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Multiple Choice 1. On January 1 of the current year, Tire Company enters into a five-year lease agreement for production equipment. The lease requires Tire Co to pay $12,500 per year in lease payments. At the end of the five-year lease term, Tire Co can purchase the equipment for $30,000. The fair value of the equipment $75,000. The estimated useful life of the equipment is 10 years. The present value of the lease payments is $50,000. The present value of the purchase option is $20,000. Tire's controller believes the purchase option price is sufficiently below the expected fair value of the equipment at the date the option becomes exercisable to reasonably assure its exercise. Tire Co would normally depreciate equipment of this type using the straight-line method. What amount is the carrying value of the asset related to this lease at December 31, of the current year? A. $40,000 B. $45,000 C. $56,000 D. $63,000 2. A company leases trucks and properly classifies the leases into capital leases. The leases have a ten-year term and the lease calculations were done three years ago when interest rates were lower. Which of the following is the appropriate accounting treatment, if any, for the application of the fair value option to lease transactions? A. Leases are not eligible for the fair value option. B. Recognize the change to fair value accounting with a cumulative adjustment to beginning retained earnings. C. Recognize the change to fair value accounting with an unrealized loss in the income statement. D. Recognize the change to fair value accounting with an unrealized loss in accumulated other comprehensive income. 3. An asset group is being evaluated for an impairment loss. The following financial information is available for the asset group: Carrying Value: $100,000,000 Sum of the undiscounted cash flows 95,000,000 Fair value 80,000,000 What is the value of the impairment loss? A. B. C. D. $0 $5,000,000 $15,000,000 $20,000,000 1 4. A company has an operating lease for its office space. The lease term is 120 months and requires monthly rent of $15,000. As an incentive for the company to enter into the lease, the lessor granted the first eight months' rent at no cost. What amount of monthly rent/lease expense should be recognized over the life of the lease? A. B. C. D. $14,000 $14,062 $15,000 $16,000 5. Sean's trial balance has the following selected items: Cash (includes $10,000 in a bond sinking fund for long-term bond payables) Accounts receivable Allowance for doubtful accounts Deposits received from customers Merchandise inventory Unearned rent Investment in Trading Securities $50,000 20,000 5,000 3,000 7,000 1,000 2,000 What amount should Sean report as total current assets in its balance sheet? A. $64,000 B. $67,000 C. $72,000 D. $74,000 6. A note payable was issued in payment for services received. The services had a fair value less than the face amount of the note payable. The note payable has no stated interest rate. How should the note payable ne presented in the balance sheet? A. At the face amount. B. At the face amount with a separate deferred asset for the discount calculated at the imputed interest rate. C. At the face amount with a separate deferred credit for the discount calculated at the imputed interest rate. D. At the face amount minus a discount calculated at the imputed interest rate. 2 7. Based on the stock transactions below, what is the weighted average number of shares outstanding as of December 21, Year 1, that should be used in the calculation of basic earnings per share in the financial statements issued on March 1, Year 2? Date January 1, Year 1 April 1, Year 1 June 1, Year 1 February 15, Year 2 March 15, Year 2 A. B. C. D. Transactions Beginning Balance 100,000 Issued 30,000 shares for cash 50% stock dividend 2-for-1 stock split Issued 40,000 shares for cash 147,500 183,750 295,000 367,500 8. On January 1, 2016, a company's new president was awarded a $200,000 bonus that would be paid out in two $100,000 installments in 2018 (year 3) and 2019 (year 4) of employment, contingent on employment through the year ending December 31, 2017. How much should the company expense for this bonus in 2017 and 2018? A. $0 for 2017; $100,000 for 2018 B. $100,000 for 2017 and $0 for 2018 C. $100,000 for 2017 and $100,000 for 2018 D. $200,000 for 2017 and $0 for 2018 9. A company, upon initial recognition of an asset retirement obligation, should not take which of the following actions? A. Allocate asset retirement cost to expense over the useful life of the related asset. B. Measure the asset retirement cost at fair