ACCT 311 Final Exam Answers

ACCT 311 Final Exam Answers

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1. XYZ Company sells appliance service contracts agreeing to repair appliances for a two-year period. XYZ’s past experience is that, of the total dollars spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year. Receipts from service contract sales for the two years ended December 31, year 2, are as follows:

Year 1	$500,000
Year 2	$600,000

Receipts from contracts are credited to unearned service contract revenue. Assume that all contract sales are made evenly during the year. What amount should XYZ report as unearned service contract revenue at December 31, year 2?

1. $360,000
2. $470,000
3. $480,000
4. $630,000

2. A Corp. had the following liabilities at December 31, year 2:

Accounts payable	$55,000
Unsecured notes, 8%, due 7/1/Y3	400,000
Accrued expenses	35,000
Contingent liability	450,000
Deferred income tax liability	25,000
Senior bonds, 7%, due 3/31/Y3	1,000,000

The contingent liability is an accrual for possible losses on a $1,000,000 lawsuit filed against A. A’s legal counsel expects the suit to be settled in year 4, and has estimated that A will be liable for damages in the range of $450,000 to $750,000.

The deferred income tax liability is not related to an asset for financial reporting and is expected to reverse in year 4.

What amount should A report in its December 31, year 2 balance sheet for current liabilities?

1. $515,000
2. $940,000
3. $1,490,000
4. $1,515,000

3. During year 2, Smith Co. filed suit against West, Inc. seeking damages for patent infringement. At December 31, year 2, Smith’s legal counsel believed that it was probable that Smith would be successful against West for an estimated amount in the range of $75,000 to $150,000, with all amounts in the range considered equally likely. In March year 3, Smith was awarded $100,000 and received full payment thereof. In its year 2 financial statements, issued in February year 3, how should this award be reported?
1. As a receivable and revenue of $100,000.
2. As a receivable and deferred revenue of $100,000.
3. As a disclosure of a contingent gain of $100,000.
4. As a disclosure of a contingent gain of an undetermined amount in the range of $75,000 to $150,000.

4. A $100,000 bond payable is issued on June 1, Year One for 104. The bond pays annual cash interest of 12 percent per year with payments every June 1 and December 1. The bond was sold to yield an effective interest rate of 10 percent per year. If the effective rate method is being used, what amount (rounded) should be reported for the liability as of December 31, Year One?
1. $102,880
2. $103,060
3. $103,067
4. $103,209

5. On December 1, year 1, shares of authorized common stock were issued on a subscription basis at a price in excess of par value. A total of 20% of the subscription price of each share was collected as a down payment on December 1, year 1, with the remaining 80% of the subscription price of each share due in year 2. Collectibility was reasonably assured. At December 31, year 1, the stockholders’ equity section of the balance sheet would report additional paid-in capital for the excess of the subscription price over the par value of the shares of common stock subscribed and
1. Common stock issued for 20% of the par value of the shares of common stock subscribed.
2. Common stock issued for the par value of the shares of common stock subscribed.
3. Common stock subscribed for 80% of the par value of the shares of common stock subscribed.
4. Common stock subscribed for the par value of the shares of common stock subscribed.

6. A company declared a cash dividend on its common stock on December 15, year 1, payable on January 12, year 2. How would this dividend affect stockholders’ equity on the following dates?

	December 15, Year 1	December 31, Year 1	January 12, Year 2
a.	Decrease	No effect	Decrease
b.	Decrease	No effect	No effect
c.	No effect	Decrease	No effect
d.	No effect	No effect	Decrease

7. At December 31, year 2 and year 1, Gow Corp. had 100,000 shares of common stock and 10,000 shares of 5%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in year 2 or year 1. Net income for year 2 was $1,000,000. For year 2, basic earnings per share amounted to
10. $10.00
11. $ 9.50
12. $ 9.00
13. $ 8.50

8. Cox Corporation had 1,200,000 shares of common stock outstanding on January 1 and December 31, year 2. In connection with the acquisition of a subsidiary company in June year 1, Cox is required to issue 50,000 additional shares of its common stock on July 1, year 3, to the former owners of the subsidiary. Cox paid $200,000 in preferred stock dividends in year 2, and reported net income of $3,400,000 for the year. Cox’s diluted earnings per share for year 2 should be
2. $2.83
3. $2.72
4. $2.67
5. $2.56

9. Bing Corporation purchased bonds at a discount on the open market as an investment and intends to hold these bonds to maturity. Assume that Bing elects the fair value option. Bing should account for these bonds at
1.  
2. Amortized cost.
3. Fair value.
4. Lower of cost or market.

