1. Theoretically, which of the following costs incurred in connection with a machine purchased
for use in a company’s manufacturing operations would be capitalized?
machine for use
2. When a company purchases land with a building on it and immediately tears down the
building so that the land can be used for the construction of a plant, the costs incurred to tear
down the building should be
A. Added to the cost of the land
B. Subtracted from the cost of the land
D. None of the above
3. During 2005, Burr Co. had the following transactions pertaining to its new office building:
Purchase price of land
Legal fees for contracts to purchase land
Demolition of old building on site
Sale of scrap from old building
Construction cost of new building (fully completed)
In Burr’s December 31, 2005 balance sheet, what amounts should be reported as the cost of land
and cost of building?
4. For 2011, Rahal’s Auto Parts estimates bad debt expense at 1% of credit sales. The company
reported accounts receivable and an allowance for uncollectible accounts of $86,500 and $2,100,
respectively, at December 31, 2010. During 2011, Rahal’s credit sales and collections were
$404,000 and $408,000, respectively, and $2,340 in accounts receivable were written off
Rahal’s accounts receivable at December 31, 2011, are:
5. On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with
credit terms 2/10, n/30. Flores uses the gross method of accounting for cash discounts.What is the
correct entry for Flores on December 5, assuming the correct payment was received on that date?
6. On September 1, 2005, Bertz, Inc. exchanged a delivery truck for a parcel of land. Bertz
bought this truck in 2003 for $10,000. At September 1, 2005, the truck had a book value of
$6,500 and a fair market value of $5,000. Bertz gave $6,000 in cash in addition to the truck as
part of this transaction. It is expected that the cash flows from the assets will be significantly
different. The previous owner of the land had listed the land for sale at $12,000. At what
amount should Bertz record the land?
7. Caravan Corporation owned a warehouse located in the path of a proposed highway.
Caravan bought the land in 1962 for $10,000. That same year, it built the warehouse at a cost of
$50,000. In 2005, after prolonged litigation, the state exercised its right of eminent domain and
condemned the property, awarding Caravan $200,000. Depreciation accumulated to the date of
the award was $45,000. On its 2005 federal income tax return, Caravan elected not to recognize
the gain since replacement property was bought for $225,000. For income statement purposes,
Caravan should recognize a gain in 2005 of
8. Crowder Company acquired a tract of land containing an extractable natural resource.
Crowder is required by the purchase contract to restore the land to a condition suitable for
recreational use after it has extracted the natural resource. Geological surveys estimate that the
recoverable reserves will be 5,000,000 tons, and that the land will have a value of $1,000,000 after
restoration. Relevant cost information follows:
Estimated restoration costs
If Crowder maintains no inventories of extracted material, what should be the charge to
depletion expense per ton of extracted material?
9. In October 2005 Ewing Company exchanged an old packaging machine, which cost $120,000
and was 50% depreciated, for a dissimilar used machine and paid a cash difference of $16,000.
The market value of the old packaging machine was determined to be $70,000. The two
machines are expected to have significantly different cash flows. For the year ended December
31, 2005, what amount of gain or loss should Ewing recognize on this exchange?
10. On January 1, 2005, Grade Company paid $300,000 for 20,000 shares of Medium Company’s
common stock which represents a 15% investment in Medium. Grade does not have the ability
to exercise significant influence over Medium. Medium declared and paid a dividend of $1 a
share to its stockholders during 2005. Medium reported net income of $260,000 for the year
ended December 31, 2005, and had a market value of $300,000 at December 31, 2005. The
balance in Grade’s balance sheet account “Investment in Medium Company” at December 31,
2005, should be
11. On December 29, 2005, BJ Co. sold a marketable equity security that had been purchased on
January 4, 2004. BJ owned no other marketable equity security. An unrealized loss was
reported as components of “Other comprehensive income” and “Accumulated other
comprehensive income” in the 2004 balance sheet. A realized gain was reported in the 2005
income statement. Was the marketable equity security classified as a trading security and did its
2004 market price decline exceed its 2005 market price recovery?
2004 market price decline
exceeded 2005 market price recovery
12. In 2005, Wallace Corporation purchased marketable securities, and at 12/31/05, had the
following marketable equity securities:
Unrealized gain (loss)
In trading portfolio:
In available-for-sale portfolio:
At December 31, 2005, what amounts should be charged to
Other comprehensive income
13. Dey Corp. began operations in 2005. An analysis of Dey’s marketable securities portfolio
acquired in 2005 shows the following totals at December 31, 2005, for available-for-sale and heldto-maturity securities:
Aggregate market value
What amount of unrealized loss should Dey report in its December 31, 2005 balance sheet?
14. For marketable debt securities included in a held-to-maturity portfolio, which of the
following amounts should be included in the period’s net income?
Unrealized temporary losses during the period.
Gains on securities sold during the period.
Permanent decline in value.
II and III
I, II and III
15. From a theoretical viewpoint, which of the following costs would be considered
16. The following data appeared in the accounting records of a retail store for the year ended
December 31, 2004:
How much was the gross margin?
