[1] Source: CMA 0688 3-22 
If the financial statements taken as a whole 
are not presented fairly in conformity with 
generally accepted accounting principles, 
the auditor must express a(n) 

   A. Unqualified opinion. 

   B. Qualified opinion. 

   C. Except for opinion. 

   D. Adverse opinion. 


[2] Source: Publisher 
The financial statements of a publicly traded 
company are accompanied by the report of 
the independent external auditors. Their 
audit is conducted in accordance with 
generally accepted auditing standards and is 
intended to provide assurance to creditors, 
investors, and other users of financial 
statements. The audit report must 

   A. Express an opinion or state that an 
   opinion cannot be expressed. 

   B. State whether informative 
   disclosures are reasonably adequate. 

   C. State whether GAAP have been 
   consistently observed. 

   D. Contain a statement that the auditor 
   assumes full responsibility for the 
   opinion. 


[3] Source: CMA 0694 2-16 
Regarding financial accounting for public 
companies, the role of the Securities and 
Exchange Commission (SEC) as currently 
practiced is to 

   A. Make rules and regulations regarding 
   filings with the SEC but not to regulate 
   annual or quarterly reports to 
   shareholders. 

   B. Regulate financial disclosures for 
   corporate, state, and municipal 
   reporting. 

   C. Make rules and regulations 
   pertaining more to disclosure of 
   financial information than to the 
   establishment of accounting recognition 
   and measurement principles. 

   D. Develop and promulgate most 
   generally accepted accounting 
   principles. 


[4] Source: CMA 0696 2-25 
Many firms include 5 or 10 years of 
financial data in their annual reports. This 
information 

   A. Is the forecast of future business. 

   B. Highlights trends in the financial 
   statements. 

   C. Highlights inventory valuation 
   methods used by the firm. 

   D. Is required by generally accepted 
   accounting principles. 


[5] Source: CMA 1295 2-15 
The content of the Management's Discussion 
and Analysis (MD&A) section of an annual 
report is 

   A. Mandated by pronouncements of the 
   Financial Accounting Standards Board. 

   B. Mandated by regulations of the 
   Securities and Exchange Commission. 

   C. Reviewed by independent auditors. 

   D. Mandated by regulations of the 
   Internal Revenue Service. 


[6] Source: CMA 1295 2-14 
The Management's Discussion and Analysis 
(MD&A) section of an annual report 

   A. Includes the company president's 
   letter. 

   B. Covers three financial aspects of a 
   firm's business: liquidity, capital 
   resources, and results of operations. 

   C. Is a technical analysis of past results 
   and a defense of those results by 
   management. 

   D. Covers marketing and product line 
   issues. 


[7] Source: CMA 1295 2-11 
The Securities and Exchange Commission 
continues to encourage management to 
provide forward-looking information to 
users of financial statements and has a safe 
harbor rule that 

   A. Protects a company that may present 
   an erroneous forecast as long as the 
   forecast is prepared on a reasonable 
   basis and in good faith. 

   B. Allows injured users of the 
   forecasted information to sue the 
   company for damages but protects 
   management from personal liability. 

   C. Delays disclosure of such 
   forward-looking information until all 
   major uncertainties have been resolved. 

   D. Bars competition from using the 
   information to gain a competitive 
   advantage. 


[8] Source: CMA 1284 3-21 
The responsibility for the proper 
preparation of a company's financial 
statements rests with its 

   A. Management. 

   B. Audit committee. 

   C. Internal auditors. 

   D. External auditors. 


[9] Source: CMA 0685 3-20 
An audit of the financial statements of 
Camden Corporation is being conducted by 
an external auditor. The external auditor is 
expected to 

   A. Express an opinion as to the fairness 
   of Camden's financial statements. 

   B. Express an opinion as to the 
   attractiveness of Camden for investment 
   purposes. 

   C. Certify to the correctness of 
   Camden's financial statements. 

   D. Critique the wisdom and legality of 
   Camden's business decisions. 


[10] Source: CMA 0692 2-30 
If the financial statements contain a 
departure from an official pronouncement of 
the Financial Accounting Standards Board 
that has a material effect on the financial 
statements, the auditor must express a(n) 

   A. Adverse opinion. 

   B. Qualified opinion. 

   C. Disclaimer of opinion. 

   D. An adverse opinion or a qualified 
   opinion. 


[11] Source: CMA 1288 3-17 
Regulation S-X disclosure requirements of 
the Securities and Exchange Commission 
(SEC) deal with 

   A. Changes in and disagreements with 
   accountants on accounting and financial 
   disclosure. 

   B. Management's discussion and 
   analysis of the financial condition and 
   the results of operations. 

   C. The requirements for filing interim 
   financial statements and pro forma 
   financial information. 

   D. Summary information, risk factors, 
   and the ratio of earnings to fixed 
   charges. 


[12] Source: CMA 1288 3-19 
Form 8-K must be filed within 

   A. 90 days after the end of the fiscal 
   year covered by the report. 

   B. 45 days after the end of each of the 
   first three quarters of each fiscal year. 

   C. 90 days after the end of an employee 
   stock purchase plan fiscal year. 

   D. 15 days after the occurrence of a 
   significant event. 


[13] Source: CMA 0694 2-18 
The SEC requires that Form 10-Q be filed 
within 

   A. 30 days after the occurrence of a 
   significant event. 

   B. 45 days after the end of each of the 
   first three quarters. 

   C. 15 days after the quarterly financial 
   reports are issued. 

   D. 45 days after the end of each quarter. 


[14] Source: Publisher 
The accounting standard-setting body whose 
purpose is to resolve controversial matters 
quickly is the 

   A. Emerging Issues Task Force (EITF). 

   B. Accounting Standards Executive 
   Committee (AcSEC). 

   C. International Accounting Standards 
   Committee (IASC). 

   D. Cost Accounting Standards Board 
   (CASB). 


[15] Source: Publisher 
Conduct Rule 203 of the AICPA's Code of 
Professional Conduct provides that a 
member shall not express assurances about 
conformity with GAAP if the financial 
statements contain a material departure from 
a principle promulgated by bodies 
designated by the AICPA Council to 
establish such principles. However, in 
unusual circumstances, a departure may be 
permissible if literal application of a 
principle would be misleading. The 
pronouncements that constitute principles as 
contemplated in Conduct Rule 203 include 

   A. FASB Concepts Statements. 

   B. GASB Statements. 

   C. Accounting Research Bulletins. 

   D. AICPA Technical Practice Aids. 


[16] Source: CMA 0696 1-21 
A main provision of the Securities Act of 
1933, as amended in 1934, is the 
requirement that 

   A. Bonds be issued only under a trust 
   indenture approved by the Securities 
   and Exchange Commission (SEC). 

   B. Public utility holding companies 
   register with the SEC. 

   C. New securities offered for sale in 
   interstate commerce be registered with 
   the SEC. 

   D. All security brokers be licensed by 
   the SEC. 


[17] Source: Publisher 
Financial statement users with a direct 
economic interest in a specific business 
include 

   A. Financial advisers. 

   B. Regulatory bodies. 

   C. Stock markets. 

   D. Suppliers. 


[18] Source: Publisher 
Which of the following is not a need of 
financial statement users? 

   A. Financial advisers and analysts need 
   financial statements to help investors 
   evaluate particular investments. 

   B. Stock exchanges need financial 
   statements to set a firm's stock price. 

   C. Regulatory agencies need financial 
   statements to evaluate price changes for 
   regulated industries. 

   D. Employees need financial 
   information to negotiate wages and 
   fringe benefits. 


[19] Source: Publisher 
The International Accounting Standards 
Committee (IASC) 

   A. Directly influences governmental 
   legislation regarding accounting 
   standards. 

   B. Develops binding pronouncements 
   for its members. 

   C. Is composed of members from 
   national standard-setting bodies. 

   D. Establishes uniform accounting 
   standards to eliminate reporting 
   differences among nations. 


[20] Source: CMA 1295 2-12 
Accounting standard setting in the U.S. is 

   A. Done primarily by the Securities and 
   Exchange Commission. 

   B. Done primarily by the private sector. 

   C. The responsibility of the public 
   sector. 

   D. Done primarily by the International 
   Accounting Standards Committee. 


[21] Source: Publisher 
When establishing financial accounting 
standards, the FASB 

   A. Issues an exposure draft as a final 
   statement. 

   B. Holds a public hearing usually 60 
   days after the discussion memorandum 
   is released. 

   C. Consults only with the SEC before 
   the statement is released. 

   D. Delegates responsibility to the SEC. 


[22] Source: Publisher 
In regard to accounting standards, the SEC 

   A. Has abdicated all responsibility to 
   the FASB. 

   B. Does not require companies listed on 
   the stock exchange to submit audited 
   financial statements. 

   C. Continues to identify areas in which 
   additional information should be 
   reported. 

   D. Still establishes the principles to be 
   followed by firms subject to the 
   securities acts. 


[23] Source: CMA 0696 2-17 
A primary objective of external financial 
reporting is 

   A. Direct measurement of the value of a 
   business enterprise. 

   B. Provision of information that is 
   useful to present and potential 
   investors, creditors, and others in 
   making rational financial decisions 
   regarding the enterprise. 

   C. Establishment of rules for accruing 
   liabilities. 

   D. Direct measurement of the 
   enterprise's stock price. 


[24] Source: CMA 1283 3-21 
The act that gives the SEC the ultimate 
power to suspend trading of a security, 
delist a security, and prevent brokers and 
dealers from working in the securities 
market is the 

   A. Securities Investor Protection Act of 
   1970. 

   B. Securities Act of 1933. 

   C. Securities Exchange Act of 1934. 

   D. Investment Company Act of 1940. 


[25] Source: CMA 1283 3-22 
Requirements not imposed by the Securities 
Exchange Act of 1934 and its amendments 
are 

   A. Proxy solicitation requirements. 

   B. Prospectus requirements. 

   C. Insider trading requirements. 

   D. Tender offer requirements. 


[26] Source: CMA 1285 3-26 
The SEC has issued Regulation S-K to 
govern disclosures in filings with the SEC 
of nonfinancial statement matters. It 
concerns descriptions of the company's 
securities, business, properties, and legal 
proceedings; information about its directors 
and officers; management's discussion and 
analysis of financial condition and results of 
operations; and 

   A. The form and content of the required 
   financial statements. 

   B. The requirements for filing interim 
   financial statements. 

   C. Unofficial interpretations and 
   practices regarding securities laws 
   disclosure requirements. 

   D. Guidelines for voluntary financial 
   projections. 


[27] Source: CMA 1286 3-21 
An external auditor's involvement with 
Form 10-Q that is being prepared for filing 
with the SEC most likely will consist of 

   A. An audit of the financial statements 
   included in Form 10-Q. 

   B. A compilation report on the financial 
   statements included in Form 10-Q. 

   C. A comfort letter that covers 
   stub-period financial data. 

   D. A review of the interim financial 
   statements included in Form 10-Q. 


[28] Source: CMA 1286 3-20 
Form 10-K is filed with the SEC to update 
the information a company supplied when 
filing a registration statement under the 
Securities Exchange Act of 1934. Form 
10-K is a report that is filed 

   A. Annually within 90 days of the end 
   of a company's fiscal year. 

   B. Semiannually within 30 days of the 
   end of a company's second and fourth 
   fiscal quarters. 

   C. Quarterly within 45 days of the end 
   of each quarter. 

   D. Monthly within 2 weeks of the end of 
   each month. 


[29] Source: CMA 1286 3-22 
SEC Form S-3 is an optional, short-form 
registration statement that relies on the 
incorporation by reference of periodic 
reports required by the Securities Exchange 
Act of 1934. Form S-3 offers substantial 
savings in filing costs over other forms 
since minimal disclosures are required in 
the prospectus. The SEC permits the use of 
Form S-3 only by those firms that have filed 
periodic reports with the SEC for at least 3 
years and if the registrant 

   A. Has less than $150 million of voting 
   stock held by nonaffiliates. 

   B. Is widely followed and actively 
   traded. 

   C. Is seeking more than $150 million in 
   funds. 

   D. Has not had to file Form 8-K during 
   the most recent 2-year period. 


[30] Source: CMA 1288 3-20 
In an effort to consolidate the registration 
process, the SEC has adopted a three-tier 
system of new security forms. However, 
these three forms do not cover all 
circumstances. Under which one of the 
following circumstances would a registrant 
use Form S-4? 

   A. Registering securities in connection 
   with mergers and related 
   business-combination transactions. 

   B. Registering securities in which the 
   registrant does not qualify for Form 
   S-1. 

   C. Registering securities when the 
   registrant has not had to file Form 8-K 
   during the most recent 2-year period. 

   D. Registering securities of real estate 
   investment trusts. 


[31] Source: CMA 1289 3-28 
The SEC has adopted a three-tier system of 
forms in an effort to consolidate the 
registration process. However, these three 
forms do not cover all circumstances. A 
registrant would use Form S-8 when 
registering securities 

   A. When the registrant does not qualify 
   for Form S-1. 

   B. To be offered to employees under 
   any stock option or other employee 
   benefit plan. 

   C. Of real estate investment trusts. 

   D. When the registrant has not had to 
   file Form 8-K during the most recent 
   2-year period. 


[32] Source: CMA 0694 2-17 
Form 8-K ordinarily must be submitted to 
the SEC after the occurrence of a significant 
event. All of the following events would be 
reported by Form 8-K except 

   A. The acquisition of a major company. 

   B. The resignation of several directors. 

   C. A change in the registrant's certifying 
   accountant. 

   D. A change from the 
   percentage-of-completion method of 
   accounting to the completed-contract 
   method for a company in the 
   construction business. 


[33] Source: Publisher 
The economic effects of a change in foreign 
exchange rates on a relatively self-contained 
and integrated operation within a foreign 
country relate to the net investment by the 
reporting enterprise in that operation. 
Consequently, translation adjustments that 
arise from the consolidation of that 
operation 

   A. Directly affect cash flows but should 
   not be reflected in income. 

   B. Directly affect cash flows and should 
   be reflected in income. 

   C. Do not directly affect cash flows and 
   should not be reflected in income. 

   D. Do not directly affect cash flows but 
   should be reflected in income. 


[34] Source: CMA 0696 2-26 
Regulation S-X disclosure requirements of 
the Securities and Exchange Commission 
(SEC) concern 

   A. Summary information, risk factors, 
   and the ratio of earnings to fixed 
   charges. 

   B. The requirements for filing interim 
   financial statements and pro forma 
   financial information. 

   C. Information concerning recent sales 
   of unregistered securities. 

   D. Management's discussion and 
   analysis of the financial condition and 
   the results of operations. 


[35] Source: CMA 0696 2-27 
Form 8-K must be filed within 

   A. 90 days after the end of an employee 
   stock purchase plan's fiscal year. 

   B. 15 calendar days or, in certain cases, 
   5 business days after the occurrence of 
   a significant event. 

   C. 90 days after the end of the fiscal 
   year covered by the report. 

   D. 45 days after the end of each of the 
   first three quarters of each fiscal year. 


[36] Source: CMA 0696 2-28 
Form 10-Q is filed with the SEC to keep 
both investors and experts appraised of a 
company's operations and financial position. 
Form 10-Q is a report that is filed within 

   A. 90 days after the end of an employee 
   stock purchase plan's fiscal year. 

   B. 15 days after the occurrence of a 
   significant event. 

   C. 90 days after the end of the fiscal 
   year covered by the report. 

   D. 45 days after the end of each of the 
   first three quarters of each fiscal year. 


[37] Source: CMA 1290 2-24 
The Financial Accounting Standards Board 
has provided guidance on disclosures of 
transactions between related parties, for 
example, transactions between subsidiaries 
of a common parent. SFAS 57, Related 
Party Disclosures, requires all of the 
following disclosures except 

   A. The nature of the relationship 
   involved. 

   B. A description of the transactions for 
   each period an income statement is 
   presented. 

   C. The dollar amounts of transactions 
   for each period an income statement is 
   presented. 

   D. The effect on the cash flow statement 
   for each period a cash flow statement is 
   presented. 


[38] Source: CMA 1291 2-4 
SFAS 47, Disclosure of Long-Term 
Obligations, resulted in identifying 
disclosure requirements for long-term 
obligations as a group. The Financial 
Accounting Standards Board believed that a 
particular group of long-term obligations 
frequently was not disclosed adequately. 
Thus, this statement was specifically 
addressed to 

   A. Loss contingencies. 

   B. Noncancelable purchase obligations. 

   C. Severance pay. 

   D. Pension plans. 


[39] Source: CIA 0593 IV-26 
Which of the following should be disclosed 
in the summary of significant accounting 
policies? 

   A. Valuation method used for 
   work-in-process inventory. 

   B. Interest capitalized for the period. 

   C. Adequacy of pension plan assets in 
   relation to vested benefits. 

   D. Depreciation charges for the period. 


[40] Source: CMA 0693 2-27 
Publicly traded companies must report all of 
the following interim financial data except 

   A. Basic and diluted earnings per share 
   for each period presented. 

   B. Summarized information on sales, 
   income taxes, extraordinary items, 
   effect of change in accounting 
   principles, net income, and 
   comprehensive income. 

   C. A condensed balance sheet, income 
   statement, and statement of cash flows 
   for each interim period presented. 

   D. The disposal of a segment of a 
   business, and extraordinary, unusual, or 
   infrequently occurring items. 


[41] Source: CMA 0695 2-23 
The accounting profession has adopted 
various standards to be followed when 
reporting inventory in the financial 
statements. All of the following are required 
to be reported in the financial statements or 
disclosed in notes to the financial statements 
except for 

   A. Inventory detail, such as raw 
   materials, work-in-process, and 
   finished goods. 

   B. Significant financing agreements, 
   such as product financing arrangements 
   and pledging of inventories. 

   C. The basis upon which inventory 
   amounts are stated. 

   D. Unrealized profit on inventories. 


[42] Source: Publisher 
SFAS 47, Disclosure of Long-Term 
Obligations, does not apply to an 
unconditional purchase obligation that is 
cancellable under which of the following 
conditions? 

   A. Upon the occurrence of a remote 
   contingency. 

   B. With the permission of the other 
   party. 

   C. If a replacement agreement is signed 
   between the same parties. 

   D. Upon payment of a nominal penalty. 


[43] Source: Publisher 
If an unconditional purchase obligation is 
not presented in the balance sheet, certain 
disclosures are required. A disclosure that 
is not required is 

   A. The nature and term of the 
   obligation. 

   B. The variable components of the 
   obligation. 

   C. The imputed interest necessary to 
   reduce the unconditional purchase 
   obligation to its present value. 

   D. The amounts purchased under the 
   obligation for each period an income 
   statement is presented. 


[44] Source: Publisher 
SFAS 107, Disclosures about Fair Value of 
Financial Instruments, requires all entities to 
disclose the fair value of all financial 
instruments for which it is practicable to 
estimate fair value. Which of the following 
is a financial instrument? 

   A. Merchandise inventory. 

   B. Deferred subscriptions revenue. 

   C. A note payable in U.S. Treasury 
   bonds. 

   D. A warranty payable. 


[45] Source: CMA 0695 2-30 
APB 22, Disclosure of Accounting Policies, 
recommends that when financial statements 
are issued, information identifying the 
accounting policies adopted by the reporting 
entity should be presented as part of the 
financial statements. All of the following are 
required to be disclosed with respect to 
accounting policies except the 

   A. Depreciation methods used for plant 
   assets. 

   B. Inventory valuation and costing 
   methods. 

   C. Accounting for long-term 
   construction contracts. 

   D. Estimated lives of depreciable 
   assets. 


[46] Source: CMA 1295 2-18 
A company is required to disclose in a note 
to the financial statements the 

   A. Names of the members of the board 
   of directors. 

   B. Method of inventory valuation used. 

   C. Market value of fixed assets. 

   D. Five highest paid employees. 


[47] Source: CMA 0689 3-5 
Information regarding accounting policies 
adopted by a company is essential to 
financial statement users. An example of an 
accounting policy that should be disclosed 
for merchandise inventory is the 

   A. Composition of inventory, i.e., raw 
   material, work-in-process, and finished 
   goods. 

   B. Market value of the inventory when 
   it is lower than cost. 

   C. Cost of the inventory when it is 
   lower than the market. 

   D. Method used for pricing inventory. 


[48] Source: CMA 0685 4-32 
Interim reporting disclosures should include 
all of the following except 

   A. Primary and fully diluted earnings 
   per share. 

   B. Significant changes in estimates or 
   provisions for income tax. 

   C. Contingent items. 

   D. Changes in investment policy. 


[49] Source: CMA 1286 3-15 
The specific accounting policies and 
methods considered to be appropriate by 
management and used for reporting purposes 

   A. Should be disclosed parenthetically 
   in the tabular portion of the financial 
   statements. 

   B. Should be disclosed in a separate 
   summary of significant accounting 
   policies preceding the notes to the 
   financial statements or in the initial note 
   to the financial statements. 

   C. Should be disclosed in management's 
   discussion of operations. 

   D. Need not be disclosed unless they 
   are at variance with generally accepted 
   accounting principles. 


[50] Source: CPA 0590 II-44 
Certain balance sheet accounts of a foreign 
subsidiary of Rowan, Inc., on December 31 
have been translated into U.S. dollars as 
follows:

                                    Translated at
                                ---------------------
                                Current    Historical
                                 Rates         Rates
                                -------     ---------
Note receivable, long-term      $240,000    $200,000
Prepaid rent                      85,000      80,000
Patent                           150,000     170,000
                                --------    --------
                                $475,000    $450,000
                                ========    ========
The subsidiary's functional currency is the 
currency of the country in which it is 
located. What total amount should be 
included in Rowan's December 31 
consolidated balance sheet for the above 
accounts? 

   A. $450,000 

   B. $455,000 

   C. $475,000 

   D. $495,000 


[51] Source: CPA 0FIN R99-15 
Whether recognized or unrecognized in an 
entity's financial statements, disclosure of 
the fair values of the entity's financial 
instruments is required when 

   A. Estimating those values is 
   practicable. 

   B. The entity maintains accurate cost 
   records. 

   C. Aggregated fair values are material 
   to the entity. 

   D. Individual fair values are material to 
   the entity. 


[52] Source: CMA 0692 2-11 
When reporting on interim periods, APB 28, 
Interim Financial Reporting, as amended, 
specifies that 

   A. Basic and diluted earnings per share 
   need not be disclosed each quarter. 

   B. Income tax expense must be 
   determined by applying progressive tax 
   rates to income on a quarterly basis. 

   C. The method used to determine the 
   value of interim inventories must be the 
   same as that used for annual inventory 
   valuation. 

   D. The cumulative effect from an 
   accounting change is always reported as 
   occurring in the first quarter, and all 
   subsequent interim periods reflect the 
   change. 


[53] Source: CMA 0687 3-1 
APB 28, Interim Financial Reporting, 
provides guidelines for interim reporting 
that state firms 

   A. May use the gross profit method for 
   interim inventory pricing although a 
   different inventory method is used for 
   annual reporting. 

