Question 12

The following information was taken from the annual report of Leno Inc.
2010
2009
BALANCE SHEET
Deferred income tax liability
$58,300
$59,400
INCOME STATEMENT
Income before taxes
Income tax expense
Net income
Effective income tax rate 35%

$108,000
(40,400)
$67,600

Based on this information, what journal entry should Leno make in 2010 to record its
income taxes?
A.
Income Tax Expense
Deferred Income Tax
Deferred Income Tax
Income Tax Payable
B.

Income Tax Expense
Deferred Income Tax
Income Tax Payable

C.

Income Tax Expense
Deferred Income Tax
Income Tax Payable

D.

Income Tax Expense
Deferred Income Tax
Income Tax Payable

Question 13

Which one of the following events does not have any impact on total working capital?
A. Warranty expense is accrued.
B. Payment of salaries previously accrued.
C. The board of directors declares a cash dividend to be paid next month.
D. Debt which was previously long-term matures next year.
Question 14

An increase in a deferred tax liability is recognized when
A. a tax audit by the IRS causes an increase in taxes due from a previous year’s tax return.

B. net income measured under GAAP is greater than taxable income on tax returns because
of temporary timing differences.
C. the amount of tax paid to the government is more than that calculated by the accountant
on the company’s tax return.
D. the tax accountant omits taxable revenue from the tax returns.
Question 15

Contingent liabilities whose ultimate payment is reasonably probable should be
A. disclosed in the footnotes to the financial statements.
B. recorded in the body of the balance sheet.
C. ignored.
D. disclosed in the auditor’s report.
Question 16

An income tax accrual at yearend will most likely
A. be a contingency.
B. decrease earnings per share.
C. decrease the debt/equity ratio.
D. decrease the debt/asset ratio
Question 17

The following information was taken from the annual report of Jones Inc.
2010
2009
BALANCE SHEET
Deferred income tax liability
$29,700
$28,300
INCOME STATEMENT
Income before taxes
Income tax expense
Net income
Effective income tax rate 40%

$88,000
(30,400)
$57,600

Based on this information, what journal entry should Jones make in 2010 to record its
income taxes?
A.
Income Tax Expense
Deferred Income Tax
Income Tax Payable
B.

Income Tax Expense
Deferred Income Tax
Income Tax Payable

C.

Income Tax Expense

Deferred Income Tax
Deferred Income Tax
Income Tax Payable
D.

Income Tax Expense
Deferred Income Tax
Income Tax Payable

Question 18

Countries throughout the world typically
A rely heavily on local stock and bond markets.
.
B. have less comprehensive accounting disclosure requirements than the U.S.
C. pay extremely large dividends to shareholders.
D carry a normal debt/equity ratio that is less than 25%.
.
Question 19

Brown Company is about to issue $300,000 of 8-year bonds paying a 12% interest rate
with interest payable semiannually. The effective interest rate for such securities is 10%.
Below are available time value of money factors that Brown chooses from to calculate
compounded interest.
8 periods, 16 periods,
8 periods, 16 periods,
10%
5%
12%
6%
Present Value of 1
0.46651
0.45811
0.40388
0.39365
Future Value of 1
2.14359
2.18287
2.47596
2.54035
Present Value of an Annuity of 1
5.33493
10.83777
4.96764
10.10590
Future Value of an Annuity of 1
11.43589
23.65749
12.29969
25.67253
To the closest dollar, how much can Brown expect to receive for the sale of these
bonds?
A. $319,339
B. $332,513
C. $229,371
D. $540,000
Question 20

The following information was extracted from the financial records of Lewis Company.
2010
2009
Balance Sheet
Notes payable
$400,000
$400,000
Less: Discount on notes payable
24,000
28,800

Income Statement
Interest expense

$32,800

$32,400

Based on this information, what is the effective interest rate on the notes payable?
A. 2.2%
B. 6.0%
C. 8.8%
D. 8.2%
Question 21

Darren Company issued $8,000 of 8% bonds on January 1, 2010, at a discount of $940.
The market rate of interest on the issue date was 10%. The carrying value of the bonds
on December 31, 2010 is
A. $7,126.
B. $8,940.
C. $6,994.
D. $7,060.
Question 22

If a company issues a note payable when the market rate of interest is less than the
stated rate, then
A the cash received will exceed the maturity value of the note.
.
B. the note will be discounted at maturity.
C. the cash received will be equal to the maturity value of the note.
D the note will be issued at a discount
.
Question 23

Crosson Company uses the straight-line method of amortization and had a ten-year, 12
percent, $1,000,000 bond issue outstanding that had been sold at a $12,000 discount in
2008. The bonds pay interest on June 30 and December 31, and the company’s fiscal
year end is December 31. The journal entry on June 30, 2011, will include:
A. a $58,800 debit to Interest Expense
B. a $1,200 credit to Bond Premium.
C. a $6,000 credit to Cash.
D. a $600 credit to Bond Discount.
Question 24

If an interest-bearing note payable is issued at a premium, then the contractual cash
payment for interest is
A. less than interest expense.
B. equal to interest expense.
C. based on the market rate of interest.
D. greater than interest expense.
Question 25

A non-interest-bearing obligation
A. requires recognition of interest expense over the life of the obligation.