17. The following data were available from Mith Co.’s records on December 31, 2005:
Finished goods inventory, 1/1/05
Finished goods inventory, 12/31/05
Cost of goods manufactured
Loss on sale of plant equipment
The cost of goods sold for 2005 was
18. Lin Co. sells its merchandise at a gross profit of 30%. The following figures are among those
pertaining to Lin’s operations for the 6 months ended June 30, 2005:
On June 30, 2005, all of Lin’s inventory was destroyed by fire. The estimated cost of this
destroyed inventory was
19. On December 31, 2004, Kern Company adopted the dollar-value LIFO inventory method.
All of Kern’s inventories constitute a single pool. The inventory on December 31, 2004, using the
dollar-value LIFO inventory method was $600,000. Inventory data for 2005 are as follows:
2/31/05 inventory at year-end prices
Relevant price index at year-end (base year 2004)
Under the dollar-value LIFO inventory method, Kern’s inventory at December 31, 2005, would
20. In preparing its bank reconciliation for the month of March 2006, Derby Company has
available the following information:
Balance per bank statement, 3/31/06
Deposit in transit, 3/31/06
Outstanding checks, 3/31/06
Credit erroneously recorded by bank in Derby’s account, 3/12/06
Bank service charges for March
What should be the correct balance of cash at March 31, 2006?
21. On March 31, 2011, Vale Co. had an unadjusted credit balance of $1,000 in its allowance for
uncollectible accounts. An analysis of Vale’s trade accounts receivable at that date revealed the
Over 60 days
What amount should Vale report as allowance for uncollectible accounts in its March 31, 2011
22. On September 1, 2005, a company borrowed cash and signed a 1-year interest-bearing note
on which both the principal and interest are payable on September 1, 2006. How will the note
payable and the related interest be classified in the December 31, 2005 balance sheet?
23. A loss contingency for which the amount of loss can be reasonably estimated should be
accrued when the occurrence of the loss is
24. Northwest Fur Co. started 2011 with $94,000 of merchandise inventory on hand. During
2011, $400,000 in merchandise was purchased on account with credit terms of 1/15, n/45. All
discounts were taken. Purchases were all made f.o.b. shipping point. Northwest paid freight
charges of $7,500. Merchandise with an invoice amount of $5,000 was returned for credit. Cost of
goods sold for the year was $380,000. Northwest uses a perpetual inventory system. What is
ending inventory assuming Northwest uses the gross method to record purchases?
25. Where should goods in transit that were recently purchased f.o.b. destination be included on
the balance sheet?
a. Accounts payable.
d. Not on the balance sheet.
26. In a period when costs are falling and inventory quantities are stable, the lowest taxable
income would be reported by using the inventory method of:
A. Weighted average.
C. Moving average.
27. Bond Company adopted the dollar-value LIFO inventory method on January 1, 2011. In
applying the LIFO method, Bond uses internal cost indexes and the multiple-pools approach. The
following data were available for Inventory Pool No. 3 for the two years following the adoption of
Under the dollar-value LIFO method the inventory at December 31, 2012, should be
D. None of the above
28. In applying LCM, market cannot be:
A. Less than net realizable value.
B. Greater than the normal profit.
C. Less than the normal profit margin.
D. Greater than net realizable value.
29. On July 8, a fire destroyed the entire merchandise inventory on hand of Larrenaga Wholesale
Corporation. The following information is available:
Sales, January 1 through July 8
Inventory, January 1
Purchase, January 1, through July 8
Gross profit ratio
Sales, January 1, through July 8
Inventory, January 1
Purchase, January 1 through July 8
Gross profit ratio
What is the estimated inventory on July 8 immediately prior to the fire?
30. When computing the cost-to-retail percentage for the conventional retail method, included in
the denominator are:
A. Net markups and net markdowns.
B. Neither net markups nor net markdowns.
C. Net markups, but not net markdowns.
D. Net markdowns, but not net markups.
31. Cloverdale, Inc. uses the conventional retail inventory method to account for inventory. The
following information relates to current year’s operations:
Beginning inventory and purchases
What amount should be reported as cost of goods sold for the year?
D. None of the above.
32. The acquisition costs of property, plant, and equipment do not include:
A. The ordinary and necessary costs to bring the asset to its desired condition and location for use.
B. The net invoice price.
C. Legal fees, delivery charges, installation, and any applicable sales tax.
D. Maintenance costs during the first 30 days of use
33. Which of the following is not a current liability?
A. Accounts payable.
B. A note payable due in 2 years.
C. Accrued interest payable.
D. Sales tax payable.
34. Gain contingencies usually are recognized in a company’s income statement when:
B. The amount can be reasonably estimated.
C. The gain is reasonably possible and the amount can be reasonable estimated.
D. The gain is probable and the amount can be reasonably estimated.
35. In the current year, Hanna Company reported warranty expense of $190,000 and the
warranty liability account increased by $20,000. What were warranty expenditures during the
36. On November 5, 2010, a Dunn Corp. truck was in an accident with an auto driven by Bell.
Dunn received notice on January 12, 2011, of a lawsuit for $700,000 damages for personal
injuries suffered by Bell. Dunn Corp.’s counsel believes that it is probable that Bell will be
awarded an estimated amount in the range between $200,000 and $450,000 and that $300,000 is a
better estimate of potential liability than any other amount. Dunn’s accounting year ends on
December 31, and the 2010 financial statements were issued on March 2, 2011. What amount of
loss should Dunn accrue at December 31, 2010?
