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Exam #2 Multiple Choice Exam Preparation Questions – 100 questions

! 40 of these questions will be on your test

! 10 multiple choice questions from Chs 13-16 will be on your test

! There will not be any problems on the test. You will have 2 hours to complete the test

1. During 2010, Woods Company purchased 20,000 shares of Holmes Corp. common stock for

$315,000 as an available-for-sale investment. The fair value of these shares was $300,000 at December 31, 2010. Woods sold all of the Holmes stock for $17 per share on December 3, 2011, incurring $14,000 in brokerage commissions. Woods Company should report a realized gain on the sale of stock in 2011 of

A) $11,000. B) $25,000. C) $26,000. D) $40,000. Use the following to answer question 2. Instrument Corp. has the following investments which were held throughout 2010–2011:

Market Value Cost 12/31/10 12/31/11 Trading $300,000 $400,000 $380,000 Available-for-sale 300,000 320,000 360,000

2. What amount would be reported as accumulated other comprehensive income related to investments in Instrument Corp.'s balance sheet at December 31, 2010?

A) $40,000 gain. B) $60,000 gain. C) $20,000 gain. D) $120,000 gain.

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3. On December 31, 2010, Patel Co. purchased equity securities as trading securities. Pertinent

data are as follows: Fair Value Security Cost At 12/31/11 A $132,000 $117,000 B 168,000 186,000 C 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. Use the following to answer question 4. Tracy Co. owns 4,000 of the 10,000 outstanding shares of Penn Corp. common stock. During

2010, Penn earns $120,000 and pays cash dividends of $40,000. 4. Tracy should report investment revenue for 2010 of A) $16,000. B) $32,000. C) $40,000. D) $48,000. 5. 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.

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6. The following information relates to Windom Company for 2010:

Realized gain on sale of available-for-sale securities $15,000 Unrealized holding gains arising during the period on available-for-sale securities 35,000 Reclassification adjustment for gains included in net income 10,000 Windom's 2010 other comprehensive income is A) $25,000. B) $40,000. C) $50,000. D) $60,000. 7. Kern Company purchased bonds with a face amount of $400,000 between interest payment

dates. Kern purchased the bonds at 102, paid brokerage costs of $6,000, and paid accrued interest for three months of $10,000. The amount to record as the cost of this long-term investment in bonds is

A) $424,000. B) $414,000. C) $408,000. D) $400,000.

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Use the following to answer questions 8-10.

The summarized balance sheets of Goebel Company and Dobbs Company as of December 31, 2010 are as follows:

Goebel Company Balance Sheet

December 31, 2010 Assets Liabilities $ 150,000 Capital stock 600,000 Retained earnings 450,000 Total equities $1,200,000

Dobbs Company

Balance Sheet December 31, 2010 Assets Liabilities $225,000 Capital stock 555,000 Retained earnings 120,000 Total equities $900,000

8. If Goebel Company acquired a 20% interest in Dobbs Company on December 31, 2010 for

$195,000 and the fair value method of accounting for the investment were used, the amount of the debit to Investment in Dobbs Company Stock would have been

A) $135,000. B) $111,000. C) $195,000. D) $180,000. 9. If Goebel Company acquired a 20% interest in Dobbs Company on December 31, 2009 for

$135,000 and during 2011 Dobbs Company had net income of $75,000 and paid a cash dividend of $30,000, applying the fair value method would give a debit balance in the Investment in Dobbs Company Stock account at the end of 2011 of

A) $111,000. B) $135,000. C) $150,000. D) $144,000. 10. If Goebel Company acquired a 30% interest in Dobbs Company on December 31, 2010 for

$202,500 and during 2011 Dobbs Company had net income of $75,000 and paid a cash dividend of $30,000, applying the equity method would give a debit balance in the Investment in Dobbs Company Stock account at the end of 2011 of

A) $202,500. B) $216,000. C) $225,000. D) $217,500.

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11. 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. Use the following to answer question 12. Landis Co. purchased $500,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2011, with

interest payable on July 1 and January 1. The bonds sold for $520,790 at an effective interest rate of 7%. Using the effective-interest method, Landis Co. decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2011 and December 31, 2011 by the amortized premiums of $1,770 and $1,830, respectively.

12. At December 31, 2011, the fair value of the Ritter, Inc. bonds was $530,000. What should

Landis Co. report as other comprehensive income and as a separate component of stockholders' equity?

A) $12,810. B) $9,210. C) $3,600. D) No entry should be made. 13. On January 2, 2010 Pod Company purchased 25% of the outstanding common stock of

Jobs, Inc. and subsequently used the equity method to account for the investment. During 2010 Jobs, Inc. reported net income of $420,000 and distributed dividends of $180,000. The ending balance in the Investment in Pod Company account at December 31, 2010 was $320,000 after applying the equity method during 2010. What was the purchase price Pod Company paid for its investment in Jobs, Inc?

A) $170,000 B) $260,000 C) $380,000 D) $470,000

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14. At December 31, 2011, Atlanta Co. has a stock portfolio valued at $40,000. Its cost was

$33,000. If the Securities Fair Value Adjustment (Available-for-Sale) has a debit balance of $2,000, which of the following journal entries is required at December 31, 2011?

