Accounts Recievable, Bank Recon Etc

1. Which of the following is NOT correct?
a.
The operating cycle sometimes is longer than one year in duration.
b.
The operating cycle always is one year in duration.
c.
The operating cycle sometimes is shorter than one year in duration.
d.
The operating cycle is a concept applicable both to manufacturing and retailing enterprises.
ANS: B PTS: 1 DIF: Easy OBJ: LO 1
TOP: AICPA FN-Reporting MSC: AACSB Reflective Thinking
2. 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.
ANS: C PTS: 1 DIF: Easy OBJ: LO 1
3. 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.
ANS: A PTS: 1 DIF: Easy OBJ: LO 4
4. 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.
ANS: D PTS: 1 DIF: Medium OBJ: LO 4
TOP: AICPA FN-Measurement MSC: AACSB Analytic
5. If the cash balance shown in a company's accounting records is less than the correct cash balance, and
neither the company nor the bank has made any errors, there must be
a.
outstanding checks.
b.
deposits in transit.
c.
deposits credited by the bank but not yet recorded by the company.
d.
bank charges not yet recorded by the company.
ANS: C PTS: 1 DIF: Medium OBJ: LO 4
6. The FASB specified in Statement No. 140 three conditions that must be met if a transfer of receivables is
to accounted 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.
ANS: B PTS: 1 DIF: Medium OBJ: LO 6
7. Which one of the following statements is NOT correct?

a.
The accounting function should be separated from the custodianship of a company's assets.
b.
Certain clerical personnel in a company should be rotated among various jobs.
c.
A company's personnel should be given well-defined responsibilities.
d.
The responsibility of receiving merchandise and paying for it usually should be given to one person.
ANS: D PTS: 1 DIF: Easy OBJ: LO 4
8. A discount given to a customer for purchasing a large volume of merchandise is typically referred to as a
a.
quantity discount.
b.
cash discount.
c.
trade discount.
d.
size discount.
9. When the direct write-off method of recognizing bad debt expense is used, the entry to write off a specific
customer account would
a.
increase net income.
b.
have no effect on net income.
c.
increase the accounts receivable balance and increase net income.
d.
decrease the accounts receivable balance and decrease net income.
10. When comparing the allowance method of accounting for bad debts with the direct write-off method,
which of the following is true?
a.
The direct write-off method is exact and also better illustrates the matching principle.
b.
The allowance method is less exact but it better illustrates the matching principle.
c.
The direct write-off method is theoretically superior.
d.
The direct write-off method requires two separate entries to write off an uncollectible account.
11. When the allowance method of recognizing bad debt expense is used, the entry to record the write-off of a
specific uncollectible account would decrease
a.
allowance for doubtful accounts.
b.
net income.
c.
net realizable value of accounts receivable.
d.
working capital.
12. When a specific customer's account is written off by a company using the allowance method, the effect on
net income and the net realizable value of the accounts receivable is
Net Realizable Value

Net Income of Accounts Receivable
a.
Increase Increase
b.
Decrease Decrease
c.
None None
d.
Decrease None
13. When the allowance method of recognizing bad debt expense is used, the entries at the time of collection
of a small account previously written off would
a.
increase net income.
b.
increase the allowance for doubtful accounts.
c.
decrease net income.
d.
decrease the allowance for doubtful accounts.
14. A method of estimating bad debts that focuses on the balance sheet rather than the income statement is the
allowance method based on
a.
direct write-off.
b.
specific accounts determined to be uncollectible.
c.
credit sales.
d.
aging the trade receivable accounts.
15.
Accounts Receivable
xxx
Allowance for Uncollectible Accounts
xxx
This entry would be made when:

a.
a customer pays its account balance.
b.
a customer defaults on its account.
c.
a previously defaulted customer pays its outstanding balance.
d.
estimated uncollectible receivables are too low.
16. What is the accounting principle underlying the recognition of an estimated liability for warranties in the
period of product sale?
a.
Matching
b.
Materiality
c.
Full Disclosure
d.
Conservatism
ANS: A PTS: 1 DIF: Medium OBJ: LO 2
17. 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
18. Which of the following factors are used to compute the number of days' sales in accounts receivable?
a.
Inventory turnover and 365 days
b.
Accounts receivable turnover and 365 days
c.
Net sales and average inventory
d.
Average accounts receivable and cost of goods sold
19. Which of the following would NOT be classified as cash?

a.
Personal checks
b.
Travelers' checks
c.
Cashiers' checks
d.
Postdated checks
20. Which of the following is NOT a basic characteristic of a system of cash control?
a.
Use of a voucher system
b.
Combined responsibility for handling and recording cash
c.
Daily deposit of all cash received
d.
Internal audits at irregular intervals
21. Bank statements provide information about all of the following except
a.
checks cleared during the period.
b.
NSF checks.
c.
bank charges for the period.
d.
errors made by the company.
22. Which of the following items would be added to the book balance on a bank reconciliation?
a.
Outstanding checks
b.
A check written for $96 entered as $69 in the accounting records
c.
Interest paid by the bank
d.
Deposits in transit
23. In preparing a bank reconciliation, interest paid by the bank on the account is
a.
added to the book balance.
b.
subtracted from the bank balance.
c.
added to the bank balance.
d.
subtracted from the book balance.
24. In preparing a monthly bank reconciliation, which of the following items would be added to the balance
reported on the bank statement to arrive at the correct cash balance?
a.
Outstanding checks
b.
Bank service charge
c.
Deposits in transit
d.
A customer's note collected by the bank on behalf of the depositor
25. Bank reconciliations are normally prepared on a monthly basis to identify adjustments needed in the
depositor's records and to identify bank errors. Adjustments should be recorded for
a.
bank errors, outstanding checks, and deposits in transit.
b.
all items except bank errors, outstanding checks, and deposits in transit.
c.
book errors, bank errors, deposits in transit, and outstanding checks.
d.
outstanding checks and deposits in transit.
Abe Company sold merchandise on credit to Bee Company for $1,000 on July 1, with terms of 2/10, net /30. On July 6,
Bee returned $200 worth of merchandise claiming the materials were defective. On July 8, Abe received a payment from
Bee and credited Accounts Receivable for $350. On July 24, Bee Company paid the remaining balance on its account.
26. See Abe Company information above. How much was the total Sales Discounts given to Bee during July?
a.
$7
b.
$0
c.
$441
d.
$2,441
27. See Abe Company information above. What was the total cash received from Bee during July?
a.
$441
b.
$450
c.
$793
d.
$800
28. For the month of December, the records of Former Corporation show the following information:
Cash received on accounts receivable ..................

$ 70,000
Cash sales ............................................
60,000
Accounts Receivable, December 1 .......................
160,000
Accounts Receivable, December 31 ......................
148,000
Accounts Receivable written off as uncollectible ......
2,000
The corporation uses the direct write-off method in accounting for uncollectible accounts receivable. What are the gross
sales for the month of December?
a.
$144,000
b.
$130,000
c.
$118,000
d.
$120,000
29. An analysis and aging of accounts receivable of the Gibson Company at December 31, 2014, showed the
following:
Accounts Receivable ..................................
$800,000
Allowance for Doubtful Accounts

(before adjustment) ................................
36,000
(cr)
Accounts estimated to be uncollectible ...............
76,800
Compute the net realizable value of the accounts receivable of Gibson Company at December 31, 2014.
a.
$804,000
b.
$799,200
c.
$723,200
d.
$727,200
ANS: C PTS: 1 DIF: Challenging OBJ: LO 2
30. An analysis and aging of the accounts receivable of Mahi Company at December 31 revealed the following
data:
Accounts Receivable .................................
$450,000
Allowance for Doubtful Accounts (before adjustment)..

25,000
(cr)
Accounts estimated to be uncollectible ..............
32,000
The net realizable value of the accounts receivable at December 31 should be

a.
$450,000.
b.
$443,000.
c.
$425,000.
d.
$418,000.
ANS: D PTS: 1 DIF: Challenging OBJ: LO 2
31. Aspen Company provides for doubtful accounts expense at the rate of 3 percent of credit sales. The
following data are available for last year:
Allowance for Doubtful Accounts, January 1 .....
$ 54,000
(cr)
Accounts written off as uncollectible during the
year .........................................
60,000
Collection of accounts written off in prior years..
(customer credit was re-established) ...........

15,000
Credit sales, year-ended December 31 ...........

3,000,000
The allowance for doubtful accounts balance at December 31, after adjusting entries, should be
a.
$45,000.
b.
$99,000.
c.
$90,000.
d.
$84,000.
ANS: B PTS: 1 DIF: Challenging OBJ: LO 2
32. The following information is from the records of Sumter, Inc. for the year ended December 31, 2014.
Allowance for Doubtful Accounts, January 1, 2014 ..
$ 6,000
(cr)
Sales, 2014 .......................................
2,920,000
Sales Returns and Allowances, 2014 ................

32,000
If the basis for estimating bad debts is 1 percent of net sales, the correct amount of doubtful accounts expense for 2014 is
a.
$22,800.
b.
$23,200.
c.
$28,880.
d.
$34,880.
33. Based on the aging of its accounts receivable at December 31, Quanto Company determined that the net
realizable value of the receivables at that date is $760,000. Additional information is as follows:
Accounts Receivable at December 31 ................
$880,000
Allowance for Doubtful Accounts at January 1 ......

128,000
(cr)
Accounts written off as uncollectible during the
year ............................................
88,000
Quanto's doubtful accounts expense for the year ended December 31 is

a.
$80,000.
b.
$96,000.
c.
$120,000.
d.
$160,000.
34. Based on its past collection experience, Base Company provides for bad debts at the rate of 2 percent of
net credit sales. On January 1, 2014, the allowance for doubtful accounts credit balance was $10,000. During 2014, Base
wrote off $18,000 of uncollectible receivables and recovered $5,000 on accounts written off in prior years. If net credit
sales for 2014 totaled $1,000,000, the doubtful accounts expense for 2014 should be
a.
$17,000.
b.
$20,000.
c.
$23,000.
d.
$35,000.
Teeming Company uses the allowance method of accounting for bad debts. The following summary schedule was prepared
from an aging of accounts receivable outstanding on December 31 of the current year.
No. of Days
Probability
Outstanding
Amount
of Collection
0-30 days
$500,000
.98
31-60 days
200,000
.90
Over 60 days
100,000
.80
The following additional information is available for the current year:

Net credit sales for the year ..................
$4,000,000
Allowance for Doubtful Accounts:
Balance, January 1 .............................

45,000
(cr)
Balance before adjustment, December 31 .........
4,000
(dr)
35. See Teeming Company information above. If Teeming bases its estimate of bad debts on the aging of
accounts receivable, doubtful accounts expense for the current year ending December 31 is
a.
$47,000.
b.
$48,000.
c.
$50,000.
d.
$54,000.
36. See Teeming Company information above. If Teeming determines bad debt expense using 1.5 percent of
net credit sales, the net realizable value of accounts receivable on the December 31 balance sheet will be
a.
$738,000.
b.
$740,000.
c.
$744,000.
d.
$750,000.
37. Harris, Inc. reported the following balances (after adjustment) at the end of 2014 and 2013.
12/31/2014
12/31/2013
Total accounts receivable .................
$105,000
$96,000
Net accounts receivable ...................
102,000
94,500
During 2014, Harris wrote off customer accounts totaling $3,200 and collected $800 on accounts written off in previous
years. Harris’ doubtful accounts expense for the year ending December 31, 2014 is
a.
$1,500.
b.
$2,400.
c.
$3,000.
d.
$3,900.
38. A new product introduced by Sunbound Promotions carries a two-year warranty against defects. The
estimated warranty costs related to dollar sales are as follows:
Year of sale ..............................
3 percent
Year after sale ...........................
5 percent
Sales and actual warranty expenditures for the years ended December 31, 2013 and 2014, are as follows:
Actual Warranty
Sales
Expenditures
2013
$ 800,000
$18,000
2014
1,000,000
70,000
What amount should Sunbound report as its estimated liability as of December 31, 2014?
a.
$4,000
b.
$24,000
c.
$56,000
d.
$74,000
39. Carter Appliance Center sells washing machines that carry a three-year warranty against manufacturer's
defects. Based on company experience, warranty costs are estimated at $60 per machine. During the year, Carter sold
48,000 washing machines and paid warranty costs of $340,000. In its income statement for the year ended December 31,
Carter should report warranty expense of
a.
$680,000.
b.
$960,000.
c.
$2,200,000.
d.
$2,880,000.
40. Windward Corporation's books disclosed the following information for the year ended December 31, 2014:
Net credit sales .....................................
$1,500,000
Net cash sales .......................................
240,000
Accounts Receivable at beginning of year .............
200,000
Accounts Receivable at end of year ...................
400,000
Windward’s accounts receivable turnover is

a.
3.75 times.
b.
4.35 times.
c.
5.00 times.
d.
5.80 times.
41. Selected information from the accounting records of Monroe Manufacturing Company follows:
Net sales ............................................
$3,600,000
Cost of goods sold ...................................
2,400,000
Inventories at January 1 .............................
672,000
Inventories at December 31 ...........................
576,000
What is the number of days' sales in average inventories for the year?
a.
102.2
b.
94.9
c.
87.6
d.
68.1
42. Conan Corporation had the following transactions in its first year of operations:
Sales (90 percent collected in the first year) .......

$900,000
Disbursements for costs and expenses .................
600,000
Purchases of equipment for cash ......................
200,000
Proceeds from issuance of common stock ...............
250,000
Payments on short-term borrowings ....................
25,000
Proceeds from short-term borrowings ..................
50,000
Depreciation on equipment ............................
40,000
Disbursements for income taxes .......................
45,000
Bad debt write-offs ..................................
30,000
What is the cash balance at December 31 of the first year?

a.
$170,000
b.
$200,000
c.
$240,000
d.
$290,000
43. Donovan Company had the following cash balances at December 31, 2014:
Cash in banks ........................................
$375,000
Petty cash funds (all funds were reimbursed on
December 31, 2014) .................................
5,000
Cash in banks includes $125,000 of compensating balances against short-term borrowing arrangements at December 31,
2014. The compensating balances are legally restricted as to withdrawal by Donovan. In the current asset section of
Donovan’s December 31, 2014, balance sheet, what total amount should be reported as Cash?
a.
$380,000
b.
$375,000
c.
$255,000
d.
$250,000
44. Assume the following facts for Lowmann Company: The month-end bank statement shows a balance of
$40,000; outstanding checks total $2,000; a deposit of $8,000 is in transit at month-end; and a check for $400 was
erroneously charged against the account by the bank. What is the correct cash balance at the end of the month?
a.
$33,600
b.
$34,400
c.
$45,600
d.
$46,400
45. In preparing the bank reconciliation of Yardley Company for the month of July, the following information
is available:
Balance per bank statement, 7/31 .....................
$60,075
Deposits in transit, 7/31 ............................
9,375
Outstanding checks, 7/31 .............................
8,625
Deposit erroneously recorded by bank to Yardley’s
account, 7/18 ......................................
375
Bank service charges for July ........................
75
What is the correct cash balance at July 31?

a.
$52,875
b.
$54,375
c.
$54,825
d.
$60,450
46. The August 31 bank statement of Mervin Inc. showed a balance of $113,000. Deducted in arriving at this
amount was a customer's NSF check for $2,400 that had been returned. Mervin had received no prior notice concerning this
check. In addition to the bank statement, other records showed there were deposits in transit totaling $17,200 and that
outstanding checks totaled $10,800. What is the cash balance per books at August 31 (prior to adjustments)?
a.
$121,800
b.
$119,400
c.
$117,000
d.
$115,400
47. Lawson Corporation's checkbook balance on December 31, 2014, was $8,000. In addition, Lawson held
the following items in its safe on December 31:
Check payable to Lawson Corporation, dated January 2, 2015, not included in December 31
checkbook balance..
$2,000
Check payable to Lawson Corporation, deposited December 20, and included in December 31
checkbook balance, but returned by bank on December 30, stamped "NSF." The check was
redeposited January 2, 2015, and cleared January 7 ..
400
Post-dated checks .......................................
150
Check drawn on Lawson Corporation's account, payable to a vendor, dated and recorded
December 31, but not mailed until January 15, 2015 ..................................
1,000
The proper amount to be shown as cash on Lawson’s balance sheet at December 31, 2014, is
a.
$7,600.
b.
$8,000.
c.
$8,600.
d.
$9,750.
48. In preparing its bank reconciliation for the month of February, Vance Company has available the following
information:
Balance per bank statement, February 28 .................
$18,025
Deposit in transit, February 28 .........................
3,125
Outstanding checks, February 28 .........................
2,875
Check erroneously deducted by bank from Vance's account,
February 10 ...........................................
125
Bank service charges for February .......................
25
What is the corrected cash balance at February 28?

