Acc 201- Part 1, 2, 3 and 4 Exam

Acc 201- Part 1, 2, 3 and 4 Exam

Part 1
1. General Product, Inc., shipped 100 million coupons in products it sold in 2011. The coupons are redeemable for thirty cents each. General anticipates that 70% of the coupons will be redeemed. The coupons expire on December 31, 2012. There were 45 million coupons redeemed in 2011, and 30 million redeemed in 2012.
What was General s coupon promotion expense in 2011?
A. $7.5 million
B. $21.0 million
C. $13.5 million
D. $30.0 million

2. Which of the following is not true about the fair value option?
A. Electing the fair value option for held-to-maturity investments simply reclassifies those investments as trading securities.
B. All of these statements are true.
C. The fair value option is irrevocable.
D. The fair value option must be elected for all shares of an investment in a particular company.

3. Beresford, Inc., purchased several investment securities during 2008, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values aren t considered permanent.
Held to maturity securities: Fair Value Fair Value Amortized Amortized
ABC Co. Bonds 12/31/10 12/31/11 Cost 12/31/10 Cost 12/31/11
$375,000 $400,000 $367,500 $360,000
Fair Value Fair Value
Trading securities: 12/31/10 12/31/11 Cost
DEF Co. Stock $48,000 $59,500 $66,000
GEH Inc. Stock $47,000 $77,000 $39,000
IJK Inc. Stock $44,000 $38,500 $32,900
Fair Value Fair Value
Available for Sale Securities 12/31/10 12/31/11 Cost
LMN Co. Stock $130,500 $150,400 $140,000
What would be the balance in Beresford s accumulated other comprehensive income with respect to these investments in its 12/31/11 balance sheet (ignore taxes)?
A. $26,500
B. $55,100
C. $50,200
D. $10,400

4. Smith buys and sells securities which it typically classifies as available for sale. On December 15, 2011,
Smith purchased $500,000 of Jones shares, and elected the fair value option to account for the Jones investment. As of December 31, 2011, the Jones shares had a fair value of $525,000. In the 2011 financial statements, Smith will show (ignore taxes)
A. investment income of $25,000 in its income statement.
B. other comprehensive income of $25,000.
C. an investment in Jones of $500,000.
D. accumulated other comprehensive income of $525,000.

5. Goofy, Inc., bought 15,000 shares of Crazy Co. s stock for $150,000 on May 5, 2010, and classified the stock as available for sale. The market value of the stock declined to $118,000 by December 31, 2010.
Goofy reclassified this investment as trading securities in December of 2011 when the market value had risen to $125,000. What effect on 2011 income should be reported by Goofy for the Crazy Co. shares?
A. $0
B. $32,000 net loss
C. $25,000 net loss
D. $7,000 net gain

6. On December 31, 2011, L, Inc., had a $1,500,000 note payable outstanding, due July 31, 2012. L borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000 of the note on January 23,
2012. In February 2012, L completed a $3,000,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2012. On March 13, 2012, L issued its 2011 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2011, balance sheet?
A. $500,000
B. $0
C. $1,000,000
D. $1,500,000

7. Hawk Corporation purchased 10,000 shares of Diamond Corporation stock in 2008 for $50 per share and classified the investment as securities available for sale. Diamond’s market value was $60 per share on December 31, 2009 and $65 on December 31, 2010. During 2011, Hawk sold all of its Diamond stock at $70 per share. In its 2011 income statement, Hawk would report a gain of
A. $150,000.
B. $200,000.
C. $50,000.
D. $300,000.

8. Hope Company bought 30% of Faith Corporation in 2011. Hope s purchase price equaled 30% of the book value of Faith s net identifiable assets, which also equaled 30% of the fair value of Faith. During 2011, Faith reported net income in the amount of $4,000,000 and declared and paid dividends in the amount of $500,000. Hope mistakenly accounted for the investment as available for sale instead of using the equity method. What effect would this error have on the investment account and net income, respectively, for 2011?
A. Understated by $1,200,000; overstated by $1,050,000
B. Overstated by $1,200,000; overstated by $1,200,000
C. Understated by $1,050,000; understated by $1,050,000
D. Overstated by $1,050,000; understated by $1,050,000

9. If Dinsburry Company concluded that an investment originally classified as a trading security would now more appropriately be classified as held to maturity, Dinsburry would
A. not reclassify the investment, as original classifications are irrevocable.
B. reclassify the investment as held to maturity and immediately recognize in net income all unrealized gains and losses as of the reclassification date.
C. reclassify the investment as held to maturity, but there would be no income effect.
D. reclassify the investment as held to maturity and treat the fair value as of the date of reclassification as the investment s amortized cost basis for future amortization.