A) Securities Fair Value Adjustment 7,000 (Available-for-Sale) Unrealized Holding Gain or

Loss-Equity 7,000

B) Securities Fair Value Adjustment 5,000 (Available-for-Sale) Unrealized Holding Gain or

Loss-Equity 5,000

C) Unrealized Holding Gain or Loss-Equity

7,000

Securities Fair Value Adjustment 7,000 (Available-for-Sale)

D) Unrealized Holding Gain or Loss-Equity

5,000

Securities Fair Value Adjustment 5,000 (Available-for-Sale)

15. 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 16. 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

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Use the following to answer question 17. Harrison Co. owns 20,000 of the 50,000 outstanding shares of Taylor, Inc. common stock.

During 2011, Taylor earns $800,000 and pays cash dividends of $640,000. 17. If the beginning balance in the investment account was $500,000, the balance at December

31, 2011 should be A) $820,000. B) $660,000. C) $564,000. D) $500,000. Use the following to answer question 18. Brown Corporation earns $240,000 and pays cash dividends of $80,000 during 2010. Dexter

Corporation owns 3,000 of the 10,000 outstanding shares of Brown. 18. How much investment income should Dexter report in 2010? A) $80,000. B) $72,000. C) $48,000. D) $240,000. 19. 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-Sale Securities Securities Aggregate cost $90,000 $110,000 Aggregate 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.

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Use the following to answer question 20. Blanco Company purchased 200 of the 1,000 outstanding shares of Darby Company's common

stock for $300,000 on January 2, 2010. During 2010, Darby Company declared dividends of $50,000 and reported earnings for the year of $200,000.

20. If Blanco Company uses the equity method of accounting for its investment in Darby

Company, its Investment in Darby Company account at December 31, 2010 should be A) $290,000. B) $300,000. C) $330,000. D) $340,000. Use the following to answer question 21. 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.

21. 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. Use the following to answer question 22. On January 3, 2010, Moss Co. acquires $100,000 of Adam Company's 10-year, 10% bonds at a

price of $106,418 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity.

22. Assuming that Moss Co. uses the straight-line method, what is the amount of premium

amortization that would be recognized in 2012 related to these bonds? A) $642 B) $422 C) $460 D) $502

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23. On October 1, 2010, Renfro Co. purchased to hold to maturity, 1,000, $1,000, 9% bonds for

$990,000 which includes $15,000 accrued interest. The bonds, which mature on February 1, 2019, pay interest semiannually on February 1 and August 1. Renfro uses the straight-line method of amortization. The bonds should be reported in the December 31, 2010 balance sheet at a carrying value of

A) $975,000. B) $975,750. C) $990,000. D) $990,250. 24. During 2010 Logic Company purchased 4,000 shares of Midi, Inc. for $30 per share. The

investment was classified as a trading security. During the year Logic Company sold 1,000 shares of Midi, Inc. for $35 per share. At December 31, 2010 the market price of Midi, Inc.'s stock was $28 per share. What is the total amount of gain/(loss) that Logic Company will report in its income statement for the year ended December 31, 2010 related to its investment in Midi, Inc. stock?

A) ($8,000) B) $5,000 C) ($3,000) D) ($1,000) 25. On October 1, 2010, Menke Co. purchased to hold to maturity, 200, $1,000, 9% bonds for

$208,000. An additional $6,000 was paid for accrued interest. Interest is paid semiannually on December 1 and June 1 and the bonds mature on December 1, 2014. Menke uses straight-line amortization. Ignoring income taxes, the amount reported in Menke's 2010 income statement from this investment should be

A) $4,500. B) $4,020. C) $4,980. D) $5,460. 26. 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.

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27. 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. Use the following to answer question 28. Cooper Construction Company had a contract starting April 2010, to construct a $9,000,000

building that is expected to be completed in September 2012, at an estimated cost of $8,250,000. At the end of 2010, the costs to date were $3,795,000 and the estimated total costs to complete had not changed. The progress billings during 2010 were $1,800,000 and the cash collected during 2010 was 1,200,000.

28. For the year ended December 31, 2010, Cooper would recognize gross profit on the building

of: A) $316,250 B) $345,000 C) $405,000 D) $0 29. Monroe Construction Company uses the percentage-of-completion method of accounting. In

2010, Monroe began work on a contract it had received which provided for a contract price of $15,000,000. Other details follow: 2010 Costs incurred during the year $7,200,000 Estimated costs to complete as of December 31 4,800,000 Billings during the year 6,600,000 Collections during the year 3,900,000

What should be the gross profit recognized in 2010? A) $600,000 B) $7,800,000 C) $1,800,000 D) $3,000,000

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30. Adler Construction Co. uses the percentage-of-completion method. In 2010, Adler began

work on a contract for $3,300,000 and it was completed in 2011. Data on the costs are: Year Ended December 31 2010 2011 Costs incurred $1,170,000 $840,000 Estimated costs to complete 780,000 —

For the years 2010 and 2011, Adler should recognize gross profit of

2010 2011

A) $0 $1,290,000

B) $774,000 $516,000

C) $810,000 $480,000

D) $810,000 $1,290,000 Use the following to answer question 31. Gomez, Inc. began work in 2010 on contract #3814, which provided for a contract price of

$7,200,000. Other details follow:

2010 2011 Costs incurred during the year $1,200,000 $3,675,000 Estimated costs to complete, as of December 31 3,600,000 0 Billings during the year 1,350,000 5,400,000 Collections during the year 900,000 5,850,000

31. Assume that Gomez uses the completed-contract method of accounting. The portion of the

total gross profit to be recognized as income in 2011 is A) $900,000. B) $1,350,000. C) $2,325,000. D) $7,200,000.

