Test Paper Essay
1. A change in the amortization rate for an intangible asset should be accounted for as a
- a. change in accounting principle.
- b. change in reporting entity.
- c. correction of an error.
- d. change in accounting estimate
2. Wriglee, Inc. went to court this year and successfully defended the brand name of its product, “Sweet Gum,” from infringement by a competitor. The cost of this defense should be charged to
- a. patents and amortized over the legal life of the patent.
- b. legal fees and amortized over 5 years or less.
- c. expenses of the period.
- d. trademarks and amortized over a period not to exceed 40 years.
3. The intangible asset goodwill may be
- a. capitalized only when purchased.
- b. capitalized either when purchased or created internally.
- c. capitalized only when created internally.
- d. written off directly to retained earnings.
4. Goodwill was purchased when a business was acquired. When the goodwill is amortized, the credit is usually made to
- a. the Goodwill account.
- b. an Accumulated Amortization account.
- c. a Deferred Credit account.
- d. a stockholders’ equity account.
5. Which of the following principles BEST describes the current method of accounting for research and development costs?
- a. Associating cause and effect
- b. Systematic and rational allocation
- c. Income tax minimization
- d. Immediate recognition as an expense
6. How should research and development costs be accounted for, according to a Financial Accounting Standards Board Statement?
- a. Must be capitalized when incurred and then amortized over their estimated useful lives.
- b. Must be expensed in the period incurred.
- c. May be either capitalized or expensed when incurred, depending upon the materiality of the amounts involved.
- d. Must be expensed in the period incurred unless it can be clearly demonstrated that the expenditure will have alternative future uses or unless contractually reimbursable.
7. Which of the following costs should be EXCLUDED from research and development expense?
- a. Modification of the design of a product
- b. Acquisition of R ; D equipment for use on a current project only.
- c. Cost of marketing research for a new product.
- d. Engineering activity required to advance the design of a product to the manufacturing stage
8. The proper accounting for the costs incurred in creating computer software products that are to be sold, leased, or otherwise marketed to external parties, is to
- a. apitalize all costs until the software is sold to external parties.
- b. charge research and development expense when incurred until technological feasibility has been established for the product.
- c. charge research and development expense only if the computer software has alternative future uses.
- d. capitalize all costs as incurred until a detailed program design or working model is created.
9. In January, 1993, Sanders Corporation purchased a patent for a new consumer product for $720,000. At the time of purchase, the patent was valid for fifteen years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only ten years. During 1998 the product was permanently removed from the market under governmental order because of a potential health hazard present in the product. What amount should Sanders charge to expense during 1998, assuming amortization is recorded at the end of each year?
- a. $480,000.
- b. $360,000.
- c. $72,000.
- d. $48,000.
10. Jeltz Company was organized in late 1997 and began operations on January 1, 1998. The company is engaged in conducting market research studies on behalf of manufacturers.
PRIOR to the start of operations, the following costs were incurred: Attorney’s fees in connection with the organization of the company
$ 42,000 Improvements to leased offices prior to occupancy
36,000 Meetings of incorporators, state filing fees, and other organization expenses 30,000
$108,000 The company has decided to record amortization of organization costs over the maximum period allowable under generally accepted accounting principles. What should be the amount of organization costs amortized for 1998?
- a. $1,800.
- b. $2,400.
- c. $14,400.
- d. $32,000.
11. Royal Baseball Company had a player contract with Bonds that was recorded in its accounting records at $580,000. Chief Baseball Company had a player contract with Griffey that was recorded in its accounting records at $560,000. Royal traded Bonds to Chief for Griffey by exchanging each player’s contract. The fair value of each contract was $600,000. What amount should be shown in the accounting records after the exchange of player contracts? Royal Chief
- a. $560,000 $560,000
- b. $560,000 $580,000
- c. 580,000 $560,000
- d. $600,000 $600,000
12. In 1998, Donald Corporation incurred research and development costs as follows: Materials and equipment
$ 80,000 Personnel
120,000 Indirect costs
$350,000 These costs relate to a product that will be marketed in 1999. It is estimated that these costs will be recouped by December 31, 2001. The equipment has no alternative future use. What is the amount of research and development costs that should be expensed in 1998?
