CPA Adapted Test Questions & Answers for Chapter 14 --24

MULTIPLE CHOICE—CPA AdaptedChapter 14 – Long Term Liabilities

1. On July 1, 2010, Spear Co. issued 1,000 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2010 and mature on April 1, 2020. Interest is payable semiannually on April 1 and October 1. What amount did Spear receive from the bond issuance?a. $1,015,000b. $1,000,000c. $990,000d. $965,000

2. On January 1, 2010, Solis Co. issued its 10% bonds in the face amount of $3,000,000, which mature on January 1, 2020. The bonds were issued for $3,405,000 to yield 8%, resulting in bond premium of $405,000. Solis uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2010, Solis's adjusted unamortized bond premium should bea. $405,000.b. $377,400.c. $364,500.d. $304,500.

3. On July 1, 2009, Noble, Inc. issued 9% bonds in the face amount of $5,000,000, which mature on July 1, 2015. The bonds were issued for $4,695,000 to yield 10%, resulting in a bond discount of $305,000. Noble uses the effective-interest method of amortizing bond discount. Interest is payable annually on June 30. At June 30, 2011, Noble's unamortized bond discount should bea. $264,050.b. $255,000.c. $244,000.d. $215,000.

4. On January 1, 2010, Huff Co. sold $1,000,000 of its 10% bonds for $885,296 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Huff report as interest expense for the six months ended June 30, 2010?a. $44,266b. $50,000c. $53,118d. $60,000

5. On January 1, 2011, Doty Co. redeemed its 15-year bonds of $2,500,000 par value for 102. They were originally issued on January 1, 1999 at 98 with a maturity date of January 1, 2014. The bond issue costs relating to this transaction were $150,000. Doty amortizes discounts, premiums, and bond issue costs using the straight-line method. What amount of loss should Doty recognize on the redemption of these bonds (ignore taxes)?a. $90,000b. $60,000c. $50,000

d. $06. On its December 31, 2010 balance sheet, Emig Corp. reported bonds payable of

$6,000,000 and related unamortized bond issue costs of $320,000. The bonds had been issued at par. On January 2, 2011, Emig retired $3,000,000 of the outstanding bonds at par plus a call premium of $70,000. What amount should Emig report in its 2011 income statement as loss on extinguishment of debt (ignore taxes)?a. $0b. $70,000c. $160,000d. $230,000

7. On January 1, 2006, Goll Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000. These bonds were to mature on January 1, 2016 but were callable at 101 any time after December 31, 2009. Interest was payable semiannually on July 1 and January 1. On July 1, 2011, Goll called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Goll's gain or loss in 2011 on this early extinguishment of debt wasa. $30,000 gain.b. $12,000 gain.c. $10,000 loss.d. $8,000 gain.

8. On June 30, 2011, Omara Co. had outstanding 8%, $3,000,000 face amount, 15-year bonds maturing on June 30, 2021. Interest is payable on June 30 and December 31. The unamortized balances in the bond discount and deferred bond issue costs accounts on June 30, 2011 were $105,000 and $30,000, respectively. On June 30, 2011, Omara acquired all of these bonds at 94 and retired them. What net carrying amount should be used in computing gain or loss on this early extinguishment of debt?a. $2,970,000.b. $2,895,000.c. $2,865,000.d. $2,820,000.

9. A ten-year bond was issued in 2009 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 2011, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in 2011 should have equaled thea. call price.b. call price less unamortized discount.c. face amount less unamortized discount.d. face amount plus unamortized discount.

10. Paige Co. took advantage of market conditions to refund debt. This was the fourth refunding operation carried out by Paige within the last three years. The excess of the carrying amount of the old debt over the amount paid to extinguish it should be reported as aa. gain, net of income taxes.b. loss, net of income taxes.c. part of continuing operations.d. deferred credit to be amortized over the life of the new debt.

*11. Eddy Co. is indebted to Cole under a $400,000, 12%, three-year note dated December 31, 2009. Because of Eddy's financial difficulties developing in 2011, Eddy owed accrued interest of $48,000 on the note at December 31, 2011. Under a troubled debt restructuring, on December 31, 2011, Cole agreed to settle the note and accrued interest for a tract of land having a fair value of $360,000. Eddy's acquisition cost of the land is $290,000. Ignoring income taxes, on its 2011 income statement Eddy should report as a result of the troubled debt restructuring

Gain on Disposal Restructuring Gaina. $158,000 $0b. $110,000 $0c. $70,000 $40,000d. $70,000 $88,000

Multiple Choice Answers—CPA AdaptedItem Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

1. a 3. a 5. a 7. d 9. c *11. d2. b 4. c 6. d 8. c 10. c

No. Answer Derivation1. a ($1,000,000 × .99) + ($1,000,000 × .10 × 3/12) = $1,015,000.

2. b $405,000 – [($3,000,000 × .10) – ($3,405,000 × .08)] = $377,400.

3. a 2009–2010:$4,695,000 + [($4,695,000 × .1) – ($5,000,000 × .09)]= $4,714,500.

2010–2011:$4,714,500 + ($471,450 – $450,000) = $4,735,950$5,000,000 – $4,735,950 = $264,050.

4. c $885,296 × .06 = $53,118.

5. a ($2,500,000 × 1.02) – = $90,000.

6. d ($3,000,000 + $70,000) – [($6,000,000 – $320,000) × 1/2] = $230,000.

7. d – ($1,000,000 × 1.01) = $8,000.

8. c $3,000,000 – ($105,000 + $30,000) = $2,865,000.

9. c Conceptual.

10. c Conceptual.

*11. d $360,000 – $290,000 = $70,000($400,000 + $48,000) – $360,000 = $88,000.

Chapter 15 – Stockholders’ Equity

1. A corporation was organized in January 2007 with authorized capital of $10 par value common stock. On February 1, 2010, shares were issued at par for cash. On March 1, 2010, the corporation's attorney accepted 7,000 shares of common stock in settlement for legal services with a fair value of $90,000. Additional paid-in capital would increase on

February 1, 2010 March 1, 2010a. Yes Nob. Yes Yesc. No Nod. No Yes

2. On July 1, 2010, Nall Co. issued 2,500 shares of its $10 par common stock and 5,000 shares of its $10 par convertible preferred stock for a lump sum of $125,000. At this date Nall's common stock was selling for $24 per share and the convertible preferred stock for $18 per share. The amount of the proceeds allocated to Nall's preferred stock should bea. $62,500.b. $75,000.c. $90,000.d. $68,750.