   B. Must determine income tax expense 
   by applying progressive tax rates to 
   income on a quarterly basis. 

   C. May prorate extraordinary items 
   over four quarters. 

   D. Need not disclose basic and diluted 
   earnings per share each quarter. 


[54] Source: CMA 0688 4-30 
When interim financial statements are 
prepared, they should be prepared 

   A. Employing the same accounting 
   principles used for annual reports. 

   B. Without determining estimated 
   income tax expense. 

   C. Quarterly only, not on a monthly 
   basis. 

   D. Containing only operating income 
   data. 


[55] Source: CMA 1285 3-27 
Form 8-K must ordinarily be submitted to 
the SEC after the occurrence of a significant 
event. Which one of the following is not an 
event that would be reported by Form 8-K? 

   A. The replacement of the registrant 
   company's external auditor. 

   B. A material change in accounting 
   principle. 

   C. The resignation of one of the 
   directors of the registrant company. 

   D. A significant acquisition or 
   disposition of assets. 


[56] Source: CMA 1285 3-30 
The requirement of the Foreign Corrupt 
Practices Act of 1977 to devise and 
maintain an adequate system of internal 
accounting control is assigned in the Act to 
the 

   A. Chief financial officer. 

   B. Board of directors. 

   C. Director of internal auditing. 

   D. Company as a whole with no 
   designation of specific persons or 
   positions. 


[57] Source: CMA 1286 3-19 
While the Securities and Exchange 
Commission (SEC) has generally allowed 
the private sector to establish accounting 
principles, the Commission has often 
exerted pressure to force the private sector 
into action. In some cases, the SEC may 
establish a moratorium on certain practices 
or require that a particular principle be 
used. In oil and gas accounting, the SEC 
requires the use of 

   A. Full-cost accounting. 

   B. Flow-through accounting. 

   C. Successful-efforts accounting. 

   D. Either full-cost or successful-efforts 
   accounting. 


[58] Source: CMA 1289 3-27 
Regarding financial accounting for public 
companies, the role of the Securities and 
Exchange Commission (SEC) as currently 
practiced is to 

   A. Make rules and regulations regarding 
   filings with the SEC but not to regulate 
   annual or quarterly reports to 
   shareholders. 

   B. Adopt pronouncements of the 
   Financial Accounting Standards Board 
   in all cases. 

   C. Regulate financial disclosures for 
   corporate, state, and municipal 
   reporting. 

   D. Make rules and regulations 
   pertaining more to disclosure outside 
   the financial statements than to the 
   setting of accounting recognition and 
   measurement principles. 


[59] Source: CMA 1289 3-29 
Form 8-K ordinarily must be submitted to 
the SEC after the occurrence of a significant 
event. All of the following events would be 
reported by Form 8-K except 

   A. A change in the registrant's certifying 
   accountant. 

   B. Filing for bankruptcy. 

   C. The acquisition of a major company. 

   D. A change from the 
   percentage-of-completion method of 
   accounting to the completed contract 
   method for a company in the 
   construction business. 


[60] Source: CMA 1289 3-30 
Form 10-Q must be filed within 

   A. Forty-five days after the end of the 
   first three quarters. 

   B. Forty-five days after the end of each 
   quarter. 

   C. Fifteen days after the quarterly 
   financial reports are issued. 

   D. Thirty days after the occurrence of a 
   significant event. 


[61] Source: CMA 1285 3-29 
Shareholders may ask or allow others to 
enter their votes at a shareholders meeting 
that they are unable to attend. The document 
furnished to shareholders to provide 
background information for their vote is a 

   A. Registration statement. 

   B. Proxy statement. 

   C. 10-K report. 

   D. Prospectus. 


[62] Source: CPA 0595 F-4 
Disclosure of information about significant 
concentrations of credit risk is required for 

   A. Most financial instruments. 

   B. Financial instruments with 
   off-balance-sheet credit risk only. 

   C. Financial instruments with 
   off-balance-sheet market risk only. 

   D. Financial instruments with 
   off-balance-sheet risk of accounting 
   loss only. 


[63] Source: CMA 1296 2-14 
In accordance with SFAS No. 47, 
Disclosure of Long-Term Obligations, for 
unconditional purchase obligations not 
recorded on the purchaser's statement of 
financial position, all of the following 
disclosures are required except for the 

   A. Nature and term of the obligations. 

   B. Total amount of the fixed and 
   determinable portion of the obligations 
   at the financial statement date and for 
   each of the next 5 years. 

   C. Nature of any variable portions of 
   the obligations. 

   D. Sources of funds used for payments. 


[64] Source: CMA 1296 1-28 
Shelf registration is a registration with the 
Securities and Exchange Commission (SEC) 
in which the security issuer 

   A. Registers the issue price range for a 
   specified period of time. 

   B. Registers a new issue with the SEC, 
   then files an amendment to its initial 
   filing, and then sells the security on a 
   piecemeal basis. 

   C. Puts a new security out for bid to all 
   of the underwriters associated with a 
   particular market. 

   D. Announces its intention to issue a 
   new security but delays its issuance 
   until a detailed financial analysis is 
   available. 


[65] Source: CMA 0693 1-12 
A red herring prospectus is a 

   A. Misleading or false prospectus. 

   B. Prospectus that has not been filed 
   with the Securities and Exchange 
   Commission. 

   C. Prospectus that has been 
   disapproved by the Securities and 
   Exchange Commission. 

   D. Preliminary prospectus filed with the 
   Securities and Exchange Commission 
   but not approved and, accordingly, 
   subject to change. 


[66] Source: CPA 0577 A-16 
The auditor's opinion refers to generally 
accepted accounting principles (GAAP). 
Which of the following best describes 
GAAP? 

   A. The interpretations of accounting 
   rules and procedures by certified public 
   accountants on audit engagements. 

   B. The pronouncements of the Financial 
   Accounting Standards Board and its 
   predecessor, the Accounting Principles 
   Board. 

   C. The guidelines set forth by various 
   governmental agencies that derive their 
   authority from Congress. 

   D. The conventions, rules, and 
   procedures that are necessary to define 
   accepted accounting practice at a 
   particular time. 


[67] Source: Publisher 
Which of the following is a source of 
officially established accounting principles 
for nongovernmental entities? 

   A. International Accounting Standards. 

   B. FASB Concepts Statements. 

   C. FASB Interpretations. 

   D. AICPA Issues Papers. 


[68] Source: Publisher 
Corporate social responsibility is 

   A. Effectively enforced through the 
   controls envisioned by classical 
   economics. 

   B. Defined as the obligation to 
   shareholders to earn a profit. 

   C. More than the obligation to 
   shareholders to earn a profit. 

   D. Defined as the obligation to serve 
   long-term, organizational interests. 


[69] Source: Publisher 
Financial managers/management accountants 
are obligated to maintain the highest 
standards of ethical conduct. Accordingly, 
the IMA Code of Ethics explicitly requires 
that they 

   A. Obtain sufficient competent evidence 
   when expressing an opinion. 

   B. Not condone violations by others. 

   C. Comply with generally accepted 
   auditing standards. 

   D. Adhere to generally accepted 
   accounting principles. 


[70] Source: Publisher 
Integrity is an ethical requirement for all 
financial managers/management accountants. 
One aspect of integrity requires 

   A. Performance of professional duties 
   in accordance with applicable laws. 

   B. Avoidance of conflict of interest. 

   C. Refraining from improper use of 
   inside information. 

   D. Maintenance of an appropriate level 
   of professional competence. 


[71] Source: CMA 2 
At Key Enterprises, the controller is 
responsible for directing the budgeting 
process. In this role, the controller has 
significant influence with executive 
management as individual department 
budgets are modified and approved. For the 
current year, the controller was instrumental 
in the approval of a particular line 
manager's budget without modification, even 
though significant reductions were made to 
the budgets submitted by other line 
managers. As a token of appreciation, the 
line manager in question has given the 
controller a gift certificate for a popular 
local restaurant. In considering whether or 
not to accept the certificate, the controller 
should refer to which section of Statements 
on Management Accounting Number 1C 
(SMA 1C) (revised), Standards of Ethical 
Conduct for Practitioners of Management 
Accounting and Financial Management? 

   A. Competency. 

   B. Confidentiality. 

   C. Integrity. 

   D. Objectivity. 


[72] Source: CMA 3 
In accordance with Statements on 
Management Accounting Number 1C (SMA 
1C) (revised), Standards of Ethical Conduct 
for Practitioners of Management Accounting 
and Financial Management, a management 
accountant who fails to perform 
professional duties in accordance with 
relevant standards is acting contrary to 
which one of the following standards? 

   A. Competency. 

   B. Confidentiality. 

   C. Integrity. 

   D. Objectivity. 


[73] Source: CMA 0695 2-21 
SFAS 95, Statement of Cash Flows, 
classifies business transactions into 
operating, investing, and financing 
activities. Which one of the following 
transactions should not be classified as a 
financing activity? 

   A. Issuance of common stock. 

   B. Purchase of treasury stock. 

   C. Payment of dividends. 

   D. Income tax refund. 


[74] Source: CIA 1192 IV-32 
A reader of a statement of cash flows 
wishes to analyze the major classes of cash 
receipts and cash payments from operating 
activities. Which methods of reporting cash 
flows from operating activities will supply 
that information? 

   A. Both the direct and indirect methods. 

   B. Only the direct method. 

   C. Only the indirect method. 

   D. Neither method. 


[75] Source: CIA 1191 IV-32 
In a statement of cash flows (indirect 
method), depreciation expense should be 
presented as 

   A. An inflow of cash. 

   B. An outflow of cash. 

   C. An addition to net income in 
   converting net income to net cash flows 
   from operating activities. 

   D. A deduction from net income in 
   converting net income to net cash flows 
   from operating activities. 


[76] Source: CMA 1294 2-21 
The following information was taken from 
the accounting records of Oak Corporation 
for the year ended December 31:

Proceeds from issuance of preferred
  stock F                                $4,000,000
Dividends paid on preferred stock F         400,000
Bonds payable converted to common
  stock NC                                2,000,000
Payment for purchase of machinery I         500,000
Proceeds from sale of plant building I    1,200,000
2% stock dividend on common stock NC        300,000
Gain on sale of plant building I            200,000
The net cash flows from investing and 
financing activities that should be presented 
on Oak's statement of cash flows for the year 
ended December 31 are, respectively 

   A. $700,000 and $3,600,000. 

   B. $700,000 and $3,900,000. 

   C. $900,000 and $3,900,000. 

   D. $900,000 and $3,600,000. 


[77] Source: Publisher 
Each of the following statements about the 
balance sheet is true except 

   A. It is a picture of the firm's financial 
   position at a particular point in time. 

   B. It presents the firm's assets and 
   claims against those assets. 

   C. It helps users assess the firm's 
   liquidity. 

   D. It shows the sources and uses of 
   cash. 


[78] Source: Publisher 
Which of the following assets is normally 
considered the most liquid? 

   A. Goodwill. 

   B. Land. 

   C. Inventory. 

   D. Accounts receivable. 


[79] Source: Publisher 
Which of the following is a characteristic of 
intangible assets? 

   A. There is certainty about their future 
   benefits. 

   B. They must be developed internally. 

   C. They are recorded at cost. 

   D. They are shown net of accumulated 
   depreciation. 


[80] Source: Publisher 
Blakely Corp. has an operating cycle of 9 
months. If trade payables are due in 10 
months, under what section of the balance 
sheet should they be shown? 

   A. Current liabilities. 

   B. Noncurrent liabilities. 

   C. Obligations. 

   D. Cash flows from financing activities. 


[81] Source: Publisher 
Current liabilities include all of the 
following except 

   A. Accrued wages. 

   B. Newspaper subscription revenue 
   collected in advance. 

   C. Advances from affiliated companies. 

   D. Accrued bonus payments 
   (estimated). 


[82] Source: Publisher 
In the multiple-step income statement, sales 
less cost of goods sold equals 

   A. Gross profit. 

   B. Operating profit. 

   C. Net income from continuing 
   operations. 

   D. Pretax income from continuing 
   operations. 


[83] Source: Publisher 
A nonrecurring item includes all of the 
following except 

   A. Extraordinary items. 

   B. Discontinued operations. 

   C. Cumulative effect of accounting 
   changes. 

   D. Interest income. 


[84] Source: Publisher 
In the current year, Big Fish Corp., a 
retailer, has sales of $95,000 and cost of 
goods sold of $45,000. The depreciation for 
the year is $5,000, and interest expense is 
$25,000. Assuming Big Fish Corp.'s tax rate 
is 34%, what is its net income for the 
current year? 

   A. $16,500 

   B. $13,200 

   C. $46,200 

   D. $33,000 


[85] Source: Publisher 
Assuming Superclean Inc. has an applicable 
tax rate of 34%, what is the net income for 
Year 1? 

   A. $18,020 

   B. $31,020 

   C. $22,440 

   D. $47,000 


[86] Source: Publisher 
What is Superclean Inc.'s Year 1 net income 
if it is located in an area where earthquakes 
occur frequently? Assume Superclean Inc. 
has an applicable tax rate of 34%. 

   A. $22,440 

   B. $25,357 

   C. $31,020 

   D. None of the answers are correct. 


[87] Source: Publisher 
A gain or loss on disposal of a segment 
includes all of the following except 

   A. Any indirect disposal costs incurred 
   during the phase-out period. 

   B. The estimated gain or loss on the 
   actual disposal. 

   C. Estimated operating income or loss 
   of the segment from the measurement 
   date to the disposal date. 

   D. Any direct disposal costs incurred 
   during the phase-out period. 


[88] Source: Publisher 
Road Runner Inc. discontinues and disposes 
of its running shoes segment. The gain or 
loss from the disposal is reported as 

   A. An extraordinary item. 

   B. An amount after continuing 
   operations, but before extraordinary 
   items. 

   C. A cumulative effect of an accounting 
   change. 

   D. An amount in the other gains or 
   losses section. 


[89] Source: Publisher 
What is Log Cabin Corp.'s cost of goods 
manufactured? 

   A. $85,000 

   B. $155,000 

   C. $140,000 

   D. $150,000 


[90] Source: Publisher 
What is Log Cabin Corp.'s cost of goods 
sold? 

   A. $74,000 

   B. $139,000 

   C. $144,000 

   D. $129,000 


[91] Source: Publisher 
To prepare a statement of cash flows for the 
current year under the direct method, all of 
the following are needed except a(n) 

   A. Income statement of the prior year. 

   B. Income statement of the current year. 

   C. Balance sheet of the prior year. 

   D. Balance sheet of the current year. 


[92] Source: Publisher 
In the statement of cash flows, depreciation 
of equipment should be added to net income 
to determine the net cash provided from 
operations because 

   A. It generates a cash inflow. 

   B. It is not an expense. 

   C. It does not affect cash. 

   D. It does not reduce the net book value 
   of the equipment. 


[93] Source: Publisher 
Jim's Landscaping Co. had sales of 
$100,000, an increase in accounts payable 
of $20,000, and a decrease in accounts 
receivable of $7,000. What is the amount of 
the cash collected from customers to be 
reported in the operating section of the 
statement of cash flows (direct 
presentation)? 

   A. $120,000 

   B. $93,000 

   C. $87,000 

   D. $107,000 


[94] Source: Publisher 
Financial statement footnotes are considered 

   A. Supplementary information. 

   B. Part of the basic financial statements. 

   C. Useful for correcting improper 
   presentations. 

   D. Part of the auditors' report. 


[95] Source: Publisher 
The operating cycle is best defined as 

   A. The average time between resource 
   acquisition and the final receipt of cash 
   from their sale. 

   B. One year. 

   C. The basis for the distinction between 
   current and noncurrent assets. 

   D. The basis for the distinction between 
   current and noncurrent liabilities. 


[96] Source: Publisher 
What is the usual presentation of items in the 
balance sheet? 

   A. Less liquid assets before more liquid 
   assets. 

   B. Noncurrent liabilities before current 
   liabilities. 

   C. Less permanent equity items before 
   more permanent equity items. 

   D. Current assets before noncurrent 
   assets. 


[97] Source: Publisher 
Intangible assets include 

   A. Cash surrender value of life 
   insurance, trademarks, and trade names. 

   B. Land held for speculation, 
   copyrights, and patents. 

   C. Organization costs, purchased 
   goodwill, and franchises. 

   D. Organization costs, internally 
   developed goodwill, and patents. 


[98] Source: Publisher 
The property, plant, and equipment section 
of the balance sheet includes 

   A. Organization costs. 

   B. Deferred charges. 

   C. Capital leases. 

   D. Capital assets not used in current 
   operations. 


[99] Source: Publisher 
In the income statement, revenue and 
expense accounts are best described as 

   A. Real accounts. 

   B. Permanent accounts. 

   C. Temporary holding accounts. 

   D. Capital accounts. 


[100] Source: Publisher 
The income statement presents data for 
primary and fully diluted EPS for which of 
the following?

                                     Cumulative Effect
      Discontinued   Extraordinary     of Accounting
       Operations        Items            Changes
      ------------   -------------   -----------------
   A. 

          Yes            Yes               No
   B. 

          No             Yes               Yes
   C. 

          Yes            No                Yes
   D. 

          Yes            Yes               Yes


[101] Source: Publisher 
The multiple-step income statement is 
characterized by 

   A. Separating revenues and expenses. 

   B. Matching operating items separately 
   from nonoperating items. 

   C. Including discontinued operations in 
   a separate section. 

   D. Including extraordinary items in a 
   separate section. 


[102] Source: Publisher 
Items reported in related disclosures but not 
in the body of the statement of cash flows 
include 

   A. Conversion of debt to equity. 

   B. Collection of a loan. 

   C. Cash flow from a hedging 
   transaction. 

   D. Issuance of stock. 


[103] Source: Publisher 
A statement of cash flows reports the cash 
effects of operations, investing transactions, 
and financing transactions during the period. 
Cash flows from investing activities 
reported in the statement of cash flows 
include cash flows from 

   A. Transactions in certain loans 
   acquired specifically for resale. 

   B. Exchanges of cash for cash 
   equivalents. 

   C. Maturities of available-for-sale 
   securities. 

   D. Receipts of donor-restricted 
   resources that must be used for 
   long-term purposes. 


[104] Source: CMA 0685 4-29 
The basic financial statements include a 

   A. Balance sheet, income statement, 
   statement of retained earnings, and 
   statement of changes in retained 
   earnings. 

   B. Statement of financial position, 
   income statement, statement of retained 
   earnings, and statement of changes in 
   retained earnings. 

   C. Balance sheet, statement of financial 
   position, income statement, and 
   statement of changes in retained 
   earnings. 

   D. Statement of financial position, 
   income statement, statement of cash 
   flows, and statement of retained 
   earnings. 


[105] Source: Publisher 
What are the disclosure requirements with 
respect to changes in capital accounts other 
than retained earnings and changes in other 
owners' equity data? 

   A. When the income statement and 
   balance sheet are presented, all changes 
   in the capital accounts and changes in 
   the number of shares of equity securities 
   must be disclosed. 

   B. When the balance sheet is presented, 
   all changes in the capital accounts must 
   be disclosed. 

   C. When the income statement is 
   presented, all changes in the capital 
   accounts and changes in the number of 
   shares of equity securities must be 
   disclosed. 

   D. Changes in the number of shares of 
   equity securities must be disclosed 
   when a balance sheet is presented, but 
   there is no specific disclosure 
   requirement with respect to the capital 
   accounts other than retained earnings. 


[106] Source: CMA 0680 4-15 
The primary purpose of the statement of 
financial position is to reflect 

   A. The fair value of the firm's assets at 
   some moment in time. 

   B. The status of the firm's assets in case 
   of forced liquidation of the firm. 

   C. The success of a company's 
   operations for a given amount of time. 

   D. Items of value, debt, and net worth. 


[107] Source: CMA Samp Q. 
A statement of financial position allows 
investors to assess all of the following 
except 

   A. The efficiency with which enterprise 
   assets are used. 

   B. The liquidity and financial flexibility 
   of the enterprise. 

   C. The capital structure of the 
   enterprise. 

   D. The net realizable value of 
   enterprise assets. 


[108] Source: CMA 0676 3-29 
Notes to financial statements are beneficial 
in meeting the disclosure requirements of 
financial reporting. The notes should not be 
used to 

   A. Describe significant accounting 
   policies. 

   B. Describe depreciation methods 
   employed by the company. 

   C. Describe principles and methods 
   peculiar to the industry in which the 
   company operates, when these 
   principles and methods are 
   predominantly followed in that industry. 

   D. Correct an improper presentation in 
   the financial statements. 


[109] Source: CMA 0684 3-13 
The accounting equation (assets - liabilities 
= equity) reflects the 

   A. Entity point of view. 

   B. Fund theory. 

   C. Proprietary point of view. 

   D. Enterprise theory. 


[110] Source: CMA 0693 2-10 
When classifying assets as current and 
noncurrent for reporting purposes, 

   A. The amounts at which current assets 
   are carried and reported must reflect 
   realizable cash values. 

   B. Prepayments for items such as 
   insurance or rent are included in an 
   "other assets" group rather than as 
   current assets as they will ultimately be 
   expensed. 

   C. The time period by which current 
   assets are distinguished from noncurrent 
   assets is determined by the seasonal 
   nature of the business. 

   D. Assets are classified as current if 
   they are reasonably expected to be 
   realized in cash or consumed during the 
   normal operating cycle. 


[111] Source: CMA 1295 2-8 
Abernathy Corporation uses a calendar year 
for financial and tax reporting purposes and 
has $100 million of mortgage bonds due on 
January 15, year 2. By January 10, year 2, 
Abernathy intends to refinance this debt with 
new long-term mortgage bonds and has 
entered into a financing agreement that 
clearly demonstrates its ability to 
consummate the refinancing. This debt is to 
be 

   A. Classified as a current liability on 
   the statement of financial position at 
   December 31, year 1. 

   B. Classified as a long-term liability on 
   the statement of financial position at 
   December 31, year 1. 

   C. Retired as of December 31, year 1. 

   D. Considered off-balance-sheet debt. 


[112] Source: CMA 1287 3-30 
Lister Company intends to refinance a 
portion of its short-term debt in year 2 and 
is negotiating a long-term financing 
agreement with a local bank. This agreement 
would be noncancellable and would extend 
for a period of 2 years. The amount of 
short-term debt that Lister Company can 
exclude from its statement of financial 
position at December 31, year 1 

   A. May exceed the amount available for 
   refinancing under the agreement. 

   B. Depends on the demonstrated ability 
   to consummate the refinancing. 

   C. Is reduced by the proportionate 
   change in the working capital ratio. 

   D. Is zero unless the refinancing has 
   occurred by year-end. 


[113] Source: CMA 0695 2-18 
When treasury stock is accounted for at cost, 
the cost is reported on the balance sheet as 
a(n) 

   A. Asset. 

   B. Reduction of retained earnings. 

   C. Reduction of additional 
   paid-in-capital. 

   D. Unallocated reduction of equity. 


[114] Source: Publisher 
APB 9, Reporting the Results of Operations, 
concludes that the all-inclusive income 
statement concept 

   A. Is synonymous with the current 
   operating concept, and that both are 
   acceptable per GAAP. 

   B. Is ordinarily more appropriate than 
   the current operating concept. 

   C. Is not appropriate. The current 
   operating concept is appropriate under 
   GAAP. 

   D. Produces an interactive income 
   statement that avoids the problems 
   associated with the changing value of 
   currencies. 


