Multiple Choice

1. Companies follow both the matching principle and the materiality constraint when applying the direct write-off method.

2. All of the following statements regarding recognition of receivables under U.S. GAAP and IFRS are True except:
U.S. GAAP and IFRS have similar asset criteria that apply to recognition of receivables.
Receivables that arise from revenue-generating activities are subject to broadly similar criteria for U.S. GAAP and IFRS.
The realization principle under IFRS implies an arm’s length transaction occurs.
Both refer to the realization principle and an earnings process.
Differences arise mainly from industry-specific guidance under U.S. GAAP.

3. Land is not subject to depreciation because it has an unlimited life. This means that items which increase the usefulness of the land such as parking lots are not depreciated.

4. Depreciation is higher and income is lower in the short run when using accelerated versus straight-line methods.

5. A contingent liability is a potential obligation that depends on a future event arising from a future transaction or event.

6. A payroll register usually shows the pay period dates, hours worked, gross pay, deductions, and net pay of each employee for every pay period.

7. A potential lawsuit claim is recorded when the claim can be reasonably estimated and it is reasonably possible.

8. An employee earned $47,000 during the year working for an employer. The FICA tax rate for Social Security is 6.2% and the FICA tax rate for Medicare is 1.45%. The employee’s annual FICA taxes amount is:
Zero, since the employee’s pay exceeds the FICA limit.

9. The total amount of cash and other assets received by a corporation from its stockholders in exchange for its stock is:
Always equal to its par value.
Always equal to its stated value.
Referred to as paid-in capital.
Referred to as retained earnings.
Always below its stated value.

10. Disadvantages of a partnership include:
Limited life.
Mutual agency.
Unlimited liability.
Co-ownership of property.
All of these.

11. When a partner leaves a partnership, the present partnership ends.

12. Par value of a stock refers to the:
Issue price of the stock.
Value assigned per share of stock by the corporate charter.
Market value of the stock on the date of the financial statements.
Maximum selling price of the stock.
Dividend value of the stock.

13. A debit balance in retained earnings is referred to as a retained earnings deficit.

14. A company had a beginning balance in retained earnings of $43,000. It had net income of $6,000 and paid out cash dividends of $5,625 in the current period. The ending balance in retained earnings equals: