ACT 5741 Midterm Exam. 142445

1. Theoretically, which of the following costs incurred in connection with a machine purchased

for use in a company's manufacturing operations would be capitalized?

Insurance on

machine while

in transit

A.

B.

C.

D.



Yes

Yes

No

No



Testing and

preparation of

machine for use

Yes

No

Yes

No



2. 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. Added to the cost of the land

B. Subtracted from the cost of the land

C. Expensed

D. None of the above



3. During 2005, Burr Co. had the following transactions pertaining to its new office building:

Purchase price of land

Legal fees for contracts to purchase land

Architects' fees

Demolition of old building on site

Sale of scrap from old building

Construction cost of new building (fully completed)



$ 60,000

2,000

8,000

5,000

3,000

350,000



In Burr's December 31, 2005 balance sheet, what amounts should be reported as the cost of land

and cost of building?

Land

A.



Building



$60,000



$360,000



B.

C.

D.



$62,000

$64,000

$65,000



$360,000

$358,000

$362,000



4. For 2011, Rahal's Auto Parts estimates bad debt expense at 1% of credit sales. The company

reported accounts receivable and an allowance for uncollectible accounts of $86,500 and $2,100,

respectively, at December 31, 2010. During 2011, Rahal's credit sales and collections were

$404,000 and $408,000, respectively, and $2,340 in accounts receivable were written off

Rahal's accounts receivable at December 31, 2011, are:

A. $90,500.

B. $88,160.

C. $82,500.

D. $80,160.



5. On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with

credit terms 2/10, n/30. Flores uses the gross method of accounting for cash discounts.What is the

correct entry for Flores on December 5, assuming the correct payment was received on that date?



a.



b.



c.



d.



Cash

Accounts Receivable

Discounts revenue



8,000



Cash

Accounts Receivable

Discounts revenue



8,000



Cash

Accounts Receivable

Interest revenue



8,150



Cash

Accounts Receivable



8,000



7,840

160

7,840

160

8,000

160

8,000



6. On September 1, 2005, Bertz, Inc. exchanged a delivery truck for a parcel of land. Bertz

bought this truck in 2003 for $10,000. At September 1, 2005, the truck had a book value of

$6,500 and a fair market value of $5,000. Bertz gave $6,000 in cash in addition to the truck as



part of this transaction. It is expected that the cash flows from the assets will be significantly

different. The previous owner of the land had listed the land for sale at $12,000. At what

amount should Bertz record the land?

A.

B.

C

D.



$11,000

$11,500

$12,000

$12,500



7. Caravan Corporation owned a warehouse located in the path of a proposed highway.

Caravan bought the land in 1962 for $10,000. That same year, it built the warehouse at a cost of

$50,000. In 2005, after prolonged litigation, the state exercised its right of eminent domain and

condemned the property, awarding Caravan $200,000. Depreciation accumulated to the date of

the award was $45,000. On its 2005 federal income tax return, Caravan elected not to recognize

the gain since replacement property was bought for $225,000. For income statement purposes,

Caravan should recognize a gain in 2005 of

A.

B.

C.

D.



0

$160,000

$185,000

$200,000



8. Crowder Company acquired a tract of land containing an extractable natural resource.

Crowder 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 5,000,000 tons, and that the land will have a value of $1,000,000 after

restoration. Relevant cost information follows:

Land



$9,000,000



Estimated restoration costs



1,500,000



If Crowder maintains no inventories of extracted material, what should be the charge to

depletion expense per ton of extracted material?

A.

B.

C.

D.



$2.10

$1.90

$1.80

$1.60



9. In October 2005 Ewing Company exchanged an old packaging machine, which cost $120,000



and was 50% depreciated, for a dissimilar used machine and paid a cash difference of $16,000.

The market value of the old packaging machine was determined to be $70,000. The two

machines are expected to have significantly different cash flows. For the year ended December

31, 2005, what amount of gain or loss should Ewing recognize on this exchange?

A.

B.

C.

D.