a.
$18,125
b.
$18,150
c.
$18,275
d.
$18,400
49. Alonso Company had the following bank reconciliation at March 31:
Balance per bank statement, 3/31 ........................
$ 93,000
Add: Deposit in transit .................................
20,600
$113,600
Less: Outstanding checks ................................
(25,200)
Balance per books, 3/31 .................................
$ 88,400
Data per bank statement for the month of April follow:
Deposits ..............................................
$116,800
Disbursements .........................................
99,400
All reconciling items at March 31 cleared through the bank in April. Outstanding checks at April 30 totaled $15,000. What
is the amount of cash disbursements per books in April?
a.
$89,200
b.
$99,400
c.
$109,600
d.
$114,400
ANS: A PTS: 1 DIF: Challenging OBJ: LO 4
50. Which of the following would be considered part of the category "trade receivables"?
a.
Advances to employees
b.
Amounts due from customers
c.
Dividends receivable
d.
Income tax refunds receivable
51. Under GAAP, an entry should be made to the Bad Debt Expense account
a.
when an account receivable with terms 2/10, n30 is past thirty days due.
b.
when an account receivable previously written off is determined to be collectible.
c.
when an account receivable is determined not to be collectible and is written off.
d.
in the period when a sale is made and not when the receivable associated with the sale is determined to be uncollectible.
52. Which of the following accounts is not affected when an account receivable written off as uncollectible is
unexpectedly collected?
a.
Cash
b.
Accounts Receivable
c.
Bad Debt Expense
d.
Allowance for Bad Debts
53. A debit balance in the Allowance for Doubtful Accounts

a.
should never occur.
b.
is always the result of management not providing a large enough allowance in order to manage earnings.
c.
may occur before the end-of-period adjustment for uncollectibles.
d.
may exist even after the end-of-period adjustment for uncollectibles.
54. For tax purposes, an entry should be made to Bad Debt Expense
a.
when an account is determined to be uncollectible.
b.
in the period in which the sale that created the receivable was made.
c.
when an account determined to be uncollectible is collected.
d.
when an account with terms 2/10, n30 is still unpaid after thirty days.
55. Estimation of uncollectible accounts receivable based on a percentage of sales

a.
emphasizes measurement of the net realizable value of accounts receivable.
b.
is only acceptable for tax purposes.
c.
emphasizes measurement of total assets.
d.
emphasizes measurement of bad debt expense.
56. Which of the following is NOT acceptable in estimating uncollectible accounts receivable under GAAP?
a.
The estimate of uncollectible accounts is based on a percentage of sales for the period.
b.
The estimate of uncollectible accounts is based on a percentage of the accounts receivable balance at the end of a period.
c.
The estimate of uncollectible accounts is based on an aging schedule.
d.
No estimate of uncollectible accounts is made; accounts are written off when it is determined they cannot be collected.
57. During 2012, Grinder Machinery company introduced a new line of machines that carry a three-year
warranty against manufacturer’s defects. Based on industry experience, warranty costs are estimated at 2% of sales in the
year of sale, 4% in the year after sale, and 6% in the second year after sale. Sales and actual warranty expenditures for the
first three-year period were as follows:
Actual
Warranty
Year
Sales
Expenditure
2012
$ 225,000
$ 3,375
2013
562,500
16,875
2014
787,500
50,625
$ 1,575,000
$ 70,875
What amount should Grinder Machinery report as a liability at December 31, 2014?
a.
$0
b.
$5,625
c.
$76,500
d.
$118, 125
58. The following information is available for Closer Company relative to 2014 operations:
Accounts receivable, January 1, 2014

$ 40,000
Accounts receivable collected during 2014

84,000
Cash sales during 2014
20,000
Inventory, January 1, 2014
48,000
Inventory, December 31, 2014
44,000
Purchases of inventory during 2014

80,000
Gross margin on sales
42,000
What is Closer Company’s accounts receivable balance at December 31, 2014?

a.
$82,000
b.
$62,000
c.
$20,000
d.
$146,000
59. Sandy Corporation uses the allowance method of accounting for uncollectible accounts. During 2014,
Sandy had charged $80,000 to Bad Debt Expense, and wrote off accounts receivable of $90,000 as uncollectible. What was
the amount of the decrease in working capital as a result of these entries?
a.
$0
b.
$90,000
c.
$80,000
d.
$10,000
60. The following information is available for Longview Company:
Credit sales during 2014
$ 50,000
Allowance for Doubtful Accounts, Dec. 31, 2013

1,800
Accounts receivable written off during 2014

1,900
As a result of a review and aging of accounts receivable, it has been determined that the Allowance for Doubtful Accounts
should show a balance of $2,400 at December 31, 2014. What amount should Longview record as bad debt expense for the
year ended December 31, 2014?
a.
$2,500
b.
$1,300
c.
$2,400
d.
$3,700
61. On December 1, 2014, Laramie Company received a $10,000, 60-day, 6% note from a customer. On
December 31, 2014, the company discounted the note at the bank. The bank’s discount rate is 9%. What were the proceeds
that Barnes received from the discounting of the note?
a.
$10,024.25
b.
$9,700.00
c.
$9,924.25
d.
$10,050.00
62. Barter Company borrows $20,000 for one year a 9% interest, but must maintain a $1,600 compensating
balance. The effective rate of interest on this loan is
a.
9.0%.
b.
17.0%.
c.
9.8%.
d.
8.0%.
63. Corbin Company has two checking accounts. A special account is used for the weekly payroll only, and the
general account is used for all other disbursements. Every week, a check in the amount of the net payroll is drawn on the
general account and deposited in the payroll account. The company maintains a $5,000 minimum balance in the payroll
account. On a monthly bank reconciliation, the payroll account should
a.
reconcile to $5,000.
b.
show a zero balance per the bank statement.
c.
show a $5,000 balance per the bank statement.
d.
be reconciled jointly with the general account in a single reconciliation.
64. Accounts receivable usually are factored

a.
with recourse on a notification basis.
b.
with recourse on a no-notification basis.
c.
without recourse on a notification basis.
d.
without recourse on a no-notification basis.
65. A firm factors $40,000 of accounts receivable without recourse. The factor agrees to provide financing
based on these receivables, but imposes a 10% fee. In addition, the transferor and transferee agree that $3,000 of sales
returns and allowances can be expected from these accounts. What is the loss or expense to recorded by the transferor?
a.
$7,000
b.
$4,000
c.
$3,000
d.
$0
66. On August 1, a firm assigned $30,000 of its $56,000 of accounts receivable. The finance company
advanced 90% of the assigned accounts less a $2,000 fee. Interest is 12% and payable monthly on the beginning-of-period
loan balance. A loan payment is remitted at the end of each month. Each payment includes principal and interest. The
amount of each loan payment equals the cash collected on receivables during the month plus interest on the loan balance.
If $8,000 was collected on accounts receivable during August, the entry for the first loan payment would include a
a.
debit to Interest Expense of $280.
b.
credit to Cash of $8,000.
c.
credit to Account Receivable Assigned of $8,000.
d.
debit to Notes Payable of $8,280.
TOP: AICPA FN-Reporting MSC: AACSB Analytic
67. Halen Company factored $50,000 of its accounts receivable with recourse. The factor retained 8% for sales
adjustments and charged $3,000 as a financing fee. For simplicity, assume the estimated and actual amounts of the
following items are equal:
Sales adjustments $2,500
Uncollectible accounts 500
Assume the transfer is recorded as a sale by Halen Company. What is the loss or financing expense to be recognized on the
transfer?
a.
$11,000
b.
$6,000
c.
$3,000
d.
$8,000
68. The plan of organization and all the methods and measures adopted within a business to safeguard its
assets, check the accuracy of its accounting data, promote operational efficiency, and encourage adherence to managerial
policies is called
a.
accounting control.
b.
administrative control.
c.
managerial control.
d.
internal control.
69. Eastern Company sells products covered by a 3-year warranty. Based on past experience of other entities in
the industry, Eastern expects to incur warranty costs equal to 1% of sales. Eastern’s sales were $45,000 in 2013 and
$50,000 in 2014. In 2014, the company spent $200 to repair goods sold in 2013 and $300 to repair goods sold in 2014.
Eastern received no warranty servicing demands from its customers in 2013, the company’s first year of operations.
What is the balance in the warranty liability account on January 1, 2015?

a.
$450
b.
$500
c.
$300
d.
$0
70. Which of the following is not correct regarding IAS 39, International Accounting Standard 39, “Financial
Instruments: Recognition and Measurement,” and SFAS No. 140, Statement of Financial Accounting Standards No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities: A Replacement of FASB
Statement No. 125”?
a.
IAS 39 represents a principles-based approach to standard setting.
b.
SFAS No. 140 represents a principles-based approach to standard setting.
c.
SFAS No. 140 represents a rule-based approach to standard setting.
d.
In the large majority of cases, application of the two standards will result in the same accounting treatment for a receivable
transfer.
71. Which of the following is one of the two steps of the 2-step test for derecognition of receivables stated in
IAS 39, International Accounting Standard 39, “Financial Instruments: Recognition and Measurement”?
a.
The transferred assets have been isolated from the transferor such that the transferor and its creditors cannot access the
assets.
b.
The transferee has the right to pledge or exchange the transferred assets.
c.
If the receivable transfer does not involve the transfer of substantially all the risks and rewards of ownership, then test to
determine if the transferor maintains effective control over the assets through either an agreement to repurchase the assets
before their maturity, or by the ability to cause the transferee to return specific assets.
d.
Determine whether the receivable transfer involves a transfer of substantially all the risks and rewards of ownership of the
receivable and, if so, account for the transfer as a sale of the receivable.
1. 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 and collectible.
c.
The revenue must be earned, measurable, and collectible.
d.
The revenue must be measurable and collectible.
2. An adjusting entry in which revenue is recognized and a receivable is established indicates that revenue
has been
Earned Collected
a.
Yes No
b.
Yes Yes
c.
No Yes
d.
No No

3. A company providing maintenance services on equipment for a fixed periodic fee would recognize
a.
an equal amount of service revenue for each act.
b.
service revenue over the fixed period by the straight-line method.
c.
service revenue in proportion to the direct costs to the provider of the services to perform each act.
d.
service revenue only when the fixed period has ended.
4. Which of the following types of service transactions is most likely to require the proportional performance
method of revenue recognition based on the seller's direct costs to perform each act?
a.
Processing of monthly mortgage payments by a mortgage banker
b.
Providing lessons, examinations, and grading by a correspondence school
c.
Providing maintenance services on equipment for a fixed periodic fee
d.
Delivering freight (by a trucking firm)
5. Builder Construction Company's projects extend over several years and collection of receivables is
reasonably certain. Each project has a contract that specifies a price and the rights and obligations of all parties. Both the
contractor and the customer are expected to fulfill their contractual obligations on each project. Reliable estimates can be
made of the extent of progress and cost to complete each project. The method that the company should use to account for
construction revenue is
a.
installment sales.
b.
percentage-of-completion.
c.
completed-contract.
d.
cost recovery.
6. How should the balances of Progress Billings and Construction in Progress be shown at reporting dates
prior to the completion of a long-term contract?
a.
Progress Billings as income, Construction in Progress as inventory
b.
Net, as income from construction if credit balance, and loss from construction if debit balance
c.
Progress Billings as deferred income, Construction in Progress as a current asset
d.
Net, as a current asset if debit balance and current liability if credit balance
7. If the percentage-of-completion method is used, what is the basis for determining the gross profit to be
recognized in the second year of a three-year contract?
a.
Cumulative actual costs and estimated costs to complete
b.
Incremental cost for the second year only
c.
Cumulative actual costs incurred only
d.
No gross profit would be recognized in year 2
8. If the completed-contract method is used, what is the basis for determining the income to be recognized in
the second year of a three-year contract?
a.
Cumulative actual costs incurred only
b.
Incremental cost for the second year only
c.
Latest available estimated costs
d.
No income would be recognized in year 2
9. The installment method of recognizing revenue

a.
should be used only in cases in which no reasonable basis exists for estimating the collectibility 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.
10. Which of the following would be used in the calculation of the gross profit recognized in the third and final
year of a construction contract that is accounted for using the percentage-of-completion method?
Actual Income
Contract Total Previously
Price Costs Recognized
a.
Yes Yes No
b.
Yes Yes Yes
c.
Yes No Yes
d.
No Yes Yes

11. Assume the percentage-of-completion method of revenue recognition is used on a long-term construction
contract. Under this method, revenues that are earned but unbilled at the balance sheet date should be disclosed
a.
as a long-term receivable in the noncurrent assets section of the balance sheet.
b.
only as a footnote disclosure until the customer is billed for the percentage of work completed.
c.
as construction in progress in the current assets section of the balance sheet.
d.
as construction in progress in the noncurrent assets section of the balance sheet.
12. When using the installment sales method,

a.
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.
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.
gross profit is deferred until all cash is received, but revenues and costs are recognized in proportion to the cash collected
from the sale.
13. The completed-contract method of accounting for long-term construction-type contracts is preferable when
a.
a contractor is involved in numerous projects.
b.
the contracts are of a relatively long duration.
c.
estimates of costs to complete and extent of progress toward completion are reasonably dependable.
d.
there are inherent uncertainties in the contract beyond normal business risks.
14. Which of the following is NOT an element identified by the AICPA as being necessary in order to use
percentage-of-completion accounting?
a.
The construction period can be reasonably estimated.
b.
The buyer can be expected to satisfy obligations under the contract.
c.
Dependable estimates can be made of the extent of progress toward completion.
d.
Dependable estimates can be made of contract costs.
15. Which of the following is NOT a difference between the percentage-of completion and completed-contract
methods of accounting for long-term construction contracts?
a.
They report different amounts for inventory during the construction period.
b.
They report different amounts for progress billings during the construction period.
c.
They cause a different cash inflow during the construction period.
d.
They report different amounts for accounts receivable during the construction period.
16. The theoretical support for using the percentage-of-completion method of accounting for long-term
construction projects is that it
a.
is more conservative than the completed-contract method.
b.
produces a realistic matching of expenses with revenues.
c.
more closely conforms to the cost principle.
d.
reports a lower Net Income figure than the completed-contract method.
17. If a company uses the completed-contract method of accounting for long-term construction contracts, then
during the period of construction, financial information related to a long-term contract will
a.
appear on both the income statement and balance sheet during the construction period.
b.
appear only on the income statement during the period of construction.
c.
appear only on the balance sheet during the period of construction.
d.
not appear on the financial statements.
18. When the percentage-of-completion method of accounting for long-term construction projects is used, why
is Construction in Progress increased by the annual recognized gross profit on long-term construction contracts?
a.
The cost of the contract has increased.
b.
The project's value has increased above cost.
c.
The economy experiences inflation over the construction period.
d.
Construction in Progress is not increased by the annual recognized profit.
19. 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.
20. The cost recovery method is

a.
used only when circumstances surrounding a sale are so uncertain that earlier recognition is impossible.
b.
the most common method of accounting for real estate sales.
c.
similar to percentage-of-completion accounting.
d.
never acceptable under generally accepted accounting principles.
21. 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.
22. Goods on consignment should be included in the inventory of

a.
the consignor but not the consignee.
b.
both the consignor and the consignee.
c.
the consignee but not the consignor.
d.
neither the consignor nor the consignee.
23. In accounting for sales on consignment, sales revenue and the related cost of goods sold should be
recognized by the
a.
consignor when the goods are shipped to the consignee.
b.
consignee when the goods are shipped to the third party.
c.
consignor when notification is received the consignee has sold the goods.
d.
consignee when cash is received from the customer.
24. A company uses the percentage-of-completion method to account for a four-year construction contract.
Progress billings sent in the second year that were collected in the third year would
a.
be included in the calculation of the income recognized in the second year.
b.
be included in the calculation of the income recognized in the third year.
c.
be included in the calculation of the income recognized in the fourth year.
d.
not be included in the calculation of the income recognized in any year.
25. In accounting for a long-term construction contract for which there is a projected profit, the balance in the
Construction in Progress account at the end of the first year of work using the percentage-of-completion method would be
a.
zero.
b.
the same as the completed-contract method.
c.
higher than the completed-contract method.
d.
lower than the completed-contract method.
26. On May 1, 2014, Lavender Construction Company entered into a fixed-price contract to construct an
apartment building for $3,000,000. Lavender appropriately accounts for this contract under the percentage-of-completion
method. Information relating to the contract is as follows:
2014
2015
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, 2015?
a.
$600,000
b.
$960,000
c.
$990,000
d.
$1,440,000
27. F & R Construction, Inc. has consistently used the percentage-of-completion method of recognizing
revenue. Last year F & R started work on a $5,000,000 construction contract, which was completed this year. The
accounting records disclosed the following data for last year:
Progress billings .....................................
$1,500,000
Costs incurred ........................................
1,350,000
Collections ...........................................
1,050,000
Estimated cost to complete ............................
2,600,000
How much revenue should F & R have recognized on this contract last year?
a.
$1,500,000
b.
$1,700,000
c.
$1,100,000
d.
$400,000
28. Gunner Construction, Inc. has consistently used the percentage-of-completion method of recognizing
revenue. During 2014, Gunner started work on a $2,500,000 fixed-price construction contract. The accounting records
disclosed the following data for the year ended December 31, 2014:
Costs incurred ........................................

$ 465,000
Estimated cost to complete ............................
2,085,000
Progress billings .....................................
550,000
Collections ...........................................
350,000
How much loss should Gunner have recognized in 2014?

a.
$15,000
b.
$35,000
c.
$50,000
d.
$315,000
29. Sailor Construction Company has consistently used the percentage-of- completion method. On January 10,
2014, Sailor began work on a $3,000,000 construction contract. At the inception date, the estimated cost of construction
was $2,250,000. The following data relate to the progress of the contract:
Gross profit recognized at December 31, 2014 ..........

$ 300,000
Costs incurred Jan. 10, 2011, through Dec. 31, 2015 ...
1,800,000
Estimated cost to complete at December 31, 2015 .......
600,000
How much gross profit should Sailor recognize for the year ended December 31, 2015?
a.
$150,000
b.
$262,500
c.
$300,000
d.
$450,000
30. For a construction firm using the completed-contract method, if costs exceed billings on some contracts by
$1,000,000 and billings exceed costs by $800,000 on others, the contracts should ordinarily be reported as a
a.
current asset of $200,000.
b.
current liability of $200,000.
c.
current asset of $1,000,000 less a contra-current asset of $800,000.
d.
current asset of $1,000,000 and a current liability of $800,000.
31. Sunfish Construction Company uses the percentage-of-completion method of accounting. In 2014, Sunfish
began work on a project which had a contract price of $1,600,000 and estimated costs of $1,200,000. Additional
information is as follows:
2014
2015
Costs incurred during the year ............
$240,000
$1,060,000
Estimated costs to complete, as of
12/31/14 ................................
960,000
Billings during the year ..................

290,000
1,310,000
Collections during the year ...............
250,000
1,200,000
The amount of gross profit Sunfish should recognize on this contract during 2014 is
a.
$40,000.
b.
$80,000.
c.
$100,000.
d.
$200,000.
32. Astor Construction Company uses the percentage-of-completion method for long-term construction
contracts. A specific job was begun in 2014 and completed in 2016. The contract price was $1,400,000 and cost
information as of each year-end is given below:
2014
2015
2016
End of year estimated cost to
complete ......................
$400,000
$200,000
$ 0
Annual cost incurred ............
400,000
400,000
120,000
Assuming Astor correctly recorded gross profit in 2014, how much gross profit should the company record in 2015?
a.
$0
b.
$20,000
c.
$300,000
d.
$320,000
The following data relate to a construction job started by Harrington Co. during 2014:
Total contract price ..................................
$300,000
Actual costs incurred during 2014 .....................
60,000
Estimated remaining costs .............................
120,000
Billed to customer during 2014 ........................
90,000
Received from customer during 2015 ....................
30,000
33. See Harrington Co. information above. Under the completed-contract method, how much should
Harrington recognize as gross profit for 2014?
a.
$0
b.
$30,000
c.
$40,000
d.
$90,000
34. See Harrington Co. information above. Under the percentage-of-completion method, how much should
Harrington recognize as gross profit for 2014?
a.
$0
b.
$40,000
c.
$80,000
d.
$100,000
35. Golden Construction Company uses the percentage-of-completion method for long-term construction
contracts. The company started a project with a contract price of $2,750 in 2014. Given the following data, what is the
balance in Construction in Progress for this contract at the end of 2014?
2014
2015
Costs incurred this year ..................
$ 400
$ 500
Total estimated costs remaining at end of year ..
1,600
1,000
a.
$150
b.
$400
c.
$550
d.
$1,750
36. Steinman Construction Company uses the percentage-of-completion method for long-term construction
contracts. The company has a project with a contract price of $7,000 on which $600 of gross profit has been recognized in
prior years. Information for the current year is as follows:
Total cost incurred through current year ...............
$5,000
Estimated costs remaining at end of current year .......
2,800
What is the loss that Steinman should recognize in the current year?
a.
$600
b.
$800
c.
$1,400
d.
No loss should be recognized.
37. Samuels Company began operations on January 1, 2014, and uses the installment sales method of
accounting. The company has the following information available for 2014 and 2015:
2014
2015
Installment sales .........................
$4,500,000
$5,400,000
Gross profit on sales .....................
30%
40%
Cash collections on 2014 sales ............
1,500,000
3,600,000
Cash collections on 2015 sales ............
4,200,000
The realized gross profit for 2015 would be

a.
$1,680,000.
b.
$2,760,000.
c.
$3,120,000.
d.
$4,320,000.
38. Sonnet Construction Company uses the completed-contract method for long-term construction contracts.
The information for a specific contract as of January 1, 2014, is shown below.
Costs incurred to date ................................

$ 700,000
Contract price ........................................
2,000,000
Estimated remaining cost to complete ..................
800,000
$600,000 of cost was incurred during 2014 and on December 31, 2014, the estimated remaining cost to complete was still
$800,000. The correct balance for the Construction in Progress at December 31, 2014 is
a.
$600,000.
b.
$700,000.
c.
$1,200,000.
d.
$1,300,000.
39. In 2011, Huxley Corp. began construction work under a three-year contract. The contract price is
$800,000. Huxley used the percentage-of-completion method for financial accounting purposes. The income to be
recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract. The
financial presentations relating to this contract at December 31, 2014, appear below.
Balance Sheet
Accounts receivable--construction contract
billings ..................................
$15,000
Construction in progress ....................
$50,000
Less contract billings ......................

(47,000)
Cost of uncompleted contract in excess of

billings ..................................
3,000
Income Statement
Income (before tax) on the contract
recognized in year 1 ......................
$10,000
How much cash was collected in 2014 on this contract?

a.
$32,000
b.
$35,000
c.
$47,000
d.
$50,000
40. Chantal Company began operations on January 2, 2014, and appropriately used the installment sales
method of accounting. The following data are available for 2014 and 2015:
2014
2015
Installment sales ......................
$3,000,000
$3,600,000
Gross profit on sales ..................
30%
40%
Cash collections from:
2014 sales ...........................

$1,000,000
$1,200,000
2015 sales ...........................
--
$1,400,000
The realized gross profit for 2015 is

a.
$1,440,000.
b.
$1,040,000.
c.
$920,000.
d.
$780,000.
41. Warthog Enterprises, which began operations on January 1, appropriately uses the installment method of
accounting. The following information is available for its first year:
Gross profit on sales .................................
40%
Deferred gross profit at December 31 ..................
$120,000
Cash collected, including down payments ...............
$225,000
What is the total amount of Warthog’s installment sales for the first year?
a.
$300,000
b.
$345,000
c.
$425,000
d.
$525,000
42. Carson Distributing, which began operating on January 1, appropriately uses the installment method of
accounting. The following information pertains to Carson's operations for the first year:
Installment sales ......................................
$1,000,000
Cost of installment sales ..............................
600,000
General and administrative expenses ....................
100,000
Collections on installment sales .......................
200,000
The balance in the deferred gross profit account at December 31 should be

a.
$400,000.
b.
$320,000.
c.
$240,000.
d.
$200,000.
43. On January 3, 2014, Continental Services, Inc., signed an agreement authorizing Peen Company to operate
as a franchisee over a 20-year period for an initial franchise fee of $200,000 received when the agreement was signed. Peen
commenced operations on July 1, 2014, at which date all of the initial services required of Continental had been performed.
The agreement also provides that Peen must pay a continuing franchise fee equal to 6% of the revenue from the franchise
annually to Continental. Peen's franchise revenue for 2014 was $900,000. For the year ended December 31, 2014, how
much should Continental record as revenue from franchise fees from the Peen franchise?
a.
$100,000
b.
$106,000
c.
$254,000
d.
$266,000
44. Assume the Abokair Corporation sold $30,000 worth of merchandise on the installment basis. The cost of
the merchandise was $24,000, and collectibility of the receivable is uncertain. Collection in the current year on the account
is $8,000. How much gross profit should be reported as realized?
a.
$1,600
b.
$2,000
c.
$6,000
d.
$8,000
45. On November 30, Monet Company consigned 90 freezers to Vangogh Company for sale at $1,600 each
and paid $1,200 in transportation costs. A report of sales was received on December 30 from Vangogh reporting the sale of
20 freezers, together with a remittance of the $27,200 balance due. The remittance was net of the agreed 15% commission.
How much, and in what month, should Monet recognize as consignment sales revenue?
November December
a.
$0 $32,000
b.
$0 $27,200
c.
$144,000 $0
d.
$142,800 $0

46. Antoine Construction Company has consistently used the percentage-of completion method of recognizing
income. During 2014, Antoine entered into a fixed-price contract to construct an office building for $10,000,000.
Information relating to the contract is as follows:
December 31
2014
2015
Percentage of completion ..............
20%
60%
Estimated total cost at completion ....
$7,500,000
$8,000,000
Income recognized (cumulative) ........
500,000
1,200,000
Contract costs incurred during 2015 were

a.
$3,200,000.
b.
$3,300,000.
c.
$3,500,000.
d.
$4,800,000.
47. Tussle Company began operations on January 1, 2014, and appropriately uses the installment method of
accounting. The following data are available for 2014 and 2015:
2014
2015
Installment sales .....................
$1,200,000
$1,500,000
Cash collections from:
2014 sales ..........................

400,000
500,000
2015 sales ..........................
--
600,000
Gross profit on sales .................
30%
40%
The realized gross profit for 2015 is

a.
$440,000.
b.
$240,000.
c.
$390,000.
d.
$600,000.
48. Marshland, Inc. had the following consignment transactions during December:
Inventory shipped on consignment to Connor Company........
$18,000
Freight paid by Marshland ................................
900
Inventory received on consignment from Leshner Company....
12,000
Freight paid by Leshner...................................
500
No sales of consigned goods were made through December 31. Marshland's December 31 balance sheet should include
consigned inventory at
a.
$18,900.
b.
$18,000.
c.
$12,500.
d.
$12,000.
49. A construction company uses the percentage-of-completion method for long-term construction contracts. A
particular job was begun in 2014 and completed in 2015. During 2014, it appeared that the project would cost 25 percent
more than originally expected. Data at the end of each year are given below:
2013
2014
2015
End-of-year estimated cost remaining
$ 200,000
$ 100,000
$ -
Annual cost incurred
200,000
200,000
60,000
The contract price was $700,000. Assuming the company properly recorded income in 2013, how much income should be
recorded in 2014?
a.
$10,000
b.
$42,000
c.
$160,000
d.
$192,000
50. Cantor Company sold $400,000 to customers on account during 2014, and collected $200,000 during the
year. The company properly uses the installment sales method of revenue recognition due to the uncertainty of collection of
these installment receivables. The company has determined that cost of sales for the $400,000 of sales was $340,000.
What is the correct balance of the company’s Deferred Gross Profit account at the end of 2014, after the recognition of
revenue for that year?
a.
$0
b.
$30,000
c.
$60,000
d.
$140,000
51. Hussong, Inc., appropriately uses the installment sales method of revenue recognition. The company sold
$1,500,000 on installment accounts during 2014. The cost of items sold was $900,000. At December 31, 2014, Hussong
reported a balance of $100,000 in the Deferred Gross Profit account. How much cash did Hussong collect on installment
contracts during 2014?
a.
$600,000
b.
$500,000
c.
$250,000
d.
$1,250,000
52. Johann Builders has a fixed -price contract providing $120,000 of revenue. Construction on the contract
was begun in 2013 and was completed in 2014. Information relating to the contract is as follows:
2013
2014
Cumulative cost incurred to the end of the year
$ 40,000
$ 105,000
Expected costs to complete
60,000
-
Billings to the end of the year
38,000
120,000
Collections to the end of the year
46,000
120,000
What amount of income should Johann recognize in 2014 assuming that the company appropriately uses the percentage-of-
completion method of income recognition?
a.
$9,286
b.
$15,000
c.
$17,000
d.
$7,000
53. When a contractor determines that a contract will result in an overall loss, when should that loss be
recognized within the completed-contract and percentage-of-completion methods?
Completed-Contract Percentage-of-Completion
a.
Immediately Over the remainder of the contract
b.
At the completion of the contract At the completion of the contract
c.
At the completion of the contract Immediately
d.
Immediately Immediately
54. The completed-contract method (as opposed to the percentage-of-completion method) of accounting for
revenue from long-term construction contracts should be used in which of the following circumstances?
a.
The contractor has been in business for many years and has completed many contracts in the past.
b.
Reasonably accurate estimates of the degree of completion cannot be made due to the lack of experience with similar types
of contracts.
c.
Reasonable accurate estimates of the degree of completion can be made based on past experience.
d.
The contracts are of a relatively long duration.
55. Under which of the following circumstances is the installment sales method appropriate for the recognition
of revenue in the income statement?
a.
For any sales where collection is spread over a reasonable long period of time.
b.
In any situation where management wishes to delay the recognition of revenue in order to smooth its income.
c.
For sales where collection is spread over a reasonable long period of time and significant doubt exists about the ultimate
collection of the receivables.
d.
For sales where collection is spread over a reasonable long period of time and no significant doubt exists concerning
ultimate collection of the receivables.
56. When Progress Billings are made by a contractor on a long-term contract, what account is credited?
a.
Contract Billings, a contra-asset account
b.
Contract Revenue, a revenue account
c.
Contract Receivable, an asset account
d.
Contract Billings, a contra-revenue account
57. Santos Company allows a liberal return privilege on its normal sales. Products purchased by customers
may be returned within 90 days of purchase if in resalable condition, for a full refund. The following information relates to
2014:
Average gross profit percentage 25%

Total sales (including actual returns) $100,000
Actual returns $ 15,000
Historical ratio of actual returns to sales 20%
Sales whose return privilege has expired at
the end of 2014 (does not include actual
returns) $ 40,000
Assuming that all criteria of SFAS No. 48, “Revenue Recognition When Right of Return Exists,” are not met, what is the
gross margin to be reported by the company in 2014?
a.
$4,000
b.
$10,000
c.
$40,000
d.
$2,000
1. Which of the following describes the flow of product costs through the inventory accounts of a
manufacturer?
a.
Raw materials, goods in process, factory overhead, finished goods
b.
Raw materials, goods in process, finished goods
c.
Raw materials, direct labor, factory overhead, finished goods
d.
Raw materials, direct labor, factory overhead
2. The use of the gross profit method assumes

a.
the amount of gross profit is the same as in prior years.
b.
sales and cost of goods sold have not changed from previous years.
c.
inventory values have not increased from previous years.
d.
the relationship between selling price and cost of goods sold is similar to prior years.
3. The gross profit method of estimating inventory would NOT be useful when
a.
a periodic system is in use and inventories are required for interim statements.
b.
there is a significant change in the mix of products being sold.
c.
inventories have been destroyed or lost by fire, theft, or other casualty, and the specific data required for inventory
valuation are not available.
d.
the relationship between gross profit and sales remains stable over time.
4. The gross profit method of inventory valuation is NOT valid when

a.
there is substantial increase in the quantity of inventory during the year.
b.
there is substantial increase in the cost of inventory during the year.
c.
the gross margin percentage changes significantly during the year.
d.
all ending inventory is destroyed by fire before it can be counted.
5. When the current year's ending inventory amount is overstated, the

a.
current year's cost of goods sold is overstated.
b.
current year's total assets are understated.
c.
current year's net income is overstated.
d.
next year's income is overstated.
6. If the ending inventory balance is understated, net income of the same period
a.
will be overstated.
b.
will be understated.
c.
will be unaffected.
d.
cannot be determined from the information.
7. An overstatement of ending inventory in Period 1 would result in income of Period 2 being

a.
overstated.
b.
understated.
c.
correctly stated.
d.
The answer cannot be determined from the information given.
8. Which statement is true about the gross profit method?

a.
It may not be used to estimate inventories for annual statements.
b.
It may not be used to estimate inventories for interim statements.
c.
It may not be used by insurers of inventory.
d.
It may not be used for internal estimates of inventory.
9. Which of the following will result if the current year's ending inventory amount is understated in the cost
of goods sold calculation?
a.
Cost of goods sold will be overstated.
b.
Total assets will be overstated.
c.
Net income will be overstated.
d.
Both cost of goods sold and net income will be overstated.
10. If ending inventory on December 31, 2014, is overstated by $40,000, what is the effect on net income for
2015?
a.
Net income is overstated by $40,000.
b.
Net income is understated by $40,000.
c.
Net income is overstated by $80,000.
d.
The answer cannot be determined from the information given.
11. Which one of the following would cause a decrease in the cost ratio as used in the retail inventory method?
a.
Higher retail prices
b.
Lower net markups
c.
More employee discounts given
d.
Higher freight-in charges
12. What is the maximum amount at which inventory can be valued when the goods have experienced a
permanent decline in value?
a.
Net realizable value reduced by a normal profit margin
b.
Sales price
c.
Historical cost
d.
Net realizable value
13. Net realizable value can be defined as

a.
selling price.
b.
selling price less costs to complete and sell.
c.
selling price plus costs to complete and sell.
d.
acquisition cost plus costs to complete and sell.
14. A markup of 25 percent on cost is equivalent to what markup on selling price? (rounded)
a.
15 percent
b.
20 percent
c.
25 percent
d.
33 percent
15. When would the replacement cost of inventory be used as the market value under the lower-of-cost-or-
market method?
a.
Always
b.
When replacement cost is above net realizable value
c.
When replacement cost is below net realizable value and above net realizable value less normal profit margin
d.
When replacement cost is below net realizable value less normal profit margin
16. If the replacement cost of a unit of inventory has declined below original cost, but the replacement cost
exceeds net realizable value, the amount to be used for purposes of inventory valuation is
a.
net realizable value.
b.
original cost.
c.
market value.
d.
net realizable value less a normal profit margin.
17. Under generally accepted accounting principles, the lower-of-cost-or-market procedure for assigning a
value to inventory can be assigned to
a.
total inventory.
b.
groups of similar inventory items.
c.
individual inventory items.
d.
all of these.
18. The lower-of-cost-or-market inventory procedure would be expected to result in the lowest inventory
valuation when applied to
a.
individual inventory items.
b.
groups of similar inventory items.
c.
total inventory.
d.
none of these.
19. 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
20. An example of an inventory accounting policy that should be disclosed is the

a.
effect of inventory profits caused by inflation.
b.
classification of inventory into raw materials, work in process, and finished goods.
c.
identification of major suppliers.
d.
method used for inventory costing.
21. Montana Company is a wholesale electronics distributor. On December 31, 2014, it prepared the following
partial income statement:
Gross sales ...............................

