accounts data bank with all solutions

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Category: Accounting Tags: accounting, accounting, accounts, analysis, bank, bonds, budget, cash, companies, company, companys, cost, costs, data, equity, equivalent, financial, future, inventory, investments, longterm, method, notes, number, order, price, proce, solutions, standard, statement, stock, total, units, used, value

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Par value per share is the price at which a share of stock is bought or sold.
True
False

Authorized stock is the total number of shares outstanding.
True
False

3 If a corporation is authorized to issue 1,000 shares of $50 common stock, it is said to have $50,000 of stock outstanding.
True
False
4 A corporation can issue two kinds of stock – common and preferred.
True
False
5 Retained earnings generally consist of a company’s cumulative net income less any net losses and dividends declared since its inception.
True
False
6 Changes in accounting estimates are accounted for in current and future periods.
True
False
7 Earnings per share is the amount of income earned per share of a company’s outstanding (weighted-average) common stock.
True
False
8 The price-earnings ratio reveals information about the stock market’s expectations for a company’s future growth in earnings.
True
False
9A liability for dividends exists:
When cumulative preferred stock is sold.
On the date of declaration.
On the date of record.
On the date of payment.
For dividends in arrears on cumulative preferred stock.
10 A stock dividend:
Is not a liability on the balance sheet.
Does not reduce a corporation’s assets and stockholders’ equity.
Transfers a portion of equity from retained earnings to contributed capital.
Does not affect total equity, but does affect the components of equity.
All of the options are correct.
11 A stock dividend transfers:
Contributed capital to retained earnings.
Retained earnings to contributed capital.
Retained earnings to assets.
Contributed capital to assets.
Assets to contributed capital.
12 The legal contract between the issuing corporation and the bondholders is called the bond indenture.
True
False

13 A bond is a written promise to pay an amount identified as the par value of the bond along with interest.
True
False
14 Interest payments on bonds are determined by multiplying the par value of the bond by the stated contract rate.
True
False

The use of debt financing insures an increase in return on equity.
True
False

16
The issue price of bonds is found by computing the future value of the bond’s cash payments, discounted at the market rate of interest.
True
False
17.
The effective interest method yields increasing amounts of bond interest expense and decreasing amounts of premium amortization over the bond’s life for bonds issued at a premium.
True
False
18.
When convertible bonds are converted to a company’s stock, the carrying value of the bonds is transferred to equity accounts and no gain or loss is recorded.
True
False

Bonds can be issued:
At par.
At a premium.
At a discount.
Between interest payment dates.
All of the choices are correct.
20.
A corporation borrowed $125,000 cash by signing a 5-year, 9% installment note requiring equal annual payments each December 31 of $32,136. What journal entry would the issuer record for the first payment?
Debit Interest Expense $7,136; debit Notes Payable $25,000; credit Cash $32,136.
Debit Notes Payable $32,136; debit Interest Payable $11,250; credit Cash $43,386.
Debit Interest Expense $11,250; debit Notes Payable $20,886; credit Cash $32,136.
Debit Notes Payable $32,136; credit Cash $32,136.
Debit Notes Payable $11,250; credit Cash $11,250.
21.
All of the following statements regarding accounting treatments for liabilities under U.S. GAAP and IFRS are true except:
Accounting for bonds and notes under U.S. GAAP and IFRS is similar.
Both U.S. GAAP and IFRS require companies to distinguish between operating leases and capital leases.
The criteria for identifying a lease as a capital lease are more general under IFRS.
Both U.S. GAAP and IFRS require companies to record costs of retirement benefits as employees work and earn them.
Use of the fair value option to account for bonds and notes is not acceptable under U.S. GAAP or IFRS.
22.
Long-term investments are usually held as an investment of cash for use in current operations.
True
False

Equity securities reflect a creditor relationship such as investments in notes, bonds, and certificates of deposit.
True
False

24.
Long-term investments include investments in land or other assets not used in a company’s operations.
True
False

25.
Debt securities are recorded at cost when purchased.
True
False
26.
The equity method with consolidation is used in accounting for long-term investments in equity securities with controlling influence.
True
False
Return on total assets can be separated into the profit margin ratio and total asset turnover.
True
False
28.
Trading securities are always reported as current assets.
True
False

29.
Held-to-maturity securities are equity securities a company intends and is able to hold until maturity.
True
False
30.
Long-term investments include:
Investments in bonds and stocks that are not readily convertible to cash.
Investments in marketable stocks that are intended to be converted into cash in the short-term.
Investments in marketable bonds that are intended to be converted into cash in the short-term.
Only investments readily convertible to cash.
Investments intended to be converted to cash within one year.

31.
The primary purpose of the statement of cash flows is to report all major cash receipts (inflows) and cash payments (outflows) during a period.
True
False
32.
To be classified as a cash equivalent, the only criterion an item must meet is that it must be readily convertible to a known amount of cash.
True
False
33.
Business activities that generate or use cash are classified as operating, investing, or financing activities on the statement of cash flows.
True
False
34.
Financing activities include (a) the purchase and sale of long-term assets, (b) the purchase and sale of short-term investments, and (c) lending and collecting on loans.
True
False

35.
The full disclosure principle requires that noncash investing and financing activities be disclosed in the financial statements.
True
False
36.
Accounting standards require companies to include a statement of cash flows in a complete set of financial statements.
True
False
37.
A cash coverage ratio of less than 1 indicates cash inadequacy to meet asset growth.
True
False

38.
The direct method for preparing and reporting the statement of cash flows reports net income and then adjusts it for items necessary to calculate net cash provided or used by operating activities.
True
False
39.
The indirect method separately lists each major item of operating cash receipts and cash payments.
True
False
40.
Which of the following transactions or events should be reported as a source of cash from operating activities when using the direct method?
Credit sales.
Cash collections from customers.
Depreciation expense.
Cash received from the sale of a building.
Cash received from the sale of treasury stock.
41.
Profitability is the ability to generate future revenues and meet long-term obligations.
True
False
Liquidity and efficiency are considered to be building blocks of financial statement analysis.
True
False
43.
The building blocks of financial statement analysis include (1) liquidity, (2) salability, (3) solvency, and (4) profitability.
True
False

44.
Standards for comparison are necessary when making judgments about a company’s performance.
True
False
45.
Intra-company analysis is based on comparisons with competitors.
True
False
46.
Horizontal analysis is the comparison of a company’s financial condition and performance to a base amount.
True
False
47.
Vertical analysis is used to reveal patterns in data covering successive periods.
True
False
48.
Trend analysis is a form of horizontal analysis that can reveal patterns in data across successive periods.
True
False
49.
Vertical analysis is a tool to evaluate individual financial statement items or groups of items in terms of a specific base amount.
True
False

50.
Horizontal analysis is used to reveal changes in the relative importance of each financial statement item.
True
False
51.
Managerial accounting provides financial and nonfinancial information to an organization’s managers and other internal decision makers.
True
False
52.
One of the usual differences between financial and managerial accounting is the time dimension of the information reported.
True
False
53.
Financial accounting relies on accepted principles that are enforced through an extensive set of rules and guidelines; on the other hand, managerial accounting systems are flexible.
True
False

Just-in-time manufacturing is a system where companies manufacture products only after the orders have been received from customers.
True
False
55.
When the attitude of continuous improvement exists throughout an organization, every manager and employee seeks to continuously experiment with new and improved business practices.
True
False

56.
The main goal of the lean business model is the elimination of waste while satisfying the customer and providing a positive return to the company.
True
False
57.
Direct materials are not usually easily traced to a product.
True
False
58.
Whether a cost is controllable or not controllable by an employee is dependent on the employee’s level of responsibility.
True
False

59.
Direct costs are incurred for the benefit of more than one cost object.
True
False
60.
The model whose goal is to eliminate waste while satisfying the customer and providing a positive return to the company is:
Total quality management.
Managerial accounting.
Customer orientation.
Continuous improvement.
Lean business model.

61.
Cost accounting systems accumulate costs and then assign them to products or services.
True
False
62.
A company that uses a cost accounting system normally has only two inventory accounts: Finished Goods Inventory and Goods in Process Inventory.
True
False
63.
Cost accounting information is helpful to management in controlling costs but has no effect on pricing decisions.
True
False
64.
There are two basic types of cost accounting systems: job order costing and periodic costing.
True
False
65.
A company that produces a large number of standardized units would normally use a job order cost accounting system.
True
False
66.
When a job is finished, its job cost sheet is completed and moved from the file of jobs in process to the file of finished jobs that are yet to be delivered to customers.
True
False

67.
Service firms, unlike manufacturing firms, should only use actual costs when determining a selling price for their services.
True
False

68.
Job order costing is applicable to manufacturing firms only and not service firms.
True
False
69.
Cost accounting systems used by manufacturing companies are based on the:
Periodic inventory system.
Perpetual inventory system.
Finished goods inventories.
Weighted average inventories.
LIFO inventory system.

70.
Job order costing systems normally use:
Periodic inventory systems.
Perpetual inventory systems.
Real inventory systems.
General inventory systems.
All of inventory systems normally use job order costing.
71.
Process manufacturing usually reflects a manufacturer that produces large quantities of identical products.
True
False

72.
To determine unit cost under a process cost accounting system, equivalent units produced must be calculated if the company has goods in process inventories.
True
False

73.
Equivalent units of production refer to the number of units that would be completed if all effort during a period had been applied only to those units that were started and completed in a period.
True
False

74.
Equivalent units of production are always the same as the total number of physical units finished during the period.
True
False

75.
The last step in the four-step accounting procedure for process costing is the calculation of equivalent units of production.
True
False

76.
A process cost summary is an accounting report that describes the costs charged to a department, the equivalent units of production by the department, and how the costs were assigned to the output.
True
False

77.
The FIFO method separates prior period costs from costs incurred during the current period.
True
False

78.
Direct costs in process cost accounting include only those costs that can be readily identified with individual product units.
True
False

79.
Which of the following characteristics applies to process cost accounting but not to job order cost accounting?
Use of a predetermined overhead rate.
Identifiable lots of production.
Equivalent units of production.
Labor time ticket for each employee.
Use of a single Goods in Process Inventory account.

80.
Equivalent units of production are equal to:
The number of units that could have been completed if all effort had been applied to units that were started and completed during a period.
The number of finished units actually produced during a period.
The number of units introduced into the process during a period.
The number of units still in process at the end of a period.
Physical units that were started and completed during a period.

81.
Variable costs per unit increase proportionately with increases in output activity.
True
False

82.
The relevant range of operations includes extremely high and low levels of production that are unlikely to occur.
True
False

83.
Cost-volume-profit analysis is frequently based on the assumption that the production level is the same as the sales level.
True
False

84.
Cost-volume-profit analysis can be used to predict the effects of reduced selling prices, increased fixed costs, and reduced variable costs on break-even points.
True
False

85.
Contribution margin is the amount of sales that exceeds total variable costs.
True
False

86.
Break-even analysis is a special case of cost-volume-profit analysis.
True
False
87.
The contribution margin per unit is the price at which a unit must be sold in order for the company to break even.
True
False
88.
A cost that remains the same in total even when volume of activity varies is a:
Fixed cost.
Curvilinear cost.
Variable cost.
Step-wise variable cost.
Standard cost.
89.
A cost that changes in proportion to changes in volume of activity is a(n):
Differential cost.
Fixed cost.
Incremental cost.
Variable cost.
Product cost.

90.
A budget can be an effective means of communicating management’s plans to the employees of a business.
True
False

91.
Budgets are normally more effective when all levels of management are involved in the budgeting process.
True
False

92.
A budget is a formal statement of future plans, usually expressed in monetary terms.
True
False

93.
Past performance is the best overall basis for evaluating current performance and assessing the need for corrective action.
True
False

94.
Continuous budgeting is the practice of preparing a new budget for a selected number of future periods and replacing budgets for periods that have lapsed.
True
False
95.
The task of preparing a budget should be the sole task of the most important department in an organization.
True
False

96.
A rolling budget is a specific budget application relevant only to a merchandising company.
True
False

97.
The budgets within the master budget must be prepared in a definite sequence as dictated by GAAP.
True
False

98.
For budgets to be effective:
Goals should be attainable.
Employees affected by a budget should be consulted when it is prepared.
Evaluations should be made carefully with opportunities to explain any failures.
They should be properly applied to avoid negative effects.
All of the options are correct.

99.
Standard material, labor, and overhead costs can be obtained from standard cost tables published by the Institute of Management Accountants.
True
False

100.
When standard costs are used, factory overhead is assigned to products with a predetermined standard overhead rate.
True
False

101.
Companies promoting continuous improvement strive to achieve practical standards rather than ideal standards.
True
False

102.
A cost variance is the difference between actual cost and standard cost.
True
False
103.
A budget performance report that includes variances can have variances caused by both price differences and quantity differences.
True
False

104.
When computing a price variance, the price is held constant.
True
False

105.
Another name for a static budget is a variable budget.
True
False

106.
Standard costs are:
Actual costs incurred to produce a specific product or perform a service.
Preset costs for delivering a product or service under normal conditions.
Established by the IMA.
Rarely achieved.
Uniform among companies within an industry.

107.
The difference between actual and standard cost caused by the difference between the actual quantity and the standard quantity is called the:
Controllable variance.
Standard variance.
Budget variance.
Quantity variance.
Price variance.

108.
Evaluation of the performance of managers of profit centers assumes that the managers can control or influence both costs and revenue generation.
True
False

109.
Investment center is another name for profit center.
True
False

110.
A cost center does not directly generate revenues.
True
False

A department that is responsible for maximizing revenues is known as a profit center.
True
False

112.
Indirect expenses should be allocated to departments based upon the benefits received by each department.
True
False

113.
Departmental wage expenses are direct expenses of that department.
True
False

114.
An example of a service department is the human resources department.
True
False

115.
A cost center is a unit of a business that incurs costs but does not directly generate revenues. All of the following are considered cost centers except:
Accounting department.
Purchasing department.
Research department.
Advertising department.
All of these could be considered cost centers.

116.
A profit center:
Incurs costs, but does not directly generate revenues.
Incurs costs and directly generates revenues.
Has a manager who is evaluated solely on efficiency in controlling costs.
Incurs only indirect costs and directly generates revenues.
Incurs only indirect costs and generates revenues.

117.
Capital budgeting decisions are risky because the outcome is uncertain, large amounts are usually involved, the investment involves a long-term commitment, and the decision could be difficult or impossible to reverse.
True
False

118.
If the internal rate of return (IRR) of an investment is below the hurdle rate, the project should be accepted.
True
False

119.
An opportunity cost is the potential benefit that is lost by taking a specific action when two or more alternative choices are available.
True
False

120.
The concept of incremental cost is the same as the concept of differential cost.
True
False

121.
In a make or buy decision, management should focus on costs that are constant under the two alternatives.
True
False

122.
An advantage of the break-even time (BET) method over the payback period method is that it recognizes the time value of money.
True
False

123.
If the straight-line depreciation method is used, the annual average investment amount used in calculating rate of return is calculated as (beginning book value + ending book value)/2.
True
False

124.
Capital budgeting decisions usually involve analysis of:
Cash outflows only.
Short-term investments.
Long-term investments.
Investments with certain outcomes only.
Operating revenues.

125.
The process of analyzing alternative investments and deciding which assets to acquire or sell is known as:
Planning and control.
Capital budgeting.
Variance analysis.
Master budgeting.
Managerial accounting.

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Question 1

Which of the following methods is appropriate for a business whose inventory consists of a relatively small number of unique, high-cost items?
Answer

FIFO

LIFO

average

specific identification
2 points
Question 2

Which of the following measures the relationship between cost of merchandise sold and the amount of inventory carried during the period?
Answer

inventory turnover

number of daysâ€™ sales in inventory

retail method of inventory costing

gross profit method of inventory costing
2 points
Question 3

Which of the following is used to analyze the efficiency and effectiveness of inventory management?
Answer

inventory turnover only

number of daysâ€™ sales in inventory only

both inventory turnover and number of daysâ€™ sales in inventory

neither inventory turnover or number of daysâ€™ sales in inventory
2 points
Question 4

When merchandise sold is assumed to be in the order in which the purchases were made, the company is using
Answer

first-in, last-out

last-in, first-out

first-in, first-out

average cost
2 points
Question 5

Use the following information to answer the following questions.

The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records during May. The company had no beginning inventory on May 1.

Date
Product Z
Units
Cost
May 3
Purchase
5
$30
May 10
Sale
3

May 17
Purchase
10
$34
May 20
Sale
6

May 23
Sale
3

May 30
Purchase
10
$40

Assuming that the company uses the perpetual inventory system, determine the cost of merchandise sold for the sale of May 20 using the FIFO inventory cost method.
Answer

$250

$180

$196

$204
2 points
Question 6

Use the following information to answer the following questions.

The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records during May. The company had no beginning inventory on May 1.

Date
Product Z
Units
Cost
May 3
Purchase
5
$30
May 10
Sale
3

May 17
Purchase
10
$34
May 20
Sale
6

May 23
Sale
3

May 30
Purchase
10
$40

Assuming that the company uses the perpetual inventory system, determine the ending inventory value for the month of May using the FIFO inventory cost method.
Answer

$494

$502

$422

$520
2 points
Question 7

Use the following information to answer the following questions.

The Boxwood Company sells blankets for $60 each. The following was taken from the inventory records during May. The company had no beginning inventory on May 1.

Date
Product Z
Units
Cost
May 3
Purchase
5
$30
May 10
Sale
3

May 17
Purchase
10
$34
May 20
Sale
6

May 23
Sale
3

May 30
Purchase
10
$40

Assuming that the company uses the perpetual inventory system, determine the gross profit for the sale of May 23 using the FIFO inventory cost method.
Answer

$78

$90

$102

$180
2 points
Question 8

Too much inventory on hand
Answer

reduces solvency

increases the cost to safeguard the assets

increases the losses due to price declines

all of the above
2 points
Question 9

The inventory costing method that reports the most current prices in ending inventory is
Answer

FIFO

Specific identification

LIFO

Average cost
2 points
Question 10

The inventory costing method that reports the earliest costs in ending inventory is
Answer

FIFO

LIFO

Average cost

Specific identification
2 points
Question 11

Taking a physical count of inventory
Answer

is not necessary when a periodic inventory system is used

should be dine near year-end

has no internal control relevance

is not necessary when a perpetual inventory system is used
2 points
Question 12

Merchandise inventory at the end of the year was understated. Which of the following statements correctly states the effect of the error?
Answer

net income is understated

net income is overstated

cost of merchandise sold is understated

merchandise inventory reported on the balance sheet is overstated
2 points
Question 13

Kristinâ€™s Boutiques has identified the following items for possible inclusion in its December 31, 2010 inventory. Which of the following would not be included in the year end inventory?
Answer

Merchandise purchased FOB shipping point was picked up by the freight company but had still not arrived at Kristinâ€™s Boutique as of December 31, 2010.

Kristin has in its warehouse merchandise on consignment from Abby Co.

Kristin has sent merchandise to various retailers on a consignment basis.

Kristin has merchandise on hand which has been returned by customers because of wrong size.
2 points
Question 14

If the cost of an item of inventory is $50 and the current replacement cost is $57, the amount included in inventory according to the lower of cost or market is
Answer

$50

$57

$107
2 points
Question 15

If merchandise inventory is being valued at cost and the purchase price is steadily falling, which method of costing will yield the largest net income?
Answer

average cost

LIFO

FIFO

weighted average
2 points
Question 16

If merchandise inventory is being valued at cost and the price level is steadily rising, the method of costing that will yield the highest net income is
Answer

periodic

LIFO

FIFO

average
2 points
Question 17

Damaged merchandise that can be sold only at prices below cost should be valued at
Answer

net realizable value

LIFO

FIFO

average
2 points
Question 18

For the year ended December 31, 2011 Depot Maxâ€™s cost of merchandise sold was $54,350. Inventory at the beginning of the year was $6,540. Ending inventory was $7,250. Depot Maxâ€™s number of days sales in inventory is closest to
Answer

47
2 points
Question 19

For the year ended December 31, 2011 Depot Maxâ€™s cost of merchandise sold was $54,350. Inventory at the beginning of the year was $6,540. Ending inventory was $7,250. Compute Depot Maxâ€™s inventory turnover for the year.
Answer

8.3

7.5

7.9

47
2 points
Question 20

If a manufacturer ships merchandise to a retailer on consignment, the unsold merchandise should be included in the inventory of the
Answer

consignee

retailer

manufacturer

shipper
2 points
Question 21

The two most widely used methods for determining the cost of inventory are
Answer

FIFO and LIFO

FIFO and average

LIFO and average

gross profit and average
2 points
Question 22

Under the _________ inventory method, accounting records maintain a continuously updated inventory value.
Answer

retail

periodic

physical

perpetual
2 points
Question 23

During the taking of its physical inventory on December 31, 2010, Barryâ€™s Bike Shop incorrectly counted its inventory as $270,000 instead of the correct amount of $190,000. The effect on the balance sheet and income statement would be as follows:
Answer

assets overstated by $80,000;retained earnings understated by $80,000; net income statement understated by $80,000.

assets overstated by $80,000;retained earnings understated by $80,000; no effect on the income statement.

assets and retained earnings overstated by $80,000; net income overstated by $80,000.

assets and retained earnings overstated by $80,000; net income understated by $80,000.
2 points
Question 24

The following lots of a particular commodity were available for sale during the year:

Beginning inventory 5 units at $61
First purchase 15 units at $63
Second purchase 10 units at $74
Third purchase 10 units at $77

The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the year.

What is the amount of cost of goods sold the year according to the LIFO method?
Answer

$1,380

$1,375

$1,510

$1,250
2 points
Question 25

Kristinâ€™s Boutiques has identified the following items for possible inclusion in its December 31, 2010 inventory. Which of the following would not be included in the year end inventory?
Answer

Merchandise purchased FOB shipping point was picked up by the freight company but had still not arrived at Kristinâ€™s Boutique as of December 31, 2010.

Kristin has in its warehouse merchandise on consignment from Abby Co.

Kristin has sent merchandise to various retailers on a consignment basis.

Kristin has merchandise on hand which has been returned by customers because of wrong size.

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Description

Company J and Company K each recently reported the same
earnings per share (EPS). Company J’s stock, however, trades at a higher price.
Which of the following statements is correct?

A. a. Company J must
have a higher P/E ratio.

B. b. Company J must
have a higher market to book ratio.

C. c. Company J must
be riskier

D. d. Company J must
have fewer growth opportunities.

E. e. All of the
statements above are correct.

Question 2 of 20

Which of the following statements is correct?

A. a. Many large firms
operate different divisions in different industries, and this makes it hard to
develop a meaningful set of industry benchmarks for these types of firms.

B. b. Financial
ratios should be interpreted with caution because there exist seasonal and
accounting differences that can reduce their comparability.

C. c. Financial
ratios should be interpreted with caution because it may be difficult to say
with certainty what is a “good” value. For example, in the case of
the current ratio, a “good” value is neither high nor low.

D. d. Ratio analysis
facilitates comparisons by standardizing numbers.

E. e. All of the
statements above are correct.

Question 3 of 20

Which of the following actions can a firm take to increase
its current ratio?

A. a. Issue
short-term debt and use the proceeds to buy back long-term debt with a maturity
of more than one year.

B. b. Reduce the
company’s days sales outstanding to the industry average and use the resulting
cash savings to purchase plant and equipment.

C. c. Use cash to
purchase additional inventory.

D. d. Statements a
and b are correct.

E. e. None of the
statements above is correct.

Question 4 of 20

Which of the following actions will cause an increase in the
quick ratio in the short run?

A. a. $1,000 worth of
inventory is sold, and an account receivable is created. The receivable exceeds
the inventory by the amount of profit on the sale, which is added to retained
earnings.

B. b. A small
subsidiary which was acquired for $100,000 two years ago and which was
generating profits at the rate of 10 percent is sold for $100,000 cash.
(Average company profits are 15 percent of assets.)

C. c. Marketable
securities are sold at cost.

D. d. All of the
answers above.

E. e. Answers a and b
above.

Question 5 of 20

Company A is financed with 90 percent debt, whereas Company
B, which has the same amount of total assets, is financed entirely with equity.
Both companies have a marginal tax rate of 35 percent. Which of the following
statements is correct?

A. a. If the two
companies have the same basic earning power (BEP), Company B will have a higher
return on assets.

B. b. If the two
companies have the same return on assets, Company B will have a higher return
on equity.

C. c. If the two
companies have the same level of sales and basic earning power (BEP), Company B
will have a lower profit margin.

D. d. All of the
answers above are correct.

E. e. None of the
answers above is correct.

Question 6 of 20

The Wilson Corporation has the following relationships:

Sales/Total assets 2.0

Return on assets (ROA) 4%

Return on equity (ROE) 6%

What is Wilson’s profit margin and debt ratio?

A. a. 2% and 0.33

B. b. 4% and 0.33

C. c. 4% and 0.67

D. d. 2% and 0.67

E. e. 4% and 0.50

Reset Selection

Question 7 of 20

Q Corp. has a basic earnings power (BEP) ratio of 15
percent, and has a times interest earned (TIE) ratio of 6. Total assets are
$100,000. The corporate tax rate is 40 percent. What is Q Corp.’s return on
assets (ROA)?

A. a. 7.5%

B. b. 10.0%

C. c. 12.2%

D. d. 13.1%

E. e. 14.5%

Question 8 of 20

Kansas Office Supply had $24,000,000 in sales last year. The
company’s net income was $400,000. Its total assets turnover was 6.0. The
company’s ROE was 15 percent. The company is financed entirely with debt and
common equity. What is the company’s debt ratio?

A. a. 0.20

B. b. 0.30

C. c. 0.33

D. d. 0.60

E. e. 0.66

Question 9 of 20 Given the following information, calculate
the market price per share of WAM Inc.

Net income = $200,000

Earnings per share = $2.00

Stockholders’ equity = $2,000,000

Market/Book ratio = 0.20

A. a. $20.00

B. b. $ 8.00

C. c. $ 4.00

D. d. $ 2.00

E. e. $ 1.00

Question 10 of 20

Taft Technologies has the following relationships:

annual sales $1,200,000

current liabilities $375,000

days sales outstanding(DSO)(360-day year) 40

Inventory Turnover Ratio 4.8

current ratio 1.2

The company’s current assets consist of cash, inventories,
and accounts receivable. How much cash does Taft have on its balance sheet?

A. -$ 8,333

B. $ 66,667

C. $125,000

D. $200,000

E. $316,667

Question 11 of 20

Info Technics Inc. has an equity multiplier of 2.50. The
company’s assets are financed with some combination of long-term debt and
common equity. What is the company’s debt ratio?

A. a. 51.20%

B. b. 26.00%

C. c. 39.36%

D. d. 65.00%

E. e. 60.00%

Question 12 of 20

Cutler Enterprises has current assets equal to $5 million.
The company’s current ratio is 1.25, and its quick ratio is 0.75. What is the
firm’s level of current liabilities (in millions)?

A. a. $2.85

B. b. $3.0

C. c. $4.0

D. d. $0.9

E. e. 1.9

Question 13 of 20

Lewis Inc. has sales of $3,600,000 per year, all of which
are credit sales. Its days sales outstanding is 42 days. What is its average
accounts receivable balance? Assume 360 days per year.

A. a. $238,090

B. b. $420,000

C. c. $280,000

D. d. $386,000

E. e. $400,000

Question 14 of 20

A firm has total interest charges of $20,000 per year, sales
of $2,800,000, a tax rate of 40 percent, and a profit margin of 6 percent. What
is the firm’s times-interest-earned ratio?

A. a. 15

B. b. 12.5

C. c. 11.5

D. d. 15.8

E. e. 16

Question 15 of 20

A fire has destroyed many of the financial records at
Anderson Associates. You are assigned to piece together information to prepare
a financial report. You have found that the firm’s return on equity is 12
percent and its debt ratio is 0.20. What is its return on assets?

A. a. 6.40%

B. b. 4.85%

C. c. 9.60%

D. d. 8.50%

E. e. 6.90%

Question 16 of 20

Rowe and Company has a debt ratio of 0.20, a total assets
turnover of 0.25, and a profit margin of 10 percent. The president is unhappy
with the current return on equity, and he thinks it could be doubled. This
could be accomplished (1) by increasing the profit margin to 14 percent and (2)
by increasing debt utilization. Total assets turnover will not change. What new
debt ratio, along with the 14 percent profit margin, is required to double the
return on equity?

A. a. 0.50

B. b. 0.56

C. c. 0.88

D. d. 0.78

E. e. 0.44

Question 17 of 20

Pinkerton Packaging’s ROE last year was 4.5 percent, but its
management has developed a new operating plan designed to improve things. The
new plan calls for a total debt ratio of 50 percent, which will result in
interest charges of $240 per year. Management projects an EBIT of $800 on sales
of $8,000, and it expects to have a total assets turnover ratio of 1.6. Under
these conditions, the federal-plus-state tax rate will be 40 percent. If the
changes are made, what return on equity will Pinkerton earn?

A. a. 2.50%

B. b. 13.44%

C. c. 13.00%

D. d. 14.02%

E. e. 14.57%

Question 18 of 20

Examining the ratios of a particular firm against the same
measures for a small group of firms from the same industry, at a point in time,
is an example of

A. a. Trend analysis.

B. b. Benchmarking.

C. c. Du Pont
analysis.

D. d. Simple ratio
analysis.

E. e. Industry
analysis.

Question 19 of 20

Which of the following statements is correct?

A. a. Having a high
current ratio and a high quick ratio is always a good indication that a firm is
managing its liquidity position well.

B. b. A decline in
the inventory turnover ratio suggests that the firm’s liquidity position is
improving.

C. c. If a firm’s
times-interest-earned ratio is relatively high, then this is one indication
that the firm should be able to meet its debt obligations.

D. d. Since ROA
measures the firm’s effective utilization of assets (without considering how
these assets are financed), two firms with the same EBIT must have the same
ROA.

E. e. If, through
specific managerial actions, a firm has been able to increase its ROA, then,
because of the fixed mathematical relationship between ROA and ROE, it must
also have increased its ROE.

Question 20 of 20

Which of the following statements is correct?

A. a. Suppose two
firms with the same amount of assets pay the same interest rate on their debt
and earn the same rate of return on their assets and that ROA is positive. However,
one firm has a higher debt ratio. Under these conditions, the firm with the
higher debt ratio will also have a higher rate of return on common equity.

B. b. One of the
problems of ratio analysis is that the relationships are subject to
manipulation. For example, we know that if we use some cash to pay off some of
our current liabilities, the current ratio will always increase, especially if
the current ratio is weak initially, for example, below 1.0.

C. c. Generally,
firms with high profit margins have high asset turnover ratios and firms with
low profit margins have low turnover ratios; this result is exactly as
predicted by the extended Du Pont equation.

D. d. Firms A and B
have identical earnings and identical dividend payout ratios. If Firm A’s
growth rate is higher than Firm Bs, then Firm A’s P/E ratio must be greater
than Firm B’s P/E ratio.

E. e. Each of the
above statements is false.

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Category: Accounting Tags: , accounting, accounts, activity, analysis, bank, better, company, cost, costing, costs, data, determine, direct, financial, fixed, income, increase, management, order, overhead, period, proce, product, products, reports, sales, sell, services, solutions, total, unit, variable

Description
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Description

The group of users of accounting information charged with
achieving the goals of the business is its

creditors.

auditors.

investors.

managers.

4-An income statement

reports the changes in assets, liabilities, and
stockholdersâ€™ equity over a period of time.

summarizes the changes in retained earnings for a specific
period of time.

reports the assets, liabilities, and stockholdersâ€™ equity at
a specific date.

presents the revenues and expenses for a specific period of
time.

5-The most important information needed to determine if
companies can pay their current obligations is the

projected net income for next year.

relationship between current assets and current liabilities.

net income for this year.

relationship between short-term and long-term liabilities

6-A liquidity ratio measures the

short-term ability of a company to pay its maturing
obligations and to meet unexpected needs for cash.

ability of a company to survive over a long period of time.

percentage of total financing provided by creditors.

income or operating success of a company over a period of
time.

8-A liquidity ratio measures the

short-term ability of a company to pay its maturing
obligations and to meet unexpected needs for cash.

ability of a company to survive over a long period of time.

percentage of total financing provided by creditors.

income or operating success of a company over a period of
time.

9-Horizontal analysis is a technique for evaluating a series
of financial statement data over a period of time

that has been arranged from the highest number to the lowest
number.

to determine the amount and/or percentage increase or
decrease that has taken place.

that has been arranged from the lowest number to the highest
number.

to determine which items are in error.

10-Vertical analysis is a technique that expresses each item
in a financial statement

as a percent of a base amount.

as a percent of the item in the previous year.

starting with the highest value down to the lowest value.

in dollars and cents.

11-Process costing is used when

production is aimed at filling a specific customer order.

the production process is continuous.

costs are to be assigned to specific jobs.

dissimilar products are involved.

12-An important feature of a job order cost system is that
each job

has its own distinguishing characteristics.

consists of one unit of output.

must be similar to previous jobs completed.

must be completed before a new job is accepted.

13-In a process cost system, product costs are summarized:

on production cost reports.

when the products are sold.

after each unit is produced.

14-An activity that has a direct cause-effect relationship
with the resources consumed is a(n)

overhead rate.

cost pool.

product activity.

15-Activity-based costing

accumulates overhead in one cost pool, then assigns the
overhead to products and services by means of a cost driver.

assigns activity cost pools to products and services, then
allocates overhead back to the activity cost pools.

allocates overhead directly to products and services based
on activity levels.

allocates overhead to multiple activity cost pools, and it
then assigns the activity cost pools to products and services by means of cost
drivers.

Don’t show me this message again for the assignment

16-A cost which remains constant per unit at various levels
of activity is a

fixed cost.

mixed cost.

variable cost.

manufacturing cost.

17-The break-even point is where

total variable costs equal total fixed costs.

total sales equal total variable costs.

total sales equal total fixed costs.

contribution margin equals total fixed costs

18-Fixed costs are $600,000 and the contribution margin per
unit is $150. What is the break-even point?

$4,000,000

$1,500,000

1,500 units

4,000 units

19-When a company assigns the costs of direct materials,
direct labor, and both variable and fixed manufacturing overhead to products,
that company is using

absorption costing.

product costing.

operations costing.

variable costing.

20-If a division manager’s compensation is based upon the
division’s net income, the manager may decide to meet the net income targets by
increasing production when using

absorption costing, in order to decrease net income.

absorption costing, in order to increase net income.

variable costing, in order to increase net income.

There is 10 more question

21-An unrealistic
budget is more likely to result when it

is developed with performance appraisal usages
in mind.

has been developed in a top down fashion.

has been developed in a bottom up fashion.

has been developed by all levels of management

22-A major
element in budgetary control is

approval of the budget by the stockholders.

the preparation of long-term plans.

the valuation of inventories.

the comparison of actual results with planned
objectives.

23-The purpose of
the sales budget report is to

control sales commissions.

control selling expenses.

determine whether income objectives are being
met.

determine whether sales goals are being met.

24-The
accumulation of accounting data on the basis of the individual manager who
has the authority to make day-to-day decisions about activities in an area is
called

master budgeting.

flexible accounting.

responsibility accounting.

static reporting.

25-Variance
reports are

(a) external financial reports.

(b) SEC financial reports.

(d) all of these

26-Internal
reports that review the actual impact of decisions are prepared by

management .justanswer.com/multiple-problems/8dl59-2-the-group-users-accounting-information-charged.html”>s.

factory workers.

department heads.

the controller.

27-The process of
evaluating financial data that change under alternative courses of action is
called

contribution margin analysis.

cost-benefit analysis.

incremental analysis.

.justanswer.com/multiple-problems/8dl59-2-the-group-users-accounting-information-charged.html”>double entry analysis.

28-Seasons
Manufacturing manufactures a product with a unit variable cost of $100 and a
unit sales price of $176. Fixed manufacturing costs were $480,000 when 10,000
units were produced and sold. The company has a one-time opportunity to sell
an additional 1,000 units at $140 each in a foreign market which would not
affect its present sales. If the company has sufficient capacity to produce
the additional units, acceptance of the special order would affect net income
as follows:

Income would increase by $40,000.

Income would increase by $140,000.

Income would increase by $8,000.

Income would decrease by $8,000.

29-Carter, Inc.
can make 100 units of a necessary component part with the following costs:

Direct Materials	$120,000
Direct Labor	20,000
Variable Overhead	60,000
Fixed Overhead	40,000

If Carter can purchase the component externally for $220,000 and only $10,000
of the fixed costs can be avoided, what is the correct make-or-buy decision?

Make and save $30,000

Buy and save $10,000

Make and save $10,000

Buy and save $30,000

30-A company has
a process that results in 15,000 pounds of Product A that can be sold for $16
per pound. An alternative would be to process Product A further at a cost of
$200,000 and then sell it for $28 per pound. Should management sell Product A
now or should Product A be processed further and then sold? What is the
effect of the action?

Process further, the company will be better off
by $180,000.

Process further, the company will be better off
by $20,000.

Sell now, the company will be better off by
$20,000.

Sell now, the company will be better off by
$200,000.

In
a process cost system, product costs are summarized:

on
production cost reports.

when
the products are sold.

after
each unit is produced.

on
job cost sheets

14-

An
activity that has a direct cause-effect relationship with the resources
consumed is a(n)

overhead
rate.

cost
pool.

product
activity.

cost
driver.

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Category: Accounting Tags: 0, 1, account, accounting, accounts, aets, answers, balance, bank, busine, capital, cash, cause, correct, credit, data, debit, entry, error, expense, expenses, following, journal, ledger, liabilities, liability, overstated, points, posted, question, revenue, solutions, trial, understated

Description
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A credit to a liability account was posted to an expense account. This error would cause __________.

A. assets to be overstated

B. liabilities to be overstated

C. expenses to be overstated

D. None of the above answers are correct.

Question 2 of 40

2.5 Points

A credit to an asset account was posted to a liability account. This error would cause __________.

A. assets to be understated

B. liabilities to be overstated

C. capital to be understated

D. None of the above answers are correct.

Question 3 of 40

2.5 Points

Which of the following errors would cause the trial balance to be out of balance?

A. An entry is posted twice.

B. An entry is not posted at all.

C. A debit is entered as $200 and the credit is entered at $2,000.

D. None of the above answers are correct.

Question 4 of 40

2.5 Points

A credit to an asset account was posted to a revenue account. This error would cause __________.

A. assets to be overstated

B. revenue to be overstated

C. expenses to be overstated

D. Both A and C are correct.

Question 5 of 40

2.5 Points

A debit to an asset account was posted to a liability account. This error would cause __________.

A. assets to be understated

B. liabilities to be overstated

C. capital to be overstated

D. None of the above answers are correct.

Question 6 of 40

2.5 Points

A credit to a liability account was posted to an asset account. This error would cause __________.

A. liabilities to be overstated

B. liabilities to be understated

C. revenues to be overstated

D. revenues to be understated

Question 7 of 40

2.5 Points

The chart of accounts __________.

A. is a numbered list of all of the business’ accounts

B. allows accounts to be located quickly

C. can be expanded as the business grows

D. All of the above answers are correct.

Question 8 of 40

2.5 Points

A credit to an asset account was posted to the capital account. This error would cause __________.

A. assets to be overstated

B. liabilities to be overstated

C. capital to be understated

D. Both A and C are correct.

Question 9 of 40

2.5 Points

A list of all the accounts from the ledger with their ending balances is called a __________.

A. normal balance

B. trial balance

C. chart of accounts

D. footing

Question 10 of 40

2.5 Points

Which of the following groups of accounts have a normal credit balance?

A. revenue, liabilities, and capital

B. assets, capital, and withdrawals

C. liabilities, expenses, and assets

D. assets, expenses, and withdrawals

Question 11 of 40

2.5 Points

Given the following list of accounts with normal balances, what are the trial balance totals of the debits and credits?

Cash

$1000

Equipment

500

Accounts Payable

350

Capital

900

Service Fees

1000

Salaries Expense

750

A. $3,250 debit, $3,250 credit

B. $1,125 debit, $1,125 credit

C. $4,500 debit, $4,500 credit

D. $2,250 debit, $2,250 credit

Question 12 of 40

2.5 Points

The purpose of the trial balance is __________.

A. to list all of the accounts in the chart of accounts

B. to report all accounts with zero balances

C. to prove that debits equal credits

D. to distribute it with the other financial reports

Question 13 of 40

2.5 Points

A debit to an expense account was posted to a revenue account. This error would cause __________.

A. assets to be overstated

B. liabilities to be overstated

C. revenue to be understated

D. None of the above answers are correct.

Question 14 of 40

2.5 Points

A debit to an expense account was posted to a revenue account. This error would cause __________.

A. assets to be overstated

B. liabilities to be overstated

C. revenue to be understated

D. None of the above answers are correct.

Question 15 of 40

2.5 Points

Which of the following is prepared last?

A. Balance Sheet

B. Income Statement

C. Statement of Owner’s Equity

D. Trial Balance

Question 16 of 40

2.5 Points

Given the following list of accounts with normal balances, what are the trial balance totals of the debits and credits?

Cash

$1,100

Accounts Receivable

800

Capital

1,900

Withdrawals

500

Service Fees

1,000

Rent Expense

500

A. $2,900 debit, $2,900 credit

B. $3,900 debit, $3,900 credit

C. $2,000 debit, $2,000 credit

D. $1,200 debit, $1,200 credit

Question 17 of 40

2.5 Points

Which of the following is not a financial statement?

A. Balance sheet

B. Income statement

C. Statement of owner’s equity

D. Trial balance

Question 18 of 40

2.5 Points

The business incurred an expense and paid it immediately. To record this __________.

A. an expense is debited and a liability is credited

B. an expense is debited and an asset is credited

C. an expense is debited and Capital is credited

D. None of the above answers are correct.

Question 19 of 40

2.5 Points

A credit to an asset account was posted to the capital account. This error would cause __________.

A. assets to be overstated

B. liabilities to be overstated

C. capital to be understated

D. Both A and C are correct.

Question 20 of 40

2.5 Points

A debit to a liability account was posted to the capital account. This error would cause __________.

A. assets to be overstated

B. liabilities to be overstated

C. capital to be overstated

D. None of the above answers are correct.

Question 21 of 40

2.5 Points

Which of the following entries records the owner taking cash for personal use?

A. debit Wage Expense; credit Cash

B. debit Capital; credit Cash

C. No entry is necessary since the owner owns the cash and the entire business.

D. debit Withdrawals; credit Cash

Question 22 of 40

2.5 Points

A credit to an asset account was posted to a revenue account. This would cause __________.

A. assets to be understated

B. liabilities to be understated

C. capital to be understated

D. revenue to be overstated

Question 23 of 40

2.5 Points

A credit to an asset account was posted to a liability account. This would cause __________.

A. assets to be understated

B. liabilities to be overstated

C. capital to be overstated

D. revenue to be overstated

Question 24 of 40

2.5 Points

A debit to a revenue account was posted to an expense account. This would cause __________.

A. expenses to be overstated

B. revenue to be understated

C. expenses to be understated

D. capital to be overstated

Question 25 of 40

2.5 Points

The purpose of posting is to __________.

A. list the transactions in chronological order in the journal

B. provide an explanation of the transaction

C. update the account balances in the ledger

D. correct a previous entry

Question 26 of 40

2.5 Points

The posting reference column on the general journal __________.

A. shows which transactions have been posted to the ledger

B. displays to which accounts the transactions have been posted

C. allows us to cross reference to the general ledger

D. All of the above answers are correct.

Question 27 of 40

2.5 Points

During the month of January, Katelyn invested $11,000 in starting her legal practice. The proper journal entry would be __________.

A. Cash, debit $11,000; Katelyn’s Capital, credit $11,000

B. Accounts Payable, debit $11,000; Cash, credit $11,000

C. Cash, debit $11,000; Revenue, credit $11,000

D. Katelyn’s Capital, debit $11,000; Cash, credit $11,000

Question 28 of 40

2.5 Points

Posting is performed by transferring information from the journal to the __________.

A. ledger

B. trial balance

C. balance sheet

D. income statement

Question 29 of 40

2.5 Points

A journal entry affecting three or more accounts is called a __________.

A. multi-level entry

B. multi-step entry

C. compound entry

D. simple entry

Question 30 of 40

2.5 Points

Business transactions are first recorded in the __________.

A. ledger

B. journal

C. trial balance

D. balance sheet

Question 31 of 40

2.5 Points

The process that begins with recording business transactions and includes the completion of the financial statements is the __________.

A. calendar year

B. natural business year

C. fiscal year

D. accounting cycle

Question 32 of 40

2.5 Points

A debit to a liability account was posted to a revenue account. This would cause __________.

A. assets to be overstated

B. liabilities to be overstated

C. capital to be overstated

D. revenue to be overstated

Question 33 of 40

2.5 Points

A debit to a liability account was posted to an expense account. This would cause __________.

A. assets to be overstated

B. liabilities to be understated

C. owner’s equity to be overstated

D. expenses to be overstated

Question 34 of 40

2.5 Points

The general journal __________.

A. is the book of original entry

B. is the book of final entry

C. contains account balances

D. is completed after the general ledger

Question 35 of 40

2.5 Points

The posting reference column in the ledger is __________.

A. used to record the journal and page number the transactions originated

B. used to record the ledger number

C. used to record the date

D. not used

Question 36 of 40

2.5 Points

A credit to a liability account was posted to an owner’s equity account. This would cause __________.

A. assets to be overstated

B. liabilities to be understated

C. owner’s equity to be understated

D. net income to be overstated

Question 37 of 40

2.5 Points

The twelve-month period a business chooses for its accounting period is a(n. __________.

A. calendar year

B. accounting period

C. fiscal year

D. accounting cycle

Question 38 of 40

2.5 Points

Revenue is traditionally recognized in the accounting records when __________.

A. cash is received

B. services are rendered

C. it is incurred

D. None of the above answers are correct.

Question 39 of 40

2.5 Points

Which of the following entries would record the payment of a utility bill?

A. debit Utilities Expense; credit Cash

B. debit Cash; credit Utilities Expense

C. debit Utilities Expense; credit Accounts Payable

D. debit Accounts Receivable; credit Utilities Expense

Question 40 of 40

2.5 Points

Which of the following entries records the acquisition of office supplies for cash?

Office Supplies

5,000

Cash

5,000

Office Supplies

5,000

Accounts Payable

5,000

Equipment

5,000

Accounts Payable

5,000

Equipment

5,000

Accounts Receivable

5,000

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Category: Accounting Tags: 0, accounting, accounts, aets, answer, answers, aociatess, average, bank, calculate, capital, carpenter, current, data, date, decimal, dollars, equity, firms, income, liabilities, margin, november, omit, ratio, responsemargin, round, sales, sign, signs, solutions, total, turnover, working, year

Description
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Description

Required:
(a) Firm D has net income of $109,500, sales of $2,342,000, and average total assets of $1,407,000. Calculate the firm’s margin, turnover, and ROI. (Omit the “%” sign in your response.)

Margin %
Turnover
ROI %

(b) Firm E has net income of $162,000, sales of $2,620,000, and ROI of 13%. Calculate the firm’s turnover and average total assets. (Omit the “$” sign in your response.)

Turnover $
Average total assets

(c) Firm F has ROI of 12.6%, average total assets of $1,754,159, and turnover of 1.3. Calculate the firm’s sales, margin, and net income. (Round your answers to the nearest whole numbers. Omit the “$” and “%” signs in your response.)

Net income $
Sales $
Margin %

2. For the year ended December 31, 2010 ,Carpenter Associates, earned an ROI of 11%. Sales for the year were $17 million, and average asset turnover was 2.4. Average owners’ equity was $3.3 million.
Required:
(a)
Calculate Carpenter Associates’s margin and net income. (Round your margin percentage to 1 decimal place and use the same for the calculation of net income. Enter your answer in dollars, not millions of dollars. Omit the “$” and “%” signs in your response.)

Margin %
Net income $

(b) Calculate Carpenter Associates’s return on equity. (Round your answer to the nearest whole percent. Omit the “%” sign in your response.)

ROE %

3.Pacific Industries, had current liabilities at November 30 of $68,900. The firm’s current ratio at that date was 1.7.

Required:
(a)
Calculate the firm’s current assets and working capital at November 30. (Omit the “$” sign in your response.)

Current assets $
Working capital $

(b)
Assume that management paid $17,500 of accounts payable on November 29. Calculate the current ratio and working capital at November 30 as if the November 29 payment had not been made. (Round your current ratio answer to two decimal places. Omit the “$” sign in your response.)

Working capital $
Current ratio
Attachment Preview:

equired:
(a)
Firm D has net income of $109,500, sales of $2,342,000, and average total assets
of $1,407,000. Calculate the firm’s margin, turnover, and ROI. (Omit the “%” sign in your
response.)
Margin
%
Turnover
ROI %
(b)
Firm E has net income of $162,000, sales of $2,620,000, and ROI of 13%.
Calculate the firm’s turnover and average total assets. (Omit the “$” sign in your
response.)
Turnover
$
Average total assets
(c)
Firm F has ROI of 12.6%, average total assets of $1,754,159, and turnover of 1.3.
Calculate the firm’s sales, margin, and net income. (Round your answers to the nearest
whole numbers. Omit the “$” and “%” signs in your response.)
Net income $
Sales $
Margin
%
2. For the year ended December 31, 2010 ,Carpenter Associates, earned an ROI of 11%.
Sales for the year were $17 million, and average asset turnover was 2.4. Average owners’
equity was $3.3 million.
Required:
(a)
Calculate Carpenter Associates’s margin and net income. (Round your margin percentage
to 1 decimal place and use the same for the calculation of net income. Enter your answer
in dollars, not millions of dollars. Omit the “$” and “%” signs in your response.)
Margin
%
Net income $
(b)
Calculate Carpenter Associates’s return on equity. (Round your answer to the
nearest whole percent. Omit the “%” sign in your response.)
ROE %
3.Pacific Industries, had current liabilities at November 30 of $68,900. The firm’s current
ratio at that date was 1.7.
Required:

(a)
Calculate the firm’s current assets and working capital at November 30. (Omit the “$”
sign in your response.)
Current assets
Working capital

$
$

(b)
Assume that management paid $17,500 of accounts payable on November 29. Calculate
the current ratio and working capital at November 30 as if the November 29 payment had
not been made. (Round your current ratio answer to two decimal places. Omit the “$”
sign in your response.)
Working capital
Current ratio

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18. Sanderson sells a single product for $50 that has a variable cost of $30. Fixed costsamount to $5 per unit when anticipated sales targets are met. If the company sells oneunit in excess of its break-even volume, profit will be:
A. $15.
B. $20.
C. $50.
D. an amount that cannot be derived based on the information presented.
E. an amount other than those in choices “A,” “B,” and “C”, but one that can be derivedbased on the information presented.
19. At a volume of 20,000 units, Dries reported sales revenues of $1,000,000, variablecosts of $300,000, and fixed costs of $260,000. The company’s contribution margin perunit is:
A. $22.
B. $28.
C. $35.
D. $37.
E. an amount other than those above.
20. At a volume of 20,000 units, Dries reported sales revenues of $1,000,000, variable
costs of $300,000, and fixed costs of $260,000. The company’s break-even point in units
is:
A. 7,027 (rounded).
B. 8,667 (rounded).
C. 9,286 (rounded).
D. 7,429 (rounded).
E. an amount other than those above.
21. A recent income statement of Black Corporation reported the following data:

If these data are based on the sale of 20,000 units, the contribution margin per unit would
be:
A. $40.
B. $150.
C. $290.
D. $360.
E. an amount other than those above.

22. A recent income statement of Black Corporation reported the following data:

If these data are based on the sale of 20,000 units, the break-even point would be:
A. 9,565 units (rounded).
B. 11,000 units (rounded).
C. 7,586 units (rounded).
D. 14,667 units (rounded).
E. an amount other than those above.
23. A recent income statement of Suni Corporation reported the following data:

If these data are based on the sale of 20,000 units, the break-even point would be:
A. 7,500 units.
B. 11,628 units.
C. 12,500 units.
D. 33,333 units.
E. an amount other than those above.
24. A recent income statement of Yang Corporation reported the following data:

If these data are based on the sale of 5,000 units, the break-even sales would be:
A. $2,000,000.
B. $2,206,000.
C. $2,500,000.
D. $10,000,000.
E. an amount other than those above.

25. Lawson, Inc. sells a single product for $12. Variable costs are $8 per unit and fixed
costs total $360,000 at a volume level of 60,000 units. Assuming that fixed costs do not
change, Lawson’s break-even point would be:
A. 30,000 units.
B. 45,000 units.
C. 90,000 units.
D. negative because the company loses $2 on every unit sold.
E. a positive amount other than those given above.
26. Grey, Inc. sells a single product for $20. Variable costs are $8 per unit and fixed costs
total $120,000 at a volume level of 5,000 units. Assuming that fixed costs do not change,
Green’s break-even sales would be:
A. $160,000.
B. $200,000.
C. $300,000.
D. $480,000.
E. an amount other than those above.
27. Orion recently reported sales revenues of $800,000, a total contribution margin of
$300,000, and fixed costs of $180,000. If sales volume amounted to 10,000 units, the
company’s variable cost per unit must have been:
A. $12.
B. $32.
C. $50.
D. $92.
E. an amount other than those above.
28. Strayer has a break-even point of 120,000 units. If the firm’s sole product sells for $40
and fixed costs total $480,000, the variable cost per unit must be:
A. $4.
B. $36.
C. $44.
D. an amount that cannot be derived based on the information presented.
E. an amount other than those in choices “A,” “B,” and “C”, but one that can be derived
based on the information presented.

