MCQ's Select Financial Statement Accounts

Question 1

For an involuntary conversion of a nonmonetary asset, in which event would an entity not be in compliance with the provisions of GAAP revenue recognition criteria?

A -If it recognizes a gain or loss on the involuntary conversion
of a nonmonetary asset, even if the insurance or
condemnation award proceeds are reinvested in a
replacement nonmonetary asset
B - If it takes removal and clean-up costs into account when
computing the gain or loss recognized on the involuntary
conversion
C - If it takes into account other incidental costs incurred in the
acquisition of replacement property when computing the
gain or loss recognized on the involuntary conversion
D - None of the above

Answer 1

If it takes into account other incidental costs incurred in the
acquisition of replacement property when computing the
gain or loss recognized on the involuntary conversion

Incidental costs incurred in the acquisition of replacement property are capitalized as costs of acquiring the replacement property. The incidental costs do not affect the gain or loss recognized due to the involuntary conversion.

Question 2

For the year ended December 31, year 1, Mont Co.’s books showed income of $600,000 before provision for income tax expense. To compute taxable income for federal income tax purposes, the following items should be noted.

Income from exempt municipal bonds $ 60,000
Depreciation deducted for tax purposes in excess of depreciation recorded on the books 120,000
Proceeds received from life insurance from the death
of an officer 100,000
Estimated tax payments 0
Enacted corporate rate 21%

What amount should Mont report on December 31, year 1, as its current federal income tax liability?

Answer 2

$67,200

Tax liability is based on taxable income, so first reconcile book income of $600,000 to taxable income, then compute the tax liability. All three items listed are IN book income but are NOT in taxable income. $600,000 - 60,000 - 120,000 - 100,000 = $320,000 × 21% = $67,200.

(Note that depreciation is a temporary difference and is a future taxable amount; the remaining two items are permanent differences).

Question 3

Park Co. uses the equity method to account for its January 1 current year purchase of Tun, Inc.’s common stock. On this date, the fair values of Tun’s FIFO inventory and land exceeded their carrying amounts. How do these excesses of fair values over carrying amounts affect Park’s reported equity in Tun’s current year earnings?
Inventory excess Land excess
A Decrease Decrease
B Decrease No effect
C Increase Increase
D Increase No effect

Answer 3

Inventory excess Land excess
B Decrease No effect

The excess of the fair value of Tun’s FIFO inventory over its carrying amount would decrease Park’’s reported equity in Tun’s earnings and the excess of the fair value of Tun’’s land over its carrying amount would have no effect on Park’s reported equity in Tun’s earnings.

Question 4

The following information was obtained from Smith Co.:

Sales $275,000
Beginning inventory 30,000
Ending inventory 18,000
Smith’s gross margin is 20%. What amount represents Smith purchases?

Answer 4

$208,000

Beginning inventory + Net purchases - Ending inventory = COGS

Net Purchases = Ending inventory + COGS - Beginning inventory

Net Purchases = ($18,000 + $220,000 - $30,000) = $208,000. [COGS = Sales x (1- Gross Margin)]

[$275,000 (1-0.2) = $220,000.]

Solve for Goods Available for Sale:
(GAFS – COGS = EI)
GAFS – $220,000 = $18,000
GAFS = $238,000

Solve for Purchases:
(BI – Purch = GAFS)
$30,000 – Purch = $238,000
Purchases = $208,000.

Question 5

Concerning the measurement of deferred tax accounts, which of the following statements is false?

A - A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year.
B - A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards.
C - The measurement of current and deferred tax liabilities and assets is based on the provisions of future changes in tax laws and rates.
D - The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.

Answer 5

C - The measurement of current and deferred tax liabilities and assets is based on the provisions of future changes in tax laws and rates.

The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated.

Question 6

On December 1, of the current year, Clark Co. leased office space for five years at a monthly rental of $60,000. On the same date, Clark paid the lessor the following amounts:
First months’ rent $ 60,000
Last months’ rent 60,000
Security deposit (refundable at lease expiration) 80,000
Installation of new walls and offices 360,000

What should be Clark’s current year expense relating to utilization of the office space?