10. On January 1, 2011, Nana Company paid $100,000 for 8,000 shares of Papa Company common stock. These securities were classified as trading securities. The ownership in Papa Company is 10%. Papa reported net income of $52,000 for the year ended December 31, 2011. The fair value of the Papa stock on that date was $45 per share. What amount will be reported in the balance sheet of Nana Company for the investment in Papa at December 31, 2011?
A. $315,600
B. $300,000
C. $360,000
D. $284,400

11. B Corp. has an employee benefit plan for compensated absences that gives employees 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, 2011, B s unadjusted balance of liability for compensated absences was $42,000. B estimated that there were 300 vacation days and 150 sick days available at December 31, 2011. B s employees earn an average of $200 per day. In its December 31, 2011, balance sheet, what amount of liability for compensated absences is B required to report?
A. $90,000
B. $144,000
C. $60,000
D. $84,000

12. On January 1, 2011, G Corporation agreed to grant its employees two weeks vacation each year, with the stipulation that vacations earned each year can be taken the following year. For the year ended December 31, 2011, G s employees each earned an average of $800 per week. 500 vacation weeks earned in 2011 were not taken during 2011. Wage rates for employees rose by an average of 5 percent by the time vacations actually were taken in 2012. What is the amount of G s 2012 wages expense related to 2011 vacation time?
A. $420,000
B. $400,000
C. $20,000
D. $0

13. Under IFRS No. 9, which is not a category for accounting for investments?
A. Fair value through profit and loss
B. Held-to-maturity
C. Fair value through other comprehensive income
D. Amortized cost

14. Assume that, on 1/1/11, Sosa Enterprises paid $5,100,000 for its investment in 36,000 shares of Orioles Co. Further, assume that Orioles has 120,000 total shares of stock issued and estimates an 8 year remaining useful life and straight-line depreciation with no residual value for its depreciable assets.
At 1/1/11, the book value of Orioles identifiable net assets was $7,000,000, and the fair value of Orioles was $10,000,000. The difference between Orioles fair value and the book value of its identifiable net assets is attributable to $1,800,000 of land and the remainder to depreciable assets. Goodwill was not part of this transaction.
The following information pertains to Orioles during 2011:
What amount would Sosa Enterprises report in its year-end 2011 balance sheet for its investment in Orioles Co.?
Net income $600,000
Dividends declared and paid $360,000
Market price of common stock on 12/31/11 $80/share
A. $3,027,000
B. $3,200,000
C. $3,135,000
D. $3,180,000

15. Knique Shoes issued a $100,000, 8-month, noninterest-bearing note. The loan was made by Second Commercial Bank whose stated discount rate is 9%. The effective interest rate on this loan (rounded) is
A. 9.50%.
B. 9.49%.
C. 9.57%.
D. 9.28%.

16. Oklahoma Oil Corp. paid interest of $785,000 during 2011, and the interest payable account decreased by $125,000. What was interest expense for the year?
A. $890,000
B. $555,000
C. $785,000
D. $660,000

End of exam
17. When cash is received from customers in the form of a refundable deposit, the cash account is increased with a corresponding increase in
A. shareholders equity.
B. paid-in capital.
C. revenue.
D. a current liability.

18. Which of the following is a contingency that should be accrued?
A. The company deducts life insurance premiums from employees paychecks.
B. It s probable that the company will receive $100,000 in settlement of a lawsuit.
C. The company is being sued and a loss is reasonably possible and reasonably estimable.
D. The company offers a two-year warranty and the expenses can be reasonably estimated.

19. What is the effective interest rate (rounded) on a 3-month, noninterest-bearing note with a stated rate of 12% and a maturity value of $200,000?
A. 12.0 %
B. 12.4%
C. 11.5%
D. 3.0%

20. On January 1, 2011, Green Corporation purchased 20% of the outstanding voting common stock of Gold Company for $300,000. The book value of the acquired shares was $275,000. The excess of cost over book value is attributable to an intangible asset on Gold s books that was undervalued and had a remaining useful life of five years. For the year ended December 31, 2011, Gold reported net income of $125,000 and paid cash dividends of $25,000. What is the carrying value of Green s investment in Gold at December 31, 2011?
A. $320,000
B. $295,000
C. $315,000
D. $ 300,000

Part 2
1. On December 31, 2011, B Corp. sold a machine to Royal and simultaneously leased it back for one year. Pertinent information at this date follows: In B’s December 31, 2011, balance sheet, the deferred revenue from the sale of this machine should be
Sales price $720,000
Carrying amount 660,000
Present value of lease rentals 68,200 ($6,000 for 12 months at 12% Estimated remaining useful life 12 years
A. $60,000.
B. $68,200.
C. $8,200.
D. $0

