the capital method.
35.
A lessee with a capital lease containing a bargain purchase option should depreciate the
leased asset over the
a. asset's remaining economic life.
b. term of the lease.
c. life of the asset or the term of the lease, whichever is shorter.
d. life of the asset or the term of the lease, whichever is longer.
36.
Based solely upon the following sets of circumstances indicated below, which set gives
rise to a sales-type or direct-financing lease of a lessor?
Transfers Ownership
Contains Bargain
Collectibility of Lease
Any Important
By End Of Lease?
Purchase Option?
Payments Assured?
Uncertainties?
a.
No
Yes
Yes
No
b.
Yes
No
No
No
c.
Yes
No
No
Yes
d.
No
Yes
Yes
Yes
37.
Which of the following would not be included in the Lease Receivable account?
a. Guaranteed residual value
b. Unguaranteed residual value
c. A bargain purchase option
d. All would be included
38.
In a lease that is appropriately recorded as a direct-financing lease by the lessor,

unearned income
a. should be amortized over the period of the lease using the effective interest method.
b. should be amortized over the period of the lease using the straight-line method.
c. does not arise.
d. should be recognized at the lease's expiration.
6 - 68
39.
In order to properly record a direct-financing lease, the lessor needs to know how to
calculate the lease receivable. The lease receivable in a direct-financing lease is best
defined as
a. the amount of funds the lessor has tied up in the asset which is the subject of the
direct-financing lease.
b. the difference between the lease payments receivable and the fair market value of the
leased property.
c. the present value of minimum lease payments.
d. the total book value of the asset less any accumulated depreciation recorded by the
lessor prior to the lease agreement.
40.
If the residual value of a leased asset is guaranteed by a third party

a. it is treated by the lessee as no residual value.
b. the third party is also liable for any lease payments not paid by the lessee.
c. the net investment to be recovered by the lessor is reduced.
d. it is treated by the lessee as an additional payment and by the lessor as realized at the
end of the lease term.
41.
When lessors account for residual values related to leased assets, they
a. always include the residual value because they always assume the residual value will
be realized.
b. include the unguaranteed residual value in sales revenue.
c. recognize more gross profit on a sales-type lease with a guaranteed residual value
than on a sales-type lease with an unguaranteed residual value.
d. All of the above are true with regard to lessors and residual values.
42.
The initial direct costs of leasing

a. are generally borne by the lessee.
b. include incremental costs related to internal activities of leasing, and internal costs
related to costs paid to external third parties for originating a lease arrangement.
c. are expensed in the period of the sale under a sales-type lease.
d. All of the above are true with regard to the initial direct costs of leasing.
43.
The primary difference between a direct-financing lease and a sales-type lease is the
a. manner in which rental receipts are recorded as rental income.
b. amount of the depreciation recorded each year by the lessor.
c. recognition of the manufacturer's or dealer's profit at the inception of the lease.
d. allocation of initial direct costs by the lessor to periods benefited by the lease
arrangements.
44.
A lessor with a sales-type lease involving an unguaranteed residual value available to the
lessor at the end of the lease term will report sales revenue in the period of inception of
the lease at which of the following amounts?
a. The minimum lease payments plus the unguaranteed residual value.
b. The present value of the minimum lease payments.
c. The cost of the asset to the lessor, less the present value of any unguaranteed
residual value.
d. The present value of the minimum lease payments plus the present value of the
unguaranteed residual value.
6 - 69
45.
For a sales-type lease,

a. the sales price includes the present value of the unguaranteed residual value.
b. the present value of the guaranteed residual value is deducted to determine the cost
of goods sold.
c. the gross profit will be the same whether the residual value is guaranteed or
unguaranteed.
d. none of these.
46.

a. In a direct-financing lease, initial direct costs are added to the net investment in the
lease.
b. In a sales-type lease, initial direct costs are expensed in the year of incurrence.
c. For operating leases, initial direct costs are deferred and allocated over the lease
term.
d. All of these.
47.
The Lease Liability account should be disclosed as

a. all current liabilities.
b. all noncurrent liabilities.
c. current portions in current liabilities and the remainder in noncurrent liabilities.
d. deferred credits.
48.
To avoid leased asset capitalization, companies can devise lease agreements that fail to
satisfy any of the four leasing criteria. Which of the following is not one of the ways to
accomplish this goal?
a. Lessee uses a higher interest rate than that used by lessor.
b. Set the lease term at something less than 75% of the estimated useful life of the
property.
c. Write in a bargain purchase option.
d. Use a third party to guarantee the assets residual value.
*49.
If the lease in a sale-leaseback transaction meets one of the four leasing criteria and is
therefore accounted for as a capital lease, who records the asset on its books and which
party records interest expense during the lease period?
a.
b.
c.
d.
*50.
Party recording the

asset on its books
Seller-lessee
Purchaser-lessor
Purchaser-lessor
Seller-lessee
Party recording
interest expense
Purchaser-lessor
Seller-lessee
Purchaser-lessor
Seller-lessee
In a sale-leaseback transaction where none of the four leasing criteria are satisfied, which
of the following is false?
a. The seller-lessee removes the asset from its books.
b. The purchaser-lessor records a gain.
c. The seller-lessee records the lease as an operating lease.
d. All of the above are false statements.
6 - 70
*51.

When a company sells property and then leases it back, any gain on the sale should
usually be
a. recognized in the current year.
b. recognized as a prior period adjustment.
c. recognized at the end of the lease.
d. deferred and recognized as income over the term of the lease.
CHAPTER 22
ACCOUNTING CHANGES AND ERROR ANALYSIS
21.
Accounting changes are often made and the monetary impact is reflected in the financial
statements of a company even though, in theory, this may be a violation of the accounting
concept of
a. materiality.
b. consistency.
c. conservatism.
d. objectivity.
22.
Which of the following is not treated as a change in accounting principle?

a. A change from LIFO to FIFO for inventory valuation
b. A change to a different method of depreciation for plant assets
c. A change from full-cost to successful efforts in the extractive industry
d. A change from completed-contract to percentage-of-completion
23.
Which of the following is not a retrospective-type accounting change?

a. Completed-contract method to the percentage-of-completion method for long-term
contracts
b. LIFO method to the FIFO method for inventory valuation
c. Sum-of-the-years'-digits method to the straight-line method
d. "Full cost" method to another method in the extractive industry
24.
Which of the following is accounted for as a change in accounting principle?

a. A change in the estimated useful life of plant assets.
b. A change from the cash basis of accounting to the accrual basis of accounting.
c. A change from expensing immaterial expenditures to deferring and amortizing them as
they become material.
d. A change in inventory valuation from average cost to FIFO.
6 - 71
25.
A company changes from straight-line to an accelerated method of calculating

depreciation, which will be similar to the method used for tax purposes. The entry to
record this change should include a
a. credit to Accumulated Depreciation.
b. debit to Retained Earnings in the amount of the difference on prior years.
c. debit to Deferred Tax Asset.
d. credit to Deferred Tax Liability.
26.
Which of the following disclosures is required for a change from sum-of-the-years-digits to

straight-line?
a. The cumulative effect on prior years, net of tax, in the current retained earnings
statement
b. Restatement of prior years income statements
c. Recomputation of current and future years depreciation
27.
A company changes from percentage-of-completion to completed-contract, which is the