value. C. Capitalize the asset retirement cost by increasing the carrying amount of the related asset. D. Capitalize the asset retirement cost at its undiscounted cash flow value 3 10. On January 1, 2016, Olson Inc. issued stock options for 200,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Olson initially estimates that it is probable the goal will be achieved. Ignoring taxes, what is reduction in earnings in 2016? A. $0 B. $200,000 C. $400,000 D. $1,200,000 11. On December 31, 2015, the Meisenhelder Company had 250,000 shares of common stock issued and outstanding. On March 31, 2016, the company sold 50,000 additional shares for cash. Meisenhelder's net income for the year ended December 31, 2016 was $700,000. During 2016, Meisenhelder declared and paid $80,000 in cash dividends on its nonconvertible preferred stock. What is the 2016 basic earnings per share (rounded)? A. $2.16. B. $3.50. C. $3.10. D. $2.80. 12. The following information pertains to Hurce Company's outstanding stock for 2016: Common Stock, $1 Par Shares Outstanding , 1/1/2016 2 for 1 stock split, 4/1/2016 Shares Issued, 7/1/2016 Preferred Stock, $100 par, 7% cumulative Shares outstanding, 1/1/2016 10,000 10,000 5,000 4,000 What is the number of shares Hurce should use to calculate 2016 basic earnings per share? A. 20,000. B. 22,500. C. 25,000. D. 27,000. 4 13. Velasco Co. changed from straight-line to DDB depreciation. The journal entry to record the change includes: A. A credit to accumulated depreciation. B. A debit to accumulated depreciation. C. A debit to a depreciable asset. D. The change does not require a journal entry. 14. During 2016, Hutton Co. decides to use FIFO to account for its inventory transactions. Previously, it had used LIFO. A. Hutton is not required to make any accounting adjustments. B. Hutton has made a change in accounting principle requiring retrospective adjustment. C. Hutton has made a change in accounting principle requiring prospective application. D. Hutton needs to correct an accounting error. 15. Hepburn Company bought a copyright for $90,000 on January 1, 2012, at which time the copyright had an estimated useful life of 15 years. On January 5, 2015, the company determined that the copyright would expire at the end of 2018. How much should Hepburn record as amortization expense for this copyright for 2015? A. $14,400. B. $7,200. C. $18,000. D. $12,000. 16. Cooper Inc. took physical inventory at the end of 2015. Purchases that were acquired FOB destination were in transit, so they were not included in the physical count. A. Cooper needs to correct an accounting error. B. Cooper has made a change in accounting principle, requiring retrospective adjustment. C. Cooper is required to adjust a change in accounting estimate prospectively. D. Cooper is not required to make any accounting adjustments. 17. Heuer Company's prepaid insurance was $8,000 at December 31, 2015, and $10,000 at December 31, 2016. Heuer reported insurance expense of $15,000 on the 2016 income statement. What amount would be reported in the statement of cash flows as insurance paid using the direct method? A. $13,000. B. $17,000. C. $15,000. D. $23,000. 5 18. Which of the following circumstances creates a future taxable amount? A. Service fees collected in advance from customers: taxable when received, recognized for financial reporting when earned. B. Accrued compensation costs for future payments. C. Straight-line depreciation for financial reporting and accelerated depreciation for tax reporting. D. Investment expenses incurred to obtain tax-exempt income (not tax deductible). 19. During the current year, Stern Company had pretax accounting income of $45 million. Stern's only temporary difference for the year was rent received for the following year in the amount of $15 million. Stern's taxable income for the year would be: A. $30 million. B. $60 million. C. $50 million. D. $45 million. 6 20. Gotting Company bought a copyright for $90,000 on January 1, 2012, at which time the copyright had an estimated useful life of 15 years. On January 5, 2015, the company determined that the copyright would expire at the end of 2016. How much should Gotting record retrospectively as the effect of change? A. $0. B. $12,000. C. $8,000. D. $14,400. Problems Information for Problems 1 and 2: Drake, Inc. has two loans recorded on its books. Loan 1 was obtained on January 1, Year 1, and Loan 2 was entered into on January 1, Year 2. Drake's year end is December 31. For the two situations related to the loans below, prepare the appropriate journal entries. Each loan should be accounted for independent of the other loan. Round numbers to the nearest dollar. 