$800,400
Sales discounts ...........................
400
Net sales .................................
$800,000
Cost of goods sold:
Beginning inventory .....................

$300,000
Net purchases ...........................

300,000
Given this information, if Montana Company's gross margin is 30 percent of net sales, what is the correct ending inventory
balance?
a.
$40,000
b.
$240,000
c.
$360,000
d.
$600,000
22. Budson Company needs an estimate of its ending inventory balance. The following information is
available:
Cost
Retail
Sales revenue .............................
$180,000
Beginning inventory .......................
$ 35,000
62,000
Net purchases .............................
100,000
135,000
Gross margin percentage ...................
30%
Given this information, when using the gross margin estimation method, ending inventory is approximately
a.
$1,000.
b.
$9,000.
c.
$19,000.
d.
$11,650.
23. The following information is available for the Crystal Company for the three months ended June 30 of this
year:
Inventory, April 1 of this year ......................

$1,200,000
Purchases ............................................
4,500,000
Freight-in ...........................................
300,000
Sales ................................................
6,400,000
The gross margin was 25 percent of sales. What is the estimated inventory balance at June 30?
a.
$880,000
b.
$933,000
c.
$1,200,000
d.
$1,500,000
24. Knitness Menswear, Inc. maintains a markup of 60 percent based on cost. The company's selling and
administrative expenses average 30 percent of sales. Annual sales were $1,440,000. Petersen's cost of goods sold and
operating profit for the year are
Cost of Operating
Goods Sold Profit
a.
$864,000 $144,000
b.
$864,000 $432,000
c.
$900,000 $108,000
d.
$900,000 $432,000

25. On October 31, a flood at Comfort Company's only warehouse caused severe damage to its entire
inventory. Based on recent history, Comfort has a gross profit of 40 percent of net sales. The following information is
available from Comfort's records for the ten months ended October 31:
Inventory, January 1 ..................................

$ 520,000
Purchases .............................................
4,120,000
Purchase returns ......................................
60,000
Sales .................................................
5,600,000
Sales discounts .......................................
400,000
A physical inventory disclosed usable damaged goods which Comfort estimates can be sold for $70,000. Using the gross
profit method, the estimated cost of goods sold for the ten months ended October 31 should be
a.
$680,000.
b.
$1,080,000
c.
$3,120,000.
d.
$3,640,000.
26. The following information appears in Molsone Company's records for the year ended December 31:

$ 325,000
Purchases .............................................
1,150,000
Purchase returns ......................................
40,000
Freight-in ............................................
30,000
Sales .................................................
1,700,000
Sales discounts .......................................
10,000
Sales returns .........................................
15,000
On December 31, a physical inventory revealed that the ending inventory was only $210,000. Molsones gross profit on net
sales has remained constant at 30 percent in recent years. Molsone suspects that some inventory may have been pilfered by
one of the company's employees. At December 31, what is the estimated cost of missing inventory?
a.
$75,000
b.
$82,500
c.
$210,000
d.
$292,500
27. Tenure Company's accounting records indicated the following information:

Inventory, 1/1/2014.....................................
1,000,000
Purchases during 2014.................................
5,000,000
Sales during 2014 .....................................
6,400,000
A physical inventory taken on December 31, 2014, revealed actual ending inventory at cost was $1,150,000. Tenure's gross
profit on sales has regularly been about 25 percent in recent years. The company believes some inventory may have been
stolen during the year. What is the estimated amount of missing inventory at December 31, 2014?
a.
$50,000
b.
$200,000
c.
$350,000
d.
$450,000
28. On June 19, 2014, a fire destroyed the entire uninsured merchandise inventory of the Shelf Merchandising
Company. The following data are available:

$ 80,000
Purchases, January 1 through June 19 ..................
560,000
Sales, January 1 through June 19 ......................
776,000
Markup percentage on cost .............................
25%
What is the approximate inventory loss as a result of the fire?

a.
$19,200
b.
$27,200
c.
$34,000
d.
$58,000
29. Commodity L sells for $12.00; selling expenses are $2.40; normal profit is $3.00. If the cost of Commodity
L is $7.80 and the replacement cost is $6.00, the lower of cost or market is
a.
$5.40.
b.
$6.60.
c.
$6.00.
d.
$7.80.
30. The following information is available for Fordham Corp. for its most recent year:
Net sales .............................................

$3,600,000
Freight-in ............................................
90,000
Purchase discounts ....................................
50,000
Ending inventory ......................................
240,000
The gross margin is 40 percent of net sales. What is the cost of goods available for sale?
a.
$1,680,000
b.
$1,920,000
c.
$2,400,000
d.
$2,440,000
31. Stellar Inc. carries Product A in inventory on December 31 at its unit cost of $22.50. Because of a sharp
decline in demand for the product, the selling price is reduced to $24.00 per unit. Stellar's normal profit margin on Product
A is $4.80, disposal costs are $3.00 per unit, and the replacement cost is $15.90. Under the rule of lower of cost or market,
Stellar's December 31 inventory of Product A should be valued at a unit cost of
a.
$15.90.
b.
$16.20.
c.
$21.00.
d.
$22.50.
A company sells four products: I, II, III, and IV. The company values all inventories using the lower-of-cost-or-market
procedure. The company has consistently experienced a profit margin of 20 percent of sales and expects this rate to hold for
the future. Additional information, shown below, is available for the most recent year as of December 31.
Original
Cost to
Estimated Cost
Expected Selling
Product
Cost
Replace
to Sell
Prices
I
$60
$70
$10
$100
II
70
90
20
120
III
80
60
10
60
IV
90
80
20
90
32. See information regarding the four products above. Using the lower-of-cost-or-market procedure, what is
the reported inventory value at December 31 for one unit of Product I?
a.
$90
b.
$80
c.
$70
d.
$60
the reported inventory value at December 31 for one unit of Product II?
a.
$70
b.
$76
c.
$90
d.
$96
the reported inventory value at December 31 for one unit of Product IV?
a.
$60
b.
$80
c.
$90
d.
$70
the reported inventory value at December 31 for one unit of Product III?
a.
$50
b.
$60
c.
$70
d.
$80
36. The Kidde Corporation uses the lower-of-cost-or-market method to value inventory. Data regarding the
items in work-in-process inventory are presented below.
Markers
Pens
Highlighters
Historical cost ................
$24,000
$18,880
$30,000
Selling price ..................
36,000
36,000
36,000
Estimated cost to complete .....
4,800
4,800
6,800
Replacement cost ...............
20,800
16,800
31,800
Normal profit margin as a
percentage of selling price ....

25%
25%
10%
The value for cost to be used in the lower-of-cost-or-market comparison for the markers is
a.
$20,800.
b.
$23,400.
c.
$24,000.
d.
$31,200.
The Kidde Corporation uses the lower-of-cost-or-market method to value inventory. Data regarding the items in work-in-
process inventory are presented below.
Markers
Pens
Highlighters
Historical cost ................
$24,000
$18,880
$30,000
Selling price ..................
36,000
36,000
36,000
Estimated cost to complete .....
4,800
4,800
6,800
Replacement cost ...............
20,800
16,800
31,800
Normal profit margin as a
percentage of selling price ....

25%
25%
10%
37. See information regarding the Kidde Corporation above. When valuing the pens, the market value to be
used in the lower-of-cost-or- market comparison is
a.
$18,800.
b.
$31,200.
c.
$16,800.
d.
$22,200.
38. See information regarding the Kidde Corporation above. The inventory valuation for highlighters using the
lower-of-cost-or-market method is
a.
$25,600.
b.
$29,200.
c.
$31,800.
d.
$30,000.
39. The following information is available for the Underwater Company for the three months ended March 31
of this year:

$ 450,000
Purchases .............................................
1,700,000
Freight-in ............................................
100,000
Sales .................................................
2,400,000
The gross margin was estimated to be 25 percent of sales. What is the estimated inventory balance at March 31?
a.
$600,000
b.
$350,000
c.
$562,500
d.
$450,000
40. Latone Company began operations in 2014. During the first two years of operations, Latone made
undiscovered errors in taking its year-end inventories that understated 2014 ending inventory by $40,000 and overstated
2015 ending inventory by $50,000. The combined effect of these errors on reported income is
2014 2015 2016

a.
understated $40,000 overstated $50,000 not affected
b.
understated $40,000 overstated $10,000 not affected
c.
understated $40,000 overstated $90,000 understated $50,000
d.
overstated $40,000 understated $50,000 overstated $10,000
41. Tonale Company began operations in 2014. During the first two years of operations, Tonale made
undiscovered errors in taking its year-end inventories that overstated 2014 ending inventory by $50,000 and overstated
2014 2015 2016

a.
overstated $50,000 overstated $90,000 understated $40,000
b.
overstated $50,000 overstated $40,000 not affected
c.
understated $50,000 understated $90,000 not affected
d.
overstated $50,000 understated $10,000 understated $40,000

42. Entole Company began operations in 2014. During the first two years of operations, Entole made
undiscovered errors in taking its year-end inventories that overstated 2014 ending inventory by $50,000 and understated
2014 2015 2016

a.
understated $50,000 overstated $90,000 understated $40,000
b.
overstated $50,000 understated $90,000 not affected
c.
overstated $50,000 understated $40,000 not affected
d.
overstated $50,000 understated $90,000 overstated $40,000

43. Comet Company prepares monthly income statements. A physical inventory is taken only at year-end;
hence, month-end inventories must be estimated. All sales are made on account. The rate of markup on cost is 50 percent.
The following information relates to the month of May:
Accounts receivable, May 1 ............................

$20,000
Accounts receivable, May 31 ...........................
30,000
Collection of accounts receivable during May ..........
50,000
Inventory, May 1 ......................................
36,000
Purchases of inventory during May .....................
32,000
The estimated cost of the May 31 inventory is

a.
$24,000.
b.
$28,000.
c.
$38,000.
d.
$44,000.
44. Which of the following would NOT be included in the cost of work in process inventory?
a.
Cost of electricity to operate factory equipment
b.
Maintenance costs of factory equipment
c.
Depreciation on office equipment in the sales manager's office
d.
Depreciation on factory equipment
45. The term LIFO reserve refers to

a.
a cost flow assumption for valuing inventory.
b.
the difference between the ending inventory amount under LIFO and the ending inventory amount under another inventory
cost flow assumption.
c.
inventory pools used in the dollar-value LIFO method.
d.
a special fund set aside to cover LIFO liquidations.
46. Which of the following statements is true?

a.
A company must use the FIFO cost flow assumption for taxes as well as for financial accounting and reporting.
b.
A company may use FIFO for inventory valuation purposes on the balance sheet provided that LIFO cost of goods sold is
reported on the income statement.
c.
Application of LIFO for financial reporting purposes must strictly follow IRS regulations relating to LIFO.
d.
LIFO is the only inventory method that must be used for financial reporting purposes if used for tax purposes.
47. If a company experiences a liquidation of a LIFO inventory layer in the second quarter that is expected to
be restored by the end of the annual financial reporting period, the company should
a.
treat the layer as if it were liquidated and include in cost of goods sold the expected replacement cost of the inventory sold.
b.
deplete the LIFO layer as if the interim period were an annual period.
c.
change to an alternative inventory cost method, such as FIFO, so that the problem of LIFO liquidation is not encountered.
d.
delay the recognition of both revenue and cost of goods sold on the inventory involved until a final determination of the
LIFO inventory can be made at the end of the annual period.
48. Which of the following would NOT be reported as inventory?

a.
Land acquired for resale by a real estate firm
b.
Stocks and bonds held for resale by a brokerage firm
c.
Partially completed goods held by a manufacturing company
d.
Machinery acquired by a manufacturing company for use in the production process
49. Goods on consignment are

a.
recorded in a consignment out account which is an inventory account.
b.
included in the consignee's inventory.
c.
recorded in a consignment in account which is an inventory account.
d.
all of these.
50. Highlight Manufacturing Company uses a perpetual inventory system for its raw materials. The inventory
records reflect a raw materials balance of $478,500 at December 31. A physical inventory taken on that date revealed raw
materials of $475,750. How will the $2,750 difference affect raw materials inventory and cost of goods sold, assuming it is
attributed to normal shrinkage?
Raw Materials Cost of Goods Sold

a.
Increase Decrease
b.
Decrease No effect
c.
Decrease Increase
d.
No effect Increase

51. Cost of goods sold is equal to

a.
the cost of inventory on hand at the end of a period plus net purchases minus the cost of inventory on hand at the beginning
of a period.
b.
the cost of inventory on hand at the beginning of a period minus net purchases plus the cost of inventory on hand at the end
of a period.
c.
the cost of inventory on hand at the beginning of a period plus net sales minus the cost of inventory on hand at the end of a
period.
d.
the cost of inventory on hand at the beginning of a period plus net purchases minus the cost of inventory on hand at the end
of a period.
52. Goods on consignment should be included in the inventory of

a.
the consignor but not the consignee.
b.
the consignee but not the consignor.
c.
both the consignor and the consignee.
d.
neither the consignor nor the consignee.
53. The use of a discounts lost account implies that the recorded cost of a purchased inventory item is its
a.
invoice price.
b.
invoice price plus the purchase discount lost.
c.
invoice price less the purchase discount taken.
d.
invoice price less the purchase discount allowable whether taken or not.
54. A company using a periodic inventory system neglected to record a purchase of merchandise on account at
year-end. This merchandise was omitted from the year-end physical count. How will these errors affect inventory at year-
end and cost of goods sold for the year?
Cost of
Inventory Goods Sold
a.
No effect Understate
b.
Understate No effect
c.
Understate Understate
d.
No effect Overstate

55. Which inventory costing method would NOT be appropriate for a manufacturer using a perpetual
inventory system?
a.
First-in, first-out
b.
Last-in, first-out
c.
Average cost
d.
Dollar-value LIFO
56. If goods shipped FOB destination are in transit at the end of the year, they should be included in the
inventory balance of the
a.
seller.
b.
common carrier.
c.
buyer.
d.
bank.
57. In a period of falling prices, the use of which of the following inventory cost flow methods would typically
result in the highest cost of goods sold?
a.
Weighted average cost
b.
Specific identification
c.
LIFO
d.
FIFO
58. The specific identification method of inventory costing

a.
eliminates all opportunity for profit manipulation.
b.
matches the flow of recorded costs with the physical flow of goods.
c.
can be used only with a perpetual inventory system.
d.
is a violation of generally accepted accounting principles.
59. Merchandise shipped FOB shipping point on the last day of the year should ordinarily be included in
a.
the buyer's inventory balance.
b.
the seller's inventory balance.
c.
neither the buyer's nor seller's inventory balance.
d.
both the buyer's and the seller's inventory balances.
60. Which inventory pricing method best approximates specific identification in most manufacturing
situations?
a.
Activity-based costing
b.
FIFO
c.
Average cost
d.
LIFO
61. In a period of rising prices, the inventory cost allocation method that tends to result in the lowest reported
net income is
a.
LIFO.
b.
FIFO.
c.
moving average.
d.
weighted average.
62. The Narrows Company makes the following entry in its accounting records:
Inventory .................................
400
Cost of Goods Sold......................
400
This entry would be made when

a.
merchandise is sold and the periodic inventory method is used.
b.
merchandise is sold and the perpetual inventory method is used.
c.
merchandise is returned and the perpetual inventory method is used.
d.
merchandise is returned and the periodic inventory method is used.
63. Which of the following is NOT true of the perpetual inventory method?
a.
Purchases are recorded as debits to the inventory account.
b.
The entry to record a sale includes a debit to Cost of Goods Sold and a credit to Inventory.
c.
After a physical inventory count, Inventory is credited for any missing inventory.
d.
Purchase returns are recorded by debiting Accounts Payable and crediting Purchase Returns and Allowances.
64. Goods in transit at year-end purchased FOB shipping point were appropriately recorded in the purchases
account but were incorrectly excluded from the ending inventory. What effect will this omission have on the company's
assets, liabilities, and retained earnings at year-end?
a.
No effect, no effect, overstated
b.
No effect, no effect, understated
c.
Understated, no effect, overstated
d.
Understated, no effect, understated
65. A company records inventory at the gross invoice price. Theoretically, how should the following affect the
costs in inventory?
Warehousing Cash Discounts

Costs Available
a.
No effect No effect
b.
No effect Decrease
c.
Increase Decrease
d.
Increase No effect