Answer 6

$66,000

Question 7

On December 1, of the current year, Clark Co. leased office space for five years at a monthly rental of $60,000. On the same date, Clark paid the lessor the following amounts:
First months’ rent $ 60,000
Last months’ rent 60,000
Security deposit (refundable at lease expiration) 80,000
Installation of new walls and offices 360,000

What should be Clark’s current year expense relating to utilization of the office space?

Answer 7

$66,000
The installation of new walls and offices are leasehold improvements since they are not separable from the leased property and revert to the lessor at the end of the lease term. They are amortized over the lease term. The prepayment of the last month’s rent was made to secure the lease and should be reported as a leasehold within intangible assets. Current year expense is $66,000 ($60,000 rent for December and $6,000 amortization of leasehold improvements [$360,000/60]).

Question 8

Titan Corporation incurred $400,000 in production costs during the year. Its beginning inventory was $70,000 and the ending inventory was valued at $20,000. Calculate the inventory turnover ratio of the company.

Answer 8

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory.

The Cost of Goods Sold in this question = 400,000 + 70,000 – 20,000 = $450,000.

Average Inventory = (70,000 + 20,000)/2 = $45,000.

The inventory turnover ratio = 450,000/45,000 = 10 times.

Question 9

A company issued rights to its existing shareholders to purchase for $15 per share, 5,000 unissued shares of common stock with a par value of $10 per share. Common stock will be credited at:

Answer 9

$10 per share when the rights are exercised

A stock right issue generally is recorded by memorandum entry only (but must be disclosed in the financial statement notes). When the rights are exercised, common stock is credited at its par value, regardless of the option price or the stock’s FMV. The difference between the option price and the par value of the stock (i.e., $15 - $10 = $5) is credited to Additional Paid-In Capital when the stock is issued.

Question 10

Delar Co. completed its year-end physical count of inventory. The inventory was valued at first-in, first-out (FIFO) costs and totaled $500,000.Delar subsequently noted the following two items:

1,000 units of inventory with a FIFO cost of $10 each were shipped and billed to a customer F.O.B.destination. These items were included in the physical count.
6,000 units at a FIFO cost of $5 each were held on consignment for one of its suppliers but were excluded from the physical count.
What amount should Delar report as inventory at year end?

Answer 10

$500,000

Delar should report $500,000 as inventory at year-end.

FOB destination means title and risk of loss pass to the buyer when the seller makes a proper tender of delivery of the goods at the destination. This was shipped via FOB destination and should be included in inventory because the inventory had not been delivered to the customer by year-end.

Consigned goods are not sold but rather transferred to an agent for possible sale. Consigned goods are included in the inventory of the consignor (owner). Thus, the inventory that is held on consignment for one of the suppliers should be excluded from the inventory physical count as Delar is a consignee. Therefore, Delar should report $500,000 of inventory at year-end.

Question 11

For the current year ended December 31, Beal Co. estimated its allowance for uncollectible accounts using the year-end aging of accounts receivable. The following data are available:
- Allowance for uncollectible accounts, 1/1 $42,000
- Provision for uncollectible accounts
(2% on credit sales of $2,000,000) 40,000
- Uncollectible accounts written-off, 11/30 46,000
- Estimated uncollectible accounts
per aging, 12/31 52,000
After the year-end adjustment, the uncollectible accounts expense for the current year should be

Answer 11

$56,000

Since Beal uses the aging method, the credit sales information is irrelevant. The balance in the allowance account was a debit of $4,000 (42,000 - 46,000) prior to the year-end adjustment. Given that the year-end allowance balance should be $52,000, bad debt expense would be debited for $56,000, and the allowance account would be credited for $56,000.

Question 12

Lind Co.’s salaries expense of $10,000 is paid every other Friday for the 10 workdays and then ending. Lind’s employees do not work on Saturdays and Sundays. The last payroll was paid on June 18. On Wednesday, June 30, the month-end balance in the salaries expense account before accruals was $14,000. What amount should Lind report as salaries expense in its income statement for the month ended June 30?

Answer 12

$22,000

It is given that the company pays $10,000 for 10 workdays. The salary paid for each workday = 10,000/10 = $1,000. This is also substantiated by the fact that the salaries expense account stood at $14,000 on June 18. Given that June 18 was a Friday and that employees do not work on Saturdays and Sundays, there were only 14 workdays in June till the 18th day of the month.