1. Loan 1 is a 4%, five-year balloon loan for $3,000,000 with interest due and paid annually on December 31. Drake records interest annually on December 31. Drake incorrectly recorded the journal entry for the Year 1 interest expense and payment as a debit to accrued interest payable and a credit to cash. Prepare the net journal entry (entries) to correct Year 1 and properly record the interest attributable to the loan as of, and for the year ended December 31, Year 2. Account Name Debit Credit 7 2. Loan 2 is an 8%, $1,000,000 loan with interest due annually on December 31. Drake did not record or pay the required Year 2 interest payment until January 1, Year 3. Prepare the journal entry (entries) Drake should record at December 31, Year 2. Account Name Debit Credit 3. On January 1, 2016, Shelley Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Shelley to make annual payments of $100,000 at the end of each year for ten years with title to pass to Shelley at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Shelley uses the straight-line method of depreciation for all of its fixed assets. Shelley accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $671,008 at an effective interest rate of 8%. With respect to this capitalized lease, Shelley should record interest and depreciation expense for 2016: Interest expense: _____________ Depreciation expense: _____________ 8 4. The following information is for Moyano, Inc. for the year ended December 31, 2016. Moyano had a cash and cash equivalents balance of $5,200 on January 1, 2016, and $2,320 on December 31, 2016. Required: Prepare a statement of cash flows in good form for the year using the direct method for operating activities. 9 Multiple Choice 1. On January 1 of the current year, Tire Company enters into a five-year lease agreement for production equipment. The lease requires Tire Co to pay $12,500 per year in lease payments. At the end of the five-year lease term, Tire Co can purchase the equipment for $30,000. The fair value of the equipment $75,000. The estimated useful life of the equipment is 10 years. The present value of the lease payments is $50,000. The present value of the purchase option is $20,000. Tire's controller believes the purchase option price is sufficiently below the expected fair value of the equipment at the date the option becomes exercisable to reasonably assure its exercise. Tire Co would normally depreciate equipment of this type using the straight-line method. What amount is the carrying value of the asset related to this lease at December 31, of the current year? A. $40,000 B. $45,000 C. $56,000 D. $63,000 2. A company leases trucks and properly classifies the leases into capital leases. The leases have a ten-year term and the lease calculations were done three years ago when interest rates were lower. Which of the following is the appropriate accounting treatment, if any, for the application of the fair value option to lease transactions? A. Leases are not eligible for the fair value option. B. Recognize the change to fair value accounting with a cumulative adjustment to beginning retained earnings. C. Recognize the change to fair value accounting with an unrealized loss in the income statement. D. Recognize the change to fair value accounting with an unrealized loss in accumulated other comprehensive income. 3. An asset group is being evaluated for an impairment loss. The following financial information is available for the asset group: Carrying Value: $100,000,000 Sum of the undiscounted cash flows 95,000,000 Fair value 80,000,000 What is the value of the impairment loss? A. B. C. D. $0 $5,000,000 $15,000,000 $20,000,000 1 4. A company has an operating lease for its office space. The lease term is 120 months and requires monthly rent of $15,000. As an incentive for the company to enter into the lease, the lessor granted the first eight months' rent at no cost. What amount of monthly rent/lease expense should be recognized over the life of the lease? A. B. C. D. $14,000 $14,062 $15,000 $16,000 5. Sean's trial balance has the following selected items: Cash (includes $10,000 in a bond sinking fund for long-term bond payables) Accounts receivable Allowance for doubtful accounts Deposits received from customers Merchandise inventory Unearned rent Investment in Trading Securities $50,000 20,000 5,000 3,000 7,000 1,000 2,000 What amount should Sean report as total current assets in its balance sheet? A. $64,000 B. $67,000 C. $72,000 D. $74,000 6. A note payable was issued in payment for services received. The services had a fair value less than the face amount of the note