1- On April 1, 2019, Dougherty Inc. entered into a cost-plus-fixed-fee contract to construct an electric generator for Altom Corporation. At the contract date, Dougherty estimated that it would take 2 years to complete the project at a cost of $2,000,000. The fixed fee stipulated in the contract is $450,000. Dougherty appropriately accounts for this contract under the percentage-of-completion method. During 2019, Dougherty incurred costs of $800,000 related to the project. The estimated cost at December 31, 2019, to complete the contract is $1,200,000. Altom was billed $600,000 under the contract. What is gross profit to be recognized?

a) $100,000

b) $150,000

c) $180,000

d) $200,000

2- Bradley Co. is expanding its operations and is in the process of selecting the method of financing this program. After some investigation, the company determines that it may (1) issue bonds and with the proceeds purchase the needed assets or (2) lease the assets on a long-term basis. Without knowing the comparative costs involved. What might be the advantages of leasing the assets instead of owning them?

a) Leasing may be more flexible in that the lease agreement may contain less restrictive provisions than the bond indenture.

b) Leasing permits 100% financing of assets, as the lease is often signed without requiring any money down from the lessee.

c) Leasing may permit more rapid changes in equipment, reduce the risk of obsolescence, and pass the risk in residual value to the lessor or a third party.

d) All of above

3- What are the major advantages to the lessor for becoming involved in a leasing arrangement?

a) It often provides profitable interest margins.

b) It can stimulate sales of a lessor's product whether it be from a dealer (lessor) or a manufacturer (lessor).

c) It often provides tax benefits which enhances the return for the lessor and other parties to the lease.

d) All of above

4- Which one is the correct description?

a) Residual value is the expected value of the leased asset at the end of the lease term.

b) A guaranteed residual value is a guarantee made to a lessor that the value of the leased

asset returned to the lessor at the end of a lease will be at least a specified amount. Any amounts probable to be paid under the residual value guarantee should be included in the present value of payments.

c) Initial direct costs are incremental costs of a lease that would not have been incurred had the lease not been executed. Initial direct costs incurred by the lessee are included in the cost of the right-of-use asset but are not recorded as part of the lease liability.

d) All of above

5- What is the relevance of revenue recognition criteria for lessor accounting for leases?

a) operating leases

b) finance (sales-type) leases

c) Only finance (sales-type) leases.

d) Both operating leases and finance (sales-type) leases.

6- Walker Company is a manufacturer and lessor of computer equipment. What should be the nature of its lease arrangements with lessees if the company wishes to account for its lease transactions as finance leases?

a) The lease transfers ownership of the property to the lessee

b) The lease contains a bargain-purchase option

c) The lease term is a major part of the remaining economic life of the underlying asset (i.e. equal to 75% or more of the estimated economic life of the property)

d) All of above

7- Waterworld Company leased equipment from Costner Company, beginning on December 31, 2018. The lease term is 4 years and requires equal rental payments of $41,933 at the beginning of each year, starting on the commencement date December 31, 2018. The equipment has a fair value at the inception of the lease of $150,000, an estimated useful life of 4 years, and no salvage value. The appropriate interest rate is 8%. What is/are journal entry(ies) in 2019?

a) Debit Right-of-Use Asset 150,000, and Credit Lease Liability 150,000

b) Debit Lease Liability 40,933, and Credit Cash 40,933

c) Debit Depreciation Expense 37,500, and Credit Right-of-Use Asset 37,500

d) Debit Interest Expense 8,645 and Lease Liability 33,288, and Credit Cash 41,933

8- Waterworld Company leased equipment from Costner Company, beginning on December 31, 2018. The lease term is 4 years and requires equal rental payments of $41,933 at the beginning of each year, starting on the commencement date December 31, 2018. The equipment has a fair value at the inception of the lease of $150,000, an estimated useful life of 4 years, and no salvage value. The appropriate interest rate is 8%. What is/are journal entry(ies) in 2020?

a) Debit Right-of-Use Asset 150,000, and Credit Lease Liability 150,000

b) Debit Lease Liability 40,933, and Credit Cash 40,933

c) Debit Depreciation Expense 37,000, and Credit Right-of-Use Asset 37,000

d) Debit Interest Expense 8,645 and Lease Liability 33,288, and Credit Cash 41,933