29. Ribco Co. makes and sells only one product. The unit contribution margin is $6 and
the break-even point in unit sales is 24,000. The company’s fixed costs are:
A. $4,000.
B. $14,400.
C. $40,000.
D. $144,000.
E. an amount other than those above.
31. At a volume level of 500,000 units, Sullivan reported the following information:

The company’s contribution-margin ratio is closest to:
A. 0.33.
B. 0.40.
C. 0.60.
D. 0.67.
E. an amount other than those above.
44. A recent income statement of Dragonwood Corporation reported the following data:

If the company desired to earn a target profit of $1,270,000, it would have to sell:
A. 5,778 units.
B. 8,600 units.
C. 10,160 units.
D. 11,908 units.
E. an amount other than those above.

45. Yellow Dot, Inc. sells a single product for $10. Variable costs are $4 per unit and
fixed costs total $120,000 at a volume level of 10,000 units. What dollar sales level
would Yellow Dot have to achieve to earn a target profit of $240,000?
A. $400,000.
B. $500,000.
C. $600,000.
D. $750,000.
E. $900,000.
Narchie sells a single product for $50. Variable costs are 60% of the selling price, and the
company has fixed costs that amount to $400,000. Current sales total 16,000 units.
46. Narchie:
A. will break-even by selling 8,000 units.
B. will break-even by selling 13,333 units.
C. will break-even by selling 20,000 units.
D. will break-even by selling 1,000,000 units.
E. cannot break-even because it loses money on every unit sold.
47. Each unit that Narchie sells will:
A. increase profit by $20.
B. increase profit by $30.
C. increase profit by $50.
D. increase profit by some other amount.
E. decrease profit by $5.

48. In order to produce a target profit of $22,000, Narchie’s dollar sales must total:
A. $8,440.
B. $21,100.
C. $1,000,000.
D. $1,055,000.
E. an amount other than those above.
49. If Narchie sells 24,000 units, its safety margin will be:
A. $200,000.
B. $400,000.
C. $1,000,000.
D. $1,200,000.
E. an amount other than those above.
50. The difference between budgeted sales revenue and break-even sales revenue is the:
A. contribution margin.
B. contribution-margin ratio.
C. safety margin.
D. target net profit.
E. operating leverage.

51. Maxine’s budget for the upcoming year revealed the following figures:

If the company’s break-even sales total $750,000, Maxine’s safety margin would be:
A. $(90,000).
B. $90,000.
C. $246,000.
D. $336,000.
E. $696,000.
52. Brooklyn sells a single product to wholesalers. The company’s budget for the
upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable
cost per unit of $8, and total fixed costs of $360,000. Brooklyn’s safety margin in units
is:
A. (13,400).
B. 0.
C. 1,600.
D. 13,600.
E. an amount other than those above.
53. Brooklyn sells a single product to wholesalers. The company’s budget for the
upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable
cost per unit of $8, and total fixed costs of $360,000. If Brooklyn’s unit sales are 200
units less than anticipated, its breakeven point will:
A. increase by $12 per unit sold.
B. decrease by $12 per unit sold.
C. increase by $8 per unit sold.
D. decrease by $8 per unit sold.
E. not change.
54. Brooklyn sells a single product to wholesalers. The company’s budget for the
upcoming year revealed anticipated unit sales of 31,600, a selling price of $20, variable
cost per unit of $8, and total fixed costs of $360,000. If Brooklyn’s unit sales are 300
units more than anticipated, its break-even point will:
A. increase by $12 per unit sold.
B. decrease by $12 per unit sold.
C. increase by $8 per unit sold.
D. decrease by $8 per unit sold.
E. not change.

56. Danielle sells a single product at $20 per unit. The firm’s most recent income
statement revealed unit sales of 100,000, variable costs of $800,000, and fixed costs of
$400,000. If a $4 drop in selling price will boost unit sales volume by 20%, the company
will experience:
A. no change in profit because a 20% drop in sales price is balanced by a 20% increase in
volume.
B. an $80,000 drop in profit.
C. a $240,000 drop in profit.
D. a $400,000 drop in profit.
E. a change in profit other than those above.
60. O’Dale sells three products: R, S, and T. Budgeted information for the upcoming
accounting period follows.

The company’s weighted-average unit contribution margin is:
A. $3.00.
B. $3.55.
C. $4.00.
D. $19.35.
E. an amount other than those above.
Jamal & Co. makes and sells two types of shoes, Plain and Fancy. Data concerning these
products are as follows:

Sixty percent of the unit sales are Plain, and annual fixed expenses are $45,000.
62. The weighted-average unit contribution margin is:
A. $4.80.
B. $9.00.
C. $9.25.
D. $17.00.
E. an amount other than those above.

63. Assuming that the sales mix remains constant, the total number of units that Jamal
must sell to break even is:
A. 2,432.
B. 2,647.
C. 4,737.
D. 5,000.
E. an amount other than those above.
64. Assuming that the sales mix remains constant, the number of units of Plain that Jamal
must sell to break even is:
A. 2,000.
B. 3,000.
C. 3,375.
D. 5,000.
E. 5,625.
65. Assuming that the sales mix remains constant, the number of units of Fancy that
Jamal must sell to break even is:
A. 2,000.
B. 3,000.
C. 3,375.
D. 5,000.
E. 5,625.
77. The following information relates to Dazie Company:

Dazie’s operating leverage factor is closest to:
A. 0.067.
B. 0.167.
C. 0.400.
D. 2.500.
E. 6.000.

78. The following information relates to Paternus Company:

If a manager at Paternus desired to determine the percentage impact on income of a given
percentage change in sales, the manager would multiply the percentage increase/decrease
in sales revenue by:
A. 0.25.
B. 0.40.
C. 2.50.
D. 4.00.
E. 10.00.
Edmonco Company produced and sold 45,000 units of a single product last year, with the
following results:

79. Edmonco’s operating leverage factor was:
A. 4.
B. 5.
C. 6.
D. 7.
E. 8.

80. If Edmonco’s sales revenues increase 15%, what will be the percentage increase in
income before income taxes?
A. 15%.
B. 45%.
C. 60%.
D. 75%.
E. An amount other than those above.
83. A company, subject to a 40% tax rate, desires to earn $500,000 of after-tax income.
How much should the firm add to fixed costs when figuring the sales revenues necessary
to produce this income level?
A. $200,000.
B. $300,000.
C. $500,000.
D. $833,333.
E. $1,250,000.
84. Barrey, Inc. is subject to a 40% income tax rate. The following data pertain to the
period just ended when the company produced and sold 45,000 units:

How many units must Barrey sell to earn an after-tax profit of $180,000?
A. 42,000.
B. 45,000.
C. 51,000.
D. 61,000.
E. An amount other than those above.
85. Barrey, Inc. is subject to a 40% income tax rate. The following data pertain to the
period just ended when the company produced and sold 45,000 units:

How many units must Barrey sell to earn an after-tax profit of $225,000?
A. 67,250.
B. 62,250.
C. 61,000.
D. 51,000.
E. An amount other than those above

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2. To record a return of merchandise purchased on credit, the accountant would

debit Purchases Returns and Allowances and credit Accounts Receivable.

debit Purchases Returns and Allowances and credit Purchases.

debit Accounts Payable and credit Purchases Returns and Allowances.

debit Purchases and credit Purchases Returns and Allowances.

3 Which of the following statements is not correct?

Cash purchases of merchandise are not recorded in the purchases journal.

A credit purchase of equipment for use in the business would be recorded in the purchases journal.

The Purchases account has a normal debit balance.

The invoice date and credit terms must be carefully recorded in the purchases journal because they determine when payment is due

4 The net income for an accounting period can be determined using the worksheet by comparing the balances and determining the difference between the balances in the two

Income Statement columns.

Income Statement or Balance Sheet columns.

Balance Sheet Debit columns.

none of the above.

5 The current ratio is calculated by

dividing current assets by current liabilities.

dividing current liabilities by current assets.

dividing total assets by total current assets.

dividing current assets by total assets

6 With the accrual basis of accounting, it is appropriate to recognize revenue from a credit sale

on the date of the sale.

on the date the account is collected in full.

each time a payment on an account balance is received.

either on the date of the sale or when the amount of the sale is collected

20. Which of the following accounts is not closed?

Purchases

Rent Expense

Sales

Merchandise Inventory

21. Which of the following statements is not correct?

Uncollectible Accounts Expense is a contra asset account.

The cost less the salvage value equals the depreciable base of a long-term asset.

Each adjustment for an accrued expense includes a credit to a liability account.

If a firm records prepaid expense items in expense account when they pay for them, their adjustment at the end of the period to record the unexpired portion would include a debit to an asset account and a credit to an expense account.

22. The entry to reverse the adjusting entry for accrued payroll taxes expense includes

a debit to Payroll Taxes Expense.

a debit to Employee Income Tax Payable.

a credit to Social Security Tax Payable and a credit to Medicare Tax Payable.

a debit to Social Security Tax Payable and a debit to Medicare Tax Payable.

23. A reversing entry should not be made for an adjusting entry to record

the accrued salaries.

an accrued expense item that will involve future cash payments.

an accrued income item that will involved future cash receipts.

depreciation.

24. An adjusting entry is usually not required for an expense item when it is

paid for and recorded in one period but not fully used until a later period.

used in one period but not paid for or recorded until a later period.

paid for, recorded, and used in one period.

budgeted but not paid for or used during the period.

25. An income statement that lists all revenues in one section and all expenses in another section is known as a

classified income statement.

multiple-step income statement.

single-step income statement.

categorized income statement.26. Which of the following groups of accounts will have zero balances after the closing process is completed?

Allowance for Doubtful Accounts and Uncollectible Accounts Expense

Purchases and Purchases Returns and Allowances

Merchandise Inventory and Sales

Depreciation Expense and Accumulated Depreciation-Equipment27. Prepaid expenses appear in the

Operating Expenses section of the income statement.

Other Expenses section of the income statement.

Current Assets section of the balance sheet.

Current Liabilities section of the balance sheet.
28. The balance of the owner’s drawing account is

listed in the Other Expenses section of the income statement.

listed in the Current Assets section of the balance sheet.

used in the calculation of ending capital on a statement of owner’s equity.

listed in the Operating Expenses section of the income statement.

29. Which of the following statements is not correct?

The worksheet is the source of data for the general journal entries required to close the temporary accounts.

In the closing process, the balance of the owner’s drawing account is transferred to the debit side of the owner’s capital account.

In the closing process, the balance of the Purchases account is transferred to the Merchandise Inventory account.

All of the above statements are correct.

Which of the following accounts will appear on the postclosing trial balance?

Capital

Depreciation Expense

Sales

Payroll Tax Expense

On January 1, 20–, a firm purchased machinery for $17,000. Depreciation expense for 20–, given the straight-line method, a 5-year useful life, and a salvage value of $3,000, is

$3,000.

$3,400.

$2,800.

$2,400.

33. Which of the following accounts is not closed?

Accumulated Depreciation

Depreciation Expense

Interest Expense

Sales

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41. Theo needs $40,000 as a down payment for a house 6
years from now. He earns 3.5 percent on his savings. Theo can either deposit
one lump sum today for this purpose or he can wait a year and deposit a lump
sum. How much additional money must he deposit if he waits for one year rather
than making the deposit today?
A. $878.98
B. $911.13
C. $1,138.90
D. $1,348.03
E. $1,420.18

42. One year ago, you invested $1,800. Today it is
worth $1,924.62. What rate of interest did you earn?
A. 6.59 percent
B. 6.67 percent
C. 6.88 percent
D. 6.92 percent
E. 7.01 percent

43. According to the Rule of 72, you can do which one
of the following?
A. double your money in five years at 7.2 percent interest
B. double your money in 7.2 years at 8 percent interest
C. double your money in 8 years at 9 percent interest
D. triple your money in 7.2 years at 5 percent interest
E. triple your money at 10 percent interest in 7.2 years

44. Forty years ago, your mother invested $5,000.
Today, that investment is worth $430,065.11. What is the average annual rate of
return she earned on this investment?
A. 11.68 percent
B. 11.71 percent
C. 11.78 percent
D. 11.91 percent
E. 12.02 percent

45. Sixteen years ago, Alicia invested $1,000. Eight
years ago, Travis invested $2,000. Today, both Alicia’s and Travis’ investments
are each worth $2,400. Assume that both Alicia and Travis continue to earn
their respective rates of return. Which one of the following statements is
correct concerning these investments?
A. Three years from today, Travis’ investment will be worth more than
Alicia’s.
B. One year ago, Alicia’s investment was worth less than Travis’
investment.
C. Travis earns a higher rate of return than Alicia.
D. Travis has earned an average annual interest rate of 3.37 percent.
E. Alicia has earned an average annual interest rate of 6.01 percent.

46. Penn Station is saving money to build a new
loading platform. Two years ago, they set aside $24,000 for this purpose.
Today, that account is worth $28,399. What rate of interest is Penn Station
earning on this investment?
A. 6.39 percent
B. 7.47 percent
C. 8.78 percent
D. 9.23 percent
E. 9.67 percent

47. Fifteen years ago, Jackson Supply set aside
$130,000 in case of a financial emergency. Today, that account has increased in
value to $330,592. What rate of interest is the firm earning on this
money?
A. 5.80 percent
B. 6.42 percent
C. 6.75 percent
D. 7.28 percent
E. 7.53 percent

48. Fourteen years ago, your parents set aside $7,500
to help fund your college education. Today, that fund is valued at $26,180.
What rate of interest is being earned on this account?
A. 7.99 percent
B. 8.36 percent
C. 8.51 percent
D. 9.34 percent
E. 10.06 percent

49. Some time ago, Julie purchased eleven acres of land
costing $36,900. Today, that land is valued at $214,800. How long has she owned
this land if the price of the land has been increasing at 10.5 percent per
year?
A. 13.33 years
B. 16.98 years
C. 17.64 years
D. 19.29 years
E. 21.08 years

50. On your ninth birthday, you received $300 which
you invested at 4.5 percent interest, compounded annually. Your investment is
now worth $756. How old are you today?
A. age 29
B. age 30
C. age 31
D. age 32
E. age 33

Essay Questions

51. You want to deposit sufficient money today into a
savings account so that you will have $1,000 in the account three years from
today. Explain why you could deposit less money today if you could earn 3.5
percent interest rather than 3 percent interest.

52. You are considering two separate investments. Both
investments pay 7 percent interest. Investment A pays simple interest and
Investment B pays compound interest. Which investment should you choose, and
why, if you plan on investing for a period of 5 years?

53. What lesson does the future value formula provide
for young workers who are looking ahead to retiring some day?

54. You are considering two lottery payment options:
Option A pays $10,000 today and Option B pays $20,000 at the end of ten years.
Assume you can earn 6 percent on your savings. Which option will you choose if
you base your decision on present values? Which option will you choose if you
base your decision on future values? Explain why your answers are either the
same or different.

55. At an interest rate of 10 percent and using the
Rule of 72, how long will it take to double the value of a lump sum invested
today? How long will it take after that until the account grows to four times
the initial investment? Given the power of compounding, shouldn’t it take less
time for the money to double the second time?

Multiple Choice Questions

56. Assume the total cost of a college education will
be $300,000 when your child enters college in 16 years. You presently have
$75,561 to invest. What rate of interest must you earn on your investment to
cover the cost of your child’s college education?
A. 7.75 percent
B. 8.50 percent
C. 9.00 percent
D. 9.25 percent
E. 9.50 percent

57. At 11 percent interest, how long would it take to
quadruple your money?
A. 6.55 years
B. 6.64 years
C. 13.09 years
D. 13.28 years
E. 13.56 years

58. Assume the average vehicle selling price in the
United States last year was $41,996. The average price 9 years earlier was
$29,000. What was the annual increase in the selling price over this time
period?
A. 3.89 percent
B. 4.20 percent
C. 4.56 percent
D. 5.01 percent
E. 5.40 percent

59. You’re trying to save to buy a new $160,000
Ferrari. You have $56,000 today that can be invested at your bank. The bank
pays 6 percent annual interest on its accounts. How many years will it be
before you have enough to buy the car? Assume the price of the car remains
constant.
A. 16.67 years
B. 17.04 years
C. 17.41 years
D. 17.87 years
E. 18.02 years

60. Imprudential, Inc. has an unfunded pension
liability of $850 million that must be paid in 25 years. To assess the value of
the firm’s stock, financial analysts want to discount this liability back to
the present. The relevant discount rate is 6.5 percent. What is the present
value of this liability?
A. $159,803,162
B. $171,438,907
C. $176,067,311
D. $184,519,484
E. $191,511,367

61. You have just received notification that you have
won the $1.4 million first prize in the Centennial Lottery. However, the prize
will be awarded on your 100^th birthday, 70 years from now. The
appropriate discount rate is 8 percent. What is the present value of your
winnings?
A. $4,288.16
B. $6,404.20
C. $15,309.91
D. $23,333.33
E. $25,000.00

62. Your coin collection contains fifty-four 1941
silver dollars. Your grandparents purchased them for their face value when they
were new. These coins have appreciated at a 10 percent annual rate. How much
will your collection be worth when you retire in 2060?
A. $3,611,008
B. $3,987,456
C. $4,122,394
D. $4,421,008
E. $4,551,172

63. In 1895, the winner of a competition was paid
$110. In 2006, the winner’s prize was $70,000. What will the winner’s prize be
in 2040 if the prize continues increasing at the same rate?
A. $389,400
B. $421,122
C. $479,311
D. $505,697
E. $548,121

64. Suppose that the first comic book of a classic
series was sold in 1954. In 2000, the estimated price for this comic book in
good condition was about $340,000. This represented a return of 27 percent per
year. For this to be true, what was the original price of the comic book in
1954?
A. $5.00
B. $5.28
C. $5.50
D. $5.71
E. $6.00

65. Suppose you are committed to owning a $140,000
Ferrari. You believe your mutual fund can achieve an annual rate of return of 9
percent and you want to buy the car in 7 years. How much must you invest today
to fund this purchase assuming the price of the car remains constant?
A. $74,208.16
B. $76,584.79
C. $77,911.08
D. $78,019.82
E. $79,446.60

66. You have just made a $1,500 contribution to your
individual retirement account. Assume you earn a 12 percent rate of return and
make no additional contributions. How much more will your account be worth when
you retire in 25 years than it would be if you waited another 10 years before
making this contribution?
A. $8,306.16
B. $9,658.77
C. $16,311.18
D. $16,907.17
E. $17,289.75

67. You are scheduled to receive $30,000 in two years.
When you receive it, you will invest it for 5 more years, at 8 percent per
year. How much money will you have 7 years from now?
A. $39,909.19
B. $41,381.16
C. $44,079.84
D. $47,209.19
E. $51,414.73

68. You expect to receive $9,000 at graduation in 2
years. You plan on investing this money at 10 percent until you have $60,000.
How many years will it be until this occurs?
A. 18.78 years
B. 19.96 years
C. 21.90 years
D. 23.08 years
E. 25.00 years

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1. You are investing $100 today in a savings account
at your local bank. Which one of the following terms refers to the value of
this investment one year from now?
A. future value
B. present value
C. principal amounts
D. discounted value
E. invested principal

2. Tracy invested $1,000 five years ago and earns 4
percent interest on her investment. By leaving her interest earnings in her
account, she increases the amount of interest she earns each year. The way she
is handling her interest income is referred to as which one of the
following?
A. simplifying
B. compounding
C. aggregation
D. accumulation
E. discounting

3. Steve invested $100 two years ago at 10 percent
interest. The first year, he earned $10 interest on his $100 investment. He
reinvested the $10. The second year, he earned $11 interest on his $110
investment. The extra $1 he earned in interest the second year is referred to
as:
A. free interest.
B. bonus income.
C. simple interest.
D. interest on interest.
E. present value interest.

4. Interest earned on both the initial principal and
the interest reinvested from prior periods is called:
A. free interest.
B. dual interest.
C. simple interest.
D. interest on interest.
E. compound interest.

5. Sara invested $500 six years ago at 5 percent
interest. She spends her earnings as soon as she earns any interest so she only
receives interest on her initial $500 investment. Which type of interest is
Sara earning?
A. free interest
B. complex interest
C. simple interest
D. interest on interest
E. compound interest

6. Shelley won a lottery and will receive $1,000 a
year for the next ten years. The value of her winnings today discounted at her
discount rate is called which one of the following?
A. single amount
B. future value
C. present value
D. simple amount
E. compounded value

7. Terry is calculating the present value of a bonus
he will receive next year. The process he is using is called:
A. growth analysis.
B. discounting.
C. accumulating.
D. compounding.
E. reducing.

8. Steve just computed the present value of a $10,000
bonus he will receive in the future. The interest rate he used in this process
is referred to as which one of the following?
A. current yield
B. effective rate
C. compound rate
D. simple rate
E. discount rate

9. The process of determining the present value of
future cash flows in order to know their worth today is called which one of the
following?
A. compound interest valuation
B. interest on interest computation
C. discounted cash flow valuation
D. present value interest factoring
E. complex factoring

10. Andy deposited $3,000 this morning into an account
that pays 5 percent interest, compounded annually. Barb also deposited $3,000
this morning into an account that pays 5 percent interest, compounded annually.
Andy will withdraw his interest earnings and spend it as soon as possible. Barb
will reinvest her interest earnings into her account. Given this, which one of
the following statements is true?
A. Barb will earn more interest the first year than Andy will.
B. Andy will earn more interest in year three than Barb will.
C. Barb will earn interest on interest.
D. After five years, Andy and Barb will both have earned the same amount
of interest.
E. Andy will earn compound interest.

11. Sue and Neal are twins. Sue invests $5,000 at 7
percent when she is 25 years old. Neal invests $5,000 at 7 percent when he is
30 years old. Both investments compound interest annually. Both Sue and Neal
retire at age 60. Which one of the following statements is correct assuming
that neither Sue nor Neal has withdrawn any money from their accounts?
A. Sue will have less money when she retires than Neal.
B. Neal will earn more interest on interest than Sue.
C. Neal will earn more compound interest than Sue.
D. If both Sue and Neal wait to age 70 to retire, then they will have
equal amounts of savings.
E. Sue will have more money than Neal as long as they retire at the same
time.

12. Samantha opened a savings account this morning.
Her money will earn 5 percent interest, compounded annually. After five years,
her savings account will be worth $5,600. Assume she will not make any
withdrawals. Given this, which one of the following statements is true?
A. Samantha deposited more than $5,600 this morning.
B. The present value of Samantha’s account is $5,600.
C. Samantha could have deposited less money and still had $5,600 in five
years if she could have earned 5.5 percent interest.
D. Samantha would have had to deposit more money to have $5,600 in five
years if she could have earned 6 percent interest.
E. Samantha will earn an equal amount of interest every year for the next
five years.

13. This afternoon, you deposited $1,000 into a
retirement savings account. The account will compound interest at 6 percent
annually. You will not withdraw any principal or interest until you retire in
forty years. Which one of the following statements is correct?
A. The interest you earn six years from now will equal the interest you
earn ten years from now.
B. The interest amount you earn will double in value every year.
C. The total amount of interest you will earn will equal $1,000Â´ .06Â´ 40.
D. The present value of this investment is equal to $1,000.
E. The future value of this amount is equal to $1,000Â´ (1 + 40)^.06.

14. Your grandmother has promised to give you $5,000
when you graduate from college. She is expecting you to graduate two years from
now. What happens to the present value of this gift if you delay your
graduation by one year and graduate three years from now?
A. remains constant
B. increases
C. decreases
D. becomes negative
E. cannot be determined from the information provided

15. Luis is going to receive $20,000 six years from
now. Soo Lee is going to receive $20,000 nine years from now. Which one of the
following statements is correct if both Luis and Soo Lee apply a 7 percent
discount rate to these amounts?
A. The present values of Luis and Soo Lee’s monies are equal.
B. In future dollars, Soo Lee’s money is worth more than Luis’ money.
C. In today’s dollars, Luis’ money is worth more than Soo Lee’s.
D. Twenty years from now, the value of Luis’ money will be equal to the
value of Soo Lee’s money.
E. Soo Lee’s money is worth more than Luis’ money given the 7 percent
discount rate.

16. Which one of the following variables is the
exponent in the present value formula?
A. present value
B. future value
C. interest rate
D. time
E. There is no exponent in the present value formula.

17. You want to have $1 million in your savings
account when you retire. You plan on investing a single lump sum today to fund
this goal. You are planning on investing in an account which will pay 7.5
percent annual interest. Which of the following will reduce the amount that you
must deposit today if you are to have your desired $1 million on the day you
retire?
I. Invest in a different account paying a higher rate of interest.
II. Invest in a different account paying a lower rate of interest.
III. Retire later.
IV. Retire sooner.
A. I only
B. II only
C. I and III only
D. I and IV only
E. II and III only

18. Which one of the following will produce the
highest present value interest factor?
A. 6 percent interest for five years
B. 6 percent interest for eight years
C. 6 percent interest for ten years
D. 8 percent interest for five years
E. 8 percent interest for ten years

19. What is the relationship between present value and
future value interest factors?
A. The present value and future value factors are equal to each other.
B. The present value factor is the exponent of the future value factor.
C. The future value factor is the exponent of the present value factor.
D. The factors are reciprocals of each other.
E. There is no relationship between these two factors.

20. Martin invested $1,000 six years ago and expected
to have $1,500 today. He has not added or withdrawn any money from this account
since his initial investment. All interest was reinvested in the account. As it
turns out, Martin only has $1,420 in his account today. Which one of the
following must be true?
A. Martin earned simple interest rather than compound interest.
B. Martin earned a lower interest rate than he expected.
C. Martin did not earn any interest on interest as he expected.
D. Martin ignored the Rule of 72 which caused his account to decrease in
value.
E. The future value interest factor turned out to be higher than Martin
expected.

