Capitalization of interest should occur during the period of construction for qualified assets when all of the following are occurring except expenditures related to the project have been made work on the project has begun interest is being incurred the asset is being used to produce revenue 3.33 points QUESTION 2 Buckeye Corporation adopted dollar-value LIFO on January 1, 2011, when the inventory value was $500,000 and the cost index was 1.0. On December 31, 2011, the inventory value at year-end costs was $535,000 and the cost index was 1.06. Buckeye would report a LIFO inventory of $504,717 $530,000 $505,000 $533,019 3.33 points QUESTION 3 Which of the following self-constructed assets would not qualify for interest capitalization? Building constructed for resale Building constructed for use in operation Equipment constructed for use in operation Equipment constructed on a repetitive basis for resale 3.33 points QUESTION 4 Consider the following: A company issued $10,000,000 in bonds on January 1, year 1. The terms are: 10 year with interest paid semiannually. Refer to the following schedule. Payment Cash Effective Interest Decrease in Balance Outstanding Balance 11,487,747 1 400,000 344,632 55,368 11,432,379 2 400,000 342,971 57,029 11,375,350 3 400,000 341,261 58,739 11,316,611 What is the stated annual rate of interest on the bonds 3 percent 4 percent 6 percent 8 percent 3.33 points QUESTION 5 CPA Company manufactures equipment that it sells or leases. On December 31, 2009 CPA leased equipment to CMA for six years. At the end of the lease, title transfers to CMA. The lease requires equal annual payments of $40,000, with the first payment due December 31, 2009. CMA could have purchased the equipment for $210,000. The equipment cost CPA $166,000 to manufacture. How much income should CPA report for 2009? $30,000 $40,000 $44,000 None of the above 3.33 points QUESTION 6 On October 31, 2011, CPA Co. borrowed $16 million cash and issued a 7-month, noninterest-bearing note. The loan was made by The Finance Co. whose stated discount rate is 8%. CPA's effective interest rate on this loan is: More than the stated discount rate of 8%. Less than the stated discount rate of 8%. Equal to the stated discount rate of 8%. Unrelated to the stated discount rate of 8%. 3.33 points QUESTION 7 Lacy's Linen Mart uses the retail method to estimate inventories. Data for the first six months of 2011 include: beginning inventory at cost and retail were $60,000 and $120,000, net purchases at cost and retail were $312,000 and $480,000, and sales during the first six months totaled $490,000. The estimated inventory at June 30, 2011, would be: $68,200. $55,000 $71,500 $63,250 3.33 points QUESTION 8 Compute the effective interest rate on a 7 percent, $500,000 loan that requires a $50,000 compensating balance. The compensating balance will earn 2 percent 7.56 percent 7.00 percent 5.33 percent 5.00 percent 3.33 points QUESTION 9 Which of the following bank items would not be included in the Cash account? Checking account balance Checks from customers not deposited Certificate of deposit Savings account 3.33 points QUESTION 10 On February 1, 2010, Pat Weaver Inc. (PWI) issued 10%, $1,000,000 bonds for $1,116,000. PWI retired all of these bonds on January 1, 2011, at 102. Unamortized bond premium on that date was $92,800. How much gain or loss should be recognized on this bond retirement? $0 gain $111,800 gain $72,800 gain $96,000 gain 3.33 points QUESTION 11 In determining the amount of the lease payment, the lessor should include the estimate of residual value if it is guaranteed include the estimate of residual value if it is not guaranteed include the estimate of residual value whether or not it is guaranteed not include any estimate of residual value 3.33 points QUESTION 12 When bonds are retired prior to their maturity date GAAP has been violated The issuing company probably will report an ordinary gain or loss The issuing company probably will report an extraordinary gain or loss The purchasing company will report a non-operating gain or loss 3.33 points QUESTION 13 On January 1, 2011, Ozark Minerals issued $10 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Ozark's no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 99. Upon issuance, Ozark should debit discount on bonds payable $100,000 credit premium on bonds payable $100,000 credit equity $100,000 credit bonds payable $10,100,000 3.33 points QUESTION 14 Howard's Supply Co. suffered a fire loss on April 20, 2011. The company's last physical inventory was taken on January 30, 2011, at which time the inventory totaled $220,000. Sales from January 30 to April 20 were $600,000 and purchases during that time were $450,000. Howard's consistently reports a 30% gross profit. The estimated inventory loss is: $490,000 $238,000 $250,000 None of the above is correct 3.33 points QUESTION 15 Consider the following: A company issued $10,000,000 in bonds on January 1, year 2011. The terms are: 10 year with interest paid semiannually. Refer to the following schedule. Payment Cash Effective Interest Decrease in Balance Outstanding Balance 11,487,747 1 400,000 344,632 55,368 11,432,379 2 400,000 342,971 57,029 11,375,350 3 400,000 341,261 58,739 11,316,611 What would be the total interest expense recognized for the bond issue over its full term? $6,512,253. $8,000,000. $11,256,109. $11,487,747. 