Question 13

In its financial statements, Hila Co. discloses supplemental information on the effects of changing prices in accordance with FASB Standards. Hila computed the increase in current cost of inventory as follows:
Increase in current cost (nominal dollars) $15,000
Increase in current cost (constant dollars) 12,000
What amount should Hila disclose as the inflation component of the increase in current cost of inventories?

Answer 13

$3000

The “inflation component” of the increase in the current cost amount is defined as the difference between the nominal dollars and constant dollars measures. $15,000 - $12,000 = $3,000.

Question 14

Red and White formed a partnership in the previous year. The partnership agreement provides for annual salary allowances of $55,000 for Red and $45,000 for White. The partners share profits equally and losses in a 60/40 ratio. The partnership had earnings of $80,000 for the current year before any allowance to partners. What amount of these earnings should be credited to each partner’s capital account?

Answer 14

Red = $43,000 and White = $37,000

Salaries of $55K for Red and $45k for White equal $100K
$100K - 80K = 20K
Red = 60% x 20K = $12k $55K - $12K = $43K
White = 40% X 20K = $8K $45K - $8K = $37K

Question 15

In January, Stitch, Inc. adopted the dollar-value LIFO method of inventory valuation. At adoption, inventory was valued at $50,000. During the year, inventory increased $30,000 using base-year prices, and prices increased 10%. The designated market value of Stitch’s inventory exceeded its cost at year end. What amount of inventory should Stitch report in its year-end balance sheet?

Answer 15

$83,000

Inventory is reported at the lower of cost or market. As indicated in the problem, market exceeded cost, so inventory should be stated at cost, using dollar value LIFO. The inventory layer added in the current year is computed in terms of base year cost. It then must be converted to current year cost because the layer was added during the current year. The index (1.1) is computed by dividing the ending inventory at current year cost ($88,000) by the ending inventory at base year cost ($80,000). The cost of ending inventory ($83,000) is the $50,000 cost of the beginning amount and the converted Year 1 layer. ($30.000 × 1.1 = $33,000).

Question 16

Herr Inc. has a fiscal year ending April 30. On May 1, of the previous year, Herr borrowed $10,000,000 at 15% to finance construction of its own building. Repayments of the loan are to commence the month following completion of the building. During the current year ended April 30, expenditures for the partially completed structure totaled $6,000,000. These expenditures were incurred evenly throughout the year. Interest earned on the unexpended portion of the loan amounted to $400,000 for the year. How much should be shown as capitalized interest on Herr’s financial statements at April 30?

Answer 16

$450,000

The problem stated $6,000,000 evenly, so to calculate the amount of expenditures evenly, you would divide $6m by 2, which equals $3,000,000.

$3,000,000 x .15 = $450,000

Question 17

On April 1 of the current year, Fay Corporation established an employee stock ownership plan (ESOP). Selected transactions relating to the ESOP during the year were as follows:
On April 1, Fay contributed $30,000 cash and 3,000 shares of its $10 par common stock to the ESOP. On this date, the market price of the stock was $18 a share.
On October 1, the ESOP borrowed $100,000 from Union National Bank and acquired 5,000 shares of Fay’s common stock in the open market at $17 a share. The note is for one year, bears interest at 10%, and is guaranteed by Fay.
On December 15, the ESOP distributed 6,000 shares of Fay common stock to employees of Fay in accordance with the plan formula.
In its year-end income statement, how much should Fay report as compensation expense relating to the ESOP?
A

Answer 17

$84,000

Cash contributed $30,000
Common stock contributed
(3,000 shares × $18 fair value) 54,000
ESOP compensation expense $84,000

Question 18

Bach Co. adopted the dollar value LIFO inventory method as of January 1, year 1. A single inventory pool and an internally computed price index are used to compute Bach’’s LIFO inventory layers. Information about Bach’’s dollar value inventory follows:
Inventory at
Date Base year cost Current year cost
1/1, Year 1 $90,000 $90,000
Year 1 layer $20,000 $30,000
Year 2 layer $40,000 $80,000
What was the price index used to compute Bach’’s Year 2 dollar value LIFO inventory layer?