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21. Gerold invested $6,200 in an account that pays 5
percent simple interest. How much money will he have at the end of ten
years?
A. $8,710
B. $9,000
C. $9,300
D. $9,678
E. $10,099

22. Alex invested $10,500 in an account that pays 6
percent simple interest. How much money will he have at the end of four
years?
A. $12,650
B. $12,967
C. $13,020
D. $13,256
E. $13,500

23. You invested $1,650 in an account that pays 5
percent simple interest. How much more could you have earned over a 20-year
period if the interest had compounded annually?
A. $849.22
B. $930.11
C. $982.19
D. $1,021.15
E. $1,077.94

24. Travis invested $9,250 in an account that pays 6
percent simple interest. How much more could he have earned over a 7-year
period if the interest had compounded annually?
A. $741.41
B. $773.58
C. $802.16
D. $833.33
E. $858.09

25. What is the future value of $7,189 invested for 23
years at 9.25 percent compounded annually?
A. $22,483.60
B. $27,890.87
C. $38,991.07
D. $51,009.13
E. $54,999.88

26. Today, you earn a salary of $36,000. What will be
your annual salary twelve years from now if you earn annual raises of 3.6
percent?
A. $55,032.54
B. $57,414.06
C. $58,235.24
D. $59,122.08
E. $59,360.45

27. You own a classic automobile that is currently
valued at $147,900. If the value increases by 6.5 percent annually, how much
will the automobile be worth ten years from now?
A. $244,035.00
B. $251,008.17
C. $270,013.38
D. $277,628.63
E. $291,480.18

28. You hope to buy your dream car four years from
now. Today, that car costs $82,500. You expect the price to increase by an
average of 4.8 percent per year over the next four years. How much will your
dream car cost by the time you are ready to buy it?
A. $98,340.00
B. $98,666.67
C. $99,517.41
D. $99,818.02
E. $100,023.16

29. This morning, TL Trucking invested $80,000 to help
fund a company expansion project planned for 4 years from now. How much
additional money will the firm have 4 years from now if it can earn 5 percent
rather than 4 percent on its savings?
A. $2,940.09
B. $3,651.82
C. $4,008.17
D. $4,219.68
E. $4,711.08

30. You just received $225,000 from an insurance
settlement. You have decided to set this money aside and invest it for your
retirement. Currently, your goal is to retire 25 years from today. How much
more will you have in your account on the day you retire if you can earn an
average return of 10.5 percent rather than just 8 percent?
A. $417,137
B. $689,509
C. $1,050,423
D. $1,189,576
E. $1,818,342

31. You just received a $5,000 gift from your
grandmother. You have decided to save this money so that you can gift it to
your grandchildren 50 years from now. How much additional money will you have
to gift to your grandchildren if you can earn an average of 8.5 percent instead
of just 8 percent on your savings?
A. $47,318.09
B. $52,464.79
C. $55,211.16
D. $58,811.99
E. $60,923.52

32. You are depositing $1,500 in a retirement account
today and expect to earn an average return of 7.5 percent on this money. How
much additional income will you earn if you leave the money invested for 45
years instead of just 40 years?
A. $10,723.08
B. $11,790.90
C. $12,441.56
D. $12,908.19
E. $13,590.93

33. You collect old coins. Today, you have two coins
each of which is valued at $250. One coin is expected to increase in value by 6
percent annually while the other coin is expected to increase in value by 4.5
percent annually. What will be the difference in the value of the two coins 15
years from now?
A. $115.32
B. $208.04
C. $241.79
D. $254.24
E. $280.15

34. Your father invested a lump sum 26 years ago at
4.25 percent interest. Today, he gave you the proceeds of that investment which
totaled $51,480.79. How much did your father originally invest?
A. $15,929.47
B. $16,500.00
C. $17,444.86
D. $17,500.00
E. $17,999.45

35. What is the present value of $150,000 to be
received 8 years from today if the discount rate is 11 percent?
A. $65,088.97
B. $71,147.07
C. $74,141.41
D. $79,806.18
E. $83,291.06

36. You would like to give your daughter $75,000
towards her college education 17 years from now. How much money must you set
aside today for this purpose if you can earn 8 percent on your
investments?
A. $18,388.19
B. $20,270.17
C. $28,417.67
D. $29,311.13
E. $32,488.37

37. You want to have $35,000 saved 6 years from now to
buy a house. How much less do you have to deposit today to reach this goal if you
can earn 5.5 percent rather than 5 percent on your savings? Today’s deposit is
the only deposit you will make to this savings account.
A. $733.94
B. $791.18
C. $824.60
D. $845.11
E. $919.02

38. Your older sister deposited $5,000 today at 8.5
percent interest for 5 years. You would like to have just as much money at the
end of the next 5 years as your sister will have. However, you can only earn 7
percent interest. How much more money must you deposit today than your sister
did if you are to have the same amount at the end of the 5 years?
A. $321.19
B. $360.43
C. $387.78
D. $401.21
E. $413.39

39. A year ago, you deposited $30,000 into a
retirement savings account at a fixed rate of 5.5 percent. Today, you could
earn a fixed rate of 6.5 percent on a similar type account. However, your rate
is fixed and cannot be adjusted. How much less could you have deposited last
year if you could have earned a fixed rate of 6.5 percent and still have the
same amount as you currently will when you retire 38 years from today?
A. $2,118.42 less
B. $3,333.33 less
C. $5,417.09 less
D. $7,274.12 less
E. $9,234.97 less

40. When you retire 40 years from now, you want to
have $1.2 million. You think you can earn an average of 12 percent on your
investments. To meet your goal, you are trying to decide whether to deposit a
lump sum today, or to wait and deposit a lump sum 2 years from today. How much
more will you have to deposit as a lump sum if you wait for 2 years before
making the deposit?
A. $1,414.14
B. $2,319.47
C. $2,891.11
D. $3,280.78
E. $3,406.78

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89. Mr. and Mrs. Arlette spent $5,900 for child care for
their 12-year-old daughter. Mr. Arlette’s earned

income was $178,000, Mrs. Arlette’s earned income was
$33,100, and the AGI on their joint return was

$225,200. Calculate their dependent care credit.

A. $5,900

B. $1,180

C. $600

D. $0

90. Mr. and Mrs. Borem spent $1,435 for child care for their
two dependent children, who are two and four

years old. Mr. Borem’s earned income was $55,870, Mrs. Borem
had no earned income, and the AGI on

their joint return was $66,210. Calculate their dependent
care credit.

A. $0

B. $287

C. $502

D. $1,435

91. Mr. and Mrs. Harvey’s tax liability before credits was
$1,675. Their income tax withholding was $1,050,

and they are entitled to a $1,189 earned income credit.
Which of the following statements is true?

A. The Harveys are entitled to a $1,050 tax refund.

B. The Harveys are entitled to a $1,189 tax refund.

C. The Harveys are entitled to a $564 tax refund.

D. The Harveys owe no additional tax but they are not
entitled to a refund.

92. Mr. Marshall was employed by IMP Inc. until October,
when he accepted a new position with Turine Inc.

Mr. Marshall earned $129,000 compensation from IMP and
$36,000 compensation from Turine. Which

of the following statements is false?

A. Turine must withhold Social Security tax from Mr.
Marshall’s $36,000 compensation.

B. Turine must withhold Medicare tax from Mr. Marshall’s
$36,000 compensation.

Mr. Marshall is entitled to an income tax credit for excess
Social Security tax withheld by his

employers this year.

D. None of the above is false.

93. Mrs. Lincoln was employed by GGH Inc. until October,
when he accepted a new position with Murdock

Inc. Mrs. Lincoln earned $145,000 compensation from GGH and
$36,000 compensation from Murdock.

Which of the following statements is false?

A. Murdock must withhold Social Security tax from Mrs.
Lincoln’s $36,000 compensation.

B. Murdock must withhold Medicare tax from Mrs. Lincoln’s
$36,000 compensation.

Mrs. Lincoln is entitled to an income tax credit for both
excess Social Security tax and excess Medicare

tax withheld by her employers this year.

Both GGH and Murdock must pay the full amount of employer
payroll tax on the compensation paid

to Mrs. Lincoln.

94. Which of the following statements concerning the
individual alternative minimum tax (AMT) is true?

The calculation of alternative minimum taxable income begins
with taxable income for regular tax

purposes.

B. A taxpayer with no tax preference items for the year
can’t be liable for AMT.

C. An individual is allowed the same exemption as a
corporation in calculating the AMT base.

D. The individual AMT rate is a flat 28%.

95. Ruth Anne, a single taxpayer, reported $152,600
alternative minimum taxable income before any

exemption on her Form 1040. Calculate Ruth Anne’s
alternative minimum tax exemption.

A. $10,025

B. $38,425

C. $48,450

D. None of the above

96. Mr. and Mrs. Stern reported $312,400 alternative minimum
taxable income before any exemption on their

Form 1040. Calculate their alternative minimum tax
exemption.

A. $0

B. $40,600

C. $74,450

D. None of the above

97. Mr. and Mrs. Reid reported $135,700 ordinary taxable
income for regular tax purposes and had $58,200

positive AMT adjustments and preferences. Compute their
tentative AMT.

A. $31,967

B. $33,911

C. $37,161

D. $40,019

98. Mr. and Mrs. Luang reported $417,900 ordinary taxable
income for regular tax purposes and had $39,100

positive AMT adjustments and preferences. Compute their
tentative AMT.

A. $124,460

B. $127,960

C. $104,594

D. None of the above

99. Mr. and Mrs. King’s regular tax liability on their joint
return was $111,850. Which of the following

statements is true?

A. If the Kings’ tentative minimum tax is $103,300, their
total tax liability is $103,300.

B. If the Kings’ tentative minimum tax is $103,300, their
total tax liability is $111,850.

C. If the Kings’ tentative minimum tax is $143,800; their
total tax liability is $143,800.

D. Both b. and c. are true.

100.Ms. Dorley’s regular tax liability on her Form 1040 is
$45,890. Which of the following statements is

true?

A. If Ms. Dorley’s tentative minimum tax is $50,700, her
total tax liability is $97,590.

B. If Ms. Dorley’s AMT is $6,380, her total tax liability is
$52,270.

C. If Ms. Dorley’s AMT is $10,112, her total tax liability
is $45,890.

D. If Ms. Dorley’s tentative minimum tax is $38,682, her
total tax liability is $38,682.

101.Ms. Kilo’s regular income tax before credits on her Form
1040 is $45,890, and she has a $5,700 minimum

tax credit from a previous year. Which of the following
statements is true?

A. If Ms. Kilo’s tentative minimum tax is $50,500, her total
tax liability is $44,800.

B. If Ms. Kilo’s tentative minimum tax is $42,400, her total
tax liability is $40,190.

C. If Ms. Kilo’s tentative minimum tax is $42,400, her total
tax liability is $42,400.

D. Both a. and c. are true.

102.Last year, Mr. Corbett’s AGI was $141,000, and his total
tax liability was $33,650. This year, his total

tax liability is $35,290. Compute the minimum amount of
current year tax that Mr. Corbett had to prepay

(withholding and estimated payments) to avoid an underpayment
penalty.

A. $31,761

B. $33,650

C. $30,285

D. $35,290

103.Last year, Mr. Tyker’s AGI was $182,800, and his total
tax liability was $51,650. This year, his total

tax liability is $65,440. Compute the minimum amount of
current year tax that Mr. Tyker had to prepay

(withholding and estimated payments) to avoid an
underpayment penalty.

A. $65,440

B. $51,650

C. $56,815

D. $58,896

104.Which of the following statements regarding tax payments
is true?

Sole proprietors must make quarterly estimated payments of income
tax, but self-employment tax is

not due until the return is filed.

Sole proprietors must make quarterly estimated payments of
self-employment tax, but income tax is not

due until the return is filed.

C. Sole proprietors must make quarterly estimated payments
of income tax and self-employment tax.

D. Sole proprietors are not required to pay income tax or
self-employment tax until the return is filed.

105.Which of the following statements concerning extensions
of time to file an individual tax return is true?

A. The extension of time to file does not extend the time
for payment of tax.

B. The extension of time to file is for four months.

An individual who requests an extension of time to file must
provide the IRS with a reasonable

explanation.

D. The IRS may disapprove an extension request if the
taxpayer fails to provide a reasonable explanation.

106.Which of the following statements concerning extensions
of time to file an individual tax return is false?

A. The extension of time to file does not extend the time
for payment of any tax due.

An individual may receive an automatic extension of the
filing date without providing any explanation

to the IRS.

C. The extended due date of a calendar-year individual tax
return is October 15 of the following year.

D. An extension request must be filed before the end of the
taxable year.

107.Mr. and Mrs. Reece couldn’t complete their 2010 Form
1040 before April 15, 2011. They estimate that

they will have a $700 balance of tax due with the return.
Which of the following statement is true?

A. If the Reeces fail to file their return by April 15, they
will owe penalties to the IRS.

The Reeces can file an extension request by April 15 to
extend the tax payment and filing date for six

months without penalty.

The Reeces can file an extension request by April 15 to
extend the filing date for six months without

penalty. They must pay the $700 estimated balance of tax due
with the extension request.

D. None of the above is true.

108.Determine Mr. Smith’s 2011 filing status in each of the
following independent cases.

a. Mr. Smith and Mrs. Smith were legally divorced on
December 1. Mr. Smith has not remarried and has

no dependent children.

b. Mr. Smith and the first Mrs. Smith were legally divorced
on February 10. Mr. Smith remarried the

second Mrs. Smith on December 5. He has no dependent
children.

c. Mrs. Smith dies on June 22. Mr. Smith has not remarried
and has no dependent children.

d. Mrs. Smith died on November 1, 2009. Mr. Smith has not
remarried and maintains a home for one

dependent child.

e. Mrs. Smith died on April 3, 2010. Mr. Smith has not
remarried and has no dependent children.

f. Mr. and Mrs. Smith were legally divorced on September 10,
2007. Mr. Smith has not remarried and

maintains a home for his two dependent children.

109.Mr. and Mrs. Bennett file a joint tax return. Determine
if each of the following unmarried individuals is

either a qualifying child or a qualifying relative for whom
the couple can claim an exemption.

a. Son Alex, age 22, lives in his parents’ home and works
fulltime as a tax accountant. Alex is selfsupporting

except for the fact that he does not pay rent to his
parents.

b. Daughter Samantha, age 20, is a full-time college
student. Samantha lives in a dormitory during the

school year, but her parents’ home is her permanent
residence and they provide 100% of her financial

support.

c. Mr. Bennett’s brother Max is 42 years old and mentally
handicapped. Max lives in a privately operated

group home, and Mr. and Mrs. Bennett provide 100% of his
financial support. Max has no gross income.

d. Mrs. Bennett’s mother, Vera, age 67, lives in a
retirement community. Mr. and Mrs. Bennett provide

about 75% of her financial support. Vera earned $5,000 this
year as a part-time receptionist.

110.Eileen, a single individual, had $125,000 taxable
income. Compute her income tax assuming that:

a. Taxable income includes no capital gains.

b. Taxable income includes $14,000 capital gain eligible for
the 15% preferential rate.

111.Alice Grim, a single taxpayer, has $219,000 taxable
income, which includes a $20,000 capital gain

taxed at 15%. Her alternative minimum taxable income in
excess of her exemption amount is $237,400.

Compute Alice’s regular tax, AMT, and total tax.

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76. Benjamin, who files as a single taxpayer, has $359,900
taxable income in 2011. Compute his regular tax

liability.

A. $103,664

B. $110,551

C. $118,767

D. None of the above

77. Alice is an unmarried individual. She has $182,340
taxable income in 2011. Compute Alice’s regular tax

liability if she files as a single taxpayer and if she files
as a head of household.

A. Single $41,827; head of household $39,892

B. Single $60,172; head of household $51,055

C. Single $45,119; head of household $42,230

D. None of the above

78. Ms. Kilo is an unmarried individual. She has $219,344
taxable income in 2011. Compute Ms. Kilo’s

regular tax liability if she files as a single taxpayer and
if she files as a surviving spouse.

A. Single $57,500; surviving spouse $61,924

B. Single $57,281; surviving spouse $54,174

C. Single $43,896; surviving spouse $49,838

D. None of the above

79. Which of the following statements regarding the
calculation of regular tax liability is false?

A. The rate schedule for calculating regular tax liability
depends on the taxpayer’s filing status.

All taxpayer, regardless of the amount of their taxable
income, pay a 10% tax on their first bracket of

income.

C. The individual tax rate schedules are adjusted annually
for inflation.

The tax brackets in the single rate schedule are one-half of
the brackets in the married-filing-jointly

rate schedule.

80. Which of the following statements regarding the
calculation of regular tax liability is false?

A. Regardless of filing status, the highest marginal rate
for individual taxpayers is 35%.

B. The individual tax rate schedules are adjusted annually
for inflation.

The tax brackets in the married-filing-separately rate
schedule are one-half of the brackets in the

married-filing-jointly rate schedule.

D. None of the above is false.

81. Mr. and Mrs. David file a joint tax return. They have
$169,300 taxable income in 2011, $120,300 of

which is ordinary income and $49,000 of which is taxed at a
15% preferential rate. Compute their tax

savings from the preferential rate.

A. $6,370

B. $5,799

C. $4,900

D. None of the above.

82. Mr. and Mrs. Daniels had the following income items in
2011:

Mr. and Mrs. Daniels have no dependents and claim the standard
deduction. Compute their income tax

liability on a joint return.

A. $20,585

B. $21,363

C. $22,248

D. $23,559

83. Linda and Raj are engaged to be married. Linda’s 2011
taxable income as a single individual would

$83,500. Raj’s 2011 taxable income as a single individual
would be $118,000. When they marry before

the end of 2011, how much of a marriage penalty will they
incur?

A. $0

B. $388

C. $833

D. None of the above

84. Which of the following situations result in a marriage
penalty for federal income tax purposes?

Mr. and Mrs. Gooding, who have filed a joint return for 11
years, divorce before the end of the tax

year.

Mr. Dylan, who is a head of household, marries Ms. Boyle,
who has no taxable income, before the end

of the tax year.

Mr. and Mrs. Small, who have filed a joint return for 20
years, elect to file separate tax returns this

year.

Mr. Langley, a single taxpayer, marries Ms. Nuyen, also a
single taxpayer. Both individuals earn a

salary in excess of $100,000.

85. Mr. and Mrs. Kain reported $80,000 AGI on their joint
return. The couple has four dependent children:

Beatrice, age 19; Bruce, age 16; Angie, age 11, and Arnold,
age 8. Compute the Kains’ child credit.

A. $1,000

B. $2,000

C. $3,000

D. $4,000

86. Mr. and Mrs. Cox reported $115,900 AGI on their joint
return. The couple has three dependent children

under age 17. Compute their child credit.

A. $0

B. $2,100

C. $2,700

D. $3,000

87. Mr. and Mrs. Lansing, who file a joint tax return, have
four dependent children under age 17. Which of

the following statements is false?

A. If the Lansings’ AGI is $77,900, their child credit is
$4,000.

B. If the Lansings’ AGI is $127,300, their child credit is
$3,100.

C. If the Lansings’ AGI is $196,000, their child credit is
zero.

D. None of the above is false.

88. Lennie and Margo spent $2,800 for child care for their
7-year-old son. Lennie’s earned income was

$41,000, Margo’s earned income was $24,800, and the AGI on
their joint return was $71,200. Calculate

their dependent care credit.

A. $0

B. $560

C. $980

D. $2,800

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51. Mrs. Raines died on June 2, 2010. Mr. Raines has not
remarried and has no children or other dependents.

What is his filing status for 2010 and 2011?

A. Surviving spouse for 2010 and 2011.

B. Surviving spouse for 2010; single for 2011.

C. Married filing jointly for 2010; surviving spouse for
2011.

D. Married filing jointly for 2010; single for 2011.

52. Which of the following taxpayers can’t use the tax rates
for married filing jointly in 2011?

A. Mr. Lane died on August 10, 2011. Mrs. Lane has not
remarried and has no dependent children.

Mrs. Holden died on January 15, 2010. Mr. Holden has not
remarried and maintains a home for two

dependent children.

Mr. and Mrs. West were legally divorced on December 21,
2011. Mrs. West has not remarried and

maintains a home for three dependent children.

D. All of the above taxpayers qualify for married filing
jointly filing status.

53. Marie, an unmarried taxpayer, is 26 years old. This
year, Marie earned $50,000 gross income. Her

itemized deductions totaled $5,100. Marie maintained a home
for her 12-year-old sister who qualifies as

Marie’s dependent. Compute Marie’s taxable income.

A. $41,200

B. $34,100

C. $36,800

D. None of the above

54. Mr. and Mrs. Liddy, ages 39 and 41, file a joint return
and have no dependents for the year. Here is their

relevant information.

Compute their adjusted gross income (AGI) and taxable
income.

A. AGI $50,200; taxable income $31,200

B. AGI $47,000; taxable income $31,200

C. AGI $47,000; taxable income $39,600

D. AGI $50,200; taxable income $39,600

55. Mr. and Mrs. Dell, ages 29 and 26, file a joint return
and have no dependents for the year. Here is their

relevant information.

Compute their adjusted gross income (AGI) and taxable
income.

A. AGI $44,700; taxable income $37,300

B. AGI $58,700; taxable income $37,300

C. AGI $58,700; taxable income $39,700

D. AGI $58,700; taxable income $44,700

56. Which of the following statements regarding the
calculation of taxable income is false?

A. The first step in the calculation of taxable income is determining
the taxpayer’s total income.

B. Adjusted gross income is equal to total income less
above-the-line deductions.

C. Adjusted gross income can be reduced by the greater of
the standard deduction or itemized deductions.

Taxpayers are allowed to deduct the greater of itemized
deductions or above-the-line deductions in

calculating taxable income.

57. Julie, an unmarried individual, lives in a home with her
13-year-old dependent son, Oscar. This year,

Julie had the following tax information.

Compute Julie’s adjusted gross income (AGI) and taxable
income.

A. AGI $118,000; taxable income $105,800

B. AGI $118,000; taxable income $95,200

C. AGI $118,000; taxable income $102,100

D. AGI $111,100; taxable income $97,900

58. Julie, an unmarried individual, lives in a home with her
13-year-old dependent son, Oscar. This year,

Julie had the following tax information.

Compute Julie’s adjusted gross income (AGI) and taxable
income.

A. AGI $97,800; taxable income $70,300

B. AGI $97,800; taxable income $76,800

C. AGI $91,300; taxable income $77,700

D. AGI $91,300; taxable income $70,300

59. Tamara and Todd Goble, ages 72 and 58, file a joint
return. Todd is legally blind. Compute their standard

deduction.

A. $10,000

B. $11,600

C. $12,750

D. $13,900

60. In determining the standard deduction, which of the
following statements is true?

A. The standard deduction is a function of filing status.

An individual who is both blind and age 65 by the last day
of the taxable year is entitled to one

additional standard deduction amount.

An individual who is claimed as a dependent on another
person’s tax return is not allowed a standard

deduction.

D. All of the above statements are true.

61. Mr. and Mrs. Kay, ages 68 and 66, file a joint return.
Mrs. Kay is legally blind. Compute their standard

deduction.

A. $11,600

B. $15,050

C. $13,900

D. $12,750

62. Melissa, age 16, is claimed as a dependent on her
parents’ tax return. This year, Melissa earned $2,000

from babysitting and $1,280 interest income from a savings
account. Compute Melissa’s standard

deduction.

A. $5,800

B. $2,300

C. $2,000

D. $950

63. Melissa, age 16, is claimed as a dependent on her
parents’ tax return. This year, Melissa earned $510 from

babysitting and $220 interest income from a savings account.
Compute Melissa’s standard deduction.

A. $730

B. $810

C. $520

D. $950

64. Hunter, age 17, is claimed as a dependent on his
parents’ tax return. This year, Hunter earned $8,500 for

appearing in a television commercial. Compute Hunter’s
standard deduction.

A. $950

B. $8,800

C. $5,800

D. $0

65. Mr. and Mrs. Upton’s marginal tax rate on their joint
return is 33%. This year, their itemized deductions

totaled $13,100, and their standard deduction (MFJ) was
$11,600. Compute their incremental tax savings

from their itemized deductions.

A. 0

B. $495

C. $3,762

D. $4,257

66. Which of the following statements describing individual
tax deductions is false?

A. Individuals can take both above-the-line and the standard
deduction in the same year.

Individuals elect to itemize deductions in a tax year in
which total itemized deductions exceed the

standard deduction.

In a year in which an individual takes the standard
deduction, any itemized deductions yield no tax

benefit.

D. Individuals who pay self-employment tax can deduct the
tax as an itemized deduction.

67. Which of the following statements describing individual
tax deductions is false?

In a year in which an individual takes the standard
deduction, any itemized deductions yield no tax

benefit.

B. The majority of individual taxpayers itemize rather than
taking the standard deduction.

Individuals elect to itemize deductions in a tax year in
which total itemized deductions exceed the

standard deduction.

Individuals who pay self-employment tax can deduct a portion
of the tax as an above-the-line

deduction.

68. Kent, an unmarried individual, invited his elderly,
widowed father, Martin, to move into his home in

January of this year. Martin’s only income item was a
$14,000 taxable pension from his former employer.

Kent provides about 75% of his father’s financial support.
What is Kent’s filing status and number of

exemptions for the year?

A. Single and one exemption

B. Single and two exemptions

C. Head of household and one exemption

D. Head of household and two exemptions

69. Ms. Dolan, an unmarried individual, invited her elderly,
widowed uncle, Martin, to move into her home

in January of this year. Martin’s only income item was
$2,390 of taxable interest on a savings account.

Ms. Dolan provides over 90% of her uncle’s financial
support. What is Ms. Dolan’s filing status and

number of exemptions for the year?

A. Single and one exemption

B. Single and two exemptions

C. Head of household and one exemption

D. Head of household and two exemptions

70. Mr. and Mrs. Anderson file a joint return. They provide
more than 50% of the financial support of their

two children, Dana, age 26, and John, age 17. Both children
live in the Andersons’ home. Dana earned

$7,100 from a part-time job, while John earned no income
this year. Which of the following statements is

true?

A. Both Dana and John are qualifying children of the
Andersons.

B. Dana is a qualifying relative and John is a qualifying
child of the Andersons.

C. John is a qualifying child of the Andersons.

D. Neither Dana nor John is a qualifying child of the
Andersons.

71. Ms. Lewis’ maintains a household which is the principal
place of residence for Kathy. Ms. Lewis’

provides more than 50% of Kathy’s financial support. In
which of the following cases can Ms. Lewis’

claim Kathy as a qualifying child?

A. Kathy is age 8 and the child of Ms. Lewis’ best friend,
who died three years ago.

B. Kathy is Ms. Lewis’ 15 year old niece.

C. Kathy is Ms. Lewis’ 30 year old unmarried sister.

D. Both b. and c.

72. Mr. and Mrs. Jelk file a joint return. They provide 65%
of the financial support for David, the 14-year old

son of a friend who died three years ago. David lives in the
home of his aunt Sarah, who provides 35% of

his financial support. Which of the following statements is
true?

A. David is a qualifying child of the Jelks.

B. If David earns less than $3,700 gross income this year,
he is a qualifying child of the Jelks.

C. If David earns less than $3,700 gross income this year,
he is a qualifying relative of the Jelks.

D. David is neither a qualifying child nor a qualifying
relative of the Jelks.

73. Which of the following statements regarding exemptions
is false?

A. Taxpayers can claim a dependency exemption for a
qualifying child or a qualifying relative.

B. A qualifying child must be the natural child, the adopted
child, or the stepchild of the taxpayer.

A qualifying relative includes an unrelated individual who
is a member of the taxpayer’s household for

the year.

D. There is no limit on the amount of gross income that a
qualifying child may earn in a year.

74. Which of the following statements regarding a qualifying
child is false?

A. The child must have been alive at least 180 days during
the tax year.

B. The child must be a U.S. citizen or resident of the
United States, Canada, or Mexico.

C. The child must not have provided more than 50% of his or
her own financial support during the year.

The child must not have filed a joint return with a spouse
unless the return was filed only as a refund

claim.

75. Mr. and Mrs. Steel, who file a joint return, have
$513,200 taxable income in 2011. Compute their regular

tax liability.

A. $101,086

B. $149,492

C. $179,620

D. None of the above

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26. An individual is indifferent between filing as a single
taxpayer or a head of household if he has $8,500 or

less of taxable income.

True False

27. Married individuals who elect to file separate tax
returns may use the single rates to compute their

tax.