$0

$6,000 loss

$10,000 loss

$10,000 gain



10. On January 1, 2005, Grade Company paid $300,000 for 20,000 shares of Medium Company’s

common stock which represents a 15% investment in Medium. Grade does not have the ability

to exercise significant influence over Medium. Medium declared and paid a dividend of $1 a

share to its stockholders during 2005. Medium reported net income of $260,000 for the year

ended December 31, 2005, and had a market value of $300,000 at December 31, 2005. The

balance in Grade’s balance sheet account “Investment in Medium Company” at December 31,

2005, should be

A.

B.

C.

D.



$280,000

$300,000

$319,000

$339,000



11. On December 29, 2005, BJ Co. sold a marketable equity security that had been purchased on

January 4, 2004. BJ owned no other marketable equity security. An unrealized loss was

reported as components of “Other comprehensive income” and “Accumulated other

comprehensive income” in the 2004 balance sheet. A realized gain was reported in the 2005

income statement. Was the marketable equity security classified as a trading security and did its

2004 market price decline exceed its 2005 market price recovery?

Trading



2004 market price decline

exceeded 2005 market price recovery



A.

B.

C.

D.



Yes

Yes

No

No



Yes

No

Yes

No



12. In 2005, Wallace Corporation purchased marketable securities, and at 12/31/05, had the

following marketable equity securities:

Cost



Market



Unrealized gain (loss)



In trading portfolio:

Security X

Security Y

Totals



$80,000

15,000

$95,000



$50,000

20,000

$70,000



$(30,000)

5,000

$(25,000)



$60,000

90,000

$150,000



$70,000

45,000

$115,000



$10,000

(45,000)

$(35,000)



In available-for-sale portfolio:

Security Q

Security R

Totals



At December 31, 2005, what amounts should be charged to



Net income

A.

B.

C.

D.



Other comprehensive income



$0

$25,000

$25,000

$60,000



$60,000

$0

$35,000

$0



13. Dey Corp. began operations in 2005. An analysis of Dey’s marketable securities portfolio

acquired in 2005 shows the following totals at December 31, 2005, for available-for-sale and heldto-maturity securities:

Available-for-sale securities

Aggregate cost

Aggregate market value



Held-to-maturity securities



$45,000



$65,000



39,000



57,000



What amount of unrealized loss should Dey report in its December 31, 2005 balance sheet?



A.

B.

C.

D.



$14,000

$9,000

$7,000

$6,000



14. For marketable debt securities included in a held-to-maturity portfolio, which of the

following amounts should be included in the period’s net income?

I.

II.

III.

A.

B.

C.

D.



Unrealized temporary losses during the period.

Gains on securities sold during the period.

Permanent decline in value.



III only

II only

II and III

I, II and III



15. From a theoretical viewpoint, which of the following costs would be considered

inventoriable?

Freight-In

A.

B.

C.

D.



Warehousing



No

No

Yes

Yes



No

Yes

No

Yes



16. The following data appeared in the accounting records of a retail store for the year ended

December 31, 2004:

Sales

Purchases

Inventories:

January 1

December 31

Sales commissions

How much was the gross margin?



$150,000

70,000

35,000

50,000

5,000



A.

B.

C.

D.



$65,000

$75,000

$90,000

$95,000



17. The following data were available from Mith Co.'s records on December 31, 2005:

Finished goods inventory, 1/1/05

Finished goods inventory, 12/31/05

Cost of goods manufactured

Loss on sale of plant equipment



$120,000

110,000

520,000

50,000



The cost of goods sold for 2005 was

A.

B.

C.

D.



$510,000

$520,000

$530,000

$580,000



18. Lin Co. sells its merchandise at a gross profit of 30%. The following figures are among those

pertaining to Lin's operations for the 6 months ended June 30, 2005:

Sales

$200,000

Beginning inventory

50,000

Purchases

130,000

On June 30, 2005, all of Lin's inventory was destroyed by fire. The estimated cost of this

destroyed inventory was

A.

B.

C.

D.



