1. An operating cycle a. Is twelve months or less in length? b. Is the average time required for a company to collect its receivables? c. Is used to determine current assets when the operating cycle is longer than one year. d. Begins with inventory and ends with cash. 2. The amount reported as "Cash" on a company's balance sheet normally should exclude a. Postdated checks that are payable to the company. b. Cash in a payroll account. c. Undelivered checks written and signed by the company. d. Petty cash. 3. If the balance shown on a company's bank statement is less than the correct cash balance, and neither the company nor the bank has made any errors, there must be a. Deposits credited by the bank but not yet recorded by the company. b. Outstanding checks. c. Bank charges not yet recorded by the company. d. Deposits in transit. 4. The FASB specified in Statement No. 140 three conditions that must be met if a transfer of receivables is to account for as a sale. Which of the following is not one of the three conditions specified? a. The transferred assets have been isolated from the transferor. b. The transferor's obligation under the recourse provisions can be reasonably estimated. c. The transferee has the right to pledge or exchange the transferred assets. d. The transferor does not maintain effective control over the assets through an agreement to repurchase the assets before their maturity. 5. In calculating a company's accounts receivable turnover, which of the following sets of factors would be used? a. Net income and average accounts receivable b. Average accounts receivable and average total assets c. Average accounts receivable and net credit sales d. Net credit sales and average stockholders' equity 6. In preparing the bank reconciliation, interest paid by the bank on the account is a. Added to the bank balance. b. Subtracted from the bank balance. c. Added to the book balance. d. Subtracted from the book balance. 7. Which of the following best describes the condition(s) that must be present for the recognition of revenue? a. The revenue must be earned, measurable, and collected. b. The revenue must be earned, measurable, and collectible. c. The revenue must be earned and collectible. d. The revenue must be measurable and collectible. 8. The installment method of recognizing revenue a. Should be used only in cases in which no reasonable basis exists for estimating the collectability of receivables. b. Is not a generally accepted accounting principle under any circumstances. c. Should be used for book purposes only if it is used for tax purposes. d. Is an acceptable alternative accounting principle for a firm that makes installment sales. 9. When using the installment sales method, a. Gross profit is deferred until all cash is received, but revenues and costs are recognized in proportion to the cash collected from the sale. b. Gross profit is recognized only after the amount of cash collected exceeds the cost of the item sold. c. Revenue, costs, and gross profit are recognized proportionally as the cash is received from the sale of product. d. Total revenues and costs are recognized at the point of sale, but gross profit is deferred in proportion to the cash that is uncollected from the sale. 10. When comparing the percentage-of-completion and completed-contract methods of accounting for long-term construction contracts, both methods will report the same a. Balances each period in the Progress Billings account. b. Expense for cost of construction each year. c. Amount of income in the year of completion. d. Inventory carrying value each year during the construction period. 11. Franchise fees are properly recognized as revenue a. When received in cash. b. When a contractual agreement has been signed. c. After the franchise business has begun operations. d. After the franchiser has substantially performed its service. 12. On May 1, 2011, Green Construction Company entered into a fixed-price contract to construct an apartment building for $3,000,000. Green appropriately accounts for this contract under the percentage-of-completion method. Information relating to the contract is as follows: 2011 2012 At December 31: Percentage of completion........ 20% 60% Estimated costs at completion ... $2,250,000 $2,400,000 Income recognized (cumulative)... $ 150,000 $ 360,000 What is the amount of contract costs incurred during the year ended December 31, 2012? a. $600,000 b. $960,000 c. $990,000 d. $1,440,000 Miller Inc. is a wholesaler of office supplies. The activity for Model III calculators during August is shown below: Balance/ Date Transaction Units Cost August 1 Inventory 2,000 $36.00 7 Purchase 3,000 37.20 12 Sales 3,600 21 Purchase 4,800 38.00 22 Sales 3,800 29 Purchase 1,600 38.60 13. Please refer to the information above regarding Miller Inc. If Miller Inc. uses a FIFO periodic inventory system, the ending inventory of Model III calculators at August 31 is reported as a. $150,080. b. $150,160. c. $152,288. d. $152,960. 14. When valuing raw materials inventory at lower of cost or market, what is the general meaning of the term "market"? a. Net realizable value b. Net realizable value less a normal profit margin c. Current replacement cost d. Discounted present value 15. Which of the following inventory costing methods reports most closely the current cost of inventory on the balance sheet? a. FIFO b. Specific identification c. Weighted average d. LIFO 16. The term "intangible assets" is used in accounting to denote a. Current or noncurrent property items without physical characteristics. b. Assets with lesser economic significance because of the nature of such assets. c. Properties without physical characteristics that have long-term effects on a business enterprise. d. Such items as patents, copyrights, and claims against customers which can be valued on a monetary basis. 