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Use the following to answer question 32. Kiner, Inc. began work in 2010 on a contract for $8,400,000. Other data are as follows:

2010 2011

Costs incurred to date $3,600,000 $5,600,000 Estimated costs to complete 2,400,000 — Billings to date 2,800,000 8,400,000 Collections to date 2,000,000 7,200,000

32. If Kiner uses the completed-contract method, the gross profit to be recognized in 2011 is A) $1,360,000. B) $2,800,000. C) $1,400,000. D) $5,600,000. 33. Remington Construction Company uses the percentage-of-completion method. During

2010, the company entered into a fixed-price contract to construct a building for Sherman Company for $30,000,000. The following details pertain to the contract: At December 31, 2010 At December 31, 2011 Percentage of completion 25% 60% Estimated total cost of contract

$22,500,000 $25,000,000

Gross profit recognized to date

1,875,000 3,000,000

The amount of construction costs incurred during 2011 was A) $15,000,000. B) $9,375,000. C) $5,625,000. D) $2,500,000.

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Use the following to answer question 34. Eilert Construction Company had a contract starting April 2011, to construct a $15,000,000

building that is expected to be completed in September 2012, at an estimated cost of $13,750,000. At the end of 2011, the costs to date were $6,325,000 and the estimated total costs to complete had not changed. The progress billings during 2011 were $3,000,000 and the cash collected during 2011 was $2,000,000. Eilert uses the percentage-of-completion method.

34. At December 31, 2011, Eilert would report Construction in Process in the amount of A) $6,900,000. B) $6,325,000. C) $5,900,000. D) $575,000. 35. Hiser Builders, Inc. is using the completed-contract method for a $5,600,000 contract that

will take two years to complete. Data at December 31, 2010, the end of the first year, are as follows: Costs incurred to date $2,560,000 Estimated costs to complete 3,280,000 Billings to date 2,400,000 Collections to date 2,000,000

The gross profit or loss that should be recognized for 2010 is A) $0. B) a $240,000 loss. C) a $120,000 loss. D) a $105,600 loss.

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Use the following to answer question 36. Gorman Construction Co. began operations in 2010. Construction activity for 2010 is shown

below. Gorman uses the completed-contract method. Billings Collections Estimated Contract Through Through Costs to Costs to Contract Price 12/31/10 12/31/10 12/31/10 Complete 1 $3,200,000 $3,150,000 $2,600,000 $2,150,000 — 2 3,600,000 1,500,000 1,000,000 820,000 $1,880,000 3 3,300,000 1,900,000 1,800,000 2,250,000 1,200,000

36. Which of the following should be shown on the balance sheet at December 31, 2010 related

to Contract 2? A) Inventory, $680,000 B) Inventory, $820,000 C) Current liability, $680,000 D) Current liability, $1,500,000 37. Oliver Co. uses the installment-sales method. When an account had a balance of $8,400, no

further collections could be made and the dining room set was repossessed. At that time, it was estimated that the dining room set could be sold for $2,400 as repossessed, or for $3,000 if the company spent $300 reconditioning it. The gross profit rate on this sale was 70%. The gain or loss on repossession was a

A) $5,880 loss. B) $6,000 loss. C) $600 gain. D) $180 gain. 38. Spicer Corporation has a normal gross profit on installment sales of 30%. A 2009 sale

resulted in a default early in 2011. At the date of default, the balance of the installment receivable was $24,000, and the repossessed merchandise had a fair value of $13,500. Assuming the repossessed merchandise is to be recorded at fair value, the gain or loss on repossession should be

A) $0. B) a $3,300 loss. C) a $3,300 gain. D) a $7,500 loss.

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39. Fryman Furniture uses the installment-sales method. No further collections could be made

on an account with a balance of $18,000. It was estimated that the repossessed furniture could be sold as is for $5,400, or for $6,300 if $300 were spent reconditioning it. The gross profit rate on the original sale was 40%. The loss on repossession was

A) $4,800. B) $4,500. C) $12,000. D) $12,600. 40. Sutton Company sells plasma-screen televisions on an installment basis and appropri-ately

uses the installment-sales method of accounting. A customer with an account balance of $5,600 refuses to make any more payments and the merchandise is repossessed. The gross profit rate on the original sale is 40%. Sutton estimates that the television can be sold as is for $1,750, or for $2,100 if $140 is spent to refurbish it. The loss on repossession is

A) $3,850. B) $2,240. C) $1,610. D) $1,400. Use the following to answer question 41. During 2010, Martin Corporation sold merchandise costing $2,100,000 on an installment basis

for $3,000,000. The cash receipts related to these sales were collected as follows: 2010, $1,200,000; 2011, $1,050,000; 2012, $750,000.

41. What is the rate of gross profit on the installment sales made by Martin Corporation during

2010? A) 30% B) 40% C) 60% D) 70%

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Use the following to answer question 42. Coaster manufactures and sells logging equipment. Due to the nature of its business, Coaster is

unable to reliably predict bad debts. During 2010, Coaster sold equipment costing $2,400,000 for $3,600,000. The terms of the sale were 20% down, with equal payments due quarterly over the next 3 years. All payments for 2010 were made on schedule. Round answers to two places.