$120,000

$70,000

$40,000

$20,000



19. On December 31, 2004, Kern Company adopted the dollar-value LIFO inventory method.

All of Kern’s inventories constitute a single pool. The inventory on December 31, 2004, using the

dollar-value LIFO inventory method was $600,000. Inventory data for 2005 are as follows:

2/31/05 inventory at year-end prices

Relevant price index at year-end (base year 2004)



$780,000

120



Under the dollar-value LIFO inventory method, Kern’s inventory at December 31, 2005, would

be

A. $650,000

B. $655,000



C. $660,000

D. $720,000



20. In preparing its bank reconciliation for the month of March 2006, Derby Company has

available the following information:

Balance per bank statement, 3/31/06



$36,050



Deposit in transit, 3/31/06



6,250



Outstanding checks, 3/31/06



5,750



Credit erroneously recorded by bank in Derby's account, 3/12/06



250



Bank service charges for March



50



What should be the correct balance of cash at March 31, 2006?

A. $35,250

B. $36,250

C. $36,300

D. $36,550



21. On March 31, 2011, Vale Co. had an unadjusted credit balance of $1,000 in its allowance for

uncollectible accounts. An analysis of Vale's trade accounts receivable at that date revealed the

following:

Age



Estimated uncollectible

Amount



0—30 days

31—60 days

Over 60 days



$60,000

4,000

2,000



5%

10%

$1,400



What amount should Vale report as allowance for uncollectible accounts in its March 31, 2011

balance sheet?

A. $4,800

B. $4,000

C. $3,800

D. $3,000



22. On September 1, 2005, a company borrowed cash and signed a 1-year interest-bearing note

on which both the principal and interest are payable on September 1, 2006. How will the note

payable and the related interest be classified in the December 31, 2005 balance sheet?

Note payable

A.

B.

C.

D.



Current liability

Noncurrent liability

Current liability

Noncurrent liability



Accrued interest

Noncurrent liability

Current liability

Current liability

No entry



23. A loss contingency for which the amount of loss can be reasonably estimated should be

accrued when the occurrence of the loss is

Reasonably

possible

A.

B.

C.

D.



Remote



Yes

Yes

No

No



No

Yes

No

Yes



24. Northwest Fur Co. started 2011 with $94,000 of merchandise inventory on hand. During

2011, $400,000 in merchandise was purchased on account with credit terms of 1/15, n/45. All

discounts were taken. Purchases were all made f.o.b. shipping point. Northwest paid freight

charges of $7,500. Merchandise with an invoice amount of $5,000 was returned for credit. Cost of

goods sold for the year was $380,000. Northwest uses a perpetual inventory system. What is

ending inventory assuming Northwest uses the gross method to record purchases?



A. $112,490.

B. $112,550.

C. $116,500.

D. $120,300.



25. Where should goods in transit that were recently purchased f.o.b. destination be included on

the balance sheet?

a. Accounts payable.

b. Inventory.

c. Equipment.

d. Not on the balance sheet.



26. In a period when costs are falling and inventory quantities are stable, the lowest taxable

income would be reported by using the inventory method of:

A. Weighted average.

B. LIFO.

C. Moving average.

D. FIFO.



27. Bond Company adopted the dollar-value LIFO inventory method on January 1, 2011. In

applying the LIFO method, Bond uses internal cost indexes and the multiple-pools approach. The

following data were available for Inventory Pool No. 3 for the two years following the adoption of

LIFO:

 



 



 



 



Ending Inventory

Year



At Current

Cost



At Year

End



Cost

Index



1/1/11

12/31/11

12/31/12



$300,000

345,600

420,000



$300,000

320,000

350,000



1.00

1.08

1.20



 



 



 



 



Under the dollar-value LIFO method the inventory at December 31, 2012, should be

A. $357,600.

B. $350,000.

C. $351,600.

D. None of the above



28. In applying LCM, market cannot be:

A. Less than net realizable value.

B. Greater than the normal profit.

C. Less than the normal profit margin.

D. Greater than net realizable value.



29. On July 8, a fire destroyed the entire merchandise inventory on hand of Larrenaga Wholesale

Corporation. The following information is available:

Sales, January 1 through July 8

Inventory, January 1

Purchase, January 1, through July 8

Gross profit ratio

Sales, January 1, through July 8

Inventory, January 1

Purchase, January 1 through July 8

Gross profit ratio



$700,000

130,000

610,000

30%

$700,000 

130,000

610,000

30%



What is the estimated inventory on July 8 immediately prior to the fire?