method used for tax purposes. The entry to record this change should include a
a. debit to Construction in Process.
b. debit to Loss on Long-term Contracts in the amount of the difference on prior years,
net of tax.
c. debit to Retained Earnings in the amount of the difference on prior years, net of tax.
d. credit to Deferred Tax Liability.
28.
Which of the following disclosures is required for a change from LIFO to FIFO?
a. The cumulative effect on prior years, net of tax, in the current retained earnings
statement
b. The justification for the change
c. Restated prior year income statements
29.
Stone Company changed its method of pricing inventories from FIFO to LIFO. What type
of accounting change does this represent?
a. A change in accounting estimate for which the financial statements for prior periods
included for comparative purposes should be presented as previously reported.
b. A change in accounting principle for which the financial statements for prior periods
included for comparative purposes should be presented as previously reported.
c. A change in accounting estimate for which the financial statements for prior periods
included for comparative purposes should be restated.
d. A change in accounting principle for which the financial statements for prior periods
included for comparative purposes should be restated.
30.
Which type of accounting change should always be accounted for in current and future
periods?
a. Change in accounting principle
b. Change in reporting entity
c. Change in accounting estimate
d. Correction of an error
6 - 72
31.
Which of the following is (are) the proper time period(s) to record the effects of a change
in accounting estimate?
a. Current period and prospectively
b. Current period and retrospectively
c. Retrospectively only
d. Current period only
32.
When a company decides to switch from the double-declining balance method to the
straight-line method, this change should be handled as a
a. change in accounting principle.
b. change in accounting estimate.
c. prior period adjustment.
d. correction of an error.
33.
The estimated life of a building that has been depreciated 30 years of an originally
estimated life of 50 years has been revised to a remaining life of 10 years. Based on this
information, the accountant should
a. continue to depreciate the building over the original 50-year life.
b. depreciate the remaining book value over the remaining life of the asset.
c. adjust accumulated depreciation to its appropriate balance, through net income, based
on a 40-year life, and then depreciate the adjusted book value as though the
estimated life had always been 40 years.
d. adjust accumulated depreciation to its appropriate balance through retained earnings,
based on a 40-year life, and then depreciate the adjusted book value as though the
estimated life had always been 40 years.
34.

a. Changes in accounting principle are always handled in the current or prospective
period.
b. Prior statements should be restated for changes in accounting estimates.
c. A change from expensing certain costs to capitalizing these costs due to a change in
the period benefited, should be handled as a change in accounting estimate.
d. Correction of an error related to a prior period should be considered as an adjustment
to current year net income.
35.
Which of the following describes a change in reporting entity?

a. A company acquires a subsidiary that is to be accounted for as a purchase.
b. A manufacturing company expands its market from regional to nationwide.
c. A company divests itself of a European branch sales office.
d. Changing the companies included in combined financial statements.
36.
Presenting consolidated financial statements this year when statements of individual

companies were presented last year is
a. a correction of an error.
b. an accounting change that should be reported prospectively.
c. an accounting change that should be reported by restating the financial statements of
all prior periods presented.
d. not an accounting change.
6 - 73
37.
An example of a correction of an error in previously issued financial statements is a

change
a. from the FIFO method of inventory valuation to the LIFO method.
b. in the service life of plant assets, based on changes in the economic environment.
c. from the cash basis of accounting to the accrual basis of accounting.
d. in the tax assessment related to a prior period.
38.
Counterbalancing errors do not include

a. errors that correct themselves in two years.
b. errors that correct themselves in three years.
c. an understatement of purchases.
d. an overstatement of unearned revenue.
39.
A company using a perpetual inventory system neglected to record a purchase of

merchandise on account at year end. This merchandise was omitted from the year-end
physical count. How will these errors affect assets, liabilities, and stockholders' equity at
year end and net income for the year?
a.
b.
c.
d.
40.
Assets
No effect
No effect
Understate
Understate
Liabilities
Understate
Overstate
Understate
No effect
Stockholders' Equity
Overstate
Understate
No effect
Understate
Net Income
Overstate.
Understate.
No effect.
Understate.
If, at the end of a period, a company erroneously excluded some goods from its ending
inventory and also erroneously did not record the purchase of these goods in its
accounting records, these errors would cause
a. the ending inventory and retained earnings to be understated.
b. the ending inventory, cost of goods sold, and retained earnings to be understated.
c. no effect on net income, working capital, and retained earnings.
d. cost of goods sold and net income to be understated.
MULTIPLE CHOICEComputational
41.
On January 1, 2008, Neal Corporation acquired equipment at a cost of $540,000. Neal

adopted the sum-of-the-years-digits method of depreciation for this equipment and had
been recording depreciation over an estimated life of eight years, with no residual value.
At the beginning of 2011, a decision was made to change to the straight-line method of
depreciation for this equipment. The depreciation expense for 2011 would be
a. $28,125.
b. $45,000.
c. $67,500.
d. $108,000.
42.
On January 1, 2008, Knapp Corporation acquired machinery at a cost of $250,000. Knapp

adopted the double-declining balance method of depreciation for this machinery and had
been recording depreciation over an estimated useful life of ten years, with no residual
value. At the beginning of 2011, a decision was made to change to the straight-line
method of depreciation for the machinery. The depreciation expense for 2011 would be
a. $12,800.
b. $18,286.
c. $25,000.
6 - 74

d. $35,714.
43.
On January 1, 2008, Piper Co., purchased a machine (its only depreciable asset) for
$300,000. The machine has a five-year life, and no salvage value. Sum-of-the-years'digits depreciation has been used for financial statement reporting and the elective
straight-line method for income tax reporting. Effective January 1, 2011, for financial
statement reporting, Piper decided to change to the straight-line method for depreciation
of the machine. Assume that Piper can justify the change.
Piper's income before depreciation, before income taxes, and before the cumulative effect
of the accounting change (if any), for the year ended December 31, 2011, is $250,000.
The income tax rate for 2011, as well as for the years 2008-2010, is 30%. What amount
should Piper report as net income for the year ended December 31, 2011?
a. $60,000
b. $91,000
c. $154,000
d. $175,000
Use the following information for questions 44 and 45.