B. is an example of an installment obligation.
C. is free of interest expense.
D. requires collateral.
Question 26

Woodsman Company issued $400,000 of 6-year, 6% bonds with interest payments
occurring annually at the end of each year. What additional information is needed in
order to determine the selling price of these bonds?
A. The face amount of the bonds
B. The stated rate of interest
C. The market rate of interest
D. The bond covenants
Question 27

Capital leases are rental agreements of which
A. the contractual arrangements are similar to a purchase in all respects.
B. the lessee desires to have rights to use the asset but not ownership of such asset.
C. the period of the lease is generally a very small portion of the leased asset’s useful life.
D. periodic rental payments are recorded as rental revenue on the asset owner’s income
statement
Question 28

Torrey Corporation issued $1,000,000 of ten-year, 10 percent bonds payable dated
January 1, 2009. The market rate of interest at that time was 11 percent. The journal
entry to record this transaction will include a:
A. credit to Cash.
B. debit to Bond Discount.
C. credit to Bond Discount.
D. credit to Bond Premium
Question 29

If an interest-bearing note payable is issued at par, then the contractual cash payment
for interest is
A. greater than interest expense.
B. equal to interest expense.
C. It cannot be determined from the information given.
D. less than interest expense.
Question 30

Gibson Corporation amortizes its bonds using the effective interest method. Which
statement is correct?
A. [Interest expense] – [Cash interest paid] = [Increase in carrying value if sold at a
premium]
B. [Interest expense] – [Cash interest paid] = [Increase in carrying value if sold at a
discount]
C. [Cash interest payment] = [Bond face amount] X [Market interest rate]
D. [Interest expense] = [Stated rate] X [Carrying value of the bonds]
Question 31

Operating leases are treated as
A. a sale if the leased asset has been transferred from the lessor to the lessee.

B. increases in liabilities for both the lessor and the lessee.
C. capital leases by the lessee.
D. rental expense by the lessee.
Question 32

Duncan Industries sold $100,000 of 12 percent bonds on January 1, 2006, when the
market interest rate was 10 percent and received $107,732 for them. The bonds mature
on January 1, 2011 and pay interest on June 30 and December 31. Duncan uses the
effective interest method of amortization. The annual cash payment for interest on the
bonds are:
A. $10,000
B. $12,000
C. $6,000
D. $5,000
Question 33

Bonds payable that are redeemed by the issuer
A. are considered unsecured.
B. are repurchased or retired .
C. typically pay far less interest than the market rate of interest.
D. have no market value
Question 34

Investments in bonds are accounted for using
A. the effective interest method.
B. capital leases.
C. historical cost.
D. net realizable value.
Question 35

Which one of the following represents the economic effects of issuing a 2-for-1 stock
split?
A. No effect on par value per share or retained earnings
B. Decrease par value per share, and no effect on retained earnings
C. No effect on par value per share, and decrease retained earnings
D. Increase par value per share and retained earnings
Question 36

The payment of previously declared cash dividends
A. increases the debt/equity ratio.
B. decreases total liabilities.
C. increases current liabilities.
D. increases earnings per share.
Question 37

Under US GAAP, companies must provide a description of the changes in
comprehensive income as either a separate statement or as a part of the statement of
changes in stockholders’ equity. Under IFRS, companies must also provide a
description of the changes in comprehensive income in a:
A. Statement of Unrecognized Income and Expense

B. Statement of Retained Earnings
C. Income Statement
D. Statement of Recognized Income and Expense
Question 38

Which one of the following serves to differentiate debt from equity?
A. Debt has a maturity date which is much shorter than the maturity period of equity.
B. Interest on debt is tax deductible while dividends to equity investors are not.
C. Interest on debt may be deferred, but dividends are a legal liability and must be paid
every year.
D. Debt holders are appointed while the board of directors elects equity holders.
Question 39

Smith Corporation’s balance sheet reflects total assets of $3 million as of December 31,
2010 and total liabilities of $1.8 million. Smith has 100,000 shares of common stock
outstanding. The market value of the stock is $9 per share. Smith’s market to book ratio
is:
A. 7.50.
B. 0.75.
C. 13.33
.
D. 12.00.
Question 40

Which one of the following is a valid reason for a stock split?
A. To increase the book value per share of common stock
B. To increase reported net income during subsequent accounting periods
C. To adjust the market price of the shares to a level where more individuals can afford to
invest in the stock
D. To increase ownership percentages of individual shareholders
Question 41

Which one of the following events decreases the current ratio?
A. A decrease in the number of common shares outstanding
B. Purchase of treasury stock
C. Sale of treasury stock for more than its cost
D. Sale of treasury stock for less than its cost
Question 43