[115] Source: CMA 0684 3-15 
An income statement for a business 
prepared under the current operating 
performance concept would include only the 
recurring earnings from its normal 
operations and 

   A. No other items. 

   B. Any extraordinary items. 

   C. Any prior-period adjustments. 

   D. Any gains or losses from 
   extinguishment of debt. 


[116] Source: Publisher 
Select the best order for the following items 
appearing in income statements:

 1.  Cumulative effect of change in accounting principle
 2.  Extraordinary items
 3.  Income from continuing operations
 4.  Discontinued operations
 5.  Prior-period adjustments
 6.  Taxes on income from continuing operations
 7.  Dividends
 8.  Net income
 9.  Revenues
10.  Expenses
11.  Income from continuing operations before income tax
   A. 9 - 10 - 8 - 7 - 6 - 2 - 4 

   B. 8 - 6 - 7 - 1 - 2 - 5 

   C. 9 - 10 - 8 - 6 - 3 - 2 - 1 - 4 

   D. 9 - 10 - 11 - 6 - 3 - 4 - 2 - 1 - 8 


[117] Source: CIA 0592 IV-36 
A company decided to sell a line of its 
business. The assets were sold for $100,000 
and had a net book value of $70,000. The 
applicable tax rate was 20%. The result of 
this transaction will appear on the 

   A. Balance sheet as a prior-period 
   adjustment. 

   B. Income statement as an extraordinary 
   item. 

   C. Income statement as discontinued 
   operations. 

   D. Income statement as an accounting 
   change. 


[118] Source: CMA 0693 2-22 
The gain or loss from disposal of a segment 

   A. Includes the operating gain or loss 
   realized by the segment from the 
   beginning of the fiscal year to the 
   disposal date. 

   B. Is reported as an addition to or 
   subtraction from the beginning balance 
   of retained earnings on the statement of 
   retained earnings. 

   C. Is reported as an extraordinary item 
   on the income statement. 

   D. Is reported as a component of net 
   income and distinguished from the 
   operating gain or loss realized by the 
   segment prior to the measurement date. 


[119] Source: CMA 0687 3-5 
When reporting the discontinuance of a 
business segment, APB 30, Reporting the 
Results of Operations, specifies that 

   A. The results of the segment operations 
   during the phase-out period be reported 
   as part of the gain or loss from 
   continuing operations. 

   B. The gain or loss on discontinued 
   operations be reported net of tax as a 
   separate item before extraordinary 
   items. 

   C. The costs directly associated with 
   discontinuance be included as an 
   expense of continuing operations. 

   D. All gains or losses expected from 
   discontinuance be reported at the 
   measurement date even though the 
   disposal date is in a subsequent period. 


[120] Source: CIA 1193 IV-32 
A loss that is material, unusual in nature, 
and infrequent in occurrence should be 
reported as 

   A. Part of continuing operations. 

   B. Part of discontinued operations. 

   C. An extraordinary item. 

   D. A prior-period item. 


[121] Source: CMA 0694 2-29 
Which one of the following material events 
would be classified as an extraordinary item 
on an income statement? 

   A. A loss due to the effects of a strike 
   against a major supplier. 

   B. A gain or loss on the disposal of a 
   portion of the business. 

   C. A gain or loss from the 
   extinguishment of debt. 

   D. A gain or loss from the translation of 
   foreign currency due to a major 
   devaluation. 


[122] Source: CMA 0693 2-24 
When reporting extraordinary items, 

   A. Each item (net of tax) is presented on 
   the face of the income statement 
   separately as a component of net 
   income for the period. 

   B. Each item is presented exclusive of 
   any related income tax. 

   C. Each item is presented as an unusual 
   item within income from continuing 
   operations. 

   D. All extraordinary gains or losses that 
   occur in a period are summarized as 
   total gains and total losses, then offset 
   to present the net extraordinary gain or 
   loss. 


[123] Source: CMA 0688 4-18 
Which one of the following items is 
included in the determination of income 
from continuing operations? 

   A. Discontinued operations. 

   B. Extraordinary loss. 

   C. Cumulative effect of a change in an 
   accounting principle. 

   D. Unusual loss from a write-down of 
   inventory. 


[124] Source: CIA 0590 IV-32 
The major distinction between the 
multiple-step and single-step income 
statement formats is the separation of 

   A. Operating and nonoperating data. 

   B. Income tax expense and 
   administrative expenses. 

   C. Cost of goods sold expense and 
   administrative expenses. 

   D. The effect on income taxes due to 
   extraordinary items and the effect on 
   income taxes due to income before 
   extraordinary items. 


[125] Source: CMA 0690 3-5 
In a multiple-step income statement for a 
retail company, all of the following are 
included in the operating section except 

   A. Sales. 

   B. Cost of goods sold. 

   C. Dividend revenue. 

   D. Administrative and selling expenses. 


[126] Source: CMA 1287 3-29 
According to SFAS 78, Classification of 
Obligations That Are Callable by the 
Creditor, long-term obligations that are or 
will become callable by the creditor 
because of the debtor's violation of a 
provision of the debt agreement at the 
balance sheet date should be classified as 

   A. Long-term liabilities. 

   B. Current liabilities unless the debtor 
   goes bankrupt. 

   C. Current liabilities unless the creditor 
   has waived the right to demand 
   repayment for more than 1 year from the 
   balance sheet date. 

   D. Contingent liabilities until the 
   violation is corrected. 


[127] Source: Publisher 
A statement of cash flows is to be presented 
in general purpose external financial 
statements by which of the following? 

   A. Publicly held business enterprises 
   only. 

   B. Privately held business enterprises 
   only. 

   C. All business enterprises. 

   D. All business enterprises and 
   not-for-profit organizations. 


[128] Source: Publisher 
A corporation issues a balance sheet and 
income statement for the current year and 
comparative income statements for each of 
the 2 previous years. Under SFAS 95, a 
statement of cash flows 

   A. Should be issued for the current year 
   only. 

   B. Should be issued for the current and 
   the previous year only. 

   C. Should be issued for all 3 years. 

   D. May be issued at the company's 
   option for any or all of the 3 years. 


[129] Source: CIA 1192 IV-30 
The management of ABC Corporation is 
analyzing the financial statements of XYZ 
Corporation because ABC is strongly 
considering purchasing a block of XYZ 
common stock that would give ABC 
significant influence over XYZ. Which 
financial statement should ABC primarily 
use to assess the amounts, timing, and 
uncertainty of future cash flows of XYZ 
Company? 

   A. Income statement. 

   B. Statement of retained earnings. 

   C. Statement of cash flows. 

   D. Balance sheet. 


[130] Source: CMA 1295 2-5 
A statement of cash flows is intended to 
help users of financial statements 

   A. Evaluate a firm's liquidity, solvency, 
   and financial flexibility. 

   B. Evaluate a firm's economic 
   resources and obligations. 

   C. Determine a firm's components of 
   income from operations. 

   D. Determine whether insiders have 
   sold or purchased the firm's stock. 


[131] Source: CMA 1288 4-19 
Which of the following items is specifically 
included in the body of a statement of cash 
flows? 

   A. Operating and nonoperating cash 
   flow information. 

   B. Conversion of debt to equity. 

   C. Acquiring an asset through a capital 
   lease. 

   D. Purchasing a building by giving a 
   mortgage to the seller. 


[132] Source: CIA 0592 IV-35 
A financial statement includes all of the 
following items: net income, depreciation, 
operating activities, and financing activities. 
What financial statement is this? 

   A. Balance sheet. 

   B. Income statement. 

   C. Statement of cash flows. 

   D. Statement of changes in equity. 


[133] Source: CIA 1193 IV-33 
Select the combination below that explains 
the impact of credit card interest incurred 
and paid during the period on (1) equity on 
the balance sheet and (2) the statement of 
cash flows.

                                 (2)
            (1)              Reflected on
      Effect on Equity       Statement of
      on Balance Sheet    Cash Flows as a(n)
      ----------------    ------------------
   A. 

         Decrease         Financing outflow
   B. 

         Decrease         Operating outflow
   C. 

         No effect        Financing outflow
   D. 

         No effect        Operating outflow


[134] Source: CMA 1293 2-29 
SFAS 95, Statements of Cash Flows, 
classifies cash receipts and cash payments 
as arising from operating, investing, and 
financing activities. All of the following 
should be classified as investing activities 
except 

   A. Cash outflows to purchase 
   manufacturing equipment. 

   B. Cash inflows from the sale of bonds 
   of other entities. 

   C. Cash outflows to lenders for interest. 

   D. Cash inflows from the sale of a 
   manufacturing plant. 


[135] Source: CIA 1195 IV-34 
In the statement of cash flows, the payment 
of common share dividends appears in the 
<List A> activities section as a <List B> of 
cash.

       List A      List B
      ---------    ------
   A. 

      Operating    Source
   B. 

      Financing    Use
   C. 

      Investing    Use
   D. 

      Investing    Source


[136] Source: Publisher 
Which of the following related cash 
transactions should be disclosed as gross 
amounts of cash receipts and cash payments 
rather than as net amounts? 

   A. The purchase and sale of fixed 
   assets. 

   B. Changes in cash and cash 
   equivalents. 

   C. The purchase and sale of federal 
   funds. 

   D. The receipts and payments from 
   demand deposits. 


[137] Source: Publisher 
Earnings-per-share disclosures are required 

   A. Only if the entity has a complex 
   capital structure. 

   B. For an entity that changes its capital 
   structure. 

   C. If an entity has issued publicly traded 
   potential common stock. 

   D. In statements of wholly owned 
   subsidiaries. 


[138] Source: CMA 1295 2-2 
Royce Company uses the direct method to 
prepare its statement of cash flows at 
December 31, year 2. The interest paid to 
bondholders is reported in the 

   A. Financing section, as a use or 
   outflow of cash. 

   B. Operating section, as a use or 
   outflow of cash. 

   C. Investing section, as a use or outflow 
   of cash. 

   D. Debt section, as a use or outflow of 
   cash. 


[139] Source: CMA 1295 2-3 
Royce Company uses the indirect method to 
prepare its year 2 statement of cash flows. It 
reports a(n) 

   A. Source or inflow of funds of $5,000 
   from the sale of the truck in the 
   financing section. 

   B. Use or outflow of funds of $140,000 
   in the financing section, representing 
   dividends. 

   C. Deduction of $15,000 in the 
   operating section, representing the 
   decrease in year-end accounts 
   receivable. 

   D. Addition of $2,000 in the operating 
   section for the $2,000 loss on the sale 
   of the truck. 


[140] Source: CMA 1295 2-4 
The total of cash provided (used) by 
operating activities plus cash provided 
(used) by investing activities plus cash 
provided (used) by financing activities is 

   A. Cash provided of $284,000. 

   B. Cash provided of $178,000. 

   C. Cash used of $582,000. 

   D. Equal to net income reported for 
   fiscal year ended December 31, year 2. 


[141] Source: CMA 0693 2-13 
With respect to the content and form of the 
statement of cash flows, 

   A. The pronouncements covering the 
   cash flow statement encourage the use 
   of the indirect method. 

   B. The indirect method adjusts ending 
   retained earnings to reconcile it to net 
   cash flows from operations. 

   C. The direct method of reporting cash 
   flows from operating activities includes 
   disclosing the major classes of gross 
   cash receipts and gross cash payments. 

   D. The reconciliation of the net income 
   to net operating cash flow need not be 
   presented when using the direct method. 


[142] Source: R. O'Keefe 
The statement of cash flows may be 
presented in either a direct or an indirect 
(reconciliation) format. In which of these 
formats would cash collected from 
customers be presented as a gross amount?

      Direct   Indirect
      ------   --------
   A. 

       No        No
   B. 

       No        Yes
   C. 

       Yes       Yes
   D. 

       Yes       No


[143] Source: CMA 0695 2-20 
SFAS 95, Statement of Cash Flows, 
classifies business transactions into 
operating, investing, and financing 
activities. All of the following should be 
included in the reconciliation of net income 
to net operating cash flow except a(n) 

   A. Decrease in inventory. 

   B. Decrease in prepaid insurance. 

   C. Purchase of land and building in 
   exchange for a long-term note. 

   D. Increase in income tax payable. 


[144] Source: CMA 1293 2-30 
When using the indirect method to prepare a 
statement of cash flows, net cash flows from 
operating activities are determined by 
adding back or deducting from net income 
those items that had no effect on cash. Which 
one of the following items should be 
deducted from net income when determining 
net cash flows from operating activities? 

   A. An increase in accrued liabilities. 

   B. Amortization of bond premiums. 

   C. A loss on the sale of plant assets. 

   D. A decrease in accounts receivable. 


[145] Source: CMA 1294 2-18 
When using the indirect method to prepare 
the statement of cash flows, the amortization 
of goodwill should be presented as a(n) 

   A. Cash flow from investing activities. 

   B. Deduction from net income. 

   C. Addition to net income. 

   D. Investing and financing activity not 
   affecting cash. 


[146] Source: CMA 1295 2-1 
Depreciation expense is added to net 
income under the indirect method of 
preparing a statement of cash flows in order 
to 

   A. Report all assets at gross book 
   value. 

   B. Ensure depreciation has been 
   properly reported. 

   C. Reverse noncash charges deducted 
   from net income. 

   D. Calculate net book value. 


[147] Source: CIA 0593 IV-44 
In reconciling net income on an accrual 
basis to net cash provided by operating 
activities, what adjustment is needed to net 
income because of (1) an increase during the 
period in prepaid expenses and (2) the 
periodic amortization of premium on bonds 
payable?

            (1)                    (2)
        Increase in      Amortization of Premium
      Prepaid Expenses       on Bonds Payable
      ----------------   -----------------------
   A. 

           Add                   Add
   B. 

           Add                   Deduct
   C. 

           Deduct                Add
   D. 

           Deduct                Deduct


[148] Source: Publisher 
In its statement of cash flows issued for the 
year ending June 30, Prince Company 
reported a net cash inflow from operating 
activities of $123,000. The following 
adjustments were included in the 
supplementary schedule reconciling cash 
flow from operating activities with net 
income:

Depreciation                           $38,000
Increase in net accounts receivable     31,000
Decrease in inventory                   27,000
Increase in accounts payable            48,000
Increase in interest payable            12,000
Net income is 

   A. $29,000 

   B. $41,000 

   C. $79,000 

   D. $217,000 


[149] Source: CIA 1188 IV-33 
The following data were extracted from the 
financial statements of a company for the 
year ended December 31:

Net income                             $70,000
Depreciation expense                    14,000
Amortization of intangibles              1,000
Decrease in accounts receivable          2,000
Increase in inventories                  9,000
Increase in accounts payable             4,000
Increase in plant assets                47,000
Increase in contributed capital         31,000
Decrease in short-term notes payable    55,000
There were no disposals of plant assets 
during the year. Based on the above, a 
statement of cash flows will report a net 
increase in cash of 

   A. $11,000 

   B. $17,000 

   C. $54,000 

   D. $69,000 


[150] Source: CMA 1294 2-20 
The net income for Cypress Inc. was 
$3,000,000 for the year ended December 
31. Additional information is as follows:

Depreciation on fixed assets         $1,500,000
Gain from cash sale of land             200,000
Increase in accounts payable            300,000
Dividends paid on preferred stock       400,000
The net cash provided by operating 
activities in the statement of cash flows for 
the year ended December 31 should be 

   A. $4,200,000 

   B. $4,500,000 

   C. $4,600,000 

   D. $4,800,000 


[151] Source: Publisher 
In the indirect presentation of cash flows 
from operating activities in a statement of 
cash flows, net income of a business 
enterprise is adjusted for noncash revenues, 
gains, expenses, and losses to determine the 
cash flows from operating activities. A 
reconciliation of net cash flows from 
operating activities to net income 

   A. Must be reported in the statement of 
   cash flows. 

   B. Must be presented separately in a 
   related disclosure. 

   C. May be either reported in the 
   statement of cash flows or presented 
   separately in a related disclosure. 

   D. Need not be presented. 


[152] Source: CMA 1286 3-14 
Whenever Morton Shoe Company must use 
market rather than cost to value an inventory 
item, the inventory account is reduced and 
the account loss due to market decline of 
inventory is increased. The balance of this 
account would be reflected as a separate 
item on the 

   A. Statement of financial position as a 
   deduction from inventory. 

   B. Statement of financial position as a 
   deduction from retained earnings. 

   C. Statement of income as an 
   extraordinary loss. 

   D. Statement of income as a deduction 
   from gross profit on sales. 


[153] Source: CMA 1287 3-28 
If a transfer of receivables with recourse is 
not classified as a sale, and the proceeds 
received are less than the net receivables, 
the difference shall be treated as a(n) 

   A. Ordinary loss recognized in the 
   current period. 

   B. Extraordinary loss recognized in the 
   current period. 

   C. Discount on transferred receivables 
   that is to be amortized to interest 
   expense over the borrowing period. 

   D. Ordinary gain allocated over the 
   borrowing period. 


[154] Source: CMA 0688 4-28 
In preparing a statement of cash flows, an 
item included in determining net cash flow 
from operating activities is the 

   A. Amortization of a bond premium. 

   B. Proceeds from the sale of equipment 
   for cash. 

   C. Cash dividends paid. 

   D. Purchase of treasury stock. 


[155] Source: CMA 0691 2-9 
Which one of the following footnote 
disclosures indicates that a corporation may 
be in a better liquidity position than 
indicated by the information on the face of 
the financial statements? 

   A. Notes discounted on which the other 
   party has full recourse against the 
   company. 

   B. The company's material contingent 
   liabilities. 

   C. Guarantee of a bank note for another 
   entity by the company. 

   D. The company's unused bank credit 
   lines. 


[156] Source: CMA 1292 2-6 
Briggs Company prepares its financial 
statements on a calendar-year basis and 
reports its financial results on February 1 of 
the following year. A fire destroyed one of 
Briggs' factories on January 15 of the 
current year. The loss is material and can be 
reasonably estimated. On its financial 
statements for the preceding year, Briggs 
should 

   A. Ignore the loss because it occurred 
   after the end of the calendar year. 

   B. Disclose the loss in the financial 
   statements of the preceding year. 

   C. Include the amount of the loss in the 
   preceding year's financial statements 
   because it can be reasonably estimated. 

   D. Disclose the loss in supplemental 
   pro forma financial statements. 


[157] Source: CMA 0693 2-8 
Disclosure of accounting policies in the first 
note to the financial statements is required 

   A. To duplicate details presented 
   elsewhere as part of the financial 
   statements. 

   B. For income recognition and periodic 
   asset cost allocations, irrespective of 
   the accountant's judgments as to the 
   appropriateness. 

   C. To identify and describe the 
   accounting principles by entity, and the 
   methods of their application. 

   D. To include only those policies that 
   are general applications of generally 
   accepted accounting principles, i.e., 
   unusual applications should be 
   excluded. 


[158] Source: CMA 1285 3-6 
The net amount of unrealized pretax gain 
(loss) related to its equity securities that 
would have been reported on Tilson 
Corporation's balance sheet for December 
31, Year 2 is 

   A. $0. 

   B. $(62,500). 

   C. $(87,500). 

   D. $(150,000). 


[159] Source: CMA 1285 3-7 
The net amount of pretax gain (loss) related 
to its equity securities that would have been 
reported on Tilson Corporation's income 
statement for December 31, Year 3 is 

   A. $25,000. 

   B. $(37,500). 

   C. $(60,000). 

   D. $125,000. 


[160] Source: CMA 0690 4-23 
The cost of goods sold for May under the 
weighted average periodic method is 

   A. $29.25. 

   B. $47.40. 

   C. $48.75. 

   D. $49.00. 


[161] Source: CMA 0690 4-24 
The cost of goods sold for May under the 
last-in, first-out (LIFO) perpetual method is 

   A. $46.00. 

   B. $48.75. 

   C. $49.00. 

   D. $51.00. 


[162] Source: CMA 0690 4-25 
The gross profit for May under first-in, 
first-out (FIFO) periodic method is 

   A. $189.00. 

   B. $191.00. 

   C. $191.25. 

   D. $194.00. 


[163] Source: CMA 0690 4-26 
The gross profit for May under the moving 
average perpetual inventory method is 

   A. $191.00. 

   B. $191.25. 

   C. $192.60. 

   D. $208.00. 


[164] Source: CIA 1191 IV-34 
A company offers its customers credit terms 
of a 2% discount if paid within 10 days, or 
the full balance is due within 30 days (2/10, 
n/30). If some customers take advantage of 
the cash discount and others do not, which 
of the following accounts will appear on the 
income statement if the net method of 
recording receivables is employed?

        Sales    Sales Discounts  Sales Discounts
      Discounts     Forfeited        Deferred
      ---------  ---------------  ---------------
   A. 

        Yes           No                Yes
   B. 

        No            No                No
   C. 

        No            Yes               No
   D. 

        Yes           Yes               No


[165] Source: CMA 1286 4-30 
When a company was in the process of 
closing its original store, no accounting 
notice of the liquidation values of the 
discontinued store's assets were considered 
in the accounting records. The accountant 
did not make any entries until the assets 
were disposed of because the company was 
still a going concern. However, when 
liquidation of a business is foreseen but not 
yet accomplished, a different financial 
statement is prepared. This statement is 
known as the 

   A. Statement of liquidation. 

   B. Charge and discharge statement. 

   C. Statement of realization. 

   D. Statement of affairs. 


[166] Source: CMA 0687 4-4 
The major segments of the statement of 
retained earnings for a period are 

   A. Dividends declared, prior period 
   adjustments, and changes due to 
   treasury stock transactions. 

   B. Before-tax income or loss and 
   dividends paid or declared. 

   C. Prior-period adjustments, before-tax 
   income or loss, income tax, and 
   dividends paid. 

   D. Net income or loss, prior-period 
   adjustments, and dividends paid or 
   declared. 


[167] Source: CMA 1288 4-28 
Separate disclosure in the statement of 
retained earnings would be required for 

   A. Repurchase and cancellation of 
   long-term debt at an amount different 
   from its carrying value. 

   B. An extraordinary loss. 

   C. Resale of treasury stock at an amount 
   greater than the price at which it was 
   purchased. 

   D. Discovery that estimated warranty 
   expense for machines sold last year was 
   recorded twice. 


[168] Source: CMA 1296 2-5 
Beginning January 1, Wright Inc. offered a 
3-year warranty from the date of sale on any 
of its products sold on or after January 1 as 
part of a program to increase sales. The 
implementation of the warranty terms was 
expected to cost the company 4% of sales. 
During the year, sales made under warranty 
totaled $4,500,000, and one-fifth of the units 
sold were returned within the terms of the 
warranty. The repair or replacement of the 
returned units cost the company $32,500. 
The amount of warranty expense that should 
appear on Wright's income statement is 

   A. 32,500 

   B. 147,500 

   C. 180,000 

   D. 212,500 


[169] Source: CMA 1296 2-21 
All of the following should be classified 
under the operating section in a statement of 
cash flows except a 

   A. Decrease in inventory. 

   B. Depreciation expense. 

   C. Decrease in prepaid insurance. 

   D. Purchase of land and building in 
   exchange for a long-term note. 


[170] Source: CMA 1296 2-22 
Which one of the following transactions 
should be classified as a financing activity 
in a statement of cash flows? 