66. When using the periodic inventory method, which of the following generally would NOT be separately
accounted for in the computation of cost of goods sold?
a.
Trade discounts applicable to purchases during the period
b.
Cash (purchase) discounts taken during the period
c.
Purchase returns and allowances of merchandise during the period
d.
Cost of transportation-in for merchandise purchases during the period
67. A firm using the perpetual inventory method returned defective merchandise costing $3,500 to one of its
suppliers. The entry to record this transaction will include a debit to
a.
Accounts Receivable.
b.
Inventory.
c.
Purchase Returns and Allowances.
d.
Accounts Payable.
68. Which of the following inventory costing methods reports most closely the current cost of inventory on the
balance sheet?
a.
FIFO
b.
c.
Weighted average
d.
LIFO
69. The average cost method is applicable to which of the following inventory systems?
Periodic Perpetual
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No

70. Assume that a company records purchases net of discount. If the company bought merchandise valued at
$15,000 on credit terms 3/15, net 30, the entry to record a payment for half of the purchase within the discount period
would include a debit to
a.
Accounts Payable for $7,275 and a credit to Cash for $7,275
b.
Accounts Payable for $7,500 and a credit to Cash for $7,500
c.
Accounts Payable for $7,275 and to Interest Expense for $250, and a credit to Cash for $7,500
d.
Accounts Payable for $7,275 and to Interest Revenue for $250 and a credit to Cash for $7,500.
71. The LIFO inventory cost flow method may be applied to which of the following inventory systems?
Periodic Perpetual
a.
No No
b.
No Yes
c.
Yes Yes
d.
Yes No

72. Which of the following will occur when inventory costs are decreasing?
a.
LIFO will result in lower net income and lower ending inventory than will FIFO.
b.
FIFO will result in lower net income and lower ending inventory than will LIFO.
c.
LIFO will result in a lower net income, but a higher ending inventory, than will FIFO.
d.
FIFO will result in a lower net income, but a higher ending inventory, than will LIFO.
73. During periods of rising prices, when the FIFO inventory cost flow method is used, a perpetual inventory
system would
a.
not be permitted.
b.
result in a higher ending inventory than a periodic inventory system.
c.
result in the same ending inventory as a periodic inventory system.
d.
result in a lower ending inventory than a periodic inventory system.
74. Which of the inventory cost flow assumptions provides the best measure of earnings, where "best" means
most appropriate for predicting future earnings, when prices have been declining?
a.
b.
FIFO
c.
LIFO
d.
Average cost
75. On August 1, Patron Company recorded purchases of inventory of $80,000 and $100,000 under credit
terms of 2/15, net 30. The payment due on the $80,000 purchase was remitted on August 14. The payment due on the
$100,000 purchase was remitted on August 29. Under the net method and the gross method, these purchases should be
included at what respective net amounts in the determination of cost of goods available for sale?
Net Method Gross Method

a.
$178,400 $176,400
b.
$176,400 $176,400
c.
$176,400 $178,400
d.
$180,000 $176,400

76. May Retailers purchased merchandise with a list price of $100,000, subject to a trade discount of 20
percent and credit terms of 2/10, n/30. At what amount should May record the cost of this merchandise if the gross method
is used?
a.
$100,000
b.
$78,400
c.
$98,000
d.
$80,000
77. With LIFO, cost of goods sold is $195,000, and ending inventory is $45,000. If FIFO ending inventory is
$65,000, how much is FIFO cost of goods sold?
a.
$215,000
b.
$195,000
c.
$175,000
d.
$65,000
78. Carryon Co., a manufacturer, had inventories at the beginning and end of its current year as follows:
Beginning
End
Raw materials .............................
$11,000
$15,000
Work in process ...........................
20,000
24,000
Finished goods ............................
12,500
9,000
During the year, the following costs and expenses were incurred:
Raw materials purchased ...............................

$150,000
Direct labor cost .....................................
60,000
Indirect factory labor ................................
30,000
Taxes and depreciation on factory building ............
10,000
Taxes and depreciation on sales room and office .......
7,500
Sales salaries ........................................
20,000
Office salaries .......................................
12,000
Utilities (60% applicable to factory, 20% to sales room,
and 20% to office) ....................................
25,000
Carryon’s cost of goods sold for the year is

a.
$257,000.
b.
$260,500.
c.
$261,000.
d.
$269,500.
79. Elan Company's Accounts Payable balance at December 31, 2014, was $1,800,000 before considering the
following transactions:
•
Goods were in transit from a vendor to Elan on December 31, 2014. The invoice price was $100,000, and the goods were
shipped FOB shipping point on December 29, 2014. The goods were received on January 4, 2015.
•
Goods shipped to Elan FOB shipping point on December 20, 2014, from a vendor were lost in transit. The invoice price
was $50,000. On January 5, 2015, Elan filed a $50,000 claim against the common carrier.
In its December 31, 2011, balance sheet, Elan should report Accounts Payable of
a.
$1,950,000.
b.
$1,900,000.
c.
$1,850,000.
d.
$1,800,000.
Paper Depot 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
80. See information for Paper Depot above. If Paper Depot 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.
81. See information for Paper Depot above. If Paper Depot uses a LIFO periodic inventory system, the ending
inventory of Model III calculators at August 31 is reported as
a.
$146,400.
b.
$150,080.
c.
$150,160.
d.
$152,960.
82. See information for Paper Depot. above. If Paper Depot uses a LIFO cost perpetual inventory system, the
ending inventory of Model III calculators at August 31 is reported as
a.
$146,400.
b.
$150,080.
c.
$150,160.
d.
$152,960.
83. See information for Paper Depot above. If Paper Depot uses a FIFO cost perpetual inventory system, the
ending inventory of Model III calculators at August 31 is reported as
a.
$150,080.
b.
$150,160.
c.
$152,232.
d.
$152,960.
Digipro Inc. is a wholesaler of photography equipment. The activity for the VTC cameras during July is shown below:
Balance/
Date
Transaction
Units
Cost
July 1
Inventory
2,000
$36.00
7
Purchase
3,000
37.00
12
Sales
3,600
21
Purchase
5,000
37.88
22
Sales
3,800
29
Purchase
1,600
38.11
84. See information for Digipro Inc. above. If Digipro Inc. uses the average cost method to account for
inventory, the ending inventory of VTC cameras at July 31 is reported as
a.
$153,400.
b.
$156,912.
c.
$158,736.
d.
$159,464.
85. See information for Digipro Inc. above. If Digipro Inc. uses a moving average perpetual inventory system,
the ending inventory of the VTC cameras at July 31 is reported as
a.
$153,400.
b.
$156,912.
c.
$158,736.
d.
$159,464.
86. The following information is available for Orange Company:
Cost of goods sold for 2014 ...........................

$1,200,000
Inventories at December 31, 2013 ......................
350,000
Inventories at December 31, 2014 ......................
310,000
Assuming that a business year consists of 360 days, the number of days' sales in average inventories for 2014 was
a.
49.5.
b.
93.
c.
99.
d.
105.
87. Following are the account balances from Canarsie Company's income statement:
Inventory, January 1, 2014 ............................

$30,000
Purchases .............................................
40,000
Purchase Returns and Allowances .......................
5,000
Purchase Discounts ....................................
4,000
Freight-In ............................................
5,000
Inventory, December 31, 2014 ..........................
15,000
Freight-Out ...........................................
6,000
Given this information, the cost of goods sold during 2014 is

a.
$51,000.
b.
$46,000.
c.
$56,000.
d.
$66,000.
88. Following are the account balances from Browne Company's income statement:
Inventory, January 1, 2014 ............................

$35,000
Purchases .............................................
35,000
2,000
4,000
Freight-In ............................................
5,000
Inventory, December 31, 2014 ..........................
10,000
Freight-Out ...........................................
6,000
Given this information, the cost of merchandise available for sale during 2014 is
a.
$65,000.
b.
$59,000.
c.
$69,000.
d.
$61,000.
89. From the following information, determine the amount of freight-in.

Beginning Inventory ...................................
$20,000
Purchases .............................................
41,000
3,000
4,000
Freight-In ............................................
?
Cost of Goods Available for Sale ......................
55,000
Ending Inventory ......................................
?
Cost of Goods Sold ....................................
22,000
a.
$1,000
b.
$2,000
c.
$3,000
d.
$4,000
90. From the following information, determine the amount of ending inventory.
Beginning Inventory ...................................

$20,000
Purchases .............................................
41,000
3,000
4,000
Freight-In ............................................
?
Cost of Goods Available for Sale ......................
55,000
Ending Inventory ......................................
?
Cost of Goods Sold ....................................
22,000
a.
$23,000
b.
$32,000
c.
$33,000
d.
$22,000
91. The following information was obtained from the accounts of Marion Company:

$30,000
Purchases .............................................
45,000
5,000
4,000
Freight-In ............................................
5,000
Inventory, December 31 ................................
20,000
Freight-Out ...........................................
6,000
Given this information, the cost of goods sold during the year is
a.
$46,000.
b.
$41,000.
c.
$51,000.
d.
$61,000.
92. During the year, The Mound Company purchased $1,920,000 of inventory. The cost of goods sold for the
year was $1,800,000 and the ending inventory at December 31 was $360,000. What was the inventory turnover for the
year?
a.
6.0
b.
5.0
c.
5.3
d.
6.4
93. The following information was obtained from the accounts of Foxx Company:
Beginning Inventory ..................................

$20,000
Purchases ............................................
40,000
Purchase Returns and Allowances ......................
2,000
Purchase Discounts ...................................
4,000
Freight-In ...........................................
5,000
Ending Inventory .....................................
10,000
Freight-Out ..........................................
6,000
Given this information, the cost of goods available for sale is

a.
$65,000.
b.
$59,000.
c.
$69,000.
d.
$61,000.
94. Selected information from the accounting records of Espy Company is as follows:
Net sales for 2014 ...................................

$900,000
Cost of goods sold for 2014 ..........................
600,000
Inventory at December 31, 2014 .......................
180,000
Inventory at December 31, 2014 .......................
156,000
Espy's inventory turnover for 2014 is

a.
5.36 times.
b.
3.85 times.
c.
3.67 times.
d.
3.57 times.
95. The following information applied to Michaels Company for 2014:
Merchandise purchased for resale .....................

$400,000
Freight-in ...........................................
7,500
Interest on notes payable to vendors .................
3,000
Purchase returns .....................................
2,500
Michaels' inventoriable cost for 2014 was

a.
$409,000.
b.
$407,500.
c.
$406,000.
d.
$405,000
Purchases and sales during a recent period for Lantern, Inc. were:
Purchases During the Period
Sales During the Period

1st Purchase
500 units
@
$2
1st Sale
600 units
@
$7
2nd Purchase
1,000 units
@
$3
2nd Sale
750 units
@
$8
3rd Purchase
500 units
@
$4
3rd Sale
500 units
@
$9
4th Purchase
500 units
@
$5
4th Sale
500 units
@
$10
2,500 units
2,350 units
Beginning inventory was 100 units at $1 each.
96. See information for Lantern, Inc.above. Given this information, what is the ending inventory if the periodic
FIFO costing alternative is used?
a.
$400
b.
$500
c.
$1,250
d.
$3,100
97. See information for Lantern, Inc.above. Given this information, what is the ending inventory if the periodic
LIFO costing alternative is used?
a.
$400
b.
$500
c.
$1,250
d.
$3,100
98. See information for Lantern, Inc.above. Given this information, what is the cost per unit available for sale
during the year when using the average cost method (rounded to the nearest cent)?
a.
$2.61
b.
$3.31
c.
$3.10
d.
$3.53
99. The following information was taken from Andson Company's accounting records:
Increase in raw materials inventory ...................
$ 7,500
Decrease in finished goods inventory ..................
17,500
Raw materials purchase ................................
215,000
Direct-labor payroll ..................................
100,000
Factory overhead ......................................
150,000
Freight-out ...........................................
22,500
There was no work-in-process inventory at the beginning or end of the year. Andson's cost of goods sold is
a.
$497,500.
b.
$487,500.
c.
$482,500.
d.
$475,000.
100. The following information is available for Prudhoe Company:

Disbursements for purchases ...........................
$290,000
Increase in trade accounts payable ....................
25,000
Decrease in merchandise inventory .....................
10,000
Cost of goods sold was

a.
$325,000.
b.
$305,000.
c.
$275,000.
d.
$255,000.
101. The following information is available for Jimmy Corporation for the month of June:
Beginning Inventory .............

8 units @ $20.00 = $160
Purchased, June 3 ...............
5 units @ $22.00 = $110
Purchased, June 5 ...............
7 units @ $24.00 = $168
Sold, June 9 ....................
9 units
Purchased, June 15 ..............
8 units @ $26.00 = $208
Sold, June 19 ...................
7 units
Given this information, the ending inventory balance using the average cost method is
a.
$276.
b.
$302.
c.
$368.
d.
$386.
102. Marie’s Sporting Goods had the following inventory records for one line of skis for the month of January:
Beginning Inventory .............

70 pairs @ $100 per pair = $7,000
Sales (Jan. 1 - Jan. 7) .........
50 pairs
Purchase (Jan. 8) ...............
46 pairs @ $104 per pair = $4,784
Sales (Jan. 9 - Jan. 16) ........
49 pairs
Purchase (Jan. 17) ..............
62 pairs @ $110 per pair = $6,820
Sales (Jan. 18 - Jan. 29) .......
56 pairs
Purchase (Jan. 30) ..............
18 pairs @ $112 per pair = $2,016
Assuming the periodic LIFO inventory method is used, what is the cost of Marie’s ending inventory?
a.
$4,124
b.
$4,268
c.
$4,376
d.
$4,100
103. Flash Company's inventory at June 30, 2014, was $75,000 based on a physical count of goods priced at
cost, and before any necessary year-end adjustment relating to the following:
•
Included in the physical count were goods billed to a customer FOB shipping point on June 30, 2014. These goods had a
cost of $1,500 and were picked up by the carrier on July 10, 2014.
•
Goods shipped FOB destination on June 28, 2014, from a vendor to Flash were received on July 3, 2014. The invoice cost
was $2,500.
What amount should Flash report as inventory on its June 30, 2014, balance sheet?
a.
$73,500
b.
$74,000
c.
$75,000
d.
$76,500
104. The balance in Locksome Company's accounts payable account at December 31, 2014, was $1,100,000
before considering the following information:
•
Goods shipped FOB shipping point on December 20, 2014, from a vendor to Locksome were lost in transit. The invoice
cost of $20,000 was not recorded by Locksome. On January 6, 2015, Locksome filed a $20,000 claim against the common
carrier.
•
On December 27, 2014, a vendor authorized Locksome to return, for full credit, goods shipped and billed at $35,000 on
December 2, 2014. The returned goods were shipped by Locksome on December 27, 2014. A $35,000 credit memo was
received and recorded by Locksome on January 6, 2015.
What amount should Locksome report as accounts payable in its December 31, 2014, balance sheet?
a.
$1,120,000
b.
$1,115,000
c.
$1,085,000
d.
$1,065,000
105. The balance in Wellstocked Company's accounts payable account on December 31, 2014, was $1,225,000
before the following information was considered:
•
Goods shipped FOB destination on December 21, 2014, from a vendor to Wellstocked were lost in transit. The invoice cost
of $45,000 was not recorded by Wellstocked. On December 28, 2014, Wellstocked notified the vendor of the lost shipment.
•
Goods were in transit from a vendor to Wellstocked on December 31, 2014. The invoice cost was $60,000, and the goods
were shipped FOB shipping point on December 28, 2014. Wellstocked received the goods on January 6, 2015.
What amount should Wellstocked report as accounts payable in its December 31, 2014, balance sheet?
a.
$1,330,000
b.
$1,285,000
c.
$1,270,000
d.
$1,225,000
106. The following information is available from Carron Company's 2014 accounting records:
Purchases ............................................
$530,000
Purchase discounts ...................................
10,000
Beginning inventory ..................................
160,000
Ending inventory .....................................
215,000
Freight-out ..........................................
40,000
Carron's 2014 cost of goods sold is

a.
$465,000.
b.
$475,000.
c.
$505,000.
d.
$585,000.
Alana's Clothing Store sells jeans. During January 2014, its inventory records for one brand of designer jeans were as
follows:
Beginning Inventory ....................

10 pairs
@
$ 20 =
$ 200
January 6 Purchase .....................
4 pairs
@
25 =
100
January 10 Sale ........................
5 pairs
January 15 Purchase ....................

7 pairs
@
30 =
210
January 20 Sale ........................
10 pairs
January 25 Purchase ....................

4 pairs
@
30 =
120
107. See information for Alana's Clothing Store above. Using this information, periodic LIFO cost of goods
sold is
a.
$360.
b.
$300.
c.
$330.
d.
$430.
108. See information for Alana's Clothing Store above. Using this information, periodic FIFO cost of goods sold
is
a.
$330.
b.
$300.
c.
$430.
d.
$250.
109. See information for Alana's Clothing Store above. Using this information, the cost of goods sold using the
average cost method is
a.
$378.
b.
$358.
c.
$265.
d.
$236.
110. Selected information from the 2011 and 2010 financial statements of Bin Company is presented below:
(in thousands)
As of December 31
2014
2013
Cash ....................................
$ 21
$ 35
Accounts receivable (net) ...............
60
98
Inventory ...............................
105
142
Prepaid expenses ........................
5
3
Cash sales ..............................