3.33 points QUESTION 16 A lease requires a payment at the beginning of each year for 12 years. The initial asset value is $80,000 with no residual value at the end of the lease. If the lessors implicit interest rate is 10 percent and the lessees incremental borrowing rate is 12 percent, the annual lease payment would be $6,666. $10,674 $11,531 $11,741 3.33 points QUESTION 17 In computing capitalized interest, average accumulated expenditures: Is the arithmetic mean of all construction expenditures. Is multiplied by the company's most recent financing rates. Is determined by time-weighting individual expenditures made during the asset construction period. None of the above 3.33 points QUESTION 18 On March 31, 2011, 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? Shareholders' equity is increased Additional paid-in capital is decreased Retained earnings is increased. An extraordinary loss is recognized 3.33 points QUESTION 19 In chat session 2 Dr. Moore stated one thing one must have when taking the CPA exam. This was? knowledge of the material organization a plan All of the above 3.33 points QUESTION 20 The information below was taken from the accounting records of CPA Construction Co. before adjusting entries: Sales $400,000 Accounts Receivable 45,000 Allowance for Uncollectible Accounts (credit balance) 1,000 Assume that CPA Construction uses the percentage-of-sales method for estimating bad debts and that this year it estimates that 2 percent of sales could be uncollectible. The year end adjusting entry would include a debit to Allowance for Uncollectible Accounts for $9,000 credit to Allowance for Uncollectible Accounts for $8,000 credit to Allowance for Uncollectible Accounts for $9,000 credit to Allowance for Uncollectible Accounts for $10,000 3.33 points QUESTION 21 The information below was taken from the accounting records of CPA Construction Co. before adjusting entries: Sales $400,000 Accounts Receivable 45,000 Allowance for Uncollectible Accounts (credit balance) 1,000 Assume that CPA Construction uses the percentage-of-receivables method for estimating bad debts and that this year it estimates that 10 percent of accounts receivable could be uncollectible. The year end adjusting entry would include a debit to Allowance for Uncollectible Accounts for $4,500 credit to Allowance for Uncollectible Accounts for $3,500 credit to Allowance for Uncollectible Accounts for $5,500 credit to Allowance for Uncollectible Accounts for $8,000 3.33 points QUESTION 22 On January 2, 2005, CPA Inc. signed a 10-year noncancelable lease for a heavy-duty drill press. The lease stipulated annual payments of $30,000 starting at the end of the first year, with title passing to CPA at the expiration of the lease. CPA treated this transaction as a capital lease. The drill press has an estimated useful life of 15 years, with no residual value. CPA uses straight-line depreciation for all of its fixed assets. Aggregate lease payments were determined to have a present value of $180,000, based on implicit interest of 10 percent. On its 2005 income statement, what amount of interest expense should CPA report from this lease transaction? $0 $12,000 $15,000 $18,000 3.33 points QUESTION 23 Assume that on March 1, 2009, CPA Company issues, at 103 plus accrued interest, 10-year bonds with a face value of $100,000 and a face interest rate of 6 percent. Interest is paid semiannually on June 30 and December 31. The bond is dated January 1, 2009, and will be due on January 1, 2019. How much accrued interest will there be at the time the bond is issued? $500 $833 $1,000 None of the above 3.33 points QUESTION 24 Consider the following: A company issued $10,000,000 in bonds on January 1, 2011. The terms are: 10 year with interest paid semiannually. Refer to the following schedule. Payment Cash Effective Interest Decrease in Balance Outstanding Balance 11,487,747 1 400,000 344,632 55,368 11,432,379 2 400,000 342,971 57,029 11,375,350 3 400,000 341,261 58,739 11,316,611 What is the interest expense on the bonds in 2012? $800,000. $680,759. $342,961. None of the above 3.33 points QUESTION 25 Liddy Corp. began constructing a new warehouse for its operations during the current year. In the year Liddy incurred interest of $30,000 on a working capital loan, and interest on a construction loan for the warehouse of $60,000. Interest computed on the average accumulated expenditures for the warehouse construction was $50,000. What amount of interest should Liddy expense for the year? $30,000 $40,000 $90,000 $140,000 3.33 points QUESTION 26 In a period when costs are falling and inventory quantities are stable, the lowest taxable income would be reported by using the inventory method of Weighted average Moving average LIFO FIFO 3.33 points QUESTION 27 Under the retail inventory method: A company measures inventory on its balance sheet by converting retail prices to cost A company measures inventory on its balance sheet at current selling prices A company measures inventory on its balance sheet on a LIFO basis None of the above is correct. 3.33 points QUESTION 28 On January 1, 2008, CPA Corp. entered into a 10-year lease agreement with CMA, Inc. for industrial equipment. Annual lease payments of $10,000 are payable at the end of each year. CPA knows that the lessor expects a 10 percent return on the lease. CPA has a 12 percent incremental borrowing rate. The equipment is expected to have an estimated useful life of 10 years. In addition, a third party has guaranteed to pay CMA a residual value of $5,000 at the end of the lease. The present value of an ordinary annuity of $1 at 12% for 10 years is 5.6502 10% for 10 years is 6.1446 The present value of $1 at 12% for 10 years is 0.3220 10% for 10 years is 0.3855 On CPA's October 31, 2008, balance sheet, the principal amount of the lease obligation was $63,374 $61,446 $58,112 None of the above 3.33 points QUESTION 29 Eagle Company issued ten-year bonds at 96 during the current year. In the year-end financial statements, the discount should be Added to bonds payable Included as an expense in the year of issue Deducted from bonds payable Reported as a deferred charge 3.33 points QUESTION 30 Which of the following items would not be included in cash equivalents? 30 day certificates of deposit Investments in stock Money market accounts Commercial paper 3.33 points