   A. Purchase of equipment. 

   B. Purchase of treasury stock. 

   C. Sale of trademarks. 

   D. Payment of interest on a mortgage 
   note. 


[171] Source: CMA 1296 2-23 
All of the following should be classified as 
investing activities except 

   A. Cash outflows to purchase 
   manufacturing equipment. 

   B. Cash inflows from the sale of bonds 
   of other entities. 

   C. Cash outflows to creditors for 
   interest. 

   D. Cash inflows from the sale of a 
   manufacturing plant. 


[172] Source: CMA 1296 2-24 
When using the indirect method to prepare a 
statement of cash flows, which one of the 
following should be deducted from net 
income when determining net cash flows 
from operating activities? 

   A. An increase in accrued liabilities. 

   B. Amortization of premiums on bonds 
   payable. 

   C. A loss on the sale of plant assets. 

   D. Depreciation expense. 


[173] Source: CMA 0697 2-2 
When preparing the statement of cash flows, 
companies are required to report separately 
as operating cash flows all of the following 
except 

   A. Interest received on investments in 
   bonds. 

   B. Interest paid on the company's bonds. 

   C. Cash collected from customers. 

   D. Cash dividends paid on the 
   company's stock. 


[174] Source: Publisher 
The cost of goods manufactured (CGM) for 
the year ended September 30, year 2 is 

   A. $484,000 

   B. $494,000 

   C. $504,000 

   D. $518,000 


[175] Source: Publisher 
The cost of goods sold (CGS) for the year 
ended September 30, year 2 is 

   A. $500,000 

   B. $504,000 

   C. $508,000 

   D. $496,000 


[176] Source: Publisher 
The total value of inventory to be reported 
on the balance sheet at September 30, year 2 
is 

   A. $44,000 

   B. $70,000 

   C. $24,000 

   D. $138,000 


[177] Source: Publisher 
SFAS 128, Earnings per Share, requires 
which of the following policies regarding 
presentation of extraordinary items? 

   A. Earnings-per-share amounts should 
   be presented in a separate schedule. 

   B. Extraordinary items should be 
   presented as an aggregate amount. 

   C. Income taxes applicable to 
   extraordinary items should be presented 
   in a separate schedule. 

   D. Earnings-per-share amounts should 
   be presented on the face of the income 
   statement or in the notes. 


[178] Source: Publisher 
Karen's Crafts, Inc. has the following 
accounts included in its December 31 trial 
balance:

Accounts payable               $250,000
Discount on bonds payable        34,000
Wages payable                    29,000
Interest payable                 14,000
Bonds payable
  (Issued 1/1/96; due 1/1/06)   500,000
Income taxes payable             26,000
What amount of current liabilities will be 
reported on Karen's December 31 statement 
of financial position? 

   A. $285,000 

   B. $319,000 

   C. $353,000 

   D. $819,000 


[179] Source: Publisher 
Perry Mansfield Corporation has the 
following accounts included in its 
December 31 trial balance:

Accounts receivable    $110,000
Inventories             250,000
Patents                  90,000
Prepaid insurance        19,500
Accounts payable         72,000
Cash                     28,000
What amount of current assets should Perry 
Mansfield include in its statement of 
financial position at December 31? 

   A. $335,500 

   B. $388,000 

   C. $407,500 

   D. $479,500 


[180] Source: Publisher 
Felicity Company has the following 
accounts included in its December 31 trial 
balance:

Treasury stock               $ 48,000
Retained earnings             141,000
Trademarks                     32,000
Preferred stock               175,000
Common stock                   50,000
Deferred income taxes          85,000
Additional paid-in capital    196,000
Accumulated depreciation       16,000
What amount of shareholders' equity will be 
reported on Felicity's December 31 
statement of financial position? 

   A. $373,000 

   B. $514,000 

   C. $562,000 

   D. $610,000 


[181] Source: Publisher 
In Hopkins Co.'s Year 3 single-step income 
statement, the section titled Revenues 
consisted of the following:

Net sales revenue                             $187,000
Results from discontinued operations:
  Loss from operations of segment
    (net of $1,200 tax effect)       $(2,400)
  Gain on disposal of segment
    (net of $7,200 tax effect)        14,400    12,000
                                     --------
Interest revenue                                10,200
Gain on sale of equipment                        4,700
Cumulative change in Year 1 and Year 2
  income due to change in depreciation
  method (net of $750 tax effect)                1,500
                                              --------
Total revenues                                $215,400
                                              ========
In the revenues section of the Year 3 income 
statement, Hopkins should have reported 
total revenues of 

   A. $217,800 

   B. $215,400 

   C. $203,700 

   D. $201,900 


[182] Source: Publisher 
Brett Corporation had retained earnings of 
$529,000 at January 1 of the current year. 
Net income for the year was $2,496,000, 
and cash dividends of $750,000 were 
declared and paid. Another $50,000 of 
dividends were declared late in December, 
but were unpaid at year-end. Brett's ending 
balance of its statement of retained earnings 
is 

   A. $1,696,000 

   B. $2,225,000 

   C. $2,275,000 

   D. $3,025,000 


[183] Source: Publisher 
The changes in account balances of the 
Samson Corporation during the year are 
presented below:

                               Increase
                               --------
Assets                         $356,000
Liabilities                     108,000
Capital stock                   240,000
Additional paid-in capital       24,000
Assuming there are no charges to retained 
earnings other than for a dividend payment 
of $52,000, the net income for the year 
should be 

   A. $16,000 

   B. $36,000 

   C. $52,000 

   D. $68,000 


[184] Source: Publisher 
Frazier Company reported current net 
income of $161,000. During the year, 
accounts receivable increased by $14,000 
and accounts payable increased by $10,500. 
Inventories declined by $8,000. 
Depreciation expense was $40,000. Net 
cash provided by operating activities is 

   A. $165,000 

   B. $189,500 

   C. $205,500 

   D. $212,500 


[185] Source: Publisher 
Heniser's net cash provided (used) by 
investing activities is 

   A. $280,000 

   B. ($10,000) 

   C. ($210,000) 

   D. ($350,000) 


[186] Source: Publisher 
Heniser's net cash provided (used) by 
financing activities is 

   A. $247,000 

   B. ($78,000) 

   C. ($138,000) 

   D. ($278,000) 


[187] Source: Publisher 
Heniser's net cash flow, assuming that it 
reported net cash provided by operating 
activities of $400,000, is 

   A. $112,000 

   B. $252,000 

   C. $392,000 

   D. $688,000 


[188] Source: Publisher 
Northern Exposure's net cash provided by 
operating activities is 

   A. $271,500 

   B. $293,500 

   C. $310,000 

   D. $348,500 


[189] Source: Publisher 
Northern Exposure's net cash provided by 
investing activities is 

   A. $185,000 

   B. $225,000 

   C. $285,000 

   D. $351,000 


[190] Source: Publisher 
Northern Exposure's net cash provided 
(used) by financing activities is 

   A. $66,000 

   B. ($24,000) 

   C. ($84,000) 

   D. ($184,000) 


[191] Source: CMA Samp Q2-7 
Appalachian Outfitters Inc., a mail order 
supplier of camping gear, is putting together 
its current year statement of cash flow. A 
comparison of the company's year-end 
balance sheet with the prior year's balance 
sheet shows the following changes from a 
year ago.

             Assets
             ------
Cash & Marketable Securities  $ (600)
Accounts Receivable              200
Inventories                     (100)
Gross Fixed Assets             4,600
Accumulated Depreciation        (500)
                              ------
  Total                       $3,600
                              ======
       Liabilities & Net Worth
       -----------------------
Accounts Payable              $  250
Accruals                          50
Long-term Note                  (300)
Long-term Debt                 1,400
Common Stock                       0
Retained Earnings              2,200
                              ------
  Total                       $3,600
                              ======

The firm's payout ratio is 20%. During the 
current year, net cash provided by 
operations amounted to 

   A. $2,900 

   B. $3,050 

   C. $3,450 

   D. $4,050 


[192] Source: CPA 0591 I-6 
Metro, Inc. reported current net income of 
$150,000. Changes occurred in several 
balance sheet accounts during the year as 
follows:

Investment in Videogold, Inc. stock, carried on
  the equity basis                                     $5,500 increase
Accumulated depreciation, caused by major repair
  to projection equipment                               2,100 decrease
Premium on bonds payable                                1,400 decrease
Deferred income tax liability (long-term)               1,800 increase
In Metro's current cash flow statement, the 
reported net cash provided by operating 
activities should be 

   A. $150,400 

   B. $148,300 

   C. $144,900 

   D. $142,800 


[193] Source: CPA 0FIN R97-7 
During the current year, Beck Co. purchased 
equipment for cash of $47,000, and sold 
equipment with a $10,000 carrying value for 
a gain of $5,000. How should these 
transactions be reported in Beck's statement 
of cash flows? 

   A. Cash outflow of $32,000. 

   B. Cash outflow of $42,000. 

   C. Cash inflow of $5,000 and cash 
   outflow of $47,000. 

   D. Cash inflow of $15,000 and cash 
   outflow of $47,000. 


[194] Source: Publisher 
In the current year, the Memphis Riverkings 
sold 20,000 season tickets at $1,000 each. 
By December 31, 16 of the 40 home games 
had been played. What amount should be 
reported as a current liability for the year? 

   A. $0 

   B. $8,000,000 

   C. $12,000,000 

   D. $20,000,000 


[195] Source: Publisher 
Zeke Company has the following accounts 
included in its December 31 trial balance:

Prepaid rent                         $ 6,200
Held-to-maturity securities           62,000
Unearned fees                         18,500
Land held for investment              39,000
Long-term receivables                 44,000
Cash surrender value of insurance     37,000
What amount of long-term investments will 
appear on Zeke's December 31 statement of 
financial position? 

   A. $120,000 

   B. $143,000 

   C. $145,000 

   D. $182,000 


[196] Source: Publisher 
Gary Previts Inc. has the following amounts 
included in its December 31 trial balance:

Inventories                $130,000
Buildings                   217,000
Equipment                   180,000
Land held for investment     66,000
Land                         72,000
Capital leases               80,000
What amount of property, plant, and 
equipment will appear on Previts' 
December 31 statement of financial 
position? 

   A. $397,000 

   B. $469,000 

   C. $549,000 

   D. $615,000 


[197] Source: Publisher 
Nelson Corporation has the following 
accounts included in its December 31 trial 
balance:

Trading securities      $ 22,000
Goodwill                 152,000
Prepaid insurance         14,000
Patents                  222,000
Franchises               130,000
Trademarks                20,000
What amount of intangible assets will be 
reported on Nelson's December 31 
statement of financial position? 

   A. $394,000 

   B. $524,000 

   C. $526,000 

   D. $538,000 


[198] Source: Publisher 
Waltco Manufacturing Corporation had net 
sales of $1,980,000 and investment revenue 
of $105,000 for the year. Its current 
expenses were:

Costs of goods sold        $1,290,000
Selling expenses              290,000
Administrative expenses       221,000
Interest expense               96,000
Income tax expense             50,000
Waltco's income before taxes for the current 
year is 

   A. $138,000 

   B. $179,000 

   C. $188,000 

   D. $284,000 


[199] Source: Publisher 
What is the amount of the operating cash 
flow for a firm with $100,000 profit before 
tax, $20,000 depreciation expense, and a 
35% marginal tax rate? 

   A. $65,000 

   B. $85,000 

   C. $92,000 

   D. $98,000 


[200] Source: CMA 1292 2-3 
SFAC 5, Recognition and Measurement in 
Financial Statements of Business 
Enterprises, indicates that for an event to be 
recognized in financial statements it must be 

   A. Relevant, reliable, and measurable. 

   B. Relevant, reliable, and useful. 

   C. Relevant, reliable, and timely. 

   D. Reliable, useful, and measurable. 


[201] Source: Publisher 
According to SFAC 2, Qualitative 
Characteristics of Accounting Information, 
an ancillary aspect of the primary 
decision-specific quality of relevance is 

   A. Verifiability. 

   B. Timeliness. 

   C. Neutrality. 

   D. Comparability. 


[202] Source: Publisher 
According to SFAC 2, Qualitative 
Characteristics of Accounting Information, a 
secondary and interactive quality is 

   A. Materiality. 

   B. Understandability. 

   C. Comparability. 

   D. Conservatism. 


[203] Source: Publisher 
According to SFAC 2, Qualitative 
Characteristics of Accounting Information, 
what is "a prudent reaction to uncertainty to 
try to ensure that uncertainty and risks 
inherent in business situations are 
adequately considered"? 

   A. Conservatism. 

   B. Comparability. 

   C. Consistency. 

   D. Neutrality. 


[204] Source: Publisher 
According to SFAC 6, Elements of 
Financial Statements, which element is 
found only in the financial statements of a 
business enterprise? 

   A. Liabilities. 

   B. Assets. 

   C. Revenues. 

   D. Equity. 


[205] Source: Publisher 
What is included in comprehensive income 
but excluded from net income? 

   A. Cumulative effects of a change in 
   accounting principle. 

   B. Extraordinary gains and losses. 

   C. Unrealized holding gains and losses 
   on available-for-sale securities. 

   D. Results of discontinued operations. 


[206] Source: Publisher 
Which element of financial statements is 
defined as enhancements of assets or 
settlements of liabilities related to an 
entity's ongoing major or central operations? 

   A. Expenses. 

   B. Revenues. 

   C. Gains. 

   D. Losses. 


[207] Source: Publisher 
Which attribute is used to measure trade 
payables? 

   A. Net settlement value. 

   B. Present value. 

   C. Net realizable value. 

   D. Replacement cost. 


[208] Source: Publisher 
What attribute is used to measure a liability 
for unearned revenue? 

   A. Net settlement value. 

   B. Present value. 

   C. Historical proceeds. 

   D. Historical cost. 


[209] Source: Publisher 
The elements of financial statements that 
have historically been subject to less 
stringent recognition criteria include 

   A. Gains and losses. 

   B. Expenses and losses. 

   C. Expenses and revenues. 

   D. Gains and revenues. 


[210] Source: Publisher 
The accounting method most clearly 
consistent with basic revenue recognition 
principles is the 

   A. Percentage-of-completion method. 

   B. Installment sales method. 

   C. Completion-of-production method. 

   D. Completed-contract method. 


[211] Source: Publisher 
In the hierarchy of qualitative characteristics 
of accounting information, the threshold for 
recognition is 

   A. The cost-benefit criterion. 

   B. Understandability. 

   C. Materiality. 

   D. Consistency. 


[212] Source: Publisher 
The elements of financial statements that 
reflect resources and claims thereto at a 
moment in time include 

   A. Investments by owners and 
   distributions to owners. 

   B. Investments by owners and 
   comprehensive income. 

   C. Assets and comprehensive income. 

   D. Assets and liabilities. 


[213] Source: CMA 0684 4-3 
The accounting measurement that is not 
consistent with the going concern concept is 

   A. Historical cost. 

   B. Realization. 

   C. The transaction approach. 

   D. Liquidation value. 


[214] Source: CMA 0685 3-30 
Basic principles of accounting relate to how 
assets, liabilities, revenues, and expenses 
are to be identified, measured, recorded, 
and reported. An item that is not a basic 
principle of accounting is 

   A. Materiality. 

   B. Historical cost. 

   C. Revenue recognition. 

   D. Matching. 


[215] Source: CIA 0590 IV-26 
The ABC Company operates a catering 
service that specializes 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. Conceptually, ABC 
should recognize revenue from its catering 
services at the date when a 

   A. Customer places an order. 

   B. Luncheon is served. 

   C. Billing is mailed. 

   D. Customer's payment is received. 


[216] Source: CIA 1193 IV-32 
Which of the following describes the proper 
treatment of a loss that is material, unusual 
in nature, and infrequent in occurrence? 

   A. Report as part of continuing 
   operations. 

   B. Report as part of discontinued 
   operations. 

   C. Report as an extraordinary item. 

   D. Report as a prior-period item. 


[217] Source: CIA 1190 IV-27 
An objective of financial reporting is to 

   A. Provide information useful for 
   investor decisions. 

   B. Assess the adequacy of internal 
   control. 

   C. Evaluate management results 
   compared with standards. 

   D. Provide information on compliance 
   with established procedures. 


[218] Source: CMA 1286 4-24 
A publicly held corporation is required to 
have its financial statements audited by an 
independent external auditor. The three 
purposes of these financial statements are to 
provide useful information (1) for credit and 
investment decisions, (2) about the firm's 
resources, and (3) for 

   A. Determining the impact of inflation. 

   B. Long-lived asset replacements. 

   C. Assessing market values of assets. 

   D. Evaluating prospective cash flows. 


[219] Source: Publisher 
According to SFAC 1, Objectives of 
Financial Reporting by Business 
Enterprises, 

   A. External users have the ability to 
   prescribe information they want. 

   B. Information is always based on exact 
   measures. 

   C. Financial reporting is usually based 
   on industries or the economy as a 
   whole. 

   D. Financial accounting does not 
   directly measure the value of a business 
   enterprise. 


[220] Source: CMA 0684 4-1 
The accounting system should be designed 

   A. To meet external reporting 
   requirements. 

   B. To balance management information 
   needs with the cost of obtaining that 
   information. 

   C. To eliminate fraud by accounting 
   personnel. 

   D. By persons not directly involved 
   with the system, such as consultants. 


[221] Source: CMA 0684 4-2 
Reliability as used in accounting includes 

   A. Determining the revenue first, then 
   determining the costs incurred in 
   earning that revenue. 

   B. The entity's giving the same treatment 
   to comparable transactions from period 
   to period. 

   C. Similar results being obtained by 
   both the accountant and an independent 
   party using the same measurement 
   methods. 

   D. The disclosure of all facts that may 
   influence the judgment of an informed 
   reader. 


[222] Source: CMA 0689 4-30 
If the going-concern assumption is no longer 
valid for a company, 

   A. Land held as an investment would be 
   valued at its liquidation value. 

   B. All prepaid assets would be 
   completely written off immediately. 

   C. Total contributed capital and 
   retained earnings would remain 
   unchanged. 

   D. The allowance for uncollectible 
   accounts would be eliminated. 


[223] Source: CMA 1290 2-19 
The concepts of earnings and 
comprehensive income have the same broad 
components, but they are not the same 
because certain classes of gains and losses 
are included in comprehensive income but 
are excluded from earnings. One of the items 
included in comprehensive income but 
excluded from earnings is 

   A. A gain on discontinued operations. 

   B. The cumulative effect of a change in 
   accounting principle. 

   C. A loss from the obsolescence of a 
   material amount of inventory. 

   D. An extraordinary gain. 


[224] Source: CMA 1290 2-20 
Revenues of an entity are normally 
measured by the exchange values of the 
assets or liabilities involved. Recognition of 
revenue does not occur until 

   A. The revenue is realized and assured 
   of collection. 

   B. The revenue is realized or realizable 
   and earned. 

   C. Products or services are exchanged 
   for cash or claims to cash. 

   D. The entity has substantially 
   accomplished what it agreed to do. 


[225] Source: CMA 1286 4-25 
Four Castles' records have been kept on the 
tax basis of accounting to eliminate the need 
to maintain a second set of records. When 
the tax basis allowed for a choice between 
cash and accrual bases of accounting, the 
firm employed the cash basis. Neither the 
tax basis nor the cash basis of accounting is 
generally acceptable for the financial 
statements of a publicly held corporation 
such as Four Castles. The accrual basis of 
accounting must be used so that 

   A. Specific expenses are related to 
   specific revenues. 

   B. Expenses of a time period are 
   related to revenues of the same time 
   period. 

   C. Expenses and related revenues are 
   expressed in terms of economic reality. 

   D. Necessary time-period allocations of 
   long-lived costs are made on a 
   systematic or rational basis. 


[226] Source: CMA 1292 2-2 
Accounting information that users can 
depend on to represent the economic 
conditions or events that it purports to 
represent best defines 

   A. Relevance. 

   B. Timeliness. 

   C. Feedback value. 

   D. Reliability. 


[227] Source: CIA 0593 IV-27 
An airline should recognize revenue from an 
airline ticket in the period in which 

   A. Passenger reservations are booked. 

   B. Passenger reservations are 
   confirmed. 

   C. The ticket is issued. 

   D. The related flight takes place. 


[228] Source: CIA 1190 IV-28 
On February 1, year 1, a computer software 
firm agrees to program a software package. 
Twelve payments of $10,000 on the first of 
each month are to be made, with the first 
payment March 1, year 1. The software is 
accepted by the client June 1, year 2. How 
much year 1 revenue should be recognized? 

   A. $0 

   B. $100,000 

   C. $110,000 

   D. $120,000 


[229] Source: CIA 1192 IV-27 
A company provides fertilization, insect 
control, and disease control services for a 
variety of trees, plants, and shrubs on a 
contract basis. For $50 per month, the 
company will visit the subscriber's premises 
and apply appropriate mixtures. If the 
subscriber has any problems between the 
regularly scheduled application dates, the 
company's personnel will promptly make 
additional service calls to correct the 
situation. Some subscribers elect to pay for 
an entire year because the company offers an 
annual price of $540 if paid in advance. For 
a subscriber who pays the annual fee in 
advance, the company should recognize the 
related revenue 

   A. When the cash is collected. 

   B. Evenly over the year as the services 
   are performed. 

   C. At the end of the contract year after 
   all of the services have been performed. 

   D. At the end of the fiscal year. 


[230] Source: CMA 1292 2-1 
One of the ingredients of the primary quality 
of relevance is 

   A. Verifiability. 

   B. Predictive value. 

   C. Neutrality. 

   D. Due process. 


[231] Source: CMA 1292 2-17 
Although a transfer of ownership has not 
occurred, the percentage-of-completion 
method is acceptable under the revenue 
recognition principle because 

   A. The assets are readily convertible 
   into cash. 

   B. The production process can be 
   readily divided into definite stages. 

   C. Cash has been received from the 
   customer. 

   D. The earning process is completed at 
   various stages. 


[232] Source: CMA 1292 2-18 
The mining industry frequently recognizes 
revenue using the completion of production 
method. This method is acceptable under the 
revenue recognition principle for all of the 
following reasons except that 

   A. Production costs can be readily 
   determined. 

   B. Sales prices are reasonably assured. 

   C. Assets are readily realizable. 

   D. Units are interchangeable. 


[233] Source: CMA 1294 2-1 
Accounting information that enables 
decision makers to confirm or correct prior 
expectations is said to have 

   A. Predictive value. 

   B. Materiality. 

   C. Representational faithfulness. 

   D. Feedback value. 


[234] Source: CMA 1294 2-2 
The historical cost of assets and liabilities 
is generally retained in accounting records 
because this information has the qualitative 
characteristics of 

   A. Neutrality, verifiability, and 
   representational faithfulness. 

   B. Reliability and relevance. 

   C. Decision usefulness, reliability, and 
   neutrality. 

   D. Timeliness, verifiability, and 
   relevance. 


[235] Source: CMA 1294 2-3 
Recognition is the process of formally 
recording and reporting an item in the 
financial statements. In order for a revenue 
item to be recognized, it must be all of the 
following except 

   A. Measurable. 

   B. Relevant. 

   C. Material. 

   D. Realized or realizable. 


[236] Source: CMA 1294 2-5 
In SFAC 5, Recognition and Measurement in 
Financial Statements of Business 
Enterprises, several alternatives have been 
identified for measuring items on the 
statement of financial position. Which of the 
following alternatives may be used?