3. Horton Co. was organized on January 2, 2010, with 500,000 authorized shares of $10 par value common stock. During 2010, Horton had the following capital transactions:

January 5—issued 375,000 shares at $14 per share.July 27—purchased 25,000 shares at $11 per share.November 25—sold 15,000 shares of treasury stock at $13 per share.

Horton used the cost method to record the purchase of the treasury shares. What would be the balance in the Paid-in Capital from Treasury Stock account at December 31, 2010?a. $0.b. $15,000.c. $30,000.d. $45,000.

4. In 2010, Hobbs Corp. acquired 9,000 shares of its own $1 par value common stock at $18 per share. In 2011, Hobbs issued 4,000 of these shares at $25 per share. Hobbs uses the cost method to account for its treasury stock transactions. What accounts and what amounts should Hobbs credit in 2011 to record the issuance of the 4,000 shares?

Treasury Additional Retained Common Stock Paid-in Capital Earnings Stock

a. $72,000 $70,000b. $72,000 $28,000c. $96,000 $4,000d. $68,000 $28,000 $4,000

5. At its date of incorporation, Sauder, Inc. issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Sauder acquired 20,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. There have been no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts?

Retained Earnings Additional Paid-in Capitala. Decrease Decreaseb. No effect Decreasec. Decrease No effectd. No effect No effect

6. Farmer Corp. owned 20,000 shares of Eaton Corp. purchased in 2007 for $240,000. On December 15, 2010, Farmer declared a property dividend of all of its Eaton Corp. shares on the basis of one share of Eaton for every 10 shares of Farmer common stock held by its stockholders. The property dividend was distributed on January 15, 2011. On the declaration date, the aggregate market price of the Eaton shares held by Farmer was $400,000. The entry to record the declaration of the dividend would include a debit to Retained Earnings ofa. $0.b. $160,000.c. $240,000.d. $400,000.

7. A corporation declared a dividend, a portion of which was liquidating. How would this distribution affect each of the following?

AdditionalPaid-in Capital Retained Earnings

a. Decrease No effectb. Decrease Decreasec. No effect Decreased. No effect No effect

8. On May 1, 2010, Ziek Corp. declared and issued a 10% common stock dividend. Prior to this dividend, Ziek had 100,000 shares of $1 par value common stock issued and outstanding. The fair value of Ziek 's common stock was $20 per share on May 1, 2010. As a result of this stock dividend, Ziek's total stockholders' equitya. increased by $200,000.b. decreased by $200,000.c. decreased by $10,000.d. did not change.

9. How would the declaration and subsequent issuance of a 10% stock dividend by the issuer affect each of the following when the market value of the shares exceeds the par value of the stock?

AdditionalCommon Stock Paid-in Capital

a. No effect No effectb. No effect Increasec. Increase No effectd. Increase Increase

10. On December 31, 2010, the stockholders' equity section of Arndt, Inc., was as follows:

Common stock, par value $10; authorized 30,000 shares;issued and outstanding 9,000 shares $ 90,000

Additional paid-in capital 116,000Retained earnings 174,000Total stockholders' equity $380,000

On March 31, 2011, Arndt declared a 10% stock dividend, and accordingly 900 additional shares were issued, when the fair market value of the stock was $18 per share. For the three months ended March 31, 2011, Arndt sustained a net loss of $32,000. The balance of Arndt’s retained earnings as of March 31, 2011, should bea. $125,800.b. $133,000.c. $134,800.d. $142,000.

*11. At December 31, 2010 and 2011, Plank Corp. had outstanding 2,000 shares of $100 par value 8% cumulative preferred stock and 10,000 shares of $10 par value common stock. At December 31, 2010, dividends in arrears on the preferred stock were $8,000. Cash dividends declared in 2011 totaled $30,000. What amounts were payable on each class of stock?

Preferred Stock Common Stocka. $16,000 $14,000b. $22,000 $8,000c. $24,000 $6,000d. $30,000 $0


1. d 3. c 5. c 7. b 9. d *11. c2. b 4. b 6. d 8. d 10. a

No. Answer Derivation1. d Conceptual.2. b ($24 2,500) + ($18 5,000) = $150,000.

$90,000————— × $125,000 = $75,000.$150,000

3. c 15,000 $2 = $30,000.4. b (4,000 $18) = $72,000; (4,000 $7) = $28,000.5. c Conceptual.6. d $400,000 (market value).

7. b Conceptual. 8. d Conceptual.

9. d Conceptual.

10. a $174,000 – $32,000 – (900 $18) = $125,800.

*11. c ($200,000 .08) + $8,000 = $24,000; $30,000 – $24,000 = $6,000

Chapter 16 — Dilutive Securities & Earnings Per Share

1. On January 2, 2010, Farr Co. issued 10-year convertible bonds at 105. During 2012, these bonds were converted into common stock having an aggregate par value equal to the total face amount of the bonds. At conversion, the market price of Farr’s common stock was 50 percent above its par value. On January 2, 2010, cash proceeds from the issuance of the convertible bonds should be reported asa. paid-in capital for the entire proceeds.b. paid-in capital for the portion of the proceeds attributable to the conversion feature

and as a liability for the balance.c. a liability for the face amount of the bonds and paid-in capital for the premium over

the face amount.d. a liability for the entire proceeds.

2. Lang Co. issued bonds with detachable common stock warrants. Only the warrants had a known market value. The sum of the fair value of the warrants and the face amount of the bonds exceeds the cash proceeds. This excess is reported asa. Discount on Bonds Payable.b. Premium on Bonds Payable.c. Common Stock Subscribed.d. Paid-in Capital in Excess of Par—Stock Warrants.

3. On January 1, 2010, Sharp Corp. granted an employee an option to purchase 6,000 shares of Sharp's $5 par value common stock at $20 per share. The Black-Scholes option pricing model determines total compensation expense to be $140,000. The option became exercisable on December 31, 2011, after the employee completed two years of service. The market prices of Sharp's stock were as follows:

January 1, 2010 $30December 31, 2011 50

For 2011, should recognize compensation expense under the fair value method ofa. $90,000.b. $30,000.c. $70,000.d. $0.