Ventura Corporation purchased machinery on January 1, 2009 for $630,000. The company used
the sum-of-the-years-digits method and no salvage value to depreciate the asset for the first two
years of its estimated six-year life. In 2010, Ventura changed to the straight-line depreciation
method for this asset. The following facts pertain:
2009
2010
Straight-line
$105,000
$105,000
Sum-of-the-years-digits
180,000
150,000
6 - 75
44.
Ventura is subject to a 40% tax rate. The cumulative effect of this accounting change on
beginning retained earnings is
a. $135,000.
b. $120,000.
c. $72,000.
d. $0.
45.
The amount that Ventura should report for depreciation expense on its 2011 income
statement is
a. $120,000.
b. $105,000.
c. $75,000.
d. none of the above.
46.
During 2011, a construction company changed from the completed-contract method to the
percentage-of-completion method for accounting purposes but not for tax purposes. Gross
profit figures under both methods for the past three years appear below:
2009
2010
2011
Completed-Contract
$ 475,000
625,000
700,000
$1,800,000
Percentage-of-Completion
$ 800,000
950,000
1,050,000
$2,800,000
Assuming an income tax rate of 40% for all years, the affect of this accounting change on
prior periods should be reported by a credit of
a. $600,000 on the 2011 income statement.
b. $390,000 on the 2011 income statement.
c. $600,000 on the 2011 retained earnings statement.
d. $390,000 on the 2011 retained earnings statement.
On January 1, 2008, Nobel Corporation acquired machinery at a cost of $600,000. Nobel adopted
the straight-line method of depreciation for this machine and had been recording depreciation
over an estimated life of ten years, with no residual value. At the beginning of 2011, a decision
was made to change to the double-declining balance method of depreciation for this machine.
47.
Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning
retained earnings, is
a. $67,200.
b. $0.
c. $78,960.
d. $112,800.
48.
The amount that Nobel should record as depreciation expense for 2011 is
a. $60,000.
b. $84,000.
c. $120,000.
d. none of the above.
6 - 76
49.
On December 31, 2011 Dean Company changed its method of accounting for inventory
from weighted average cost method to the FIFO method. This change caused the 2011
beginning inventory to increase by $420,000. The cumulative effect of this accounting
change to be reported for the year ended 12/31/11, assuming a 40% tax rate, is
a. $420,000.
b. $252,000.
c. $168,000.
d. $0.
50.
Heinz Company began operations on January 1, 2010, and uses the FIFO method in
costing its raw material inventory. Management is contemplating a change to the LIFO
method and is interested in determining what effect such a change will have on net
income. Accordingly, the following information has been developed:
Final Inventory
FIFO
LIFO
Net Income (computed under the FIFO method)
2010
$640,000
560,000
980,000
2011
$ 712,000
636,000
1,080,000
Based on the above information, a change to the LIFO method in 2011 would result in net
income for 2011 of
a. $1,120,000.
b. $1,080,000.
c. $1,004,000.
d. $1,000,000.
51.
Lanier Company began operations on January 1, 2010, and uses the FIFO method in
costing its raw material inventory. Management is contemplating a change to the LIFO
method and is interested in determining what effect such a change will have on net
income. Accordingly, the following information has been developed:
Final Inventory
2010
2011
FIFO
$320,000
$360,000
LIFO
240,000
300,000
Net Income (computed under the FIFO method)
500,000
600,000
Based upon the above information, a change to the LIFO method in 2011 would result in
net income for 2011 of
a. $540,000.
b. $600,000.
c. $620,000.
d. $660,000.
52.
Equipment was purchased at the beginning of 2008 for $204,000. At the time of its
purchase, the equipment was estimated to have a useful life of six years and a salvage
value of $24,000. The equipment was depreciated using the straight-line method of
depreciation through 2010. At the beginning of 2011, the estimate of useful life was
revised to a total life of eight years and the expected salvage value was changed to
$15,000. The amount to be recorded for depreciation for 2011, reflecting these changes in
estimates, is
a. $12,375.
b. $19,800.
c. $22,800.
d. $23,625.
6 - 77

Swift Company purchased a machine on January 1, 2008, for $300,000. At the date of
acquisition, the machine had an estimated useful life of six years with no salvage. The machine is
being depreciated on a straight-line basis. On January 1, 2011, Swift determined, as a result of
additional information, that the machine had an estimated useful life of eight years from the date
of acquisition with no salvage. An accounting change was made in 2011 to reflect this additional
information.
53.
Assume that the direct effects of this change are limited to the effect on depreciation and
the related tax provision, and that the income tax rate was 30% in 2008, 2009, 2010, and
2011. What should be reported in Swift's income statement for the year ended December
31, 2011, as the cumulative effect on prior years of changing the estimated useful life of
the machine?
a. $0
b. $20,000
c. $30,000
d. $105,000
54.
What is the amount of depreciation expense on this machine that should be charged in
Swift's income statement for the year ended December 31, 2011?
a. $30,000
b. $37,500
c. $60,000
d. $75,000

Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended
12/31/10 and 12/31/11 contained the following errors:
Ending inventory
Depreciation expense
2010
$15,000 overstatement
6,000 understatement
2011
$24,000 understatement
12,000 overstatement
55.
Assume that the 2010 errors were not corrected and that no errors occurred in 2009. By
what amount will 2010 income before income taxes be overstated or understated?
a. $21,000 overstatement
b. $9,000 overstatement
c. $21,000 understatement
d. $9,000 understatement
56.
Assume that no correcting entries were made at 12/31/10, or 12/31/11. Ignoring income
taxes, by how much will retained earnings at 12/31/11 be overstated or understated?
a. $24,000 overstatement
b. $21,000 overstatement
c. $30,000 understatement
d. $9,000 understatement
6 - 78
Use the following information for questions 57 through 59.

Langley Company's December 31 year-end financial statements contained the following errors:
Dec. 31, 2010
Dec. 31, 2011
Ending inventory
$7,500 understated
$11,000 overstated
2,000 understated
An insurance premium of $18,000 was prepaid in 2010 covering the years 2010, 2011, and 2012.
The prepayment was recorded with a debit to insurance expense. In addition, on December 31,
2011, fully depreciated machinery was sold for $9,500 cash, but the sale was not recorded until
2012. There were no other errors during 2011 or 2012 and no corrections have been made for
any of the errors. Ignore income tax considerations.
57.
What is the total net effect of the errors on Langley's 2011 net income?
a. Net income understated by $14,500.
b. Net income overstated by $7,500.
c. Net income overstated by $13,000.
d. Net income overstated by $15,000.
58.
What is the total net effect of the errors on the amount of Langley's working capital at
December 31, 2011?
a. Working capital overstated by $5,000
b. Working capital overstated by $1,500
c. Working capital understated by $4,500
d. Working capital understated by $12,000
59.
What is the total effect of the errors on the balance of Langley's retained earnings at
December 31, 2011?
a. Retained earnings understated by $10,000
b. Retained earnings understated by $4,500
c. Retained earnings understated by $2,500
d. Retained earnings overstated by $3,500
60.
Accrued salaries payable of $51,000 were not recorded at December 31, 2010. Office
supplies on hand of $24,000 at December 31, 2011 were erroneously treated as expense
instead of supplies inventory. Neither of these errors was discovered nor corrected. The
effect of these two errors would cause
a. 2011 net income to be understated $75,000 and December 31, 2011 retained earnings
to be understated $24,000.
b. 2010 net income and December 31, 2010 retained earnings to be understated
$51,000 each.
c. 2010 net income to be overstated $27,000 and 2011 net income to be understated
$24,000.
d. 2011 net income and December 31, 2011 retained earnings to be understated $24,000
each.
6 - 79

Bishop Co. began operations on January 1, 2010. Financial statements for 2010 and 2011 contained the following errors:
Dec. 31, 2010
Dec. 31, 2011
Ending inventory
$132,000 too high
$156,000 too low
84,000 too high
Insurance expense
60,000 too low
60,000 too high
Prepaid insurance
60,000 too high
In addition, on December 31, 2011 fully depreciated equipment was sold for $28,800, but the sale
was not recorded until 2012. No corrections have been made for any of the errors. Ignore income
tax considerations.
61.
The total effect of the errors on Bishop's 2011 net income is

a. understated by $376,800.
b. understated by $244,800.
c. overstated by $115,200.
d. overstated by $199,200.
62.
The total effect of the errors on the balance of Bishop's retained earnings at December 31,
2011 is understated by
a. $328,800.
b. $268,800.
c. $184,800.
d. $136,800.
63.
The total effect of the errors on the amount of Bishop's working capital at December 31,
2011 is understated by
a. $400,800.
b. $316,800.
c. $184,800.
d. $124,800.