9- Cardinal Ltd. is negotiating to lease a piece of equipment to MTBA plc. MTBA requests that the lease be for 9 years. The equipment has a useful life of 10 years. Cardinal wants a guarantee that the residual value of the equipment at the end of the lease is at least 5,000. MTBA agrees to guarantee a residual value of this amount though it expects the residual value of the equipment to be only 2,500 at the end of the lease term. If the fair value of the equipment at lease commencement is 70,000, what would be the amount of the annual rental payments Cardinal demands of MTBA, assuming each payment will be made at the beginning of each year and Cardinal wishes to earn a rate of return on the lease of 8%? (Present value of 1 for 4 periods at 6% and Present value of an ordinary annuity for 4 periods at 6%.)

a) 47,000

b) 23,763

c) 23,237

d) 6,706

10- Cardinal Ltd. is negotiating to lease a piece of equipment to MTBA plc. MTBA requests that the lease be for 9 years. The equipment has a useful life of 10 years. Cardinal wants a guarantee that the residual value of the equipment at the end of the lease is at least 5,000. MTBA agrees to guarantee a residual value of this amount though it expects the residual value of the equipment to be only 2,500 at the end of the lease term. If the fair value of the equipment at lease commencement is 70,000. What is a journal entry on this situation?

a) Debit Lease Receivable 150,001, and Credit Sales Revenue 150,001

b) Debit Lease Receivable 150,001and Cost of goods sold 120,000, and Credit Sales Revenue 150,001 and Inventory 120,000

c) Debit Lease Receivable 30,044, and Credit Cash 30,044

d) Debit Cash 30,040, andCredit Lease Receivable 30,040

11- On December 31, 2018, Burke Corporation signed a lease contract fora machine with a period of 5 years, irrevocably. Annual lease payments of $ 8,668 beginning December 31, 2018.The engine's economic life is 6 years and the residual value is $ 5,000.The machine is returned to the lessor at the end of the lease period. Burke uses the straight-line method for depreciation. Burke's incremental borrowing rate is 5%, and the implicit rate of the lessor is unknown.How much the present value of the lease payment?

a) $39,401

b) $39,402

c) $39,403

d) $39,404

12- What are the major reasons why companies change accounting policies?

a) Desire to show better profit picture.

b) Desire to increase cash flows through reduction in income taxes.

b) Requirement by International Accounting Standards Board to change accounting methods.

c) All of above

13- State how each of the following items is reflected in the financial statements.

a) Change in accounting policy; retrospective application to prior period financial statements.

b) Correction of an error and therefore prior period adjustment; adjust the beginning balance of retained earnings.

c) Change in accounting estimate; currently and prospectively. Part of operating section of income statement.

d) All of above

14- What is not the example of a change in estimate?

a) change in the amount of trade receivables

b) revisions of estimated lives

c) changes in estimates of warranty costs

d) change in estimate of deferred charges or credits.

15- How the following items are recorded in the accounting records in Impairment of goodwill?

a) Change in accounting estimatecurrently and prospectively.

b) Change in estimateaccount for currently and prospectively

c) Charge to expensepossibly separately disclosed.

d) Correction of an error and reported as a prior period adjustmentadjust the beginning balance of retained earnings.

16- How the following items are recorded in the accounting records in a change in depreciation method?

a) Change in accounting estimatecurrently and prospectively.

b) Change in estimateaccount for currently and prospectively

c) Charge to expensepossibly separately disclosed.

d) Correction of an error and reported as a prior period adjustmentadjust the beginning balance of retained earnings.

17- How the following items are recorded in the accounting records in the large write-off of inventories because of obsolescense?

a) Change in accounting estimatecurrently and prospectively.

b) Change in estimateaccount for currently and prospectively

c) Charge to expensepossibly separately disclosed.

d) Correction of an error and reported as a prior period adjustmentadjust the beginning balance of retained earnings.

18- How the following items are recorded in the accounting records in change from cash basis to the accrual basis of accounting?

a) Change in accounting estimatecurrently and prospectively.

b) Change in estimateaccount for currently and prospectively

c) Charge to expensepossibly separately disclosed.

d) Correction of an error and reported as a prior period adjustmentadjust the beginning balance of retained earnings.

19- How the following items are recorded in the accounting records in change from average-cost to FIFO method for inventory accounting?

a) Change in accounting policyretrospective application to all affected prior-period financial statements.

b) Change in estimateaccount for currently and prospectively

c) Charge to expensepossibly separately disclosed.

d) Correction of an error and reported as a prior period adjustmentadjust the beginning balance of retained earnings.

20- How the following items are recorded in the accounting records in change in the estimate of service lives for plant assets?

a) Change in accounting policyretrospective application to all affected prior-period financial statements.

b) Change in estimateaccount for currently and prospectively

c) Change in accounting estimatecurrently and prospectively.

d) Correction of an error and reported as a prior period adjustmentadjust the beginning balance of retained earnings.