Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
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1.
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Carlton Co. manufactures equipment that is sold or leased. On December 31, 20X1,
Carlton leased equipment to Acme for a five-year period ending December 31, 20X6, at which date
ownership of the leased asset will be transferred to Acme. Equal payments under the lease are $66,000
(including $6,000 executory costs) and are due on December 31 of each year. The first payment was
made on December 31, 20X1. Collectibility of the remaining lease payments is reasonably assured, and
Carlton has no material cost uncertainties. The normal sales price of the equipment is $231,000, and
cost is $180,000. For the year ended December 31, 20X1, what amount of income should Carlton realize
from the lease transaction?
a. | $51,000. | b. | $66,000. | c. | $69,000. | d. | $99,000. | | |
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2.
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In a
lease that is recorded as a sales-type lease by the lessor, interest revenue
a. | should be
recognized in full as revenue at the lease's inception. | b. | should be
recognized over the period of the lease using the straight-line method. | c. | should be
recognized over the period of the lease using the effective interest
method. | d. | does NOT arise. | | |
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3.
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On
January 2, 20X1, Hernandez, Inc. signed a ten-year noncancelable lease for a heavy duty drill press.
The lease stipulated annual payments of $70,000 starting at the end of the first year, with title
passing to Hernandez at the expiration of the lease. Hernandez treated this transaction as a capital
lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez
uses straight-line depreciation for all of its plant assets. Aggregate lease payments were
determined to have a present value of $420,000, based on implicit interest of
10%.
In its 20X1 income statement, what amount of depreciation expense
should Hernandez report from this lease transaction?
a. | $70,000. | b. | $46,667. | c. | $42,000. | d. | $28,000. | | |
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4.
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On
December 31, 20X1, Sanford, Inc. leased machinery with a fair value of $420,000 from Cey Rentals
Co. The agreement is a six-year noncancelable lease requiring annual payments of $80,000
beginning December 31, 20X1. The lease is appropriately accounted for by Sanford as
a capital lease. Sanford's incremental borrowing rate is 11%. Sanford knows the interest rate
implicit in the lease payments is 10%.
The present
value of an annuity due of 1 for 6 years
at 10% is 4.7908.
The present value of an annuity due of 1 for 6 years
at 11% is
4.6959.
In its December
31, 20X1 balance sheet, Sanford should report a lease liability of
a. | $303,264. | b. | $340,000. | c. | $375,672. | d. | $383,264. | | |
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5.
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A
lessee had a ten-year capital lease requiring equal annual payments. The reduction of the
lease liability in year 2 should equal
a. | the current liability shown for the lease at the end of year
1. | b. | the current
liability shown for the lease at the end of year 2. | c. | the reduction of
the lease obligation in year 1. | d. | one-tenth of the original lease
liability. | | |
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6.
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Included in Stoner Corp.'s liability account balances at December 31, 20X1, were
the following:
14% note payable issued October 1, 20X1,
maturing
September 30,
20X2
$250,000
16% note payable issued April 1, 20X1, payable
in
six equal annual installments of
$100,000
beginning April 1,
20X2
600,000
Stoner's
December 31, 20X1 financial statements were issued on March 31, 20X2. On January 15, 20X2, the
entire $600,000 balance of the 16% note was refinanced by issuance of a long-term
obligation payable in a lump sum. In addition, on March 10, 20X2, Stoner consummated a
noncancelable agreement with the lender to refinance the 14%, $250,000 note on a long-term
basis, on readily determinable terms that have not yet been implemented. On the December 31,
20X1 balance sheet, the amount of the notes payable that Stoner should classify as
short-term obligations is
a. | $350,000. | b. | $250,000. | c. | $100,000. | d. | $0. | | |
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7.
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On
December 31, 20X1, Gant Co. has $4,000,000 of short-term notes payable due on February 14,
20X2. On January 10, 20X2, Gant arranged a line of credit with County Bank which allows
Gant to borrow up to $3,000,000 at one percent above the prime rate for three
years. On February 2, 20X2, Gant borrowed $2,400,000 from County Bank and used $1,000,000
additional cash to liquidate $3,400,000 of the short-term notes payable. The amount of
the short-term notes payable that should be reported as current liabilities on the
December 31, 20X1 balance sheet which is issued on March 5, 20X2 is
a. | $0. | b. | $600,000. | c. | $1,000,000. | d. | $1,600,000. | | |
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8.
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Deltoid Corp. signed a three-month, zero-interest-bearing note on November 1,
20X1 for the purchase of $40,000 of inventory. The face value of the note was $40,588. Assuming
Deltoid used a "Discount on Note Payable" account to initially record the note and
that the discount will be amortized equally over the three-month period, the adjusting
entry made at December 31, 20X1 will include a
a. | debit to
Discount on Note Payable for $196. | b. | debit to Interest Expense for $392. | c. | credit to
Discount on Note Payable for $196. | d. | credit to Interest Expense for $392. | | |
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9.