*4. On January 2, 2010, for past services, Rosen Corp. granted Nenn Pine, its president, 16,000 stock appreciation rights that are exercisable immediately and expire on January 2, 2011. On exercise, Nenn is entitled to receive cash for the excess of the market price of the stock on the exercise date over the market price on the grant date. Nenn did not exercise any of the rights during 2010. The market price of Rosen's stock was $30 on January 2, 2010, and $45 on December 31, 2010. As a result of the stock appreciation rights, Rosen should recognize compensation expense for 2010 ofa. $0.b. $80,000.c. $240,000.d. $480,000.

Multiple Choice Answers—Dilutive Securities, CPA AdaptedItem Ans. Item Ans. Item Ans. Item Ans.

1. d 2. a 3. c *4. c

No. Answer Derivation1. d Conceptual.2. a Conceptual.3. c $140,000 ÷ 2 = $70,000.

*4. c ($45 – $30) × 16,000 = $240,000.

Earnings Per Share

5. Didde Co. had 300,000 shares of common stock issued and outstanding at December 31, 2010. No common stock was issued during 2011. On January 1, 2011, Didde issued 200,000 shares of nonconvertible preferred stock. During 2011, Didde declared and paid $100,000 cash dividends on the common stock and $80,000 on the preferred stock. Net income for the year ended December 31, 2011 was $620,000. What should be Didde's 2011 earnings per common share?a. $2.07b. $1.80c. $1.73d. $1.47

6. At December 31, 2011 and 2010, Miley Corp. had 180,000 shares of common stock and 10,000 shares of 5%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2011 or 2010. Net income for 2011 was $400,000. For 2011, earnings per common share amounted toa. $2.22.b. $1.94.c. $1.67.d. $1.11.

7. Marsh Co. had 2,400,000 shares of common stock outstanding on January 1 and December 31, 2011. In connection with the acquisition of a subsidiary company in June 2010, Marsh is required to issue 100,000 additional shares of its common stock on July 1, 2012, to the former owners of the subsidiary. Marsh paid $200,000 in preferred stock dividends in 2011, and reported net income of $3,400,000 for the year. Marsh's diluted earnings per share for 2011 should bea. $1.42.b. $1.36.c. $1.33.d. $1.28.

8. Foyle, Inc., had 560,000 shares of common stock issued and outstanding at December 31, 2010. On July 1, 2011, an additional 40,000 shares of common stock were issued for cash. Foyle also had unexercised stock options to purchase 32,000 shares of common stock at $15 per share outstanding at the beginning and end of 2011. The average market price of Foyle's common stock was $20 during 2011. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2011?

a. 580,000 b. 588,000c. 608,000d. 612,000

9. When computing diluted earnings per share, convertible securities area. ignored.b. recognized only if they are dilutive.c. recognized only if they are antidilutive.d. recognized whether they are dilutive or antidilutive.

10. In determining diluted earnings per share, dividends on nonconvertible cumulative preferred stock should bea. disregarded.b. added back to net income whether declared or not.c. deducted from net income only if declared.d. deducted from net income whether declared or not.

11. The if-converted method of computing earnings per share data assumes conversion of convertible securities as of thea. beginning of the earliest period reported (or at time of issuance, if later).b. beginning of the earliest period reported (regardless of time of issuance).c. middle of the earliest period reported (regardless of time of issuance).d. ending of the earliest period reported (regardless of time of issuance).

Multiple Choice Answers—Earnings Per Share—CPA AdaptedItem Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

5. b 6. b 7. d 8. b 9. b 10. d 11. a

No.Answer Derivation

5. b $620,000 – $80,000————————— = $1.80.

300,000

6. b $400,000 – (10,000 × $100 × .05)——————————————— = $1.94.

180,000

7. d $3,400,000 – $200,000——————————– = $1.28. 2,400,000 + 100,000

8. b 560,000 + (40,000 × 6/12) + [32,000 – (32,000 × $15 ÷ $20)] = 588,000.

9. b Conceptual.10. d Conceptual.11. a Conceptual.

Chapter 17 - Investments

1. On October 1, 2010, Wenn Co. purchased 600 of the $1,000 face value, 8% bonds of Loy, Inc., for $702,000, including accrued interest of $12,000. The bonds, which mature on January 1, 2017, pay interest semiannually on January 1 and July 1. Wenn used the straight-line method of amortization and appropriately recorded the bonds as available-for-sale. On Wenn's December 31, 2011 balance sheet, the carrying value of the bonds isa. $690,000.b. $684,000.c. $681,600.d. $672,000.

2. Valet Corp. began operations in 2010. An analysis of Valet’s equity securities portfolio acquired in 2010 shows the following totals at December 31, 2010 for trading and available-for-sale securities:

Trading Available-for-SaleSecurities Securities

Aggregate cost $90,000 $110,000Aggregate fair value 65,000 95,000

What amount should Valet report in its 2010 income statement for unrealized holding loss?a. $40,000.b. $10,000.c. $15,000.d. $25,000.

3. At December 31, 2010, Jeter Corp. had the following equity securities that were purchased during 2010, its first year of operation:

Fair Unrealized Cost Value Gain (Loss)

Trading Securities:Security A $ 90,000 $ 60,000 $(30,000)

B 15,000 20,000 5,000Totals $105,000 $ 80,000 $(25,000)

Available-for-Sale Securities:Security Y $ 70,000 $ 80,000 $ 10,000

Z 85,000 55,000 (30,000)Totals $155,000 $135,000 $(20,000)

All market declines are considered temporary. Fair value adjustments at December 31, 2010 should be established with a corresponding charge against

Income Stockholders’ Equitya. $45,000 $ 0b. $30,000 $30,000c. $25,000 $20,000

d. $25,000 $ 04. On December 29, 2011, James Co. sold an equity security that had been purchased on

January 4, 2010. James owned no other equity securities. An unrealized holding loss was reported in the 2010 income statement. A realized gain was reported in the 2011 income statement. Was the equity security classified as available-for-sale and did its 2010 market price decline exceed its 2011 market price recovery?

2010 Market PriceDecline Exceeded 2011

Available-for-Sale Market Price Recoverya. Yes Yesb. Yes Noc. No Yesd. No No

Use the following information for questions 5 through 7.