Link Co. purchased machinery that cost $810,000 on January 4, 2009. The entire cost was
recorded as an expense. The machinery has a nine-year life and a $54,000 residual value. The
error was discovered on December 20, 2011. Ignore income tax considerations.
64.
Link's income statement for the year ended December 31, 2011, should show the
cumulative effect of this error in the amount of
a. $726,000.
b. $642,000.
c. $558,000.
d. $0.
65.
Before the correction was made, and before the books were closed on December 31,
2011, retained earnings was understated by
a. $810,000.
b. $726,000.
c. $642,000.
d. $558,000.
6 - 80

Ernst Company purchased equipment that cost $750,000 on January 1, 2010. The entire cost
was recorded as an expense. The equipment had a nine-year life and a $30,000 residual value.
Ernst uses the straight-line method to account for depreciation expense. The error was
discovered on December 10, 2012. Ernst is subject to a 40 % tax rate.
66.
Ernsts net income for the year ended December 31, 2010, was understated by
a. $402,000.
b. $450,000.
c. $670,000.
d. $750,000.
67.
Before the correction was made and before the books were closed on December 31,
2012, retained earnings was understated by
a. $332,000.
b. $336,000.
c. $354,000.
d. $450,000.
CHAPTER 23
STATEMENT OF CASH FLOWS
21.
It is an objective of the statement of cash flows to

a. disclose changes during the period in all asset and all equity accounts.
b. disclose the change in working capital during the period.
c. provide information about the operating, investing, and financing activities of an entity
during a period.
d. none of these.
22.
The primary purpose of the statement of cash flows is to provide information

a. about the operating, investing, and financing activities of an entity during a period.
b. that is useful in assessing cash flow prospects.
c. about the cash receipts and cash payments of an entity during a period.
d. about the entity's ability to meet its obligations, its ability to pay dividends, and its
needs for external financing.
23.
Of the following questions, which one would not be answered by the statement of cash
flows?
a. Where did the cash come from during the period?
b. What was the cash used for during the period?
c. Were all the cash expenditures of benefit to the company during the period?
d. What was the change in the cash balance during the period?

S
24.
25.
6 - 81
The first step in the preparation of the statement of cash flows requires the use of
information included in which comparative financial statements?
a. Statements of cash flows
b. Balance sheets
c. Income statements
d. Statements of retained earnings
Cash equivalents are
a. treasury bills, commercial paper, and money market funds purchased with excess
cash.
b. investments with original maturities of three months or less.
c. readily convertible into known amounts of cash.
d. all of these.
26.
A company borrows $10,000 and signs a 90-day nontrade note payable. In preparing a
statement of cash flows (indirect method), this event would be reflected as a(n)
a. addition adjustment to net income in the cash flows from operating activities section.
b. cash outflow from investing activities.
c. cash inflow from investing activities.
d. cash inflow from financing activities.
27.
To arrive at net cash provided by operating activities, it is necessary to report revenues

and expenses on a cash basis. This is done by
a. re-recording all income statement transactions that directly affect cash in a separate
cash flow journal.
b. estimating the percentage of income statement transactions that were originally
reported on a cash basis and projecting this amount to the entire array of income
statement transactions.
c. eliminating the effects of income statement transactions that did not result in a
corresponding increase or decrease in cash.
d. eliminating all transactions that have no current or future effect on cash, such as
depreciation, from the net income computation.
28.
An increase in inventory balance would be reported in a statement of cash flows using the
indirect method (reconciliation method) as a(n)
a. addition to net income in arriving at net cash flow from operating activities.
b. deduction from net income in arriving at net cash flow from operating activities.
c. cash outflow from investing activities.
d. cash outflow from financing activities.
29.
A statement of cash flows typically would not disclose the effects of

a. capital stock issued at an amount greater than par value.
b. stock dividends declared.
c. cash dividends paid.
d. a purchase and immediate retirement of treasury stock.
30.
When preparing a statement of cash flows (indirect method), which of the following is not
an adjustment to reconcile net income to net cash provided by operating activities?
a. A change in interest payable
b. A change in dividends payable
c. A change in income taxes payable
d. All of these are adjustments.
6 - 82
31.

Declaration of a cash dividend on common stock affects cash flows from operating
activities under the direct and indirect methods as follows:
Direct Method
a.
Outflow
b.
Inflow
c.
Outflow
d.
No effect
Indirect Method
Inflow
Inflow
Outflow
No effect
32.
In a statement of cash flows, the cash flows from investing activities section should report
a. the issuance of common stock in exchange for a factory building.
b. stock dividends received.
c. a major repair to machinery charged to accumulated depreciation.
d. the assignment of accounts receivable.
33.
Xanthe Corporation had the following transactions occur in the current year:
1.
2.
3.
4.
5.
6.
Cash sale of merchandise inventory.

Sale of delivery truck at book value.
Sale of Xanthe common stock for cash.
Issuance of a note payable to a bank for cash.
Sale of a security held as an available-for-sale investment.
Collection of loan receivable.
How many of the above items will appear as a cash inflow from investing activities on a
statement of cash flows for the current year?
a. Five items
b. Four items
c. Three items
d. Two items
P
34.
Which of the following would be classified as a financing activity on a statement of cash

flows?
a. Declaration and distribution of a stock dividend
b. Deposit to a bond sinking fund
c. Sale of a loan receivable
d. Payment of interest to a creditor
35.
The amortization of bond premium on long-term debt should be presented in a statement

of cash flows (using the indirect method for operating activities) as a(n)
a. addition to net income.
b. deduction from net income.
c. investing activity.
d. financing activity.

S
6 - 83
36.
Crabbe Company reported $80,000 of selling and administrative expenses on its income
statement for the past year. The company had depreciation expense and an increase in
prepaid expenses associated with the selling and administrative expenses for the year.
Assuming use of the direct method, how would these items be handled in converting the
accrual based selling and administrative expenses to the cash basis?
Increase in
Depreciation
Prepaid Expenses
a.
Deducted From
Deducted From
b.
Added To
Added To
c.
Deducted From
Added To
d.
Added To
Deducted From
37.
When preparing a statement of cash flows (indirect method), an increase in ending

inventory over beginning inventory will result in an adjustment to reported net earnings
because
a. cash was increased while cost of goods sold was decreased.
b. cost of goods sold on an accrual basis is lower than on a cash basis.
c. acquisition of inventory is an investment activity.
d. inventory purchased during the period was less than inventory sold resulting in a net
cash increase.
38.
When preparing a statement of cash flows, a decrease in accounts receivable during a

period would cause which one of the following adjustments in determining cash flow from
operating activities?
a.
b.
c.
d.
Direct Method
Increase
Decrease
Increase
Decrease
Indirect Method
Decrease
Increase
Increase
Decrease
39.
In determining net cash flow from operating activities, a decrease in accounts payable
during a period
a. means that income on an accrual basis is less than income on a cash basis.
b. requires an addition adjustment to net income under the indirect method.
c. requires an increase adjustment to cost of goods sold under the direct method.
d. requires a decrease adjustment to cost of goods sold under the direct method.
40.
When preparing a statement of cash flows, an increase in accounts payable during a

period would require which of the following adjustments in determining cash flows from
a.
b.
c.
d.
Indirect Method
Increase
Decrease
Increase
Decrease
Direct Method
Decrease
Increase
Increase
Decrease
6 - 84
41.

When preparing a statement of cash flows, a decrease in prepaid insurance during a
period would require which of the following adjustments in determining cash flows from
a.
b.
c.
d.
42.
Indirect Method
Increase
Decrease
Increase
Decrease
Direct Method
Decrease
Increase
Increase
Decrease
When preparing a statement of cash flows, the following are used for which method in
determining cash flows from operating activities?
a.
b.
c.
d.
Gross Accounts Receivable

Indirect
Direct
Direct
Neither
Net Accounts Receivable

Direct
Indirect
Direct
Indirect
43.

a. The indirect method starts with income before extraordinary items.
b. The direct method is known as the reconciliation method.
c. The direct method is more consistent with the primary purpose of the statement of
cash flows.
d. All of these.
44.
When using the indirect method to prepare the operating section of a statement of cash
flows, which of the following is added to net income to compute cash provided by/used by
a. Increase in accounts receivable.
b. Gain on sale of land.
c. Amortization of patent.
d. All of the above are added to net income to arrive at cash flow from operating
activities.
45.
When using the indirect method to prepare the operating section of a statement of cash
flows, which of the following is deducted from net income to compute cash provided
by/used by operating activities?
a. Decrease in accounts receivable.
b. Gain on sale of land.
c. Amortization of patent.
d. All of the above are deducted from net income to arrive at cash flow from operating
activities.
46.
Which of the following is false concerning the statement of cash flows?