2. C Corp. has a rate of return on assets of 10%. Not including any indirect effects on earnings, the rate of return on assets is immediately increased when C records
A Capital Lease An Operating Lease
a. yes yes b. no no c. yes no d. no yes
A. Option b
B. Option c
C. Option a
D. Option d

3. If the lessor retains title to leased property under the terms of the lease,
A. the amount to be recovered through periodic lease payments is increased by the present value of the residual amount.
B. the amount to be recovered through periodic lease payments is reduced by the present value of the residual amount.
C. the amount to be recovered will be the same as if there were no residual value.
D. the lessor will record a greater amount of depreciation due to the residual value.

4. Discount-Mart issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

Payment
Cash

Effective Interest

Decrease on balance

Outstanding balance

$8,640,967

1

$300, 000

345,639

345,639

8,686,606

2

300,000

347,464

347,464

8,734,070

3

300,00

349,363

349,363

8,783,433

4

300,000

What would be the total interest cost of the bonds over their full term?
A. $7,359,033
B. $1,359,033
C. $6,000,000
D. $4,640,967

5. On December 31, 2010, Reagan, Inc., signed a lease for some equipment having a 9-year useful life with Silver Leasing Co. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2016. There’s no bargain purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease.
Reagan s lease amortization schedule appears below:
Dec. 31 Payments Interest decrease balance Balance
2010 $519,115
2010 $90,000 $90,000 429,115
2011 90,000 $17,165 72,835 356,280
2012 90,000 14,251 75,749 280,531
2013 90,000 11,221 78,779 201,752
2014 90,000 8,070 81,930 119,822
2015 90,000 4,793 85,207 34,615
2016 36,000 1,385 34,615 0
At what amount would Reagan record the leased asset at inception of the agreement?
A. $429,115
B. $540,000
C. $576,000
D. $519,115

6. Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.
What is the carrying value of the bonds as of December 31, 2012?
A. $11,432,379
B. $11,256,109
C. $11,316,611
D. $11,375,350

7. When an equipment dealer receives a long-term note in exchange for equipment, the present value of the future cash flows received on the notes is
A. credited to sales revenue at the exchange date.
B. treated as a current liability at the exchange date.
C. recorded as interest revenue at the exchange date.
D. recorded as interest receivable at the exchange date.

8. On June 30, 2011, Hardy Corporation issued $10 million of its 8% bonds for $9.2 million. The bonds were priced to yield 10%. The bonds are dated June 30, 2011, and mature on June 30, 2018. Interest is payable semiannually on December 31 and July 1. If the effective interest method is used, by how much should the bond discount be reduced for the 6 months ended December 31, 2011?
A. $60,000
B. $32,000
C. $46,000
D. $40,000

9. On January 1, 2011, Zebra Corporation issued 1,000 of its 8%, $1,000 bonds at 98. Interest is payable semiannually on January 1 and July 1. The bonds mature on January 1, 2021. Zebra paid $50,000 in bond issue costs. Zebra uses the straight-line amortization method. What is the bond carrying value reported in the December 31, 2011, balance sheet?
A. $1,040,000
B. $1,045,000
C. $982,000
D. $987,000

10. Technoid, Inc., sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2011. The manufacturing cost of the computers was $12 million.
This non-cancelable lease had the following terms: * Lease payments: $2,466,754 semiannually; first payment at January 1, 2011; remaining payments at June 30 and December 31 each year through June 30, 2015. * Lease term: 5 years (10 semiannual payments)
* No residual value; no bargain purchase option
* Economic life of equipment: 5 years
* Implicit interest rate and lessee s incremental borrowing rate: 5% semiannually
* Fair value of the computers at January 1, 2011: $20 million
Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred.
What is the net carrying value of the lease liability in Lone Star’s June 30, 2011 balance sheet? Round your answer to the nearest dollar.
A. $21,000,000
B. $2,466,754
C. $17,533,246
D. $15,943,154

11. Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2011. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.
What is the stated annual rate of interest on the bonds?
A. 4%
B. 8%
C. 6%
D. 3%

12. MSG Corporation has $100,000 of 10-year, 6% bonds outstanding on December 31, 2010. The bonds have 3 years remaining to maturity. The unamortized premium remaining on these bonds was $6,000.
MSG uses straight-line amortization. On May 1, 2011, $10,000 of the bonds were retired at 112. How much, and what type of gain or loss, most likely results from this retirement?