Rich, Inc. acquired 30% of Doane Corp.'s voting stock on January 1, 2010 for $400,000. During 2010, Doane earned $160,000 and paid dividends of $100,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. During 2011, Doane earned $200,000 and paid dividends of $60,000 on April 1 and $60,000 on October 1. On July 1, 2011, Rich sold half of its stock in Doane for $264,000 cash.

5. Before income taxes, what amount should Rich include in its 2010 income statement as a result of the investment?a. $160,000.b. $100,000.c. $48,000.d. $30,000.

6. The carrying amount of this investment in Rich's December 31, 2010 balance sheet should bea. $400,000.b. $418,000.c. $448,000.d. $460,000.

7. What should be the gain on sale of this investment in Rich's 2011 income statement?a. $64,000.b. $55,000.c. $49,000.d. $40,000.

8. On January 1, 2010, Reston Co. purchased 25% of Ace Corp.'s common stock; no goodwill resulted from the purchase. Reston appropriately carries this investment at equity and the balance in Reston’s investment account was $720,000 at December 31, 2010. Ace reported net income of $450,000 for the year ended December 31, 2010, and paid common stock dividends totaling $180,000 during 2010. How much did Reston pay for its 25% interest in Ace?a. $652,500.b. $765,000.c. $787,500.

d. $877,500.9. On December 31, 2010, Patel Co. purchased equity securities as trading securities.

Pertinent data are as follows:Fair Value

Security Cost At 12/31/11A $132,000 $117,000B 168,000 186,000C 288,000 258,000

On December 31, 2011, Patel transferred its investment in security C from trading to available-for-sale because Patel intends to retain security C as a long-term investment. What total amount of gain or loss on its securities should be included in Patel's income statement for the year ended December 31, 2011?a. $3,000 gain.b. $27,000 loss.c. $30,000 loss.d. $45,000 loss.

Multiple Choice Answers—CPA AdaptedItem Ans. Item Ans. Item Ans. Item Ans. Item Ans.

1. d 3. c 5. c 7. c 9. b2. d 4. d 6. b 8. a

No. Answer Derivation1. d $702,000 – $12,000 = $690,000

15$690,000 – ($90,000 × — ) = $672,000.

75

2. d $90,000 – $65,000 = $25,000.

3. c

4. d Conceptual.

5. c $160,000 × 30% = $48,000.

6. b $400,000 + $48,000 – ($100,000 × 30%) = $418,000.

7. c $418,000 – ($60,000 × 30%) + ($200,000 × 50% × 30%) = $430,000.$264,000 – ($430,000 ÷ 2) = $49,000.

8. a $720,000 – ($450,000 × 25%) + ($180,000 × 25%) = $652,500.

9. b $18,000 – $15,000 – $30,000 = $27,000 loss.

Chapter 18 – Revenue Recognition1. According to the FASB's conceptual framework, the process of reporting an item in the

financial statements of an entity isa. recognition.b. realization.c. allocation.d. matching.

2. Green Construction Co. has consistently used the percentage-of-completion method of recognizing revenue. During 2010, Green entered into a fixed-price contract to construct an office building for $12,000,000. Information relating to the contract is as follows:

At December 31 2010 2011

Percentage of completion 15% 45%Estimated total cost at completion $9,000,000 $9,600,000Gross profit recognized (cumulative) 600,000 1,440,000Contract costs incurred during 2011 were:

a. $2,880,000.b. $2,970,000.c. $3,150,000.d. $4,320,000.

3. Bruner Constructors, Inc. has consistently used the percentage-of-completion method of recognizing income. In 2010, Bruner started work on a $35,000,000 construction contract that was completed in 2011. The following information was taken from Bruner's 2010 accounting records:

Progress billings $11,000,000Costs incurred 10,500,000Collections 7,000,000Estimated costs to complete 21,000,000

What amount of gross profit should Bruner have recognized in 2010 on this contract?a. $3,500,000b. $2,333,334c. $1,750,000d. $1,166,667

4. During 2010, Gates Corp. started a construction job with a total contract price of $3,500,000. The job was completed on December 15, 2011. Additional data are as follows:

2010 2011 Actual costs incurred $1,350,000 $1,525,000Estimated remaining costs 1,350,000 —Billed to customer 1,200,000 2,300,000Received from customer 1,000,000 2,400,000

Under the completed-contract method, what amount should Gates recognize as gross profit for 2011?a. $225,000b. $312,500c. $475,000

d. $625,0005. Hogan Farms produced 800,000 pounds of cotton during the 2010 season. Hogan sells

all of its cotton to Ott Co., which has agreed to purchase Hogan's entire production at the prevailing market price. Recent legislation assures that the market price will not fall below $.70 per pound during the next two years. Hogan's costs of selling and distributing the cotton are immaterial and can be reasonably estimated. Hogan reports its inventory at expected exit value. During 2010, Hogan sold and delivered to Ott 600,000 pounds at the market price of $.70. Hogan sold the remaining 200,000 pounds during 2011 at the market price of $.72. What amount of revenue should Hogan recognize in 2010?a. $420,000b. $432,000c. $560,000d. $576,000

6. Braun, Inc. appropriately uses the installment-sales method of accounting to recognize income in its financial statements. Some pertinent data relating to this method of accounting include:

2010 2011 Installment sales $750,000 $720,000Cost of installment sales 570,000 504,000Gross profit $180,000 $216,000

Rate of gross profit 24% 30%

Balance of deferred gross profit at year end:2010 $108,000 $ 36,0002011 198,000

Total $108,000 $234,000

What amount of installment accounts receivable should be presented in Braun's December 31, 2011 balance sheet?a. $720,000b. $810,000c. $780,000d. $866,666

7. Hartz Co., which began operations on January 1, 2010, appropriately uses the installment-sales method of accounting. The following information pertains to Hartz's operations for the year 2010:

Installment sales $1,200,000Regular sales 480,000Cost of installment sales 720,000Cost of regular sales 288,000General and administrative expenses 96,000Collections on installment sales 288,000

The deferred gross profit account in Hartz's December 31, 2010 balance sheet should bea. $115,200.b. $192,000.c. $364,800.

d. $480,000.8. On January 1, 2010, Orton Co. sold a used machine to King, Inc. for $350,000. On this

date, the machine had a depreciated cost of $245,000. King paid $50,000 cash on January 1, 2010 and signed a $300,000 note bearing interest at 10%. The note was payable in three annual installments of $100,000 beginning January 1, 2011. Orton appropriately accounted for the sale under the installment method. King made a timely payment of the first installment on January 1, 2011 of $130,000, which included interest of $30,000 to date of payment. At December 31, 2011, Orton has deferred gross profit ofa. $70,000.b. $66,000.c. $60,000.d. $51,000.