- a. $0.
- b. $200,000.
- c. $270,000.
- d. $350,000.
13. Larkin Inc. ncurred the following costs during the year ended December 31, 1998: Laboratory research aimed at discovery of new knowledge
$ 90,000 Design of tools, jigs, molds, and dies involving new technology
22,500 Quality control during commercial production, including routine testing of products
135,000 Construction of research facilities having an estimated useful life of 5 years but no alternative future use 180,000 The total amount to be classified and expensed as research and development in 1998 is
- a. $283,500.
- b. $427,500.
- c. $292,500.
- d. $148,500.
14. Liabilities are
- a. any accounts having credit balances after closing entries are made.
- b. deferred credits that are recognized and measured in conformity with generally accepted accounting principles.
- c. bligations to transfer ownership shares to other entities in the future.
- d. obligations arising from past transactions and payable in assets or services in the future.
15. Which of the following is true about accounts payable?
1. Accounts payable should not be reported at their present value.
2. When accounts payable are recorded at the net amount, a Purchase Discounts account will be used.
3. When accounts payable are recorded at the gross amount, a Purchase Discounts Lost account will be used.
- a. 1
- b. 2
- c. 3
- d. Both 2 and 3 are true.
16. Which of the following should NOT be included in the current liabilities section of the balance sheet?
- a. Trade notes payable
- b. Short-term zero-interest-bearing notes payable
- c. The discount on short-term notes payable
- d. All of these are included d
17. Which of the following is a current liability?
- a. Preferred dividends in arrears
- b. A dividend payable in the form of additional shares of stock
- c. A cash dividend payable to preferred stockholders
- d. All of these c
18. Which of the following may be a current liability?
- a. Withheld Income Taxes
- b. Deposits Received from Customers
- c. Deferred Revenue
- d. All of these d
19. The accounting profession contends that the most acceptable basis of accruing property taxes is during the
- a. fiscal period of the taxpayer.
- b. iscal period of the taxing unit.
- c. year appearing on the tax bill.
- d. year in which paid. d
20. Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles?
- a. Amount of loss is reasonably estimable and event occurs infrequently.
- b. Amount of loss is reasonably estimable and occurrence of event is probable.
- c. Event is unusual in nature and occurrence of event is probable.
- d. Event is unusual in nature and event occurs infrequently. b
21. A contingency can be accrued when
- a. it is certain that funds are available to settle the disputed amount.
- b. an asset may have been impaired.
- c. he amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred.
- d. it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated.
22. Which of the following is the proper way to report a gain contingency?
- a. As an accrued amount
- b. As deferred revenue
- c. As an account receivable with additional disclosure explaining the nature of the contingency
- d. As a disclosure only d
23. Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties.
The amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss contingency should be
- a. accrued.
- b. disclosed but NOT accrued.
- c. NEITHER accrued NOR disclosed.
- d. classified as an appropriation of retained earnings.
24. On January 1, 1998, the Gregg Company sold property to the Jackson Company. There was no established exchange price for the property, and Jackson gave Gregg a $2,000,000 zero-interest-bearing note payable in 5 equal annual installments of $400,000, with the first payment due December 31, 1998. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was $1,442,000 at January 1, 1998.
What should be the balance of the Discount on Notes Payable account on the books of Jackson at December 31, 1998 after adjusting entries are made, assuming that the effective interest method is used?
- a. $0.
- b. $428,220.
- c. $446,400.
- d. $558,000.
25. Rose Co. is a retail store operating in a state with a 6% retail sales tax. The retailer may keep 2% of the sales tax collected. Rose Co. records the sales tax in the Sales account. The amount recorded in the Sales account during May was $148,400. The amount of sales taxes (to the nearest dollar) for May is
- a. $8,726.
- b. $8,400.
- c. $8,904.
- d. $9,438.