42. Assuming that Coaster uses the cost-recovery method of accounting for its installment sales, what amount of realized gross profit will Coaster report in its income statement for the year ended December 31, 2011?

A) $0 B) $240,000 C) $316,800 D) $960,000 43. On January 1, 2010, Shaw Co. sold land that cost $210,000 for $280,000, receiving a note

bearing interest at 10%. The note will be paid in three annual installments of $112,595 starting on December 31, 2010. Because collection of the note is very uncertain, Shaw will use the cost-recovery method. How much revenue from this sale should Shaw recognize in 2010?

A) $0 B) $21,000 C) $28,000 D) $70,000 44. On April 1, 2010 Weston, Inc. entered into a franchise agreement with a local business-man.

The franchisee paid $240,000 and gave a $160,000, 8%, 3-year note payable with interest due annually on March 31. Weston recorded the $400,000 initial franchise fee as revenue on April 1, 2010. On December 30, 2010, the franchisee decided not to open an outlet under Weston's name. Weston canceled the franchisee's note and refunded $128,000, less accrued interest on the note, of the $240,000 paid on April 1. What entry should Weston make on December 30, 2010?

A) Loss on Repossessed Franchise 128,000 Cash 128,000

B) Loss on Repossessed Franchise 118,400 Cash 118,400

C) Loss on Repossessed Franchise 278,400 Cash 118,400 Note Receivable 160,000

D) Revenue from Franchise Fees 400,000 Interest Income 9,600 Cash 118,400 Note Receivable 160,000 Revenue from Repossessed Franchise 112,000

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45. Wynne Inc. charges an initial franchise fee of $920,000, with $200,000 paid when the

agreement is signed and the balance in five annual payments. The present value of the future payments, discounted at 10%, is $545,872. The franchisee has the option to purchase $120,000 of equipment for $96,000. Wynne has substantially provided all initial services required and collectibility of the payments is reasonably assured. The amount of revenue from franchise fees is

A) $200,000. B) $721,872. C) $745,872. D) $920,000. 46. According to the FASB's conceptual framework, the process of reporting an item in the

financial statements of an entity is A) recognition. B) realization. C) allocation. D) matching. 47. 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 $1,525,000 Estimated remaining costs 1,350,000 — Billed to customer 1,200,000 2,300,000 Received from customer 1,000,000 2,400,000

Under the completed-contract method, what amount should Gates recognize as gross profit for 2011? A) $225,000 B) $312,500 C) $475,000 D) $625,000

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48. 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) $420,000 B) $432,000 C) $560,000 D) $576,000 49. 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 $720,000 Cost of installment sales 570,000 504,000 Gross profit $180,000 $216,000 Rate of gross profit 24% 30%

Balance of deferred gross profit at year end:

2010 $108,000 $ 36,000 2011 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) $720,000 B) $810,000 C) $780,000 D) $866,666 50. 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 the

A) 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.

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Use the following to answer question 51. At the beginning of 2010, Pitman Co. purchased an asset for $600,000 with an estimated useful

life of 5 years and an estimated salvage value of $50,000. For financial reporting purposes the asset is being depreciated using the straight-line method; for tax purposes the double-declining-balance method is being used. Pitman Co.'s tax rate is 40% for 2010 and all future years.

51. At the end of 2010, which of the following deferred tax accounts and balances is reported on

Pitman's balance sheet?

Account Balance

A) Deferred tax asset $52,000

B) Deferred tax liability $52,000

C) Deferred tax asset $78,000

D) Deferred tax liability

$78,000

Use the following to answer question 52. Mathis Co. at the end of 2010, its first year of operations, prepared a reconciliation between

pretax financial income and taxable income as follows: Pretax financial income $ 500,000 Estimated litigation expense 1,250,000 Installment sales (1,000,000) Taxable income $ 750,000

The estimated litigation expense of $1,250,000 will be deductible in 2012 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $500,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $500,000 current and $500,000 noncurrent. The income tax rate is 30% for all years. 52. The deferred tax liability—current to be recognized is A) $75,000. B) $225,000. C) $150,000. D) $300,000.

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Use the following to answer questions 53-54. Hopkins Co. at the end of 2010, its first year of operations, prepared a reconciliation between

pretax financial income and taxable income as follows: Pretax financial income $ 750,000 Estimated litigation expense 1,000,000 Extra depreciation for taxes (1,500,000) Taxable income $ 250,000

The estimated litigation expense of $1,000,000 will be deductible in 2011 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $500,000 in each of the next three years. The income tax rate is 30% for all years. 53. Income tax payable is A) $0. B) $75,000. C) $150,000. D) $225,000. 54. The deferred tax asset to be recognized is A) $75,000 current. B) $150,000 current. C) $225,000 current. D) $300,000 current. 55. Cross Company reported the following results for the year ended December 31, 2010, its

first year of operations: 2010 Income (per books before income taxes) $ 750,000 Taxable income 1,200,000

The disparity between book income and taxable income is attributable to a temporary difference which will reverse in 2011. What should Cross record as a net deferred tax asset or liability for the year ended December 31, 2010, assuming that the enacted tax rates in effect are 40% in 2010 and 35% in 2011? A) $180,000 deferred tax liability B) $157,500 deferred tax asset C) $180,000 deferred tax asset D) $157,500 deferred tax liability