10. On both December 31, year 1, and December 31, year 2, Kopp Co.’s only marketable equity security had the same fair value, which was below cost. Kopp considered the decline in value to be temporary in year 1 but other than temporary in year 2. At the end of both years the security was classified as a noncurrent asset. Kopp considers the investment to be available-for-sale. Assume that Kopp does not elect the fair value option to account for its available-for-sale securities. What should be the effects of the determination that the decline was other than temporary on Kopp’s year 2 net noncurrent assets and net income?
1. No effect on both net noncurrent assets and net income.
2. No effect on net noncurrent assets and decrease in net income.
3. Decrease in net noncurrent assets and no effect on net income.
4. Decrease in both net noncurrent assets and net income.

11. A company sells inventory costing $15,000 to a customer for $20,000. Because of significant uncertainties surrounding the transaction, the installment sales method is viewed as proper. In the first year, the company collects $5,700. In the second year, the company collects another $8,000. What amount of profit should the company recognize in the second year?
1. $2,000
2. $3,000
3. $4,000
4. $5,000

12. A company sends 10,000 units of its products to one of its customers on December 28, Year One. The customer has a right to return any of this merchandise within 6 months for a full refund. The company wants to record this transaction as a sale in Year One. Which of the following is most likely to necessitate that the recording of the transaction as a sale be delayed until Year Two?
1. The company can make a reasonable estimation that 25 percent of the units will be returned.
2. Return of the goods is not contingent on resale.
3. If the goods are stolen from the customer, the obligation is not affected.
4. The company cannot make a reasonable estimation of the number of units that will be returned.

13. In a statement of cash flows, if used equipment is sold at a gain, the amount shown as a cash inflow from investing activities equals the carrying amount of the equipment
1. Plus the gain.
2. Plus the gain and less the amount of tax attributable to the gain.
3. Plus both the gain and the amount of tax attributable to the gain.
4. With no addition or subtraction.

14. On September 1, year 1, Canary Co. sold used equipment for a cash amount equaling its carrying amount for both book and tax purposes. On September 15, year 1, Canary replaced the equipment by paying cash and signing a note payable for new equipment. The cash paid for the new equipment exceeded the cash received for the old equipment. How should these equipment transactions be reported in Canary’s year 1 statement of cash flows?
1. Cash outflow equal to the cash paid less the cash received.
2. Cash outflow equal to the cash paid and note payable less the cash received.
3. Cash inflow equal to the cash received and a cash outflow equal to the cash paid and note payable.
4. Cash inflow equal to the cash received and a cash outflow equal to the cash paid.

15. In a statement of cash flows (using indirect approach for operating activities), an increase in inventories should be presented as a(n)
1. Outflow of cash.
2. Inflow and outflow of cash.
3. Addition to net income.
4. Deduction from net income.

16. A company starts the year with accounts payable of $13,000 but ends the year with the balance being $19,000. Net income for the year is $300,000. If the company reports its cash flows from operating activities by means of the indirect method, what amount should be reported?
1. $287,000
2. $294,000
3. $306,000
4. $319,000

17. Which of the following differences would result in future taxable amounts?
1. Expenses or losses that are deductible after they are recognized in financial income.
2. Revenues or gains that are taxable before they are recognized in financial income.
3. Expenses or losses that are deductible before they are recognized in financial income.
4. Revenues or gains that are recognized in financial income but are never included in taxable income.

18. For the year ended December 31, year 1, Tyre Co. reported pretax financial statement income of $750,000. Its taxable income was $650,000. The difference is due to accelerated depreciation for income tax purposes. Tyre’s effective income tax rate is 30%, and Tyre made estimated tax payments during year 1 of $90,000. What amount should Tyre report as current income tax expense for year 1?
1. $105,000
2. $135,000
3. $195,000
4. $225,000

19. A temporary difference that would result in a deferred tax liability is
1. Interest revenue on municipal bonds.
2. Accrual of warranty expense.
3. Excess of tax depreciation over financial accounting depreciation.
4. Subscriptions received in advance.

20. Because Jab Co. uses different methods to depreciate equipment for financial statement and income tax purposes, Jab has temporary differences that will reverse during the next year and add to taxable income. Deferred income taxes that are based on these temporary differences should be classified in Jab’s balance sheet as a
1. Contra account to current assets.
2. Contra account to noncurrent assets.
3. Current liability.
4. Noncurrent liability.

21. On January 1, Year One, a company started a defined benefit pension plan for its employees. Assume that the annual service cost is $200,000. Funding is $150,000 each January 1, beginning on January 1, Year One. The interest rate used for discount purposes to determine the projected benefit obligation is 10 percent. Both actual and expected earnings on plan assets are 8 percent. What pension liability should this company report on its December 31, Year Two, balance sheet?
1. $83,040
2. $105,040
3. $111,040
4. $125,040

22. A company has a defined benefit pension plan. Which of the following does not create a prior service cost?
1. The expected length of life for the average employee is increased by two years by the actuary determining the company’s projected benefit obligation.
2. The plan is amended by the company, a move which causes an increase in the projected benefit obligation.
3. The plan is begun and employees are given credit for the time they have worked previously.
4. The plan is amended by the company, a move which causes a decrease in the projected benefit obligation.

