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C. A nominal amount is allocated to the warrants. D. All of the proceeds are allocated to the bonds. Correct Answer: Rationale for Your Answer: ? 7. On January 2, 2009, Tobias Company began using straight-line depreciation for a certain class of assets. In the past, the company had used double-declining-balance depreciation for these assets. As of January 2, 2009, the amount of the change in accumulated depreciation is $40,000. The appropriate tax rate is 40%. The separately reported change in 2009 earnings is: A. An increase of $40,000. B. A decrease of $40,000. C. An increase of $24,000. D. None of these are correct. See calculations and correct answer below. Calculations: Correct Answer: 8. B Company switched from the sum-of-the-years-digits depreciation method to straight-line depreciation in 2009. The change affects machinery purchased at the beginning of 2007 at a cost of $72,000. The machinery has an estimated life of five years and an estimated residual value of $3,600. What is B’s 2009 depreciation expense? A. $ 8,400 B. $13,680 C. $15,840 D. $ 9,120 Calculations and Rationale: Correct Answer: ? 9. Retrospective restatement usually is appropriate for a change in which one of the following? Choose A, B, C, or D. A. B. C. D. Correct Answer: Rationale for Your Answer: 10. In 2009, internal auditors discovered that Fay, Inc. had debited an expense account for the $700,000 cost of a machine purchased on January 1, 2006. The machine’s useful life was expected to be 5 years with no residual value. Straight-line depreciation is used by Fay. The journal entry to correct the error will include a credit to accumulated depreciation of: A. $140,000. B. $280,000. C. $420,000. D. $700,000. Calculations: Correct Answer: 11. During 2009, P Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts: P Company uses the periodic inventory system to ascertain year-end quantities that are converted to dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income taxes, P’s retained earnings at January 1, 2009 would be A. Correct as stated. B. $ 30,000 overstated. C. $150,000 overstated. D. $270,000 overstated. Calculations: Correct Answer: 12. A change that uses the prospective approach is accounted for by: A. Implementing it in the current year. B. Reporting pro forma data. C. Retrospective restatement of all prior financial statements in a comparative annual report. D. Giving current recognition of the past effect of the change. Correct Answer: Rationale for Your Answer: 13. Which of the following accounting changes should not be accounted for prospectively? A. The correction of an error. B. A change from declining balance to straight-line depreciation. C. A change from straight-line to declining balance depreciation. D. A change in the expected salvage value of a depreciable asset. Correct Answer: Rationale for Your Answer: 14. Issued stock refers to the number of shares: A. Outstanding plus treasury shares. B. Shares issued for cash. C. In the hand of shareholders. D. That may be issued under state law. Correct Answer: Rationale for Your Answer: 15. The common stock account on a company’s balance sheet is measured as: A. The number of common shares outstanding multiplied by the stock’s par value per share. B. The number of common shares outstanding multiplied by the stock’s current market value per share. C. The number of common shares issued multiplied by the stock’s par value per share. D. None of these is correct. The correct answer and rationale for your answer are shown below: Correct Answer: Rationale for Your Answer: ? 16. Roberto Corporation was organized on January 1, 2009. The firm was authorized to issue 100,000 shares of $5 par common stock. During 2009, Roberto had the following transactions relating to shareholders’ equity: • Issued 10,000 shares of common stock at $7 per share. • Issued 20,000 shares of common stock at $8 per share. • Reported a net income of $100,000. • Paid dividends of $50,000.Purchased 3,000 shares of treasury stock at $10 (part of the 20,000 shares issued at $8). What is total shareholders’ equity at the end of 2009? A. $270,000. B. $300,000. C. $250,000. D. $200,000. Calculations: Correct Answer: 17. The par value of shares issued is normally recorded in the: A. Paid-in capital in excess of par account. B. Common stock account. C. Retained earnings account. D. Appropriated retained earnings account. Correct Answer: Rationale for Your Answer: ? 18. The owners of a corporation are its shareholders. If a corporation has only one class of shares, they typically are labeled common shares. Each of the following are ownership rights held by common shareholders, unless specifically withheld by agreement except: A. The right to vote on policy issues. B. The right to share in profits when dividends are declared (in proportion to the percentage of shares owned by the shareholder). C. The right to dividends equal to a stated rate time par value (if dividends are paid). D. The right to share in the distribution of any assets remaining at liquidation after other claims are satisfied. Correct Answer: Rationale for Your Answer: 19. If a futures contract is used to hedge a debt sale, and interest rates go down causing debt security prices to rise, the potential benefit of being able to issue debt at that lower interest rate (higher price) will be offset by a loss on the futures position. This statement is: True False Correct Answer: Rationale for Your Answer: 20. Hedging is used to deal with exposure to: A. Fair value risk. B. Cash flow risk. C. Foreign exchange risk. D. All of these are correct. Correct Answer: Rationale for Your Answer: 21. Disclosure notes would not include: A. Depreciation methods used and estimated useful life. B. Definition of cash equivalents. C. Details of pension plans. D. Data to adjust the financial statements so that they are not misleading. Correct Answer: Rationale for Your Answer: 22. The Management Discussion and Analysis section of the annual report can best be described as: A. Frank but objective. B. Independent but precise. C. Legalistic and lengthy. D. Biased but informative. Correct Answer: Rationale for Your Answer: 23. The quick ratio is: A. The liquidity ratio divided by the equity ratio. B. Current assets minus inventory divided by current liabilities minus accounts payable. C. Current assets minus inventory and prepaid items divided by current liabilities. D. Cash divided by accounts payable. Correct Answer: Rationale for Your Answer: 24. Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below. HHF’s debt-to-equity ratio is: A. 0.75. B. 1.13. C. 0.53. D. 1.80. Calculations: Correct Answer: 25. Which of the following is not a required segment reporting disclosure according to International Accounting Standards? A. Segment profit or loss. B. Segment assets. C. Segment liabilities. D. All are required disclosures. Calculations: Correct Answer:

C. A nominal amount is allocated to the warrants.
D. All of the proceeds are allocated to the bonds.

Correct Answer:
Rationale for Your Answer:
?
7. On January 2, 2009, Tobias Company began using straight-line depreciation for a certain class of assets. In the past, the company had used double-declining-balance depreciation for these assets. As of January 2, 2009, the amount of the change in accumulated depreciation is $40,000. The appropriate tax rate is 40%. The separately reported change in 2009 earnings is:

A. An increase of $40,000.
B. A decrease of $40,000.
C. An increase of $24,000.
D. None of these are correct. See calculations and correct answer below.

Calculations:
Correct Answer:
8. B Company switched from the sum-of-the-years-digits depreciation method to straight-line depreciation in 2009. The change affects machinery purchased at the beginning of 2007 at a cost of $72,000. The machinery has an estimated life of five years and an estimated residual value of $3,600. What is B’s 2009 depreciation expense?

A. $ 8,400
B. $13,680
C. $15,840
D. $ 9,120

Calculations and Rationale:
Correct Answer:
?
9. Retrospective restatement usually is appropriate for a change in which one of the following? Choose A, B, C, or D.

A.
B.
C.
D.

Correct Answer:
Rationale for Your Answer:

10. In 2009, internal auditors discovered that Fay, Inc. had debited an expense account for the $700,000 cost of a machine purchased on January 1, 2006. The machine’s useful life was expected to be 5 years with no residual value. Straight-line depreciation is used by Fay. The journal entry to correct the error will include a credit to accumulated depreciation of:

A. $140,000.
B. $280,000.
C. $420,000.
D. $700,000.

Calculations:
Correct Answer:
11. During 2009, P Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts:
P Company uses the periodic inventory system to ascertain year-end quantities that are converted to dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income taxes, P’s retained earnings at January 1, 2009 would be

A. Correct as stated.
B. $ 30,000 overstated.
C. $150,000 overstated.
D. $270,000 overstated.

Calculations:
Correct Answer:

12. A change that uses the prospective approach is accounted for by:

A. Implementing it in the current year.
B. Reporting pro forma data.
C. Retrospective restatement of all prior financial statements in a comparative annual report.
D. Giving current recognition of the past effect of the change.