True False

28. An individual with $400,000 taxable income has the same
marginal rate as a single taxpayer or as a head

of household.

True False

29. It is impossible for a progressive income tax system to
be both marriage neutral and horizontally

equitable.

True False

30. Mr. and Mrs. Kline file a joint return on which they
claim the standard deduction and two exemptions. If

the taxable income on their return is $55,300, they are not
paying a marriage penalty.

True False

31. Mr. and Mrs. Toliver’s AGI on their jointly filed return
is $339,000. Regardless of the number of their

children, the Tolivers are not eligible for a child credit.

True False

32. Mr. and Mrs. Casey have two dependent children, ages 3
and 6. The Caseys spent $10,300 for child care

this year. Mrs. Casey is employed full-time as an attorney.
Mr. Casey is an unpublished novelist who has

yet to earn any money from his writing. The Caseys are
eligible for a dependent care credit.

True False

33. The earned income credit is only available to low-income
taxpayers with dependent children.

True False

34. The earned income credit offsets the burden of the
federal payroll tax on low-income families and

encourages individuals to seek employment rather than to
depend on welfare.

True False

35. Mrs. Starling worked for Abbot Inc. from January 1
through September 19. Her salary from Abbot for

this period totaled $122,000. Mrs. Starling worked for JJT
Inc. from October 1 through December 31. Her

salary from JJT for this period totaled $38,000. JJT is not
required to withhold Social Security tax from

Mrs. Starling’s salary because Abbot Inc. already withheld
the maximum tax for the year.

True False

36. An individual must pay the greater of her regular income
tax or her alternative minimum tax (AMT) for

the year.

True False

37. The standard deduction and exemption amount are not
deductible in the computation of alternative

minimum taxable income.

True False

38. Every individual taxpayer is entitled to an AMT
exemption, the amount of which varies with filing

status.

True False

39. The highest individual marginal rate for regular tax
purposes is 35%, while the highest individual

marginal rate for alternative minimum tax (AMT) purposes is
only 28%.

True False

40. Miss Blixen’s regular income tax is $77,390, and her
tentative minimum tax is $74,100. Consequently,

Miss Blixen’s alternative minimum tax (AMT) is zero.

True False

41. The unextended due date for the individual tax return
(Form 1040) is the 15th day of the third month

following the close of the taxable year.

True False

42. Mr. Pearl’s total income and self-employment tax on this
year’s Form 1040 is $72,610. If Mr. Pearl paid at

least $65,349 of this tax in the form of withholding or
quarterly estimated payments, he will not incur an

underpayment penalty.

True False

43. Individual taxpayers can obtain an automatic extension
of time to file a calendar year Form 1040 until

October 15 of the following year.

True False

44. An extension of the time to file an individual tax
return also extends the time to pay any balance of tax

due with the return.

True False

45. Mr. and Mrs. Eller’s AGI last year was $287,300, and
their total tax was $70,268. The couple’s safeharbor

estimate of current year tax is $77,295.

True False

46. Mr. and Mrs. Warren’s AGI last year was $90,300, and
their total tax was $13,988. This year, the couple’s

total tax is $14,700. Unless the Warrens paid at least
$13,988 in the form of withholding and quarterly

estimated payments, they will incur an underpayment penalty
this year.

True False

47. Samantha died on January 18, 2010. Her husband Dave
lived by himself for the next three years until he

remarried in 2013. What was Dave’s filing status in 2010 and
2011?

A. Married filing jointly in 2010; surviving spouse in 2011.

B. Married filing jointly in 2010; single in 2011.

C. Surviving spouse in 2010 and 2011.

D. Surviving spouse in 2010; single in 2011.

48. Leon died on August 23, 2009, and his wife Mary has not
remarried. Since her husband’s death, Mary has

maintained a home for her two dependent children, who were
ages 7 and 4 when their father died. Which

of the following describes Mary’s filing status for 2010,
2011, and 2012?

A. Surviving spouse for 2010, 2011, and 2012.

B. Surviving spouse for 2010 and 2011; head of household for
2012.

C. Head of household for 2010, 2011, and 2012.

D. Surviving spouse for 2010; head of household for 2011 and
2012.

49. Mr. Jones and his first wife were legally divorced on
February 19, 2011. Mr. Jones remarried the second

Mrs. Jones on December 20, 2011. Which of the following
describes Mr. Jones’ filing status in 2011?

A. Married filing jointly with the second Mrs. Jones

B. Married filing jointly with the first Mrs. Jones

C. Married filing separately (can’t file jointly with either
spouse)

D. None of the above

50. Which of the following statements regarding filing
status is false?

A widow or widower maintaining a home for a dependent child
qualifies as surviving spouse for two

tax years following the year of the spouse’s death.

B. Marital status for tax purposes is determined on the last
day of the year.

C. Any unmarried individual with a dependent child qualifies
as head of household.

D. An unmarried individual without children or other
dependents files as a single taxpayer.

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1. Harry and Sally were married on December 23, 2011. Their
income for the entire year is reported on a

joint return.

True False

2. A taxpayer who knowingly signs a joint return on which
his spouse has failed to report her income is

liable for any tax assessments made by the IRS on that
income.

True False

3. Mrs. Paley died on July 14, 2010. Her husband has not
remarried. The Paleys’ two children, ages 34 and

36, are financially independent. Mr. Paley may file as a
surviving spouse in 2011 and 2012.

True False

4. Charlie is single and provides 100% of the financial
support for his dependent mother, Angela, who lives

with Charlie. Charlie’s filing status is head of household.

True False

5. For the taxable year in which a married person dies, the
widow or widower can file a joint return with the

deceased.

True False

6. Mr. Lenz died on May 4, 2010. His widow, Mrs. Lenz,
maintains a home for her three children, ages 4, 6,

and 11. Mrs. Lenz must file as a head of household in 2011.

True False

7. An individual’s taxable income equals adjusted gross
income less the greater of the standard deduction or

itemized deductions and the exemption amount.

True False

8. An individual’s taxable income equals adjusted gross
income less the exemption amount.

True False

9. Adjusted gross income equals total income less itemized
deductions.

True False

10. In computing taxable income, an individual is allowed to
deduct the lesser of itemized deductions or the

standard deduction.

True False

11. In computing taxable income, an individual is allowed to
deduct both the standard deduction and any

itemized deduction for the year.

True False

12. Mr. Thomas is age 69, has perfect vision, and files as a
single taxpayer. His standard deduction for 2011

is $7,250.

True False

13. Mr. Andrews is age 58, legally blind, and files as a
single taxpayer. His standard deduction for 2011 is

$5,800.

True False

14. Bill and Afton are married and file a joint tax return.
Bill is 67 and Afton is 66, and neither is legally

blind. Their standard deduction for 2011 is $13,900.

True False

15. The majority of individual taxpayers take the standard
deduction rather than itemizing.

True False

16. The standard deduction for single individuals equals
one-half of the standard deduction for married

individuals filing jointly.

True False

17. An above-the-line deduction reduces both adjusted gross
income and taxable income.

True False

18. An itemized deduction doesn’t result in any tax savings
in a year in which an individual taxpayer takes the

standard deduction.

True False

19. An individual who files his own tax return but is
claimed as a dependent on another individual’s return is

not allowed any standard deduction or personal exemption.

True False

20. A husband and wife are allowed only one exemption on a
jointly filed return.

True False

21. In order to be claimed as a dependent, an individual
must be either a qualifying child or a qualifying

relative.

True False

22. Only natural and adopted children or stepchildren can be
a qualifying child for tax purposes.

True False

23. Mr. and Mrs. Queen provide 90% of the financial support
for Mrs. Queen’s mother, Doreen, who lives in

the couples’ home. Doreen’s only income this year is a
$7,500 taxable pension from her former employer.

Mr. and Mrs. Queen can’t claim Doreen as a dependent this
year.

True False

24. Jay Blount, 26-years old and a full time student, lives
in his parents’ home. Although Jay earned $8,400

from a part-time job, his parents provide at least 75% of
his financial support. Jay’s parents may claim

him as a dependent on their 2011 return.

True False

25. The tax rates for individuals who qualify as a
head-of-household are lower than the tax rate for single

individuals.

True False

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CHAPTER
12 â€“ Practice Problems

CASH FLOW ESTIMATION AND RISK ANALYSIS

(12-1) Cash flow estimation

1. Although it is
extremely difficult to make accurate forecasts of the revenues that a project
will generate, projects’ initial outlays and subsequent costs can be forecasted
with great accuracy. This is especially
true for large product development projects.

a. True

b. False

(12-1) Relevant cash flows

2. Since the focus of
capital budgeting is on cash flows rather than on net income, changes in
noncash balance sheet accounts such as inventory are not included in a capital
budgeting analysis.

a. True

b. False

(12-1) Relevant cash flows

3. If an investment
project would make use of land which the firm currently owns, the project
should be charged with the opportunity cost of the land.

a. True

b. False

(12-2) Depreciation cash flows

4. The primary advantage
to using accelerated rather than straight-line depreciation is that with
accelerated depreciation the present value of the tax savings provided
by depreciation will be higher, other things held constant.

a. True

b. False

(12-1) Opportunity costs

5. Opportunity costs
include those cash inflows that could be generated from assets the firm already
owns if those assets are not used for the project being evaluated.

a. True

b. False

(12-1) Sunk costs

6. Suppose Walker
Publishing Company is considering bringing out a new finance text whose
projected revenues include some revenues that will be taken away from another
of Walker’s books. The lost sales on the
older book are a sunk cost and as such should not be considered in the analysis
for the new book.

a. True

b. False

(12-1) Cash flow issues

7. Which of the
following is NOT a
relevant cash flow and thus should not be reflected in the analysis of a
capital budgeting project?

a. Changes in net working capital.

b. Shipping and installation costs.

c. Cannibalization effects.

d. Opportunity costs.

e. Sunk costs that have been expensed for tax
purposes.

(12-1) Sunk costs

8. Which of the
following statements is CORRECT?

a. A sunk cost is any cost that must be expended
in order to complete a project and bring it into operation.

b. A sunk cost is any cost that was expended in
the past but can be recovered if the firm decides not to go forward with the
project.

c. A sunk cost is a cost that was incurred and
expensed in the past and cannot be recovered if the firm decides not to go
forward with the project.

d. Sunk costs were formerly hard to deal with, but
once the NPV method came into wide use, it became possible to simply include
sunk costs in the cash flows and then calculate the PV.

e. A good example of a sunk cost is a situation
where Home Depot opens a new store, and that leads to a decline in sales of one
of the firmâ€™s existing stores.

(12-2) Depreciation

9. Which of the
following statements is CORRECT?

a. Using accelerated depreciation rather than
straight line would normally have no effect on a projectâ€™s total projected cash
flows but it would affect the timing of the cash flows and thus the NPV.

b. Under current laws and regulations,
corporations must use straight-line depreciation for all assets whose lives are
5 years or longer.

c. Corporations must use the same depreciation
method (e.g., straight line or accelerated) for stockholder reporting and tax
purposes.

d. Since depreciation is not a cash expense, it
has no effect on cash flows and thus no effect on capital budgeting decisions.

e. Under accelerated depreciation, higher
depreciation charges occur in the early years, and this reduces the early cash
flows and thus lowers a project’s projected NPV.

(12-1) Relevant cash flows C I K

10. Which of the
following factors should be included in the cash flows used to estimate
a projectâ€™s NPV?

a. All costs associated with the project that have
been incurred prior to the time the analysis is being conducted.

b. Interest on funds borrowed to help finance the
project.

c. The end-of-project recovery of any working
capital required to operate the project.

d. Cannibalization effects, but only if those
effects increase the projectâ€™s projected cash flows.

e. Expenditures to date on research and
development related to the project, provided those costs have already been
expensed for tax purposes.

(12-1) Relevant cash flow

11. When evaluating a new
project, firms should include in the projected cash flows all of the following EXCEPT:

a. Changes in net working capital attributable to
the project.

b. Previous expenditures associated with a market
test to determine the feasibility of the project, provided those costs have
been expensed for tax purposes.

c. The value of a building owned by the firm that
will be used for this project.

d. A decline in the sales of an existing product,
provided that decline is directly attributable to this project.

e. The salvage value of assets used for the
project that will be recovered at the end of the projectâ€™s life.

(12-1) Externalities

12. Which of the
following statements is CORRECT?

a. An externality is a situation where a project
would have an adverse effect on some other part of the firmâ€™s overall
operations. If the project would have a favorable
effect on other operations, then this is not an externality.

b. An example of an externality is a situation
where a bank opens a new office, and that new office causes deposits in the
bankâ€™s other offices to increase.

c. The NPV method automatically deals correctly
with externalities, even if the externalities are not specifically identified,
but the IRR method does not. This is
another reason to favor the NPV.

d. Both the NPV and IRR methods deal correctly
with externalities, even if the externalities are not specifically
identified. However, the payback method
does not.

e. Identifying an externality can never lead to an
increase in the calculated NPV.

(12-2) Annual CF

13. As assistant to the
CFO of Boulder Inc., you must estimate the Year 1 cash flow for a project with
the following data. What is the Year 1
cash flow?

Sales revenues $13,000

Depreciation $4,000

Other operating costs $6,000

Tax rate 35.0%

a. $5,950

b. $6,099

c. $6,251

d. $6,407

e. $6,568

(12-2) Annual CF

14. Clemson Software is
considering a new project whose data are shown below. The required equipment has a 3-year tax life,
after which it will be worthless, and it will be depreciated by the
straight-line method over 3 years.
Revenues and other operating costs are expected to be constant over the
project’s 3-year life. What is the
project’s Year 1 cash flow?

Equipment cost (depreciable basis) $65,000

Straight-line depreciation rate 33.333%

Sales revenues, each year $60,000

Operating costs (excl. deprec.) $25,000

Tax rate 35.0%

a. $28,115

b. $28,836

c. $29,575

d. $30,333

e. $31,092

(12-2) Project NPV

15. Temple Corp. is
considering a new project whose data are shown below. The equipment that would be used has a 3-year
tax life, would be depreciated by the straight-line method over its 3-year
life, and would have a zero salvage value.
No new working capital would be required. Revenues and other operating costs are
expected to be constant over the project’s 3-year life. What is the project’s NPV?

Risk-adjusted WACC 10.0%

Net investment cost (depreciable basis) $65,000

Straight-line deprec. rate 33.3333%

Sales revenues, each year $65,500

Operating costs (excl. deprec.), each year $25,000

Tax rate 35.0%

a. $15,740

b. $16,569

c. $17,441

d. $18,359

e. $19,325

(12-2) Salvage value

16. Marshall-Miller &
Company is considering the purchase of a new machine for $50,000,
installed. The machine has a tax life of
5 years, and it can be depreciated according to the following rates. The firm expects to operate the machine for 4
years and then to sell it for $12,500.
If the marginal tax rate is 40%, what will the after-tax salvage value
be when the machine is sold at the end of Year 4?

Year Depreciation
Rate

1 0.20

2 0.32

3 0.19

4 0.12

5 0.11

6 0.06

a. $8,878

b. $9,345

c. $9,837

d. $10,355

e. $10,900

(12-2) Project NPV

17. Foley Systems is considering
a new investment whose data are shown below.
The equipment would be depreciated on a straight-line basis over the
project’s 3-year life, would have a zero salvage value, and would require some
additional working capital that would be recovered at the end of the project’s
life. Revenues and other operating costs
are expected to be constant over the project’s life. What is the project’s NPV? (Hint: Cash flows are constant in Years 1 to
3.)

WACC 10.0%

Net investment in fixed assets
(basis) $75,000

Required new working capital $15,000

Straight-line deprec. rate 33.333%

Sales revenues, each year $75,000

Operating costs (excl. deprec.),
each year $25,000

Tax rate 35.0%

a. $23,852

b. $25,045

c. $26,297

d. $27,612

e. $28,993

Solutions to Problem 17

[1]7. (12-2)
Project npv

t = 0 t
= 1 t = 2 t = 3

Investment in fixed
assets WACC = 10% -$75,000

Investment in net
working capital -$15,000

Sales revenues $75,000 $75,000 $75,000

– Operating costs (excl. deprec.) 25,000 25,000 25,000

Depreciation Rate = 33.333%
25,000 25,000 25,000

Operating income
(EBIT) $25,000 $25,000 $25,000

–
Taxes Rate
= 35% 8,750 8,750 8,750

After-tax EBIT $16,250 $16,250 $16,250

+
Depreciation 25,000
25,000 25,000

Cash flow from
operations -$90,000 $41,250 $41,250 $41,250

Recovery of working
capital
15,000

Total cash flows -$90,000 $41,250 $41,250 $56,250

NPV $23,852

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Category: Accounting Tags: 0, 1, 2, accounting, accounts, bank, capital, data, deduct, deductible, expense, following, gain, gains, income, investment, land, lebolds, liability, loes, longterm, lopez, marginal, ordinary, rate, recognized, sale, section, solutions, statements, stock, taxable, taxed, truea, year

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63. Frederick Tims, a single individual, sold the following
investment assets in 2011.

If Frederick’s taxable income before considering the above
sales is $100,000, compute his taxable income

and regular tax liability.

A. Taxable income $125,000; tax liability $32,470

B. Taxable income $100,000; tax liability $21,720

C. Taxable income $125,000; tax liability $25,367

D. Taxable income $125,000; tax liability $28,720

64. Tom Johnson, whose marginal tax rate on ordinary income
is 35%, sold four investment assets resulting

in the following capital gains and losses.

How much of Tom’s net capital gain is taxed at 15%?

A. $42,800

B. $3,900

C. $2,700

D. $0

65. Mr. Quinn recognized a $900 net short-term capital gain
and a $1,380 long-term capital gain this year.

Which of the following statements is false?

A.

If Mr. Quinn’s marginal tax rate on ordinary income is 15%,
the tax liability on his capital gains is

$135.

B.

If Mr. Quinn’s marginal tax rate on ordinary income is 33%,
the tax liability on his capital gains is

$504.

C. Only $1,380 of the capital gain is subject to a
preferential tax rate.

D. None of the above is false.

66. Kate recognized a $25,700 net long-term capital gain and
a $33,000 net short-term capital loss this year.

What is her current net tax cost or savings from her capital
transactions if her marginal rate on ordinary

income is 28%?

A. $0

B. $840 net tax savings

C. $2,044 net tax savings

D. $3,015 net tax cost

67. Ms. Beal recognized a $42,400 net long-term capital gain
and a $33,000 net short-term capital loss this

year. What is her current net tax cost from her capital
transactions if her marginal rate on ordinary income

is 35%?

A. $6,360

B. $5,910

C. $1,410

D. $0

68. Mr. and Mrs. Philips recognized the following capital
gains and losses this year.

Their AGI before consideration of these gains and losses was
$140,000. Compute their AGI.

A. $140,000

B. $131,000

C. $137,000

D. $143,000

69. Which of the following statements about the individual
capital gains and losses is false?

A. Gain on sale of Section 1231 depreciable real property is
taxed at a 25% maximum rate.

B. Short-term capital gains are taxed as ordinary income.

C. Capital losses are deductible only against capital gains.

D. Nondeductible capital losses are carried forward for
deduction against future capital gains.

70. This year, Ms. Kwan recognized a $16,900 net long-term
capital loss. Which of the following statements

is true?

A. Ms. Kwan has a $16,900 long-term capital loss
carryforward into future years.

B. Ms. Kwan has a $16,900 nondeductible loss that she can
carry back three years and forward five years.

C. Ms. Kwan can deduct $3,000 of the loss as an itemized
deduction.

D. None of the above is true.

71. In 2001, Mrs. Qualley, contributed $100,000 in exchange
for 1,000 shares of Little Corporation, which

is a qualified small business. This year, Mrs. Qualley’s
only capital transaction was the sale of the 1,000

shares of Little qualified small business stock for
$180,000. Compute Mrs. Qualley’s tax on her capital

gain from this sale.

A. $6,000

B. $11,200

C. $22,400

D. None of the above.

72. Mr. Forest, a single taxpayer, recognized a $252,000
loss on the sale of Section 1244 stock. What is the

character of this loss?

A. $50,000 ordinary and $202,000 capital

B. $100,000 ordinary and $152,000 capital

C. $252,000 capital

D. $252,000 ordinary

73. In 1996, Mr. Exton, a single taxpayer, contributed
$30,000 in exchange for 100 shares of Morton stock.

In 2005, he paid $43,000 to another shareholder to purchase
100 more shares of Morton stock. Morton

stock qualified as Section 1244 stock when it was issued.
This year, Mr. Exton sold his 200 Morton

shares for $250 per share. What is the amount and character
of Mr. Exton’s recognized loss?

A. $23,000 ordinary loss

B. $23,000 long-term capital loss

C. $3,000 long-term capital gain and $30,000 ordinary loss

D. $5,000 long-term capital loss and $18,000 ordinary loss

74. Which of the following statements about Section 1244
stock is true?

A. Some portion of a loss recognized on sale of Section 1244
stock is an ordinary deduction.

B. Gain recognized on sale of Section 1244 stock is taxed at
a 28% maximum rate.

C.

Individuals may purchase Section 1244 stock directly from
the issuing corporation or from another

shareholder.

D. Corporations may issue an unlimited amount of Section
1244 stock.

75. Ms. Kerry, who itemized deductions on Schedule A, paid
$15,000 interest on funds borrowed to acquire

taxable bonds. She also paid $660 of management fees that
were fully deductible on Schedule A. Her

AGI is $100,000, which includes $19,700 of interest income.
How much of the interest expense can she

deduct?

A. $0

B. $19,040

C. $19,700

D. $15,000

76. Ms. Lopez paid $7,260 interest on a mortgage on
undeveloped land that she holds as an investment. Ms.

Lopez’s AGI is $112,200, which includes $4,900 interest
income from a certificate of deposit. Which of

the following statements is true?

A. Ms. Lopez can’t deduct any of the $7,260 interest
expense.

B. Ms. Lopez can deduct $7,260 interest expense as an itemized
deduction.

C. Ms. Lopez can deduct $4,900 interest expense as an
itemized deduction.

D. Ms. Lopez can deduct $4,900 interest expense as an
above-the-line deduction.

77. Which of the following statements about investment
interest expense is true?

A. The interest is allowed as an above-the-line deduction.

B. The interest is allowed as a miscellaneous itemized
deduction.

C. Nondeductible interest carries forward into future years.

D. The interest is deductible to the extent of the
individual’s gross investment income.

78. This year, Mr. and Mrs. Lebold paid $3,100 investment
interest expense. They earned $4,750 investment

income consisting of $1,900 interest and $2,850 qualified
dividends, and they incurred no investment

expenses. Which of the following statements is true?

A

.

The Lebolds can deduct $3,100 interest expense if they elect
to treat $1,200 of the qualifying dividends

as ordinary income not taxed at a preferential rate.

B.

The Lebolds can deduct $3,100 interest expense if they elect
to treat the qualifying dividends as

ordinary income not taxed at a preferential rate.

C. The Lebolds can deduct $3,100 interest expense because
their investment income exceeds $3,100.

D. The Lebolds’ deduction for their interest expense is
limited to $1,900.

79. Which of the following statements about an investment in
undeveloped land is false?

A.

An investor can elect to capitalize interest expense on a
mortgage incurred to purchase the

undeveloped land.

B. An investor can elect to capitalize property taxes on
undeveloped land.

C. An investment in undeveloped land is considered a liquid
asset.

D. Gain recognized on the sale of undeveloped land held as
an investment is capital gain.

80. Ms. Regga, a physician, earned $375,000 from her medical
practice and $20,500 interest and qualified

dividends from her investment portfolio. She was allocated a
$67,000 loss from a passive activity.

Compute Ms. Regga’s AGI.

A. $328,500

B. $375,000

C. $395,500

D. None of the above

81. Mr. and Mrs. Sturm actively manage an office building that
they purchased in January 1997. This year,

the office building generated a $68,000 net loss. The
couple’s had the following sources of income

How much of the rental loss is deductible this year?

A. $0

B. $14,000

C. $25,000

D. $68,000

82. Lindsey owns and actively manages an apartment complex.
This year, the complex generated a $40,300

net loss. If Lindsey’s AGI before considering this loss is
$118,200, and she owns no other passive

activities, how much of the loss is deductible this year?

A. $0

B. $9,100

C. $25,000

D. None of the above

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Category: Accounting Tags: 0, 1, accounting, accounts, bank, basis, busine, capital, compute, data, decedent, decedents, estate, federal, following, gain, gift, gifts, income, individual, margot, market, materially, million, owned, owns, participates, real, recognized, solutions, stock, taxable, transfers, value, year

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83. Ms. Plant owns and actively manages an apartment
complex. This year, the complex generated a $32,790

net loss. If Ms. Plant’s AGI before considering this loss is
$196,100, and she owns no other passive

activities, how much of the loss is deductible this year?

A. $0

B. $25,000

C. $32,790

D. None of the above

84. Mr. Vernon owns stock in two S corporations, Able
Corporation and Benson Inc. This year, Mr. Vernon

had the following income and loss items.

If Vernon materially participates in Able’s business but not
in Benson’s business, compute his AGI.

A. $94,000

B. $74,000

C. $61,000

D. $41,000

85. Ms. Watts owns stock in two S corporations, MKP
Corporation and Reynolds Inc. This year, Ms. Watts

had the following income and loss items.

If Ms. Watts materially participates in the business of both
corporations, compute her AGI.

A. $85,700

B. $113,700

C. $127,700

D. $155,700

86. Ms. Cowler owns stock in Serzo Inc., an S corporation,
and an interest in OTW Partnership. This year,

Ms. Cowler had the following income and loss items.

If Ms. Cowler’s interests in Serzo and OTW are passive
activities, compute her AGI.

A. $68,000

B. $65,600

C. $85,000

D. $66,800

87. Mr. and Mrs. Nelson operate a small business as a sole
proprietorship. This year, they have the following

tax information.

A. $50,900

B. $47,367

C. $50,147

D. None of the above

88. In 2010, Mr. Margot purchased a limited interest in a
business partnership, which is her only passive

activity. In 2010, she was allocated $14,900 of the
partnership’s ordinary business loss. In 2011, she was

allocated $7,700 of the partnership’s ordinary business
income. Which of the following statements is

false?

A. In 2010, Mr. Margot could not deduct any of her allocated
partnership loss.

B. In 2011. Mr. Margot can deduct $7,700 of the 2010 loss.

C. Mr. Margot has a $7,200 passive activity loss
carryforward into 2012.

D. None of the above statements is false.

89. Mr. and Mrs. Perry own stock in an S corporation, which
is their only passive activity. They have an

$8,200 passive activity loss carryforward into 2011. In
2011, the Perrys are allocated a $1,600 share of

corporate ordinary business income. Late in 2011, they
recognize a $3,500 long-term capital gain on the

sale of their entire stock interest. How much of their loss
carryforward can the Perrys deduct in 2011?