23. The Aberdeen Company maintains a defined benefit pension plan for its employees. On January 1, Year Four, this pension plan is amended so that employees can retire at the age of 64 rather than 65. As a result of this decision, the projected benefit obligation on that date increases by $2 million. The average remaining service life of the active employee group is 10 years. The discount interest rate is 7 percent per year. Which of the following statements is true?
1. The $2 million is recorded as an expense on January 1, Year Four.
2. The $2 million is recorded as an expense on December 31, Year Four.
3. The company reports $1.8 million as accumulated other comprehensive income in stockholders’ equity on December 31, Year Four.
4. The company reports $2.14 million as accumulated other comprehensive income in stockholders’ equity on December 31, Year Four.

24. At the end of the current year, a company with a defined benefit pension plan has a projected benefit obligation of $414,000, plan assets of $302,000, pension expense of $119,000, prior service cost (other comprehensive income) of $23,000, unrecognized gain (other comprehensive income) of $5,000, service cost of $124,000, and funding for the year of $84,000. What liability is reported by the company on its balance sheet?
1. $98,000
2. $101,000
3. $104,000
4. $112,000

25. A company leases a machine on January 1, Year One for five years which call for annual payments of $10,000 per year beginning on January 1, Year One. The present value of these payments based on a reasonable interest rate of 10 percent is assumed to be $42,000. This lease is an operating lease. How much expense will the company recognize for Year One?
1. $4,200
2. $8,400
3. $10,000
4. $12,600

26. On January 1, Year One, Owens buys a large warehouse for $700,000 which it immediately sells to National Financing for $800,000. The warehouse has an expected life of 10 years. Owens immediately signs a contract to lease the warehouse back for its own use. This lease is for 10 years with payments of $120,000 per year. The first payment is made immediately. Assume that these payments were computed using a 10 percent annual interest rate. Which of the following statements is true?
1. The $100,000 gain on the original sale must be recognized by Owens immediately.
2. The $100,000 gain on the original sale will be recorded by Owens as other comprehensive income.
3. The $100,000 gain on the original sale will be deferred until the end of the lease and then recognized as a gain.
4. The $100,000 gain on the original sale will be deferred and then written off each year as a reduction in the depreciation expense on the leased warehouse.

27. The Turpen Company buys a machine for $30,000. Normally, the machine would be sold to a customer for $42,000. However, in hopes of expanding the number of available customers, Turpen leases the machine for 4 years to the Royal Corporation. The accountants for the Turpen Company are currently studying how this lease should be recorded for financial reporting purposes. Which of the following statements is true?
1. Because this property is normally sold, the lease contract must be recorded as a capital lease by Turpen.
2. Because this property is normally sold, the lessee (Royal) must report it as a sales-type lease.
3. If the machine has an expected life of five years, then both parties must report the transaction as a capital lease.
4. If the lease contract gives Royal the option to buy the machine at the end of four years, then both parties must report the transaction as a capital lease

28. Danville Corporation buys a truck for $52,000 and leases it to Viceroy for 8 years. At the end of that time, Viceroy can buy the truck for $7,000 in cash. Which of the following is not true?
1. If this purchase option is viewed as a bargain, Danville should record the $7,000 as a future cash flow in accounting for the lease even though it is not guaranteed.
2. Unless the purchase option is viewed as a bargain, Danville cannot account for this lease as a capital lease.
3. The purchase option cannot be viewed as a bargain unless it is significantly below the expected fair value of the truck on that date.
4. If this purchase option is viewed as a bargain, Danville’s profit to be recognized in the first year will be increased.

29. On January 1, Year One, Company A agrees to lease a truck from Ford for five years, the truck’s entire life. This arrangement is viewed as a capital lease. Payments will be exactly $10,000 per year with the first payment made immediately and the second on January 1, Year Two and so on. A reasonable interest rate is 10 percent. The present value of a single amount of $1 in five years at an annual rate of 10 percent is .630. The present value of an annuity due of $1 for five years at an annual rate of 10 percent is 3.81. What liability is reported by Company A on its December 31, Year One balance sheet?
1. $28,100
2. $30,910
3. $31,740
4. $40,000

30. The Blacksville Company reports sales of $500,000 in Year One, its first year in operations. Sales increased to $600,000 in Year Two and $700,000 in Year Three. The company had total reported expenses of $280,000 in Year One, $370,000 in Year Two, and $460,000 in Year Three. This company has consistently been applying the Red Method, which recognizes one particular expense as always being equal to 10 percent of sales. Assume, though, that at the very end of Year Three, company officials decide to change to the Purple Method. This method is also accepted by US GAAP but computes this same expense as simply being $62,000 each year. Blacksville is now preparing to present income statements for only Years Two and Three. After making the change, what is the beginning retained earnings reported for Year Three? Ignore income taxes. Assume no dividends are distributed.
1. $436,000
2. $442,000
3. $448,000
4. $450,000