a. When pension expense exceeds cash funding, the difference is deducted from
investing activities on the statement of cash flows.
b. The FASB requires companies to classify all income taxes paid as operating cash
outflows.
c. Under U.S. GAAP, the purchase of land by issuing stock will be shown as a cash
outflow under investing activities and a cash inflow under financing activities.
d. All of the above are true concerning the statement of cash flows.
6 - 85
47.
Dolan Company reports its income from investments under the equity method and
recognized income of $25,000 from its investment in Moss Co. during the current year,
even though no dividends were declared or paid by Moss during the year. On Dolan's
statement of cash flows (indirect method), the $25,000 should
a. not be shown.
b. be shown as cash inflow from investing activities.
c. be shown as cash outflow from financing activities.
d. be shown as a deduction from net income in the cash flows from operating activities
section.
48.
In reporting extraordinary transactions on a statement of cash flows (indirect method), the

a. gross amount of an extraordinary gain should be deducted from net income.
b. net of tax amount of an extraordinary gain should be added to net income.
c. net of tax amount of an extraordinary gain should be deducted from net income.
d. gross amount of an extraordinary gain should be added to net income.
49.
Which of the following is shown on a statement of cash flows?

a. A stock dividend
b. A stock split
c. An appropriation of retained earnings
d. None of these
50.
How should significant noncash transactions be reported in the statement of cash flows
according to FASB Statement No. 95?
a. They should be incorporated in the statement of cash flows in a section labeled,
"Significant Noncash Transactions."
b. Such transactions should be incorporated in the section (operating, financing, or
investing) that is most representative of the major component of the transaction.
c. These noncash transactions are not to be incorporated in the statement of cash flows.
They may be summarized in a separate schedule at the bottom of the statement or
appear in a separate supplementary schedule to the financials.
d. They should be handled in a manner consistent with the transactions that affect cash
flows.
MULTIPLE CHOICEComputational
Napier Co. provided the following information on selected transactions during 2011:
Purchase of land by issuing bonds
Proceeds from issuing bonds
Purchases of inventory
Purchases of treasury stock
Loans made to affiliated corporations
Dividends paid to preferred stockholders
Proceeds from issuing preferred stock
Proceeds from sale of equipment
51.
$250,000
500,000
950,000
150,000
350,000
100,000
400,000
50,000
The net cash provided (used) by investing activities during 2011 is

a. $50,000.
b. $(300,000).
6 - 86

c. $(550,000).
d. $(1,250,000).
52.
The net cash provided by financing activities during 2011 is

a. $550,000.
b. $650,000.
c. $800,000.
d. $900,000.

The balance sheet data of Kohler Company at the end of 2011 and 2010 follow:
2011
Cash
$ 50,000
Accounts receivable (net)
120,000
Merchandise inventory
140,000
Prepaid expenses
20,000
Buildings and equipment
180,000
Accumulated depreciationbuildings and equipment
(36,000)
Land
180,000
Totals
$654,000
Accounts payable
Accrued expenses
Notes payablebank, long-term
Mortgage payable
Common stock, $10 par
Retained earnings (deficit)
$136,000
24,000
60,000
418,000
16,000
$654,000
2010
$ 70,000
90,000
90,000
50,000
150,000
(16,000)
80,000
$514,000
$110,000
36,000
80,000
318,000
(30,000)
$514,000
6 - 87
Land was acquired for $100,000 in exchange for common stock, par $100,000, during the year;
all equipment purchased was for cash. Equipment costing $10,000 was sold for $4,000; book
value of the equipment was $8,000 and the loss was reported as an ordinary item in net income.
Cash dividends of $20,000 were charged to retained earnings and paid during the year; the
transfer of net income to retained earnings was the only other entry in the Retained Earnings
account. In the statement of cash flows for the year ended December 31, 2011, for Naley
Company:
53.
The net cash provided by operating activities was

a. $52,000.
b. $66,000.
c. $56,000.
d. $48,000.
54.
The net cash provided (used) by investing activities was

a. $26,000.
b. $(40,000).
c. $(136,000).
d. $(36,000).
55.
The net cash provided (used) by financing activities was

a. $ -0-.
b. $(20,000).
c. $(40,000).
d. $60,000.
56.
The following information on selected cash transactions for 2011 has been provided by
Mancuso Company:
Proceeds from sale of land
Proceeds from long-term borrowings
Purchases of plant assets
Purchases of inventories
Proceeds from sale of Mancuso common stock
$160,000
400,000
144,000
680,000
240,000
What is the cash provided (used) by investing activities for the year ended December 31,
2011, as a result of the above information?
a. $16,000
b. $256,000.
c. $160,000.
d. $800,000.
57.
Selected information from Dinkel Company's 2011 accounting records is as follows:

Proceeds from issuance of common stock
Proceeds from issuance of bonds
Cash dividends on common stock paid
Cash dividends on preferred stock paid
Sale of stock to officers and employees not included above
$ 400,000
1,200,000
160,000
60,000
120,000
100,000
6 - 88

Dinkel's statement of cash flows for the year ended December 31, 2011, would show net
cash provided (used) by financing activities of
a. $60,000.
b. $(220,000).
c. $160,000.
d. $1,360,000.

Harlan Mining Co. has recently decided to go public and has hired you as an independent CPA.
One statement that the enterprise is anxious to have prepared is a statement of cash flows.
Financial statements of Harlan Mining Co. for 2011 and 2010 are provided below.
BALANCE SHEETS
Cash
Accounts receivable
Merchandise inventory
Property, plant and equipment
Less accumulated depreciation
Accounts payable
Income taxes payable
Bonds payable
Common stock
Retained earnings
12/31/11
$204,000
180,000
192,000
$304,000
(160,000)
144,000
$720,000
12/31/10
$ 96,000
108,000
240,000
$480,000
(152,000)
$ 88,000
176,000
180,000
108,000
168,000
$720,000
328,000
$772,000
$ 48,000
196,000
300,000
108,000
120,000
$772,000
INCOME STATEMENT
For the Year Ended December 31, 2011
Sales
Cost of sales
Gross profit
Selling expenses
Administrative expenses
Income from operations
Interest expense
Income before taxes
Income taxes
Net income
$4,200,000
3,576,000
624,000
$300,000
96,000
396,000
228,000
36,000
192,000
48,000
$ 144,000
The following additional data were provided:

1. Dividends for the year 2011 were $96,000.
2. During the year, equipment was sold for $120,000. This equipment cost $176,000 originally
and had a book value of $144,000 at the time of sale. The loss on sale was incorrectly
charged to cost of sales.
3. All depreciation expense is in the selling expense category.
Questions 58 through 62 relate to a statement of cash flows (direct method) for the year ended
December 31, 2011, for Harlan Mining Company.

