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FINANCE EXAM 3

1. The Hasting Company began operations on January 1, 2003 and uses the FIFO
method in costing its raw material inventory. An analyst is wondering what net
income would have been if the company had consistently followed LIFO (instead
of FIFO) from the beginning, 1/1/2003. He has the following information available
to him:
What would net income have been in 2004 if Hastings had used LIFO since
1/1/2003?

$ 110,000
$ 150,000
$ 170,000
$ 230,000

2. A customer is currently suing a company. A reasonable estimate can be made of


the costs that would result from a ruling unfavorable to the company, and the
amount involved is material. The company's managers, lawyers, and auditors
agree that there is only a remote likelihood of an unfavorable ruling. This
contingency:
Should be disclosed in a footnote.
Should be disclosed as a parenthetical comment in the balance sheet.
Need not to be disclosed.
Should be disclosed by an appropriation of retained earnings.

3. The ABC Company operates a catering service specializing in business luncheons


for large corporations. ABC requires customers to place their orders 2 weeks in
advance of the scheduled events. ABC bills its customers on the tenth day of the
month following the date of service and requires that payment be made within
30 days of the billing date. Collections from customers have never been an issue
in the past. ABC should recognize revenue from its catering services at the date
when a:
Customer places an order.
Luncheon is served.
Billing is mailed.
Customer's payment is received.

4. On June 30, 2001, Cole Inc., exchanged 3,000 shares of Stone Corp. $30 par
value common stock for a patent owned by Gore Co.. The Stone stock was
acquired in 1999 at a cost of $80,000. At the exchange date, Stone common
stock had a fair value of $45 per share, and the patent had a net carrying value
of $160,000 on Gore's books. Cole should record the patent at:
$80,000
$90,000
$135,000
$160,000
Number of Stone Corp.
shares
x Fair value
Cost of patent to be
recorded

3,000
$45
$1,35,000

5. On June 30, 2001, Cole Inc., exchanged 3,000 shares of Stone Corp. $30 par
value common stock for a patent owned by Gore Co.. The Stone stock was
acquired in 1999 at a cost of $80,000. At the exchange date, Stone common
stock had a fair value of $45 per share, and the patent had a net carrying value
of $160,000 on Gore's books. Cole should record the patent at:

$80,000
$90,000
$135,000
$160,000
Check once both questions word to word same if 4 is correct then why
cant 5th right kindly check
6. On January 1, 1997, Phillips, Inc. leased a new machine from U.S. Leasing. The
specific information on the lease is as follows:

On January 1, 1997, Phillips, Inc. should record a lease liability of:

$275,000
$359,464
$0
$250,000

7. FRC Inc. acquired Marketing Inc on 1/1/2004. Marketing Inc. has 10,000 shares
outstanding. Each share in Marketing Inc. was exchanged for half a share in FRC,
Inc. Shares of FRC Inc., were trading at $100 per share at the date of the
announcement of the transaction. Marketing Inc, had the following assets and
liabilities that were assumed by FRC Inc.

The amount of Goodwill recognized by FRC, Inc. on January 1, 2004 is:


$400,000
$360,000
$495,000
$455,000
8. ABC expenses stock options as required by GAAP. On January 1,2005, ABC
granted 50 key executives 100 options each. Each option entitled the option
holder to purchase 1 share of ABC common stock at $60 per share. The options
will vest on January 1st 2008.
On the grant date, January 1st, 2005, the stock was quoted on the stock exchange
at $63 per share. The fair value of the options on the grant date was estimated at
$15 per option. The amounts of compensation expense ABC should recognize with
respect to the options during 2005, 2006, and 2007 are:

1.
2.
3.
4.

9. Which of the following situations will not cause a deferred income tax amount to
be recorded?
An expense that is recognized in 2005 for income tax purposes and in
2006 for financial statement purposes.
Interest income from municipal bonds that is recognized in 2005 for financial
statement purposes but is tax exempt for income tax purposes.
A revenue is recognized in 2005 for income tax purposes and in 2006 for
financial statement purposes.
None of the above situations would cause a deferred income tax amount.