A. $0

B. $5,100

C. $8,200

D. $1,600

90. Ms. Poppe, a single taxpayer, made the three gifts this
year. She gave $6,300 cash to her niece to fund a

summer vacation in Europe, $50,000 cash to Yale University,
which is her alma mater, 50,000 acres of

land to her brother. Ms. Poppe’s tax basis in the land was
$400,000, and its fair market value of date of

gift was $615,000. Compute Ms. Poppe’s taxable gifts for the
year.

A. $387,000

B. $602,000

C. $621,300

D. $639,000

91. Mr. and Mrs. Gupta want to make cash gifts to each of
their four children, the children’s four spouses, and

three grandchildren (11 donees). Compute the total amount
that the Guptas can transfer to their youngergeneration

family members without making a taxable gift for the year.

A. $91,000

B. $182,000

C. $143,000

D. $286,000

92. Bess gave her grandson ten acres of undeveloped land.
Bess’ tax basis in the land was $35,000, and its

fair market value at date of gift was $175,000. Two years
after receiving the land, the grandson sold it for

$200,000. Compute his recognized gain on sale.

A. $0

B. $25,000

C. $165,000

D. $200,000

93. Mr. Lee made the following transfers this year. Which of
the transfers are treated as gifts for federal tax

purposes?

A. Political contribution to the Democratic party

B. Charitable contribution to the United Way

C. Payment to a hospital for the medical expenses of his
39-year old son

D. None of the above are treated as gifts.

94. Which of the following statements about the federal gift
tax is false?

A. The tax is imposed on the donor.

B. The tax is based on the fair market value of the gifted
property.

C. An individual can give away $5 million every year without
being subject to tax.

D. The donor’s basis in the gifted property carries over to
become the donee’s basis.

95. Which of the following are included in a decedent’s
taxable estate?

A. Real property owned by the decedent and included in the
probate estate.

B. Proceeds of a life insurance policy on the decedent’s
life if the decedent owned the policy.

C.

An individual retirement account owned by the decedent and
payable to the beneficiary named in the

account.

D. All of the above are included.

96. Which of the following reduce a decedent’s taxable estate?

A. The decedent’s funeral expenses.

B. Testamentary transfers to charitable organizations.

C. Testamentary transfers to the decedent’s spouse.

D. Testamentary transfers to the decedent’s children.

97. Mrs. Heyer inherited real estate from her mother. The
mother’s basis in the real estate was $382,000, and

the fair market value at the date of the mother’s death was
$900,000. The mother’s taxable estate was only

$2.4 million, so the estate did not owe any federal estate
tax. This year, Mrs. Heyer sold the real estate for

$875,000. Compute her gain or loss recognized on sale.

A. $0

B. $25,000 loss

C. $493,000 gain

D. $875,000 gain

98. Mr. Lainson died in 2010 when the total FMV of his
property was $12 million and his debts totaled

$450,000. His executor paid $15,000 of funeral expenses and
$50,000 of accounting and legal fees to

settle the estate. Mr. Lainson bequeathed $1 million to
Villanova University, $200,000 to the Lutheran

church, and $3 million to his surviving wife. He left the
remainder of the estate to his children. Compute

Mr. Lainson’s taxable estate.

A. $10,285,000

B. $6,850,000

C. $6,800,000

D. $6,785,000

99. Mr. McCann died in 2011. During his lifetime, he made
taxable gifts significantly in excess of his $5

million lifetime exclusion. Mr. McCann’s taxable estate was
$12.9 million. Compute the estate tax on this

estate.

A. $4.515 million

B. $5.805 million

C. $5.355 million

D. $4.23 million

100.In 2009, Mr. Yang paid $160,000 for a corporate bond
with a $200,000 stated redemption value. Based

on the bond’s yield to maturity, amortization of the $40,000
discount was $3,024 in 2009 and $2,960

in 2010. Mr. Yang sold the bond for $169,500 in 2011. What
are his tax consequences in each year

assuming that:

a. He bought the newly issued bond from the corporation?

b. He bought the bond in the public market through his
broker?

101.Beverly earned a $75,000 salary and recognized a $7,200
loss on the sale of corporate stock this year.

Compute her AGI in each of the following independent cases.

a. Beverly had no other capital transactions this year.

b. Beverly recognized a $13,500 capital gain on the sale of
mutual fund shares.

c. Beverly received a $9,500 capital gain distribution from
a mutual fund and had a $3,200 capital loss

carryforward from a previous year.

102.Mr. Carp, a single taxpayer, recognized a $44,000
long-term capital gain, a $12,000 short-term capital

gain, and a $10,000 long-term capital loss. Compute Mr.
Carp’s tax if his taxable income before

consideration of his capital transactions is $405,000.

103.Ms. Mollani owns stock in two S corporations, Aloha and
Honu. This year, she had the following income

and loss items:

Compute Sheila’s AGI under each of the following
assumptions.

a. She materially participates in Aloha’s business but not
in Honu’s business.

b. She materially participates in Honu’s business but not in
Aloha’s business.

c. She materially participates in both corporate businesses.

d. She does not materially participate in either business.

104.Mr. Ames, an unmarried individual, made a gift of real
estate to his nephew. Compute the amount subject

to the federal gift tax in each of the following situations.

a. FMV of the real estate was $1,800,000, and the transfer
was Mr. Ames first taxable gift.

b. FMV of the real estate was $7,250,000 and the transfer
was Mr. Ames first taxable gift.

c. FMV of the real estate was $2,300,000. Two years ago, Mr.
Ames made his first taxable gift of

marketable securities with a $3,920,000 FMV in excess of the
annual exclusion.

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Category: Accounting Tags: 0, 1, 2, 3, accounting, accounts, annuity, bank, basis, bond, capital, common, data, following, gain, income, life, longterm, newland, ordinary, paid, policy, purchased, rate, received, recognizes, ricardo, shares, solutions, statements, stock, truea, wallace, year, years

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43. Which of the following statements about investment
property is false?

A.

The term securities includes corporate stock, certificates
of deposit, notes, bonds, and other debt

instruments.

B. Interest and dividends are taxed at the same rate as
long-term capital gain.

C.

Interest on private activity bonds issued by a state or
local government is excluded from ordinary

income.

D.

A mutual fund is a diversified portfolio of securities owned
and managed by a regulated investment

company.

44. In 2009, Mr. Lewis paid $40,000 for a newly issued
corporate bond with a $50,000 stated redemption

value. This year, he sold the bond for $43,900. Through date
of sale, Mr. Lewis recognized $940 of the

original issue discount (OID) as accrued interest income. Compute
his gain or loss on sale.

A. $3,900 long-term capital gain

B. $3,900 ordinary income

C. $2,960 ordinary income

D. $2,960 long-term capital gain

45. In 2009, Mr. Young paid $40,000 to buy a publicly traded
corporate bond through his broker. The bond’s

stated redemption value was $45,000. This year, Mr. Young
sold the bond for $47,100. Compute his gain

or loss on sale.

A. $2,100 long-term capital gain.

B. $7,100 ordinary income.

C. $5,000 ordinary income and $2,100 long-term capital gain.

D. $7,100 long-term capital gain.

46. Jane, a cash basis individual, purchased a publicly
traded bond at a $6,000 market discount. Which of the

following statements is true?

A. Jane must accrue the market discount as interest income
over the life of the bond.

B. If Jane holds the bond to maturity, she will recognize a
$6,000 capital gain.

C. If Jane holds the bond to maturity, she will recognize
$6,000 ordinary income.

D. None of the statements is true.

47. At the beginning of the year, Calvin paid $5,000 for 60
shares of Eddington stock. In June, he received a

$300 cash distribution with respect to the stock. His Form
1099-DIV reported that $170 was an ordinary

dividend and $130 was nontaxable. Compute Calvin’s tax basis
in his 60 shares at year-end.

A. $4,870

B. $4,700

C. $4,830

D. $5,000

48. At the beginning of the year, Ms. Faro paid $15,000 for
750 shares of Gravois stock. She instructed her

broker to reinvest any dividends in additional Gravois
shares. Her Form 1099-DIV reported that she

earned $820 dividend income which purchased 39 additional
shares. Which of the following statements is

true?

A. Ms. Faro recognizes no dividend income and has a $15,000
basis in her 789 shares.

B. Ms. Faro recognizes no dividend income and has a $15,820
basis in her 789 shares.

C. Ms. Faro recognizes $820 dividend income and has a
$15,820 basis in her 789 shares.

D. None of the above statements is true.

49. Mr. Gordon, a resident of Pennsylvania, paid $20,000 for
a bond issued by Delaware. This year, he

received $800 of interest on the bond. His marginal state
tax rate is 7%, and under Pennsylvania law,

interest on debt obligations issued by another state is
taxable. Mr. Gordon can deduct state income tax on

his federal return, and his marginal federal tax rate is
35%. Computer his after-tax rate of return on the

bond.

A. 4%

B. 3.82%

C. 3.72%

D. 2.42%

50. Mr. and Mrs. Golding own 13,850 shares in PTJ mutual
fund. This year, they received a $6,390 cash

distribution from PTJ. Which of the following statements is
false?

A. Some or all of the distribution may be a capital gain
distribution.

B. Some or all of the distribution may be a qualifying
dividend.

C. Some or all of the distribution may be ordinary income.

D. None of the above is false.

51. Twenty years ago, Mr. Wallace purchased a $250,000
insurance policy on his own life and named his

daughter as sole beneficiary. He has paid $14,250 total
premiums to keep this policy in force. This year,

he liquidates the policy for its $20,000 cash surrender
value. Which of the following statements is true?

A. Mr. Wallace recognizes $5,750 ordinary income on the
liquidation.

B. Mr. Wallace recognizes $20,000 ordinary income on the
liquidation.

C. Mr. Wallace recognizes no gain on the liquidation.

D. Mr. Wallace recognizes $5,750 capital gain on the
liquidation.

52. Sixteen years ago, Ms. Herbert purchased an annuity for
$96,000. Beginning in September 2011, the

annuity began paying Ms. Herbert $4,000 per month for the
rest of her life. Based on her age, Ms.

Herbert’s expected return is $300,000. How much of the
$16,000 that she received in 2011 is included in

taxable income?

A. $0

B. $5,120

C. $10,880

D. None of the above

53. Emil Nelson paid $174,500 for an annuity that will pay
him $1,300 per month for life. Based on Emil’s

age, his expected return is $405,813. In 2011, Emil received
12 payments totaling $15,600. How much of

this total is taxable income?

A. $0

B. $5,300

C. $6,708

D. None of the above.

54. Fifteen years ago, Lenny purchased an insurance policy
on his own life. The policy provides a $3 million

death benefit. Lenny has paid $682,000 of premiums, and the
cash surrender value of the policy is

$725,000. He plans to liquidate the policy to generate cash
for his business. If Lenny’s marginal tax rate is

35%, how much after-tax cash will the liquidation generate?

A. $725,000

B. $734,950

C. $682,000

D. $471,250

55. Which of the following statements about annuity
contracts is true?

A. Annuity contracts provide a fixed income stream.

B. Payments received from an annuity contract are
tax-exempt.

C. Payments received from an annuity contract are fully
taxable as ordinary income.

D. Payments received from an annuity contract are fully
taxable as capital gain.

56. Twenty years ago, Mrs. Cole purchased an insurance
policy on her own life. Mrs. Cole died this year,

and the policy paid the $300,000 death benefit to her son
Jeffrey. During her life, Mrs. Cole paid total

premiums of $71,200 on the policy. Which of the following
statements is true?

A. Jeffrey must recognize the $300,000 payment as ordinary income.

B. Jeffrey must recognize $228,800 of the $300,000 payment
as capital gain.

C. Jeffrey can exclude the $300,000 payment from gross
income.

D. Jeffrey must recognize $228,800 of the $300,000 payment
as ordinary income.

57. Mr. Ricardo exchanged 75 shares of Haslet common stock
for 516 shares of Newland common stock

pursuant to a reorganization of the two corporations. His
basis in the Haslet stock was $49,200, and

the fair market value of the Newland stock was $138,000.
Which of the following statements about the

exchange is true?

A. Mr. Ricardo recognizes no gain and takes a $138,000 basis
in the Newland stock.

B. Mr. Ricardo recognizes an $88,800 gain and takes a
$138,000 basis in the Newland stock.

C. Mr. Ricardo recognizes no gain and takes a zero basis in
the Newland stock.

D. Mr. Ricardo recognizes no gain and takes a $49,200 basis
in the Newland stock.

58. Mrs. Lindt exchanged 212 shares of Nipher common stock
for 773 shares of Newland common stock.

Her basis in the Nipher stock was $49,200, and the fair
market value of the Newland stock was $138,000.

Which of the following statements about the exchange is
true?

A. Mrs. Lindt’s basis in her Newland stock is $138,000.

B. Mrs. Lindt recognizes no gain on the exchange because she
did not receive any cash.

C. If the exchange is pursuant to a reorganization of Nipher
and Newland, Mrs. Lindt recognizes no gain.

D. None of the above is true.

59. Ten years ago, Elaine paid $10 per share for 2,000
shares of Lazlo common stock. This year, Elaine

learned that Lazlo is in bankruptcy and can pay only 40% of
its outstanding debt. What are the tax

consequences to Elaine of Lazlo’s bankruptcy?

A. $20,000 long-term capital loss

B. $12,000 long-term capital loss

C. $20,000 ordinary loss

D. No gain or loss

60. Six years ago, Mr. Ahmed loaned $10,000 to a neighbor in
exchange for an interest-bearing debt

obligation. This year, the neighbor informed Mr. Ahmed that
he was defaulting on the debt. What are the

tax consequences to Mr. Ahmed of this bad debt?

A. $10,000 ordinary loss

B. $10,000 short-term capital loss

C. $10,000 long-term capital loss

D. No loss recognized

61. In 2009, Mrs. Owens paid $50,000 for 3,000 shares of a
mutual fund and elected to reinvest dividends in

additional shares. In 2009 and 2010, she received Form 1099s
reporting the following.

If Mrs. Owens sells her 3,390 shares in 2011 for $22 per
share, compute her recognized gain.

A. $24,580

B. $19,780

C. $16,630

D. $0

62. In 2009, Mrs. Owens paid $50,000 for 3,000 shares of a
mutual fund and elected to reinvest dividends in

additional shares. In 2009 and 2010, she received Form 1099s
reporting the following.

If Mrs. Owens sells 1,000 shares in 2011 for $22 per share
and uses the average basis method, compute

her recognized gain.

A. $4,910

B. $5,333

C. $3,883

D. $0

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Category: Accounting Tags: 0, accounting, accounts, activity, adjusted, bank, basis, busine, data, deathtrue, decedent, expense, expenses, gratuitous, income, individual, inthe, investment, involved, itemizeddeduction, limitationtrue, miscellaneous, money, moyer, paid, paive, prior, property, rental, solutions, subject, taxable, transfer, transferred, year

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26. Investment expenses are a miscellaneous itemized
deduction subject to the 2% AGI limitation.

True False

27. Mr. Johnson borrowed money to buy Chicago municipal
bonds. This year, he paid $2,000 of interest

on his loan and earned $3,500 of interest income from the
bonds. None of the interest expense is

deductible.

True False

28. An owner of undeveloped land held for investment must
capitalize the property taxes paid on the land

each year.

True False

29. Investment interest expense is a miscellaneous itemized
deduction subject to the 2% AGI limitation.

True False

30. Mr. Moyer owns residential rental property. This year,
he received $7,000 revenue from the tenants and

incurred $14,900 rental expenses. Mr. Moyer must include
$7,000 in gross income and is allowed only

$7,000 of above-the-line deductions for the expenses.

True False

31. Ruth Darma is a shareholder who is not involved in the
day-to-day activities of an S corporation. Her

interest in the business is a passive activity.

True False

32. Mr. Gray recognized a $60,000 loss on sale of his entire
interest in a passive activity. He had a $52,000

passive activity loss carryforward from prior years. Mr.
Gray can deduct the $52,000 loss in the year of

sale.

True False

33. Material participation in a business activity means that
the individual is involved in the day-to-day

operations on a regular, continuous, and substantial basis.

True False

34. An inter vivos transfer is a gratuitous transfer of
property by an individual that occurs at death.

True False

35. All gratuitous transfers of property are subject to gift
tax.

True False

36. This year, Mr. Chester gave $50,000 to an old friend who
has no legal obligation to repay the money. The

entire $50,000 is a taxable gift.

True False

37. Gift tax is based on the donor’s adjusted tax basis in
the transferred property.

True False

38. The kiddie tax limits the tax savings from a transfer of
income-producing property to a minor child by

taxing a portion of such income at the parent’s marginal tax
rate.

True False

39. The federal taxable estate of a decedent can exceed the
value of the probate estate.

True False

40. A beneficiary’s basis of inherited property equals the
decedent’s adjusted basis immediately prior to

death.

True False

41. As a general tax planning rule, an individual should sell
assets that have declined in value prior to death

and keep appreciated property to transfer to his heirs at
his death.

True False

42. Life insurance proceeds are includible in the taxable
estate of the decedent if the decedent was the owner

of the policy.

True False

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Category: Accounting Tags: 0, 1, 15true, 2, accounting, accounts, annual, bank, basis, busine, capital, cash, data, discount, earned, gain, income, individual, individuals, life, lotrue, maximum, ofthe, policy, qualified, rate, sale, section, solutions, state, stock, surrender, taxationtrue, taxed, tothe

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1. The tax consequences of a business activity are generally
the same as the tax consequences of an

investment activity.

True False

2. The income generated from an investment activity is
primarily attributable to invested capital rather than

the owner’s personal involvement in the activity.

True False

3. Electing to reinvest dividends in additional shares of
stock does not defer income recognition.

True False

4. The interest earned on a state or local government bond
is exempt from federal taxation.

True False

5. The interest earned on investments in U.S. debt
obligations is subject to state taxation.

True False

6. Qualified dividend income earned by an individual taxpayer
is taxed at a maximum rate of 15%.

True False

7. Only accrual basis individuals are required to accrue
original issue discount on a bond as annual interest

income.

True False

8. Cash basis individuals must accrue market discount on a
bond as annual interest income over the life of

the bond.

True False

9. The cash surrender value of a life insurance policy is
taxable to the policy beneficiary upon the death of

the insured individual.

True False

10. Mr. Adams paid $53,500 in premiums on a whole life insurance
policy. When he canceled the policy,

he received its cash surrender value of $61,600. He must
recognize $61,600 of income as a result of the

cancellation.

True False

11. An owner of a life insurance policy that includes an
investment element must recognize income equal to

the annual increase in the policy’s cash surrender value.

True False

12. Ms. Martin received $80,000 from a $100,000 life
insurance policy as an accelerated death benefit. None

of the $80,000 is taxable to her.

True False

13. Brokerage fees paid when stock is purchased are added to
the basis of the stock.

True False

14. If an investor sells some of the securities in a block
but can’t identify which ones were sold, she is

presumed to have sold the securities with the latest
acquisition date.

True False

15. On April 19, 2011, Sandy learned that her stock
investment had become worthless. The stock is deemed

to be worthless on December 31, 2011.

True False

16. Two years ago, James loaned $60,000 to his friend. The
debt is now uncollectible. If the loan created a

bona fide debt, James recognizes a short-term capital loss.

True False

17. The tax rate on capital gains is determined solely by
reference to the capital asset’s holding period.

True False

18. Individual taxpayers may carry nondeductible capital
losses forward indefinitely.

True False

19. An individual with a 15% rate marginal tax rate on
ordinary income will pay no tax on long-term capital

gains.

True False

20. Unrecaptured Section 1250 gain is taxed at a maximum
rate of 28%.

True False

21. Individual taxpayers are not allowed to deduct capital
losses in excess of capital gains.

True False

22. Up to $100,000 of loss recognized on the sale of Section
1244 stock by a married individual filing a joint

return is characterized as ordinary loss.

True False

23. Lana owns 50 shares of stock qualifying as Section 1244
stock. If she sells the stock to George, he can

also treat the stock as Section 1244 stock.

True False

24. Investors must hold qualified small business stock for
more than five years in order to exclude a

percentage of the gain on sale of such stock from gross
income.

True False

25. Gain on the sale of qualified small business stock is
taxed at a maximum rate of 15%.

True False

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Category: Accounting Tags: 0, 1, account, accounting, accounts, admitted, aetscontributed, allen, bank, bonus, capital, credit, daniel, data, david, following, goodwill, income, information, inventory, onefifth, onlyb, onlyc, option, partner, partners, partnership, partnershipand, provided, recorded, refer, retiring, solutions, tiffany, values

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21. When a partnership is formed, noncash assets
contributed by partners should be recorded:
I. at their respective book values for income tax purposes.
II. at their respective fair values for financial accounting purposes.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

22. When a new partner is admitted into a partnership
and the new partner receives a capital credit less than the tangible assets
contributed, which of the following explains the difference?
I. The new partner’s goodwill has been recognized.
II. The old partners received a bonus from the new partner.
A. I only
B. II only
C. Either I or II
D. Neither I nor II

23. When a new partner is admitted into a partnership
and the new partner receives a capital credit greater than the tangible assets
contributed, which of the following explains the difference?
I. The old partners’ goodwill is being recognized.
II. The new partner’s goodwill is being recognized.
A. I only
B. II only
C. Either I or II
D. Both I and II

24. When a new partner is admitted into a partnership
and the capital of the old partners decreases, which of the following explains
the reason for the decrease?
I. Undervalued liabilities were written up to their fair values.
II. Undervalued assets were written up to their fair values.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

25. When a partner retires from a partnership and the
retiring partner is paid more than the capital balance in her account, which of
the following explains the difference?
I. The retiring partner is receiving a bonus from the other partners.
II. The retiring partner’s goodwill is being recognized.
A. I only
B. II only
C. Either I or II
D. Neither I nor II

26. When the old partners receive a bonus upon
admission of a new partner into a partnership, the bonus is allocated to:
I. all the partners in their profit and loss sharing ratio.
II. the existing partners in their profit and loss sharing ratio.
A. I only
B. II only
C. Either I or II
D. Neither I nor II

27. When a new partner is admitted into a partnership
and the old partners’ goodwill is recognized, the goodwill is allocated to:
I. all the partners in their profit-and-loss-sharing ratio.
II. the old partners in their profit and loss sharing ratio.
A. I only
B. II only
C. Either I or II
D. Neither I nor II

In the RST partnership, Ron’s capital is $80,000,
Stella’s is $75,000, and Tiffany’s is $50,000. They share income in a 3:2:1
ratio, respectively. Tiffany is retiring from the partnership. Each of the
following questions is independent of the others.

28. Refer to the above information. Tiffany is paid
$60,000, and no goodwill is recorded. In the journal entry to record Tiffany’s
withdrawal:
A. Tiffany, Capital will be credited for $60,000.
B. Ron, Capital will be debited for $5,000.
C. Stella, Capital will be debited for $4,000.
D. Cash will be debited for $60,000.

29. Refer to the above information. Tiffany is paid
$60,000, and no goodwill is recorded. What is the Ron’s capital balance after
Tiffany withdraws from the partnership?
A. $74,000
B. $71,000
C. $75,000
D. $86,000

30. Refer to the above information. Tiffany is paid
$56,000, and all implied goodwill is recorded. What is the total amount of
goodwill recorded?
A. $0
B. $6,000
C. $30,000
D. $36,000

In the AD partnership, Allen’s capital is $140,000
and Daniel’s is $40,000 and they share income in a 3:1 ratio, respectively. They
decide to admit David to the partnership. Each of the following questions is
independent of the others.

31. Refer to the information provided above. What
amount will David have to invest to give him one-fifth percent interest in the
capital of the partnership if no goodwill or bonus is recorded?
A. $60,000
B. $36,000
C. $50,000
D. $45,000

32. Refer to the information provided above. Assume
that David invests $50,000 for a one-fourth interest. Goodwill is to be
recorded. The journal to record David’s admission into the partnership will
include:
A. a credit to cash for $50,000.
B. a debit to goodwill for $7,500.
C. a credit to David, Capital for $60,000.
D. a credit to David, Capital for $50,000.

33. Refer to the information provided above. Allen and
Daniel agree that some of the inventory is obsolete. The inventory account is
decreased before David is admitted. David invests $40,000 for a one-fifth
interest. What is the amount of inventory written down?
A. $4,000
B. $20,000
C. $15,000
D. $10,000

34. Refer to the information provided above. Allen and
Daniel agree that some of the inventory is obsolete. The inventory account is
decreased before David is admitted. David invests $40,000 for a one-fifth
interest. What are the capital balances of Allen and Daniel after David is
admitted into the partnership?
.png”>
A. Option A
B. Option B
C. Option C
D. Option D

35. Refer to the information provided above. David
directly purchases a one-fifth interest by paying Allen $34,000 and Daniel
$10,000. The land account is increased before David is admitted. By what amount
is the land account increased?
A. $40,000
B. $10,000
C. $36,000
D. $20,000

36. Refer to the information provided above. David
directly purchases a one-fifth interest by paying Allen $34,000 and Daniel
$10,000. The land account is increased before David is admitted. What are the
capital balances of Allen and Daniel after David is admitted into the
partnership?
.png”>
A. Option A
B. Option B
C. Option C
D. Option D

37. Refer to the information provided above. David
invests $40,000 for a one-fifth interest in the total capital of $220,000. The
journal to record David’s admission into the partnership will include:
A. a credit to Cash for $40,000.
B. a debit to Allen, Capital for $3,000.
C. a credit to David, Capital for $40,000.
D. a credit to Daniel, Capital for $1,000.