9. Piper Co. began operations on January 1, 2010 and appropriately uses the installment method of accounting. The following information pertains to Piper's operations for 2010:

Installment sales 1,800,000Cost of installment sales 1,080,000General and administrative expenses 180,000Collections on installment sales 825,000

The balance in the deferred gross profit account at December 31, 2010 should bea. $330,000.b. $495,000.c. $390,000.d. $720,000.

10. Moon Co. records all sales using the installment method of accounting. Installment sales contracts call for 36 equal monthly cash payments. According to the FASB's conceptual framework, the amount of deferred gross profit relating to collections 12 months beyond the balance sheet date should be reported in thea. current liabilities section as a deferred revenue.b. noncurrent liabilities section as a deferred revenue.c. current assets section as a contra account.d. noncurrent assets section as a contra account.

11. Crane, Inc. is a retailer of home appliances and offers a service contract on each appliance sold. Crane sells appliances on installment contracts, but all service contracts must be paid in full at the time of sale. Collections received for service contracts should be recorded as an increase in aa. deferred revenue account.b. sales contracts receivable valuation account.c. stockholders' valuation account.d. service revenue account.


1. a 3. d 5. c 7. c 9. c 11. a2. b 4. d 6. b 8. c 10. c

No. Answer Derivation1. a Conceptual.2. b ($9,600,000 ×45%) – ($9,000,000 ×15%) = $2,970,000.

$10,500,0003. d —————— ×($35,000,000 – $31,500,000) = $1,166,667.

$31,500,000

4. d $3,500,000 – $1,350,000 – $1,525,000 = $625,000.

5. c 800,000 lbs. ×$.70 = $560,000.

6. b ($36,000 ÷ 24%) + ($198,000 ÷ 30%) = $810,000.

7. c $1,200,000 – $720,000 = $480,000 gross profit (40% gross profit rate)$480,000 – ($288,000 ×.4) = $364,800.

8. c $300,000 + $50,000 = $350,000$350,000 – $245,000 = $105,000 gross profit (30% gross profit rate)($300,000 – $100,000) × 30% = $60,000.

9. c $1,800,000 – $1,080,000 = $720,000 (40% gross profit rate)$720,000 – ($825,000 ×40%) = $390,000.

10. c Conceptual.11. a Conceptual.

Chapter 20 Accounting for Pensions & Post Retirement Benefits

1. The following information pertains to Hopson Co.'s pension plan:

Actuarial estimate of projected benefit obligation at 1/1/11 $72,000Assumed discount rate 10%Service costs for 2011 $18,000Pension benefits paid during 2011 $15,000

If no change in actuarial estimates occurred during 2011, Hopson's projected benefit obligation at December 31, 2011 wasa. $64,200.b. $75,000.c. $79,200.d. $82,200.

2. Interest cost included in pension expense recognized for a period by an employer sponsoring a defined-benefit pension plan represents thea. shortage between the expected and actual returns on plan assets.b. increase in the projected benefit obligation due to the passage of time.c. increase in the fair value of plan assets due to the passage of time.d. amortization of the discount on accumulated OCI (PSC).

3. Logan Corp., a company whose stock is publicly traded, provides a noncontributory defined-benefit pension plan for its employees. The company's actuary has provided the following information for the year ended December 31, 2011:

Projected benefit obligation $600,000Accumulated benefit obligation 525,000Fair value of plan assets 825,000Service cost 240,000Interest on projected benefit obligation 24,000Amortization of prior service cost 60,000Expected and actual return on plan assets 82,500

The market-related asset value equals the fair value of plan assets. No contributions have been made for 2011 pension cost. In its December 31, 2011 balance sheet, Logan should report a pension asset / liability ofa. Pension liability of $600,000b. Pension asset of $824,000c. Pension asset of $225,000d. Pension liability of $525,000

4. Seigel Co. maintains a defined-benefit pension plan for its employees. At each balance sheet date, Yeager should report a pension asset / liability equal to thea. accumulated benefit obligation.b. projected benefit obligation.c. accumulated benefit obligation.d. funded status relative to the projected benefit obligation.

5. Ohlman, Inc. maintains a defined-benefit pension plan for its employees. As of December 31, 2011, the market value of the plan assets is less than the accumulated benefit obligation. The projected benefit obligation exceeds the accumulated benefit obligation. In its balance sheet as of December 31, 2011, Ohlman should report a liability in the amount of thea. excess of the projected benefit obligation over the fair value of the plan assets.b. excess of the accumulated benefit obligation over the fair value of the plan assets.c. projected benefit obligation.d. accumulated benefit obligation.

6. At December 31, 2011, the following information was provided by the Vargas Corp. pension plan administrator:

Fair value of plan assets $4,500,000Accumulated benefit obligation 5,580,000Projected benefit obligation 7,200,000

What is the amount of the pension liability that should be shown on Vargas' December 31, 2011 balance sheet?a. $7,200,000b. $2,700,000c. $1,620,000d. $1,080,000

Multiple Choice Answers—CPA AdaptedItem Ans. Item Ans. Item Ans.

1. d 3. c 5. a2. b 4. d 6. b

No. Answer Derivation1. d $72,000 + $18,000 + ($72,000 × .10) – $15,000 = $82,200.

2. b Conceptual.

3. c $825,000 - $600,000 = $225,000.

4. d Conceptual.

5. a Conceptual.

6. b $7,200,000 – $4,500,000 = $2,700,000.

Chapter 21 –Accounting for Leases1. Lease A does not contain a bargain purchase option, but the lease term is equal to 90

percent of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How should the lessee classify these leases?