750
675
Credit sales (percent of cash sales) ....
82%
85%
Cost of goods sold (percent of total sales)
60%
58%
Net income ..............................
30
38
Bin Company's merchandise inventory turnover for 2014 is

a.
3.43
b.
5.68
c.
6.79
d.
6.63
111. The inventory write-down rule under IAS 2 can best be labeled
a.
lower of cost or market.
b.
lower of cost or net realizable value.
c.
lower of net realizable value or market
d.
lower of ceiling or floor.
TOP: AICPA FN-Measurement MSC: AACSB Reflective Thinking
1. On-Call Service Corporation bought a building lot to construct a new corporate office building. An older
home on the building lot was razed immediately so that the office building could be constructed. The cost of purchasing the
older home should be
a.
recorded as part of the cost of the land.
b.
written off as a loss in the year of purchase.
c.
written off as an extraordinary item in the year of purchase.
d.
recorded as part of the cost of the new building.
2. 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.
such items as patents, copyrights, and claims against customers which can be valued on a monetary basis.
d.
properties without physical characteristics that have long-term effects on a business enterprise.
3. Which of the following intangible assets does NOT have the characteristic of exchangeability?
a.
Patent
b.
Copyright
c.
Goodwill
d.
Franchise
4. In a business combination, goodwill is defined as the excess of cost over the

a.
net book value of assets acquired.
b.
fair value of assets acquired.
c.
book value of assets acquired less the liabilities assumed.
d.
fair value of assets acquired less the liabilities assumed.
5. Goodwill should be recorded in the accounting records only when

a.
it is purchased from another company.
b.
it can be established that a definite benefit or advantage has resulted to a firm from some item such as a good name,
capable staff, or reputation.
c.
it is acquired through the purchase of another business entity.
d.
a firm reports above normal earnings for five or more consecutive years.
6. 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.
7. Shorecrest Company recently accepted a donation of land with a fair value of $250,000 from the city of
Sutton in return for a promise to build a plant in Sutton.
The entry that Shorecrest should use to record this land is:
a.
Land.............................. 250,000
Donated Capital-Land 250,000
b.
Land.............................. 250,000
Gain from Receipt of Donated Land 250,000
c.
Land.............................. 250,000
Unrealized Gain from Receipt of
Donated Land.................. 250,000
d.
Land.............................. 250,000
Retained Earnings................ 250,000
8. Cirrus Inc. purchased certain plant assets under a deferred payment contract. The agreement was to pay
$40,000 per year for ten years. The plant assets should be valued at
a.
$400,000.
b.
$400,000 plus imputed interest.
c.
present value of $40,000 annuity for ten years at an imputed interest rate.
d.
future value of $40,000 annuity for ten years at an imputed interest rate.
9. 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.
10. If the cost of ordinary repairs is capitalized as an addition to the building account during the current year,
a.
net income for the current year will be understated.
b.
stockholders' equity at the end of the current year will be understated.
c.
total assets at the end of the current year will not be affected.
d.
total liabilities at the end of the current year will not be affected.
11. A company purchased land to be used as the site for the construction of a plant. Timber was cut from the
building site so that construction of the plant could begin. The proceeds from the sale of the timber should be
a.
classified as other income.
b.
deducted from the cost of the land.
c.
deducted from the cost of the plant.
d.
netted against the costs to clear the land and expensed as incurred.
12. When a company purchases land with a building on it and immediately tears down the building so that the
land can be used for the construction of a plant, the costs incurred to tear down the building should be
a.
amortized over the estimated time period between the tearing down of the building and the completion of the plant.
b.
expensed as incurred.
c.
added to the cost of the plant.
d.
added to the cost of the land.
13. A donated plant asset for which the fair value has been determined, and for which incidental costs were
incurred in acceptance of the asset, should be recorded at an amount equal to its
a.
incidental costs incurred.
b.
fair value and incidental costs incurred.
c.
book value on books of donor and incidental costs incurred.
d.
book value on books of donor.
14. 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.
15. A company is constructing an asset for its own use. Construction began in 2013. The asset is being
financed entirely with a specific new borrowing. Construction expenditures were made in 2013 and 2014 at the end of each
quarter. The total amount of interest cost capitalized in 2014 should be determined by applying the interest rate on the
specific new borrowing to the
a.
total accumulated expenditures for the asset in 2014.
b.
average accumulated expenditures for the asset in 2014.
c.
average expenditures for the asset in 2014.
d.
total expenditures for the asset in 2014.
16. 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.
17. Which of the following principles best describes the current method of accounting for research and
development costs?
a.
Immediate recognition as an expense
b.
Systematic and rational allocation
c.
Income tax minimization
d.
Associating cause and effect
18. If a company constructs a laboratory building to be used as a research and development facility, the cost of
the laboratory building is matched against earnings as
a.
research and development expense in the period(s) of construction.
b.
depreciation deducted as part of research and development costs.
c.
depreciation or immediate write-off depending on company policy.
d.
an expense at such time as productive research and development has been obtained from the facility.
19. 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
20. 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.
21. Which of the following is true?

a.
The Financial Accounting Standards Board has never permitted the disclosure of the fair values of noncurrent operating
assets in the notes to financial statements.
b.
The SEC currently requires the disclosure of the fair values of noncurrent operating assets in the notes to financial
statements of companies that are registered with the SEC.
c.
The Financial Accounting Standards Board currently requires the disclosure of the fair values of noncurrent operating
assets in the notes to the financial statements.
d.
Disclosure of the fair values of noncurrent operating assets in the notes to the financial statements is currently encouraged
but not required by the Financial Accounting Standards Board.
22. A machine with an original estimated useful life of ten years is moved to another location in the factory
after it had been in service for three years. The efficiency of the machine is increased for its remaining useful life. The
reinstallation costs should be capitalized if the remaining useful life of the machine is
Five Years Ten Years

a.
No No
b.
No Yes
c.
Yes Yes
d.
Yes No

23. An expenditure subsequent to acquisition of assembly-line manufacturing equipment benefits future

periods. The expenditure should be capitalized if it is a
Betterment Rearrangement
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No

24. Which of the following concepts is often given as justification not to value noncurrent operating assets at
their current values?
a.
The revenue principle
b.
Verifiability
c.
Relevance
d.
Predictive value
25. On February 12, Oceans Company purchased a tract of land as a factory site for $190,000. An existing
building on the property was razed and construction was begun on a new factory building in March of the same year.
Additional data are available as follows:
Cost of razing old building ..........................

$ 55,000
Title insurance and legal fees to purchase land ......
7,500
Architect's fees .....................................
52,500
New building construction cost .......................
975,000
The recorded cost of the completed factory building should be

a.
$1,165,000
b.
$1,220,000
c.
$1,027,500
d.
$1,082,500
26. The Morris Corporation acquired land, buildings, and equipment from a bankrupt company at a lump-sum
price of $180,000. At the time of acquisition, Morris paid $12,000 to have the assets appraised. The appraisal disclosed the
following values:
Land ..................................................
$120,000
Buildings .............................................
80,000
Equipment .............................................
40,000
What cost should be assigned to the land, buildings, and equipment, respectively?
a.
$64,000, $64,000, and $64,000
b.
$90,000, $60,000, and $30,000
c.
$96,000, $64,000, and $32,000
d.
$120,000, $80,000, and $40,000
27. Osborne Company acquired three machines for $200,000 in a package deal. The three assets together had a
book value of $160,000 on the seller's books. An appraisal costing the purchaser $2,000 indicated that the three machines
had the following market values (book values are given in parentheses):
Machine 1: $60,000 ($40,000)

Machine 2: $80,000 ($50,000)
Machine 3: $100,000 ($70,000)
The three assets should be individually recorded at a cost of (rounded to the nearest dollar)
Machine 1 Machine 2 Machine 3

a.
$40,000 $53,333 $66,667
b.
$50,000 $62,500 $87,500
c.
$40,000 $50,000 $70,000
d.
$50,500 $67,333 $84,167

28. Diamond, Inc. purchased a machine under a deferred payment contract on December 31, 2013. Under the
terms of the contract, Diamond is required to make eight annual payments of $140,000 each beginning December 31, 2014.
The appropriate interest rate is 8 percent. The purchase price of the machine is
a.
$1,389,190.
b.
$1,120,000.
c.
$868,900.
d.
$804,530.
29. On October 1, Azuma, Inc. exchanged 8,000 shares of its $25 par value common stock for a parcel of land
to be held for a future plant site.Azuma's common stock had a fair market value of $80 per share on the exchange date.
Azuma received $36,000 from the sale of scrap when an existing building on the site was razed. The land should be carried
at
a.
$200,000.
b.
$236,000.
c.
$604,000.
d.
$640,000.
30. Broham Manufacturing Company purchased a machine on January 2, 2014. The invoice price of the
machine was $40,000, and the vendor offered a 2 percent discount for payment within ten days. The following additional
costs were incurred in connection with the machine:
Transportation-in ....................................
$1,200
Installation cost ....................................
700
Testing costs prior to regular operation .............
550
If the invoice is paid within the discount period, Broham should record the acquisition cost of the machine at
a.
$41,650.
b.
$41,100.
c.
$40,400.
d.
$39,200.
31. The general ledger of the Flybird Corporation as of December 31 includes the following accounts:
Organization costs ...................................
$ 20,000
Deposits with advertising agency (will be used to
promote goodwill) ..................................
32,000
Discount on bonds payable ............................
60,000
Excess of cost over book value of net assets of
acquired subsidiary ................................
280,000
Trademarks ...........................................
48,000
In the preparation of Flybird's balance sheet as of December 31, what should be reported as total intangible assets?
a.
$68,000
b.
$328,000
c.
$368,000
d.
$380,000
32. On June 30, 2014, Diode Inc. purchased for cash at $50 per share all 150,000 shares of outstanding
common stock of Moore Company. Moore's balance sheet at June 30, 2014, showed net assets with a book value of
$6,000,000. The fair value of Moore's property, plant, and equipment on June 30, 2014, was $800,000 in excess of its book
value. What amount, if any, will be recorded by Diode as goodwill on the date of purchase?
a.
$0
b.
$700,000
c.
$800,000
d.
$1,500,000
33. On July 31, 2014, Mason Company purchased for $4,000,000 cash all of the outstanding common stock of
Turquoise Company when Turquoise's balance sheet showed net assets of $3,200,000. Turquoise's assets and liabilities had
fair values different from the book values as follows:
Book Value
Fair Value
Property, plant, and equipment,
net ...........................
$5,000,000
$5,750,000
Other assets ....................
500,000
0
Long-term debt ..................
3,000,000
2,800,000
As a result of the transaction, what amount will be shown as goodwill in the July 31, 2014, consolidated balance sheet of
Mason Company and its wholly owned subsidiary, Turquoise Company?
a.
$350,000
b.
$250,000
c.
$750,000
d.
$800,000
34. Place Company started construction of a new office building on January 1, 2014, and moved into the
finished building on July 1, 2015. Of the building's $5,000,000 total cost, $4,000,000 was incurred in 2014 evenly
throughout the year. Place's incremental borrowing rate was 12 percent throughout 2014, and the total amount of interest
incurred by Place during 2014 was $204,000. What amount should Place report as capitalized interest at December 31,
2014?
a.
$480,000
b.
$300,000
c.
$240,000
d.
$204,000
35. Sonora Company borrowed $400,000 on a 10 percent note payable to finance a new warehouse Sonora is
constructing for its own use. The only other debt on Sonora's books is a $600,000, 12 percent mortgage payable on an
office building. At the end of the current year, average accumulated expenditures on the new warehouse totaled $475,000.
Sonora should capitalize interest for the current year in the amount of
a.
$40,000.
b.
$47,500.
c.
$49,000.
d.
$52,250.
36. Bluesy Company acquired land and paid for it in full by issuing $700,000 of its 10 percent bonds payable
and 40,000 shares of its common stock, par $10. The stock was selling at $21 per share and the bonds were trading at 102.
What amount should Bluesy record as the cost of the land?
a.
$1,100,000
b.
$1,540,000
c.
$1,554,000
d.
$1,604,000
37. Bluesy Company purchased land with a current market value of $240,000. Its book value in the accounts
of the seller was $130,500. In exchange for the land, Bluesy issued 20,000 shares of its common stock, par $10, with an
estimated market value of $14 per share. Bluesy stock is not traded on an established stock exchange. What amount should
Bluesy record as the cost of the land?
a.
$130,500
b.
$200,000
c.
$240,000
d.
$280,000
38. The third year of a construction project began with a $30,000 balance in Construction in Progress. Included
in that figure is $6,000 of interest capitalized in the first two years. Construction expenditures during the third year were
$80,000 which were incurred evenly throughout the entire year. The company has had over $300,000 in interest-bearing
debt outstanding the third year, at a weighted average rate of 9 percent. How much interest for the third year is capitalized?
a.
$3,600
b.
$6,300
c.
$9,360
d.
$9,900
39. Song Company started construction on a building on January 1 of this year and completed construction on
December 31 of the same year. Song had only two interest notes outstanding during the year, and both of these notes were
outstanding for all 12 months of the year. The following information is available:
Average accumulated expenditures .....................

$250,000
Ending balance in construction in progress
before capitalization of interest ..................

360,000
6 percent note incurred specifically for the project .
150,000
9 percent long-term note .............................
500,000
What amount of interest should Song capitalize for the current year?
a.
$15,000
b.
$18,000
c.
$22,500
d.
$27,900
40. A company made the following cash expenditures on a self-constructed building begun January 1 of the
current year:
January 1 ............................................
$50,000
June 1 ...............................................
60,000
December 1 ...........................................
90,000
The building is still under construction at year-end. What is the amount of the average accumulated expenditures for the
purpose of capitalizing interest?
a.
$87,500
b.
$92,500
c.
$100,000
d.
$200,000
41. During 2014, Robby, Inc. incurred the following costs:
Research and development services performed by Tronic

Company for Robby ................................
$125,000
Testing for evaluation of new products ...............
150,000
Laboratory research aimed at discovery of new knowledge
187,500
In its income statement for the year ended December 31, 2014, Robby should report research and development expense of
a.
$462,500.
b.
$312,500.
c.
$150,000.
d.
$125,000.
42. Tundra Co. incurred research and development costs in 2014 as follows:
Equipment acquired for use in various research and

development projects ...............................
$500,000
Depreciation on the above equipment ..................
67,500
Materials used .......................................
100,000
Compensation costs of personnel ......................
250,000
Outside consulting fees ..............................
75,000
Indirect costs appropriately allocated ...............
125,000
The total research and development costs charged in Tundra's 2014 income statement should be
a.
$425,000.
b.
$542,500.
c.
$617,500.
d.
$925,000.
43. During the year just ended, Salt Company made the following expenditures relating to its plant building:
Continuing and frequent repairs .....................

$160,000
Repainted the plant building ........................
40,000
Major improvements to the electrical wiring system ..
128,000
Partial replacement of roof tiles ...................
56,000
How much should be charged to repair and maintenance expense during the year just ended?
a.
$160,000
b.
$216,000
c.
$256,000
d.
$328,000
44. On September 10, Gravelly Company incurred the following costs for one of its printing presses:
Purchase of stapling attachment .....................

