Multiple Choice Answers

Question 1

When a transfer is made between cash and cash equivalents with no gain or loss, how is the transaction treated in the statement of cash flows?
Answer It is included as an operating activity.
It is included as a noncash financing activity.
It is included as an investing activity.
It is not reported.

Question 2
Universal Travel Inc. borrowed $500,000 on November 1, 2009, and signed a 12-month note bearing interest at 6%. Interest is payable in full at maturity on October 31, 2010. In connection with this note, Universal Travel Inc. should report interest payable at December 31, 2009, in the amount of:
Answer
$ 8,000.
$30,000.
$ 5,000.
$25,000.

Question 3
M Corp. has an employee benefit plan for compensated absences that gives employees 15 paid vacation days. Vacation days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days. At December 31, 2009, M’s unadjusted balance of liability for compensated absences was $30,000. M estimated that there were 200 vacation days available at December 31, 2009. M’s employees earn an average of $150 per day. In its December 31, 2009, balance sheet, what amount of liability for compensated absences is M required to report?
Answer $ 0.
$ 30,000.
$225,000.
$450,000.

Question 4
Slotnick Chemical received customer deposits on returnable containers in the amount of $300,000 during 2009. Fifteen percent of the containers were not returned. The deposits are based on the container cost marked up 20%. How much profit did Slotnick realize on the forfeited deposits?
Answer $0.
$7,500.
$9,000.
$45,000.

Question 5
When a deposit on returnable containers is forfeited, the firm holding the deposit will experience:
Answer A decrease in cost of goods sold.
An increase in current liabilities.
An increase in accounts receivable.
An increase in revenue.
Question 6
Short-term obligations can be reported as long-term liabilities if:
Answer The firm has a long-term line of credit.
The firm has tentative plans to issue long-term bonds.
The firm intends to and has the ability to refinance as long-term.
The firm has the ability to refinance on a long-term basis.

Question 7
On December 31, 2009, L, Inc. had a $1,500,000 note payable outstanding, due July 31, 2010. L borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000 of the note on January 23, 2010. In February 2010, L completed a $3,000,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2010. On March 13, 2010, L issued its 2009 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2009, balance sheet?
Answer $ 0
$ 500,000
$1,000,000
$1,500,000

Question 8
Which of the following is a contingency that should be accrued?
Answer The company is being sued and a loss is reasonably possible and reasonably estimable.
The company deducts life insurance premiums from employees’ paychecks.
The company offers a two-year warranty and the expenses can be reasonably estimated.
It is probable that the company will receive $100,000 in settlement of a lawsuit.

Question 9
Orange Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company’s asset in that country. If expropriation is reasonably possible, a loss contingency should be
Answer
Disclosed but not accrued as a liability.
Disclosed and accrued as a liability
Accrued as liability but not disclosed.
Neither accrued as a liability nor disclosed.

Question 10
At the beginning of 2009, Angel Corporation began offering a 2-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2009 were $180 million. Fifteen percent of the units sold were returned in 2009 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel’s 2009 income statement is:
Answer $ 5.3 million.
$ 7.2 million.
$10.6 million.
$27.0 million.

Question 11
Gain contingencies usually are recognized in a company’s income statement when:
Answer
Realized.
The amount can be reasonably estimated.
The gain is reasonably possible and the amount can be reasonable estimated.
The gain is probable and the amount can be reasonably estimated.

Question 12
Which of the following is not a liability?
Answer
An unused line of credit.
Estimated income taxes.
Sales tax collected from customers.
Advances from customers.

Question 13
Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2009. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.
What would be the total interest expense recognized for the bond issue over its full term?
Answer
$ 6,512,253.
$ 8,000,000.
$11,256,109.
$11,487,747.

Question 14
On January 1, 2009, Legion Company sold $200,000 of 10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $177,000, priced to yield 12%. Legion records interest at the effective rate. Legion should report bond interest expense for the six months ended June 30, 2009, in the amount of:
Answer $ 8,850
$10,000
$10,620
$12,000

Question 15
Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2009. They have a ten-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.
What is the effective annual rate of interest on the bonds?
Answer 3%.
4%.
6%.
8%.

