1 - Miami University



Analysis of Review

|Number |Topic |Use |Answer |Cumulative |

|1 |Leases |Yes |b |1 |

|2 |Leases |Yes |d |2 |

|3 |Taxes |Yes |a |1 |

|4 |Taxes |Yes |b |2 |

|5 |Earnings Per Share |Yes |d |1 |

|6 |Earnings Per Share |Yes |d |2 |

|7 |Leases |Yes |c |3 |

|8 |Taxes |Yes |b |3 |

|9 |Taxes |Yes |b |4 |

|10 |Leases |Yes |d |4 |

|11 |Pensions |Yes |d |1 |

|12 |Payroll |No | | |

|13 |Pensions |Yes |c |2 |

|14 |Pensions |Yes |d |3 |

|15 |Error Correction |No | | |

|16 |Derivatives |Yes |d |1 |

|17 |Earnings Per Share |Yes |a |3 |

|18 |Earnings Per Share |Yes |c |4 |

|19 |Error Correction |No | | |

|20 |Error Correction |No | | |

|21 |Error Correction |No | | |

|22 |Old Pensions |No | | |

|23 |Pensions |Yes |a |4 |

|24 |Derivatives |Yes |b |2 |

|25 |Joint ventures |No | | |

|26 |Joint ventures |No | | |

|27 |Investments |No | | |

|28 |Joint ventures |No | | |

|29 |Investments |No | | |

|30 |Derivatives |Yes |a |3 |

|31 |Earnings per share |Yes |c |5 |

|32 |Derivatives |Yes |a |4 |

|33 |Leases |Yes |c |5 |

|34 |Taxes |Yes |d |5 |

|35 |Derivatives |Yes |b |5 |

|36 |Accounts Receivable |No |b |1 |

|37 |Impairment |No |a |1 |

|38 |Impairment |No |c |2 |

|39 |Discontinued Operations |No |b |1 |

|40 |Accounts Receivable/Cash Flow |Yes |c |2/1 |

|41 |Cash Flow Statement |Yes |c |2 |

|42 |Cash Flow Statement |Yes |b |3 |

|43 |Accounts Receivable |Yes |d |3 |

|44. |Cash Flow Statement |Yes |d |4 |

|45 |Cash Flow Statement |Yes |c |5 |

|46 |Cash Flow Statement |Yes |c |6 |

|47 |Long Term Construction |Yes |b |1 |

|48 |Long Term Construction |Yes |d |2 |

1. If a lessor appropriately classifies a lease as a sales-type lease, the following items related to the lease should be reported on the lessor’s income statement in the first year of the lease.

| | | | |Gain (loss) |

| | | | |On Sale of |

| |Rental |Interest |Depreciation |Leased Property |

| |Revenue |Revenue |Expense | |

|a. |No |No |No |No |

|b. |No |Yes |No |Yes |

|c. |No |Yes |Yes |Yes |

|d. |Yes |No |Yes |No |

2. A lease should be classified as a capital lease if the present value of the minimum lease payments at the beginning of the lease term is equal to or exceeds

a. 70 percent of the fair value of the leased property.

b. 75 percent of the fair value of the leased property.

c. 80 percent of the fair value of the leased property.

d. 90 percent of the fair value of the leased property.

3. On October 1, 1995, Pine Company received $120,000 of rent in advance for the period October 1, 1995, through September 30, 1996. For income tax purposes, $120,000 was included in the 1995 taxable income; whereas, for financial reporting purposes, only $30,000 was included in the 1995 pretax financial income. The tax effects of the $90,000 difference would affect provision for income taxes, the deferred tax asset, and the deferred tax liability in the following ways for 1995:

Provision for Deferred Deferred

Income Taxes Tax Asset Tax Liability

a. Increase Increase No effect

b. Decrease Increase No effect

c. Increase No effect Increase

d. Decrease No effect Increase

4. The expected tax benefits resulting from a net operating loss carryforward are reported in the year of the net operating loss as a(n)

a. Income tax refund receivable.

b. Deferred tax asset.

c. Extraordinary gain.

d. Reduction in deferred tax liability.

5. In calculating diluted earnings per share, the interest expense relating to convertible bonds that are dilutive should be

a. Deducted from income to arrive at income available for common shareholders.

b. Deducted from income, net of its tax effect, to arrive at income available for common shareholders.

c. Added to income to arrive at income available for common shareholders.

d. Added to income, net of its tax effect, to arrive at income available for common shareholders.