A. $667 ordinary gain
B. $667 extraordinary loss
C. $667 ordinary loss
D. $667 extraordinary gain

13. If the residual value of a leased asset turns out to be more than the amount guaranteed by the lessee, the
A. lessee will reduce the last year’s depreciation.
B. lessee must pay the lessor the amount of the excess.
C. lessor must compensate the lessee for the excess.
D. lessor isn’t obligated to compensate the lessee for the excess.

14. On January 1, 2011, Packard Corporation leased equipment to Hewlitt Company. The lease term is 8 years. The first payment of $450,000 was made on January 1, 2011. Remaining payments are made on December 31 each year, beginning with December 31, 2011. The equipment cost Packard Corporation $2,400,000. The present value of the minimum lease payments is $2,640,000. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, what will be the balance reported as a liability by Hewlitt in the December 31, 2012, balance sheet?
A. $1,509,000
B. $1,950,000
C. $1,704,900
D. $1,959,000

15. On January 1, 2011, Princess Corporation leased equipment to King Company. The lease term is 8 years. The first payment of $675,000 was made on January 1, 2011. The equipment cost Princess Corporation $3,600,000. The present value of the minimum lease payments is $3,960,000. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, how much interest revenue will Princess record in 2012 on this lease?
A. $328,500.
B. $293,850.
C. $261,000.
D. $325,350.

16. S Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1. Not including any indirect effects on earnings, the immediate impact of recording a capital lease on these ratios is a(an) Return on Assets Debt/Equity Ratio
a. increase increase
b. decrease decrease
c. increase decrease
d. decrease increase
A. Option a
B. Option d
C. Option c
D. Option b

17. Technoid, Inc., sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2011. The manufacturing cost of the computers was $12 million.
This non-cancelable lease had the following terms:
* Lease payments: $2,466,754 semiannually; first payment at January 1, 2011; remaining payments at June 30 and December 31 each year through June 30, 2015.
* Lease term: 5 years (10 semiannual payments)
* No residual value; no bargain purchase option
* Economic life of equipment: 5 years
* Implicit interest rate and lessee s incremental borrowing rate: 5% semiannually
* Fair value of the computers at January 1, 2011: $20 million
Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred. Lone Star Company would account for this as a(an)
A. capital lease.
B. sales-type lease.
C. direct financing lease.
D. operating lease.

18. Technoid, Inc., sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2011. The manufacturing cost of the computers was $12 million.
This non-cancelable lease had the following terms:
* Lease payments: $2,466,754 semiannually; first payment at January 1, 2011; remaining payments at June 30 and December 31 each year through June 30, 2015.
* Lease term: 5 years (10 semi-annual payments)
* No residual value; no bargain purchase option
* Economic life of equipment: 5 years
* Implicit interest rate and lessee’s incremental borrowing rate: 5% semi-annually
* Fair value of the computers at January 1, 2011: $20 million
Collectibility of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred. Technoid would account for this as a(an)
A. capital lease.
B. direct financing lease.
C. sales-type lease.
D. operating lease.

19. On December 31, 2010, Reagan, Inc., signed a lease for some equipment having a 9-year useful life with Silver Leasing Co. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2016.

There’s no bargain purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease.
Reagan s lease amortization schedule appears below:
What is the carrying value of the lease liability on Reagan’s December 31, 2012 balance sheet (after the third lease payment is made)?
A. $266,280
B. $356,280
C. $280,531
D. $190,530

20. Francisco leased equipment from Julio on December 31, 2011. The lease is a 10-year lease with annual payments of $150,000 due on December 31 of each year. The present value of the lease is $1,020,000.
Francisco’s incremental borrowing rate is 12% for this type of lease. The implicit rate of 10% is known by the lessee. What should be the balance in Francisco lease liability at December 31, 2012?
A. $824,400.
B. $792,000.
C. $807,000.
D. $806,400.

Part 3
1. Information for Hobson International Corp. for the current year ($ in millions):
Income from continuing operations before tax $150
Extraordinary loss (pretax) 30
Temporary differences (all related to operating income):
Accrued warranty expense in excess of write-offs included in operating income 10
Depreciation deducted on tax return in excess of depreciated expense 25
Permanent differences (all related to operating income):
Nondeductible portion of travel & entertainment expense 5
The applicable enacted tax rate for all periods is 40%
What should Hobson International report as income from continuing operations?
A. $94 million
B. $150 million
C. $88 million
D. $90 million

2. Giada Foods reported $940 million in income before income taxes for 2011, its first year of operations. Tax depreciation exceeded depreciation for financial reporting purposes by $100 million. The company also had non-tax-deductible expenses of $80 million relating to permanent differences. The income tax rate for
2011 was 35%, but the enacted rate for years after 2011 is 40%. The balance in the deferred tax liability in the December 31, 2011, balance sheet is
A. $40 million.
B. $35 million.
C. $56 million.
D. $16 million.