Lease A Lease B a. Operating lease Capital leaseb. Operating lease Operating leasec. Capital lease Capital leased. Capital lease Operating lease

2. On December 31, 2011, Burton, Inc. leased machinery with a fair value of $840,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of $160,000 beginning December 31, 2011. The lease is appropriately accounted for by Burton as a capital lease. Burton's incremental borrowing rate is 11%. Burton knows the interest rate implicit in the lease payments is 10%.

The present value of an annuity due of 1 for 6 years at 10% is 4.7908.The present value of an annuity due of 1 for 6 years at 11% is 4.6959.

In its December 31, 2011 balance sheet, Burton should report a lease liability ofa. $606,528.b. $680,000.c. $751,344.d. $766,528.

3. On December 31, 2010, Harris Co. leased a machine from Catt, Inc. for a five-year period. Equal annual payments under the lease are $630,000 (including $30,000 annual executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2010, and the second payment was made on December 31, 2011. The five lease payments are discounted at 10% over the lease term. The present value of minimum lease payments at the inception of the lease and before the first annual payment was $2,502,000. The lease is appropriately accounted for as a capital lease by Harris. In its December 31, 2011 balance sheet, Harris should report a lease liability ofa. $1,902,000.b. $1,872,000.c. $1,711,800.d. $1,492,200.

4. A lessee had a ten-year capital lease requiring equal annual payments. The reduction of the lease liability in year 2 should equala. the current liability shown for the lease at the end of year 1.b. the current liability shown for the lease at the end of year 2.c. the reduction of the lease liability in year 1.d. one-tenth of the original lease liability.

Use the following information for questions 5 and 6.

On January 2, 2011, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press. The lease stipulated annual payments of $150,000 starting at the end of the first year, with title passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all of its plant assets. Aggregate lease payments were determined to have a present value of $900,000, based on implicit interest of 10%.

5. In its 2011 income statement, what amount of interest expense should Hernandez report from this lease transaction?a. $0b. $56,250c. $75,000d. $90,000

6. In its 2011 income statement, what amount of depreciation expense should Hernandez report from this lease transaction?a. $150,000b. $100,000c. $90,000d. $60,000

7. In a lease that is recorded as a sales-type lease by the lessor, interest revenuea. should be recognized in full as revenue at the lease's inception.b. should be recognized over the period of the lease using the straight-line method.c. should be recognized over the period of the lease using the effective interest

method.d. does not arise.

8. Torrey Co. manufactures equipment that is sold or leased. On December 31, 2011, Torrey leased equipment to Dalton for a five-year period ending December 31, 2016, at which date ownership of the leased asset will be transferred to Dalton. Equal payments under the lease are $220,000 (including $20,000 executory costs) and are due on December 31 of each year. The first payment was made on December 31, 2011. Collectibility of the remaining lease payments is reasonably assured, and Torrey has no material cost uncertainties. The normal sales price of the equipment is $770,000, and cost is $600,000. For the year ended December 31, 2011, what amount of income should Torrey realize from the lease transaction?a. $170,000b. $220,000c. $230,000d. $330,000

*9. Jamar Co. sold its headquarters building at a gain, and simultaneously leased back the building. The lease was reported as a capital lease. At the time of the sale, the gain should be reported asa. operating income.b. an extraordinary item, net of income tax.c. a separate component of stockholders' equity.d. a deferred gain.

*10. On December 31, 2011, Haden Corp. sold a machine to Ryan and simultaneously leased it back for one year. Pertinent information at this date follows:

Sales price $900,000Carrying amount 825,000Present value of reasonable lease rentals

($7,500 for 12 months @ 12%) 85,000Estimated remaining useful life 12 years

In Haden’s December 31, 2011 balance sheet, the deferred profit from the sale of this machine should bea. $85,000.b. $75,000.c. $10,000.d. $0.


1. c 3. a 5. d 7. c *9. d2. a 4. a 6. d 8. a *10 d

No. Answer Derivation1. c Conceptual.2. a ($160,000 × 4.7908) – $160,000 = $606,528.

3. a $2,502,000 – $630,000 + $30,000 = $1,902,000 (2010).

$1,902,000 – [$600,000 – ($1,902,000 × .10)] = $1,492,200 (2011).

4. a Conceptual.

5. d $900,000 × .10 = $90,000.

6. d $900,000 ÷ 15 = $60,000.

7. c Conceptual.

8. a $770,000 – $600,000 = $170,000.

*9. d Conceptual.

*10. d = 9.44%, < 10% of FV of asset it is a minor leaseback.

Chapter 22-Accounting Changes and Error Analysis

1. Which of the following should be reported as a prior period adjustment?Change in Change from

Estimated Lives Unaccepted Principleof Depreciable Assets to Accepted Principle

a. Yes Yesb. No Yesc. Yes Nod. No No

2. On December 31, 2011, Grantham, Inc. appropriately changed its inventory valuation method to FIFO cost from weighted-average cost for financial statement and income tax purposes. The change will result in a $1,500,000 increase in the beginning inventory at January 1, 2011. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings isa. $0.b. $450,000.c. $1,050,000.d. $1,500,000.

3. On January 1, 2011, Frost Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in an $800,000 increase in the January 1, 2011 inventory. Assume that the income tax rate for all years is 30%. The cumulative effect of the accounting change should be reported by Frost in its 2011a. retained earnings statement as a $560,000 addition to the beginning balance.b. income statement as a $560,000 cumulative effect of accounting change.c. retained earnings statement as an $800,000 addition to the beginning balance.d. income statement as an $800,000 cumulative effect of accounting change.

4. On January 1, 2008, Lake Co. purchased a machine for $792,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 1, 2011, Lake determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $72,000. An accounting change was made in 2011 to reflect these additional data. The accumulated depreciation for this machine should have a balance at December 31, 2011 ofa. $438,000.b. $462,000.c. $480,000.d. $528,000.

5. On January 1, 2008, Hess Co. purchased a patent for $595,000. The patent is being amortized over its remaining legal life of 15 years expiring on January 1, 2023. During 2011, Hess determined that the economic benefits of the patent would not last longer than ten years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2011?a. $357,000b. $408,000c. $420,000d. $436,375

6. During 2010, a textbook written by Mercer Co. personnel was sold to Roark Publishing, Inc., for royalties of 10% on sales. Royalties are receivable semiannually on March 31, for sales in July through December of the prior year, and on September 30, for sales in January through June of the same year.