58.
The net cash provided by operating activities is

a. $204,000.
b. $144,000.
c. $120,000.
d. $100,000.
59.
The net cash provided (used) by investing activities is

a. $(176,000).
b. $24,000.
c. $120,000.
d. $(144,000).
60.
Under the direct method, the cash received from customers is

a. $4,272,000.
b. $4,128,000.
c. $4,200,000.
d. $4,220,000.
61.
Under the direct method, the total taxes paid is

a. $48,000.
b. $20,000.
c. $28,000.
d. $68,000.
62.
The net cash provided (used) by financing activities is

a. $(120,000).
b. $24,000.
c. $(216,000).
d. $96,000.
63.
During 2011, Stout Inc. had the following activities related to its financial operations:
6 - 89
Carrying value of convertible preferred stock in Stout,

converted into common shares of Stout
$ 360,000
Payment in 2011 of cash dividend declared in 2010 to
preferred shareholders
186,000
Payment for the early retirement of long-term bonds payable
(carrying amount $2,220,000)
2,250,000
Proceeds from the sale of treasury stock (on books at cost of $258,000)
300,000
The amount of net cash used in financing activities to appear in Stout's statement of cash
flows for 2011 should be
a. $1,590,000.
b. $1,776,000.
c. $2,136,000.
d. $2,148,000.
6 - 90
64.
Hager Company sold some of its plant assets during 2011. The original cost of the plant
assets was $750,000 and the accumulated depreciation at date of sale was $700,000.
The proceeds from the sale of the plant assets were $105,000. The information
concerning the sale of the plant assets should be shown on Hager's statement of cash
flows (indirect method) for the year ended December 31, 2011, as a(n)
a. subtraction from net income of $55,000 and a $50,000 increase in cash flows from
financing activities.
b. addition to net income of $55,000 and a $105,000 increase in cash flows from
investing activities.
c. subtraction from net income of $55,000 and a $105,000 increase in cash flows from
d. addition of $105,000 to net income.
65.
An analysis of the machinery accounts of Noller Company for 2011 is as follows:

Machinery, Net of
Accumulated
Accumulated
Machinery
Depreciation
Depreciation
Balance at January 1, 2011
$500,000
$125,000
$375,000
Purchases of new machinery in 2011
for cash
200,000
200,000
Depreciation in 2011
100,000
(100,000)
Balance at Dec. 31, 2011
$700,000
$225,000
$475,000
The information concerning Noller's machinery accounts should be shown in Noller's
statement of cash flows (indirect method) for the year ended December 31, 2011, as a(n)
a. subtraction from net income of $100,000 and a $200,000 decrease in cash flows from
financing activities.
b. addition to net income of $100,000 and a $200,000 decrease in cash flows from
c. $100,000 increase in cash flows from financing activities.
d. $200,000 decrease in cash flows from investing activities.
66.
Equipment which cost $213,000 and had accumulated depreciation of $114,000 was sold
for $111,000. This transaction should be shown on the statement of cash flows (indirect
method) as a(n)
a. addition to net income of $12,000 and a $111,000 cash inflow from financing activities.
b. deduction from net income of $12,000 and a $99,000 cash inflow from investing
activities.
c. deduction from net income of $12,000 and a $111,000 cash inflow from investing
activities.
d. addition to net income of $12,000 and a $99,000 cash inflow from financing activities.
67.
During 2011, equipment was sold for $156,000. The equipment cost $252,000 and had a
book value of $144,000. Accumulated DepreciationEquipment was $687,000 at
12/31/10 and $735,000 at 12/31/11. Depreciation expense for 2011 was
a. $60,000.
b. $96,000.
c. $156,000.
d. $192,000.
6 - 91

Equipment that cost $300,000 and had a book value of $156,000 was sold for $180,000. Data
from the comparative balance sheets are:
12/31/11
12/31/10
Equipment
$2,160,000
$1,950,000
Accumulated Depreciation
660,000
570,000
68.
Depreciation expense for 2011 was

a. $258,000.
b. $234,000.
c. $54,000.
d. $36,000.
69.
Equipment purchased during 2011 was

a. $510,000.
b. $300,000.
c. $210,000.
d. $90,000.

Financial statements for Kiner Company are given below:
Kiner Company
Balance Sheet
January 1, 2011
Assets
Cash
Accounts receivable
Buildings and equipment
Accumulated depreciation
buildings and equipment
Patents
$ 320,000
288,000
1,200,000
(400,000)
144,000
$1,552,000
Equities
Accounts payable
Capital stock
Retained earnings
$ 152,000
920,000
480,000
$1,552,000
6 - 92

Kiner Company
Statement of Cash Flows
For the Year Ended December 31, 2011
Increase (Decrease) in Cash
Cash flows from operating activities

Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accounts receivable
Increase in accounts payable
Depreciationbuildings and equipment
Gain on sale of equipment
Amortization of patents
Net cash provided by operating activities
Cash flows from investing activities
Sale of equipment
Purchase of land
Purchase of buildings and equipment
Net cash used by investing activities
Cash flows from financing activities
Payment of cash dividend
Sale of common stock
Net cash provided by financing activities
Net increase in cash
Cash, January 1, 2011
Cash, December 31, 2011
$400,000
$(128,000)
64,000
120,000
(48,000)
16,000
24,000
424,000
96,000
(200,000)
(384,000)
(488,000)
(120,000)
320,000
200,000
136,000
320,000
$456,000
Total assets on the balance sheet at December 31, 2011 are $2,216,000. Accumulated depreciation on the equipment sold was $112,000.
70.
When the equipment was sold, the Buildings and Equipment account received a credit of
a. $96,000.
b. $208,000.
c. $160,000.
d. $112,000.
71.
The book value of the buildings and equipment at December 31, 2011 was
a. $1,016,000.
b. $1,040,000.
c. $1,424,000.
d. $1,176,000.
72.
The accounts payable at December 31, 2011 were

a. $88,000.
b. $216,000.
c. $64,000.
d. $296,000.

73.
The balance in the Retained Earnings account at December 31, 2011 was
a. $360,000.
b. $880,000.
c. $760,000.
d. $1,000,000.
74.
Capital stock (plus any additional paid-in capital) at December 31, 2011 was
a. $800,000.
b. $920,000.
c. $520,000.
d. $1,240,000.
6 - 93

The balance in retained earnings at December 31, 2010 was $720,000 and at December 31,
2011 was $582,000. Net income for 2011 was $500,000. A stock dividend was declared and
distributed which increased common stock $200,000 and paid-in capital $110,000. A cash
dividend was declared and paid.
75.
The amount of the cash dividend was

a. $248,000.
b. $328,000.
c. $442,000.
d. $638,000.
76.
The stock dividend should be reported on the statement of cash flows (indirect method) as
a. an outflow from financing activities of $200,000.
b. an outflow from financing activities of $310,000.
c. an outflow from investing activities of $310,000.
d. Stock dividends are not shown on a statement of cash flows.
77.
The following information was taken from the 2011 financial statements of Dunlop
Corporation:
Bonds payable, January 1, 2011
Bonds payable, December 31, 2011
$ 500,000
2,000,000
During 2011
A $450,000 payment was made to retire bonds payable with a face amount of
$500,000.
Bonds payable with a face amount of $200,000 were issued in exchange for
equipment.
In its statement of cash flows for the year ended December 31, 2011, what amount should
Dunlop report as proceeds from issuance of bonds payable?
a. $1,500,000
b. $1,750,000
c. $1,800,000
d. $2,200,000
6 - 94
78.