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56. In 2010, Krause Company accrued, for financial statement reporting, estimated losses on

disposal of unused plant facilities of $1,500,000. The facilities were sold in March 2011 and a $1,500,000 loss was recognized for tax purposes. Also in 2010, Krause paid $100,000 in premiums for a two-year life insurance policy in which the company was the beneficiary. Assuming that the enacted tax rate is 30% in both 2010 and 2011, and that Krause paid $780,000 in income taxes in 2010, the amount reported as net deferred income taxes on Krause's balance sheet at December 31, 2010, should be a

A) $420,000 asset. B) $360,000 asset. C) $360,000 liability. D) $450,000 asset. 57. Horner Corporation has a deferred tax asset at December 31, 2011 of $80,000 due to the

recognition of potential tax benefits of an operating loss carryforward. The enacted tax rates are as follows: 40% for 2008–2010; 35% for 2011; and 30% for 2012 and thereafter. Assuming that management expects that only 50% of the related benefits will actually be realized, a valuation account should be established in the amount of:

A) $40,000 B) $16,000 C) $14,000 D) $12,000 Use the following to answer question 58. Mitchell Corporation prepared the following reconciliation for its first year of operations:

Pretax financial income for 2011 $ 900,000 Tax exempt interest (75,000) Originating temporary difference (225,000) Taxable income $600,000

The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2011 is 35%. 58. What amount should be reported in its 2011 income statement as the deferred portion of

income tax expense? A) $90,000 debit B) $120,000 debit C) $90,000 credit D) $105,000 credit

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59. Ewing Company sells household furniture. Customers who purchase furniture on the

installment basis make payments in equal monthly installments over a two-year period, with no down payment required. Ewing's gross profit on installment sales equals 40% of the selling price of the furniture. For financial accounting purposes, sales revenue is recognized at the time the sale is made. For income tax purposes, however, the installment method is used. There are no other book and income tax accounting differences, and Ewing's income tax rate is 30%. If Ewing's December 31, 2011, balance sheet includes a deferred tax liability of $300,000 arising from the difference between book and tax treatment of the installment sales, it should also include installment accounts receivable of

A) $2,500,000. B) $1,000,000. C) $750,000. D) $300,000. 60. Ferguson Company has the following cumulative taxable temporary differences:

12/31/11 12/31/10 $1,350,000 $960,000

The tax rate enacted for 2011 is 40%, while the tax rate enacted for future years is 30%. Taxable income for 2011 is $2,400,000 and there are no permanent differences. Ferguson's pretax financial income for 2011 is A) $3,750,000. B) $2,790,000. C) $2,010,000. D) $1,050,000. Use the following to answer question 61. Lyons Company deducts insurance expense of $84,000 for tax purposes in 2010, but the

expense is not yet recognized for accounting purposes. In 2011, 2012, and 2013, no insurance expense will be deducted for tax purposes, but $28,000 of insurance expense will be reported for accounting purposes in each of these years. Lyons Company has a tax rate of 40% and income taxes payable of $72,000 at the end of 2010. There were no deferred taxes at the beginning of 2010.

61. Assuming that income tax payable for 2011 is $96,000, the income tax expense for 2011

would be what amount? A) $129,600 B) $107,200 C) $96,000 D) $84,800

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62. The following information is available for Kessler Company after its first year of

operations: Income before taxes $250,000 Federal income tax payable $104,000 Deferred income tax (4,000) Income tax expense 100,000 Net income $150,000

Kessler estimates its annual warranty expense as a percentage of sales. The amount charged to warranty expense on its books was $95,000. Assuming a 40% income tax rate, what amount was actually paid this year for warranty claims? A) $105,000 B) $100,000 C) $95,000 D) $85,000 Use the following to answer question 63. At the beginning of 2010; Elephant, Inc. had a deferred tax asset of $4,000 and a deferred tax

liability of $6,000. Pre-tax accounting income for 2010 was $300,000 and the enacted tax rate is 40%. The following items are included in Elephant's pre-tax income: Interest income from municipal bonds $24,000 Accrued warranty costs, estimated to be paid in 2011 $52,000 Operating loss carryforward $38,000 Installment sales revenue, will be collected in 2011 $26,000 Prepaid rent expense, will be used in 2011 $12,000

63. The ending balance in Elephant, Inc's deferred tax liability at December 31, 2010 is A) $9,200 B) $15,200 C) $10,400 D) $31,200

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64. Based on the following information, compute 2011 taxable income for South Co. assuming

that its pre-tax accounting income for the year ended December 31, 2011 is $230,000.