Answer 18

1.33

Total of Base year = $150,000
Total of Current Year = $200,000

200,000/150,000 = 1.33

Question 19

Information pertaining to dividends from Wray Corp.’s common stock investments for the year ended December 31, 2017 are as follows:

On September 8, 2017, Wray received a $50,000 cash dividend from Seco, Inc., in which Wray owns a 30% interest. A majority of Wray’s directors are also directors of Seco.
On October 15, 2017, Wray received a $6,000 dividend from King Co. Wray owns a 5% in King Co.
Wray owns a 2% interest in Bow Corp., which declared a $200,000 cash dividend on November 27, 2017 to stockholders of record on December 15, 2017, payable on January 5, 2018.

What amount should Wray report as dividend income in its Income Statement for the year ended December 31, 2017?

Answer 19

$10,000
This answer is correct because it includes the King and Bow dividend.

Question 20

A state requires quarterly sales tax returns to be filed with the sales tax bureau by the 20th day following the end of the calendar quarter. However, the state further requires that sales taxes collected be remitted to the sales tax bureau by the 20th day of the month following any month such collections exceed $500. These payments can be taken as credits on the quarterly sales tax return.

Taft Corp. operates a retail hardware store. All items are sold subject to a 6% state sales tax, which Taft collects and records as sales revenue. The sales taxes paid by Taft are charged against sales revenue. Taft pays the sales taxes when they are due. Following is a monthly summary appearing in Taft’s first quarter year 2 sales revenue account:

                                                                  Debit	Credit January	                                                      $ —	   $10,600 February	                                                600	       7,420 March	                                                           —	          9,540
                                                                   $600      $27,560

In its financial statements for the quarter ended March 31, year 2, Taft’s sales revenue and sales taxes payable would be

Answer 20

Sales Revenue $26,000
Sales Taxes payable $9,60

This answer is correct. The amount reported for sales revenue should include amounts charged customers when inventory is sold, but should exclude amounts collected for sales taxes. To determine the correct amount for sales revenue, Taft must divide the total of sales and sales taxes by 100% plus the sales tax percentage (6%), as indicated below.

Month Total Percentage Sales revenue
Jan. $10,600 ÷ 106% $10,000
Feb. $ 7,420 ÷ 106% 7,000
March 9,540 ÷ 106% 9,000
Total $26,000
Sales taxes payable would include all sales taxes collected, less any sales taxes already remitted.

January sales taxes ($10,600 − $10,000) $ 600
February sales taxes ($7,420 − $7,000) 420
March sales taxes ($9,540 − $9,000) 540
Total 1,560
Less taxes remitted (600)
Sales taxes payable $ 960

Question 21

On January 1, year 1, Poe Company adopted the dollar-value LIFO inventory method. Poe’s entire inventory constitutes a single pool. Inventory data for year 1 and year 2 are as follows:

Date Inventory at current Inventory at base Relevant price
year cost year cost index
1/1/Y1 $150,000 $150,000 1.00
12/31/Y1 220,000 200,000 1.10
12/31/Y2 276,000 230,000 1.20

Poe’s LIFO inventory value at December 31, year 2, is

Answer 21

$241,000

When using dollar-value LIFO, the ending inventory at current year cost must first be converted to base year cost. This amount is given at 12/31/Y2 ($230,000), but it could be computed as follows: $276,000 ÷ 1.20 = $230,000. The next step is to determine the incremental LIFO layers at base year cost. The 1/1/Y1 (base year) layer is $150,000, the year 1 layer is $50,000 ($200,000 − $150,000), and the year 2 layer is $30,000 ($230,000 − $200,000). Finally, the LIFO layers are restated using the price index in effect at the time each layer was added.

                           Base cost		Ending inventory at DV LIFO cost 1/1/Y1 layer	         $150,00 × 1.00 =	$150,000 Year 1 layer               50,000 × 1.10 =	     55,000 Year 2 layer	            30,000 × 1.20 =	      36,000
                             $230,000		   $241,000

Question 22

All but one of the following are required before a transfer of receivables can be recorded as a sale.
A - The transferred receivables are beyond the reach of the transferor and its creditors.
B - The transferor has not kept effective control over the transferred receivables through a repurchase agreement.
C - The transferor maintains continuing involvement.
D - The transferee can pledge or sell the transferred receivables.