Lindsay Corporation had net income for 2011 of $3,000,000. Additional information is as
follows:
Depreciation of plant assets
Amortization of intangibles
$1,200,000
240,000
420,000
540,000
Lindsay's net cash provided by operating activities for 2011 was

a. $4,560,000.
b. $4,440,000.
c. $4,320,000.
d. $1,680,000.
79.
Net cash flow from operating activities for 2011 for Spencer Corporation was $300,000.
The following items are reported on the financial statements for 2011:
Cash dividends paid on common stock
Depreciation and amortization
Increase in accounts receivables
20,000
12,000
24,000
Based on the information above, Spencers net income for 2011 was
a. $312,000.
b. $296,000.
c. $264,000.
d. $256,000.
80.
During 2011, Orton Company earned net income of $384,000 which included depreciation expense of $78,000. In addition, the company experienced the following changes in
the account balances listed below:
Increases
Accounts payable
Inventory
$45,000
36,000
Decreases
Accounts receivable
Accrued liabilities
Prepaid insurance
$12,000
24,000
33,000
Based upon this information what amount will be shown for net cash provided by
operating activities for 2011?
a. $492,000
b. $465,000
c. $285,000
d. $267,000
81.
Minear Company reported net income of $340,000 for the year ended 12/31/11. Included
in the computation of net income were: depreciation expense, $60,000; amortization of a
patent, $32,000; income from an investment in common stock of Brett Inc., accounted for
under the equity method, $48,000; and amortization of a bond discount, $12,000. Minear
also paid an $80,000 dividend during the year. The net cash provided by operating
activities would be reported at:
a. $396,000.
b. $316,000.
c. $284,000.
d. $204,000.
6 - 95
82.
In preparing Titan Inc.s statement of cash flows for the year ended December 31, 2011,
the following amounts were available:
Collect note receivable
$320,000
Issue bonds payable
406,000
Purchase treasury stock
210,000
What amount should be reported on Titan, Inc.s statement of cash flows for investing
activities?
a. $320,000
b. $110,000
c. $726,000
d. $110,000
83.
In preparing Titan Inc.s statement of cash flows for the year ended December 31, 2011,
the following amounts were available:
Collect note receivable
$320,000
Issue bonds payable
406,000
Purchase treasury stock
210,000
What amount should be reported on Titan, Incs statement of cash flows for financing
activities?
a. $ 86,000
b. $726,000
c. $196,000
d. $110,000
84.
Jarvis, Inc. reported net income of $34,000 for the year ended December 31, 2011
Included in net income were depreciation expense of $8,400 and a gain on sale of
equipment of $1,700. Each of the following accounts increased during 2011:
Accounts receivable
$2,200
Inventory
$4,500
Prepaid rent
$6,800
Available-for-sale securities
$1,000
Accounts payable
$5,000
What is the amount of cash provided by operating activities for Jarvis, Inc. for the year
ended December 31, 2011?
a. $31,200
b. $33,900
c. $22,200
d. $32,200
85.
Jarvis, Inc. reported net income of $34,000 for the year ended December 31, 2011
Included in net income were depreciation expense of $8,400 and a gain on sale of
equipment of $1,700. The equipment had an historical cost of $40,000 and accumulated
depreciation of $24,000. Each of the following accounts increased during 2011:
Patents
$4,500
Prepaid rent
$6,800
Available-for-sale securities
$1,000
Bonds payable
$5,000
6 - 96

What is the amount of cash provided by or used by investing activities for Jarvis, Inc. for
the year ended December 31, 2011?
a. ( $ 3,800)
b. $ 5,400
c. $12,200
d. $17,200
86.
Jarvis, Inc. reported net income of $34,000 for the year ended December 31, 2011.
Included in net income was a gain on early extinguishment of debt of $60,000 related to
bonds payable with a book value of $1,200,000. Each of the following accounts increased
during 2011:
Notes receivable
$45,000
Deferred tax liability
$10,000
Treasury stock
$90,000
What is the amount of cash used by financing activities for Jarvis, Inc. for the year ended
December 31, 2011?
a. $1,230,000
b. $1,240,000
c. $ 160,000
d. $ 195,000
87.
During 2011, Greta Company earned net income of $192,000 which included depreciation
expense of $39,000. In addition, the Company experienced the following changes in the
account balances listed below:
Decreases
Accounts receivable.....$ 6,000
Prepaid expenses......... 16,500
Accrued liabilities............12,000
Increases
Accounts payable...$22,500
Inventory. ..18,000
Based upon this information what amount will be shown for net cash provided by
operating activities for 2011.
a. $246,000.
b. $232,500.
c. $142,500.
d. $133,500.
88.
Cashman Company reported net income of $255,000 for the year ended 12/31/11.
Included in the computation of net income were: depreciation expense, $45,000;
amortization of a patent, $24,000; income from an investment in common stock of Linda
Inc., accounted for under the equity method, $36,000; and amortization of a bond
premium, $9,000. Cashman also paid a $60,000 dividend during the year. The net cash
provided by operating activities would be reported at:
a. $279,000.
b. $231,000.
c. $219,000.
d. $171,000.
6 - 97
89.
Net cash flow from operating activities for 2011 for Graham Corporation was $300,000.
The following items are reported on the financial statements for 2011:
Depreciation and amortization
$ 20,000
Cash dividends paid on common stock
12,000
24,000
Based only on the information above, Grahams net income for 2011 was:
a. $256,000.
b. $264,000.
c. $296,000.
d. $304,000.
90.
Donnegan Company reported operating expenses of $285,000 for 2011. The following
data were extracted from the companys financial records:
12/31/10
12/31/11
Prepaid Expenses $ 60,000
$69,000
Accrued Expenses 210,000
255,000
On a statement of cash flows for 2011, using the direct method, cash payments for
operating expenses should be:
a. $339,000.
b. $321,000.
c. $249,000.
d. $231,000.
91.
The following information was taken from the 2011 financial statements of Jenny Gardner
Corporation:
Inventory, January 1, 2011
$ 90,000
Inventory, December 31, 2011
120,000
Accounts payable, January 1, 2011
75,000
Accounts payable, December 31, 2011
120,000
Sales
600,000
Cost of goods sold
450,000
If the direct method is used in the 2011 statement of cash flows, what amount should
Jenny Gardner report as cash payments to suppliers?
a. $435,000
b. $465,000
c. $495,000
d. $525,000
92.
Alex Company prepares its statement of cash flows using the direct method for operating
activities. For the year ended December 31, 2011, Alex Company reports the following
activity:
Sales on account
$1,300,000
Cash sales
740,000
Decrease in accounts receivable
610,000
72,000
Increase in inventory
48,000
Cost of good sold
975,000
6 - 98

What is the amount of cash collections from customers reported by Alex Company for the
year ended December 31, 2011?
a. $2,040,000
b. $1,910,000
c. $2,650,000
d. $1,430,000
93.
Alex Company prepares its statement of cash flows using the direct method for operating
activities. For the year ended December 31, 2011, Alex Company reports the following
activity:
Sales on account
$1,300,000
Cash sales
740,000
Decrease in accounts receivable
610,000
72,000
Increase in inventory
48,000
Cost of goods sold
975,000
What is the amount of cash payments to suppliers reported by Alex Company for the year
ended December 31, 2011?
a. $ 951,000
b. $ 999,000
c. $1,095,000
d. $ 855,000
Questions 94 through 97 are based on the data shown below related to the statement of cash
flows for Putnam, Inc.:
Putnam, Inc.
Comparative Balance Sheets
December 31,
2011
2010
Assets:
Current Assets:
Cash
Accounts Receivable (net)
Merchandise Inventory
Prepaid Expenses
Total Current Assets
Long-Term Investments
Plant Assets:
Property, Plant & Equipment
Accumulated Depreciation
Total Plant Assets
Total Assets
$ 690,000
1,560,000
1,950,000
351,000
4,551,000
225,000
$ 540,000
1,080,000
1,260,000
315,000
3,195,000
2,190,000
(450,000)
1,740,000
$6,516,000
1,440,000
(270,000)
1,170,000
$4,365,000