$90,000
Installation of attachment ..........................
20,000
Replacement parts for renovation of press ...........
60,000
Labor and overhead in connection with renovation
of press ..........................................
28,000
Neither the attachment nor the renovation increased the estimated useful life of the press. However, the renovation resulted
in significantly increased productivity. What amount of the costs should be capitalized?
a.
$198,000
b.
$110,000
c.
$90,000
d.
$88,000
TOP: AICPA FN-Reporting MSC: AACSB Analytic
45. On April 30, 2014, Brother, Inc. purchased for $30 per share all 200,000 of Cousin Corp.'s outstanding
common stock. On this date Cousin's balance sheet showed net assets of $5,000,000. Additionally, the fair value of
Cousin's identifiable assets on this date was $400,000 in excess of their carrying amount. On Brother's April 30, 2014,
consolidated balance sheet, what amount should be reported as goodwill?
a.
$350,000
b.
$400,000
c.
$600,000
d.
$1,000,000
46. Selected information from the 2014 and 2013 financial statements of Pitney Corporation is presented
below.
(in thousands)
As of Dec.31
2014
2013
Cash ......................................
$ 21
$ 35
Marketable Securities .....................
27
22
Accounts Receivable (net) .................
60
98
Inventory .................................
105
142
Prepaid Expenses ..........................
5
3
Land and Building (net) ...................
247
315
Accounts Payable ..........................
57
75
Accrued Expenses ..........................
10
14
Notes Payable (short-term) ................
8
4
Bond Payable ..............................
52
66
Pitney had cash sales of $750 and credit sales of $615 during 2014. Cost of goods sold for 2014 was $819. Pitney's fixed
asset turnover for 2014 is
a.
2.97.
b.
4.86.
c.
2.53.
d.
5.53.
47. According to the most current FASB standards, intangible assets acquired in a basket purchase that does
not represent the acquisition of an entire business should be
a.
valued by allocating the total purchase price according to the relative fair values of all assets acquired, regardless of
whether the assets are separately tradable or contract based.
b.
valued by allocating the total purchase price according to the relative fair values only of intangible assets that are separately
tradable or contract based.
c.
valued by recording separately traded and contract based intangible assets at their individual fair values with any
unallocated purchase price being recognized as goodwill.
d.
unallocated purchase price being expensed in the year of acquisition.
48. According to the most current FASB standards, intangible assets acquired in a basket purchase which
represents the acquisition of an entire business should be
a.
unallocated purchase price being recognized as goodwill.
b.
valued by allocating the total purchase price according to the relative fair values only of intangible assets that are separately
tradable or contract based.
c.
valued by allocating the total purchase price according to the relative fair values of all assets acquired, regardless of
whether the assets are separately tradable or contract based.
d.
unallocated purchase price being expensed in the year of acquisition.
49. Which of the following is correct?

a.
The fair value of internally generated intangible assets should be estimated and recorded on the books of the entity that
developed the assets even in the absence of a business acquisition.
b.
The fair value of internally generated intangible assets may be estimated but should not be recorded on the books or
displayed on the financial statements of the entity.
c.
Managers may value their own companies and recognize goodwill in the company accounts even though an entity has not
been acquired in a business acquisition.
d.
Goodwill should be recognized in the accounts whenever the value of the firm increases based on current market prices of
the firm's common stock.
50. Which of the following is true regarding the traditional approach to estimating the fair value of an
intangible asset?
a.
The traditional approach requires the use of the risk-free rate of interest.
b.
The traditional approach requires the use of various possible outcomes and their probability of occurrence.
c.
The traditional approach requires the use of judgment in determining a risk-adjusted rate of interest.
d.
The traditional approach requires the assumption that cash flows occur at the beginning of each period (an annuity due).
51. Acquired in-process research and development should be

a.
capitalized when acquired but not amortized.
b.
capitalized when acquired and amortized over a period not to exceed 40 years.
c.
capitalized when acquired and amortized based on the number of units of product or services sold each period.
d.
expensed when acquired.
52. Which of the following most accurately describes the position taken by current generally accepted
accounting principles?
a.
Both pooling of interests and the purchase method are still permitted under certain circumstances.
b.
The valuation basis to be applied is the acquisition method under which the fair value of consideration transferred includes
any contingent consideration, but excludes direct combination costs..
c.
The valuation basis to be applied is the cost method under which the valuation basis is the fair value of the assets and
liabilities acquired including direct combination costs, but excluding contingent consideration.
d.
The purchase method requires a business acquisition transaction to be structured to meet twelve very specific criteria
required by generally accepted accounting principles.
53. Which of the following most accurately describes the position taken by generally accepted accounting
principles regarding the accounting for the costs of drilling dry wells in the oil and gas industry?
a.
Only the successful efforts method may be used.
b.
Only the full cost method may be used.
c.
Both the successful efforts and full-cost methods may be used.
d.
Neither the successful efforts method nor the full cost method may be used pending the development by the Securities and
Exchange Commission of its own approach to accounting for the costs of drilling dry wells.
54. A trademark is an example of which general category of intangible asset that should be recognized
separately according to current generally accepted accounting principles?
a.
Marketing-related
b.
Customer-related
c.
Artistic-related
d.
Contract-based
55. A copyright is an example of which general category of intangible asset that should be recognized
a.
Marketing-related
b.
Customer-related
c.
Artistic-related
d.
Contract-based
56. Broadcast rights are an example of which general category of intangible asset that should be recognized
a.
Contract-based
b.
Customer-related
c.
Artistic-related
d.
Marketing-related
57. Order backlogs are an example of which general category of intangible asset that should be recognized
a.
Marketing-related
b.
Customer-related
c.
Artistic-related
d.
Contract-based
58. Trade secrets are an example of which general category of intangible asset that should be recognized
a.
Marketing-related
b.
Customer-related
c.
Artistic-related
d.
Technology-based
59. In a “basket” or “lump-sum” purchase of assets, which of the following best describes the process by
which the historical cost of the various assets acquired should be determined?
a.
Allocation of the total cost to the individual assets on the basis of the historical cost of the individual assets to their original
owner.
b.
Allocation of the total cost to the individual assets on the basis of the fair market value of the individual assets at the time
of the “basket” purchase.
c.
Recording of the individual assets at their current value with recognition of a gain or loss for the difference between the
price paid for the assets and the current value of the individual assets.
d.
Recording of the individual assets at their original historical cost to the seller with a gain or loss recognized as the
difference between the total of the original historical cost figures and the price paid in the basket purchase.
60. Which of the following ordinarily would be treated as a revenue expenditure rather than a capital
expenditure?
a.
Repair and maintenance on buildings
b.
The replacement of a major component of a building
c.
An addition to an existing building
d.
Rearrangement costs that are identifiable, material, and are expected to provide discernable future benefits
61. Solara Company entered into a contract with Hammer Construction Company to construct a building.
Construction began in 2014 and was completed in 2015. As of January 1, 2015, Solara had made total progress payments to
Hammer of $50,000. In addition, interest capitalized on the building during 2014 was $2,500. Solara made additional
payments on June 30, 2015, and December 31, 2015. Solara had issued $80,000 of 9% bonds to finance part of the
construction. The average interest on Solara’s additional debt was 11% for 2015.
How much interest should be capitalized by Solara for 2015?

a.
$6,750
b.
$6,975
c.
$13,500
d.
$13,725
62. Dan Company recently acquired two items of equipment. The transactions are described below:
June 10:
Acquired a press at an invoice price of $6,500, subject to a 2% cash discount which was taken. Costs of freight and
insurance during shipment were $205. Installation costs were $350.
November 12:
Acquired a welding machine at an invoice price of $4,000, subject to a 4% cash discount which was NOT taken. Additional
welding supplies were acquired at a total cost of $300.
The increase in the equipment account as a result of the above transactions would be
a.
$10,525
b.
$10,720
c.
$10,925
d.
$11,225
63. Which of the following best describes the proper treatment of cash discounts on acquired machinery?
a.
The historical cost of the machinery should be the invoice price; the discount should be ignored.
b.
The historical cost of the machinery should be the net-of-discount amount, regardless of whether the discount is actually
taken.
c.
The historical cost of the machinery should be the net-of-discount amount only if the discount is actually taken.
d.
The historical cost of the machinery should be the invoice price plus the amount of the discount which is treated a interest
capitalized on the purchase.
64. Which of the following is true regarding International Accounting Standard No. 23 (IAS 23), “Borrowing
Costs,” and FASB Statement of Financial Accounting Standards No. 34 (SFAS No. 34), ”Capitalization of Interest Cost”?
a.
IAS 23 requires the capitalization of borrowing costs less the amount of investment income generated by borrowed
construction funds temporarily invested.
b.
SFAS No.34 requires the capitalization of borrowing costs less the amount of investment income generated by borrowed
construction funds temporarily invested.
c.
IAS 23 requires that all interest should be expensed.
d.
Both IAS 23 and SFAS No. 34 require the capitalization of borrowing costs with no adjustment for the amount of
investment income generated by borrowed
65. The cost of land to be used in the operations of a business should include all of the following except
a.
commissions related to the acquisition of the land.
b.
excavation in preparation for the construction of a new building on the land.
c.
property taxes to the date of acquisition assumed by the purchaser.
d.
the cost of surveys of the land.
66. The cost of a building to be used in the operations of a business should usually include all of the following
except
a.
cost of renovation to prepare the building for its intended use.
b.
costs of building permits related to expansion of the building begun after acquisition.
c.
property taxes related to periods prior to acquisition that are assumed by the buyer.
d.
costs incurred to have existing buildings removed to make room for the construction of new buildings.
67. Which of the following best describes the approach prescribed in IAS 38, “Intangible Assets”?
a.
Expense all research and development costs.
b.
Capitalize all research and development costs.
c.
Expense all research costs and capitalize all development costs.
d.
Capitalize all research costs and expense all development costs.
1. The sum-of-the-years'-digits method of depreciation is being used for a machine with a five-year estimated useful
life. What would be the fraction applied to the cost to be depreciated in the fourth year?
a.
2/5
b.
4/5
c.
2/15
d.
4/15
2. Depreciation of noncurrent operating assets is an accounting process for the purpose of

a.
reporting declining asset values on the balance sheet.
b.
allocating asset costs over the periods benefited by use of the assets.
c.
accounting for costs to reflect the change in general price levels.
d.
setting aside funds to replace assets when their economic usefulness expires.
3. Which of the following principles best describes the conceptual rationale for the methods of matching
depreciation expense with revenues?
a.
Partial recognition
b.
Immediate recognition
c.
Systematic and rational allocation
d.
Associating cause and effect
4. Information needed to compute a depletion charge per unit includes the

a.
estimated total amount of resources available for removal.
b.
amount of resources removed during the period.
c.
cumulative amount of resources removed.
d.
amount of resources sold during the period.
5. The composite depreciation method
a.
is applied to a group of homogeneous assets.
b.
is an accelerated method of depreciation.
c.
does not recognize gain or loss on the retirement of specific assets in the group.
d.
excludes salvage value from the base of the depreciation calculation.
6. In order to calculate the third year's depreciation on an asset using the sum-of- the-years'-digits method,
which of the following must be known about the asset?
a.
Its acquisition cost
b.
Its estimated salvage value
c.
Its estimated useful life
d.
All of these must be known.
7. Which of the following statements is the assumption on which straight-line depreciation is based?
a.
The operating efficiency of the asset decreases in later years.
b.
Service value declines as a function of obsolescence rather than time.
c.
Service value declines as a function of time rather than use.
d.
Physical wear and tear are more important than economic obsolescence.
8. A method that ignores salvage value in the early years of the asset’s life in calculating periodic
depreciation expense is the
a.
productive-output method.
b.
group composite method.
c.
sum-of-the-years'-digits method.
d.
double-declining-balance method.
9. Which of the following is NOT required to be reported in the financial statements or disclosed in the
accompanying notes?
a.
Balances of major classes of noncurrent operating assets at the balance sheet date
b.
Gross historical cost and accumulated amortization for intangible assets at the balance sheet date
c.
Gross historical cost and accumulated depreciation for tangible noncurrent operating assets at the balance sheet date
d.
A general description of the cost allocation methods used with respect to major classes of noncurrent operating assets
10. Which of the following depreciation methods most closely approximates the method used to deplete the
cost of natural resources?
a.
Straight-line method
b.
Double-declining-balance method
c.
Sum-of-the-years'-digits method
d.
Units-of-production method
11. Which of the following depreciation methods applies a uniform depreciation rate each period to an asset's
book value?
a.
Straight-line
b.
Declining-balance
c.
Units-of-production
d.
Sum-of-the-years'-digits
12. Which of the following reasons provides the best theoretical support for accelerated depreciation?
a.
Assets are more efficient in early years and initially generate more revenue.
b.
Expenses should be allocated in a manner that "smoothes" earnings.
c.
Repairs and maintenance costs will probably increase in later periods, so depreciation should decline.
d.
Accelerated depreciation provides easier replacement because of the time value of money.
13. When the estimate of an asset's useful life is changed,

a.
depreciation expense for all past periods must be recalculated.
b.
there is no change in the amount of depreciation expense recorded for future years.
c.
only the depreciation expense in the remaining years is changed.
d.
None of these are true.
14. Which of the following depreciation methods is computed in the same way as depletion?
a.
Straight-line
b.
c.
Double-declining-balance
d.
Productive-output
15. In accordance with generally accepted accounting principles, which of the following methods of
amortization is normally recommended for intangible assets?
a.
b.
Straight-line
c.
Group composite
d.
Double-declining-balance
16. The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were
a.
less than current market value.
b.
greater than cost.
c.
greater than book value.
d.
less than book value.
17. When an exchange of similar assets involves a gain,

a.
the recorded amount of the new asset is the cost of the old asset plus any cash paid.
b.
the recorded amount of the new asset is the net book value of the old asset plus any cash paid.
c.
the recorded amount of the new asset is its fair market value less any cash paid.
d.
None of these are true.
18. On January 1 Murphy Company acquired a machine with a four-year useful life. Murphy estimates the
salvage value of the machine will be equal to ten percent of the acquisition cost. The company is debating between using
either the double-declining-balance method or the sum-of-the-years'-digits method of depreciation. Comparing the
depreciation expense for the first two years computed using these methods, the depreciation expense for the double-
declining-balance method (compared to the sum-of-the-years'-digits method) will match which of the patterns shown
below?
First Second
Year Year
a.
Lower Lower
b.
Lower Higher
c.
Higher Lower
d.
Higher Higher

19. Legal fees incurred in successfully defending a patent suit should be capitalized when the patent has been
Internally Purchased from

Developed an Inventor
a.
Yes No
b.
Yes Yes
c.
No Yes
d.
No No

20. Which of the following utilizes the straight-line depreciation method?
Composite Group
Depreciation Depreciation
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No

21. When assets are exchanged at a loss in an exchange lacking commercial substance, the basis of the new
asset is usually
a.
the list price of the new asset.
b.
the book value of the old asset plus any cash paid on the trade-in.
c.
the fair market value of the new asset.
d.
either the book value of the old asset plus any cash paid on the trade-in or the fair market value of the new asset.
22. A depreciable asset has an estimated 15 percent salvage value. At the end of its estimated useful life, the
accumulated depreciation would equal the original cost of the asset under which of the following depreciation methods?
Productive- Sum-of-the- Double-

Output Years'-Digits Declining-Balance
a.
Yes No No
b.
No No No
c.
No Yes No
d.
Yes Yes Yes