38. Refer to the information provided above. David
invests $40,000 for a one-fifth interest in the total capital of $220,000. What
are the capital balances of Allen and Daniel after David is admitted into the
partnership?
.png”>
A. Option A
B. Option B
C. Option C
D. Option D

39. Refer to the information provided above. David
invests $50,000 for a one-fifth interest. What amount of goodwill will be
recorded?
A. $20,000
B. $4,000
C. $40,000
D. $15,000

40. Which of the
following observations is true of an S corporation?
A. It elects to be taxed in the same manner as a corporation.
B. It does not have the burden of double taxation of corporate income.
C. Its shareholders have personal liability for the corporation’s
obligations.
D. Its primary income source should be passive investments

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Category: Accounting Tags: accounting, accounting, accounts, aetscontributed, bank, book, data, fair, financial, formed, income, noncash, onlyb, onlynbspboth, partners, partnership, purposes, purposesii, recordedi, respective, solutions, values

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21. When a partnership is formed, noncash assets
contributed by partners should be recorded:
I. at their respective book values for income tax purposes.
II. at their respective fair values for financial accounting purposes.
A. I only
B. II onlyÂ Both I and II. Neither I nor I

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Category: Accounting Tags: accounting, accounts, bank, bond, bonda, bonds, change, company, coupon, data, debentures, debt, equal, false, firm, given, greater, high, increases, market, maturity, mortgage, percenta, rate, rates, required, return, risk, sinking, solutions, trueb, typically, value, years, yield

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.doc#_edn1″ title=””>[i]. The market value of any
real or financial asset, including stocks, bonds, or art work, may be found by
determining future cash flows and then discounting them back to the present.

a. True

b. False

.doc#_edn2″ title=””>[ii]. If a firm raises capital by
selling new bonds, the buyer is called the “issuing firm,” and the
coupon rate is generally set equal to the required rate.

a. True

b. False

.doc#_edn3″ title=””>[iii]. A 20-year original maturity
bond with 1 year left to maturity has more interest rate risk than a 10-year
original maturity bond with 1 year left to maturity. (Assume that the bonds
have equal default risk and equal coupon rates.)

a. True

b. False

.doc#_edn4″ title=””>[iv]. Because short-term interest
rates are much more volatile than long-term rates, you would, in the real
world, be subject to much more interest rate risk if you purchased a 30-day
bond than if you bought a 30-year bond.

a. True

b. False

.doc#_edn5″ title=””>[v]. For bonds, price
sensitivity to a given change in interest rates generally increases as years remaining to maturity increases.

a. True

b. False

.doc#_edn6″ title=””>[vi]. Typically, debentures have
higher interest rates than mortgage bonds primarily because the mortgage bonds
are backed by assets while debentures are unsecured.

a. True

b. False

.doc#_edn7″ title=””>[vii]. Other things equal, a firm
will have to pay a higher coupon rate on a subordinated debenture than on a
second mortgage bond.

a. True

b. False

.doc#_edn8″ title=””>[viii]. A call provision gives
bondholders the right to demand, or “call for,” repayment of a
bond. Typically, calls are exercised if
interest rates rise, because when rates rise the bondholder can get the
principal amount back and reinvest it elsewhere at higher rates.

a. True

b. False

.doc#_edn9″ title=””>[ix]. Many bond indentures allow
the company to acquire bonds for a sinking fund either by purchasing bonds in
the market or by a lottery administered by the trustee for the purchase of a
percentage of the issue through a call at face value.

a. True

b. False

.doc#_edn10″ title=””>[x]. A zero coupon bond is a
bond that pays no interest and is offered (and subsequently sells) at par,
therefore providing compensation to investors in the form of capital
appreciation.

a. True

b. False

Floating rate debt

.doc#_edn11″ title=””>[xi]. The motivation for floating
rate bonds arose out of the costly experience of the early 1980s when inflation
pushed interest rates to very high levels causing sharp declines in the prices
of long-term bonds.

a. True

b. False

.doc#_edn12″ title=””>[xii]. A junk bond is a high risk,
high yield debt instrument typically used to finance a leveraged buyout or a
merger, or to provide financing to a company of questionable financial
strength.

a. True

b. False

.doc#_edn13″ title=””>[xiii]. There is an inverse
relationship between bond ratings and the required return on a bond. The required return is lowest for AAA-rated
bonds, and required returns increase as the ratings get lower.

a. True

b. False

Medium:

.doc#_edn14″ title=””>[xiv]. If the required rate of
return on a bond is greater than
its coupon interest rate (and r_d remains above the coupon rate), the
market value of that bond will always be below
its par value until the bond matures, at which time its market value will equal
its par value. (Accrued interest between
interest payment dates should not be considered when answering this question.)

a. True

b. False

.doc#_edn15″ title=””>[xv]. You have just noticed in
the financial pages of the local newspaper that you can buy a $1,000 par value
bond for $800. If the coupon rate is 10
percent, with annual interest payments, and there are 10 years to maturity, you
should make the purchase if your reÂquired return on investments of this type
is 12 percent.

a. True

b. False

.doc#_edn16″ title=””>[xvi]. The prices of high-coupon
bonds tend to be less sensitive to a given change in interest rates than
low-coupon bonds, other things equal and held constant.

a. True

b. False

.doc#_edn17″ title=””>[xvii]. A bond with a $100 annual
interest payment with five years to maturity (not expected to default) would
sell for a premium if interest rates were below 9 percent and would sell for a
discount if interest rates were greater than 11 percent.

a. True

b. False

stated term to maturity.
Therefore, if the yield curve is upward sloping, an outstanding callable
bond should have a lower yield to maturity than an otherwise identical
noncallable bond.

a. True

b. False

increases the value of the bond increases and the issuer is
responsible for the accumulated value which may become much greater than the
original face value.

a. True

b. False

.doc#_edn18″ title=””>[xviii]. Income bonds pay interest
only when the amount of the interest is actually earned by the company. Thus, these securities cannot bankrupt a
company and this makes them safer than regular bonds.

a. True

b. False

.doc#_edn19″ title=””>[xix]. Restrictive covenants are
designed so as to protect both the bondholder and the issuer even though they
may constrain the actions of the firm’s managers. Such covenants are contained in the bond’s
indenture.

a. True

b. False

.doc#_edn20″ title=””>[xx]. You are considering two
bonds. Both are rated double A (AA),
both mature in 20 years, both have a 10 percent coupon, and both are offered to
you at their $1,000 par value. However,
Bond X has a sinking fund
while Bond Y does not. This is probably
not an equilibrium situation, as Bond X, which has the sinking fund, would
generally be expected to have a higher
yield than Bond Y.

a. True

b. False

.doc#_edn1″ title=””>[i]. Floating rate debt is
advantageous to investors because the interest rate moves up if market rates
rise. Floating rate debt shifts interest
rate risk to companies and thus has no advantages for issuers.

a. True

b. False

.doc#_edn2″ title=””>[ii]. A firm with a low bond
rating faces a more severe penalty when the Security Market Line (SML) is
relatively steep than when it is not so steep.

a. True

b. False

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Category: Accounting Tags: accounting, accounts, annual, bank, beta, bonds, capital, common, company, cost, currently, data, debt, dividend, equity, firms, increase, market, mature, outstanding, paid, partly, percent, percenta, percentb, policy, preferred, price, rate, selling, share, shares, solutions, stock, structure

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3.Last week, Lester’s Electronics paid an annual dividend of
$2.10 on its common stock. The company has a longstanding policy of increasing
its dividend by 3 percent annually. This policy is expected to continue. What
is the firm’s cost of equity if the stock is currently selling for $44.60 a
share?

a.7.66 percent

b.7.71 percent

c.7.79 percent

D. 7.85 percent e. 7.90 percent

4.Deltronics just paid its first annual dividend of $.20 a
share. The firm plans to increase the dividend by 4 percent per year
indefinitely. What is the firm’s cost of equity if the current stock price is
$11 a share? a. 5.82 percent

B. 5.89 percent

c.6.33 percent

d.6.48 percent

e.6.54 percentÂ

5.The common stock of
Pittsburgh Steel Products has a beta of 1.42 and a standard deviation of 21.6
percent. The market rate of return is 12.5 percent and the risk-free rate is 5
percent. What is the cost of equity for Pittsburgh Steel Products?

a. 15.65 percent

b.17.75 percent

c.18.45 percent

d.20.50 percent

e.22.75 percent

6.Ziegler’s Supply
has a beta of 1.06, a variance of .0124, a dividend growth rate of 2.8 percent,
a stock price of $27 a share, and an expected annual dividend of $1.10 per
share next year. The market rate of return is 10.8 percent and the risk-free
rate is 4.1 percent. What is the cost of equity for Ziegler’s Supply?

a.6.89 percent

b.7.87 percent

c.8.48percent

d. 9.04 percent

e.11.19 percent

7. Juno has 8 percent
bonds outstanding that mature in 19 years. The bonds pay interest semiannually
and have a face value of $1,000. Currently, the bonds are selling for $989
each. What is Juno’spre-tax cost of debt?

a. 8.09 percent

B. 8.11 percent

c.8.14 percent

d.8.18 percent

e.8.23 percent

8.Cobblestone Tours
has 10,000 bonds that are currently quoted at 103.6. The bonds mature in 9
years and carry a 10 percent annual coupon. What is Cobblestone Tour’s aftertax
cost of debt if the applicable tax rate is 34 percent?

A. 6.20 percent

b.6.27 percent

c.7.17 percent

d.9.28 percent

e.9.39 percent

9. The preferred
stock of Nadine Fashions pays an annual dividend of $7.25 a share and sells for
$54 a share. The tax rate is 35 percent. What is the firm’s cost of preferred
stock?

a.8.73 percent

b.9.46 percent

c.12.78percent

D. 13.43 percent

e.14.47 percent

10.Wilson’s has a
cost of equity of 12.4 percent. The market risk premium is 8.4 percent and the
risk- free rate is 3.7 percent. The company is acquiring a competitor, which
will increase the company’s beta to 1.4. What effect, if any, will the
acquisition have on Wilson’s cost of equity capital?

a.no effect

b.decrease of 10.92
percent

c.decrease of 1.48
percent

D. increase of 3.06
percent

e. increase of 5.29 percent

11.The 6 percent
preferred stock of Mercer Livestock is selling for $62 a share. What is the
firm’s cost of preferred stock if the tax rate is 34 percent and the par value
per share is $100?

a.5.88 percent

b.6.39 percent

3 | P a g e

c.7.04 percent

d.8.27percentE. 9.68
percent

12.The Burger Stop
has 80,000 shares of common stock outstanding at a price of $28 a share. It
also has 15,000 shares of preferred stock outstanding at a price of $63 a
share. There are five hundred 8.5 percent bonds outstanding that are priced at
par. The bonds mature in 14 years, pay interest semiannually, and have a face
value of $1,000. What is the capital structure weight of the preferred stock?

a. 18.87 percent

b. 21.21 percent

C. 25.64 percent

d. 26.29 percent

e. 32.18 percent

13.J&J Movers has
40,000 shares of common stock outstanding at a price of $34 a share. It also
has 4,000 shares of preferred stock outstanding at a price of $58 a share. The
firm has 9 percent, 10- year bonds outstanding with a total face value of
$500,000. The bonds are currently quoted at 96 and pay interest semiannually.
What is the capital structure weight of the firm’s debt if the tax rate is 34
percent?

A. 23.17 percent

b.25.68 percent

c.25.94 percent

d.27.18 percent

e.28.46 percent

14.The component
costs of capital are market-determined variables in the sense that they are
based on investors’ required returns.

a.True

b.False

15.For capital
budgeting and cost of capital purposes, the firm should assume that each dollar
of capital is obtained in accordance with its target capital structure, which
for many firms means partly as debt, partly as preferred stock, and partly
common equity.

a.True

b.False
=”msonormal”>

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Category: Accounting Tags: accounting, accounts, aets, annual, average, bank, cash, company, conversion, credit, current, cycle, data, days, daysb, daysc, daysd, dayse, firm, firms, increase, inventory, million, payable, percent, policy, rate, receivable, relaxed, restricted, sales, solutions, terms, total

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.doc#_edn1″ title=””>[1]. Jarrett Enterprises is considering whether
to pursue a restricted or relaxed current asset investment policy. The firmâ€™s
annual sales are $400,000; its fixed assets are $100,000; debt and equity are
each 50 percent of total assets. EBIT is $36,000, the interest rate on the
firmâ€™s debt is 10 percent, and the firmâ€™s tax rate is 40 percent. With a
restricted policy, current assets will be 15 percent of sales. Under a relaxed
policy, current assets will be 25 percent of sales. What is the difference in
the projected ROEs between the restricted and relaxed policies?

a. 0.0%

b. 6.2%

c. 5.4%

d. 1.6%

e. 3.8%

.doc#_edn2″ title=””>[2]. On average, a firm sells $2,000,000 in
merchandise a month. It keeps inventory
equal to one-half of its monthly sales on hand at all times. If the firm
analyzes its accounts using a 365-day year, what is the firmâ€™s inventory
conversion period?

a. 365.0 days

b. 182.5 days

c. 30.3 days

d. 15.2 days

e. 10.5 days

.doc#_edn3″ title=””>[3]. Biondi Manufacturing Company (BMC) has an
average accounts receivable balance of $1,250,000, an average inventory balance
of $1,750,000, and an average accounts payable balance of $800,000. Its annual sales are $12,000,000 and its cost
of goods sold represents 80 percent of annual sales. Assume there are 365 days in a year. What is BMCâ€™s cash conversion cycle?

a. 84.15 days

b. 53.23 days

c. 72.28 days

d. 100.55 days

e. 60.83 days

.doc#_edn4″ title=””>[4]. Porta Stadium Inc. has annual sales of
$80,000,000 and keeps average inventory of $20,000,000. On average, the firm has accounts receivable
of $16,000,000. The firm buys all raw
materials on credit, its trade credit terms are net 35 days, and it pays on
time. The firmâ€™s managers are searching
for ways to shorten the cash conversion cycle. If sales can be maintained at existing levels
but inventory can be lowered by $4,000,000 and accounts receivable lowered by
$2,000,000, what will be the net change in the cash conversion cycle? Use a
365-day year. Round to the closest whole
day.

a. +105 days

b. -105 days

c. +27 days

d. -27 days

e. -3 days

.doc#_edn5″ title=””>[5]. You have recently been hired to improve
the performance of Multiplex Corporation, which has been experiencing a severe
cash shortage. As one part of your
analysis, you want to determine the firmâ€™s cash conversion cycle. Using the following information and a 365-day
year, what is your estimate of the firmâ€™s current cash conversion cycle?

Â·
Current inventory = $120,000.

Â·
Annual sales = $600,000.

Â·
Accounts receivable = $157,808.

Â·
Accounts payable = $25,000.

Â·
Total annual purchases = $365,000.

Â·
Purchases credit terms:
net 30 days.

Â·
Receivables credit terms:
net 50 days.

a. 49 days

b. 193 days

c. 100 days

d. 168 days

e. 144 days

.doc#_edn6″ title=””>[6]. Kolan Inc. has annual sales of $36,500,000
($100,000 a day on a 365-day basis). On average, the company has $12,000,000 in
inventory and $8,000,000 in accounts receivable. The company is looking for
ways to shorten its cash conversion cycle, which is calculated on a 365-day
basis. Its CFO has proposed new policies that would result in a 20 percent
reduction in both average inventories and accounts receivables. The company
anticipates that these policies will also reduce sales by 10 percent. Accounts
payable will remain unchanged. What effect would these policies have on the
companyâ€™s cash conversion cycle?

a. -40 days

b. -22 days

c. -13 days

d. +22 days

e. +40 days

Answer:
e

.doc#_edn7″ title=””>[7]. Gaston Piston Corp. has annual sales of
$50,735,000 and maintains an average inventory level of $15,012,000. The average accounts receivable balance
outstanding is $10,008,000. The company
makes all purchases on credit and has always paid on the 30th day. The company is now going to take full
advantage of trade credit and pay its suppliers on the 40th day. If sales can be maintained at existing levels
but inventory can be lowered by $1,946,000 and accounts receivable lowered by
$1,946,000, what will be the net change in the cash conversion cycle? (Assume there are 365 days in the year.)

a. -14.0 days

b. -18.8 days

c. -28.0 days

d. -25.6 days

e. -38.0 days

.doc#_edn8″ title=””>[8]. Cross Collectibles currently fills mail
orders from all over the U.S.
and receipts come in to headquarters in Little
Rock, Arkansas. The firmâ€™s average accounts receivable (A/R)
is $2.5 million and is financed by a bank loan with 11 percent annual interest.
Cross is considering a regional lockbox
system to speed up collections that it believes will reduce A/R by 20 percent. The annual cost of the system is $15,000. What is the estimated net annual savings to
the firm from implementing the lockbox system?

a. $500,000

b. $ 30,000

c. $ 60,000

d. $ 55,000

e. $ 40,000

.doc#_edn9″ title=””>[9]. Allen
Brothers is interested in increasing its free cash flow (which it hopes will
result in a higher EVA and stock price).
The companyâ€™s goal is to generate $180 million of free cash flow over
the upcoming year. Allenâ€™s CFO has made the following projections for the
upcoming year:

Â·
EBIT is projected to be $850 million.

Â·
Gross capital expenditures are expected to total $360
million, and its depreciation expense is expected to be $120 million. Thus, its net capital expenditures are
expected to total $240 million.

Â·
The firmâ€™s tax rate is 40 percent.

The company forecasts
that there will be no change in its cash and marketable securities, nor will
there be any changes in notes payable or accrued liabilities. Which of the following will enable the
company to achieve its goal of generating $180 million in free cash flow?

a.
Accounts receivable increase $470 million, inventory
increases $230 million, and accounts payable increase $790 million.

b.
Accounts receivable increase $470 million, inventory
increases $230 million, and accounts payable increase $610 million.

c.
Accounts receivable decrease by $500 million, inventory
increases by $480 million, and accounts payable decline by $80 million.

d.
Accounts receivable decrease by $400 million, inventory
increases by $480 million, and accounts payable increase by $80 million.

e.
Accounts receivable increase by $500 million, inventory
increases by $100 million, and accounts payable decline by $480 million.

.doc#_edn10″ title=””>[10]. Short
Construction offers its customerâ€™s credit terms of 2/10, net 30 days, while
Fryman Construction offers its customerâ€™s credit terms of 2/10, net 45
days. The aging schedules for each of
the two companiesâ€™ accounts receivable are reported below:

Short Construction Fryman Construction

Age of Value of Percentage of Value of Percentage of

Account (Days)
Account Total Value Account Total Value

0-10
$58,800 60% $
73,500 50%

11-30 19,600 20
29,400 20

31-45 14,700 15
29,400 20

46-60 2,940 3
10,290 7

Over 60
1,960 2 4,410 3

Total
Receivables $98,000 $147,000

Which company has the
greatest percentage of overdue accounts and what is their percentage of overdue
accounts?

a.
Fryman;
50% overdue.

b.
Short;
20% overdue.

c.
Fryman;
30% overdue.

d.
Fryman;
3% overdue.

e.
Short;
40% overdue.

Tough:

.doc#_edn11″ title=””>[11]. Jordan Air Inc. has average inventory of
$1,000,000. Its estimated annual sales
are $10 million and the firm estimates its receivables conversion period to be
twice as long as its inventory conversion period. The firm pays its trade
credit on time; its terms are net 30 days.
The firm wants to decrease its cash conversion cycle by 10 days. It believes that it can reduce its average
inventory to $863,000. Assume a 365-day
year and that sales will not change. By
how much must the firm also reduce its accounts receivable to meet its goal of
a 10-day reduction in its cash conversion cycle?

a. $
101,900

b. $1,000,000

c. $
136,986

d. $
333,520

e. $
0

Multiple Part:

(The following information applies to the next three
problems.)

Callison Airlines is deciding whether to pursue a
restricted or relaxed current asset investment policy. Callisonâ€™s annual sales are expected to total
$3.6 million, its fixed assets turnover ratio equals 4.0, and its debt and
common equity are each 50 percent of total assets. EBIT is $150,000, the interest rate on the
firmâ€™s debt is 10 percent, and the firmâ€™s tax rate is 40 percent. If the company follows a restricted policy,
its total assets turnover will be 2.5.
Under a relaxed policy, its total assets turnover will be 2.2.

.doc#_edn12″ title=””>[12]. If
the firm adopts a restricted policy, how much will it save in interest expense
(relative to what it would be if Callison were to adopt a relaxed policy)?

a. $ 3,233

b. $ 6,175

c. $ 9,818

d. $ 7,200

e. $10,136

.doc#_edn13″ title=””>[13]. What
is the difference in the projected ROEs between the restricted and relaxed
policies?

a. 2.24%

b. 1.50%

c. 1.00%

d. 0.50%

e. 0.33%

.doc#_edn14″ title=””>[14]. Assume
now the company expects that if it adopts a restricted policy, its sales will
fall by 15 percent, EBIT will fall by 10 percent, but its total assets
turnover, debt ratio, interest rate, and tax rate will remain the same. In this situation, what is the difference in
the projected ROEs between the restricted and relaxed policies?

a. 2.24%

b. 1.50%

c. 1.00%

d. 0.50%

e. 0.33%

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Category: Accounting Tags: , 0, 1, 2, 3, accounting, accounts, accrued, aets, applicable, bank, beginning, book, corporation, data, debitcredit, deferred, depreciation, equity, expense, gator, income, incs, liabilities, litigation, rate, solutions, subtotal, total, year

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1599. CHAPTER
14â€”TAXES ON THE FINANCIAL STATEMENTS Question PR #1
Kooler, Inc., is a domestic corporation. It owns 100% of Texas, Inc., a
domestic corporation, 100% of Paris, a foreign corporation, and 45% of Iowa,
Inc., a domestic corporation.

a.

Which
entitiesâ€™ incomes are included in Koolerâ€™s combined GAAP financial
statements?

b.

How would
your answer change if Kooler instead owned 15% of Iowa?

1600. CHAPTER
14â€”TAXES ON THE FINANCIAL STATEMENTS Question PR #2
Bunker, Inc., is a domestic corporation. It owns 100% of Texas, Inc., a
domestic corporation, 100% of Paris, a foreign corporation, and 35% of Iowa,
Inc., a domestic corporation.

a.

Which entitiesâ€™
incomes are included in Bunkerâ€™s Federal consolidated income tax return?

b.

How would
your answer change if Bunker instead owned 15% of Iowa?

1601. CHAPTER 14â€”TAXES
ON THE FINANCIAL STATEMENTS Question PR #3
Rochelle, Inc., reported the following results for the current year.

Book income
(before tax)

$500,000

Tax
depreciation in excess of book

25,000

Non-tax-deductible
warranty expense

17,500

Municipal bond
interest income

20,000

Determine Rochelleâ€™s taxable income for the current year. Identify any
temporary or permanent book-tax differences.

1602. CHAPTER
14â€”TAXES ON THE FINANCIAL STATEMENTS Question PR #4
PaintCo Inc., a domestic corporation, owns 100% of BrushCo Ltd., an Irish
corporation. Assume that the U.S. corporate tax rate is 35% and the Irish rate
is 10%. PaintCo is permanently reinvesting BrushCoâ€™s earnings outside the
United States under ASC 740-30 (APB 23). The corporationsâ€™ book income,
permanent and temporary book-tax differences, and current tax expense are as
follows. Determine PaintCoâ€™s total tax expense reported on its financial
statements, its current tax expense (benefit), and its deferred tax expense
(benefit).

PaintCo

BrushCo

Book income
before tax

$600,000

$400,000

Permanent
differences

Meals & entertainment expense

40,000

â€“0â€“

Municipal bond interest income

(100,000)

â€“0â€“

Temporary
differences

Tax > book depreciation

(100,000)

â€“0â€“

Book > tax bad debt expense

20,000

â€“0â€“

1603. CHAPTER
14â€”TAXES ON THE FINANCIAL STATEMENTS Question PR #5
PaintCo Inc., a domestic corporation, owns 100% of BrushCo Ltd., an Irish
corporation. Assume that the U.S. corporate tax rate is 35% and the Irish rate
is 10%. PaintCo is permanently reinvesting BrushCoâ€™s earnings outside the
United States under ASC 740-30 (APB 23). The corporationsâ€™ book income,
permanent and temporary book-tax differences, and current tax expense are as
follows. Provide the income tax footnote rate reconciliation for PaintCo using
both dollar amounts and percentages.

PaintCo

BrushCo

Book income
before tax

$600,000

$400,000

Permanent
differences

Meals & entertainment expense

40,000

â€“0â€“

Municipal bond interest income

(100,000)

â€“0â€“

Temporary
differences

Tax > book depreciation

(100,000)

â€“0â€“

Book > tax bad debt expense

20,000

â€“0â€“

1604. CHAPTER
14â€”TAXES ON THE FINANCIAL STATEMENTS Question PR #6
Gator, Inc., is a domestic corporation with the following balance sheet for
book and tax purposes at the end of the year. Assume a 34% corporate tax rate
and no valuation allowance.

Tax Debit/(Credit)

Book Debit/(Credit)

Assets

Cash

$ 300

$ 300

Accounts
Receivable

5,000

5,000

Buildings

300,000

300,000

Acc.
Depreciation

(150,000)

(80,000)

Furniture
& Fixtures

40,000

40,000

Acc.
Depreciation

(21,000)

(15,000)

Total Assets

$174,300

$250,300

Liabilities

Accrued
Litigation Expense

$ â€“0â€“

($ 27,000)

Note Payable

(116,000)

(116,000)

Total
Liabilities

($116,000)

($143,000)

Stockholder Equity

Paid in
Capital

($ 1,000)

($ 1,000)

Retained
Earnings

(57,300)

(106,300)

Total
Liabilities and
Stockholders Equity

($174,300)

($250,300)

Gator Inc.â€™s gross deferred tax assets and liabilities at the beginning of
Gatorâ€™s year are listed below.

Beginning of Year

Accrued
Litigation Expense

$21,000

Subtotal

$21,000

Applicable
Tax Rate

Â´ 34%

Gross
Deferred Tax Asset

$
7,140

Building â€“ Acc.
Depreciation

($61,000)

Furniture
& fixtures â€“ Acc. Depreciation

(3,200)

Subtotal

($64,200)

Applicable
tax rate

Â´ 34%

Gross
deferred tax liability

($21,828)

Gator Inc.â€™s book income before tax is $6,300. Gator records two permanent
book-tax differences. It earned $250 in tax exempt municipal bond interest and
$460 in nondeductible meals and entertainment expense. Determine the change in
Gatorâ€™s deferred tax assets for the current year.

1605. CHAPTER
14â€”TAXES ON THE FINANCIAL STATEMENTS Question PR #7
Gator, Inc., is a domestic corporation with the following balance sheet for
book and tax purposes at the end of the year. Assume a 34% corporate tax rate
and no valuation allowance.

Tax Debit/(Credit)

Book Debit/(Credit)

Assets

Cash

$ 300

$ 300

Accounts
Receivable

5,000

5,000

Buildings

300,000

300,000

Acc.
Depreciation

(150,000)

(80,000)

Furniture
& Fixtures

40,000

40,000

Acc.
Depreciation

(21,000)

(15,000)

Total Assets

$174,300

$250,300

Liabilities

Accrued
Litigation Expense

$ â€“0â€“

($ 27,000)

Note Payable

(116,000)

(116,000)

Total
Liabilities

($116,000)

($143,000)

Stockholder Equity

Paid in
Capital

($ 1,000)

($ 1,000)

Retained
Earnings

(57,300)

(106,300)

Total
Liabilities and
Stockholders Equity

($174,300)

($250,300)

Gator Inc.â€™s gross deferred tax assets and liabilities at the beginning of
Gatorâ€™s year are listed below.

Beginning of Year

Accrued
Litigation Expense

$21,000

Subtotal

$21,000

Applicable
Tax Rate

Â´ 34%

Gross
Deferred Tax Asset

$
7,140

Building â€“
Acc. Depreciation

($61,000)

Furniture
& fixtures â€“ Acc. Depreciation

(3,200)

Subtotal

($64,200)

Applicable
tax rate

Â´ 34%

Gross
deferred tax liability

($21,828)

Gator Inc.â€™s book income before tax is $6,300. Gator records two permanent
book-tax differences. It earned $250 in tax exempt municipal bond interest and
$460 in nondeductible meals and entertainment expense. Determine the net
deferred tax asset or net deferred tax liability at year end.

1606. CHAPTER
14â€”TAXES ON THE FINANCIAL STATEMENTS Question PR #8
Gator, Inc., is a domestic corporation with the following balance sheet for
book and tax purposes at the end of the year. Assume a 34% corporate tax rate
and no valuation allowance.