A. $192,000

B. $490,000

C. $510,000

D. $280,000



30. When computing the cost-to-retail percentage for the conventional retail method, included in

the denominator are:

A. Net markups and net markdowns.

B. Neither net markups nor net markdowns.

C. Net markups, but not net markdowns.

D. Net markdowns, but not net markups.



31. Cloverdale, Inc. uses the conventional retail inventory method to account for inventory. The

following information relates to current year's operations:

Cost

Beginning inventory and purchases

Net markups

Net markdowns

Net sales



$313,500



Retail

540,000

30,000

20,000

480,000



What amount should be reported as cost of goods sold for the year?

A. $273,600.

B. $272,861.

C. $275,000.

D. None of the above.



32. The acquisition costs of property, plant, and equipment do not include:

A. The ordinary and necessary costs to bring the asset to its desired condition and location for use.

B. The net invoice price.

C. Legal fees, delivery charges, installation, and any applicable sales tax.

D. Maintenance costs during the first 30 days of use



33. Which of the following is not a current liability?

A. Accounts payable.

B. A note payable due in 2 years.

C. Accrued interest payable.

D. Sales tax payable.



34. Gain contingencies usually are recognized in a company's income statement when:

A. Realized.

B. The amount can be reasonably estimated.

C. The gain is reasonably possible and the amount can be reasonable estimated.

D. The gain is probable and the amount can be reasonably estimated.



35. In the current year, Hanna Company reported warranty expense of $190,000 and the

warranty liability account increased by $20,000. What were warranty expenditures during the

year?

A. $190,000.

B. $170,000.

C. $210,000.

D. $0.



36. On November 5, 2010, a Dunn Corp. truck was in an accident with an auto driven by Bell.

Dunn received notice on January 12, 2011, of a lawsuit for $700,000 damages for personal

injuries suffered by Bell. Dunn Corp.’s counsel believes that it is probable that Bell will be

awarded an estimated amount in the range between $200,000 and $450,000 and that $300,000 is a

better estimate of potential liability than any other amount. Dunn’s accounting year ends on

December 31, and the 2010 financial statements were issued on March 2, 2011. What amount of

loss should Dunn accrue at December 31, 2010?

A.

B.

C.

D.



$0

$200,000

$300,000

$450,000



37. When bonds are sold at a premium and the effective interest method is used, at each interest

payment date, the interest expense:

A. Remains constant.

B. Is equal to the change in book value.

C. Increases.

D. Decreases



38. Which of the following is not a requirement for a qualified pension plan?

A. It cannot discriminate in favor of highly paid employees.

B. It must cover at least 80% of the employees.

C. It must be funded in advance of retirement.

D. Benefits must vest after a specified period of service, commonly five years.



39. Visor Co. maintains a defined benefit pension plan for its employees. The service cost

component of Visor’s net periodic pension cost is measured using the

A. Unfunded accumulated benefit obligation.



B. Unfunded vested benefit obligation.

C. Projected benefit obligation

D. Expected return on plan assets.



40. Mars Inc. has a defined benefit pension plan. On December 31 (the end of the fiscal year), the

company received the PBO report from the actuary. The following information was included in

the report: ending PBO, $110,000; benefits paid to retirees, $10,000; interest cost, $7,200. The

discount rate applied by the actuary was 8%. What was the beginning PBO?

A. $90,000.

B. $100,000.

C. $107,200.

D. $112,000.



41. When bonds are sold at a premium and the effective interest method is used, at each interest

payment date, the interest expense:

A. Remains constant.

B. Is equal to the change in book value.

C. Increases.

D. Decreases.



42. When the interest payment dates are March 1 and September 1, and the bonds are issued on

July 1, the amount of interest expense reported in the December 31 income statement for the year

of issue would be for:

A. Six months.

B. Four months.

C. Ten months.

D. Twelve months.



43. Downing Company issues $3,000,000, 6%, 5-year bonds dated January 1, 2012 on

January 1, 2012. The bonds pay interest semiannually on June 30 and December 31. The

bonds are issued to yield 5%. What are the proceeds from the bond issue?