                              Net
      Present   Current   Realizable
       Value      Cost       Value
      -------   -------   ----------
   A. 

        No        No          No
   B. 

        No        Yes         Yes
   C. 

        Yes       Yes         No
   D. 

        Yes       Yes         Yes


[237] Source: CMA 1290 2-17 
Based on SFAC 5, Recognition and 
Measurement in Financial Statements of 
Business Enterprises, a complete set of 
financial statements for a period should 
show all of the following except the 

   A. Financial position at the end of the 
   period. 

   B. Earnings for the period. 

   C. Comprehensive income for the 
   period. 

   D. Management discussion and 
   analysis. 


[238] Source: CMA 0691 2-10 
Amortization of intangible assets, such as 
copyrights or patents, is the accounting 
process of 

   A. Determining the cash flow from 
   operations for the current period. 

   B. Systematically allocating the cost of 
   the intangible asset to the periods of 
   use. 

   C. Accumulating a fund for the 
   replacement of the asset at the end of its 
   useful life. 

   D. Systematically reflecting the change 
   in general price levels over the current 
   period. 


[239] Source: CMA 0691 2-18 
The appropriate attribute to use when 
selling assets in an orderly liquidation is 

   A. Historical cost. 

   B. Current cost. 

   C. Net realizable value. 

   D. Current market value. 


[240] Source: CMA 1292 2-19 
All of the following are acceptable methods 
for recognizing revenue from service 
transactions except the 

   A. Collection method. 

   B. Specific-performance method. 

   C. Completed-performance method. 

   D. Accretion method. 


[241] Source: CIA 1193 IV-30 
A company that sprays chemicals in 
residences to eliminate or prevent 
infestation of insects requires that customers 
prepay for 3 months' service at the beginning 
of each new quarter. Select the term that 
appropriately describes this situation from 
the viewpoint of the exterminating company. 

   A. Deferred revenue. 

   B. Earned revenue. 

   C. Accrued revenue. 

   D. Prepaid expense. 


[242] Source: CMA 1294 2-4 
Limitations of the statement of financial 
position include all of the following except 

   A. The use of historical cost for valuing 
   assets and liabilities. 

   B. Inclusion of information on capital 
   maintenance. 

   C. Exclusion of some economic 
   resources and obligations. 

   D. The use of estimates in the 
   determination of certain items. 


[243] Source: CMA 0691 2-11 
A Midwestern public utility reports 
noncurrent assets as the first item on its 
statement of financial position. This practice 
is an example of the 

   A. Going-concern assumption. 

   B. Conservatism. 

   C. Economic-entity assumption. 

   D. Industry practice constraint. 


[244] Source: CMA 1290 2-15 
Accounting information that is capable of 
making a difference in a decision by helping 
users to confirm or correct expectations best 
defines 

   A. Neutrality. 

   B. Timeliness. 

   C. Reliability. 

   D. Relevance. 


[245] Source: CMA 1290 2-16 
One of the ingredients of the primary quality 
of reliability is 

   A. Verifiability. 

   B. Feedback value. 

   C. Comparability. 

   D. Consistency. 


[246] Source: CMA 1290 2-18 
Recognition is the process of formally 
incorporating an item into the financial 
statements of an entity as an asset, liability, 
revenue, or expense. Recognition criteria 
include all of the following except 

   A. Measurability with sufficient 
   reliability. 

   B. Meeting a definition of an element of 
   financial statements. 

   C. Decision usefulness. 

   D. Relevance. 


[247] Source: CMA 0691 2-15 
The percentage-of-completion method of 
accounting for long-term construction 
contracts is an exception to the 

   A. Matching principle. 

   B. Going concern assumption. 

   C. Historical cost principle. 

   D. Revenue recognition principle. 


[248] Source: CMA 0692 2-1 
Accounting information is relevant to the 
extent that it has the capacity to make a 
difference in a decision by a user. 
According to SFAC 2, Qualitative 
Characteristics of Accounting Information, 
relevant information must provide 

   A. Representational faithfulness. 

   B. Neutrality. 

   C. Verifiability. 

   D. Feedback value. 


[249] Source: CMA 0684 4-4 
Depending upon the circumstances, revenue 
can be recognized at different times for 
accounting purposes. Generally accepted 
revenue recognition methods do not include 

   A. End of production. 

   B. During production. 

   C. Receipt of cash. 

   D. Present value of a contract to sell 
   merchandise. 


[250] Source: CMA 0685 3-26 
Net losses on firm purchase commitments 
for goods for inventory result from a 
contract price in excess of the current 
market price. If a firm expects that losses 
will occur when the purchase is effected, 
expected losses, if material, should 

   A. Be recognized in the accounts and 
   separately disclosed as a loss on the 
   income statement of the period during 
   which the decline in price takes place. 

   B. Be recognized in the accounts and 
   separately disclosed as a loss on the 
   income statement of the period during 
   which the contract is executed. 

   C. Be recognized in the accounts and 
   separately disclosed as a net unrealized 
   loss on the balance sheet at the end of 
   the period during which the decline in 
   price takes place. 

   D. Be recognized in the accounts and 
   separately disclosed as a net unrealized 
   loss on the balance sheet at the end of 
   the period during which the contract is 
   executed. 


[251] Source: CMA 1284 4-6 
A consulting firm started and completed a 
project for a client in December Year 1. The 
project has not been recorded on the 
consulting firm's books and the firm will not 
receive payment from the client until 
February Year 2. The adjusting entry that 
should be made on the books of the 
consulting firm on December 31, Year 1, the 
last day of the firm's fiscal year, would be to 

   A. Debit cash in transit and credit 
   consulting revenue. 

   B. Debit consulting revenue receivable 
   and credit consulting revenue. 

   C. Debit consulting revenue and credit 
   consulting revenue receivable. 

   D. Debit unearned consulting revenue 
   and credit consulting revenue. 


[252] Source: CMA 1289 4-18 
If Matson Industries uses the installment 
method of revenue recognition for internal 
reporting purposes, total revenue for 
TruMark for the month of November is 

   A. $2,464,000. 

   B. $1,176,000. 

   C. $3,248,000. 

   D. $1,960,000. 


[253] Source: CMA 1289 4-19 
If Matson Industries uses the 
percentage-of-completion method of 
revenue recognition for internal reporting 
purposes, total revenue for TruMark for the 
month of November is 

   A. $2,464,000. 

   B. $1,176,000. 

   C. $3,248,000. 

   D. $1,470,000. 


[254] Source: CMA 1289 4-20 
If Matson Industries uses the 
completed-contract method of revenue 
recognition for internal reporting purposes, 
total revenue for TruMark for the month of 
November is 

   A. $2,464,000. 

   B. $1,176,000. 

   C. $1,470,000. 

   D. $1,960,000. 


[255] Source: CMA 0691 2-13 
The gross profit recognized for the fiscal 
year ended May 31, Year 3 from this 
contract would be 

   A. $250,000 

   B. $500,000 

   C. $750,000 

   D. $1,000,000 


[256] Source: CMA 0691 2-14 
The current assets reported on Beach 
Construction Company's May 31, Year 3 
statement of financial position as a result of 
this contract would be 

   A. Accounts receivable of $500,000, 
   and inventory of $6,750,000. 

   B. Accounts receivable of $6,000,000, 
   and inventory of $1,500,000. 

   C. Accounts receivable of $6,000,000, 
   and inventory of $6,750,000. 

   D. Accounts receivable of $500,000, 
   and inventory of $1,500,000. 


[257] Source: CPA 0592 I-21 
Dolce Co., which began operations on 
January 1, 1999, appropriately uses the 
installment method of accounting to record 
revenues. The following information is 
available for the years ended December 31, 
1999 and 2000:

                             1999         2000
                           ----------  ----------
Sales                      $1,000,000  $2,000,000
Gross profit realized on
  sales made in
    1999                      150,000      90,000
    2000                        --        200,000
Gross profit percentages          30%         40%
What amount of installment accounts 
receivable should Dolce report in its 
December 31, 2000 balance sheet? 

   A. $1,100,000 

   B. $1,300,000 

   C. $1,700,000 

   D. $1,900,000 


[258] Source: CPA 0FIN R98-8 
Leon Co., which began operations on 
January 2, 2000, appropriately uses the 
installment sales method of accounting. The 
following information is available for 2000:

Installment sales            $1,800,000
Realized gross profit
  on installment sales          240,000
Gross profit percentage
  on sales                          40%
What amounts should Leon report as 
accounts receivable and deferred gross 
profit for the year ended December 31, 
2000?

       Accounts     Deferred
      Receivable  Gross Profit
      ----------  ------------
   A. 

       $600,000    $480,000
   B. 

       $600,000    $360,000
   C. 

       $1,200,000  $480,000
   D. 

       $1,200,000  $720,000


[259] Source: CPA 1192 I-43 
Several of Fox, Inc.'s customers are having 
cash flow problems. Information pertaining 
to these customers for the years ended 
March 31, 1999 and 2000 follows:

                   3/31/99   3/31/00
                   -------   -------
Sales              $10,000   $15,000
Cost of sales        8,000     9,000
Cash collections
  on 1999 sales      7,000     3,000
  on 2000 sales       --      12,000
If the cost-recovery method is used, what 
amount would Fox report as gross profit 
from sales to these customers for the year 
ended March 31, 2000? 

   A. $2,000 

   B. $3,000 

   C. $5,000 

   D. $15,000 


[260] Source: Publisher 
The revenue recognized by Dogg Company 
on May 28 is 

   A. $100,000 

   B. $400,000 

   C. $500,000 

   D. $0 


[261] Source: Publisher 
The gross profit or loss recognized by Dogg 
Company on its financial statements dated 
and issued June 15 is 

   A. $500,000 

   B. $100,000 

   C. $(150,000) 

   D. $250,000 


[262] Source: Publisher 
The effect of the purchase on Katt 
Corporation's financial reporting on May 28 
is a(n) 

   A. Increase in fixed assets of $500,000, 
   a decrease in cash of $250,000, and an 
   increase in shareholders' equity of 
   $250,000. 

   B. Increase in fixed assets of $500,000, 
   a decrease in cash of $250,000, and an 
   increase in liabilities of $250,000. 

   C. Increase in fixed assets of $250,000 
   and an increase in liabilities of 
   $250,000. 

   D. Decrease in fixed assets of 
   $500,000, a decrease in cash of 
   $250,000, and an increase in liabilities 
   of $250,000. 


[263] Source: CPA 0595 F-33 
During 2000, Kam Co. began offering its 
goods to selected retailers on a consignment 
basis. The following information was 
derived from Kam's 2000 accounting 
records:

Beginning inventory              $122,000
Purchases                         540,000
Freight-in                         10,000
Transportation to consignees        5,000
Freight-out                        35,000
Ending inventory -- held by Kam   145,000
  held by consignees               20,000
In its 2000 income statement, what amount 
should Kam report as cost of goods sold? 

   A. $507,000 

   B. $512,000 

   C. $527,000 

   D. $547,000 


[264] Source: CMA 1292 2-14 
The gross profit or loss recognized in the 
fiscal year ended November 30, Year 2 
from the tunnel contract is 

   A. $12,000,000 gross profit. 

   B. $4,000,000 gross profit. 

   C. $6,000,000 gross profit. 

   D. $3,000,000 gross profit. 


[265] Source: CMA 1292 2-15 
The gross profit or loss recognized in the 
fiscal year ended November 30, year 3 from 
the tunnel contract is 

   A. $8,000,000 gross profit. 

   B. $4,000,000 gross loss. 

   C. $2,000,000 gross profit. 

   D. $6,000,000 gross profit. 


[266] Source: CMA 1292 2-16 
Assume that the estimated costs to complete 
at November 30, year 3 were $20 million 
rather than the $10 million shown in the 
given schedule. The gross loss recognized 
on the contract from its inception through 
November 30, year 3 is 

   A. $7,500,000. 

   B. $1,200,000. 

   C. $2,000,000. 

   D. $8,000,000. 


[267] Source: CMA 1284 4-8 
An adjusting entry that records the earned 
portion of unearned revenue previously 
recorded always includes a 

   A. Debit to an account in the asset 
   category. 

   B. Credit to an account in the asset 
   category. 

   C. Debit to an account in the owners' 
   equity category. 

   D. Credit to an account in the owners' 
   equity category. 


[268] Source: CMA 0685 4-33 
Citizen Metals Corporation produces 
precious metals from its mining activities. 
The selling price for its product is 
reasonably assured, the units are 
interchangeable, and the costs of selling and 
distributing the product are insignificant. In 
order for Citizen to recognize revenue as 
early in the revenue cycle as is permitted by 
generally accepted accounting principles, 
the revenue recognition method that Citizen 
should use is the 

   A. Cash method. 

   B. Production method. 

   C. Percentage-of-completion method. 

   D. Cost recovery method. 


[269] Source: CMA 1288 4-24 
When the right of return exists, all of the 
following criteria must be met before 
revenue is recognized except that the 

   A. Amount of future returns can be 
   reasonably estimated. 

   B. Seller's price to the buyer is 
   substantially fixed at the date of the 
   sale. 

   C. Buyer's obligation to the seller must 
   be liquidated within 150 days from the 
   date of the sale. 

   D. Buyer is obligated to pay the seller 
   and the obligation is not contingent on 
   the resale of the product. 


[270] Source: CIA 0594 IV-26 
The percentage-of-completion and the 
completed-contract methods of accounting 
for long-term construction projects in 
progress differ in that 

   A. It is only under the 
   percentage-of-completion method that 
   progress billings are accumulated in a 
   contra-inventory account called billings 
   on construction in progress. 

   B. It is only under the 
   completed-contract method that 
   accumulated construction costs are 
   included in a construction in progress 
   inventory account. 

   C. Only the percentage-of-completion 
   method recognizes all revenues and 
   gross profit on the contract when the 
   contract is completed. 

   D. It is only under the 
   percentage-of-completion method that 
   gross profit earned to date is 
   accumulated in the construction in 
   progress inventory account. 


[271] Source: CMA 0695 2-14 
After a successful drive aimed at members 
of a specific national association, Gorham 
Publishing Company received a total of 
$90,000 for three-year subscriptions 
beginning April 1, Year 1, and recorded this 
amount in the unearned revenue account. 
Assuming Gorham only records adjustments 
at the end of the calendar year, the adjusting 
entry required to reflect the proper balances 
in the accounts at December 31, Year 1, 
would be to 

   A. Debit subscription revenue for 
   $67,500 and credit unearned revenue 
   for $67,500. 

   B. Debit unearned revenue for $67,500 
   and credit subscription revenue for 
   $67,500. 

   C. Debit unearned revenue for $30,000 
   and credit subscription revenue for 
   $30,000. 

   D. Debit unearned revenue for $22,500 
   and credit subscription revenue for 
   $22,500. 


[272] Source: CIA 0593 IV-25 
In December year 1, catalogues were 
printed for use in a special promotion in 
January year 2. The catalogues were 
delivered by the printer on December 13, 
year 1, with an invoice for $70,000 
attached. Payment was made in January year 
2. The $70,000 should be reported as a 
deferred cost at the December 31, year 1 
balance sheet date because of the 

   A. Matching principle. 

   B. Revenue recognition principle. 

   C. Cost principle. 

   D. Going concern principle. 


[273] Source: CMA 1285 4-12 
If Genova uses the installment sales method 
for internal reporting purposes, the gross 
profit that Genova would realize in the 
current year on the sale of the equipment is 

   A. $0. 

   B. $48,000. 

   C. $80,000. 

   D. $120,000. 


[274] Source: CMA 1285 4-13 
If Genova uses the cost recovery method for 
internal reporting purposes, the gross profit 
that Genova would realize in the current 
year on the sale of the equipment is 

   A. $0. 

   B. $48,000. 

   C. $80,000. 

   D. $120,000. 


[275] Source: CMA 1292 2-20 
To properly account for an installment sale, 
all of the following must be readily 
determinable except 

   A. The amount of gross profit to be 
   deferred. 

   B. The total cash collected on each 
   year's sales. 

   C. The operating costs to be deferred. 

   D. Costs associated with default and 
   repossession. 


[276] Source: CIA 0590 IV-31 
DEF is the consignee for 1,000 units of 
product X for ABC Company. ABC should 
recognize the revenue from these 1,000 units 
when 

   A. The agreement between DEF and 
   ABC is signed. 

   B. ABC ships the goods to DEF. 

   C. DEF receives the goods from ABC. 

   D. DEF sells the goods and informs 
   ABC of the sale. 


[277] Source: CIA 0592 IV-34 
On December 1, Year 1, a company using 
the installment sales method sold goods that 
cost $1,000 for $1,500. The buyer paid 
$100 down. Monthly payments start January 
1, Year 2. Interest accrues at 1% per month 
on the unpaid balance. To the nearest dollar, 
the effect on profit for Year 1 is 

   A. $14 increase. 

   B. $33 increase. 

   C. $47 increase. 

   D. $67 increase. 


[278] Source: CIA 1195 IV-27 
The practice of recording advanced 
payments from customers as a liability is an 
example of applying the 

   A. Going-concern assumption. 

   B. Monetary-unit assumption. 

   C. Historic cost principle. 

   D. Revenue recognition principle. 


[279] Source: CIA 1192 IV-26 
A newly acquired plant asset is to be 
depreciated over its useful life. The 
rationale for this process is the 

   A. Economic-entity assumption. 

   B. Monetary-unit assumption. 

   C. Materiality assumption. 

   D. Going-concern assumption. 


[280] Source: CIA 1192 IV-37 
Because of inexact estimates of the service 
life and the residual value of a plant asset, a 
fully depreciated asset was sold at a 
material gain. This gain should be reported 

   A. In the other revenues and gains 
   section of the income statement. 

   B. As part of sales revenue on the 
   income statement. 

   C. In the extraordinary item section of 
   the income statement. 

   D. As an adjustment to prior periods' 
   depreciation on the statement of 
   retained earnings. 


[281] Source: CIA 0595 IV-29 
Assume that employees confessed to a 
$500,000 inventory theft but are not able to 
make restitution. How should this material 
fraud be shown in the company's financial 
statements? 

   A. Classified as a loss and shown as a 
   separate line item in the income 
   statement. 

   B. Initially classified as an accounts 
   receivable because the employees are 
   responsible for the goods. Since they 
   cannot pay, the loss would be 
   recognized as a write-off of accounts 
   receivables. 

   C. Included in cost of goods sold 
   because the goods are not on hand, 
   losses on inventory shrinkage are 
   ordinary, and it would cause the least 
   amount of attention. 

   D. Recorded directly to retained 
   earnings since it is not an 
   income-producing item. 


[282] Source: CIA 0592 IV-29 
A company with total assets of 
$100,000,000 and net income of $9,000,000 
purchases staplers with an estimated life of 
10 years for $1,000. In connection with the 
purchase, the company debits miscellaneous 
expense. This scenario is most closely 
associated with which of the following 
concepts or principles? 

   A. Materiality and going concern. 

   B. Relevance and neutrality. 

   C. Reliability and 
   comparability/consistency. 

   D. Materiality and cost-benefit. 


[283] Source: CIA 0591 IV-44 
The assets of a company forced into 
liquidation should be shown on the balance 
sheet at their 

   A. Undepreciated historical cost. 

   B. Current market value. 

   C. Net realizable value. 

   D. Current cost. 


[284] Source: CIA 0593 IV-42 
A plot of land is acquired in exchange for 
$250,000 cash and a noninterest-bearing 
note with a face amount of $1,000,000 on 
January 1, 2001. The $1,000,000 is payable 
in installments of $250,000 each, with the 
first installment due December 31, 2001. 
With regard to imputing interest on this note, 
(1) what market rate should be used to 
account for interest for 2001 and (2) what 
should be done in future years when there is 
a change in prevailing interest rates?

                                                         (2)
                                                 Impact of Change in
                       (1)                       Prevailing Interest
                                                    Rates in Future
      Market Rate to Use to Compute Interest     Periods on Rate Used
       to Compute Interest Expense for 2001    to Account for This Note
      --------------------------------------   ------------------------
   A. 

      Rate prevailing at January 2, 2001        Ignore change in rate
   B. 

      Rate prevailing at January 2, 2001        Use new market rate
   C. 

      Rate prevailing at December 31, 2001      Ignore change in rate
   D. 

      Rate prevailing at December 31, 2001      Use new market rate


[285] Source: CIA 1196 IV-19 
How will net income be affected by the 
amortization of a premium on bonds 
payable? 

   A. Interest expense is decreased, so net 
   income is increased. 

   B. Interest expense is increased, so net 
   income is decreased. 

   C. Interest revenue is increased, so net 
   income is increased. 

   D. Interest revenue is decreased, so net 
   income is decreased. 


[286] Source: CIA 0596 IV-24 
The effective-interest method and the 
straight-line method of amortizing a bond 
discount differ in that the effective-interest 
method results in 

   A. Higher total interest expense over 
   the term of the bonds. 

   B. Escalating annual interest expense 
   over the term of the bonds. 

   C. Shrinking annual interest expense 
   over the term of the bonds. 

   D. Constant annual interest expense 
   over the term of the bonds. 


[287] Source: CIA 1195 IV-16 
An organization has a long-term construction 
contract in process. During the current 
period, the estimated total contract cost has 
increased sufficiently so that there is a 
current-period loss, even though the contract 
is still estimated to be profitable overall. 
Under these circumstances, the [List A] 
method of revenue recognition would 
require a [List B] period adjustment of 
expected gross profit recognized on the 
contract.

              List A              List B
      ------------------------    -------
   A. 

      Percentage-of-completion    Prior
   B. 

      Percentage-of-completion    Current
   C. 

      Completed-contract          Prior
   D. 