10.In periods with rising prices and increasing quantities of inventories, which of the
following relationships among inventory valuation methods is generally correct:
FIFO has a higher inventory balance and a lower net income than LIFO.
FIFO has a higher inventory balance and a higher net income than LIFO.
LIFO has a higher inventory balance and a higher net income than FIFO.
LIFO has a higher inventory balance and a lower net income than FIFO.

11.Denny Co. sells major household appliance service contracts for cash. The
service contracts are for a one-year, two-year, or three-year period. Cash
receipts from contracts are credited to Unearned Service Revenues. This account
had a balance of $900,000 at December 31, 2001 before year-end adjustment.
Service contracts still outstanding at December 31, 2001 expire as follows:

What amount should be reported as Unearned Service Revenues in Denny's


December 31, 2001 balance sheet?
$900,000
$600,000
$1,500,000
$300,000

12.ABC signed a 5-year operating lease agreement whereby WXY Rentals will
provide a truck which cost WXY $20,000. The lease payments are $2,500,
payable at the end of each year. The truck will revert to WXY at the end of five
years. The truck has a 10-year useful life. At the inception of the lease, ABC
should:
make no journal entry
record rental expense of $2,500 for the first year's rental
record the lease asset and a corresponding liability, at its current market value
record the lease asset and a corresponding liability, at the present value of the
five equal annual lease payments.

13.Merry Co. purchased a machine costing $125,000 for its manufacturing


operations and paid shipping costs of $20,000. Merry spent an additional
$10,000 testing and preparing the machine for use. What amount should Merry
record as the cost of the machine?
$155,000
$145,000
$135,000
$125,000

14.Ignoring any related tax implications, what is the effect on a company's balance
sheet when depreciation expense is recognized?
This transaction affects only the income statement, so no change on the balance
sheet will occur.
Total assets and total stockholder's equity will decrease by the same
amount.

There will be no change in the total assets, liabilities and stockholders equity
accounts.
Total liabilities will increase and total stockholder's equity will decrease by the
same amount.

15.The Hastco Company had the following balances in their stockholders' equity
accounts as of December 31, 2000:
Paid-in Capital: $53,000
Retained Earnings: $31,000
During the year ended December 31, 2000, The Hastco Company generated
$36,000 in net income, and declared and paid $16,000 in Dividends. The ending
balance in the retained earnings account at December 31, 1999 was:
$11,000
$37,000
$5,000
$61,000
16.All of the following would qualify a lease as a capital lease except:
The lease term is 80% of the asset's estimated useful life.
The lease agreement contains a bargain purchase option.
The present value of the lease payments equals 70% of the fair market value of
the leased asset.
Title to the leased asset transfers to the lessee at the end of the lease term.

17.Which of the following is/are criteria for recognizing revenue from a sale?
Title and risks of ownership have been exchanged.
The company is reasonably assured of collecting the receivable.

The customer has, in turn, sold the product to its own customer.
Both title and risks of ownership have been exchanged and the
company is reasonably assured of collecting the receivable.

18.Use the following information to answer the next two questions.


Downey Company bought a delivery truck for $62,000 on January 1, 2005. They
installed a rear hydraulic lift for $8,000 and paid sales tax of $3,000. In addition,
Downey paid $2,400 for a one-year insurance policy. They estimate the useful life of
the truck to be 10 years and its residual value to be $8,000.
If Downey uses the straight-line method of depreciation, what is the depreciation
expense for 2006 and book value at the end of 2006?
$7,300 and $58,400
$6,500 and $60,000
$6,790 and $62,320
$6,500 and $66,500

19. Downey Company bought a delivery truck for $62,000 on January 1, 2005. They
installed a rear hydraulic lift for $8,000 and paid sales tax of $3,000. In addition,
Downey paid $2,400 for a one-year insurance policy. They estimate the useful life of
the truck to be 10 years and its residual value to be $8,000.
If Downey uses the double declining-balance method, how much is the truck's
depreciation expense for2006?
$11,680
$12,144
$10,400
$11,760

20.For accounting purposes, goodwill


is recorded whenever a company achieves a level of net income that exceeds
the industry average.
is recorded when a company purchases another business.
is expensed in the period it is recorded because benefits from goodwill are
difficult to identify.
is never recorded

21.Goodwill should
be written off as soon as possible against retained earnings.
absent impairment, not be written off because it has an indefinite life.
written off as soon as possible as an expense.
amortized over a maximum of forty years.