37. When bonds are sold at a premium and the effective interest method is used, at each interest
payment date, the interest expense:
A. Remains constant.
B. Is equal to the change in book value.
38. Which of the following is not a requirement for a qualified pension plan?
A. It cannot discriminate in favor of highly paid employees.
B. It must cover at least 80% of the employees.
C. It must be funded in advance of retirement.
D. Benefits must vest after a specified period of service, commonly five years.
39. Visor Co. maintains a defined benefit pension plan for its employees. The service cost
component of Visor’s net periodic pension cost is measured using the
A. Unfunded accumulated benefit obligation.
B. Unfunded vested benefit obligation.
C. Projected benefit obligation
D. Expected return on plan assets.
40. Mars Inc. has a defined benefit pension plan. On December 31 (the end of the fiscal year), the
company received the PBO report from the actuary. The following information was included in
the report: ending PBO, $110,000; benefits paid to retirees, $10,000; interest cost, $7,200. The
discount rate applied by the actuary was 8%. What was the beginning PBO?
41. When bonds are sold at a premium and the effective interest method is used, at each interest
payment date, the interest expense:
A. Remains constant.
B. Is equal to the change in book value.
42. When the interest payment dates are March 1 and September 1, and the bonds are issued on
July 1, the amount of interest expense reported in the December 31 income statement for the year
of issue would be for:
A. Six months.
B. Four months.
C. Ten months.
D. Twelve months.
43. Downing Company issues $3,000,000, 6%, 5-year bonds dated January 1, 2012 on
January 1, 2012. The bonds pay interest semiannually on June 30 and December 31. The
bonds are issued to yield 5%. What are the proceeds from the bond issue?
PV of a single sum for 5 periods
PV of a single sum for 10 periods
PV of an annuity for 5 periods
PV of an annuity for 10 periods
44. On January 2, 2012, a calendar-year corporation sold 8% bonds with a face value of
$900,000. These bonds mature in five years, and interest is paid semiannually on June 30
and December 31. The bonds were sold for $830,400 to yield 10%. Using the effectiveinterest method of computing interest, how much should be charged to interest expense in 2012?
45. Kraft, Inc. sponsors a defined-benefit pension plan. The following data relates to the
operation of the plan for the year 2013.
Contributions to the plan
Actual return on plan assets
Projected benefit obligation (beginning of year)
Fair value of plan assets (beginning of year)
The expected return on plan assets and the settlement rate were both 10%. The amount
of pension expense reported for 2013 is
46 Winter Co. is being sued for illness caused to local residents as a result of negligence on the
company’s part in permitting the local residents to be exposed to highly toxic chemicals from its
plant. Winter’s lawyer states that it is probable that Winter will lose the suit and be found liable
for a judgment costing Winter anywhere from $1,600,000 to $8,000,000. However, the lawyer
states that the most probable cost is $4,800,000. As a
result of the above facts, Winter should accrue
a. a loss contingency of $1,600,000 and disclose an additional contingency of up to
b. a loss contingency of $4,800,000 and disclose an additional contingency of up to
c. a loss contingency of $4,800,000 but not disclose any additional contingency.
d. no loss contingency but disclose a contingency of $1,600,000 to $8,000,000.
47. During the year, Kiner Company made an entry to write off a $16,000 uncollectible account.
Before this entry was made, the balance in accounts receivable was $200,000 and the balance in
the allowance account was $18,000. The net realizable value of accounts receivable after the
write-off entry was
48. 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
49. Jenkins Corporation has $2,500,000 of short-term debt it expects to retire with proceeds
from the sale of 90,000 shares of common stock. If the stock is sold for $20 per share subsequent
to the balance sheet date, but before the balance sheet is issued, what
amount of short-term debt could be excluded from current liabilities?
50. A company gives each of its 50 employees (assume they were all employed continuously
through 2012 and 2013) 12 days of vacation a year if they are employed at the end of the year.
The vacation accumulates and may be taken starting January 1 of the next year. The employees
work 8 hours per day. In 2012, they made $21 per hour and in 2013 they made $24 per hour.
During 2013, they took an average of 9 days of vacation each. The company’s policy is to record
the liability existing at the end of each year at the wage rate for that year. What amount of
vacation liability would be reflected on the 2012 and 2013 balance sheets, respectively?
a. $100,800; $140,400
b. $115,200; $144,000
c. $100,800; $144,000
d. $115,200; $140,4