      Completed-contract          Current


[288] Source: CIA 1196 IV-11 
If the company uses the 
percentage-of-completion method of 
accounting for this contract, the gross profit 
to be recognized in year 1 is 

   A. ($100,000) 

   B. $100,000 

   C. $200,000 

   D. $350,000 


[289] Source: CIA 1196 IV-12 
If the company uses the completed-contract 
method of accounting for this contract, the 
gross profit to be recognized in year 3 is 

   A. $200,000 

   B. $600,000 

   C. $800,000 

   D. $1,000,000 


[290] Source: CIA 1196 IV-30 
A vendor sells specialty inks on 
consignment to a manufacturer of colored 
paper at a price of $200 per barrel. Payment 
is made to the vendor in the month the 
manufacturer uses the barrels in production. 
The vendor records revenues when the 
barrels are shipped and makes no adjusting 
entries to record unearned revenues until the 
December 31st closing of the books. At the 
end of July, the manufacturer had 40 barrels 
of ink on consignment. During August, the 
vendor consigned 50 barrels and received 
payment for 30 barrels. Another five barrels 
were returned to the vendor by the 
manufacturer for credit. At the end of 
August, what is the amount of unearned 
revenue contained in the vendor's accounts 
receivable from the manufacturer? 

   A. $3,000 

   B. $4,000 

   C. $11,000 

   D. $12,000 


[291] Source: CIA 1193 IV-37 
ABC Manufacturing Company ships 
merchandise costing $40,000 on 
consignment to XYZ Stores. ABC pays 
$3,000 of freight costs to a transport 
company, and XYZ pays $2,000 for local 
advertising costs that are reimbursable from 
ABC. By the end of the period, three fourths 
of the consigned merchandise has been sold 
for $50,000 cash. XYZ notifies ABC of the 
sales, retains a 10% commission and the 
paid advertising costs, and remits the cash 
due ABC. Select the journal entry that 
appropriately records the notification of 
sale and the receipt of cash by ABC. 

   A. 

       Cash                       $40,000
       Advertising expense          2,000
       Commission expense           5,000
       Freight expense              3,000
          Revenue from
           consignment sales                   $50,000
   B. 

       Cash                       $43,000
       Advertising expense          2,000
       Commission expense           5,000
          Revenue from
           consignment sales                   $50,000
   C. 

       Cash                       $50,000
          Revenue from
           consignment sales                   $50,000
   D. 

       Cash                       $45,000
       Commission expense           5,000
          Revenue from
           consignment sales                   $50,000


[292] Source: CIA 0595 IV-11 
If sales are accounted for using the 
installment method, which of the following 
is (are) only recognized in proportion to the 
cash collected on the sales during the 
period? 

   A. Sales. 

   B. Sales and cost of sales. 

   C. Sales and cost of sales and selling 
   expenses. 

   D. Sales and cost of sales and 
   administrative expenses. 


[293] Source: CIA 0596 IV-1 
The company has a rate of gross profit on 
year 2 installment sales of 

   A. 20% 

   B. 40% 

   C. 50% 

   D. 80% 


[294] Source: CIA 0596 IV-2 
The amount of gross profit the company will 
recognize in year 1 on year 1 installment 
sales is 

   A. $800 

   B. $2,000 

   C. $3,200 

   D. $4,000 


[295] Source: CIA 0596 IV-3 
The company's gross profit amount from 
year 2 sales to be deferred to future years 
would be 

   A. $2,000 

   B. $3,000 

   C. $8,000 

   D. $10,000 


[296] Source: CIA 0595 IV-12 
A company sells inventory for $80,000 that 
had an inventory cost of $40,000. The terms 
of the sale involve payments receivable of 
$10,000 in the first year, $45,000 in the 
second year, and $25,000 in the third year. 
The buyer of the inventory is a new firm 
with no credit history. If the cost recovery 
method of revenue recognition is used, then 
the amount of gross profit the company will 
recognize in the second year is 

   A. $0 

   B. $5,000 

   C. $15,000 

   D. $45,000 


[297] Source: CMA 0696 2-1 
The amount of total gross profit to be 
recognized in year 1 is 

   A. $350,000 

   B. $700,000 

   C. $1,400,000 

   D. $766,667 


[298] Source: CMA 0696 2-2 
If Diamond Clover Construction Inc. were 
to use the completed-contract method of 
accounting, the total amount to be 
recognized as income in year 2 would be 

   A. $1,400,000 

   B. $1,750,000 

   C. $2,650,000 

   D. $700,000 


[299] Source: CMA 0696 2-19 
The revenue recognized by Arens and 
Associates on May 28 is 

   A. $200,000 

   B. $800,000 

   C. $1,000,000 

   D. $0 


[300] Source: CMA 0696 2-20 
The gross profit recognized by Arens and 
Associates on its financial statements dated 
and issued June 15 is 

   A. $1,000,000 

   B. $200,000 

   C. $0 

   D. $500,000 


[301] Source: CMA 0696 2-21 
The effect of the purchase on Markal 
Company's financial reporting on May 28 is 
a(n) 

   A. Increase in fixed assets of $500,000 
   and a decrease in cash of $500,000. 

   B. Increase in fixed assets of 
   $1,000,000, a decrease in cash of 
   $500,000, and an increase in liabilities 
   of $500,000. 

   C. Increase in fixed assets of $500,000 
   and an increase in liabilities of 
   $500,000. 

   D. Decrease in fixed assets of 
   $1,000,000, a decrease in cash of 
   $500,000, and an increase in liabilities 
   of $500,000. 


[302] Source: CMA 1296 2-6 
In order for an event to be recognized in the 
financial statements, it must be 

   A. Relevant, reliable, and measurable. 

   B. Relevant, reliable, and useful. 

   C. Relevant, reliable, and timely. 

   D. Reliable, useful, and measurable. 


[303] Source: CMA 1296 2-7 
Long-term payables are measured using 

   A. Historical cost. 

   B. Current market value. 

   C. Net realizable value. 

   D. Present value of future cash flows. 


[304] Source: CMA 1296 2-8 
Damaged inventory is measured using 

   A. Historical cost. 

   B. Current cost. 

   C. Net realizable value. 

   D. Present value of future cash flows. 


[305] Source: CMA 1296 2-9 
Land currently used in the business is 
measured at 

   A. Historical cost. 

   B. Current cost. 

   C. Current market value. 

   D. Net realizable value. 


[306] Source: CMA 1296 2-10 
The percentage-of-completion method of 
accounting for long-term construction 
contracts is an exception to the 

   A. Matching principle. 

   B. Going-concern assumption. 

   C. Economic-entity assumption. 

   D. Revenue recognition principle. 


[307] Source: CMA 1296 2-11 
Revenues of an entity are generally 
measured by the exchange values of the 
assets or liabilities involved. Recognition of 
revenue does not occur until the 

   A. Revenue is realized and collected. 

   B. Revenue is realized and earned. 

   C. Entity has signed a binding contract. 

   D. Entity has substantially 
   accomplished what it agreed to do. 


[308] Source: CMA 1296 2-12 
In accounting for inventories, generally 
accepted accounting principles require 
departure from the historical cost principle 
when the utility of inventory has fallen 
below cost. This rule is known as the 
"lower of cost or market" rule. "Market" as 
defined here means 

   A. Original cost minus allowance for 
   obsolescence. 

   B. Original cost plus normal profit 
   margin. 

   C. Replacement cost of the inventory. 

   D. Original cost minus cost to dispose. 


[309] Source: CMA 0697 2-3 
The information reported in the statement of 
cash flows should help investors, creditors, 
and others to assess all of the following 
except the 

   A. Amount, timing, and uncertainty of 
   prospective net cash inflows of a firm. 

   B. Company's ability to pay dividends 
   and meet obligations. 

   C. Company's ability to generate future 
   cash flows. 

   D. Management of the firm with respect 
   to the efficient and profitable use of its 
   resources. 


[310] Source: CMA 0697 2-4 
A statement of financial position is intended 
to help investors and creditors 

   A. Assess the amount, timing, and 
   uncertainty of prospective net cash 
   inflows of a firm. 

   B. Evaluate economic resources and 
   obligations of a firm. 

   C. Evaluate economic performance of a 
   firm. 

   D. Evaluate changes in the ownership 
   equity of a firm. 


[311] Source: Publisher 
On December 31, year 1, Melanie Company 
sold on account and shipped merchandise 
with a list price of $150,000 to Desoto 
Company. The terms of the sale were n/30, 
FOB shipping point. The merchandise 
arrived at Desoto on January 5, year 2. Due 
to confusion about the shipping terms, the 
sale was not recorded until January year 2, 
and the merchandise, sold at a markup of 
25% of cost, was included in Melanie's 
inventory on December 31, year 1. Melanie 
uses a periodic inventory system. As a result 
of the error, Melanie's income before 
income taxes for the year ended December 
31, year 1 was 

   A. Understated by $30,000. 

   B. Understated by $150,000. 

   C. Understated by $37,500. 

   D. Overstated by $120,000. 


[312] Source: Publisher 
Inventory valued at the 
lower-of-cost-or-market is never valued at 
less than which measurement attribute? 

   A. Historical cost. 

   B. Current cost. 

   C. Present value. 

   D. Net realizable value. 


[313] Source: Publisher 
Using the percentage-of-completion method, 
the total gross profit to be recognized in 
year 1 is 

   A. $700,000 

   B. $1,400,000 

   C. $2,800,000 

   D. $2,500,000 


[314] Source: Publisher 
Using the percentage-of-completion method, 
the total gross profit to be recognized in 
year 2 is 

   A. $2,100,000 

   B. $2,800,000 

   C. $3,500,000 

   D. $3,900,000 


[315] Source: Publisher 
If Katie Howell Construction Company uses 
the completed-contract method, the income 
recognized in year 2 will be 

   A. $2,800,000 

   B. $3,500,000 

   C. $5,300,000 

   D. $1,400,000 


[316] Source: Publisher 
The revenue recognized by Dogg Company 
on May 28 is 

   A. $100,000 

   B. $400,000 

   C. $500,000 

   D. $0 


[317] Source: Publisher 
The gross profit or loss recognized by Dogg 
Company on its financial statements dated 
and issued June 15 is 

   A. $500,000 

   B. $100,000 

   C. $(150,000) 

   D. $250,000 


[318] Source: Publisher 
The effect of the purchase on Katt 
Corporation's financial reporting on May 28 
is a(n) 

   A. Increase in fixed assets of $500,000, 
   a decrease in cash of $250,000, and an 
   increase in shareholders' equity of 
   $250,000. 

   B. Increase in fixed assets of $500,000, 
   a decrease in cash of $250,000, and an 
   increase in liabilities of $250,000. 

   C. Increase in fixed assets of $250,000 
   and an increase in liabilities of 
   $250,000. 

   D. Decrease in fixed assets of 
   $500,000, a decrease in cash of 
   $250,000, and an increase in liabilities 
   of $250,000. 


[319] Source: Publisher 
According to SFAC 7, Using Cash Flow 
Information and Present Value in Accounting 
Measurements, the objective of present 
value is to estimate fair value when used to 
determine accounting measurements for

     Initial-Recognition      Fresh-Start
           Purposes             Purposes
     -------------------      -----------
   A. 

              No                   No
   B. 

              Yes                  Yes
   C. 

              Yes                  No
   D. 

              No                   Yes


[320] Source: Publisher 
The expected cash flow approach to 
measuring present value promulgated by 
SFAC 7 

   A. Uses a single set of estimated cash 
   flows. 

   B. Is limited to assets and liabilities 
   with contractual cash flows. 

   C. Focuses on explicit assumptions 
   about the range of expected cash flows 
   and their respective probabilities. 

   D. Focuses on the single most likely 
   amount or best estimate. 


[321] Source: CPA 1191 I-31 
On January 1, 2000, Dell, Inc. contracted 
with the City of Little to provide 
custom-built desks for the city schools. The 
contract made Dell the city's sole supplier, 
and required Dell to supply no less than 
4,000 desks and no more than 5,500 desks 
per year for 2 years. In turn, Little agreed to 
pay a fixed price of $110 per desk. During 
2000, Dell produced 5,000 desks for Little. 
At December 31, 2000, 500 of these desks 
were segregated from the regular inventory 
and were accepted and awaiting pickup by 
Little. Little paid Dell $450,000 during 
2000. What amount should Dell recognize as 
contract revenue in 2000? 

   A. $450,000 

   B. $495,000 

   C. $550,000 

   D. $605,000 


[322] Source: CPA 0592 I-37 
On October 1, 2000, Acme Fuel Co. sold 
100,000 gallons of heating oil to Karn Co. at 
$3 per gallon. Fifty thousand gallons were 
delivered on December 15, 2000, and the 
remaining 50,000 gallons were delivered on 
January 15, 2001. Payment terms were 50% 
due on October 1, 2000, 25% due on first 
delivery, and the remaining 25% due on 
second delivery. What amount of revenue 
should Acme recognize from this sale during 
2000? 

   A. $75,000 

   B. $150,000 

   C. $225,000 

   D. $300,000 


[323] Source: CPA 1190 II-5 
Amar Farms produced 300,000 pounds of 
cotton during the 2000 season. Amar sells 
all of its cotton to Brye Co., which has 
agreed to purchase Amar's entire production 
at the prevailing market price. Recent 
legislation assures that the market price will 
not fall below $.70 per pound during the 
next 2 years. Amar's costs of selling and 
distributing the cotton are immaterial and 
can be reasonably estimated. Amar reports 
its inventory at expected exit value. During 
2000, Amar sold and delivered 200,000 
pounds to Brye at the market price of $.70. 
Amar sold the remaining 100,000 pounds 
during 2001 at the market price of $.72. 
What amount of revenue should Amar 
recognize in 2000? 

   A. $140,000 

   B. $144,000 

   C. $210,000 

   D. $216,000 


[324] Source: CPA 1194 F-58 
The following information pertains to Eagle 
Co.'s 2000 sales:

Cash sales
  Gross                     $80,000
  Returns and allowances      4,000
Credit sales
  Gross                     120,000
  Discounts                   6,000
On January 1, 2000, customers owed Eagle 
$40,000. On December 31, 2000, customers 
owed Eagle $30,000. Under the cash basis 
of accounting, what amount of net revenue 
should Eagle report for 2000? 

   A. $76,000 

   B. $170,000 

   C. $190,000 

   D. $200,000 


[325] Source: CPA 0595 F-25 
Jessica, a consultant, keeps her accounting 
records on a cash basis. During 2000, 
Jessica collected $200,000 in fees from 
clients. At December 31, 1999, Jessica had 
accounts receivable of $40,000. At 
December 31, 2000, Jessica had accounts 
receivable of $60,000, and unearned fees of 
$5,000. On an accrual basis, what was 
Jessica's service revenue for 2000? 

   A. $175,000 

   B. $180,000 

   C. $215,000 

   D. $225,000 


[326] Source: CMA 1293 2-11 
On December 31, Year 1, Occident, Inc. 
shipped merchandise with a list price of 
$90,000 to Plaza Company. The goods were 
sold on account with terms of net 30 days, 
F.O.B. shipping point. Due to an oversight, 
the sale was not recorded until January Year 
2, and the merchandise, which was sold at a 
25 percent markup, was included in 
Occident's perpetual inventory on December 
31, Year 1. As a result, Occident's income 
before taxes for the year ended December 
31, Year 1 was understated by 

   A. $90,000. 

   B. $72,000. 

   C. $67,500. 

   D. $18,000. 


[327] Source: CPA 0592 I-39 
Zeta Co. reported sales revenue of $2.3 
million in its income statement for the year 
ended December 31, 2001. Additional 
information was as follows:

                                       12/31/00    12/31/01
                                       --------    --------
Accounts receivable                    $500,000    $650,000
Allowance for uncollectible accounts    (30,000)    (55,000)
Uncollectible accounts totaling $10,000 
were written off during 2001. Under the 
cash basis of accounting, Zeta would have 
reported 2001 sales of 

   A. $2,140,000 

   B. $2,150,000 

   C. $2,175,000 

   D. $2,450,000 


[328] Source: CPA 0590 I-45 
On December 31, 1999, Mill Co. sold 
construction equipment to Drew, Inc. for 
$1.8 million. The equipment had a carrying 
amount of $1.2 million. Drew paid 
$300,000 cash on December 31, 1999 and 
signed a $1.5 million note bearing interest at 
10%, payable in five annual installments of 
$300,000. Mill appropriately accounts for 
the sale under the installment method. On 
December 31, 2000, Drew paid $300,000 
principal and $150,000 interest. For the 
year ended December 31, 2000, what total 
amount of revenue should Mill recognize 
from the construction equipment sale and 
financing? 

   A. $250,000 

   B. $150,000 

   C. $120,000 

   D. $100,000 


[329] Source: Publisher 
A company began work on a long-term 
construction contract in 1995. The contract 
price was $3,000,000. Year-end 
information related to the contract is as 
follows:

                         1995        1996        1997        1998
                      ----------  ----------  ----------  ----------
Estimated total cost  $2,500,000  $2,500,000  $2,500,000  $2,500,000
Cost incurred            700,000     900,000     400,000     500,000
Billings                 800,000     200,000   1,000,000   1,000,000
Collections              600,000     200,000   1,200,000   1,000,000
If the company uses the 
percentage-of-completion method of 
accounting for this contract, the gross profit 
to be recognized in any one year is greatest 
in 

   A. 1995 

   B. 1996 

   C. 1997 

   D. 1998 


[330] Source: CMA 1286 4-8 
The factors primarily relied upon to 
determine the economic life of an asset are 

   A. Passage of time, asset usage, and 
   obsolescence. 

   B. Tax regulations and SEC guidelines. 

   C. Tax regulations and asset usage. 

   D. SEC guidelines and asset usage. 


[331] Source: CPA 1194 F-44 
During 2000, Orr Co. incurred the following 
costs:

Research and development services
  performed by Key Corp. for Orr       $150,000
Design, construction, and testing of
  preproduction prototypes and models   200,000
Testing in search for new products of
  process alternatives                  175,000
In its 2000 income statement, what should 
Orr report as research and development 
expense? 

   A. $150,000 

   B. $200,000 

   C. $350,000 

   D. $525,000 


[332] Source: CPA 0592 I-51 
West, Inc. made the following expenditures 
relating to Product Y:

   - Legal costs to file a patent on Product Y -- $10,000.  Production
     of the finished product would not have been undertaken without the
     patent.
   - Special equipment to be used solely for development of Product Y
     -- $60,000.  The equipment has no other use and has an estimated
     useful life of 4 years.
   - Labor and material costs incurred in producing a prototype model
     -- $200,000
   - Cost of testing the prototype -- $80,000
What is the total amount of costs that will be 
expensed when incurred? 

   A. $280,000 

   B. $295,000 

   C. $340,000 

   D. $350,000 


[333] Source: CMA 0689 3-1 
The limits to the market value (i.e., the 
ceiling and the floor) that should be used in 
the lower of cost or market comparison of 
cameras are 

   A. $217 and $198. 

   B. $217 and $185. 

   C. $198 and $166. 

   D. $185 and $166. 


[334] Source: CMA 0689 3-2 
The amount that should be used to value the 
lenses on the basis of lower of cost or 
market is 

   A. $105. 

   B. $106. 

   C. $108. 

   D. $137. 


[335] Source: CMA 0689 3-3 
The amount that should be used to value the 
tripods on the basis of lower of cost or 
market is 

   A. $51.00 

   B. $53.00 

   C. $57.00 

   D. $71.25 


[336] Source: CMA 0689 4-6 
Depreciation of plant assets refers to 

   A. Asset valuation for statement of 
   financial position purposes. 

   B. Allocating the cost of the asset to the 
   periods of use. 

   C. Accumulating a fund for the 
   replacement of the asset. 

   D. Accounting for costs to reflect the 
   change in general price levels. 


[337] Source: CMA 0689 4-7 
Most plant assets have a limited useful 
physical life. All of the following factors 
limit the useful life of a plant asset except 

   A. Wear and tear. 

   B. Deterioration and decay. 

   C. Obsolescence. 

   D. Tax regulations. 


[338] Source: CPA 0586 I-12 
On December 31, 1999, Jason Company 
adopted the dollar-value LIFO retail 
inventory method. Inventory data for 2000 
are as follows:

                                    LIFO Cost    Retail
                                    ---------   --------
Inventory, 12/31/99                 $360,000    $500,000
Inventory, 12/31/00                     ?        660,000
Increase in price level for 2000                     10%
Cost-retail ratio for 2000                           70%
Under the dollar-value LIFO retail method, 
Jason's inventory at December 31, 2000 
should be 

   A. $437,000 

   B. $462,000 

   C. $472,000 

   D. $483,200 


[339] Source: CMA Samp Q2-5 
Pearl Corporation acquired manufacturing 
machinery on January 1 for $9,000. During 
the year, the machine produced 1,000 units, 
of which 600 were sold. There was no 
work-in-process inventory at the beginning 
or at the end of the year. Installation charges 
of $300 and delivery charges of $200 were 
also incurred. The machine is expected to 
have a useful life of five years with an 
estimated salvage value of $1,500. Pearl 
uses the straight-line depreciation method. 
The original cost of the machinery to be 
recorded in Pearl's books is 

   A. $9,500 

   B. $9,300 

   C. $9,200 

   D. $9,000 


[340] Source: CMA 1289 4-21 
If Brighton Corporation continues to 
determine its bad debt expense by using the 
historical percentage of credit sales, the bad 
debt expense for the 2000-01 fiscal year 
would be 

   A. $82,875 

   B. $86,275 

   C. $66,950 

   D. $70,350 


[341] Source: CMA 1289 4-22 
If Brighton Corporation determines its bad 
debt expense by using the aging schedule of 
its accounts receivable, the bad debt 
expense for the 2000-01 fiscal year would 
be 

   A. $82,875 

   B. $66,950 

   C. $70,350 

   D. $79,475 


[342] Source: CMA 1289 4-23 
The book value of the net accounts 
receivable written off by Brighton 
Corporation during the 2000-01 fiscal year 
is 

   A. $76,500 

   B. $79,900 

   C. $73,100 

   D. $79,475 


[343] Source: CPA 1193 I-21 
Based on a physical inventory taken on 
December 31, 2000, Chewy Co. determined 
its chocolate inventory on a FIFO basis at 
$26,000 with a replacement cost of 
$20,000. Chewy estimated that, after further 
processing costs of $12,000, the chocolate 
could be sold as finished candy bars for 
$40,000. Chewy's normal profit margin is 
10% of sales. Under the 
lower-of-cost-or-market rule, what amount 
should Chewy report as chocolate inventory 
in its December 31, 2000 balance sheet? 

   A. $28,000 

   B. $26,000 

   C. $24,000 

   D. $20,000 


[344] Source: CPA 1180 II-11 
The following information is available for 
the Silver Company for the 3 months ended 
March 31 of this year:

Merchandise inventory,
  January 1 of this year      $  900,000
Purchases                      3,400,000
Freight-in                       200,000
Sales                          4,800,000
The gross margin recorded was 25% of 
sales. What should be the merchandise 
inventory at March 31? 

   A. $700,000 

   B. $900,000 

   C. $1,125,000 

   D. $1,200,000 


[345] Source: CMA 0690 3-4 
FCL Corporation has the following 
inventory information available for the year 
ended December 31.