payable. The note payable has no stated interest rate. How should the note payable ne presented in the balance sheet? A. At the face amount. B. At the face amount with a separate deferred asset for the discount calculated at the imputed interest rate. C. At the face amount with a separate deferred credit for the discount calculated at the imputed interest rate. D. At the face amount minus a discount calculated at the imputed interest rate. 2 7. Based on the stock transactions below, what is the weighted average number of shares outstanding as of December 21, Year 1, that should be used in the calculation of basic earnings per share in the financial statements issued on March 1, Year 2? Date January 1, Year 1 April 1, Year 1 June 1, Year 1 February 15, Year 2 March 15, Year 2 A. B. C. D. Transactions Beginning Balance 100,000 Issued 30,000 shares for cash 50% stock dividend 2-for-1 stock split Issued 40,000 shares for cash 147,500 183,750 295,000 367,500 8. On January 1, 2016, a company's new president was awarded a $200,000 bonus that would be paid out in two $100,000 installments in 2018 (year 3) and 2019 (year 4) of employment, contingent on employment through the year ending December 31, 2017. How much should the company expense for this bonus in 2017 and 2018? A. $0 for 2017; $100,000 for 2018 B. $100,000 for 2017 and $0 for 2018 C. $100,000 for 2017 and $100,000 for 2018 D. $200,000 for 2017 and $0 for 2018 9. A company, upon initial recognition of an asset retirement obligation, should not take which of the following actions? A. Allocate asset retirement cost to expense over the useful life of the related asset. B. Measure the asset retirement cost at fair value. C. Capitalize the asset retirement cost by increasing the carrying amount of the related asset. D. Capitalize the asset retirement cost at its undiscounted cash flow value 3 10. On January 1, 2016, Olson Inc. issued stock options for 200,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Olson initially estimates that it is probable the goal will be achieved. Ignoring taxes, what is reduction in earnings in 2016? A. $0 B. $200,000 C. $400,000 D. $1,200,000 11. On December 31, 2015, the Meisenhelder Company had 250,000 shares of common stock issued and outstanding. On March 31, 2016, the company sold 50,000 additional shares for cash. Meisenhelder's net income for the year ended December 31, 2016 was $700,000. During 2016, Meisenhelder declared and paid $80,000 in cash dividends on its nonconvertible preferred stock. What is the 2016 basic earnings per share (rounded)? A. $2.16. B. $3.50. C. $3.10. D. $2.80. 12. The following information pertains to Hurce Company's outstanding stock for 2016: Common Stock, $1 Par Shares Outstanding , 1/1/2016 2 for 1 stock split, 4/1/2016 Shares Issued, 7/1/2016 Preferred Stock, $100 par, 7% cumulative Shares outstanding, 1/1/2016 10,000 10,000 5,000 4,000 What is the number of shares Hurce should use to calculate 2016 basic earnings per share? A. 20,000. B. 22,500. C. 25,000. D. 27,000. 4 13. Velasco Co. changed from straight-line to DDB depreciation. The journal entry to record the change includes: A. A credit to accumulated depreciation. B. A debit to accumulated depreciation. C. A debit to a depreciable asset. D. The change does not require a journal entry. 14. During 2016, Hutton Co. decides to use FIFO to account for its inventory transactions. Previously, it had used LIFO. A. Hutton is not required to make any accounting adjustments. B. Hutton has made a change in accounting principle requiring retrospective adjustment. C. Hutton has made a change in accounting principle requiring prospective application. D. Hutton needs to correct an accounting error. 15. Hepburn Company bought a copyright for $90,000 on January 1, 2012, at which time the copyright had an estimated useful life of 15 years. On January 5, 2015, the company determined that the copyright would expire at the end of 2018. How much should Hepburn record as amortization expense for this copyright for 2015? A. $14,400. B. $7,200. C. $18,000. D. $12,000. 16. Cooper Inc. took physical inventory at the end of 2015. Purchases that were acquired FOB destination were in transit, so they were not included in the physical count. A. Cooper needs to correct an accounting error. B. Cooper has made a change in accounting principle, requiring retrospective adjustment. C. Cooper is required to adjust a change in accounting estimate prospectively. D. Cooper is not required to make any accounting adjustments. 