The shareholders’ equity section of Winters Company contained the following balances
as of December 31, 2010:
Preferred stock (10%, $15 par value, cumulative)
$1,500
Preferred stock (12%, $10 par value , noncumulative)
1,500
Common stock ($1 par value, 5,000 shares authorized, 3,500 issued
3,500
and 400 held in treasury)
Additional paid-in capital:
Preferred stock (10%)
1,050
Preferred stock (12%)
1,275

Common stock
Retained earnings
Less: Treasury stock
Total shareholders’ equity

2,345
4,256
(5,750)
$9,676

During 2011, Winters entered into the following transaction: On May 13, the company
repurchased 55 shares of its common stock in the open market at $25 per share. Which
of the following would be included in the journal entry for May 13?
A. a debit to Cash for $1,375.
B. a credit to Common Stock for $1,375.
C. a debit to Treasury Stock for $1,375.
D. a debit to Common Stock for $1,375.

Question 44

The shareholders’ equity section of Winters Company contained the following balances
as of December 31, 2010:
Preferred stock (10%, $15 par value, cumulative)
$1,500
Preferred stock (12%, $10 par value , noncumulative)
1,500
Common stock ($1 par value, 5,000 shares authorized, 3,500 issued
3,500
and 400 held in treasury)
Additional paid-in capital:
Preferred stock (10%)
1,050
Preferred stock (12%)
1,275
Common stock
2,345
Retained earnings
4,256
Less: Treasury stock
(5,750)
Total shareholders’ equity
$9,676
During 2011, Winters entered into the following transaction: On September 26, the
company issued 200 shares of its 10 percent preferred stock at $23 per share. Which of
the following would be included in the September 26 journal entry?
A. a debit to Cash for $3,000.
B. a debit to Preferred Stock for $3,000.
C. a credit to Additional Paid-In Capital, 10% Preferred Stock for $1,600.
D. a credit to Cash for $4,600.
Question 45

A company declared cash dividends in 2009, and paid the dividends in 2010. The
payment in 2010
A. decreases net income.
B. decreases the debt/equity ratio.
C. increases the number of shares of stock outstanding.
D. decreases shareholders’ equity.
Question 46

If preferred stock, which can be exchanged for long-term debt in three years, is
classified as an equity financial instrument instead of a liability, then
A. the current ratio declines.
B. fixed assets and net worth increase.
C. earnings per share is less than if the preferred stock was reported as debt.
D. the debt/equity ratio is less than if the preferred stock was reported as debt.
Question 47

If a corporation uses retention of earnings to finance the purchase of property instead of
issuing equity securities, then
A. it will pay more dividends.
B. it will have a higher debt/equity ratio.
C. a company’s earnings per share will decrease.
D. leverage is being used.
Question 48

Information related to Lamar Co. for the years ending December 31, 2010 and 2009
follows:
12-31-10
12-31-09
Common stock
$120,000
$80,000
Retained earnings at year end (after closing)
100,000
70,000
Dividends declared for 2010 totaled $20,000. How much was generated through
operations?
A. $70,000
B. $50,000
C. $10,000
D. $30,000
Question 49

The shareholders’ equity section of Manning Company as of December 31, 2010
follows:
Common stock (11,000 shares issued @ $6 par)
$66,000
Additional paid-in capital (Common stock)
100,000
Retained earnings
60,000
Less: Treasury stock (1,000 share @ $12)
(12,000)

Total shareholders’ equity

$214,000

The company declares and distributes a 3 percent stock dividend on the outstanding
shares. The market price of the stock is $85 per share. The journal entry to record the
stock dividend would include:
A. a credit to Common Stock for $1,800.
B. a debit to Additional Paid-In Capital, Common Stock for $25,500.
C. a debit to Additional Paid-In Capital, Common Stock for $23,700.
D. a credit to Stock Dividend for $25,500.

Question 50

The shareholders’ equity section of Winters Company contained the following balances
as of December 31, 2010:
Preferred stock (10%, $15 par value, cumulative)
$1,500
Preferred stock (12%, $10 par value , noncumulative)
1,500
Common stock ($1 par value, 5,000 shares authorized, 3,500 issued
3,500
and 400 held in treasury)
Additional paid-in capital:
Preferred stock (10%)
1,050
Preferred stock (12%)
1,275
Common stock
2,345
Retained earnings
4,256
Less: Treasury stock
(5,750)
Total shareholders’ equity
$9,676
During 2011, Winters entered into the following transaction: On December 2, the
company declared a cash dividend of $1,050, which was paid on December 27. Winters
did not declare or pay any dividends during 2010. If Winters uses a separate dividend
account for each type of stock, which of the following would be included in the journal
entry to record the declaration of the 12% Preferred stock dividend?
A. a debit to Cash for $180.
B. a debit to Dividend Expense for $180.
C. a debit to 12% Preferred Cash Dividend for $180.
D. a debit to Dividends Payable for $180.