Question 16
Auerbach Inc. issued 4% bonds on October 1, 2009. The bonds have a maturity date of September 30, 2019 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2010. The effective interest rate established by the market was 6%.
Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance at December 31, 2009, rounded up to the nearest thousand?
Answer $252,369,000
$256,369,000
$256,200,000
$257,030,070.

Question 17
Ordinarily, the proceeds from the sale of a bond issue will be equal to:
Answer The face amount of the bond.
The total of the face amount plus all interest payments.
The present value of the face amount plus the present value of the stream of interest payments.
The face amount of the bond plus the present value of the stream of interest payments.

Question 18
The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest
Answer Less the present value of all future interest payments at the rate of interest stated on the bond.
Plus the present value of all future interest payments at the rate of interest stated on the bond.
Plus the present value of all future interest payments at the market (effective) rate of interest.
Less the present value of all future interest payments at the market (effective) rate of interest.

Question 19
The rate of interest that actually is incurred on a bond payable is called the:
Answer Face rate.
Contract rate.
Effective rate.
Stated rate.

Question 20
When the interest payment dates are March 1 and September 1, and notes are issued on July 1, the amount of interest expense to be accrued at December 31 of the year of issue would:
Answer Not be required.
Be for six months.
Be for four months.
Be for ten months.

Question 21
On April 1, 2009, Austere Corporation issued $300,000 of 10% bonds at 105. Each $1,000 bond was sold with 25 detachable stock warrants, each permitting the investor to purchase one share of common stock for $17. On that date, the market value of the common stock was $15 per share and the market value of each warrant was $2. Austere should record what amount of the proceeds from the bond issue as an increase in liabilities?
Answer $285,000
$300,000
$315,000
$0

Question 22
On March 31, 2009, MDS, Inc.’s bondholders exchanged their convertible bonds for common stock. The carrying amount of these bonds on Ashley’s books was less than the fair value but greater than the par value of the common stock issued. If Ashley used the book value method of accounting for the conversion, which of the following statements correctly states an effect of this conversion?
Answer
Shareholders’ equity is increased.
Additional paid-in capital is decreased.
Retained earnings is increased.
An extraordinary loss is recognized

Question 23
Crawford Inc. has bonds outstanding during a year in which the market rate of interest has risen. Crawford elected the fair value option for the bonds upon issuance. What will the company report for the bonds in its income statement for the year?
Answer
Interest expense and a gain.
Interest expense and a loss.
A gain and no interest expense.
A loss and no interest expense.

Question 24
The rate of return on shareholders’ equity indicates
Answer the margin of safety provided to creditors.
the extent of “trading on the equity” or financial leverage.
profitability without regard to how resources are financed .
the effectiveness of employing resources provided by owners.

Question 25
The rate of return on assets indicates
Answer the margin of safety provided to creditors.
the extent of “trading on the equity” or financial leverage.
profitability without regard to how resources are financed .
the effectiveness of employing resources provided by owners.

Question 26
When preferred stock is purchased by the issuing corporation at a price below the original issue price and the stock is retired, the transaction:
Answer Increases net income for the year.
Increases retained earnings.
Increases revenue for the year.
Increases paid-in capital share repurchase.

Question 27
When treasury shares are resold at a price below cost:
Answer
Paid-in capital and/or retained earnings is reduced.
Paid-in capital and/or retained earnings is increased.
Retained earnings is always reduced.
A loss is taken on the income statement.

Question 28
When treasury stock is purchased for an amount greater than its par value, what is the effect on total shareholders’ equity?
Answer Increase
Decrease
No effect
Cannot tell from the given information.

Question 29
Which of the following statements is true when dividends are not declared or paid on cumulative preferred stock?
Answer The shareholders must be allowed to convert their shares to common stock.
The unpaid dividends are accrued as a liability.
The unpaid dividends are reported in a note to the financial statements.
The unpaid dividends accrue interest until paid.

Question 30
When dividends are declared in one fiscal year and paid in the next fiscal year, the liability for the dividend should be recorded as of the:
Answer Date the dividend is declared.
Last day of the fiscal year.
Date of record.
Date of payment.

Question 31
When a company issues a stock dividend which of the following would be affected?
Answer Earnings per share.
Total assets.
Total liabilities.
Total stockholder’s equity.