Equities:
Current Liabilities:
Accounts Payable
Accrued Expenses
Dividends Payable
Total Current Liabilities
Long-Term Notes Payable
Stockholders' Equity:
Common Stock
Retained Earnings
Total Equities
6 - 99
$1,275,000
309,000
201,000
1,785,000
825,000
$1,095,000
282,000
3,000,000
906,000
$6,516,000
2,400,000
588,000
$4,365,000
1,377,000
Putnam, Inc.
Comparative Income Statements
Net Credit Sales
Cost of Goods Sold
Gross Profit
Expenses (including Income Tax)
Net Income
December 31,
2011
2010
$7,020,000
$3,753,000
3,915,000
1,881,000
3,105,000
1,872,000
2,586,000
1,374,000
$ 519,000
$ 498,000
Additional Information:
a. Accounts receivable and accounts payable relate to merchandise held for sale in the
normal course of business. The allowance for bad debts was the same at the end of
2011 and 2010, and no receivables were charged against the allowance. Accounts
payable are recorded net of any discount and are always paid within the discount
period.
b. The proceeds from the note payable were used to finance the acquisition of property,
plant, and equipment. Capital stock was sold to provide additional working capital.
94.
What amount of cash was collected from 2011 accounts receivable?

a. $7,500,000.
b. $7,020,000.
c. $6,540,000.
d. $3,270,000.
95.
What amount of cash was paid on accounts payable to suppliers during 2011?
a. $4,605,000.
b. $4,425,000.
c. $4,095,000.
d. $3,735,000.
96.
The amount to be shown on the cash flow statement as net cash provided by investing
activities would total what amount?
a. $225,000.
b. $750,000.
c. $795,000.
d. $975,000.
6 - 100 Test Bank for Intermediate Accounting, Thirteenth Edition

97.
The amount to be shown on the cash flow statement as net cash provided by financing
activities would total what amount?
a. $1,425,000.
b. $825,000.
c. $600,000.
d. $408,000.

Fleming Company provided the following information on selected transactions during 2011:
Dividends paid to preferred stockholders
Loans made to affiliated corporations
Proceeds from issuing bonds
Proceeds from issuing preferred stock
Proceeds from sale of equipment
Purchases of inventories
Purchase of land by issuing bonds
$ 150,000
750,000
900,000
1,050,000
450,000
1,200,000
300,000
600,000
98.
The net cash provided (used) by investing activities during 2011 is

a. $(600,000).
b. $(300,000).
c. $150,000.
d. $450,000.
99.
The net cash provided (used) by financing activities during 2011 is

a. $(1,650,000).
b. $450,000.
c. $750,000.
d. $1,200,000.
100.
The net cash provided by operating activities in Sosa Company's statement of cash flows
for 2011 was $115,000. For 2011, depreciation on plant assets was $45,000, amortization
of patent was $8,000, and cash dividends paid on common stock was $54,000. Based
only on the information given above, Sosas net income for 2011 was
a. $115,000.
b. $62,000.
c. $8,000.
d. $116,000.
101.
During 2011, Oldham Corporation, which uses the allowance method of accounting for
doubtful accounts, recorded a provision for bad debt expense of $25,000 and in addition it
wrote off, as uncollectible, accounts receivable of $10,000. As a result of these
transactions, net cash flows from operating activities would be calculated (indirect
method) by adjusting net income with a
a. $25,000 increase.
b. $10,000 increase.
c. $15,000 increase.
d. $15,000 decrease.
6 - 101

A flood damaged a building and contents. Floods are unusual and infrequent in this area. The
receipts from insurance companies totaled $300,000, which was $90,000 less than the book
values. The tax rate is 30%.
102.
On the statement of cash flows (indirect method), the receipts from insurance companies
should
a. be shown as an addition to net income of $210,000.
b. be shown as an inflow from investing activities of $210,000.
c. be shown as an inflow from investing activities of $300,000.
d. not be shown.
103.
On the statement of cash flows (indirect method), the flood loss should
a. be shown as an addition to net income of $63,000.
b. be shown as an addition to net income of $90,000.
c. be shown as an inflow from investing activities of $63,000.
d. not be shown.
104.
Zook Incorporated, had net income for 2011 of $5,000,000. Additional information is as
follows:
Amortization of patents
Depreciation on plant assets
Long-term debt:
Bond premium amortization
Interest paid
Provision for doubtful accounts:
Current receivables
Long-term nontrade receivables
$ 45,000
1,650,000
65,000
900,000
80,000
30,000
What should be the net cash provided by operating activities in the statement of cash
flows for the year ended December 31, 2011, based solely on the above information?
a. $6,820,000.
b. $6,870,000.
c. $6,740,000.
d. $6,840,000.
105.
The net income for the year ended December 31, 2011, for Oliva Company was
$1,200,000. Additional information is as follows:
Depreciation on plant assets
Amortization of leasehold improvements
Provision for doubtful accounts on short-term receivables
Provision for doubtful accounts on long-term receivables
Interest paid on short-term borrowings
Interest paid on long-term borrowings
$600,000
340,000
120,000
100,000
80,000
60,000
Based solely on the information given above, what should be the net cash provided by
operating activities in the statement of cash flows for the year ended December 31, 2011?
a. $2,260,000.
b. $2,360,000.
c. $2,340,000.
d. $2,500,000.
6 - 102 Test Bank for Intermediate Accounting, Thirteenth Edition

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CHAPTER 6

ACCOUNTING AND THE TIME VALUE OF MONEY

What best describes the time value of money?

Accounting and the Time Value of Money

What is NOT a variable that is considered in interest computations?

Accounting and the Time Value of Money

Test Bank for Intermediate Accounting, Thirteenth Edition

In the time diagram below, which concept is being depicted?

Present value of an ordinary annuity

On December 1, 2010, Richards Company sold some machinery to Fleming Company.

If the number of periods is known, the interest rate is determined by

Accounting and the Time Value of Money

Which of the following statements is true?

Test Bank for Intermediate Accounting, Thirteenth Edition

Which of the following is true?

Which statement is false?

Accounting and the Time Value of Money

An accountant wishes to find the present value of an annuity of $1 payable at the

Test Bank for Intermediate Accounting, Thirteenth Edition

Which of the following is a current liability?

Which of the following is true about accounts payable?

Accounting and the Time Value of Money

Which of the following may be a current liability?

Which of the following items is a current liability?

Which of the following is a current liability?

Stock dividends distributable should be classified on the

Test Bank for Intermediate Accounting, Thirteenth Edition

An account which would be classified as a current liability is

Which of the following is not considered a part of the definition of a liability?

Accounting and the Time Value of Money

What is a discount as it relates to zero-interest-bearing notes payable?

Which of the following situations may give rise to unearned revenue?

Which of the following statements is correct?

Test Bank for Intermediate Accounting, Thirteenth Edition

Which of the following statements is false?

Which of the following is not a correct statement about sales taxes?

If a short-term obligation is excluded from current liabilities because of refinancing, the

Accounting and the Time Value of Money

Which of these is not included in an employer's payroll tax expense?

The amount of the liability for compensated absences should be based on

What are compensated absences?

Test Bank for Intermediate Accounting, Thirteenth Edition

When is a contingent liability recorded?

Which of the following is an example of a contingent liability?

Which of the following terms is associated with recording a contingent liability?

Which of the following is the proper way to report a gain contingency?

Accounting and the Time Value of Money

A contingency can be accrued when

Test Bank for Intermediate Accounting, Thirteenth Edition

Ortiz Corporation, a manufacturer of household paints, is preparing annual financial

Use of the accrual method in accounting for product warranty costs

Accounting and the Time Value of Money

What condition is necessary to recognize an asset retirement obligation?

Test Bank for Intermediate Accounting, Thirteenth Edition

How do you determine the acid-test ratio?

What does the current ratio inform you about a company?

The ratio of current assets to current liabilities is called the

Accrued liabilities are disclosed in financial statements by

The numerator of the acid-test ratio consists of

Accounting and the Time Value of Money

An example of an item which is not a liability is

The term used for bonds that are unsecured as to principal is