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If a
corporation purchases a lot and building and subsequently tears down the building and uses the
property as a parking lot, the proper accounting treatment of the cost of the building would
depend on
a. | the significance
of the cost allocated to the building in relation to the combined cost of the lot and
building. | b. | the length of time for which the building was held prior to
its demolition. | c. | the contemplated future use of the parking
lot. | d. | the intention of
management for the property when the building was acquired. | | |
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10.
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Which
of the following statements is correct?
a. | A company may exclude a short-term obligation from
current liabilities if the firm intends to refinance the obligation on a long-term
basis. | b. | A company may exclude a short-term obligation from
current liabilities if the firm can demonstrate an ability to consummate a
refinancing. | c. | A company may exclude a short-term obligation from current
liabilities if it is paid off after the balance sheet date and subsequently replaced by long-term
debt before the balance sheet is issued. | d. | None of
these. | | |
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11.
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Cotton Hotel Corporation recently purchased Holiday Hotel and the land on which
it is located with the plan to tear down the Holiday Hotel and build a new luxury hotel on the
site. The cost of the Holiday Hotel should be
a. | depreciated over
the period from acquisition to the date the hotel is scheduled to be torn
down. | b. | written off as an extraordinary loss in the year the hotel
is torn down. | c. | capitalized as part of the cost of the
land. | d. | capitalized as part of the cost of the new
hotel. | | |
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12.
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Which
of the following assets do NOT qualify for capitalization of interest costs incurred during
construction of the assets?
a. | Assets under construction for an enterprise's own
use. | b. | Assets intended
for sale or lease that are produced as discrete projects. | c. | Assets financed
through the issuance of long-term debt. | d. | Assets not currently undergoing the activities necessary
to prepare them for their intended use. | | |
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13.
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Which
of these is NOT a major characteristic of a plant asset?
a. | Possesses
physical substance | b. | Acquired for use in operations | c. | Yields services
over a number of years | d. | All of these are major characteristics of a plant
asset. | | |
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14.
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When
computing the amount of interest cost to be capitalized, the concept of "avoidable
interest" refers to
a. | the total interest cost actually
incurred. | b. | a cost of capital charge for stockholders'
equity. | c. | that portion of total interest cost which would not have been
in- curred if expenditures for asset construction had not been made. | d. | that portion of
average accumulated expenditures on which no interest cost was
incurred. | | |
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15.
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The
period of time during which interest must be capitalized ends when
a. | the asset is
substantially complete and ready for its intended use. | b. | no further
interest cost is being incurred. | c. | the asset is abandoned, sold, or fully
depreciated. | d. | the activities that are necessary to get the asset ready for
its intended use have begun. | | |
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16.
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Which
of the following statements is true regarding capitalization of interest?
a. | Interest cost
capitalized in connection with the purchase of land to be used as a building site should be
debited to the land account and not to the building account. | b. | The amount of
interest cost capitalized during the period should not exceed the actual interest cost
incurred. | c. | When excess borrowed funds not immediately needed for
construction are temporarily invested, any interest earned should be offset against interest
cost incurred when determining the amount of interest cost to be
capitalized. | d. | The minimum amount of interest to be capitalized is determined
by multiplying a weighted average interest rate by the amount of average accumulated
expenditures on qualifying assets during the period. | | |
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17.
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When
funds are borrowed to pay for construction of assets that qualify for capitalization of
interest, the excess funds not needed to pay for construction may be temporarily invested in
interest- bearing securities. Interest earned on these temporary investments should
be
a. | offset against
interest cost incurred during construction. | b. | used to reduce
the cost of assets being constructed. | c. | multiplied by an appropriate interest rate to determine
the amount of interest to be capitalized. | d. | recognized as
revenue of the period. | | |
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18.
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For a
nonmonetary exchange of plant assets, accounting recognition should NOT be given
to
a. | a loss when the
transaction is deemed to have economic substance. | b. | a gain when the
transaction is deemed to have economic substance. | c. | a loss when the
transaction is deemed not to have economic substance. | d. | part of a loss
when the transaction is deemed to have economic substance and cash is given
up. | | |
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19.
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During 2001, Elston Co. incurred average accumulated expenditures of $300,000
during construction of assets that qualified for capitali- zation of interest. The only
debt outstanding during 2001 was a $400,000, 10%, 5-year note payable dated January 1,
1999. What is the amount of interest that should be capitalized by Elston during
2001?
a. | $0. | b. | $10,000. | c. | $30,000. | d. | $40,000. | | |
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20.