                                         Cost     Retail
                                        -------   --------
    Beginning inventory at 1/1          $35,000   $100,000
    Net purchases                        55,000    110,000
    Net markups                                     15,000
    Net markdowns                                   25,000
    Net sales                                      150,000
The December 31 ending inventory at cost 
using the LIFO retail inventory method 
(assuming stable prices) equals 

   A. $17,500 

   B. $20,000 

   C. $50,000 

   D. $90,000 


[346] Source: CPA 0593 I-18 
Under the moving-average method, what 
amount should Metro report as inventory at 
January 31, 2000? 

   A. $1,300 

   B. $2,640 

   C. $3,225 

   D. $3,900 


[347] Source: CPA 0593 I-19 
Under the LIFO method, what amount should 
Metro report as inventory at January 31, 
2000? 

   A. $3,225 

   B. $1,300 

   C. $2,700 

   D. $3,900 


[348] Source: CMA 1291 2-25 
Ram Company uses the specific 
identification method of inventory valuation 
for internal reporting purposes and the 
last-in, first-out (LIFO) method for external 
reporting and tax purposes. The inventory at 
November 30, Year 1, the end of Ram's 
fiscal year, was valued at $500,000 using 
specific identification and $450,000 using 
LIFO. The preadjusted credit balance in the 
LIFO reserve account on November 30, 
Year 1 was $30,000. The adjusting entry 
required to reflect inventory on the LIFO 
basis as of November 30, Year 1 would be 
to 

   A. Debit inventory for $20,000 and 
   credit LIFO reserve for $20,000. 

   B. Debit inventory for $20,000 and 
   credit cost of goods sold for $20,000. 

   C. Debit cost of goods sold for $50,000 
   and credit LIFO reserve for $50,000. 

   D. Debit cost of goods sold for $20,000 
   and credit LIFO reserve for $20,000. 


[349] Source: CMA 1291 2-27 
On December 31, Year 1, Johnson 
Corporation sold on account and shipped 
merchandise with a list price of $75,000 to 
Gibsen Company. The terms of the sale 
were n/30, FOB shipping point. The 
merchandise arrived at Gibsen on January 5, 
Year 2. Because of confusion about the 
shipping terms, the sale was not recorded 
until January of Year 2 and the merchandise, 
sold at a markup of 25% of cost, was 
included in Johnson's inventory on 
December 31, Year 1. Johnson uses a 
periodic inventory system. As a result of the 
above, Johnson's income before income 
taxes for the year ended December 31, Year 
1 was 

   A. Understated by $15,000. 

   B. Understated by $75,000. 

   C. Understated by $18,750. 

   D. Overstated by $60,000. 


[350] Source: CMA 1291 2-29 
Wright Hardware's ending inventory as of 
December 31, Year 2 computed by the 
dollar-value LIFO method was 

   A. $240,000 

   B. $250,000 

   C. $251,000 

   D. $275,000 


[351] Source: CMA 1291 2-30 
Wright Hardware's ending inventory as of 
December 31, Year 3, computed by the 
dollar-value LIFO method would be 

   A. $240,000 

   B. $250,000 

   C. $251,000 

   D. $300,000 


[352] Source: CMA 0692 2-3 
The primary reporting objective of 
accounting for inventory is 

   A. To provide management with 
   information about the fair value of the 
   inventory. 

   B. The proper valuation of inventory to 
   more closely match its replacement 
   cost. 

   C. To provide investors and creditors 
   with an inventory value that closely 
   represents the liquidation value of 
   inventory. 

   D. The matching of the appropriate 
   expense against revenue to obtain a 
   proper determination of income. 


[353] Source: CMA 1292 2-4 
Bad debt expense must be estimated to 
satisfy the matching principle when 
expenses are recorded in the same periods 
as the related revenues. In estimating the 
provision for doubtful accounts for a period, 
companies accrue 

   A. A percentage of total sales. 

   B. A percentage of accounts receivable 
   transactions for the period. 

   C. Either an amount based on a 
   percentage of credit sales or an amount 
   based on a percentage of accounts 
   receivable after adjusting for any 
   balance in the allowance for doubtful 
   accounts. 

   D. Either an amount based on a 
   percentage of total sales or an amount 
   based on a percentage of accounts 
   receivable after adjusting for any 
   balance in the allowance for doubtful 
   accounts. 


[354] Source: CMA 1292 2-5 
Aston Company acquired a new machine at 
a cost of $200,000 and incurred costs of 
$2,000 to have the machine shipped to its 
factory. Aston also paid $4,500 to construct 
and prepare a site for the new machine and 
$3,500 to install the necessary electrical 
connections. Aston estimates that the useful 
life of this new machine will be 5 years and 
that it will have a salvage value of $15,000 
at the end of that period. Assuming that 
Aston acquired the machine on January 1 
and will take a full year's depreciation, the 
proper amount of depreciation expense to be 
recorded by Aston if it uses the 
double-declining-balance method is 

   A. $74,000 

   B. $84,000 

   C. $80,800 

   D. $78,000 


[355] Source: CMA 1292 2-8 
In accounting for inventories, generally 
accepted accounting principles require 
departure from the historical cost principle 
when the utility of inventory has fallen 
below cost. This rule is known as "lower of 
cost or market." Market as defined here 
means 

   A. Original cost minus allowance for 
   obsolescence. 

   B. Original cost plus normal profit 
   margin. 

   C. Replacement cost of the inventory. 

   D. Original cost minus cost to dispose. 


[356] Source: CPA 1193 I-20 
Brock Co. adopted the dollar-value LIFO 
inventory method as of January 1, 1999. A 
single inventory pool and an internally 
computed price index are used to compute 
Brock's LIFO inventory layers. Information 
about Brock's inventory follows:

                          Inventory
             ------------------------------------
               At Base-  At Current-   At Dollar-
   Date       Year Cost   Year Cost    Value LIFO
----------   ----------  -----------   ----------
1/1/99        $40,000     $40,000       $40,000
1999 layer      5,000      14,000         6,000
              -------     -------       -------
12/31/99       45,000      54,000        46,000
2000 layer     15,000      26,000          ?
              -------     -------       -------
12/31/00      $60,000     $80,000          ?
              =======     =======       =======
What was Brock's dollar-value LIFO 
inventory at December 31, 2000? 

   A. $80,000 

   B. $74,000 

   C. $66,000 

   D. $60,000 


[357] Source: CMA 1292 2-21 
According to SFAS 34, Capitalization of 
Interest Costs, interest should be capitalized 
for assets that are 

   A. In use or ready for their intended use 
   in the earning activities of the 
   enterprise. 

   B. Being constructed or otherwise being 
   produced as discrete projects for an 
   enterprise's own use. 

   C. Not being used in the earning 
   activities of the enterprise and not 
   undergoing the activities necessary to 
   get them ready for use. 

   D. Routinely produced. 


[358] Source: CMA 1292 2-25 
If Addison uses FIFO inventory pricing, the 
value of the inventory on November 30 
would be 

   A. $936. 

   B. $1,012. 

   C. $1,046. 

   D. $1,104. 


[359] Source: CMA 1292 2-27 
If Addison uses weighted-average inventory 
pricing, the gross profit for November will 
be 

   A. $1,482 

   B. $1,516 

   C. $1,528 

   D. $1,574 


[360] Source: CMA 1292 2-28 
If Addison uses periodic LIFO inventory 
pricing, the cost of goods sold for 
November will be 

   A. $2,416. 

   B. $2,442. 

   C. $2,474. 

   D. $2,584. 


[361] Source: CMA 1292 2-29 
If Addison uses perpetual LIFO inventory 
pricing, the value of the inventory at 
November 30 will be 

   A. $936. 

   B. $1,012. 

   C. $1,046. 

   D. $1,076. 


[362] Source: CPA 1193 I-18 
On March 31, 2000, Vale Co. had an 
unadjusted credit balance of $1,000 in its 
allowance for uncollectible accounts. An 
analysis of Vale's trade accounts receivable 
at that date revealed the following:

                                 Estimated
          Age         Amount  Uncollectible
     ------------    -------- -------------
      0 - 30 days     $60,000          5%
     31 - 60 days       4,000         10%
     Over 60 days       2,000     $1,400
What amount should Vale report as 
allowance for uncollectible accounts in its 
March 31, 2000 balance sheet? 

   A. $4,800 

   B. $4,000 

   C. $3,800 

   D. $3,000 


[363] Source: CPA 0595 F-11 
Walt Co. adopted the dollar-value LIFO 
inventory method as of January 1, 2000, 
when its inventory was valued at $500,000. 
Walt's entire inventory constitutes a single 
pool. Using a relevant price index of 1.10, 
Walt determined that its December 31, 2000 
inventory was $577,500 at current-year 
cost, and $525,000 at base-year cost. What 
was Walt's dollar-value LIFO inventory at 
December 31, 2000? 

   A. $525,000 

   B. $527,500 

   C. $552,500 

   D. $577,500 


[364] Source: CMA 0693 2-17 
A decline in the value of an 
available-for-sale security below cost that 
is deemed to be other than temporary should 

   A. Be accumulated in a valuation 
   allowance resulting from the passage of 
   time. 

   B. Be treated as a realized loss and 
   included in the determination of net 
   income for the period. 

   C. Not be realized until the security is 
   sold. 

   D. Be treated as an unrealized loss and 
   included in the equity section of the 
   balance sheet as a separate item. 


[365] Source: CMA 0693 2-23 
Regarding the development of computer 
software that is to be commercially 
marketed, 

   A. All costs incurred should be 
   expensed in the same manner as other 
   research and development costs. 

   B. The costs incurred to complete a 
   working model that established 
   technological feasibility should be 
   capitalized. 

   C. All costs incurred prior to the first 
   sale of the product should be 
   capitalized. 

   D. The costs incurred after 
   technological feasibility has been 
   established should be capitalized. 


[366] Source: CMA 0693 2-28 
All of the following should be disclosed 
when reporting inventories except 

   A. The use of the lower of cost or 
   market method, if applicable. 

   B. The method(s) used for determining 
   the cost. 

   C. The nature of any changes in the 
   method(s) of determining the cost, and 
   the effect on net income. 

   D. An estimated amount of obsolete 
   inventory included in the total inventory 
   valuation. 


[367] Source: CMA 1293 2-1 
On the Statement of Financial Position, 
accounts receivable is valued at the 

   A. Current market value. 

   B. Estimated net realizable value. 

   C. Original cost when the asset was 
   acquired. 

   D. Amount payable when due. 


[368] Source: CMA 1293 2-2 
Prepaid expenses are valued on the 
Statement of Financial Position at the 

   A. Cost to acquire the asset. 

   B. Face amount collectible at maturity. 

   C. Cost to acquire minus accumulated 
   amortization. 

   D. Cost less expired or used portion. 


[369] Source: CMA 1293 2-6 
Using the straight-line depreciation method, 
Ames' Year 4 depreciation expense is 

   A. $36,464 

   B. $40,600 

   C. $40,848 

   D. $45,000 


[370] Source: CMA 1293 2-7 
Using the double-declining-balance method, 
Ames' Year 4 depreciation expense is 

   A. $36,464 

   B. $40,334 

   C. $40,848 

   D. $45,000 


[371] Source: CMA 1293 2-8 
Using the sum-of-the-years'-digits method, 
Ames' Year 4 depreciation expense 
(rounded to the nearest dollar) is 

   A. $36,464 

   B. $40,334 

   C. $40,600 

   D. $40,848 


[372] Source: CMA 1293 2-9 
Nichols Corporation renewed an insurance 
policy for three years beginning September 
1, Year 1, and recorded the $81,000 
premium in the Prepaid Insurance account. 
The $81,000 premium represents an 
increase of $23,400 from the $57,600 
premium charged three years ago. Assuming 
Nichols only records its insurance 
adjustments at the end of the calendar year, 
the adjusting entry required to reflect the 
proper balances in the insurance accounts at 
December 31, Year 1, Nichols' year end, 
would be to 

   A. Debit Insurance Expense for $9,000 
   and credit Prepaid Insurance for 
   $9,000. 

   B. Debit Prepaid Insurance for $9,000 
   and credit Insurance Expense for 
   $9,000. 

   C. Debit Insurance Expense for $72,000 
   and credit Prepaid Insurance for 
   $72,000. 

   D. Debit Insurance Expense for $21,800 
   and credit Prepaid Insurance for 
   $21,800. 


[373] Source: CPA 0595 F-9 
At January 1, 2000, Jamin Co. had a credit 
balance of $260,000 in its allowance for 
uncollectible accounts. Based on past 
experience, 2% of Jamin's credit sales have 
been uncollectible. During 2000, Jamin 
wrote off $325,000 of uncollectible 
accounts. Credit sales for 2000 were $9 
million. In its December 31, 2000 balance 
sheet, what amount should Jamin report as 
allowance for uncollectible accounts? 

   A. $115,000 

   B. $180,000 

   C. $245,000 

   D. $440,000 


[374] Source: CPA 0593 I-51 
Ward Co. estimates its uncollectible 
accounts expense to be 2% of credit sales. 
Ward's credit sales for 2000 were $1 
million. During 2000, Ward wrote off 
$18,000 of uncollectible accounts. Ward's 
allowance for uncollectible accounts had a 
$15,000 balance on January 1, 2000. In its 
December 31, 2000 income statement, what 
amount should Ward report as uncollectible 
accounts expense? 

   A. $23,000 

   B. $20,000 

   C. $18,000 

   D. $17,000 


[375] Source: CPA 0588 I-51 
Wren Company had the following account 
balances at December 31, 2000:

Accounts receivable               $  900,000
Allowance for doubtful accounts
  (before any provision for 2000
  doubtful accounts expense)          16,000
Credit sales for 2000              1,750,000
Wren is considering the following methods 
of estimating doubtful accounts expense for 
2000:

   - Based on credit sales at 2%
   - Based on accounts receivable at 5%
What amount should Wren charge to 
doubtful accounts expense under each 
method?

      Percentage of      Percentage of
      Credit Sales    Accounts Receivable
      -------------   -------------------
   A. 

        $51,000            $45,000
   B. 

        $51,000            $29,000
   C. 

        $35,000            $45,000
   D. 

        $35,000            $29,000


[376] Source: CMA 0684 3-14 
The operations of the firm may be viewed as 
a continual series of transactions or as a 
series of separate ventures. The inventory 
valuation method that views the firm as a 
series of separate ventures is 

   A. First-in, first-out. 

   B. Last-in, first-out. 

   C. Weighted average. 

   D. Specific identification. 


[377] Source: CMA 1284 4-7 
Sanns, Inc. always charges prepaid 
insurance when it purchases or renews 
insurance policies. Thus, the 3-year renewal 
premium for a policy that expired on July 31 
of the current year was charged to prepaid 
insurance. The 3-year renewal policy cost 
$63,000, up $27,000 from the $36,000 it 
had cost 3 years earlier. The adjusting entry 
necessary to reflect the insurance accounts 
at December 31 of the current year, Sanns' 
fiscal year-end, would be to 

   A. Debit prepaid insurance for $8,750 
   and credit insurance expense for 
   $8,750. 

   B. Debit insurance expense for $54,250 
   and credit prepaid insurance for 
   $54,250. 

   C. Debit insurance expense for $15,750 
   and credit prepaid insurance for 
   $15,750. 

   D. Debit prepaid insurance for $15,750 
   and credit insurance expense for 
   $15,750. 


[378] Source: CMA 1286 4-13 
Pie Baker, Ltd. purchased a secret fruit pie 
recipe for $75,000. An additional $10,000 
was spent in securing the secret recipe and 
safeguarding its contents. Pie Baker expects 
to keep the recipe a secret indefinitely. 
Because of taste changes, the industry has 
found that recipes have been used for an 
average of 8 years. Based on this 
information, Pie Baker should 

   A. Capitalize the $85,000 cost and then 
   amortize it over 40 years. 

   B. Expense the $85,000 cost because 
   the secret formula cost should not be 
   capitalized. 

   C. Capitalize the $85,000 cost and then 
   amortize it over the period the recipe is 
   to remain a secret. 

   D. Capitalize the $85,000 cost and 
   amortize it over 8 years. 


[379] Source: CMA 1287 4-14 
If Nasus uses periodic LIFO inventory 
pricing, the cost of goods sold for 
November would be 

   A. $1,237. 

   B. $1,300. 

   C. $992. 

   D. $1,292. 


[380] Source: CMA 1287 4-15 
If Nasus uses perpetual LIFO inventory 
pricing, the value of the inventory on 
November 30 would be 

   A. $468 

   B. $460 

   C. $523 

   D. $552 


[381] Source: CMA 1287 4-17 
If Nasus uses perpetual moving average 
inventory pricing, the sale of 220 items on 
November 16 would be recorded at a unit 
cost of 

   A. $2.10 

   B. $2.08 

   C. $2.16 

   D. $2.20 


[382] Source: CMA 1287 4-18 
If Nasus uses weighted average inventory 
pricing, the gross profit for November 
would be 

   A. $741 

   B. $1,254 

   C. $755 

   D. $1,041 


[383] Source: CMA 1287 4-19 
If Nella uses the sum-of-the-years'-digits 
method of depreciation, the amount of 
depreciation computed for this equipment 
for book purposes in Year 3 would be 

   A. $52,500 

   B. $45,000 

   C. $48,750 

   D. $18,750 


[384] Source: CMA 1287 4-22 
If Nella had used the units-of-production 
method of depreciation, the amount of 
depreciation computed for this equipment 
for book purposes in Year 1 would have 
been 

   A. $25,500 

   B. $12,750 

   C. $11,475 

   D. $22,950 


[385] Source: CMA 1287 4-23 
On July 1, Year 3, Sandell Corporation 
traded in a piece of equipment for a larger 
model with a fair market price of $500,000. 
Sandell had purchased the original 
equipment in Year 1 for $280,000 and 
recognized depreciation of $120,000 up to 
the date of the trade. The seller gave Sandell 
a trade-in allowance of $180,000 on the 
original equipment. To record this disposal 
for book purposes, the accountant should 
recognize 

   A. A gain on disposal, with the new unit 
   recorded at $500,000. 

   B. A loss on disposal, with the new unit 
   recorded at $500,000. 

   C. A loss on disposal, with the new unit 
   recorded at $500,000 minus the loss. 

   D. No gain or loss on disposal, with the 
   new unit recorded at book value of the 
   traded unit plus cash paid (or owed). 


[386] Source: CMA 1288 4-13 
If Fidler estimates its bad debts by aging the 
accounts receivable, the adjusting entry to 
allowance for uncollectible accounts made 
on November 30 of the current year will be 
for 

   A. $56,000 

   B. $43,320 

   C. $29,320 

   D. $15,320 


[387] Source: CMA 1288 4-14 
If Fidler estimates its bad debts by 
continuing to use the percentage of net sales, 
the balance in the allowance for 
uncollectible accounts after the adjusting 
entry is made at November 30 of the current 
year will be 

   A. $56,000 

   B. $29,320 

   C. $42,000 

   D. $28,000 


[388] Source: CMA 1288 4-29 
Wendell Company recognizes bad debt 
expense at year-end by adjusting the 
allowance for uncollectible accounts 
receivable. During the year ended 
November 30 of the current year, Wendell 
wrote off accounts receivable totaling 
$34,500. At the end of the year, the company 
recognized bad debt expense for the year, 
through an adjusting entry, in the amount of 
$16,500. Because of these two events, 
Wendell Company's working capital was 

   A. Decreased by $51,000. 

   B. Decreased by $34,500. 

   C. Decreased by $18,000. 

   D. Decreased by $16,500. 


[389] Source: CMA 0689 3-7 
If Harper exchanges its used machine and 
$15,000 cash for Austin's used machine, the 
gain that Harper should recognize from this 
transaction for financial reporting purposes 
would be 

   A. $0 

   B. $2,526 

   C. $15,000 

   D. $16,000 


[390] Source: CMA 0689 3-8 
If Harper exchanges its used machine for 
Lubin's used machine and also receives 
$20,000 cash, the gain that Harper should 
recognize from this transaction for financial 
reporting purposes would be 

   A. $0 

   B. $4,000 

   C. $16,000 

   D. $25,000 


[391] Source: CMA 0689 3-10 
If Austin exchanges its used machine for 
Harper's machine and $15,000 cash, the gain 
(loss) that Austin should recognize from this 
transaction for financial reporting purposes 
would be 

   A. $0 

   B. $(2,526) 

   C. $(15,000) 

   D. $15,000 


[392] Source: CMA 0690 4-28 
The depreciation on Pyne's delivery truck 
for year two using the 
double-declining-balance (DDB) method 
would be 

   A. $4,320 

   B. $4,800 

   C. $6,000 

   D. $7,200 


[393] Source: CMA 0690 4-29 
The depreciation on Pyne's used delivery 
car for year three using the 
sum-of-the-years'-digits (SYD) method 
would be 

   A. $700 

   B. $800 

   C. $1,400 

   D. $1,600 


[394] Source: CMA 0691 2-1 
If Sawyer uses a first-in, first-out perpetual 
inventory system, the total cost of the 
inventory for Part Number C-588 at May 31 
is 

   A. $3,230 

   B. $3,510 

   C. $3,575 

   D. $3,770 


[395] Source: CMA 0691 2-2 
If Sawyer uses a last-in, first-out periodic 
inventory system, the total cost of the 
inventory for Part Number C-588 at May 31 
is 

   A. $3,185 

   B. $3,230 

   C. $3,510 

   D. $3,575 


[396] Source: CMA 0691 2-3 
If Sawyer uses a last-in, first-out perpetual 
inventory system, the total cost of the 
inventory for Part Number C-588 at May 31 
is 

   A. $3,185 

   B. $3,230 

   C. $3,521 

   D. $3,575 


[397] Source: CMA 1291 2-2 
According to SFAS 34, Capitalization of 
Interest Cost, interest should be capitalized 
for assets that are 

   A. In use or ready for their intended use 
   in the earning activities of the 
   enterprise. 

   B. Being constructed or otherwise being 
   produced as discrete projects for an 
   enterprise's own use. 

   C. Not being used in the earning 
   activities of the enterprise and that are 
   not undergoing the activities necessary 
   to get them ready for use. 

   D. Routinely produced but require an 
   extended period of time and are used in 
   the earning activities of the enterprise. 


[398] Source: CMA 1291 2-23 
If Buel Company sold 100 shares of Pulp 
Corp. stock for $19 per share during Year 2, 
the effect of this transaction would be to 

   A. Reduce investment in marketable 
   securities by $2,000 and recognize a 
   realized loss on the income statement of 
   $100. 

   B. Reduce investment in marketable 
   securities by $1,800 and recognize an 
   unrealized gain in the shareholders' 
   equity section of the statement of 
   financial position in the amount of 
   $100. 

   C. Reduce investment in marketable 
   securities by $1,800 and reduce the 
   unrealized loss in the shareholders' 
   equity section of the statement of 
   financial position by $100. 

   D. Reduce investment in marketable 
   securities by $2,000, recognize a 
   realized gain on the income statement of 
   $100 and reduce the unrealized loss in 
   the shareholders' equity section of the 
   statement of financial position by $200. 


