Multiple Choice Answers

1. Fenland Co. plans to retire $100 million in bonds in five years, so it wishes to create a fund by making equal investments at the beginning of each year during that period in an account it expects to earn 8% annually. What amount does Fenland need to invest each year?
A. $17,045,650
B. $23,190,400
C. The amount can’t be determined from the given information.
D. 15,783,077
2. Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales aren’t reasonably assured and bad debt losses can’t be reasonably predicted. It’s unlikely that repossessed merchandise will be in salable condition. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2010. Collections on this sale were $20,000 in 2010, $15,000 in 2011, and $20,000 in 2012.
In its 2011 year-end balance sheet, Reliable would report installment receivables (net) of
A. $20,000.
B. $4,000.
C. $0.
D. $15,000.

3. Lucia Ltd. reported net income of $135,000 for the year ended December 31, 2011. January 1 balances in accounts receivable and accounts payable were $29,000 and $26,000 respectively. Year-end balances in these accounts were $30,000 and $24,000, respectively. Assuming that all relevant information has been presented, Lucia’s cash flows from operating activities would be
A. $138,000.
B. $132,000.
C. $136,000.
D. $134,000.

4. On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80 million. The sale was completed on December 31, 2011.
The following additional facts pertain to the transaction:
* The Footwear Division qualifies as a component of the entity according to GAAP regarding discontinued operations.
* The book value of Footwear’s assets totaled $48 million on the date of the sale.
* Footwear’s operating income was a pretax loss of $10 million in 2011.
* Foxtrot’s income tax rate is 40%.
In the 2011 income statement for Foxtrot Co., it would report income from discontinued operations of
A. $13.2 million.
B. $22 million.
C. $9.2 million.
D. $26 million.

5. Davenport Inc. offers a new employee a lump sum signing bonus at the date of employment. Alternatively, the employee can take $30,000 at the date of employment and another $50,000 two years later. Assuming the employee’s time value of money is 8% annually, what lump sum at employment date would make her indifferent between the two options?
A. $62,867
B. $72,867
C. $60,000
D. $80,000

6. Elmore Co. purchased an offset press on January 1, 2008, at a cost of $120,000. The press had an estimated eight-year life with no residual value. Elmore uses straight-line depreciation. At January 1, 2011, Elmore estimated that the press would have only three more years of remaining life with no residual value. For 2011, Elmore would report depreciation of
A. $20,000.
B. $15,000.
C. $30,000.
D. $25,000.

7. Misty Company reported the following before-tax items during the current year:
Sales
$600
Operating expenses
250
Restructuring charges
20
Extraordinary loss
50
Misty’s effective tax rate is 40%.
What would be Misty’s income before extraordinary item(s)?
A. $198
B. $360
C. $210
D. $330

8. Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay 1/3 of the sales price of a jet ski when they initially purchase the ski, and then pay another 1/3 each year for the next two years. Because Lake has little information about collectibility of these receivables, they use the installment method for revenue recognition. In 2010 Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2010, $300,000 in 2011, and $300,000 in 2012 associated with those sales. In 2011 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2011, $400,000 in 2012, and $400,000 in 2013 associated with those sales. In 2013 Lake also repossessed $200,000 of jet skis that were sold in 2011. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In 2010, Lake would recognize realized gross profit of
A. $300,000.
B. $0.
C. $150,000.
D. $450,000.

9. Jack’s Fireworks, which was established in 2009, changed its method of accounting for inventories from the average cost method to the first-in, first-out (FIFO) method in 2011. Cost of goods sold for the periods 2009-2011 under FIFO and the average cost method were
Year FIFO Average Cost Difference
2009 $120,000 $110,000 $10,000
2010 140,000 128,000 12,000
2011 150,000 144,000 6,000
Jack’s Fireworks is subject to a 30% income tax rate. In its income statement for the year ended December 31, 2011, Jack’s would report the cumulative effect of a change in accounting principle, net of income taxes, of
A. $0.
B. $19,600.
C. $(4,200).
D. $(15,400).

10. Jacobsen Corporation prepares its financial statement applying U.S. GAAP. During its 2011 fiscal year, the company reported before-tax income of $620,000. This amount does not include the following two items, both of which are considered to be material in amount:
Unusual and infrequent gain
$200,000
Loss from discontinued operations
(300,000)
The company’s income tax rate is 40%. In its 2011 income statement, Jacobsen would report income from continuing operations of
A. $620,000.
B. $312,000.
C. $372,000.
D. $492,000.

11. Mustard’s Inc. sold the rights to use one of its patented processes that will result in cash receipts of $2,500 at the end of each of the next four years and a lump sum receipt of $4,000 at the end of the fifth year. The total present value of these payments if interest is at 9% is
A. $12,100.
B. $11,468.
C. $14,000.
D. $10,699.

12. In 2011, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC uses the percentage-of-completion method to account for such projects and provides you with the following information (dollars in millions):
Accounts receivable (from construction progress billings)
$37.5
Actual construction costs incurred in 2011
$135
Cash collected on project during 2011
$105
Construction in progress, 12/31/11
$207
Estimated percentage of completion during 2011
60%
What were the construction billings by CCC during 2011?
A. $37.5 million
B. $142.5 million
C. $67.5 million
D. $225 million

13. On October 28, 2011, Mercedes Company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2011, the end of the company’s fiscal year. The division’s loss from operations for 2011 was $2,000,000.
The division’s book value and fair value less cost to sell on December 31 were $3,000,000 and $3,500,000, respectively. What before-tax amount(s) should Mercedes report as loss on discontinued operations in its 2011 income statement?
A. None
B. $500,000 gain included in continuing operations and a $2,000,000 loss from discontinued operations
C. $2,000,000 loss
D. $2,500,000 loss