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During 20X1, Allen Corporation constructed assets costing $500,000. The
weighted-average accumulated expenditures on these assets during 20X1 was $300,000. To help pay
for construction, $220,000 was borrowed at 10% on January 1, 20X1, and funds not needed for
construction were temporarily invested in short-term securities, yielding $4,500 in interest
revenue. Other than the construction funds borrowed, the only other debt
outstanding during the year was a $250,000, 10-year, 9% note payable dated January 1, 1995.
What is the amount of interest that should be capitalized by Allen during
20X1?
a. | $30,000. | b. | $15,000. | c. | $29,200. | d. | $47,200. | | |
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21.
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Pitt
Co. exchanged similar nonmonetary assets with Young Co. No cash was exchanged. The carrying amount of
the asset surrendered by Pitt exceeded both the fair value of the asset received and Young's
carrying amount of that asset. Pitt should recognize the difference between the carrying amount
of the asset it surrendered and
a. | the fair value of the asset it received as a
loss. | b. | the fair value of the asset it received as a
gain. | c. | Young's carrying amount of the asset it received as a
loss. | d. | Young's carrying amount of the asset it received as a
gain. | | |
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22.
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Net
realizable value is
a. | acquisition cost plus costs to complete and
sell. | b. | selling price. | c. | selling price
plus costs to complete and sell. | d. | selling price less costs to complete and
sell. | | |
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23.
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Fisher Company exchanged 500 shares of Dolan Company common stock, which Fisher was
holding as an investment, for equipment from West Company. The Dolan Company common stock,
which had been purchased by Fisher for $50 per share, had a quoted market value of $58 per share at
the date of exchange. The equipment had a recorded amount on West's books of $26,500.
What journal entry should Fisher make to record this exchange?
a. | Equipment
................................. 25,000
Investment in Dolan Co.
Common Stock ... 25,000 | b. | Equipment
................................. 26,500
Investment in Dolan Co.
Common Stock ... 25,000
Gain on Disposal of
Investment ......... 1,500 | c. | Equipment
................................. 26,500
Loss on
Disposal of Investment ............ 2,500
Investment in Dolan Co.
Common Stock ... 29,000 | d. | Equipment
................................. 29,000
Investment in Dolan Co.
Common Stock ... 25,000
Gain on Disposal of
Investment ......... 4,000 | | |
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24.
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When
an investment in an available-for-sale security is transferred to trading because the company
anticipates selling the stock in the near future, the carrying value assigned to the investment
upon entering it in the trading portfolio should be
a. | its original
cost. | b. | its fair value at the date of the
transfer. | c. | the higher of its original cost or its fair value at the date
of the transfer. | d. | the lower of its original cost or its fair value at the date of
the transfer. | | |
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25.
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In a
period of rising prices, the inventory method which tends to give the highest reported inventory
is
a. | FIFO. | b. | moving average. | c. | LIFO. | d. | weighted-average. | | |
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26.
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APB
OPINION NO. 21 specifies that, regarding the amortization of a premium or discount on a debt
security, the
a. | effective
interest method of allocation must be used. | b. | straight-line
method of allocation must be used. | c. | effective interest method of allocation should be used but
other methods can be applied if there is no material difference in the results
obtained. | d. | par value method must be used and therefore no allocation is
necessary. | | |
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27.
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When
a company holds between 20% and 50% of the outstanding stock of an investee, which of the following
statements applies?
a. | The investor should always use the equity method to account for
its investment. | b. | The investor should use the equity method to account for its
investment unless circumstances indicate that it is unable to exercise "significant
influence" over the investee. | c. | The investor must use the fair value method unless it can
clearly demonstrate the ability to exercise "significant influence" over the
investee. | d. | The investor should always use the fair value method to account
for its investment. | | |
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28.
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Byner
Corporation accounts for its investment in the common stock of Yount Company under the equity
method. Byner Corporation should ordinarily record a cash dividend received from Yount
as
a. | a reduction of
the carrying value of the investment. | b. | additional paid-in capital. | c. | an addition to
the carrying value of the investment. | d. | dividend income. | | |
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29.
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Sloan
Company's trading securities portfolio which is appropriately included in current assets is as
follows:
December 31, 20X1
Fair Unrealized
Cost Value
Gain (Loss)
Arlington Corp.
$260,000 $210,000
$(50,000)
Downs,
Inc. 245,000
265,000 20,000
$505,000 $475,000
$(30,000)
Ignoring income
taxes, what amount should be reported as a charge against income in Sloan's 20X1 income statement if
20X1 is Sloan's first year of operation? a. | $0. | b. | $20,000. | c. | $30,000. | d. | $50,000. | | |
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30.
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Under
the equity method of accounting for investments, an investor recognizes its share of the earnings in
the period in which the
a. | investor sells the investment. | b. | investee
declares a dividend. | c. | investee pays a dividend. | d. | earnings are
reported by the investee in its financial statements. | | |
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