Instructions

Solve the following 25 problems. Write all your solutions on this sheet. In addition, write your calculations or rationale for your answer on this sheet. In other words, it’s not enough to give the correct answer. You must also show why your answer is correct through your calculations or rationale. The spaces expand as you write. Each problem is worth 4 points.

Problems

1.    Holiday Laboratories purchased a high speed industrial centrifuge at a cost of $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000.

The capitalized cost is: 

A. $455,000.
B. $446,000.
C. $437,000.
D. $435,000.

2.    Vijay Inc. purchased a 3-acre tract of land for a building site for $320,000. On the land was a building with an appraised value of $120,000. The company demolished the old building at a cost of $12,000, but was able to sell scrap from the building for $1,500. The cost of title insurance was $900 and attorney fees for reviewing the contract was $500. Property taxes paid were $3,000, of which $250 covered the period subsequent to the purchase date.

The capitalized cost of the land is: 

A. $336,400.
B. $336,150.
C. $334,650.
D. $201,150.

3.    Simpson and Homer Corporation acquired an office building on three acres of land for a lump-sum price of $2,400,000. The building was completely furnished. According to independent appraisals, the fair values were $1,300,000, $780,000, and $520,000 for the building, land, and furniture and fixtures, respectively.

The initial values of the building, land, and furniture and fixtures would be: 

A. $1,300,000, $780,000, $520,000.
B. $1,200,000, $720,000, $480,000.
C. $720,000, $1,200,000, $480,000.
D. These figures are not accurate – see my calculations for details.

4.    When bonds are sold at a discount, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of discount is: 

A.    Higher than the effective interest amount every year.

B.    Higher than the effective interest amount in the early years and less than the effective interest amount in the later years.

C.    Less than the effective interest amount in the early years and more than the effective interest amount in the later years.

D.   Less than the effective interest amount every year.

5.    On January 1, 2009, 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, 2019. 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, 2009, balance sheet? 

A. $1,045,000.
B. $1,040,000.
C. $987,000.
D. $982,000.

6.    When bonds include detachable warrants, what is the appropriate accounting for the cash proceeds from the bond issue? 

A.    The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative market values.

B.    The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative face values.

C.    A nominal amount is allocated to the warrants.

D.   All of the proceeds are allocated to the bonds.

7.    On January 2, 2009, Tobias Company began using straight-line depreciation for a certain class of assets. In the past, the company had used double-declining-balance depreciation for these assets. As of January 2, 2009, the amount of the change in accumulated depreciation is $40,000. The appropriate tax rate is 40%. The separately reported change in 2009 earnings is: 

A. An increase of $40,000.
B. A decrease of $40,000.
C. An increase of $24,000.
D. None of these are correct. See calculations and correct answer below.

8.    B Company switched from the sum-of-the-years-digits depreciation method to straight-line depreciation in 2009. The change affects machinery purchased at the beginning of 2007 at a cost of $72,000. The machinery has an estimated life of five years and an estimated residual value of $3,600. What is B’s 2009 depreciation expense? 

A. $ 8,400
B. $13,680
C. $15,840
D. $ 9,120

9.    Retrospective restatement usually is appropriate for a change in which one of the following? Choose A, B, C, or D.

  
A. 
B. 
C. 
D. 

10.In 2009, internal auditors discovered that Fay, Inc. had debited an expense account for the $700,000 cost of a machine purchased on January 1, 2006. The machine’s useful life was expected to be 5 years with no residual value. Straight-line depreciation is used by Fay. The journal entry to correct the error will include a credit to accumulated depreciation of: 

A. $140,000.
B. $280,000.
C. $420,000.
D. $700,000.

11.During 2009, P Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts:

  
P Company uses the periodic inventory system to ascertain year-end quantities that are converted to dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income taxes, P’s retained earnings at January 1, 2009 would be 

A. Correct as stated.
B. $ 30,000 overstated.
C. $150,000 overstated.
D. $270,000 overstated.

12.A change that uses the prospective approach is accounted for by: 

A. Implementing it in the current year.
B. Reporting pro forma data.
C. Retrospective restatement of all prior financial statements in a comparative annual report.
D. Giving current recognition of the past effect of the change.

13.Which of the following accounting changes should not be accounted for prospectively? 

A. The correction of an error.
B. A change from declining balance to straight-line depreciation.
C. A change from straight-line to declining balance depreciation.
D. A change in the expected salvage value of a depreciable asset.

14.Issued stock refers to the number of shares: 

A. Outstanding plus treasury shares.
B. Shares issued for cash.
C. In the hand of shareholders.
D. That may be issued under state law.

15.The common stock account on a company’s balance sheet is measured as: 

A.    The number of common shares outstanding multiplied by the stock’s par value per share.

B.    The number of common shares outstanding multiplied by the stock’s current market value per share.

C.    The number of common shares issued multiplied by the stock’s par value per share.

D.   None of these is correct. The correct answer and rationale for your answer are shown below:

16.Roberto Corporation was organized on January 1, 2009. The firm was authorized to issue 100,000 shares of $5 par common stock. During 2009, Roberto had the following transactions relating to shareholders’ equity:

·         Issued 10,000 shares of common stock at $7 per share.

·         Issued 20,000 shares of common stock at $8 per share.

·         Reported a net income of $100,000.

·         Paid dividends of $50,000.Purchased 3,000 shares of treasury stock at $10 (part of the 20,000 shares issued at $8).

What is total shareholders’ equity at the end of 2009? 

A. $270,000.
B. $300,000.
C. $250,000.
D. $200,000.

17.The par value of shares issued is normally recorded in the: 
A. Paid-in capital in excess of par account.
B. Common stock account.
C. Retained earnings account.
D. Appropriated retained earnings account.

18.The owners of a corporation are its shareholders. If a corporation has only one class of shares, they typically are labeled common shares. Each of the following are ownership rights held by common shareholders, unless specifically withheld by agreement except:  

A.    The right to vote on policy issues.

B.    The right to share in profits when dividends are declared (in proportion to the percentage of shares owned by the shareholder).

C.    The right to dividends equal to a stated rate time par value (if dividends are paid).

D.   The right to share in the distribution of any assets remaining at liquidation after other claims are satisfied.

19.If a futures contract is used to hedge a debt sale, and interest rates go down causing debt security prices to rise, the potential benefit of being able to issue debt at that lower interest rate (higher price) will be offset by a loss on the futures position. 

This statement is: True    False

20.Hedging is used to deal with exposure to: 
A. Fair value risk.
B. Cash flow risk.
C. Foreign exchange risk.
D. All of these are correct.

21.Disclosure notes would not include: 

A. Depreciation methods used and estimated useful life.
B. Definition of cash equivalents.
C. Details of pension plans.
D. Data to adjust the financial statements so that they are not misleading.

22.The Management Discussion and Analysis section of the annual report can best be described as: 

A. Frank but objective.
B. Independent but precise.
C. Legalistic and lengthy.
D. Biased but informative.

23.The quick ratio is: 

A. The liquidity ratio divided by the equity ratio.
B. Current assets minus inventory divided by current liabilities minus accounts payable.
C. Current assets minus inventory and prepaid items divided by current liabilities.
D. Cash divided by accounts payable.

24.Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below.

 HHF’s debt-to-equity ratio is: 

A. 0.75.
B. 1.13.
C. 0.53.
D. 1.80.

25.Which of the following is not a required segment reporting disclosure according to International Accounting Standards? 

A. Segment profit or loss.
B. Segment assets.
C. Segment liabilities.
D. All are required disclosures.