3. Bumble Bee Co. had taxable income of $7,000, MACRS depreciation of $5,000, book depreciation of $2,000, and accrued warranty expense of $400 on the books although no warranty work was performed.
What is Bumble Bee’s pretax accounting income?
A. $4,400.
B. $3,600.
C. $2,600.
D. $9,600.

4. Woody Corp. had taxable income of $8,000 in the current year. The amount of MACRS depreciation was $3,000 while the amount of depreciation reported in the income statement was $1,000. Assuming no other differences between tax and accounting income, Woody’s pretax accounting income was
A. $10,000.
B. $5,000.
C. $6,000.
D. $11,000.

5. Alamo, Inc., had $300 million in taxable income for the current year. Alamo also had a decrease in deferred tax assets of $30 million and an increase in deferred tax liabilities of $60 million. The company is subject to a tax rate of 40%. The total income tax expense for the year was
A. $ 390 million.
B. $180 million.
C. $150 million.
D. $210 million.

6. The EPBO for a particular employee on January 1, 2011, was $150,000. The APBO at the beginning of the year was $30,000. The appropriate discount rate for this postretirement plan is 5%. The employee is expected to serve the company for a total of twenty-five years, with five of those years already served as of January 1, 2011. What is the APBO at December 31, 2011?
A. $30,000.
B. $42,800.
C. $31,500.
D. $37,800.

7. The changes in account balances for Allen Inc. for 2011 are as follows:
Assets $225,000 debit
Common stock 125,000 credit
Liabilities 80,000 credit
Paid-in capital–excess of par 15,000 credit
Assuming the only changes in retained earnings in 2011 were for net income and a $25,000 dividend, what was net income for 2011?
A. $20,000
B. $30,000
C. $15,000
D. $5,000

8. Pug Corporation has 10,000 shares of $10 par common stock outstanding and 20,000 shares of $100 par, 6% noncumulative, nonparticipating preferred stock outstanding. Dividends have not been paid for the past two years. This year, a $150,000 dividend will be paid. What are the dividends per share for preferred and common, respectively?
A. $6; $1.50.
B. $7.50; $0.
C. $6; $3.
D. $7.50; $1.50.

9. Persoff Industries International has a defined benefit pension plan. The company revised its estimate of future salary levels causing its defined benefit obligation to increase by $16 million. Also, Persoff’s $25 million actual return on plan assets exceeded the $22 million expected return. Persoff prepares its financial statements in accordance with International Financial Reporting Standards. The company will
A. record a $16 million gain-OCI.
B. report an unrecognized net loss as an offset to the net pension liability in the liability section of the balance sheet.
C. report an unrecognized net gain as an increase in the net pension asset in the liability section of the balance sheet.
D. record a $3 million decrease in its plan assets.

10. The following information pertains to Havana Corporation’s defined benefit pension plan:
($ in 000s) 2011 2012
Beginning Beginning
Balances balances
Projected benefit obligation ($6,000) ($6,504)
Plan assets 5,760 6,336
Prior service cost–AOCI 600 552
Net loss–AOCI 720 786
At the end of 2011, Havana contributed $696 thousand to the pension fund and benefit payments of $624 thousand were made to retirees. The expected rate of return on plan assets was 10%, and the actuary’s discount rate is 8%. There were no changes in actuarial estimates and assumptions regarding the PBO.
What is Havana’s 2011 actual return on plan assets?
A. $6,336 thousand
B. $504 thousand
C. $618 thousand
D. $1,128 thousand

11. JL Health Services reported a net loss-AOCI in last year’s balance sheet. This year, the company revised its estimate of future salary levels causing its PBO estimate to decline by $24. Also, the $48 million actual return on plan assets was less than the $54 million expected return. As a result,
A. the net pension liability will decrease by $24 million.
B. the statement of comprehensive income will report a $6 million gain and a $24 million loss.
C. the net pension liability will increase by $18 million.
D. accumulated other comprehensive income will increase by $18 million.

12. Information for Hobson International Corp. for the current year ($ in millions):
Income from continuing operations before tax $150
Extraordinary loss (pretax) 30
Temporary differences (all related to operating income):
Accrued warranty expense in excess of write-offs included in operating income 10
Depreciation deducted on tax return in excess of depreciated expense 25
Permanent differences (all related to operating income):
Nondeductible portion of travel & entertainment expense 5
The applicable enacted tax rate for all periods is 40%.
What is Hobson’s income t

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