6. Dual presentation of earnings per share data is required

a. For all corporations.

b. Whenever stock is reacquired.

c. When the capital structure of a corporation is simple.

d. When the capital structure of a corporation is complex.

7. Lovejoy Leasing Corp. leased a bulldozer to a local construction company for five years. The fair value (normal selling price) of the bulldozer was $75,000. Lovejoy was properly carrying the bulldozer in its inventory account at $55,000. The bulldozer must be returned to Lovejoy at the end of the lease term. When setting the lease payments, which were $16,468 at the start of each year, Lovejoy took into account an unguaranteed residual value of $15,000. Initial direct costs amounted to $300. The rate implicit in this lease was 12 percent. What amount should Lovejoy have recorded as the cost of goods sold in connection with this lease?

a. $38,532

b. $40,000

c. $46,789

d. $55,300

8. Faire Corporation’s pretax accounting income for 1995 was $420,000. Included in this amount was $47,000 of rent revenue. At the beginning of the year there were no balances in deferred tax accounts. The balance sheet included $15,000 of unearned rent revenue. The $15,000 will be earned early in 1996. The total of $62,000 had been collected from a tenant during 1995, and this was the amount reported on the tax return as rent revenue. This was the only difference between accounting and taxable income in 1995. Faire’s income tax rate was 40 percent in 1995 and 35 percent in 1996. Faire’s 1995 provision for income taxes should be

a. $168,000

b. $168,750

c. $174,000

d. $179,250

9. Ace Company incurred a net operating loss of $525,000 during year 2000. The effective tax rate during 2000 was 40 percent. For the three previous years, its taxable income and effective tax rates were as follows:

|Year | |Taxable Income | |Effective Tax Rate | |

|1997 | |$50,000 | |25% | |

|1998 | |$440,000 | |30% | |

|1999 | |$275,000 | |35% | |

If there were no differences between pretax accounting income and taxable income in any of the years, the income tax refund receivable account should be debited at December 31, 2000, for

a. $156,750

b. $161,750

c. $171,250

d. $210,000

10. Baxter Company leased equipment to Fritz Inc. on January 1, 1999. The lease is for an eight-year period expiring December 31, 2006. The first of eight equal annual payments of $900,000 was made on January 1, 1999, at the signing of the lease. Baxter had purchased the equipment on December 29, 1998 for $4,800,000. The lease is appropriately accounted for as a sales-type lease by Baxter. Assume that the present value at January 1, 1999, of all rent payments over the lease term discounted at a 10 percent interest rate was $5,280,000. What amount of interest revenue should Baxter record in year 2000 (the second year of the lease period) as a result of the lease?

a. $528,000

b. $472,000

c. $438,000

d. $391,800

11. Flash Company has a defined benefit plan for its employees. The following information relates to this plan:

Projected Benefit Obligation, 1/1/99 $10,000,000

Fair value of plan assets, 1/1/99 10,600,000

Market-related value of plan assets, 1/1/99 10,400,000

Service cost—1999 800,000

Actual return on plan assets, 1999 900,000

Settlement rate 10%

Long-term rate of return on assets 8%

Prior service costs are being amortized in the amount of $20,000 per year. Flash’s net periodic pension expense for the year was.

a. $880,000

b. $920,000

c. $948,000

d. $988,000

13. The service cost of a defined benefit pension plan is the

a. annual fee charged by the plan administrator.

b. change in the pension liability caused by plan amendments.

c. change in the pension liability caused by one additional year of employee service.

d. annual interest charge of the pension liability.

14. To compute the amortization on the cumulative unrecognized gains and losses in a pension plan, the corridor is 10% of the

a. average of the beginning balances of the fair value of plan assets and the projected benefit obligation.

b. higher of the beginning balances of the fair value of plan assets or the projected benefit obligation.

c. lower of the beginning balances of the fair value of plan assets or the projected benefit obligation.

d. higher of the beginning market-related value of the plan assets or the projected benefit obligation.

16. A fair value hedge would most likely be achieved with a

a. Knockout provision with an interest rate ceiling.

b. Knockout provision with an interest rate floor.

c. Pay-fixed, receive variable interest rate swap.

d. Pay-variable, receive fixed interest rate swap.