Royalty income of $108,000 was accrued at 12/31/10 for the period July-December 2010.

Royalty income of $120,000 was received on 3/31/11, and $156,000 on 9/30/11. Mercer learned from Roark that sales subject to royalty were estimated at

$1,620,000 for the last half of 2011.In its income statement for 2011, Mercer should report royalty income ata. $276,000.b. $288,000.c. $318,000.d. $330,000.

7. On January 1, 2010, Janik Corp. acquired a machine at a cost of $500,000. It is to be depreciated on the straight-line method over a five-year period with no residual value. Because of a bookkeeping error, no depreciation was recognized in Janik's 2010 financial statements. The oversight was discovered during the preparation of Janik's 2011 financial statements. Depreciation expense on this machine for 2011 should bea. $0.b. $100,000.c. $125,000.d. $200,000.

8. On December 31, 2011, special insurance costs, incurred but unpaid, were not recorded. If these insurance costs were related to work in process, what is the effect of the omission on accrued liabilities and retained earnings in the December 31, 2011 balance sheet?

Accrued Liabilities Retained Earningsa. No effect No effectb. No effect Overstatedc. Understated No effectd. Understated Overstated

9. Black, Inc. is a calendar-year corporation whose financial statements for 2010 and 2011 included errors as follows:

Year Ending Inventory Depreciation Expense2010 $162,000 overstated $135,000 overstated2011 54,000 understated 45,000 understated

Assume that purchases were recorded correctly and that no correcting entries were made at December 31, 2010, or at December 31, 2011. Ignoring income taxes, by how much should Black's retained earnings be retroactively adjusted at January 1, 2012?a. $144,000 increaseb. $36,000 increasec. $18,000 decreased. $9,000 increase


1. b 3. a 5. b 7. b 9. a2. c 4. a 6. d 8. c

No. Answer Derivation1. b Conceptual.

2. c $1,500,000 × (1 – .3) = $1,050,000.

3. a $800,000 × (1 – .3) = $560,000.

4. a $792,000 × 3/8 = $297,000$297,000 + [($792,000 – $297,000 – $72,000) × 1/3] = $438,000.

5. b $595,000 × 3/15 = $119,000$595,000 – $119,000 – [($595,000 – $119,000) × 1/7] = $408,000.

6. d ($120,000 – $108,000) + $156,000 + ($1,620,000 × .10) = $330,000.

7. b $500,000 ÷ 5 = $100,000.

8. c Conceptual.

9. a $54,000 (u) + $135,000 (u) – $45,000 (o) = $144,000 (u).

Chapter 23- Statement of Cash Flows


A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the balance.

1. In a statement of cash flows, what amount is included in investing activities for the above transaction?a. Cash paymentb. Acquisition pricec. Zerod. Mortgage amount

2. In a statement of cash flows, what amount is included in financing activities for the above transaction?a. Cash paymentb. Acquisition pricec. Zerod. Mortgage amount


Smiley Corp.'s transactions for the year ended December 31, 2011 included the following: Purchased real estate for $550,000 cash which was borrowed from a bank. Sold available-for-sale securities for $500,000. Paid dividends of $600,000. Issued 500 shares of common stock for $250,000. Purchased machinery and equipment for $125,000 cash. Paid $450,000 toward a bank loan. Reduced accounts receivable by $100,000. Increased accounts payable $200,000.

3. Smiley's net cash used in investing activities for 2011 was a. $675,000.b. $375,000.c. $175,000.d. $50,000.

4. Smiley's net cash used in financing activities for 2011 wasa. $50,000.b. $250,000.c. $450,000.d. $500,000.


Peavy Corp.'s transactions for the year ended December 31, 2011 included the following:

Acquired 50% of Gant Corp.'s common stock for $180,000 cash which was borrowed from a bank.

Issued 5,000 shares of its preferred stock for land having a fair value of $320,000. Issued 500 of its 11% debenture bonds, due 2016, for $392,000 cash. Purchased a patent for $220,000 cash. Paid $120,000 toward a bank loan. Sold available-for-sale securities for $796,000. Had a net increase in returnable customer deposits (long-term) of $88,000.

5. Peavy’s net cash provided by investing activities for 2011 wasa. $296,000.b. $396,000.c. $476,000.d. $616,000.

6. Peavy’s net cash provided by financing activities for 2011 wasa. $452,000.b. $540,000.c. $572,000.d. $660,000.

Use the following information for questions 7 through 9.

Jamison Corp.'s balance sheet accounts as of December 31, 2011 and 2010 and information relating to 2011 activities are presented below.

December 31, 2011 2010

AssetsCash $ 440,000 $ 200,000Short-term investments 600,000 —Accounts receivable (net) 1,020,000 1,020,000Inventory 1,380,000 1,200,000Long-term investments 400,000 600,000Plant assets 3,400,000 2,000,000Accumulated depreciation (900,000) (900,000)Patent 180,000 200,000

Total assets $6,520,000 $4,320,000Liabilities and Stockholders' EquityAccounts payable and accrued liabilities $1,660,000 $1,440,000Notes payable (nontrade) 580,000 —Common stock, $10 par 1,600,000 1,400,000Additional paid-in capital 800,000 500,000Retained earnings 1,880,000 980,000

Total liabilities and stockholders' equity $6,520,000 $4,320,000

Information relating to 2011 activities: Net income for 2011 was $1,500,000. Cash dividends of $600,000 were declared and paid in 2011. Equipment costing $1,000,000 and having a carrying amount of $320,000 was sold in 2011

for $360,000.

A long-term investment was sold in 2011 for $320,000. There were no other transactions affecting long-term investments in 2011.

20,000 shares of common stock were issued in 2011 for $25 a share. Short-term investments consist of treasury bills maturing on 6/30/12.

7. Net cash provided by Jamison’s 2011 operating activities wasa. $1,500,000.b. $2,120,000.c. $2,080,000.d. $2,160,000.

8. Net cash used in Jamison’s 2011 investing activities wasa. $2,320,000.b. $1,820,000.c. $1,680,000.d. $1,720,000.

9. Net cash provided by Jamison’s 2011 financing activities wasa. $480,000.b. $520,000.c. $1,080,000.d. $1,680,000.

10. Foxx Corp.'s comparative balance sheet at December 31, 2011 and 2010 reported accumulated depreciation balances of $800,000 and $600,000, respectively. Property with a cost of $50,000 and a carrying amount of $38,000 was the only property sold in 2011. Depreciation charged to operations in 2011 wasa. $188,000.b. $200,000.c. $212,000.d. $224,000.

