Sample Final Flashcards
Management must have the intent and ability to hold a bond investment until maturity if it is to be classified as a held-to-maturity security.
a. True
b. False
a. True
An increase in the fair value of the debt trading securities portfolio increases both assets and net income.
a. True
b. False
a. True
The primary difference in accounting for available-for-sale debt investments and accounting for trading debt investments is which of the following?
a. Measuring the fair value of the long-term and short-term investment portfolios on the balance sheet.
b. Determination of the acquisition cost.
c. Reporting of the unrealized holding gain or loss on investments within the financial statements.
d. Determination of the unrealized holding gain or loss.
c. Reporting of the unrealized holding gain or loss on investments within the financial statements.
When is the equity method used to account for long-term investments in common stock?
a. When the investment is between 20% and 50% of the voting stock, regardless of whether or not significant influence can be achieved.
b. When the investment is greater than 50% of the voting stock, regardless of whether or not significant influence can be achieved.
c. When the investment is greater than 50% of the voting stock and significant influence can be achieved.
d. When the investment is between 20% and 50% of the voting stock and significant influence can be achieved.
d. When the investment is between 20% and 50% of the voting stock and significant influence can be achieved.
Fun with Florals Corporation acquired all the voting common stock shares of Crafts-toGo Corporation under the acquisition method. Crafts-to-Go remains a separate corporation. Which of the following statements about the financial statements is true?
a. The assets and liabilities of Crafts-to-Go Corporation would be not revalued and disclosed at fair value on the date of acquisition.
b. Fun with Florals will use the equity method of accounting for this investment.
c. Fun with Florals will prepare consolidated financial statements.
d. Fun with Florals will use the fair value method of accounting for this investment.
c. Fun with Florals will prepare consolidated financial statements.
Kiki Company purchased 40% of Fred Company’s common stock on January 1, 2018 for $170,000. The Investment in Fred had a $180,000 fair value at the end of 2018 and a $150,000 fair value at the end of 2019. Fred Company reported net income of $50,000 in 2018 and $41,000 in 2019 and declared and paid dividends of $20,000 each year. On Kiki Company’s balance sheet at December 31, 2019, what amount was reported for the investment in Fred Company?
$190,400
On January 1, 2019, Shelley Company paid $650,000 cash for 100% of the outstanding common stock of SCD Company. SCD’s stockholders’ equity on the date of acquisition was $500,000. The current fair value of SCD’s plant and equipment was $100,000 in excess of the equipment’s book value. If the fair value and book value are the same for SCD’s remaining assets and liabilities, what was the amount of goodwill acquired by Shelley Company?
a. $150,000.
b. $40,000.
c. $50,000.
d. $250,000.
c. $50,000.
Goodwill = $50,000. Price paid of $650,000 less $600,000 (Book Value of $500,000
plus Fair Value Differential of $100,000).
Which one of the following would not be recorded as an intangible asset?
a. Patents
b. Copyrights
c. Internally generated goodwill
d. Franchises
c. Internally generated goodwill
The units-of-production method of depreciation allocates an asset’s cost over its useful life based on the current period’s production relative to its total estimated production.
a. True
b. False
a. True
Which of the following properly describes the accounting for goodwill?
a. Goodwill is recorded when it is internally generated.
b. Goodwill is amortized over its useful life.
c. Goodwill is the difference between the amount paid for a company relative to the book value of the acquired company’s net assets.
d. Goodwill is written down when it has been determined to be impaired.
c. Goodwill is the difference between the amount paid for a company relative to the
book value of the acquired company’s net assets.
Use of the double-declining-balance method of depreciation results in higher depreciation expense during the first year of an asset’s life relative to use of the straight-line depreciation method.
a. True
b. False
a. True
Gains and losses on disposal of a long-lived asset are determined by comparing the asset’s cost to its book value.
a. True
b. False
b. False
Carter Company disposed of an asset at the end of the eighth year of its estimated life for $10,000 cash. The asset’s life was originally estimated to be 10 years. The original cost was $50,000 with an estimated residual value of $5,000. The asset was being depreciated using the straight-line method. What was the gain or loss on the disposal?
a. $1,000 loss.
b. $4,000 loss.
c. $5,500 gain.
d. $10,000 gain.
b. $4,000 loss.
Annual straight-line depreciation expense = $4,500 = ($50,000 − $5,000) ÷ 10.
End of year eight book value = $14,000 = $50,000 − ($4,500 × 8).
A $4,000 loss occurs because the selling price of $10,000 is less than book value of $14,000.