26. The total payroll of the Went Company for the month of October, 1998 was $120,000, of which $30,000 represented amounts paid in excess of $65,400 to certain employees. 100,000 represented amounts paid to employees in excess of the $7,000 maximum subject to unemployment taxes. $30,000 of federal income taxes and $3,000 of union dues were withheld. The net state unemployment tax is 1%, the net federal unemployment tax is . 8%, and the current F. I. C. A. tax is 7. 65% on an employee’s wages to $65,400 and 1. 45% in excess of $65,400. What amount should Went record as payroll tax expense?
- a. $39,540.
- b. $37,680.
- c. $7,680.
- d. $9,480. c
(Problems 27 – 29)
Kell Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Kell $2. 00 each. Kell estimates that 40 percent of the coupons will be redeemed.
Data for 1998 and 1999 are as follows: 1998 1999 Bags of dog food sold 500,000 600,000 Leashes purchased 18,000 22,000 Coupons redeemed 120,000 150,000
27. The premium expense for 1998 is
- a. $25,000.
- b. $30,000.
- c. $35,000.
- d. $50,000. d
28. The estimated liability for premiums at December 31, 1998 is
- a. $7,500.
- b. $10,000.
- c. $17,500.
- d. $20,000. d
29. The estimated liability for premiums at December 31, 1999 is
- a. $11,250.
- b. $21,250.
- c. 22,500.
- d. $42,500. d
30. Long Company estimates its annual warranty expense as 4% of annual net sales. The following data relate to the calendar year 1998: Net sales $1,500,000; Warranty liability account – 12/31/98 Balance, $10,000 debit before adjustment; 12/31/98 Balance, $50,000 credit after adjustment. Which one of the following entries was made to record the 1998 estimated warranty expense?
- a. Warranty Expense ………………… ………………. 60,000
Retained Earnings (prior-period adjustment) ………………………….. 10,000
Warranty Liability …………… ………………………………. …….. 50,000
- b.Warranty Expense ………………. …………………. 50,000
Retained Earnings (prior-period adjustment) …………………….. 10,000
Warranty Liability ……………… ………………………….. ………. 60,000
- c. Warranty Expense ………………… ………………… 40,000
Warranty Liability …………………. ………………………………… 40,000
- d. Warranty Expense ……………………. …………….. 60,000
Warranty Liability ……………… ……………………………………. 60,000
31. On January 3, 1998, Ace Corp. owned a machine that had cost $70,000. The accumulated depreciation was $60,000, estimated salvage value was $6,000, and fair market value was $110,000.
On January 4, 1998, this machine was irreparably damaged by Ross Corp. and became worthless. In October 1998, a court awarded damages of $110,000 against Ross in favor of Ace. At December 31, 1998, the final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in the opinion of Ace’s attorney, Ross’s appeal will be denied. At December 31, 1998, what amount should Ace accrue for this gain contingency?
- a. $110,000.
- b. $90,000.
- c. $70,000.
- d. $0. d
32. Zest Trading Stamp Co. records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Zest’s past experience indicates that only 80% of the stamps sold to licensees will be redeemed.
Zest’s liability for stamp redemptions was $7,500,000 at December 31, 1997. Additional information for 1998 is as follows: Stamp service revenue from stamps sold to licensees $5,000,000; Cost of redemptions 3,400,000 If all the stamps sold in 1998 were presented for redemption in 1999, the redemption cost would be $2,500,000. What amount should Zest report as a liability for stamp redemptions at December 31, 1998?
- a. $9,100,000.
- b. $6,600,000.
- c. $6,100,000.
- d. $4,100,000. c
33. Pratt Corp. ‘s payroll for the pay period ended October 31, 1998 is summarized as follows: Department Total Federal Income |Department |Wages |Tax Withheld |F. I. C. A |Unemployment | |Factory | $75,000 | $ 9,000 |$70,000 |$22,000 | |Sales | 22,000 | 3,000 | 16,000 | 2,000 | |Office | 18,000 | 2,000 | 8,000 | -0- | | |$115,000 |$14,000 |$94,000 |$24,000 | Assume the following payroll tax rates: F. I. C. A. for employer and employee 7%; Unemployment 3% What amount should Pratt accrue as its share of payroll taxes in its October 31, 1998 balance sheet?
- a. $21,300.
- b. $14,720.
- c. $13,880.
- d. $7,300.