11. Nagel Co.'s prepaid insurance was $90,000 at December 31, 2011 and $45,000 at December 31, 2010. Insurance expense was $36,000 for 2011 and $27,000 for 2010. What amount of cash disbursements for insurance would be reported in Nagel's 2011 net cash provided by operating activities presented on a direct basis?a. $99,000.b. $81,000.c. $54,000.d. $36,000.


1. a 3. c 5. b 7. c 9. a 11. b2. c 4. b 6. b 8. a 10. c

No. Answer Derivation

1. a Conceptual.

2. c Conceptual.

3. c ($550,000) + $500,000 – $125,000 = ($175,000).

4. b $550,000 – $600,000 + $250,000 – $450,000 = ($250,000).

5. b ($180,000) – $220,000 + $796,000 = $396,000.

6. b $180,000 + $392,000 – $120,000 + $88,000 = $540,000.

7. c $1,500,000 – $180,000 + ($900,000 – $900,000 + $680,000) - ($360,000 – $320,000) + $20,000 + $220,000 – ($320,000 – $200,000) = $2,080,000.

8. a $320,000 + $360,000 – ($3,400,000 + $1,000,000 – $2,000,000) – $600,000 = $2,320,000.

9. a 20,000 × $25 = $500,000$500,000 + $580,000 – $600,000 = $480,000.

10. c $800,000 – $600,000 + ($50,000 – $38,000) = $212,000.

11. b $90,000 + $36,000 – $45,000 = $81,000.

Chapter 24- Full Disclosure in Financial Reporting

1. Which of the following facts concerning plant assets should be included in the summary of significant accounting policies?

Depreciation Method Compositiona. No Yesb. Yes Yesc. Yes Nod. No No

2. Farr, Inc. is a multidivisional corporation which has both intersegment sales and sales to unaffiliated customers. Farr should report segment financial information for each division meeting which of the following criteria?a. Segment profit or loss is 10% or more of consolidated profit or loss.b. Segment profit or loss is 10% or more of combined profit or loss of all company

segments.c. Segment revenue is 10% or more of combined revenue of all the company

segments.d. Segment revenue is 10% or more of consolidated revenue.

3. Unruh Corp. and its divisions are engaged solely in manufacturing operations. The following data (consistent with prior years' data) pertain to the industries in which operations were conducted for the year ended December 31, 2011.

AssetsIndustry Revenue Profit 12/31/11

A $ 8,000,000 $1,320,000 $16,000,000B 6,400,000 1,120,000 14,000,000C 4,800,000 960,000 10,000,000D 2,400,000 440,000 5,200,000E 3,400,000 540,000 5,600,000F 1,200,000 180,000 2,400,000

$26,200,000 $4,560,000 $53,200,000

In its segment information for 2011, how many reportable segments does Unruh have?a. Threeb. Fourc. Fived. Six

4. The following information pertains to Nixon Corp. and its divisions for the year ended December 31, 2011.

Sales to unaffiliated customers $2,500,000Intersegment sales of products similar to those sold to

unaffiliated customers 750,000Interest earned on loans to other operating segments 50,000

Nixon and all of its divisions are engaged solely in manufacturing operations. Nixon has a reportable segment if that segment's revenue exceedsa. $330,000.b. $325,000.c. $255,000.d. $250,000.

5. Advertising costs may be accrued or deferred to provide an appropriate expense in each period for

Interim Year-endFinancial Reporting Financial Reporting

a. Yes Nob. Yes Yesc. No Nod. No Yes

6. Mayo Corp. has estimated that total depreciation expense for the year ending December 31, 2011 will amount to $300,000, and that 2011 year-end bonuses to employees will total $600,000. In Mayo's interim income statement for the six months ended June 30, 2011, what is the total amount of expense relating to these two items that should be reported?a. $0.b. $150,000.c. $450,000.d. $900,000.

7. Fina Corp. had the following transactions during the quarter ended March 31, 2011:

Loss from hurricane damage $350,000Payment of fire insurance premium for calendar year 2011 500,000

What amount should be included in Fina's income statement for the quarter ended March 31, 2011?

Extraordinary Loss Insurance Expensea. $350,000 $500,000b. $350,000 $125,000c. $87,500 $125,000d. $0 $500,000

8. For interim financial reporting, an extraordinary gain occurring in the second quarter should bea. recognized ratably over the last three quarters.b. recognized ratably over all four quarters with the first quarter being restated.c. recognized in the second quarter.d. disclosed by note only in the second quarter.

*9. How is the average inventory used in the calculation of each of the following?Acid-Test (Quick) Ratio Inventory Turnover Ratio

a. Numerator Numeratorb. Numerator Denominatorc. Not Used Denominatord. Not Used Numerator

*10. Which of the following ratios is(are) useful in assessing a company's ability to meet current maturing or short-term obligations?

Acid-Test Ratio Debt to Total Assets Ratioa. No Nob. No Yesc. Yes Yesd. Yes No

*11. Which of the following ratios should be used in evaluating the effectiveness with which the company uses its assets?

Receivables Turnover Payout Ratioa. Yes Yesb. No Noc. Yes Nod. No Yes

Multiple Choice Answers—CPA AdaptedItem Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans

.1. c 3. b 5. b 7. b *9. c *11. c2. c 4. b 6. c 8. c *10. d

No. Answer Derivation1. c Conceptual.

2. c Conceptual.

3. b Revenue test: $26,200,000 × 10% = $2,620,000Profit test: $4,560,000 × 10% = $456,000Asset test: $53,200,000 × 10% = $5,320,000A, B, C, E.

4. b ($2,500,000 + $750,000) × 10% = $325,000.

5. b Conceptual.

6. c ($300,000 + $600,000) ÷ 2 = $450,000.

7. b Extraordinary loss = $350,000Insurance expense = $500,000 ÷ 4 = $125,000.

8. c Conceptual.

*9. c Conceptual.

*10. d Conceptual.

*11. c Conceptual.