Answer 22

C - The transferor maintains continuing involvement.

A sale occurs if the seller surrenders control of the receivables transferred. Control is deemed to have been surrendered by the seller only if all three conditions listed in the other choices are met. This answer is used to determine whether a recourse liability is recorded as part of the sale, not whether a transaction can be recorded as a sale.

A, B & D This is only one of the requirements that have to be met before a transfer of receivables can be recorded as a sale.

Question 23

At December 31, Year 1, a $1,200,000 note payable was included in Cobb Corp.’s liability account balances. The note is dated October 1, Year 1, bears interest at 15%, and is payable in three annual payments including $400,000 of principle plus interest due. The first interest and principal payment was made on October 1, Year 2. In its December 31, Year 2 balance sheet, what amount should Cobb report as accrued interest payable for this note?

Answer 23

$30,000
The $30,000 answer is correct and equals ($1,200,000 − $400,000)(.15)(3/12). On 10/1/year 2, the first $400,000 principal payment was made. That left $800,000 of principal balance remaining on 10/1/year 2. The interest on that amount is computed as shown above.

Question 24

Yola Co. and Zaro Co. are fuel oil distributors. To facilitate the delivery of oil to their customers, Yola and Zaro exchanged ownership of 1,200 barrels of oil without physically moving the oil. Yola paid Zaro $30,000 to compensate for a difference in the grade of oil.

On the date of the exchange, cost and market values of the oil were as follows:

                                          Yola Co.	Zaro Co. Cost	                            $100,000	$126,000 Market values	              120,000	   150,000 In Zaro's income statement, what amount of gain should be reported from the exchange of the oil?

Answer 24

$0
This exchange was made to facilitate a sale of inventory to customers.

Under FAS 153, this is one of the exceptions to measuring exchanges of nonmonetary assets at market value. In this case, the exchange is measured at book value; no gain or loss is recognized. The oil received by Zaro would be measured (debited) at book value ($126,000) less cash received ($30,000), or $96,000. Cash would be debited for $30,000. The oil exchanged would be credited for $126,000.

No gain or loss is recognized.

Question 25

The following information was obtained from Smith Co.:

Sales $275,000
Beginning inventory 30,000
Ending inventory 18,000

Smith’s gross margin is 20%. What amount represents Smith purchases?

Answer 25

$208,000
This answer is correct. To solve the problem, first calculate cost of sales. Since gross margin is 20%, cost of sales is equal to $220,000 ($275,000 × 80%). Then, purchases are calculated by adding ending inventory and deducting beginning inventory from cost of sales. $208,000 ($18,000 − $30,000 + $220,000).

Question 26

On January 2, Year 1, Saxe Company purchased 20% of Lex Corporation’s common stock for $150,000. Saxe Corporation intends to hold the stock indefinitely. This investment did not give Saxe the ability to exercise significant influence over Lex. During Year 1 Lex reported net income of $175,000 and paid cash dividends of $100,000 on its common stock. There was no change in the fair value of the common stock during the Year. The balance in Saxe’s investment in Lex Corporation account at December 31, Year 1, should be

Answer 26

$150,000

Correct! The equity method is used when the investor owns 20% or more of the investee’s voting stock, unless there is evidence that the investor does not have the ability to exercise significant influence over the investee. Since this is the case, Saxe must carry the stock at fair value. Under this method, dividends received are to be recognized as income to the investor, and the investment account is unaffected. As there has been no change in the fair value, the investment account would still have a balance of $150,000 at 12/31/Y1.

Question 27

On January 1, year 1, Beal Corporation adopted a plan to accumulate funds for a new plant building to be erected beginning July 1, year 6, at an estimated cost of $1,200,000. Beal intends to make five equal annual deposits in a fund that will earn interest at 8% compounded annually. The first deposit is made on July 1, year 1. Present value and future amount factors are as follows:

Present value of 1 at 8% for 5 periods 0.68
Present value of 1 at 8% for 6 periods 0.63
Future amount of ordinary annuity of 1 at 8% for 5 periods 5.87
Future amount of annuity in advance of 1 at 8% for 5 periods 6.34

Beal should make five annual deposits (rounded) of

Answer 27

189,300

This answer is correct. The desired fund balance on July 1, year 6 ($1,200,000) is a future amount. The series of five equal annual deposits is an annuity in advance. Whether this is an ordinary annuity or an annuity in advance can be determined by looking at the last deposit. The last deposit (7/1/Y5)) is made one year prior to the date the future amount is needed. Therefore, these are beginning-of-year payments, and this is an annuity in advance. The deposit amount is computed below.