17. Which of the following intangible assets does not have the characteristic of exchangeability? a. Patent b. Copyright c. Goodwill d. Franchise 18. In a business combination, goodwill is defined as the excess of cost over the a. Fair value of assets acquired. b. Fair value of assets acquired less the liabilities assumed. c. Book value of assets acquired less the liabilities assumed. d. Net book value of assets acquired. 19. Donated equipment for which the fair value has been determined should be recorded as a debit to the appropriate equipment account and a credit to a. Other Income. b. Retained Earnings. c. Capital Stock. d. Revenue or Gain. 20. An asset is being constructed for an enterprise's own use. The asset has been financed with a specific new borrowing. The interest cost incurred during the construction period as a result of expenditures for the asset is a. A part of the historical cost of acquiring the asset to be written off over the estimated useful life of the asset. b. Interest expense in the construction period. c. Recorded as a deferred charge and amortized over the term of the borrowing. d. A part of the historical cost of acquiring the asset to be written off over the term of the borrowing used to finance the construction of the asset. 21. According to SFAS No. 34, "Capitalization of Interest Cost," interest should be capitalized for assets that are a. In use or ready for their intended use in the earnings activities of the enterprise. b. Being constructed or otherwise being produced as discrete projects for an enterprise's own use. c. Not being used in the earnings activities of the enterprise and that are not undergoing the activities necessary to get them ready for use. d. Routinely produced on a repetitive basis for inventory but require an extended period of time for completion. 22. When a company replaces an old asphalt roof on its plant with a new fiberglass insulated roof, which of the following types of expenditure has occurred? a. Ordinary repairs and maintenance b. Addition c. Rearrangement d. Betterment 23. When a company replaces an old asphalt roof on its plant with a new fiberglass insulated roof, which of the following types of expenditure has occurred? a. Ordinary repairs and maintenance b. Addition c. Rearrangement d. Betterment 24. An improvement made to a machine increased its fair market value and its production capacity by 25 percent without extending the machine's useful life. The cost of the improvement should be a. Expensed. b. Debited to Accumulated Depreciation. c. Capitalized in the machine account. d. Allocated between Accumulated Depreciation and the machine account. 25. Which of the following research and development related costs should be capitalized and amortized over current and future periods? a. Labor and material costs incurred in building a prototype model. b. Cost of testing equipment that will also be used in another separate research and development project scheduled to begin next year. c. Administrative salaries allocated to research and development. d. Research findings purchased from another company to aid a particular research project currently in process. Part II Short Essays 25 points total. Please respond to each essay with at least a one to two paragraph response. Short essay I (15 points) 1. Marvel System Services provides its customers with computer-based services over an extended period. Customers are required to prepay the entire fee for the extended service. Marvel performs initial setup activities to enter a customer into its system. The initial setup allows the customer to receive automated services from Marvel from that point forward in the service agreement. The management of Marvel plans to recognize the revenue over the life of the service contract, but plans to recognize a disproportionate amount of revenue at the beginning of the contract as a result of the completion of the setup activities and the cost incurred in connection with the completion of the setup activities. Required: Do you agree with the proposal by the management of Marvel regarding revenue recognition related to the setup activities? How should revenue be recognized for an agreement such as this? Short Essay II (10 points) 2. The Letter Perfect Company produces word processing software. The company recently purchased a large tract of land on which will be constructed several buildings to house the production and administrative personnel of the company. The following improvements are expected to be made to the land as part of the construction of the complex: 1. The roads on all sides of the land will be graded and paved. 2. Street lights will be installed. 3. Sewer and drainage systems will be installed. 4. Several private roads will be constructed on the property. 5. Sidewalks will be constructed to connect the various buildings. 6. Parking lots will be constructed at selected places on the property for employee and customer parking. 7. The property will be suitably landscaped. Required: Explain how each of the above items would be accounted for in the records of Letter Perfect Company