17. For purposes of computing weighted average number of shares outstanding during the year, a midyear event that must be treated as occurring at the beginning of the year is the

a. declaration and distribution of a stock dividend.

b. purchase of treasury stock

c. sale of additional common stock

d. issuance of stock warrants

18. During its fiscal year, Richard’s Distributing Company had net income of $100,000 (no extraordinary items) and 50,000 shares of common stock and 10,000 shares of preferred stock outstanding. Richards declared and paid dividends of $0.50 per share to common and $6.00 per share to preferred. The preferred stock is convertible into common stock on a share-for-share basis. For the year, Richards Distributing Company should report diluted earnings per share of

a. $0.25

b. $0.67

c. $0.80

d. $1.67

23. On January 1, 2001, Cubs Corporation adopted a defined benefit pension plan. The plan’s service cost of $150,000 was fully funded at the end of 2001. Prior service cost was funded by a contribution of $60,000 at the end of 2001. Amortization of prior service cost was $24,000 for 2001. What is the amount of Cub’s comprehensive income at December 31, 2001?

a. $36,000

b. $60,000

c. $84,000

d. $90,000

24. On March 1, 2002 Vernonia Corporation stock was trading for $43 per share. On that date Lynn Good bought a call option for $7.00. The expiration date was June 30. The strike price was $40. On June 30 Vernonia Corporation traded at $38 per share. What was Lynn Good’s profit or loss on the call option?

a. $900 loss

b. $700 loss

c. $200 gain

d. $500 gain

30. Which of the following would most likely be the underlying of an interest rate swap?

a. 30-day LIBOR.

b. The fixed rate of interest stated in the derivative.

c. The hypothetical value upon which interest is calculated.

d. The principle amount of the loan being hedged.

31. Jett Corp. had 600,000 shares of common stock outstanding on January 1, issued 900,000 shares on July 1, and had income applicable to common stock of $1,260,000 for the year. Basic earnings per share would be

a. $2.10

b. $1.00

c. $1.20

d. $1.40

32. The Explorer Company uses interest rate swaps to hedge its variable rate loans. At the beginning of the year the value of the swaps on the books was a liability of $2,500,000 At year end the finance company reported that the swaps were assets in the amount of $2,350,000 on the finance company books. All swaps qualify as perfect hedges. What is the effect on Explorer’s income statement.

a. No effect

b. Gain of $150,000

c. Loss of $150,000

d. Loss of $2,350,000

33. On January 1, 2004, Sims Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Sims to make annual payments of $300,000 at the end of each year for ten years with the title to pass to Sims at the end of this period. The machinery has an estimated life of fifteen years and no salvage value. Sims uses the straight line method of depreciation for all of its fixed assets. The present value of the minimum lease payments is $2,013,024 at an implicit interest rate of 8%. With respect to this lease Sims should record for 2004

a. Lease expense of $300,000

b. Interest expense of $134,202 and depreciation expense of $114,204

c. Interest expense of $161,043 and depreciation expense of $134,202

d. Interest expense of $137,043 and depreciation of $201,302

34. Prince Corporation recorded the following entry for taxes in its first year of operations:

Provision for income taxes $1,050,000

Income taxes payable $966,000

Deferred tax liability $84,000

Prince uses the straight line method of depreciation for financial reporting purposes and accelerated depreciation for tax purposes. The amount charged to depreciation expense on its books this year was $1,400,000. No differences existed between book income and taxable income except for the amount of depreciation. Assuming an enacted tax rate of 30%, what amount was deducted for depreciation on the corporation’s tax return?

a. $1,120,000

b. $1,316,000

c. $1,484,000

d. $1,680,000

35. Which of the following would constitute an embedded option to an interest rate swap:

a. Early termination agreement

b. Knockout provision

c. Pay variable portion in the swap

d. Pay fixed portion in the swap.

36. A method of estimating bad debts that focuses on the balance sheet rather than the income statement is the allowance method based on

a. Direct write-off

b. Aging the trade receivable accounts.

c. Credit sales

d. Specific accounts determined to be uncollectible.