Future taxable Temporary difference (deductible) amount

Installment sales $192,000

Depreciation $60,000

Unearned rent ($200,000)

A) $282,000 B) $178,000 C) $482,000 D) $222,000 65. Duncan Inc. uses the accrual method of accounting for financial reporting purposes and

appropriately uses the installment method of accounting for income tax purposes. Profits of $300,000 recognized for books in 2010 will be collected in the following years: Collection of Profits 2011 $ 50,000 2012 $100,000 2013 $150,000

The enacted tax rates are: 40% for 2010, 35% for 2011, and 30% for 2012 and 2013. Taxable income is expected in all future years. What amount should be included in the December 31, 2010, balance sheet for the deferred tax liability related to the above temporary difference? A) $17,500 B) $75,000 C) $92,500 D) $120,000 66. A reconciliation of Gentry Company's pretax accounting income with its taxable income for

2010, its first year of operations, is as follows: Pretax accounting income $3,000,000 Excess tax depreciation (90,000) Taxable income $2,910,000

The excess tax depreciation will result in equal net taxable amounts in each of the next three years. Enacted tax rates are 40% in 2010, 35% in 2011 and 2012, and 30% in 2013. The total deferred tax liability to be reported on Gentry's balance sheet at December 31, 2010, is

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A) $36,000. B) $30,000. C) $31,500. D) $27,000. Use the following to answer question 67. Rowen Corporation reported the following results for its first three years of operation:

2010 income (before income taxes) $ 100,000 2011 loss (before income taxes) (900,000) 2012 income (before income taxes) 1,000,000

There were no permanent or temporary differences during these three years. Assume a corporate tax rate of 30% for 2010 and 2011, and 40% for 2012. 67. Assuming that Wilcox elects to use the carryback provision, what income (loss) is reported

in 2011? (Assume that any deferred tax asset recognized is more likely than not to be realized.)

A) $(900,000) B) $ -0- C) $(870,000) D) $(550,000) 68. Rodd Co. reports a taxable and pretax financial loss of $400,000 for 2011. Rodd's taxable

and pretax financial income and tax rates for the last two years were: 2009 $400,000 30% 2010 400,000 35%

The amount that Rodd should report as an income tax refund receivable in 2011, assuming that it uses the carryback provisions and that the tax rate is 40% in 2011, is A) $120,000. B) $140,000. C) $160,000. D) $180,000.

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69. Munoz Corp.'s books showed pretax financial income of $1,500,000 for the year ended

December 31, 2011. In the computation of federal income taxes, the following data were considered: Gain on an involuntary conversion $650,000 (Munoz has elected to replace the property within the statutory period using total proceeds.)

Depreciation deducted for tax purposes in excess of depreciation deducted for book purposes

100,000

Federal estimated tax payments, 2011 125,000 Enacted federal tax rate, 2011 30%

What amount should Munoz report as its current federal income tax liability on its December 31, 2011 balance sheet? A) $100,000 B) $130,000 C) $225,000 D) $255,000 70. Haag Corp.'s 2011 income statement showed pretax accounting income of $750,000. To

compute the federal income tax liability, the following 2011 data are provided: Income from exempt municipal bonds $ 30,000 Depreciation deducted for tax purposes in excess of depreciation deducted for financial statement purposes

60,000

Estimated federal income tax payments made 150,000 Enacted corporate income tax rate 30%

What amount of current federal income tax liability should be included in Hagg's December 31, 2011 balance sheet? A) $48,000 B) $66,000 C) $75,000 D) $198,000

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71. On January 1, 2011, Piper Corp. purchased 40% of the voting common stock of Betz, Inc.

and appropriately accounts for its investment by the equity method. During 2011, Betz reported earnings of $360,000 and paid dividends of $120,000. Piper assumes that all of Betz's undistributed earnings will be distributed as dividends in future periods when the enacted tax rate will be 30%. Ignore the dividend-received deduction. Piper's current enacted income tax rate is 25%. The increase in Piper's deferred income tax liability for this temporary difference is

A) $72,000. B) $60,000. C) $43,200. D) $28,800. 72. Foltz Corp.'s 2010 income statement had pretax financial income of $250,000 in its first

year of operations. Foltz uses an accelerated cost recovery method on its tax return and straight-line depreciation for financial reporting. The differences between the book and tax deductions for depreciation over the five-year life of the assets acquired in 2010, and the enacted tax rates for 2010 to 2014 are as follows:

Book Over (Under) Tax Tax Rates

2010 $(50,000) 35%

2011 (65,000) 30%

2012 (15,000) 30%

2013 60,000 30%

2014 70,000 30%

There are no other temporary differences. In Foltz's December 31, 2010 balance sheet, the noncurrent deferred income tax liability and the income taxes currently payable should be

Noncurrent Deferred Income Tax Liability

Income Taxes Currently Payable

A) $39,000 $50,000

B) $39,000 $70,000

C) $15,000 $60,000

D) $15,000 $70,000

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73. Didde Corp. prepared the following reconciliation of income per books with income per tax return for the year ended December 31, 2011: Book income before income taxes $1,200,000 Add temporary difference Construction contract revenue which will reverse in 2012 160,000 Deduct temporary difference Depreciation expense which will reverse in equal

amounts in

each of the next four years (640,000) Taxable income $720,000

Didde's effective income tax rate is 34% for 2011. What amount should Didde report in its 2011 income statement as the current provision for income taxes? A) $54,400 B) $244,800 C) $408,000 D) $462,400 74. Dunn, Inc. uses the accrual method of accounting for financial reporting purposes and

appropriately uses the installment method of accounting for income tax purposes. Installment income of $900,000 will be collected in the following years when the enacted tax rates are: Collection of Income Enacted Tax Rates 2010 $ 90,000 35% 2011 180,000 30% 2012 270,000 30% 2013 360,000 25%