34. The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the
- a. bond indenture.
- b. bond debenture.
- c. registered bond.
- d. bond coupon. a
35. Stone, Inc. ssued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that
- a. the yield (effective or market) rate of interest exceeded the nominal (stated) rate.
- b. the nominal rate of interest exceeded the yield rate.
- c. the yield and nominal rates coincided.
- d. no necessary relationship exists between the two rates. b
36. Cox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for
- a. 10 periods and 10% from the present value of 1 table.
- b. 0 periods and 5% from the present value of 1 table.
- c. 10 periods and 8% from the present value of 1 table.
- d. 20 periods and 4% from the present value of 1 table. d
37. The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as
- a. an adjustment to the cost basis of the asset obtained by the debt issue.
- b. an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument.
- c. an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt.
- d. difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption. d
(Problems 38 – 40) On January 1, 1998, Adams Co. issued eight-year bonds with a face value of $200,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: Present value of 1 for 8 periods at 6% ………… .627 Present value of 1 for 8 periods at 8% ………… .540 Present value of 1 for 16 periods at 3% ……….. .623 Present value of 1 for 16 periods at 4% ……….. .534 Present value of annuity for 8 periods at 6% …… 6. 210 Present value of annuity for 8 periods at 8% …… 5. 747 Present value of annuity for 16 periods at 3% ….. 12. 61 Present value of annuity for 16 periods at 4% ….. 11. 652 a
38. The present value of the principal is
- a. $106,800.
- b. $108,000.
- c. $124,600.
- d. $125,400. b
39. The present value of the interest is
- a. $68,964.
- b. $69,912.
- c. $74,520.
- d. $75,366. b
40. The issue price of the bonds is
- a. $176,712.
- b. $176,964.
- c. $177,912.
- d. $199,920. a
41. The December 31, 1998, balance sheet of Drabek Corporation includes the following items: 9% bonds payable due December 31, 2007 – $500,000; Unamortized premium on bonds payable – 13,500 The bonds were issued on December 31, 1997, at 103, with interest payable on July 1 and December 31 of each year. Drabek uses straight-line amortization.
On March 1, 1999, Drabek retired $200,000 of these bonds at 98 plus accrued interest. What should Drabek record as an extraordinary gain on retirement of these bonds? Ignore taxes.
- a. $9,400.
- b. $5,400.
- c. $9,300.
- d. $10,000. c
42. The 10% bonds payable of the Hight Company had a net carrying amount of $380,000 on December 31, 1998. The bonds, which had a face value of $400,000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective interest method. Interest was paid on January 1 and July 1 of each year. On July 1, 1999, several years before their maturity, Hight retired the bonds at 102, excluding accrued interest.
What is the extraordinary loss that Hight should record on the early retirement of the bonds on July 1, 1999? Ignore taxes.
- a. $8,000.
- b. $25,200.
- c. $22,400.
- d. $28,000. b
43. Madison Company’s 1998 financial statements contain the following selected data: Income taxes – $40,000; Interest expense – 10,000; Net income – 60,000. Madison’s times interest earned for 1998 is
- a. 6 times.
- b. 9 times.
- c. 10 times.
- d. 11 times. d
44. On January 1, 1998, Nell Co. sold to Katt Corp. $200,000 of its 10% bonds for $177,059 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Nell report as interest expense for the six months ended June 30, 1998?
- a. $8,853.
- b. $10,000.
- c. $10,624.
- d. $12,000.
- c. $10,624.
45. A ten-year bond was issued in 1996 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 1998, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in 1998 should have equaled the
- a. call price.
- b. call price less unamortized discount.
- c. face amount less unamortized discount.
- d. face amount plus unamortized discount.
1 d 2 d 3 a 4 a 5 d 6 d 7 c 8 b 9 b 10 a 11 c 12 d 13 c 14 d 15 a 16 d 17 c 18 d 19 d 20 b 21 c 22 d 23 a 24 b 25 b 26 c 27 d 28 d 29 d 30 d 31 d 32 c 33 d 34 a 35 b 36 d 37 d 38 a 39 b 40 a 41 c 42 b 43 d 44 c 45 c