Tax Debit/(Credit)

Book Debit/(Credit)

Assets

Cash

$ 300

$ 300

Accounts
Receivable

5,000

5,000

Buildings

300,000

300,000

Acc.
Depreciation

(150,000)

(80,000)

Furniture
& Fixtures

40,000

40,000

Acc.
Depreciation

(21,000)

(15,000)

Total Assets

$174,300

$250,300

Liabilities

Accrued
Litigation Expense

$ â€“0â€“

($ 27,000)

Note Payable

(116,000)

(116,000)

Total
Liabilities

($116,000)

($143,000)

Stockholder Equity

Paid in
Capital

($ 1,000)

($ 1,000)

Retained
Earnings

(57,300)

(106,300)

Total
Liabilities and
Stockholders Equity

($174,300)

($250,300)

Gator Inc.â€™s gross deferred tax assets and liabilities at the beginning of
Gatorâ€™s year are listed below.

Beginning of Year

Accrued
Litigation Expense

$21,000

Subtotal

$21,000

Applicable
Tax Rate

Â´ 34%

Gross Deferred
Tax Asset

$
7,140

Building â€“
Acc. Depreciation

($61,000)

Furniture
& fixtures â€“ Acc. Depreciation

(3,200)

Subtotal

($64,200)

Applicable
tax rate

Â´ 34%

Gross
deferred tax liability

($21,828)

Gator Inc.â€™s book income before tax is $6,300. Gator records two permanent
book-tax differences. It earned $250 in tax exempt municipal bond interest and
$460 in nondeductible meals and entertainment expense. Determine the change in
Gatorâ€™s deferred tax liabilities for the current year.

1607. CHAPTER
14â€”TAXES ON THE FINANCIAL STATEMENTS Question PR #9
Gator, Inc., is a domestic corporation with the following balance sheet for
book and tax purposes at the end of the year. Assume a 34% corporate tax rate
and no valuation allowance.

Tax Debit/(Credit)

Book Debit/(Credit)

Assets

Cash

$ 300

$ 300

Accounts
Receivable

5,000

5,000

Buildings

300,000

300,000

Acc.
Depreciation

(150,000)

(80,000)

Furniture
& Fixtures

40,000

40,000

Acc.
Depreciation

(21,000)

(15,000)

Total Assets

$174,300

$250,300

Liabilities

Accrued
Litigation Expense

$ â€“0â€“

($
27,000)

Note Payable

(116,000)

(116,000)

Total
Liabilities

($116,000)

($143,000)

Stockholder Equity

Paid in
Capital

($ 1,000)

($ 1,000)

Retained
Earnings

(57,300)

(106,300)

Total
Liabilities and
Stockholders Equity

($174,300)

($250,300)

Gator Inc.â€™s gross deferred tax assets and liabilities at the beginning of
Gatorâ€™s year are listed below.

Beginning of Year

Accrued
Litigation Expense

$21,000

Subtotal

$21,000

Applicable
Tax Rate

Â´ 34%

Gross
Deferred Tax Asset

$
7,140

Building â€“
Acc. Depreciation

($61,000)

Furniture
& fixtures â€“ Acc. Depreciation

(3,200)

Subtotal

($64,200)

Applicable
tax rate

Â´ 34%

Gross
deferred tax liability

($21,828)

Gator Inc.â€™s book income before tax is $6,300. Gator records two permanent
book-tax differences. It earned $250 in tax exempt municipal bond interest and
$460 in nondeductible meals and entertainment expense. Determine Gatorâ€™s change
in net deferred tax asset or net deferred tax liability for the current year
and provide the journal entry to record this amount.

1608. CHAPTER
14â€”TAXES ON THE FINANCIAL STATEMENTS Question PR #10
Gator, Inc., is a domestic corporation with the following balance sheet for
book and tax purposes at the end of the year. Assume a 34% corporate tax rate
and no valuation allowance.

Tax Debit/(Credit)

Book Debit/(Credit)

Assets

Cash

$ 300

$ 300

Accounts
Receivable

5,000

5,000

Buildings

300,000

300,000

Acc.
Depreciation

(150,000)

(80,000)

Furniture
& Fixtures

40,000

40,000

Acc.
Depreciation

(21,000)

(15,000)

Total Assets

$174,300

$250,300

Liabilities

Accrued
Litigation Expense

$ â€“0â€“

($ 27,000)

Note Payable

(116,000)

(116,000)

Total
Liabilities

($116,000)

($143,000)

Stockholder Equity

Paid in
Capital

($ 1,000)

($ 1,000)

Retained
Earnings

(57,300)

(106,300)

Total
Liabilities and
Stockholders Equity

($174,300)

($250,300)

Gator Inc.â€™s gross deferred tax assets and liabilities at the beginning of
Gatorâ€™s year are listed below.

Beginning of Year

Accrued
Litigation Expense

$21,000

Subtotal

$21,000

Applicable
Tax Rate

Â´ 34%

Gross
Deferred Tax Asset

$
7,140

Building â€“
Acc. Depreciation

($61,000)

Furniture
& fixtures â€“ Acc. Depreciation

(3,200)

Subtotal

($64,200)

Applicable
tax rate

Â´ 34%

Gross
deferred tax liability

($21,828)

Gator Inc.â€™s book income before tax is $6,300. Gator records two permanent
book-tax differences. It earned $250 in tax exempt municipal bond interest and
$460 in nondeductible meals and entertainment expense. Calculate Gatorâ€™s
current tax expense.

1609. CHAPTER
14â€”TAXES ON THE FINANCIAL STATEMENTS Question PR #11
Gator, Inc., is a domestic corporation with the following balance sheet for
book and tax purposes at the end of the year. Assume a 34% corporate tax rate
and no valuation allowance.

Tax Debit/(Credit)

Book Debit/(Credit)

Assets

Cash

$ 300

$ 300

Accounts
Receivable

5,000

5,000

Buildings

300,000

300,000

Acc.
Depreciation

(150,000)

(80,000)

Furniture
& Fixtures

40,000

40,000

Acc.
Depreciation

(21,000)

(15,000)

Total Assets

$174,300

$250,300

Liabilities

Accrued
Litigation Expense

$ â€“0â€“

($ 27,000)

Note Payable

(116,000)

(116,000)

Total
Liabilities

($116,000)

($143,000)

Stockholder Equity

Paid in
Capital

($ 1,000)

($ 1,000)

Retained
Earnings

(57,300)

(106,300)

Total
Liabilities and
Stockholders Equity

($174,300)

($250,300)

Gator Inc.â€™s gross deferred tax assets and liabilities at the beginning of
Gatorâ€™s year are listed below.

Beginning of Year

Accrued
Litigation Expense

$21,000

Subtotal

$21,000

Applicable
Tax Rate

Â´ 34%

Gross
Deferred Tax Asset

$
7,140

Building â€“
Acc. Depreciation

($61,000)

Furniture
& fixtures â€“ Acc. Depreciation

(3,200)

Subtotal

($64,200)

Applicable
tax rate

Â´ 34%

Gross
deferred tax liability

($21,828)

Gator Inc.â€™s book income before tax is $6,300. Gator records two permanent
book-tax differences. It earned $250 in tax exempt municipal bond interest and
$460 in nondeductible meals and entertainment expense. Provide the journal
entry to record Gatorâ€™s current tax expense.

1610. CHAPTER
14â€”TAXES ON THE FINANCIAL STATEMENTS Question PR #12
Gator, Inc., is a domestic corporation with the following balance sheet for
book and tax purposes at the end of the year. Assume a 34% corporate tax rate
and no valuation allowance.

Tax Debit/(Credit)

Book Debit/(Credit)

Assets

Cash

$ 300

$ 300

Accounts
Receivable

5,000

5,000

Buildings

300,000

300,000

Acc.
Depreciation

(150,000)

(80,000)

Furniture
& Fixtures

40,000

40,000

Acc.
Depreciation

(21,000)

(15,000)

Total Assets

$174,300

$250,300

Liabilities

Accrued
Litigation Expense

$ â€“0â€“

($ 27,000)

Note Payable

(116,000)

(116,000)

Total
Liabilities

($116,000)

($143,000)

Stockholder Equity

Paid in
Capital

($ 1,000)

($ 1,000)

Retained
Earnings

(57,300)

(106,300)

Total
Liabilities and
Stockholders Equity

($174,300)

($250,300)

Gator Inc.â€™s gross deferred tax assets and liabilities at the beginning of
Gatorâ€™s year are listed below.

Beginning of Year

Accrued
Litigation Expense

$21,000

Subtotal

$21,000

Applicable
Tax Rate

Â´ 34%

Gross
Deferred Tax Asset

$
7,140

Building â€“
Acc. Depreciation

($61,000)

Furniture
& fixtures â€“ Acc. Depreciation

(3,200)

Subtotal

($64,200)

Applicable
tax rate

Â´ 34%

Gross
deferred tax liability

($21,828)

Gator Inc.â€™s book income before tax is $6,300. Gator records two permanent
book-tax differences. It earned $250 in tax exempt municipal bond interest and
$460 in nondeductible meals and entertainment expense. What is Gatorâ€™s total
provision for income tax expense reported on its GAAP financial statement and
its book net income after tax?

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Category: Accounting Tags: accounting, accounts, bank, based, bonus, company, considered, cost, data, discover, does, effect, ending, error, ethics, financial, goods, harriets, inventory, knowingly, manager, method, million, overstate, overstated, plan, profit, purchased, sales, sold, solutions, specifically, statements, units, violation

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Harriet’s Toy Shop had net sales of $852,000. The gross profit was $230,000. Calculate Harriet’s cost of goods sold.

A company made the following merchandise purchases and sales during the month of January:

Beginning Inventory 100 units at $10 each

Jan. 5 purchased 40 units at $12 each

Jan. 10 sold 60 units

Jan. 15 purchased 70 units at $13 each

Jan. 25 sold 50 units

If the company uses the First In, First Out inventory valuation method and the perpetual inventory system, what would be the cost of the 100 units in ending inventory?

The inventory manager’s compensation includes a bonus plan based on gross profit. You discover that the inventory manager has knowingly overstated ending inventory by $2 million. What effect does this error have on the financial statements of the company and specifically gross profit? Why would the manager knowingly overstate ending inventory? Would this be considered an ethics violation?

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Category: Accounting Tags: 0, 1, 2, accounting, accounts, agreed, allocated, auming, bank, bonus, capital, corporationiii, correct, currentyear, data, follows, given, goodwill, income, information, joint, option, organized, partner, partners, partnership, partnershipii, purchases, recognized, refer, solutions, statementbelow, total, venture, year

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11. The JPB partnership reported net income of
$160,000 for the year ended December 31, 2008. According to the partnership
agreement, partnership profits and losses are to be distributed as follows:
.png”>
How should partnership net income for 2008 be allocated to J, P, and B?
.png”>
A. Option A
B. Option B
C. Option C
D. Option D

The APB partnership agreement specifies that
partnership net income be allocated as follows:

.png”>

Average capital balances for the current year were $50,000 for A, $30,000 for
P, and $20,000 for B.

12. Refer to the information given. Assuming a current
year net income of $150,000, what amount should be allocated to each partner?

.png”>
A. Option A
B. Option B
C. Option C
D. Option D

13. Refer to the information given. Assuming a current
year net income of $50,000, what amount should be allocated to each partner?
.png”>
A. Option A
B. Option B
C. Option C
D. Option D

14. RD formed a partnership on February 10, 2009. R
contributed cash of $150,000, while D contributed inventory with a fair value
of $120,000. Due to R’s expertise in selling, D agreed that R should have 60
percent of the total capital of the partnership. R and D agreed to recognize
goodwill. What is the total capital of the RD partnership and the capital
balance of R after the goodwill is recognized?
.png”>
A. Option A
B. Option B
C. Option C
D. Option D

15. A joint venture may be organized as a:
I. Partnership.
II. Corporation.
III. Undivided interest.
A. I only
B. II only
C. I or III only
D. I, II, or III

.png”>

16. Refer to the above information. Which statement
below is correct if a new partner receives a bonus upon contributing assets
into the partnership?
A. B < A and D = C – A
B. B > A and D = C + A
C. A = B and A = D + C
D. B > A and C = D + A

17. Refer to the above information. Which statement
below is correct if the old partners receive a bonus upon the contribution of
assets into the partnership by a new partner?
A. B < A and D = C – A
B. B + A and D > C + A
C. B < A and D = C + A
D. B > A and D = C + A

18. Refer to the above information. Which statement
below is correct if goodwill of the old partners is recognized upon the
contribution of assets into the partnership by a new partner?
A. B = A and D < C + A
B. B = A and D > C + A
C. B < A and D = C + A
D. B > A and D < C + A

19. Refer to the above information. Which statement
below is correct if a new partner purchases an interest in capital directly
from the old partners?
A. C < D
B. C = D
C. C = D and B = A
D. C < D and B = A

20. Refer to the above information. Which statement
below is correct if a new partner’s goodwill is recognized upon contributing
assets into the partnership?
A. B = A and D > C + A
B. B < A and D < C + A
C. B > A and D = C + A
D. B > A and D > C + A

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89. Mr. and Mrs. Arlette spent $5,900 for child care for
their 12-year-old daughter. Mr. Arlette’s earned

income was $178,000, Mrs. Arlette’s earned income was
$33,100, and the AGI on their joint return was

$225,200. Calculate their dependent care credit.

A. $5,900

B. $1,180

C. $600

D. $0

90. Mr. and Mrs. Borem spent $1,435 for child care for their
two dependent children, who are two and four

years old. Mr. Borem’s earned income was $55,870, Mrs. Borem
had no earned income, and the AGI on

their joint return was $66,210. Calculate their dependent
care credit.

A. $0

B. $287

C. $502

D. $1,435

91. Mr. and Mrs. Harvey’s tax liability before credits was
$1,675. Their income tax withholding was $1,050,

and they are entitled to a $1,189 earned income credit.
Which of the following statements is true?

A. The Harveys are entitled to a $1,050 tax refund.

B. The Harveys are entitled to a $1,189 tax refund.

C. The Harveys are entitled to a $564 tax refund.

D. The Harveys owe no additional tax but they are not
entitled to a refund.

92. Mr. Marshall was employed by IMP Inc. until October,
when he accepted a new position with Turine Inc.

Mr. Marshall earned $129,000 compensation from IMP and
$36,000 compensation from Turine. Which

of the following statements is false?

A. Turine must withhold Social Security tax from Mr.
Marshall’s $36,000 compensation.

B. Turine must withhold Medicare tax from Mr. Marshall’s
$36,000 compensation.

C.

Mr. Marshall is entitled to an income tax credit for excess
Social Security tax withheld by his

employers this year.

D. None of the above is false.

93. Mrs. Lincoln was employed by GGH Inc. until October,
when he accepted a new position with Murdock

Inc. Mrs. Lincoln earned $145,000 compensation from GGH and
$36,000 compensation from Murdock.

Which of the following statements is false?

A. Murdock must withhold Social Security tax from Mrs.
Lincoln’s $36,000 compensation.

B. Murdock must withhold Medicare tax from Mrs. Lincoln’s
$36,000 compensation.

C.

Mrs. Lincoln is entitled to an income tax credit for both
excess Social Security tax and excess Medicare

tax withheld by her employers this year.

D.

Both GGH and Murdock must pay the full amount of employer
payroll tax on the compensation paid

to Mrs. Lincoln.

94. Which of the following statements concerning the
individual alternative minimum tax (AMT) is true?

A.

The calculation of alternative minimum taxable income begins
with taxable income for regular tax

purposes.

B. A taxpayer with no tax preference items for the year
can’t be liable for AMT.

C. An individual is allowed the same exemption as a
corporation in calculating the AMT base.

D. The individual AMT rate is a flat 28%.

95. Ruth Anne, a single taxpayer, reported $152,600
alternative minimum taxable income before any

exemption on her Form 1040. Calculate Ruth Anne’s
alternative minimum tax exemption.

A. $10,025

B. $38,425

C. $48,450

D. None of the above

96. Mr. and Mrs. Stern reported $312,400 alternative minimum
taxable income before any exemption on their

Form 1040. Calculate their alternative minimum tax
exemption.

A. $0

B. $40,600

C. $74,450

D. None of the above

97. Mr. and Mrs. Reid reported $135,700 ordinary taxable
income for regular tax purposes and had $58,200

positive AMT adjustments and preferences. Compute their
tentative AMT.

A. $31,967

B. $33,911

C. $37,161

D. $40,019

98. Mr. and Mrs. Luang reported $417,900 ordinary taxable
income for regular tax purposes and had $39,100

positive AMT adjustments and preferences. Compute their
tentative AMT.

A. $124,460

B. $127,960

C. $104,594

D. None of the above

99. Mr. and Mrs. King’s regular tax liability on their joint
return was $111,850. Which of the following

statements is true?

A. If the Kings’ tentative minimum tax is $103,300, their
total tax liability is $103,300.

B. If the Kings’ tentative minimum tax is $103,300, their
total tax liability is $111,850.

C. If the Kings’ tentative minimum tax is $143,800; their
total tax liability is $143,800.

D. Both b. and c. are true.

100.Ms. Dorley’s regular tax liability on her Form 1040 is
$45,890. Which of the following statements is

true?

A. If Ms. Dorley’s tentative minimum tax is $50,700, her
total tax liability is $97,590.

B. If Ms. Dorley’s AMT is $6,380, her total tax liability is
$52,270.

C. If Ms. Dorley’s AMT is $10,112, her total tax liability
is $45,890.

D. If Ms. Dorley’s tentative minimum tax is $38,682, her
total tax liability is $38,682.

101.Ms. Kilo’s regular income tax before credits on her Form
1040 is $45,890, and she has a $5,700 minimum

tax credit from a previous year. Which of the following
statements is true?

A. If Ms. Kilo’s tentative minimum tax is $50,500, her total
tax liability is $44,800.

B. If Ms. Kilo’s tentative minimum tax is $42,400, her total
tax liability is $40,190.

C. If Ms. Kilo’s tentative minimum tax is $42,400, her total
tax liability is $42,400.

D. Both a. and c. are true.

102.Last year, Mr. Corbett’s AGI was $141,000, and his total
tax liability was $33,650. This year, his total

tax liability is $35,290. Compute the minimum amount of
current year tax that Mr. Corbett had to prepay

(withholding and estimated payments) to avoid an underpayment
penalty.

A. $31,761

B. $33,650

C. $30,285

D. $35,290

103.Last year, Mr. Tyker’s AGI was $182,800, and his total
tax liability was $51,650. This year, his total

tax liability is $65,440. Compute the minimum amount of
current year tax that Mr. Tyker had to prepay

(withholding and estimated payments) to avoid an
underpayment penalty.

A. $65,440

B. $51,650

C. $56,815

D. $58,896

104.Which of the following statements regarding tax payments
is true?

A

.

Sole proprietors must make quarterly estimated payments of income
tax, but self-employment tax is

not due until the return is filed.

B.

Sole proprietors must make quarterly estimated payments of
self-employment tax, but income tax is not

due until the return is filed.

C. Sole proprietors must make quarterly estimated payments
of income tax and self-employment tax.

D. Sole proprietors are not required to pay income tax or
self-employment tax until the return is filed.

105.Which of the following statements concerning extensions
of time to file an individual tax return is true?

A. The extension of time to file does not extend the time
for payment of tax.

B. The extension of time to file is for four months.

C.

An individual who requests an extension of time to file must
provide the IRS with a reasonable

explanation.

D. The IRS may disapprove an extension request if the
taxpayer fails to provide a reasonable explanation.

106.Which of the following statements concerning extensions
of time to file an individual tax return is false?

A. The extension of time to file does not extend the time
for payment of any tax due.

B.

An individual may receive an automatic extension of the
filing date without providing any explanation

to the IRS.

C. The extended due date of a calendar-year individual tax
return is October 15 of the following year.

D. An extension request must be filed before the end of the
taxable year.

107.Mr. and Mrs. Reece couldn’t complete their 2010 Form
1040 before April 15, 2011. They estimate that

they will have a $700 balance of tax due with the return.
Which of the following statement is true?

A. If the Reeces fail to file their return by April 15, they
will owe penalties to the IRS.

B.

The Reeces can file an extension request by April 15 to
extend the tax payment and filing date for six

months without penalty.

C.

The Reeces can file an extension request by April 15 to
extend the filing date for six months without

penalty. They must pay the $700 estimated balance of tax due
with the extension request.

D. None of the above is true.

108.Determine Mr. Smith’s 2011 filing status in each of the
following independent cases.

a. Mr. Smith and Mrs. Smith were legally divorced on
December 1. Mr. Smith has not remarried and has

no dependent children.

b. Mr. Smith and the first Mrs. Smith were legally divorced
on February 10. Mr. Smith remarried the

second Mrs. Smith on December 5. He has no dependent
children.

c. Mrs. Smith dies on June 22. Mr. Smith has not remarried
and has no dependent children.

d. Mrs. Smith died on November 1, 2009. Mr. Smith has not
remarried and maintains a home for one

dependent child.

e. Mrs. Smith died on April 3, 2010. Mr. Smith has not
remarried and has no dependent children.

f. Mr. and Mrs. Smith were legally divorced on September 10,
2007. Mr. Smith has not remarried and

maintains a home for his two dependent children.

109.Mr. and Mrs. Bennett file a joint tax return. Determine
if each of the following unmarried individuals is

either a qualifying child or a qualifying relative for whom
the couple can claim an exemption.

a. Son Alex, age 22, lives in his parents’ home and works
fulltime as a tax accountant. Alex is selfsupporting

except for the fact that he does not pay rent to his
parents.

b. Daughter Samantha, age 20, is a full-time college
student. Samantha lives in a dormitory during the

school year, but her parents’ home is her permanent
residence and they provide 100% of her financial

support.

c. Mr. Bennett’s brother Max is 42 years old and mentally
handicapped. Max lives in a privately operated

group home, and Mr. and Mrs. Bennett provide 100% of his
financial support. Max has no gross income.

d. Mrs. Bennett’s mother, Vera, age 67, lives in a
retirement community. Mr. and Mrs. Bennett provide

about 75% of her financial support. Vera earned $5,000 this
year as a part-time receptionist.

110.Eileen, a single individual, had $125,000 taxable
income. Compute her income tax assuming that:

a. Taxable income includes no capital gains.

b. Taxable income includes $14,000 capital gain eligible for
the 15% preferential rate.

111.Alice Grim, a single taxpayer, has $219,000 taxable
income, which includes a $20,000 capital gain

taxed at 15%. Her alternative minimum taxable income in
excess of her exemption amount is $237,400.

Compute Alice’s regular tax, AMT, and total tax.

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76. Benjamin, who files as a single taxpayer, has $359,900
taxable income in 2011. Compute his regular tax

liability.

A. $103,664

B. $110,551

C. $118,767

D. None of the above

77. Alice is an unmarried individual. She has $182,340
taxable income in 2011. Compute Alice’s regular tax

liability if she files as a single taxpayer and if she files
as a head of household.

A. Single $41,827; head of household $39,892

B. Single $60,172; head of household $51,055

C. Single $45,119; head of household $42,230

D. None of the above

78. Ms. Kilo is an unmarried individual. She has $219,344
taxable income in 2011. Compute Ms. Kilo’s

regular tax liability if she files as a single taxpayer and
if she files as a surviving spouse.

A. Single $57,500; surviving spouse $61,924

B. Single $57,281; surviving spouse $54,174

C. Single $43,896; surviving spouse $49,838

D. None of the above

79. Which of the following statements regarding the
calculation of regular tax liability is false?

A. The rate schedule for calculating regular tax liability
depends on the taxpayer’s filing status.

B.

All taxpayer, regardless of the amount of their taxable
income, pay a 10% tax on their first bracket of

income.

C. The individual tax rate schedules are adjusted annually
for inflation.

D.

The tax brackets in the single rate schedule are one-half of
the brackets in the married-filing-jointly

rate schedule.

80. Which of the following statements regarding the
calculation of regular tax liability is false?

A. Regardless of filing status, the highest marginal rate
for individual taxpayers is 35%.

B. The individual tax rate schedules are adjusted annually
for inflation.

C.

The tax brackets in the married-filing-separately rate
schedule are one-half of the brackets in the

married-filing-jointly rate schedule.

D. None of the above is false.

81. Mr. and Mrs. David file a joint tax return. They have
$169,300 taxable income in 2011, $120,300 of

which is ordinary income and $49,000 of which is taxed at a
15% preferential rate. Compute their tax

savings from the preferential rate.

A. $6,370

B. $5,799

C. $4,900

D. None of the above.

82. Mr. and Mrs. Daniels had the following income items in
2011:

Mr. and Mrs. Daniels have no dependents and claim the standard
deduction. Compute their income tax

liability on a joint return.

A. $20,585

B. $21,363

C. $22,248

D. $23,559

83. Linda and Raj are engaged to be married. Linda’s 2011
taxable income as a single individual would

$83,500. Raj’s 2011 taxable income as a single individual
would be $118,000. When they marry before

the end of 2011, how much of a marriage penalty will they
incur?

A. $0

B. $388

C. $833

D. None of the above

84. Which of the following situations result in a marriage
penalty for federal income tax purposes?

A.

Mr. and Mrs. Gooding, who have filed a joint return for 11
years, divorce before the end of the tax

year.

B.

Mr. Dylan, who is a head of household, marries Ms. Boyle,
who has no taxable income, before the end

of the tax year.

C.

Mr. and Mrs. Small, who have filed a joint return for 20
years, elect to file separate tax returns this

year.

D.

Mr. Langley, a single taxpayer, marries Ms. Nuyen, also a
single taxpayer. Both individuals earn a

salary in excess of $100,000.

85. Mr. and Mrs. Kain reported $80,000 AGI on their joint
return. The couple has four dependent children:

Beatrice, age 19; Bruce, age 16; Angie, age 11, and Arnold,
age 8. Compute the Kains’ child credit.

A. $1,000

B. $2,000

C. $3,000

D. $4,000

86. Mr. and Mrs. Cox reported $115,900 AGI on their joint
return. The couple has three dependent children

under age 17. Compute their child credit.

A. $0

B. $2,100

C. $2,700

D. $3,000

87. Mr. and Mrs. Lansing, who file a joint tax return, have
four dependent children under age 17. Which of

the following statements is false?

A. If the Lansings’ AGI is $77,900, their child credit is
$4,000.

B. If the Lansings’ AGI is $127,300, their child credit is
$3,100.

C. If the Lansings’ AGI is $196,000, their child credit is
zero.

D. None of the above is false.

88. Lennie and Margo spent $2,800 for child care for their
7-year-old son. Lennie’s earned income was

$41,000, Margo’s earned income was $24,800, and the AGI on
their joint return was $71,200. Calculate

their dependent care credit.

A. $0

B. $560

C. $980

D. $2,800

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Accounting Questions

ACCT 301 Week 4

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Which of the following accounts will appear on the postclosing trial balance?

On January 1, 20–, a firm purchased machinery for $17,000. Depreciation expense for 20–, given the straight-line method, a 5-year useful life, and a salvage value of $3,000, is

33. Which of the following accounts is not closed?

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CHAPTER
12 â€“ Practice Problems