17. Heuer Company's prepaid insurance was $8,000 at December 31, 2015, and $10,000 at December 31, 2016. Heuer reported insurance expense of $15,000 on the 2016 income statement. What amount would be reported in the statement of cash flows as insurance paid using the direct method? A. $13,000. B. $17,000. C. $15,000. D. $23,000. 5 18. Which of the following circumstances creates a future taxable amount? A. Service fees collected in advance from customers: taxable when received, recognized for financial reporting when earned. B. Accrued compensation costs for future payments. C. Straight-line depreciation for financial reporting and accelerated depreciation for tax reporting. D. Investment expenses incurred to obtain tax-exempt income (not tax deductible). 19. During the current year, Stern Company had pretax accounting income of $45 million. Stern's only temporary difference for the year was rent received for the following year in the amount of $15 million. Stern's taxable income for the year would be: A. $30 million. B. $60 million. C. $50 million. D. $45 million. 6 20. Gotting Company bought a copyright for $90,000 on January 1, 2012, at which time the copyright had an estimated useful life of 15 years. On January 5, 2015, the company determined that the copyright would expire at the end of 2016. How much should Gotting record retrospectively as the effect of change? A. $0. B. $12,000. C. $8,000. D. $14,400. Problems Information for Problems 1 and 2: Drake, Inc. has two loans recorded on its books. Loan 1 was obtained on January 1, Year 1, and Loan 2 was entered into on January 1, Year 2. Drake's year end is December 31. For the two situations related to the loans below, prepare the appropriate journal entries. Each loan should be accounted for independent of the other loan. Round numbers to the nearest dollar. 1. Loan 1 is a 4%, five-year balloon loan for $3,000,000 with interest due and paid annually on December 31. Drake records interest annually on December 31. Drake incorrectly recorded the journal entry for the Year 1 interest expense and payment as a debit to accrued interest payable and a credit to cash. Prepare the net journal entry (entries) to correct Year 1 and properly record the interest attributable to the loan as of, and for the year ended December 31, Year 2. Account Name Retained Earnings (3000000*4%) Accrued Interest Payable Debit Credit 120,000 120,000 (Being Entry to Fix Year 1 error) Interest Expenses (3000000*4%) Cash 120,000 120,000 (To record interest expenses for year 2) 7 2. Loan 2 is an 8%, $1,000,000 loan with interest due annually on December 31. Drake did not record or pay the required Year 2 interest payment until January 1, Year 3. Prepare the journal entry (entries) Drake should record at December 31, Year 2. Account Name Interest Expenses (1,000,000*8%) Accrued Interest Payable (To record Interest Expenses accrued in year 2) Debit 80,000 Credit 80,000 3. On January 1, 2016, Shelley Corporation signed a ten-year non cancelable lease for certain machinery. The terms of the lease called for Shelley to make annual payments of $100,000 at the end of each year for ten years with title to pass to Shelley at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Shelley uses the straight-line method of depreciation for all of its fixed assets. Shelley accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $671,008 at an effective interest rate of 8%. With respect to this capitalized lease, Shelley should record interest and depreciation expense for 2016: Interest expense: __$53,681__ (i.e. $671,008 * 8% = $53,681) Depreciation expense: _$44,734_ (i.e. $671,008/15 = $44,734) 8 4. The following information is for Moyano, Inc. for the year ended December 31, 2016. Moyano had a cash and cash equivalents balance of $5,200 on January 1, 2016, and $2,320 on December 31, 2016. Required: Prepare a statement of cash flows in good form for the year using the direct method for operating activities. Answer: Moyano, Inc. Statement of Cash Flows for the year ended Dec 31 2016 Cash flows from operating activities Collections from customers Collection from Interest on Investment Cash paid for purchase of inventory Cash paid for Operating Expenses Cash paid for Income Tax Cash paid for Interest on Debt Net cash Provided by operating activities Cash flows from investing activities Sale of Land Cash paid for Purchase of Equipment Net cash used in investing activities 1,900 200 -1,000 -500 -80 -300 220 100 -4,100 -4,000 9 Cash flows from financing activities Sale of Common Stock Issuance of Debt securities Cash Paid for Debt Principal Reduction Cash Paid for dividends on common stock Net cash Provided by financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 600 2000 -1500 -200 900 -2,880 5,200 2,320 10