2.50%

PV of a single sum for 5 periods



3.00%



5.00%



6.00%



0.88385



0.86261



0.78353



0.74726



PV of a single sum for 10 periods

PV of an annuity for 5 periods

PV of an annuity for 10 periods



0.7812

4.64583

8.75206



0.74409

4.57971

8.5302



0.61391

4.32948

7.72173



0.55839

4.21236

7.36009



a. $3,000,000

b. $3,129,896

c. $3,131,285

d. $3,130,385



44. On January 2, 2012, a calendar-year corporation sold 8% bonds with a face value of

$900,000. These bonds mature in five years, and interest is paid semiannually on June 30

and December 31. The bonds were sold for $830,400 to yield 10%. Using the effectiveinterest method of computing interest, how much should be charged to interest expense in 2012?

a. $72,000.

b. $83,040.

c. $83,316.

d. $90,000.



45. Kraft, Inc. sponsors a defined-benefit pension plan. The following data relates to the

operation of the plan for the year 2013.

Service cost

$ 250,000

Contributions to the plan

220,000

Actual return on plan assets

180,000

Projected benefit obligation (beginning of year)

2,400,000

Fair value of plan assets (beginning of year)

1,600,000



The expected return on plan assets and the settlement rate were both 10%. The amount

of pension expense reported for 2013 is

a. $250,000.

b. $310,000.

c. $330,000.

d. $490,000.



46 Winter Co. is being sued for illness caused to local residents as a result of negligence on the

company's part in permitting the local residents to be exposed to highly toxic chemicals from its

plant. Winter's lawyer states that it is probable that Winter will lose the suit and be found liable

for a judgment costing Winter anywhere from $1,600,000 to $8,000,000. However, the lawyer



states that the most probable cost is $4,800,000. As a

result of the above facts, Winter should accrue

a. a loss contingency of $1,600,000 and disclose an additional contingency of up to

$6,400,000.

b. a loss contingency of $4,800,000 and disclose an additional contingency of up to

$3,200,000.

c. a loss contingency of $4,800,000 but not disclose any additional contingency.

d. no loss contingency but disclose a contingency of $1,600,000 to $8,000,000.



47. During the year, Kiner Company made an entry to write off a $16,000 uncollectible account.

Before this entry was made, the balance in accounts receivable was $200,000 and the balance in

the allowance account was $18,000. The net realizable value of accounts receivable after the

write-off entry was

a. $200,000.

b. $198,000.

c. $166,000.

d. $182,000.



48. Which of the following is a current liability?

a. Preferred dividends in arrears

b. A dividend payable in the form of additional shares of stock

c. A cash dividend payable to preferred stockholders

d. All of these



49. Jenkins Corporation has $2,500,000 of short-term debt it expects to retire with proceeds

from the sale of 90,000 shares of common stock. If the stock is sold for $20 per share subsequent

to the balance sheet date, but before the balance sheet is issued, what

amount of short-term debt could be excluded from current liabilities?

a. $1,800,000

b. $2,500,000

c. $700,000

d. $0



50. A company gives each of its 50 employees (assume they were all employed continuously

through 2012 and 2013) 12 days of vacation a year if they are employed at the end of the year.

The vacation accumulates and may be taken starting January 1 of the next year. The employees

work 8 hours per day. In 2012, they made $21 per hour and in 2013 they made $24 per hour.

During 2013, they took an average of 9 days of vacation each. The company’s policy is to record

the liability existing at the end of each year at the wage rate for that year. What amount of

vacation liability would be reflected on the 2012 and 2013 balance sheets, respectively?

a. $100,800; $140,400

b. $115,200; $144,000

c. $100,800; $144,000

d. $115,200; $140,400