23. A company using the group depreciation method for its delivery trucks retired one of the trucks after the
average service life of the group was reached. Cash proceeds were received from a salvage company. The net carrying
amount of these group asset accounts would be decreased by the
a.
original cost of the truck.
b.
original cost of the truck less the cash proceeds.
c.
cash proceeds received.
d.
cash proceeds received and original cost of the truck.
24. In recording the trade of one asset for another, which of the following accounts is usually debited?
a.
Cash
b.
Accumulated Depreciation-Old Asset
c.
Gain on Exchange of Asset
d.
None of these
25. Stanley Company purchased a machine that was installed and placed in service on January 2, 2013, at a
total cost of $680,000. Residual value was estimated at $70,000. The machine is being depreciated over ten years by the
double-declining-balance method. For the year 2014, Stanley should record depreciation expense of
a.
$108,800
b.
$97,600
c.
$68,000
d.
$61,000
26. Lex Soaps purchased a machine on January 1, 2013, for $18,000 cash. The machine has an estimated
useful life of four years and a salvage value of $4,700. Lex uses the double-declining-balance method of depreciation for
all its assets. What will be the machine's book value as of December 31, 2014?
a.
$5,100
b.
$4,700
c.
$4,500
d.
$4,300
27. Hyde Company traded in an old machine with a book value of $15,000 on a new machine. The exchange
did not have commercial substance. The new machine, which had a cash price of $75,000, was purchased for $64,000 cash
plus the old machine. Hyde should record the cost of the new machine as
a.
$64,000.
b.
$71,000.
c.
$75,000.
d.
$79,000.
28. Underwood Company purchased a machine on January 2, 2013, for $1,000,000. The machine has an
estimated useful life of five years and a salvage value of $100,000. Depreciation was computed by the 150% declining-
balance method. The accumulated depreciation balance at December 31, 2014, should be
a.
$360,000.
b.
$459,000.
c.
$490,000.
d.
$510,000.
29. Mantle Company exchanged a used autograph-signing machine with Maris Company for a similar machine
with less use. Mantle's old machine originally cost $50,000 and had accumulated depreciation of $40,000, as well as a
market value of $40,000, at the time of the exchange. Maris' old machine originally cost $60,000 and at the time of the
exchange had a book value of $30,000 and a market value of $32,000. Maris gave Mantle $8,000 cash as part of the
exchange. The exchange lacked commercial substance. Mantle should record the cost of the new machine at
a.
$8,000.
b.
$10,000.
c.
$16,000.
d.
$32,000.
30. Zenith Corporation bought a machine on January 1, 2014. In purchasing the machine, the company paid
$40,000 cash and signed an interest-bearing note for $105,000. The estimated useful life of the machine is five years, after
which time the salvage value is expected to be $10,000. Given this information, how much depreciation expense would be
recorded for the year ending December 31, 2015, if the company uses the sum-of-the-years'-digits depreciation method?
a.
$45,000
b.
$36,000
c.
$40,000
d.
$34,000
31. On January 1, 2014, Jameson Company purchased equipment at a cost of $420,000. The equipment was
estimated to have a useful life of five years and a salvage value of $60,000. Jameson uses the sum-of-the-years'-digits
method of depreciation. What should the accumulated depreciation be at December 31, 2017?
a.
$240,000
b.
$288,000
c.
$336,000
d.
$360,000
32. On June 30, 2014, a fire in Walnut Company's plant caused the total loss of a production machine. The
machine was being depreciated at $20,000 annually and had a carrying amount of $160,000 at December 31, 2013. On the
date of the fire, the fair value of the machine was $220,000, and Walnut received insurance proceeds of $200,000 in
October 2014. In its income statement for the year ended December 31, 2014, what amount should Walnut recognize as a
gain or loss on disposition?
a.
$0
b.
$20,000 loss
c.
$40,000 gain
d.
$50,000 gain
33. On January 1, 2012, Costas Co. purchased a new machine for $1,250,000. The new machine has an
estimated useful life of five years and the salvage value was estimated to be $250,000. Costas uses the sum-of-the-years'-
digits method of depreciation. The amount of depreciation expense for 2014 is
a.
$200,000.
b.
$250,000.
c.
$300,000
d.
$416,667
34. On December 2, 2014, Loofa Company, which operates a furniture rental business, traded in a used
delivery truck with a carrying amount of $5,400 for a new delivery truck having a list price of $16,000 and paid a cash
difference of $7,500 to the dealer. The used truck had a fair value of $6,000 on the date of the exchange. The exchange has
commercial substance. At what amount should the new truck be recorded on Loofa's books?
a.
$10,600
b.
$12,900
c.
$13,500
d.
$16,000
35. On January 1, 2014, Ashton Company purchased equipment at a cost of $570,000. The equipment was
estimated to have a useful life of five years and a salvage value of $60,000. Ashton uses the sum-of-the-years'-digits
method of depreciation. What should the accumulated depreciation be at December 31, 2016?
a.
$340,000
b.
$408,000
c.
$456,000
d.
$510,000
36. In January, Fanning Corporation entered into a contract to acquire a new machine for its factory. The
machine, which had a cash price of $400,000, was paid for as follows:
Down payment ..........................................
$ 30,000
Note payable in 10 equal monthly installments .........
240,000
1,000 shares of Hunter common stock with an agreed
value of $50 per share ..............................
50,000
Total .................................................
$320,000
Prior to the machine's use, installation costs of $10,000 were incurred. The machine has an estimated useful life of ten
years and an estimated salvage value of $10,000. What should Hunter record as depreciation expense for the first year
under the straight-line method?
a.
$38,100
b.
$39,100
c.
$40,000
d.
$41,000
37. Meteor Motor Sales exchanged a car from its inventory for a computer to be used as a noncurrent operating
asset. The following information relates to this exchange that took place on July 31, 2014:
Carrying amount of the car ............................
$30,000
Listed selling price of the car .......................
45,000
Fair value of the computer ............................
43,000
Cash difference paid by Meteor ........................
5,000
The exchange has commercial substance.
On July 31, 2014, how much profit should Meteor recognize on this exchange?
a.
$0
b.
$8,000
c.
$10,000
d.
$13,000
38. The Bromley Company purchased a tooling machine in 2004 for $120,000. The machine was being
depreciated on the straight-line method over an estimated useful life of 20 years, with no salvage value. At the beginning of
2014, when the machine had been in use for ten years, the company paid $20,000 to overhaul the machine. As a result of
this improvement, the company estimated that the useful life of the machine would be extended an additional five years.
What would be the depreciation expense recorded for the machine in 2014?
a.
$4,000
b.
$5,333
c.
$6,000
d.
$7,333
39. Stiller Company owns a machine that was bought on January 2, 2011, for $376,000. The machine was
estimated to have a useful life of five years and a salvage value of $24,000. Stiller uses the sum-of-the-years'-digits method
of depreciation. At the beginning of 2014, Stiller determined that the useful life of the machine should have been four years
and the salvage value $35,200. For the year 2014, Stiller should record depreciation expense on this machine of
a.
$19,200.
b.
$44,400.
c.
$59,200.
d.
$70,400.
40. Winwood Construction purchased a crane on January 1, 2013, for $102,750. At the time of purchase, the
crane was estimated to have a life of six years and a residual value of $6,750. In 2015, Winwood determined that the crane
had a total useful life of seven years and a residual value of $4,500. If Winwood uses the straight-line method of
depreciation, what will be the depreciation expense for the crane in 2015?
a.
$16,000
b.
$13,250
c.
$9,464
d.
$8,000
41. At the start of its business, Londres Corp. decided to use the composite method of depreciation and
prepared the following schedule of machinery owned.
Total
Estimated
Estimated Life
Cost
Salvage Value
in Years
Machine A
$350,000
$25,000
20
Machine B
130,000
10,000
15
Machine C
25,000
--
5
Londres computes depreciation on the straight-line method. Based on the information presented, the composite life of these
assets (in years) should be
a.
13.4
b.
14.4
c.
15.9
d.
17.1
42. A truck that cost $12,000 was originally being depreciated over four years using the straight-line method
with no salvage value. If after one year, it was decided that the truck would last an additional four years (or a total of five
years), the second year's depreciation would be
a.
$1,500
b.
$2,250
c.
$2,400
d.
$3,000
43. On January 1, 2013, Canal Locks Corporation purchased drilling equipment for $11,500. The equipment
has an estimated useful life of four years and a salvage value of $200. Given this information, if Canal uses the sum-of-the-
years'-digits method of depreciation and then trades the equipment for new equipment with a fair market value of $16,000
on December 31, 2014, and pays $8,000 cash in the exchange, assuming the exchange has commercial substance, the new
equipment should be recorded at
a.
$16,000.
b.
$12,475.
c.
$11,590.
d.
$8,110.
44. On January 1, 2013, Pastel Colors Corporation purchased drilling equipment for $11,500. The equipment
has an estimated useful life of four years and a salvage value of $200. Assuming that Pastel Colors uses the straight-line
method of depreciation, if it trades the equipment for new equipment with a list price of $15,500 on December 31, 2014,
and pays $4,050 in the exchange, assuming the exchange lacks commercial substance, the new equipment should be
recorded at
a.
$15,500.
b.
$11,450.
c.
$9,850.
d.
$9,900.
45. Lovejoy Co. purchased a patent on January 1, 2011, for $714,000. The patent was being amortized over its
remaining legal life of 15 years expiring on January 1, 2026. During 2014, Lovejoy determined that the economic benefits
of the patent would not last longer than 10 years from the date of acquisition. What amount should be charged to patent
amortization expense for the year ended December 31, 2014?
a.
$47,600
b.
$71,400
c.
$81,600
d.
$142,800
46. Morgan Trucking traded a used truck with a book value of $1,700 and a fair market value of $2,300 for a
new truck with a list price of $17,800. Morgan agreed to pay $13,000 in cash for the exchange in addition to giving up the
used truck. Assuming the exchange has commercial substance, at what amount should the new truck be recorded?
a.
$17,800
b.
$15,300
c.
$14,700
d.
None of these
47. Ibarra Carpet traded cleaning equipment with a cost of $27,000 and accumulated depreciation of $5,250
for new equipment with a fair market value of $14,500. Assuming the exchange lacks commercial substance, Ibarra should
record the new equipment at
a.
$14,750.
b.
$13,750.
c.
$14,500.
d.
$7,500.
48. During 2009, Cabot Machine Company spent $352,000 on research and development costs for an
invention. This invention was patented on January 2, 2010, at a nominal cost that was expensed in 2010. The patent has a
legal life of 17 years and an estimated useful life of 8 years. In January 2014, Cabot paid $32,000 for legal fees in a
successful defense of the patent. Amortization for 2014 should be
a.
$2,462.
b.
$8,000.
c.
$32,000.
d.
$52,000.
49. On January 1, 2010, Elaine Company purchased for $600,000, a trademark with an estimated useful life of
16 years. In January 2014, Elaine paid $90,000 for legal fees in a successful defense of the trademark. Trademark
amortization expense for the year ended December 31, 2014, should be
a.
$37,500.
b.
$43,125.
c.
$45,000.
d.
$90,000.
50. Cavallo Company acquired a tract of land containing an extractable natural resource. Cavallo is required
by the purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural
resource. Geological surveys estimate that the recoverable reserves will be 2,500,000 tons and that the extraction will be
completed in five years. Relevant cost information follows:
Land .................................................
$9,000,000
Exploration and development costs ....................
$1,000,000
Expected cash flows for restoration costs ............
$1,500,000
Credit-adjusted risk free interest rate ..............
10%
What should be the depletion charge per ton of extracted material?

a.
$4.00
b.
$4.37
c.
$3.97
d.
$3.60
51. Backhoe Construction Company recently exchanged an old truck, which cost $118,000 and was one-third
depreciated, and paid $80,000 cash for a used crane having a current fair value of $140,000. Assuming the exchange has
commercial substance, at what amount should the crane be recorded on the books of Backhoe?
a.
$80,000
b.
$118,000
c.
$140,000
d.
$152,000
52. In January 2014, Router Mining Corporation purchased a mineral mine for $7,200,000 with removable ore
estimated by geological surveys at 4,320,000 tons. The property has an estimated value of $720,000 after the ore has been
extracted. Router incurred $2,160,000 of development costs preparing the property for the extraction of ore. During 2014,
540,000 tons were removed and 480,000 tons were sold. For the year ended December 31, 2014, Router should include
what amount of depletion in its cost of goods sold?
a.
$720,000
b.
$810,000
c.
$960,000
d.
$1,080,000
53. In 2013, Pauley Company paid $1,000,000 to purchase land containing a total estimated 160,000 tons of
extractable mineral deposits. The estimated value of the property after the mineral has been removed is $200,000.
Extraction activities began in 2014, and by the end of the year, 20,000 tons had been recovered and sold. In 2015,
geological studies indicated that the total amount of mineral deposits had been underestimated by 25,000 tons. During
2015, 30,000 tons were extracted, and 28,000 tons were sold. What is the depletion rate per ton (rounded to the nearest
cent) in 2015?
a.
$4.24
b.
$4.32
c.
$4.85
d.
$5.19
54. In January 2014, Bevis Company exchanged an old machine, with a book value of $256,000 and a fair
value of $260,000, and paid $40,000 cash for a similar used machine having a fair value of $300,000. The exchange lacked
commercial substance. At what amount should the machine acquired in the exchange be recorded on Bevis' books?
a.
$256,000
b.
$296,000
c.
$300,000
d.
$304,000
55. Nielsen Cargo Company recently exchanged an old truck, which cost $108,000 and was one-third
depreciated, and paid $70,000 cash for a similar truck having a current fair value of $130,000. The exchange lacked
commercial substance. At what amount should the truck be recorded on the books of Nielsen?
a.
$70,000
b.
$108,000
c.
$130,000
d.
$142,000
56. On July 1, Toucan Corporation, a calendar-year company, received a condemnation award of $150,000 as
compensation for the forced sale of a plant located on company property that stood in the path of a new highway. On this
date, the plant building had a depreciated cost of $75,000 and the land cost was $25,000. On October 1, Toucan purchased
a parcel of land for a new plant site at a cost of $62,500. Ignoring income taxes, Toucan should report in its income
statement for the year ended December 31 a gain of
a.
$0.
b.
$12,500.
c.
$37,500.
d.
$50,000.
57. The Chisholm Company purchased a machine on November 1, 2005, for $148,000. At the time of
acquisition, the machine was estimated to have a useful life of ten years and an estimated salvage value of $4,000.
Chisholm has recorded monthly depreciation using the straight-line method. On July 1, 2014, the machine was sold for
$13,000. What should be the loss recognized from the sale of the machine?
a.
$4,000
b.
$5,000
c.
$10,200
d.
$13,000
58. In January 2014, Shone Company exchanged an old machine, with a book value of $156,000 and a fair
value of $140,000, and paid $40,000 cash for a similar used machine having a list price of $200,000. The exchange had
commercial substance. At what amount should the machine acquired in the exchange be recorded on Shone's books?
a.
$200,000
b.
$196,000
c.
$184,000
d.
$180,000
59. Raptor Company owns a tract of land that it purchased in 2008 for $200,000. The land is held as a future
plant site and has a fair market value of $280,000 on July 1, 2014. Talon Company also owns a tract of land held as a future
plant site. Talon paid $360,000 for the land in 2013 and the land has a fair market value of $380,000 on July 1, 2014. On
this date, Raptor exchanged its land and paid $100,000 cash for the land owned by Talon. The exchange had commercial
substance. At what amount should Raptor record the land acquired in the exchange?
a.
$280,000
b.
$300,000
c.
$320,000
d.
$380,000
60. A company owns a piece of land that originally cost $10,000 and has a fair market value of $8,000. It is
exchanged along with $5,000 cash for another piece of land having a fair value of $13,000. The exchange had commercial
substance. The proper journal entry to record this transaction is
a.
Land (new)........................ 15,000
Land (old)...................... 10,000
Cash ........................... 5,000
b.
Land (new) ....................... 13,000
Loss on Exchange ................. 2,000
Land ........................... 10,000
Cash ........................... 5,000
c.
Land (new)........................ 18,000
Land (old) ..................... 10,000
Cash ........................... 5,000
Gain on Exchange ............... 3,000
d.
Land (new)........................ 13,000
Retained Earnings ................ 2,000
Land (old)...................... 10,000
Cash ........................... 5,000

61. In October 2014, Pollock Company exchanged a used packaging machine having a book value of $240,000
for a new machine and paid a cash difference of $30,000. The market value of the used packaging machine was determined
to be $280,000. The exchange had commercial substance. In its income statement for the year ended December 31, 2014,
how much gain should Pollock recognize on this exchange?
a.
$0
b.
$10,000
c.
$30,000
d.
$40,000
62. Which of the following assets generally is required to be tested at least annually for impairment?
a.
Machinery
b.
Patent
c.
Renewable broadcast license
d.
Copyright
63. Which of the following represents the maximum amortization period mandated by current generally
accepted accounting principles for amortizable intangible asset?
a.
10 years
b.
20 years
c.
40 years
d.
No arbitrary cap on the useful life of amortizable intangible assets has been established.
64. The impairment test for an intangible asset with an indefinite life compares the
a.
fair value of the asset to its book value.
b.
sum of the undiscounted cash flows expected to be generated by the asset to its book value.
c.
sum of the discounted cash flows expected to be generated by the asset to its fair value.
d.
sum of the undiscounted cash flows expected to be generated by the asset to its fair value.
65. The impairment test for an intangible asset with a definite life compares the
a.
fair value of the asset to its book value.
b.
sum of the undiscounted cash flows expected to be generated by the asset to its book value.
c.
sum of the discounted cash flows expected to be generated by the asset to its fair value.
d.
sum of the undiscounted cash flows expected to be generated by the asset to its fair value.
66. Which of the following assets generally is required to be tested at least annually for impairment?
a.
Machinery
b.
Patent
c.
Goodwill
d.
Copyright
67. Five years ago, Monroe, Inc., purchased a patent for $110,000. Lower demand for the product produced
under this patent necessitates that an impairment test be made. On the date of purchase, the patent had an estimated useful
life of eleven years. It currently has a remaining useful life of four years. The current fair value of the patent is $43,000.
Company management estimates that the patent will generate future cash flows of $12,000 per year for the next four years.
The amount of the impairment loss to be recognized is

a.
$50,000.
b.
$60,000.
c.
$12,000.
d.
$17,000.

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1. Which of the following is NOT correct?

7. Which one of the following statements is NOT correct?

Net Realizable Value

Allowance for Uncollectible Accounts

This entry would be made when:

19. Which of the following would NOT be classified as cash?

Cash received on accounts receivable ..................

Allowance for Doubtful Accounts

Allowance for Doubtful Accounts (before adjustment)..

The net realizable value of the accounts receivable at December 31 should be

Collection of accounts written off in prior years..

(customer credit was re-established) ...........

Credit sales, year-ended December 31 ...........

Sales Returns and Allowances, 2014 ................

Allowance for Doubtful Accounts at January 1 ......

Quanto's doubtful accounts expense for the year ended December 31 is

The following additional information is available for the current year:

Allowance for Doubtful Accounts:

Balance, January 1 .............................

Windward’s accounts receivable turnover is

Sales (90 percent collected in the first year) .......

What is the cash balance at December 31 of the first year?

What is the correct cash balance at July 31?

What is the corrected cash balance at February 28?

Data per bank statement for the month of April follow:

53. A debit balance in the Allowance for Doubtful Accounts

55. Estimation of uncollectible accounts receivable based on a percentage of sales

Accounts receivable, January 1, 2014

Accounts receivable collected during 2014

Cash sales during 2014

Inventory, January 1, 2014

Inventory, December 31, 2014

Purchases of inventory during 2014

What is Closer Company’s accounts receivable balance at December 31, 2014?

60. The following information is available for Longview Company:

Credit sales during 2014

Allowance for Doubtful Accounts, Dec. 31, 2013

Accounts receivable written off during 2014

64. Accounts receivable usually are factored

What is the balance in the warranty liability account on January 1, 2015?

ANS: A PTS: 1 DIF: Easy OBJ: LO 1

9. The installment method of recognizing revenue

ANS: B PTS: 1 DIF: Medium OBJ: LO 3

12. When using the installment sales method,

20. The cost recovery method is

21. Franchise fees are properly recognized as revenue

22. Goods on consignment should be included in the inventory of

Percentage of completion ........

Costs incurred ........................................

How much loss should Gunner have recognized in 2014?

Gross profit recognized at December 31, 2014 ..........

Billings during the year ..................

The realized gross profit for 2015 would be

Costs incurred to date ................................

Less contract billings ......................

Cost of uncompleted contract in excess of

How much cash was collected in 2014 on this contract?

2014 sales ...........................

The realized gross profit for 2015 is

The balance in the deferred gross profit account at December 31 should be

ANS: A PTS: 1 DIF: Medium OBJ: LO 2

Contract costs incurred during 2015 were

2014 sales ..........................

The realized gross profit for 2015 is