       Future amount

       F.A. factor	=	$1,200,000

       6.34	=	$189,274

Question 28

Poe, Inc. had the following bank reconciliation at March 31

Balance per bank statement, March 31 $46,500
Add deposit in transit 10,300
56,800
Less outstanding checks 12,600
Balance per books, March 31 $44,200
Data per bank for the month of April follow:
Deposits $58,400
Disbursements 49,700

All reconciling items at March 31 cleared the bank in April. Outstanding checks at April 30 totaled $7,000. There were no deposits in transit at April 30. What is the cash balance per books at April 30?

Answer 28

$48,200

Balance per books, 3/31 $44,200
Deposits per bank, April $58,400
Less deposit in transit, 3/31 (10,300)
Equals deposits made by firm in April 48,100
Checks clearing bank in April $49,700
Less outstanding checks, 3/31 (12,600)
Plus outstanding checks, 4/30 7,000
Equals checks written by firm in April (44,100)
Balance per books, 4/30 $48,200

Question 29

Light Co. had the following bank reconciliation at March 31:

Balance per bank statement, 3/31 $23,250
Add: Deposit in transit 5,150
28,400
Less: Outstanding checks 6,300
 Balance per books, 3/31 $22,100
Additional information from Light’s bank statement for the month of April is as follows:
Deposits $29,200
Disbursements 24,800
All reconciling items at March 31 cleared through the bank in April. Outstanding checks at April 30 totaled $3,200. What is the amount of cash disbursements per books in April?

Answer 29

$21,700

Correct. This question asks you to determine the amount of cash disbursed per books in April. The total disbursements per the April bank statement is $24,800, but $6,300 of the bank disbursements are outstanding checks from March that would have cleared in April. In addition, there were $3,200 of checks outstanding at the end of April. Total disbursements per books is calculated as follows:
April disbursements per bank statement $24,800
March checks cleared in April statement (6,300)
Checks outstanding end of April 3,200
Total cash disbursements in April $21,700

Question 30

Godart Co. issued $4.5mn notes payable as a scrip dividend that matured in five years. At maturity, each shareholder of Godart’s 3mn shares will receive payment of the note principal, plus interest. The annual interest rate was 10%.

What amount should be paid to the stockholders at the end of the fifth year?

Answer 30

$6.75M
Instead of paying $4.5mn in dividends at declaration, the firm decided to issue notes due in five years, calling for the principal amount ($4.5mn), plus five years of simple interest to be paid. The note does not call for compounding.

Therefore, the amount due at maturity is $4.5mn + (5 years)(.10)($4.5mn) = $6.75.

Question 31

An expenditure to install an improved electrical system is a

Capital expenditure
Revenue expenditure

Answer 31

Capital Expenditure Yes
Revenue Expenditure NO

Question 31

An expenditure to install an improved electrical system is a

Capital expenditure
Revenue expenditure

Answer 31

Capital Expenditure Yes
Revenue Expenditure NO

Capital expenditures are not normal, recurring expenses, and they benefit the operations of more than one period. Examples of capital expenditures include additions, replacements, betterments, and extraordinary repairs and maintenance. Revenue expenditures are normal, recurring expenditures such as normal repairs and maintenance. The installation of an improved electrical system (a betterment) is a capital expenditure because it would benefit more than one period.

Question 32

Which of the following statements is(are) correct about the carrying amount of a long-lived asset after an impairment loss has been recognized? Assume the long-lived asset is being held for use in the business and that the asset is depreciable.

I. The reduced carrying amount of the asset may be increased in subsequent years if the impairment loss has been recovered.
II. The reduced carrying amount of the asset represents the amount that should be depreciated over the asset’s remaining useful life.

Answer 32

II only

Recoveries of impairment losses shall not be recognized.