Question 32
Preferred stock is called preferred because it usually has two preferences. These preferences relate to:
Answer Dividends and voting rights.
Par value and dividends.
The preemptive right and voting rights.
Assets at liquidation and dividends.
Question 33
Preferred shares that are participating may:
Answer Vote for the board of directors.
Be exchanged for common stock.
Receive extra cash during corporate liquidation.
Receive additional dividends beyond the stated amount.
Question 34
Beagle Corporation has 20,000 shares of $10 par common stock outstanding and 10,000 shares of $100 par, 6% cumulative, nonparticipating preferred stock outstanding. Dividends have not been paid for the past two years. This year, a $300,000 dividend will be paid. What are the dividends per share payable to preferred and common, respectively?
Answer $6; $12.
$18; $6.
$6; $6.
None of these is correct.

Question 35
Paid-in capital in excess of par is reported:
Answer As a reduction of shareholders’ equity.
As a noncurrent asset.
As a noncurrent liability.
As an increase in shareholders’ equity.
Question 36
In terms of business volume, the dominant form of business organization is the:
Answer Partnership.
Corporation.
Limited liability company.
Proprietorship.

Question 37
Issued stock refers to the number of shares:
Answer Outstanding plus treasury shares.
Shares issued for cash.
In the hand of shareholders.
That may be issued under state law.

Question 38
Bowers Corporation reported the following ($ in 000s) for the year:
Sales on account were $1,900 and bad debt expense was $18 for the year. How much cash was collected from customers on account?
Answer
$1,627.
$1,642.
$1,638.
$2,142.

Question 39
Ludwig Company’s prepaid rent was $9,000 at December 31, 2008, and $13,000 at December 31, 2009. Ludwig reported rent expense of $19,000 on the 2009 income statement. What amount would be reported in the statement of cash flows as rent paid using the direct method?
Answer $15,000.
$19,000.
$23,000.
None of these is correct.

Question 40
Dooling Corporation reported balances in the following accounts for the current
year:
Cost of goods sold was $7,500. What was the amount of cash paid to suppliers?
Answer
$7,000.
$7,200.
$7,300.
$7,500.

Question 41
Hemmer Company reported net income for 2009 in the amount of $40,000. The company’s financial statements also included the following:
What is net cash provided by operating activities?
Answer $38,000.
$43,000.
$35,000.
$48,000.

Question 42
How is the amortization of patents reported in a statement of cash flows that is prepared using the indirect method?
Answer A decrease in cash flows from investing activities.
An increase in cash flows from investing activities.
A deduction from net income in arriving at cash flows from operations.
An addition to net income in arriving at cash flows from operations.
Question 43
Which of the following is not reported as an adjustment to net income when using the indirect method of computing net cash flows from operating activities?
Answer
Cash dividends paid.
A change in accounts receivable.
Depreciation.
A change in a prepaid expense.

Question 44
Which of the following would not be a component of cash flows from investing activities?
Answer Sale of land.
Purchase of securities.
Purchase of equipment.
Dividends paid.

Question 45
During 2009, T Company engaged in the following activities:
In T’s statement of cash flows, what were net cash outflows from financing activities for 2009?
Answer $392.
$440.
$560.
$732.

Question 46
Which of the following is reported as a financing activity in the statement of cash flows?
Answer The sale of securities classified as available for sale.
The acquisition of stock for the purpose of retiring it.
The payment of interest on bonds payable.
The receipt of dividend revenue.

Question 47
Which of the following is always reported as an outflow of cash?
Answer The accrual of warranty expense.
The declaration of a cash dividend.
The purchase of equipment for cash.
Amortization expense.

Question 48
A 10% stock dividend is reported in connection with a statement of cash flows as:
Answer A financing activity.
An investing activity.
A noncash activity.
Not reported in the statement of cash flows.

Question 49
Which of the following causes a change in cash?
Answer Accrual of interest payable.
Recording of depreciation expense.
Write-off of an uncollectible account.
Payment of a cash dividend declared in the previous fiscal year.

Question 50
On June 1, 2009, Dirty Harry Co. borrowed cash by issuing a 6-month noninterest-bearing note with a maturity value of $500,000 and a discount rate of 6%. What is the carrying value of the note as of September 30, 2009?
Answer
$525,000.
$300,000.
$495,000.
$475,000.