22.Freeman, Inc., reported net income of $40,000 for 2005. However, the
company's income tax return excluded a revenue item of $3,000 (reported on
the income statement) because under the tax laws the $3,000 would not be
reported for tax purposes until 2006. Assuming a 30% income tax rate, this
situation would cause a 2005 deferred tax amount of
$3,000 asset.
$3,000 liability
$ 900 asset.
$ 900 liability.

23.Before closing entries were recorded at the end of the accounting period
(December 31, 2005), the following data were taken from the accounts of
Buynow Corporation:

The total amount of owners' equity that should be reported on the balance sheet
dated December 31, 2005, after all the closing entries, is
$ 338,000.
$128,000.
$300,000.
$304,000.

24. The major accounting difference between interest incurred during a period and
cash dividends declared during the same period is:
Interest decreases retained earnings while dividend declared increases retained
earnings
Interest reduces net income while dividends declared do not affect net
income
Interest does not affect net income while dividends reduce net income
There is no major difference. Both are treated identically for accounting
purposes.

25.In December, a Global Grocer customer pays in time and receives a 2%


discounts for prompt payment. The customer had purchased goods worth $500.
Which of the possible answers below correctly states the journal entries to record
the payment and the discount taken. Previously, Global Grocer had established
an allowance for prompt payment discounts.
Debit Accounts receivable ($500); Credit Cash ($490); credit allowance for
discounts ($10).
Debit Cash ($500); Credit Accounts receivable ($500).
Debit Cash ($490); Debit Allowance for sales discounts ($10); Credit
Accounts receivable ($500)
None of the above

26.Here is International Corp.'s income statement for the month of December.

What is the company's December EBITDA to total interest coverage ratio?


6.5x
18.5x
14.5x
20.2x

27.The following financial ratios are for Average Corp. and Superior Corp., two
hardware stores.

Which of the following statements is inconsistent with the above ratios?


Superior Corp has a higher return on equity primarily because it has a
significantly higher net income margin
Average Corp. on a relative basis uses significantly more debt financing than
Superior Corp.
Average Corp. utilizes its assets more effectively than Superior Corp.
Superior Corp. generates more income per dollar of sales than Average Corp.

28.On June 30, 2000, Microsoft Corporation was holding $4.8 billion of cash that it
had collected from customers in advance for future software licenses and the future
delivery of other products and services. In its financial statements, Microsoft
classified and recorded this amount as:
part of revenue on its income statement.
the asset Accounts Receivable on its balance sheet.
the liability Unearned Revenue on its balance sheet.
an expense on its income statement.

29.Which statement is false?


An unrealized gain or loss on hold-to-maturity marketable securities is
recognized in income.
An unrealized gain or loss on trading securities is recognized in income.
An unrealized gain or loss on a company's common stock held by the
owners' of the company is not recognized by the company.
An unrealized gain or loss on available-for-sale marketable securities is not
recognized in income.

30.International, Inc. established an allowance for bad debts at the end of October.
In November, International wrote off a $500 account receivable because
payment was considered to be remote. What would be the effect of the $500
account receivable write-off on International's November financial statements?
Assets would decrease, liabilities would remain constant and retained earning
would decrease.
Assets would remain constant; liabilities would increase and retained earnings
would decrease.

No change would be made in total assets, liabilities or shareholder's equity.


Assets would decrease, liabilities would decrease and retained earnings would
remain constant.