14. Koko Company pays $10 million at the beginning of each year for 10 years to Mocha Inc. for a building with a fair value of $75 million. What interest rate is Mocha earning on financing this land sale?
A. Between 13% and 14%
B. The answer can’t be determined from the given information.
C. Between 5.5% and 6%
D. Between 7% and 8%

15. Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay 1/3 of the sales price of a jet ski when they initially purchase the ski, and then pay another 1/3 each year for the next two years. Because Lake has little information about collectibility of these receivables, they use the installment method for revenue recognition. In 2010 Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2010, $300,000 in 2011, and $300,000 in 2012 associated with those sales. In 2011 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2011, $400,000 in 2012, and $400,000 in 2013 associated with those sales. In 2013 Lake also repossessed $200,000 of jet skis that were sold in 2011. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In 2013, Lake would record a loss on repossession of
A. $80,000.
B. $120,000.
C. $45,000.
D. $200,000.

16. Misty Company reported the following before-tax items during the current year:
Sales
$600
Operating expenses
250
Restructuring charges
20
Extraordinary loss
50
Misty’s effective tax rate is 40%.
What would be Misty’s net income for the current year?
A. $198
B. $168
C. $112
D. $148

17. Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay 1/3 of the sales price of a jet ski when they initially purchase the ski, and then pay another 1/3 each year for the next two years. Because Lake has little information about collectibility of these receivables, they use the installment method for revenue recognition. In 2010 Lake began operations and sold jet skis with a total price of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2010, $300,000 in 2011, and $300,000 in 2012 associated with those sales. In 2011 Lake sold jet skis with a total price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2011, $400,000 in 2012, and $400,000 in 2013 associated with those sales. In 2013 Lake also repossessed $200,000 of jet skis that were sold in 2011. Those jet skis had a fair value of $75,000 at the time they were repossessed.
In its December 31, 2011, balance sheet, Lake would report
A. deferred gross profit of $700,000.
B. deferred gross profit of $1,050,000.
C. installment receivables (net) of $900,000.
D. installment receivables (net) of $750,000.

18. First Financial Auto Loan Department wishes to know the payment required at the first of each month on a $10,500, 48-month, 11% auto loan. To determine this amount, First Financial would
A. Multiply $10,500 by the present value of 1.
B. Divide $10,500 by the present value of an annuity due of 1.
C. Divide $10,500 by the future value of an ordinary annuity of 1.
D. Multiply $10,500 by the present value of an ordinary annuity of 1.

19. Chancellor Ltd. sells an asset with a $1 million fair value to Sophie Inc. Sophie agrees to make 6 equal payments, one year apart, commencing on the date of sale. The payments include principal and 6% annual interest. Compute the annual payments.
A. $191,852
B. $166,651
C. $135,252
D. $203,351

20. To determine the future value factor for an annuity due for period n when given tables only for an ordinary annuity:
A. Obtain the FVA factor for n – 1 and add 1.
B. Obtain the FVA factor for n + 1 and add 1.
C. Obtain the FVA factor for n and deduct 1.
D. Obtain the FVA factor for n + 1 and deduct 1.

21. Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales aren’t reasonably assured and bad debt losses can’t be reasonably predicted. It’s unlikely that repossessed merchandise will be in salable condition. Therefore, Reliable uses the cost recovery method. Merchandise costing $30,000 was sold for $55,000 in 2010. Collections on this sale were $20,000 in 2010, $15,000 in 2011, and $20,000 in 2012.
In 2010, Reliable would recognize gross profit of
A. $25,000.
B. $0.
C. $8,333.
D. $8,090.

22. On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80 million. The sale was completed on December 31, 2011.
The following additional facts pertain to the transaction:
* The Footwear Division qualifies as a component of the entity according to GAAP regarding discontinued operations.
* The book value of Footwear’s assets totaled $48 million on the date of the sale.
* Footwear’s operating income was a pretax loss of $10 million in 2011.
* Foxtrot’s income tax rate is 40%.
Suppose that the Footwear Division’s assets had not been sold by December 31, 2011, but were considered held for sale. Assume that the fair value of these assets at December 31 was $40 million. In the 2011 income statement for Foxtrot Co., it would report a loss from discontinued operations of
A. $18 million loss
B. $10 million loss
C. $10.8 million loss
D. $3 million loss

23. In 2011, Cupid Construction Co. (CCC) began work on a two-year fixed price contract project. CCC uses the percentage-of-completion method to account for such projects and provides you with the following information (dollars in millions):
Accounts receivable (from construction progress billings)
$37.5
Actual construction costs incurred in 2011
$135
Cash collected on project during 2011
$105
Construction in progress, 12/31/11
$207
Estimated percentage of completion during 2011
60%
What is the fixed contract price for CCC’s project?
A. $345 million
B. $72 million
C. $120 million
D. $225 million

24. Indiana Co. began a construction project in 2011 that will provide it $150 million when it is completed in 2013. During 2011, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project.
In 2012, Indiana incurred costs of $58.5 million and estimated an additional $40.5 million in costs to complete the project. Using the percentage-of-completion method, Indiana recognized _______ on the project in 2012.
A. $1.5 million gross profit
B. $6 million gross profit
C. $15 million gross profit
D. $13.5 million gross profit

25. Jacobsen Corporation prepares its financial statement applying International Financial Reporting Standards. During its 2011 fiscal year, the company reported before-tax income of $620,000. This amount does not include the following two items, both of which are considered to be material in amount:

Unusual and infrequent gain
$200,000
Loss from discontinued operations
(300,000)
The company’s income tax rate is 40%. In its 2011 income statement, Jacobsen would report income from continuing operations of
A. $620,000.
B. $492,000.
C. $372,000.
D. $312,000.