The installment income is Dunn's only temporary difference. What amount should be included in the deferred income tax liability in Dunn's December 31, 2010 balance sheet? A) $225,000 B) $256,500 C) $283,500 D) $315,000

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75. Wright Co., organized on January 2, 2010, had pretax accounting income of $880,000 and

taxable income of $1,600,000 for the year ended December 31, 2010 The only temporary difference is accrued product warranty costs which are expected to be paid as follows: 2011 $240,000 2012 120,000 2013 120,000 2014 240,000

The enacted income tax rates are 35% for 2010, 30% for 2011 through 2013, and 25% for 2014. If Wright expects taxable income in future years, the deferred tax asset in Wright's December 31, 2010 balance sheet should be A) $144,000. B) $168,000. C) $204,000. D) $252,000. 76. Kraft, Inc. sponsors a defined-benefit pension plan. The following data relates to the

operation of the plan for the year 2011. Service cost $ 200,000 Contributions to the plan 220,000 Actual return on plan assets 180,000 Projected benefit obligation (beginning of year) 2,400,000 Market-related and fair value of plan assets (beginning of year) 1,600,000

The expected return on plan assets and the settlement rate were both 10%. The amount of pension expense reported for 2011 is A) $200,000. B) $260,000. C) $280,000. D) $440,000.

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77. Barton, Inc. received the following information from its pension plan trustee concerning the

operation of the company's defined-benefit pension plan for the year ended December 31, 2011. January 1, 2011 December 31, 2011 Fair value of pension plan assets $4,200,000 $4,500,000 Projected benefit obligation 4,800,000 5,160,000 Accumulated benefit obligation 840,000 1,020,000 Accumulated OCI – (Gains / Losses) -0- (90,000)

The service cost component of pension expense for 2011 is $360,000 and the amortization of prior service cost due to an increase in benefits is $60,000. The settlement rate is 10% and the expected rate of return is 9%. What is the amount of pension expense for 2011? A) $360,000 B) $522,000 C) $531,000 D) $432,000 Use the following to answer question 78. The following information for Cooper Enterprises is given below:

December 31, 2011 Assets and obligations Plan assets (at fair value) $100,000 Accumulated benefit obligation 185,000 Projected benefit obligation 200,000 Other Items Pension asset / liability, January 1, 2011

5,000

Contributions 60,000

Accumulated other comprehensive loss 83,950 There were no actuarial gains or losses at January 1, 2011. The average remaining service life of employees is 10 years. 78. What is the amount that Cooper Enterprises should report as its pension liability on its

balance sheet as of December 31, 2011? A) $100,000 B) $15,000 C) $185,000 D) $200,000

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79. The following information is related to the pension plan of Long, Inc. for 2011.

Actual return on plan assets $200,000 Amortization of net gain 82,500 Amortization of prior service cost due to increase in benefits

150,000

Expected return on plan assets 230,000 Interest on projected benefit obligation 362,500 Service cost 800,000

Pension expense for 2011 is A) $1,195,000. B) $1,165,000. C) $1,030,000. D) $1,000,000. Use the following to answer questions 80-81. The following data are for the pension plan for the employees of Lockett Company.

1/1/10 12/31/10 12/31/11 Accumulated benefit obligation $7,500,000 $7,800,000 $10,200,000 Projected benefit obligation 8,100,000 8,400,000 11,100,000 Plan assets (at fair value) 6,900,000 9,000,000 9,900,000 AOCL – net loss -0- 1,440,000 1,500,000 Settlement rate (for year) 10% 9% Expected rate of return (for year) 8% 7%

Lockett's contribution was $1,260,000 in 2011 and benefits paid were $1,125,000. Lockett estimates that the average remaining service life is 15 years. 80. The actual return on plan assets in 2011 was A) $900,000. B) $765,000. C) $600,000. D) $465,000. 81. Assume that the actual return on plan assets in 2011 was $800,000. The unexpected gain on

plan assets in 2011 was A) $191,000. B) $170,000. C) $149,000. D) $107,000.

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Use the following to answer questions 82-84. On January 1, 2011, Newlin Co. has the following balances:

Projected benefit obligation $2,100,000 Fair value of plan assets 1,800,000

The settlement rate is 10%. Other data related to the pension plan for 2011 are: Service cost $180,000 Amortization of prior service costs due to increase in benefits

60,000

Contributions 300,000 Benefits paid 105,000 Actual return on plan assets 237,000 Amortization of net gain 18,000 82. The corridor for 2011 was $900,000. The amount of AOCI-net loss amortized in 2011 was A) $100,000. B) $96,000. C) $42,000. D) $36,000. 83. The balance of the projected benefit obligation at December 31, 2011 is A) $2,685,000. B) $2,385,000. C) $2,355,000. D) $2,337,000. 84. The fair value of plan assets at December 31, 2011 is A) $2,430,000. B) $2,250,000. C) $2,232,000. D) $2,214,000.

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85. Rathke, Inc. has a defined-benefit pension plan covering its 50 employees. Rathke agrees to

amend its pension benefits. As a result, the projected benefit obligation increased by $1,500,000. Rathke determined that all its employees are expected to receive benefits under the plan over the next 5 years. In addition, 20% are expected to retire or quit each year. Assuming that Rathke uses the years-of-service method of amortization for prior service cost, the amount reported as amortization of prior service cost in year one after the amendment is

A) $300,000. B) $500,000. C) $150,000. D) $400,000. Use the following to answer questions 86-89.

The following information relates to the pension plan for the employees of Turner Co.:

1/1/10 12/31/10 12/31/11

Accum. benefit obligation $5,280,000 $5,520,000 $7,200,000

Projected benefit obligation 5,580,000 5,976,000 8,004,000 Fair value of plan assets 5,100,000 6,240,000 6,888,000

AOCI – net (gain) or loss -0- (864,000) (960,000)

Settlement rate (for year) 11% 11%

Expected rate of return (for year) 8% 7%

Turner estimates that the average remaining service life is 16 years. Turner's contribution was $756,000 in 2011 and

benefits paid were $564,000.

86. The interest cost for 2011 is A) $537,840. B) $607,200. C) $657,360. D) $880,440. 87. The unexpected gain or loss on plan assets in 2011 is A) $39,360 loss. B) $22,560 gain. C) $19,200 gain. D) $214,560 gain. 88. The corridor for 2011 is A) $619,200. B) $624,000. C) $678,000. D) $800,400. 89. The amount of AOCI (net gain) amortized in 2011 is A) $15,300. B) $15,000. C) $11,626. D) $9,977.

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90. Presented below is information related to Decker Manufacturing Company as of December

31, 2011: Projected benefit obligation in excess of plan assets $900,000 Accumulated OCI -net gain 300,000 Accumulated OCI (PSC) 405,000

The amount for the prior service cost is related to an increase in benefits. The fair value of the pension plan assets is $600,000. The pension asset / liability reported on the balance sheet at December 31, 2011 is A) Pension liability of $300,000 B) Pension liability of $600,000 C) Pension liability of $900,000 D) Pension liability of $1,305,000 Use the following to answer question 91. Foster Corporation received the following report from its actuary at the end of the year:

December 31, 2010 December 31, 2011 Projected benefit obligation $1,600,000 $1,800,000 Accumulated benefit obligation 1,300,000 1,480,000 Fair value of pension plan assets 1,380,000 1,440,000

91. The amount reported as the pension liability at December 31, 2010 is A) $ -0-. B) $200,000. C) $220,000. D) $300,000.

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Use the following to answer questions 92-93. The following information relates to Jackson, Inc.:

For the Year Ended December 31, 2010 2011 Plan assets (at fair value) $1,260,000 $1,824,000 Pension expense 570,000 450,000 Projected benefit obligation 1,620,000 1,884,000 Annual contribution to plan 600,000 450,000 Accumulated OCI (PSC) 480,000 420,000

92. The amount reported as the liability for pensions on the December 31, 2010 balance sheet is A) $ -0-. B) $30,000. C) $360,000. D) $390,000. 93. The amount reported as the liability for pensions on the December 31, 2011 balance sheet is A) $ -0-. B) $60,000. C) $1,884,000. D) $520,000. 94. Presented below is pension information related to Waters Company as of December 31,

2011: Accumulated benefit obligation $3,000,000 Projected benefit obligation 3,500,000 Plan assets (at fair value) 3,600,000 Accumulated OCI (G / L) 100,000

The amount to be reported as Pension Asset / Liability as of December 31, 2011 is A) Pension Liability of $500,000. B) Pension Asset of $600,000. C) Pension Liability of $100,000. D) Pension Asset of $100,000.

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95. Huggins Company has the following information at December 31, 2011 related to its

pension plan: Projected benefit obligation $4,000,000 Accumulated benefit obligation 3,200,000 Plan assets (fair value) 4,200,000 Accumulated OCI (PSC) 300,000

A) Pension liability of $300,000. B) Pension asset of $1,000,000. C) Pension liability of $800,000. D) Pension asset of $200,000. 96. The following facts relate to the Patton Co. postretirement benefits plan for 2011:

Service cost $170,000 Discount rate 9% APBO, January 1, 2011 $1,500,000 EPBO, January 1, 2011 $2,000,000 Benefit payments to employees $115,000

The amount of postretirement expense for 2011 is A) $170,000. B) $305,000. C) $350,000. D) $420,000. 97. The following facts relate to the postretirement benefits plan of Keller, Inc. for 2011:

Service cost $680,000 Discount rate 8% APBO, January 1, 2011 $4,000,000 EPBO, January 1, 2011 $4,800,000 Average remaining service to full eligibility 20 years Average remaining service to expected retirement 25 years

The amount of postretirement expense for 2011 is A) $1,000,000. B) $1,160,000. C) $1,200,000. D) $1,224,000.

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98. The following facts relate to the Gamble Co. postretirement benefits plan for 2011:

Service cost $126,000 Discount rate 10% EPBO, January 1, 2011 $1,095,000 APBO, January 1, 2011 $900,000 Actual return on plan assets in 2011 $31,500 Expected return on plan assets in 2011 $24,000

The amount of postretirement expense for 2011 is A) $184,500. B) $192,000. C) $211,500. D) $216,000. 99. The following information pertains to Hopson Co.'s pension plan:

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

If no change in actuarial estimates occurred during 2011, Hopson's projected benefit obligation at December 31, 2011 was A) $64,200. B) $75,000. C) $79,200. D) $82,200. 100. At December 31, 2011, the following information was provided by the Vargas Corp.

pension plan administrator: A) $7,200,000 B) $2,700,000 C) $1,620,000 D) $1,080,000