37. Which of the following costs of Goodwill should be amortized over their estimated useful lives?

Cost of Goodwill

from a business Cost of

combination developing

accounted for goodwill

as a purchase internally

a. No No

b. No Yes

c. Yes No

d. Yes Yes

38. When conducting an analysis of goodwill for impairment, the following procedure is used:

a. The undiscounted future cash flows of the goodwill asset are compared to its book value to assess whether an impairment exists

b. The discounted future cash flows of the goodwill asset are compared to its book value to assess whether an impairment exists.

c. the fair value of the reporting unit is compared to the book value of the reporting unit.

d. cash flow from assets within the asset group are compared to the fair value of the goodwill

39. In 2005 Morpheus Company determined that it must recognize an impairment of goodwill in the amount of $8,400,000. The book value of the related subsidiary was $66,500,000 at the beginning of the year. Morpheus decided to sell the subsidiary during 2005 and was able to complete the sale to Neo Company for $16,100,000. Prior to the sale the subsidiary had pretax loss of $4,900,000. The effective tax rate is 40%. What amount will Morpheus report on the income statement for loss on discontinued operation?

a. $22,260,000

b. $25,200,000

c. $28,140,000

d. $30,240,000

40. Beginning accounts receivable was $10,000, and ending accounts receivable was $8,000. Sales from the year totaled $60,000, with $45,000 of it sold on account. Based on this information, what amounts of revenue and cash flow from operations will be reported for the year?

| | | | |

| | |Revenue |Cash inflow |

| |a. |$45,000 |$58,000 |

| |b. |$60,000 |$58,000 |

| |c. |$60,000 |$62,000 |

| |d. |$45,000 |$62,000 |

41. Which one of the following items would be found in the operating activities section of the cash flow statement under the indirect format?

a. collections from the sale of equipment

b. payment to the shareholders for dividends

c. increase in accounts receivable

d. proceeds from issuing bonds

42. Hiway Haulers owned a truck that cost $20,000 when it was purchased on January1, 1997. It had accumulated depreciation of $12,000 at December 31, 1998. The company originally estimated the truck would have a residual value after using it for three years of $2,000. It sold the truck for $15,000 cash on January 1, 1999. The amount of the gain or loss on the sale of the truck was:

a. $ 3,000 gain

b. $ 7,000 gain

c. $13,000 gain

d. $ 1,000 loss

43. A transaction to write-off an account receivable would affect the:

a. Accounts Receivable and Bad Debts Expense accounts.

b. Allowance for Doubtful Accounts and Bad Debts Expense accounts.

c. Allowance for Doubtful Accounts and Cash accounts.

d. Allowance for Doubtful Accounts and Accounts Receivable accounts.

44. At year-end, Pat counted $300 in office supplies on hand. The firm had $150 of supplies on hand at the beginning of the year and had purchased $1,800 of supplies during the year. What was supplies expense for the year?

a. $1,350

b. $1,950

c. $1,800

d. $1,650

45. Bosco Company had the following financial information:

Accounts receivable—December 31, 2001 $60,000

Cash collected from customers during 2002 $400,000

Accounts receivable—December 31, 2002 $70,000

Sales revenue for 2002 was:

a. $470,000

b. $460,000

c. $410,000

d. $390,000

46. The net income for the year ended December 31,2002 for Garfield Corporation was $1,760,000. Additional information is as follows:

Purchase of plant assets $1,400,000

Depreciation on plant assets $ 740,000

Dividends declared and paid $ 485,000

Net decrease in noncash current assets $ 145,000

Loss on sale of machine $ 65,000

Based on the above information, what should be the net cash flow from operating activities in Garfield’s statement of cash flows for the year ended December 31, 2002?

a. $2,565,000

b. $2,645,000

c. $2,710,000

d. $3,625,000

47. When goods or services are exchanged for cash or claims to cash (receivables), revenues are

a. earned.

b. realized or realizable.

c. realized or realizable and earned.

d. realized or realizable or earned.

48. Noland Constructors, Inc. has consistently used the percentage-of-completion method of recognizing income. In 2007, Noland started work on a $35,000,000 construction contract that was completed in 2008. The following information was taken from Noland's 2007 accounting records:

Progress billings $11,000,000

Costs incurred 10,500,000

Collections 7,000,000

Estimated costs to

complete 21,000,000

What amount of revenue should Noland have recognized in 2007 on this contract?

a. $28,000,000

b. $24,500,000

c. $12,833,333

d. $11,666,665

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