Correct Answer:
Rationale for Your Answer:

13. Which of the following accounting changes should not be accounted for prospectively?

A. The correction of an error.
B. A change from declining balance to straight-line depreciation.
C. A change from straight-line to declining balance depreciation.
D. A change in the expected salvage value of a depreciable asset.

Correct Answer:
Rationale for Your Answer:
14. Issued stock refers to the number of shares:

A. Outstanding plus treasury shares.
B. Shares issued for cash.
C. In the hand of shareholders.
D. That may be issued under state law.

Correct Answer:
Rationale for Your Answer:

15. The common stock account on a company’s balance sheet is measured as:

A. The number of common shares outstanding multiplied by the stock’s par value per share.
B. The number of common shares outstanding multiplied by the stock’s current market value per share.
C. The number of common shares issued multiplied by the stock’s par value per share.
D. None of these is correct. The correct answer and rationale for your answer are shown below:

Correct Answer:
Rationale for Your Answer:

?

16. Roberto Corporation was organized on January 1, 2009. The firm was authorized to issue 100,000 shares of $5 par common stock. During 2009, Roberto had the following transactions relating to shareholders’ equity:

• Issued 10,000 shares of common stock at $7 per share.
• Issued 20,000 shares of common stock at $8 per share.
• Reported a net income of $100,000.
• Paid dividends of $50,000.Purchased 3,000 shares of treasury stock at $10 (part of the 20,000 shares issued at $8).
What is total shareholders’ equity at the end of 2009?

A. $270,000.
B. $300,000.
C. $250,000.
D. $200,000.

Calculations:
Correct Answer:

 

17. The par value of shares issued is normally recorded in the:
A. Paid-in capital in excess of par account.
B. Common stock account.
C. Retained earnings account.
D. Appropriated retained earnings account.

Correct Answer:
Rationale for Your Answer:

?
18. The owners of a corporation are its shareholders. If a corporation has only one class of shares, they typically are labeled common shares. Each of the following are ownership rights held by common shareholders, unless specifically withheld by agreement except:
A. The right to vote on policy issues.
B. The right to share in profits when dividends are declared (in proportion to the percentage of shares owned by the shareholder).
C. The right to dividends equal to a stated rate time par value (if dividends are paid).
D. The right to share in the distribution of any assets remaining at liquidation after other claims are satisfied.

Correct Answer:
Rationale for Your Answer:

19. If a futures contract is used to hedge a debt sale, and interest rates go down causing debt security prices to rise, the potential benefit of being able to issue debt at that lower interest rate (higher price) will be offset by a loss on the futures position.
This statement is: True False
Correct Answer:
Rationale for Your Answer:

20. Hedging is used to deal with exposure to:
A. Fair value risk.
B. Cash flow risk.
C. Foreign exchange risk.
D. All of these are correct.

Correct Answer:
Rationale for Your Answer:

 

21. Disclosure notes would not include:

A. Depreciation methods used and estimated useful life.
B. Definition of cash equivalents.
C. Details of pension plans.
D. Data to adjust the financial statements so that they are not misleading.

Correct Answer:
Rationale for Your Answer:

22. The Management Discussion and Analysis section of the annual report can best be described as:

A. Frank but objective.
B. Independent but precise.
C. Legalistic and lengthy.
D. Biased but informative.

Correct Answer:
Rationale for Your Answer:

23. The quick ratio is:

A. The liquidity ratio divided by the equity ratio.
B. Current assets minus inventory divided by current liabilities minus accounts payable.
C. Current assets minus inventory and prepaid items divided by current liabilities.
D. Cash divided by accounts payable.

Correct Answer:
Rationale for Your Answer:

 

24. Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below.
HHF’s debt-to-equity ratio is:
A. 0.75.
B. 1.13.
C. 0.53.
D. 1.80.
Calculations:

 

Correct Answer:

25. Which of the following is not a required segment reporting disclosure according to International Accounting Standards?

A. Segment profit or loss.
B. Segment assets.
C. Segment liabilities.
D. All are required disclosures.

Calculations:

 

Correct Answer:

 

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