On January 1, 2021, Coco Company purchased a machine costing $70,000. Coco also incurred the following costs: transportation, $2,000; installation, $1,000; sales tax, $300; and $2,000 of repairs made to address damage that occurred during installation. The correct transaction to record the asset purchase is:
a. Increase Machine $70,000; Decrease Cash $70,000
b. Increase Machine $75,300; Decrease Cash $75,300
c. Increase Machine $73,000; Decrease Cash $73,000
d. Increase Machine $73,300; Decrease Cash $73,300
d. Increase Machine $73,300; Decrease Cash $73,300
Machine value is all costs necessary to ready the asset for its intended use:
$70,000 + $1,000 + $2,000 + $300 = $73,300.
Repairs needed due to damage are avoidable and would not be capitalized as part of the asset.
On January 1, 2018, Walter, Inc. purchased a machine costing $50,000. Walter also paid $2,000 for transportation and installation. The expected useful life of the machine is 10 years and the residual value is $0.
a. If Walter uses the straight-line depreciation method, what is the book value of the equipment at the end of year 1?
b. If on December 31 of Year 1 Walter sold the equipment for $27,000 in cash is
there a gain or loss recorded?
c. If so, which is it and in what amount?
d. Record the transaction (accounts, direction and amounts) to record the sale of the asset:
a. 46,800
b. Loss
c. -19,800
d.
Increase in Cash (Asset): Cash increases by $27,000 due to the sale.
Decrease in Machine (Asset): The machine, recorded as an asset at its cost of $52,000, is removed from the books.
Decrease due to Accumulated Depreciation (Asset): The accumulated depreciation on the machine, which was $5,200, is removed. This effectively increases the assets because accumulated depreciation is a contra-asset account (it normally has a credit balance, reducing the value of assets).
Recognition of Loss (Stockholders’ Equity): The loss of $19,800 decreases Stockholders’ Equity
Cash received from customers may result in a current liability.
a. True
b. False
b. True
-> Unearned Revenue, which is recorded when we have received cash from the customer but have an outstanding performance obligation
A contingent liability is disclosed in a note to the financial statements when the liability is reasonably possible and can be estimated.
a. True
b. False
b. True
Which of the following is correct?
a. Deferred revenues are considered increases to stockholders’ equity.
b. Working capital is measured as current liabilities minus current assets.
c. Working capital increases when a company pays the principal on a long-term
note.
d. Deferred revenues will eventually become revenue earned.
d. Deferred revenues will eventually become revenue earned.
Phipps Company borrowed $25,000 cash on October 1, 2019, and signed a nine-month, 8% interest-bearing note payable with interest payable at maturity. Assuming that adjusting entries have not been made during the year, the amount of accrued interest payable to be reported on the December 31, 2019 balance sheet is which of the following?
a. $250.
b. $300.
c. $500.
d. $750.
c. $500.
December 31, 2019 interest payable = $500 = Amount borrowed × Interest
rate × Number of months borrowed during 2019 relative to a year = $25,000
× 8% × (3 ÷ 12).
Mission Corp. borrowed $50,000 cash on April 1, 2019, and signed a one-year 12%,
interest-bearing note payable. The interest and principal are both due on March 31,
2020.The amount of interest expense for the year ended December 31, 2019 is:
a. $6,000.
b. $4,500.
c. $4,000.
d. $1,500.
b. $4,500.
December 31, 2019: Interest expense = $4,500 = Amount borrowed × Interest
rate × Number of months borrowed relative to a year = $50,000 × 12% × (9 ÷
12).
Houston Company is involved in a lawsuit. In which of the following situations is only a note disclosure of the contingent liability reported within the financial statements?
a. When the loss is remote and the amount cannot be reasonably estimated.
b. When the loss is probable and the amount can be reasonably estimated.
c. When the loss is reasonably possible and the amount can be reasonably estimated.
d. When the loss is remote and the amount can be reasonably estimated.
c. When the loss is reasonably possible and the amount can be reasonably estimated.
Smith Corporation entered into the following transactions: Purchased inventory on
account; Collected an account receivable; and Purchased equipment using cash. Which of the following statements about Smith’s transactions is correct?
a. The inventory purchase on account increased working capital.
b. Collecting an account receivable increases working capital.
c. The equipment purchase decreases working capital.
d. The inventory purchase on account decreases working capital.
c. The equipment purchase decreases working capital.
The major disadvantages of issuing a bond are the risk of bankruptcy and the negative impact on cash flow because debt must be repaid at a specified date in the future.
a. True
b. False
a. True