[399] Source: CMA 1291 2-24 
Assume no marketable securities were sold 
or acquired during Year 2 and that the total 
market values of the shares in the portfolio 
were as follows on December 31, Year 2:

                            Total Market Value
                                of Stock on
     Company                December 31, Year 2
     ---------              -------------------
     Regis Co.                    $ 3,900
     Camp, Inc.                    24,000
     Bell Ltd.                     10,400
     Pulp Corp.                    11,400
                                  -------
                                  $49,700
                                  =======
The effect on Buel Company's Year 2 
financial statements would be to 

   A. Reduce net total current assets on the 
   Year 2 statement of financial position 
   by $900 and report an unrealized loss 
   as a separate item in the shareholders' 
   equity section of the Year 2 statement of 
   financial position. 

   B. Reduce net total current assets on the 
   Year 2 statement of financial position 
   by $1,300 and recognize an unrealized 
   loss on the Year 2 income statement of 
   $1,300. 

   C. Reduce net total current assets on the 
   Year 2 statement of financial position 
   by $900, recognize an unrealized gain 
   of $600, and recognize an unrealized 
   loss of $1,500 on the Year 2 income 
   statement. 

   D. Reduce net total current assets on the 
   Year 2 statement of financial position 
   by $900 and recognize an unrealized 
   loss on the Year 2 income statement of 
   $900. 


[400] Source: CIA 0594 IV-1 
The company uses straight-line depreciation 
for financial reporting purposes, but uses 
accelerated depreciation for tax purposes. 
Which of the following account balances 
would be lower in the financial statements 
used for tax purposes than it would be in the 
general purpose financial statements? 

   A. Accumulated depreciation. 

   B. Retained earnings. 

   C. Gross fixed assets. 

   D. Accounts receivable. 


[401] Source: CIA 0594 IV-2 
On the year-end financial statements, the 
company will report cost of goods sold of 

   A. $440,000 

   B. $530,000 

   C. $620,000 

   D. $670,000 


[402] Source: CIA 0594 IV-5 
The company will report year-end total 
assets of 

   A. $800,000 

   B. $890,000 

   C. $950,000 

   D. $1,010,000 


[403] Source: CIA 0594 IV-3 
Which is the correct order of the following 
four steps in the accounting cycle?

1   prepare adjusting journal entries
2   take a post-closing trial balance
3   prepare an adjusted trial balance
4   prepare reversing entries
   A. 1, 3, 2, 4 

   B. 4, 1, 3, 2 

   C. 3, 1, 2, 4 

   D. 1, 2, 3, 4 


[404] Source: CIA 0594 IV-4 
Which adjusting entry should be used at 
year-end to account for interest expense on 
the long-term debt? 

   A. 

        Interest expense         $100,000
             Interest payable                 $100,000
   B. 

        Interest expense          $50,000
             Cash                              $50,000
   C. 

        Interest payable         $100,000
             Interest expense                 $100,000
   D. 

        Interest expense          $50,000
             Interest payable                  $50,000


[405] Source: CIA 0594 IV-6 
Assume that the company reports cost of 
goods sold of $200,000 and interest expense 
of $10,000 for the current period. Also 
assume a 50% tax rate on corporate 
earnings. The final closing entry required to 
ensure that current earnings are incorporated 
into year-end retained earnings is 

   A. 

        Income summary           $140,000
             Retained earnings                $140,000
   B. 

        Retained earnings        $280,000
             Income summary                   $280,000
   C. 

        Income summary           $240,000
             Retained earnings                $240,000
   D. 

        Retained earnings        $240,000
             Income summary                   $240,000


[406] Source: CIA 1192 IV-26 
A newly acquired plant asset is to be 
depreciated over its useful life. The best 
rationale for this process is the 

   A. Monetary unit assumption. 

   B. Materiality assumption. 

   C. Going concern assumption. 

   D. Revenue recognition assumption. 


[407] Source: CIA 1192 IV-37 
Because of inexact estimates of the service 
life and the residual value of a plant asset, a 
fully depreciated asset was sold in the 
current year at a material gain. This gain 
should be reported 

   A. In the other revenues and gains 
   section of the current year income 
   statement. 

   B. As part of sales revenue on the 
   current year income statement. 

   C. In the extraordinary item section of 
   the current year income statement. 

   D. As an adjustment to prior periods' 
   depreciation on the statement of 
   retained earnings. 


[408] Source: CIA 0594 IV-16 
Suppose that the opening balance of 
inventory was overstated due to errors in the 
physical count taken at the end of the prior 
year. The error has not been detected, but 
the physical count taken this year was 
conducted correctly. Which of the following 
accounts is overstated for the current year 
end? 

   A. Cost of goods sold. 

   B. Net sales. 

   C. Net income. 

   D. Retained earnings. 


[409] Source: CPA 0593 II-9 
Beam Co. paid $1,000 cash and traded 
inventory, which had a carrying amount of 
$20,000 and a fair value of $21,000, for 
other inventory in the same line of business 
with a fair value of $22,000. What amount 
of gain (loss) should Beam record related to 
the inventory exchange? 

   A. $2,000 

   B. $1,000 

   C. $0 

   D. $(1,000) 


[410] Source: CIA 0591 IV-32 
On December 1, Year 1, a company sold 
services to a customer and accepted a note 
in exchange with a $120,000 face value and 
an interest rate of 10%. The note requires 
that both the principal and interest be paid at 
the maturity date, December 1, Year 2. The 
company's accounting period is the calendar 
year. What adjusting entry (related to this 
note) would be required at December 31, 
Year 1 on the company's books? 

   A. 

        Deferred interest income         $1,000
              Interest receivable                  $1,000
   B. 

        Interest income                  $1,000
              Interest receivable                  $1,000
   C. 

        Interest receivable              $1,000
              Deferred interest income             $1,000
   D. 

        Interest receivable              $1,000
              Interest income                      $1,000


[411] Source: CIA 0594 IV-29 
Which of the following is true regarding the 
assignment and factoring of accounts 
receivable for a manufacturing firm? 

   A. The lender has recourse to the 
   manufacturing firm under factoring but 
   not under the assignment of accounts 
   receivable. 

   B. The factoring of accounts receivable 
   provides collateral for the 
   manufacturing firm, whereas the 
   assignment of receivables provides 
   direct financing. 

   C. The assignment of accounts 
   receivable involves the invoice from 
   the manufacturing firm to its customer 
   being stamped with a notification that 
   payment is to be made directly to the 
   other party, whereas the factoring of 
   accounts receivable does not. 

   D. The factoring of accounts receivable 
   involves the invoice from the 
   manufacturing firm to its customer being 
   stamped with a notification that payment 
   is to be made directly to the other party, 
   whereas the assignment of accounts 
   receivable does not. 


[412] Source: CIA 1191 IV-31 
When a perpetual inventory system is used 
and a difference exists between the 
perpetual inventory amount balance and the 
physical inventory count, a separate entry is 
needed to adjust the perpetual inventory 
amount. Which of the following 
demonstrates that adjusting entry? 

   A. 

        Inventory over and short
             Inventory
   B. 

        Extraordinary loss due to writedown of inventory
             Inventory
   C. 

        Extraordinary loss due to writedown of inventory
             Allowance for inventory shortages
   D. 

        Cost of goods sold
             Retained earnings appropriated for shortages


[413] Source: CIA 1190 IV-32 
MKT Corporation's assets on December 31, 
Year 1, include the following:

 I.  U.S. Treasury Bills, acquired on October 15, Year 1, which mature
     on April 15, Year 2.
II.  Shares of PF Company.  PF has been very profitable and
     MKT Corporation plans to increase its ownership in PF as it
     believes PF has strong growth potential.
III. Bonds of ABC Corporation that mature in 3 years.  These bonds will
     be sold, as needed, to meet MKT's current financing needs.
Which of the above should be classified as 
temporary investments? 

   A. I and III only. 

   B. I and II only. 

   C. I, II, and III. 

   D. III only. 


[414] Source: CIA 0594 IV-30 
Which of the following is not an appropriate 
basis for measuring the historical cost of 
fixed assets? 

   A. The purchase price, freight costs, 
   and installation costs of a productive 
   asset should be included in the asset's 
   cost. 

   B. Proceeds obtained in the process of 
   readying land for its intended purpose, 
   such as from the sale of cleared timber, 
   should be recognized immediately in 
   income. 

   C. The costs of improvements to 
   equipment incurred after its acquisition 
   should be added to the asset's cost if 
   they provide future service potential. 

   D. Special assessments imposed by a 
   local government for sewage and 
   drainage systems are recorded by the 
   owner of the land in the land account. 


[415] Source: CIA 0594 IV-19 
Under which of the following depreciation 
methods is it possible for depreciation 
expense to be higher in the later years of an 
asset's useful life? 

   A. Straight line. 

   B. Activity method based on units of 
   production. 

   C. Sum of the years' digits. 

   D. Weighted average. 


[416] Source: CIA 0594 IV-20 
A company has just purchased a machine for 
$100,000 that has a five-year estimated 
useful life and a zero estimated salvage 
value. It is expected to be used to produce 
250,000 units of output, and 75,000 of those 
units are expected to be produced in the first 
year. Which of the following depreciation 
methods will result in the greatest amount of 
depreciation expense for this machine in its 
first year? 

   A. Straight line. 

   B. Activity method based on units of 
   production. 

   C. Sum of the years' digits. 

   D. Declining balance method with a 
   30% depreciation rate. 


[417] Source: CIA 0594 IV-21 
The correct form of the journal entry 
recorded upon the sale of a plant asset sold 
for an amount of cash in excess of its net 
book value is as follows: 

   A. No journal entry is required. 

   B. 

        Cash
        Accumulated depreciation - machinery
        Gain on disposal of machinery
             Machinery
   C. 

        Cash
        Machinery
             Accumulated depreciation - machinery
             Gain on disposal of machinery
   D. 

        Cash
        Accumulated depreciation
             Machinery
             Gain on disposal of machinery


[418] Source: CIA 0593 IV-30 
An organization purchased a computer on 
January 1 of the current year for $108,000. It 
was estimated to have a 4-year useful life 
and a salvage value of $18,000. The 
double-declining-balance method is to be 
used. The amount of depreciation to be 
reported for the current year is 

   A. ($108,000 - $18,000)(25% x 2) 

   B. ($108,000 - $18,000)(25% x ) 

   C. ($108,000)(25% x 2) 

   D. ($108,000)(25% x ) 


[419] Source: CIA 0592 IV-37 
An oil company using the successful-efforts 
method drilled two wells. The first, a dry 
hole, cost $50,000. The second cost 
$100,000 and had estimated recoverable 
reserves of 25,000 barrels, of which 10,000 
were sold this year. What will be the total 
expense for the year related to the 
exploration and production from these two 
wells? 

   A. $40,000 

   B. $60,000 

   C. $90,000 

   D. $150,000 


[420] Source: CMA 0694 2-21 
To comply with SFAS 2, Accounting for 
Research and Development Costs, 
expenditures for research and development 

   A. Must be capitalized in the period 
   incurred and amortized over the 
   estimated life of the asset. 

   B. May be expensed in the period 
   incurred or capitalized if the 
   probability of future benefits can 
   readily be determined. 

   C. Must be expensed in the period 
   incurred, unless the costs are for testing 
   a prototype. 

   D. Must be expensed in the period 
   incurred, unless the work performed is 
   for others as part of a contractual 
   agreement. 


[421] Source: CMA 0694 2-22 
The limits to the market value (i.e., the 
ceiling and the floor) that should be used in 
the lower of cost or market comparison of 
skis are 

   A. $217 and $198 

   B. $217 and $185 

   C. $198 and $166 

   D. $185 and $166 


[422] Source: CMA 0694 2-23 
The cost amount that should be used in the 
lower of cost or market comparison of ski 
boots is 

   A. $105 

   B. $106 

   C. $108 

   D. $137 


[423] Source: CMA 0694 2-24 
The market amount that should be used to 
value the parkas on the basis of lower of 
cost or market is 

   A. $51.00 

   B. $53.00 

   C. $50.00 

   D. $71.25 


[424] Source: CMA 0695 2-23 
The accounting profession has adopted 
various standards to be followed when 
reporting inventory in the financial 
statements. All of the following are required 
to be reported in the financial statements or 
disclosed in notes to the financial statements 
except for 

   A. Inventory detail, such as raw 
   materials, work-in-process, and 
   finished goods. 

   B. Significant financing agreements, 
   such as product financing arrangements 
   and pledging of inventories. 

   C. The basis upon which inventory 
   amounts are stated. 

   D. Unrealized profit on inventories. 


[425] Source: CPA 0FIN R99-5 
Castillo Co. had the following balances at 
December 31, 2000:

Cash in checking account                 $  35,000
Cash in money market account                75,000
U.S. Treasury bill, purchased 11/1/2000,
  maturing 1/31/2001                       350,000
U.S. Treasury bill, purchased 12/1/2000,
  maturing 3/31/2001                       400,000
Castillo treats all highly liquid investments 
with a maturity of three months or less when 
purchased as cash equivalents. What amount 
should Castillo report as cash and cash 
equivalents in its December 31, 2000, 
balance sheet? 

   A. $110,000 

   B. $385,000 

   C. $460,000 

   D. $860,000 


[426] Source: CPA 1189 II-1 
Ral Corp.'s checkbook balance on 
December 31, 2000 was $5,000. In 
addition, Ral held the following items in its 
safe on that date:

Check payable to Ral Corp., dated January 2, 2001, in
  payment of a sale made in December 2000, not included
  in December 31 checkbook balance                           $2,000
Check payable to Ral Corp., deposited December 15 and
  included in December 31 checkbook balance, but
  returned by Bank on December 30 stamped "NSF."  The
  check was redeposited on January 2, 2001 and cleared
  on January 9.                                                 500
Check drawn on Ral Corp.'s account, payable to a vendor,
  dated and recorded in Ral's books on December 31, but
  not mailed until January 10, 2001                             300
The proper amount to be shown as cash on 
Ral's balance sheet at December 31, 2000 is 

   A. $4,800 

   B. $5,300 

   C. $6,500 

   D. $6,800 


[427] Source: CMA 1295 2-22 
The allowance method of recording bad 
debt expense is preferred over the direct 
write-off method because it 

   A. "Allows" for discrepancies. 

   B. Is more flexible. 

   C. Achieves a proper matching of 
   expenses and revenues. 

   D. Is easier to implement. 


[428] Source: CMA 1295 2-23 
An "aging schedule" is used to 

   A. Classify categories of workers. 

   B. Determine depreciation pools. 

   C. Estimate the net realizable value of 
   accounts receivable. 

   D. Estimate inventory obsolescence. 


[429] Source: CMA 1295 2-24 
Woody Company sold $150,000 of its 
accounts receivable without recourse. The 
purchaser assessed a finance charge of 5%. 
Woody should record 

   A. A debit to cash of $150,000. 

   B. A credit to accounts receivable of 
   $150,000. 

   C. A credit to liability on transferred 
   accounts receivable of $150,000. 

   D. Interest expense of $7,500. 


[430] Source: CMA 1295 2-27 
Jordan Inc. is a profitable company with the 
goal to maximize cash flow. A valid reason 
for Jordan not to adopt the last-in, first-out 
(LIFO) method of inventory valuation is 

   A. Prices are rising. 

   B. Prices are falling. 

   C. The company has high administrative 
   costs. 

   D. The reduction effect on inventory. 


[431] Source: CMA 1295 2-25 
Tony Brown has asked Cheryl James, 
accountant, what she thinks of implementing 
a perpetual inventory system. Which one of 
the following statements is correct? 

   A. A perpetual system is cheaper to 
   administer than a periodic system. 

   B. The cost of implementing and 
   administering a perpetual system for 
   Tony's AutoParts Store would probably 
   exceed any savings generated by 
   achieving better control. 

   C. A perpetual system might eliminate 
   the necessity of having to take a 
   physical inventory every year. 

   D. A perpetual inventory system 
   requires a daily reconciliation between 
   goods sold per the cash register and 
   goods remaining in stock. 


[432] Source: CMA 1295 2-26 
Tony Brown uses the first-in, first-out 
(FIFO) method to value inventory and is 
concerned about the impact on inventory 
valuation of a switch from a periodic 
inventory system to a perpetual inventory 
system. Which one of the following 
statements is correct? 

   A. The impact cannot be calculated. 

   B. Inventory and cost of goods sold will 
   be the same whether or not a perpetual 
   or periodic inventory system is used. 

   C. Inventory will be valued higher 
   under a perpetual inventory system. 

   D. Inventory will be valued lower 
   under a perpetual inventory system. 


[433] Source: CMA 1288 4-24 
When the right of return exists, all of the 
following criteria must be met before 
revenue is recognized except that the 

   A. Amount of future returns can be 
   reasonably estimated. 

   B. Seller's price to the buyer is 
   substantially fixed at the date of the 
   sale. 

   C. Buyer's obligation to the seller must 
   be liquidated within 150 days from the 
   date of the sale. 

   D. Buyer is obligated to pay the seller 
   and the obligation is not contingent on 
   the resale of the product. 


[434] Source: CMA 0694 2-5 
The following inventory valuation errors 
have been discovered for Knox Corporation.

  The year 1 year-end inventory was overstated by $23,000.
  The year 2 year-end inventory was understated by $61,000.
  The year 3 year-end inventory was understated by $17,000.
The reported income before taxes for Knox 
was

        Year           Income Before Taxes
        ----           -------------------
        Year 1               $138,000
        Year 2                254,000
        Year 3                168,000
Reported income before taxes for year 1, 
year 2, and year 3, respectively, should have 
been 

   A. $161,000, $170,000, and $212,000 

   B. $115,000, $338,000, and $124,000 

   C. $161,000, $338,000, and $90,000 

   D. $115,000, $338,000, and $212,000 


[435] Source: CMA 1287 3-25 
One of the conditions necessary to recognize 
a transfer of receivables with recourse as a 
sale is that the 

   A. Transferee surrenders control of the 
   receivables but retains a beneficial 
   interest. 

   B. Transferor has derecognized all 
   assets sold. 

   C. The transferor is not both entitled 
   and obligated to repurchase the 
   receivables. 

   D. Transferred assets are isolated from 
   the transferee. 


[436] Source: CMA 1287 3-26 
If a transfer of receivables with recourse 
qualifies to be recognized as a sale, the 
proceeds from the sale are 

   A. Accounted for as a secured 
   borrowing. 

   B. Recorded at fair value for the assets 
   obtained and liabilities incurred. 

   C. Recorded at the historical cost of the 
   assets obtained. 

   D. Reduced by the fair value of the 
   recourse obligation. 


[437] Source: CMA 1290 2-4 
The entry to write off Norris Corporation's 
accounts receivable balance of $10,000 will 

   A. Increase total assets and decrease 
   net income. 

   B. Decrease total assets and net income. 

   C. Have no effect on total assets and 
   decrease net income. 

   D. Have no effect on total assets and net 
   income. 


[438] Source: CMA 1290 2-5 
As a result of the November 30 adjusting 
entry to provide for bad debts, the 
allowance for doubtful accounts will 

   A. Increase by $30,000. 

   B. Increase by $25,500. 

   C. Increase by $22,500. 

   D. Decrease by $22,500. 


[439] Source: CMA 1290 2-6 
After a suggestion from the company's 
external auditors, Madison wishes to value 
its accounts receivable using the balance 
sheet approach. The chart below presents 
the aging of the accounts receivable 
subsidiary ledger accounts at November 30.

                                                   Greater
              Total  Less than    61-90    91-120    than
Account      Balance  60 days     days      days   120 days
--------   --------- ---------  -------- --------- --------
Arcadia     $ 50,000  $ 50,000
Dawson       128,000    90,000  $ 38,000
Gracelon     327,000   250,000    77,000
Prentiss      25,000                                $25,000
Strauss      210,000                      $210,000
            --------  --------  --------  --------  -------
Total       $740,000  $390,000  $115,000  $210,000  $25,000
            ========  ========  ========  ========  =======
% uncollectible          1%        5%        15%       40%
The final entry to the related accounts is 

   A. Debit allowance for doubtful 
   accounts for $22,150 and credit bad 
   debt expense for $22,150. 

   B. Debit allowance for doubtful 
   accounts for $12,150 and credit sales 
   for $12,150. 

   C. Credit accounts receivable for 
   $12,150 and debit bad debt expense for 
   $12,150. 

   D. Credit allowance for doubtful 
   accounts for $22,150 and debit bad debt 
   expense for $22,150. 


[440] Source: CMA 1288 4-15 
Lambert Company acquired a machine on 
October 1 that was placed in service on 
November 30. The cost of the machine was 
$63,000, of which $20,000 was given as a 
down payment. The remainder was 
borrowed at 12% annual interest. 
Additional costs included $2,500 for 
shipping, $4,000 for installation, $3,000 for 
testing, and $1,290 of interest on the 
borrowed funds. How much should be 
reported for this acquisition in the machine 
account on Lambert Company's statement of 
financial position as of November 30? 

   A. $63,000 

   B. $65,500 

   C. $69,500 

   D. $72,500 


[441] Source: Publisher 
A transfer of financial assets should be 
reported as a sale if certain conditions are 
met. Which of the following is one of the 
conditions? 

   A. Transferees may pledge or exchange 
   the assets. 

   B. The assets are within the reach of the 
   transferor's creditors. 

   C. The transferor has an option to 
   repurchase the asset. 

   D. The transferor receives beneficial 
   interests in the asset as consideration. 


[442] Source: CMA 0694 2-6 
During the year 1 year-end physical 
inventory count at Tequesta Corporation, 
$40,000 worth of inventory was counted 
twice. Assuming that the year 2 year-end 
inventory was correct, the result of the year 
1 error was that 

   A. Year 1 retained earnings was 
   understated, and year 2 ending 
   inventory was correct. 

   B. Year 1 cost of goods sold was 
   overstated, and year 2 income was 
   understated. 

   C. Year 1 income was overstated, and 
   year 2 ending inventory was overstated. 

   D. Year 1 cost of goods sold was 
   understated, and year 2 retained 
   earnings was correct. 


[443] Source: CMA 0697 2-19 
If Devereaux Inc. uses the first-in, first-out 
method, the value of its inventory at 
November 30, 1997 would be 

   A. $4,400 

   B. $4,480 

   C. $4,560 

   D. $4,960 


[444] Source: CMA 0697 2-20 
If Devereaux Inc. uses the last-in, first-out 
method, the value of its inventory at 
November 30, 1997 would be 

   A. $4,400 

   B. $4,480 

   C. $4,560 

   D. $4,785 


[445] Source: CMA 0687 3-11 
If Boggs, Inc. exercised significant influence 
over Mattly Corporation and properly 
accounted for the long-term investment 
under the equity method, the amount of net 
investment revenue Boggs should report 
from its investment in Mattly would be 

   A. $30,000 

   B. $60,000 

   C. $80,000 

   D. $90,000 


[446] Source: CMA 0687 3-12 
If Boggs, Inc. did not exercise significant 
influence over Mattly Corporation and 
properly accounted for the long-term 
investment under the cost method, the 
amount of net investment revenue Boggs 
should report from its investment in Mattly 
would be 

   A. $20,000 

   B. $30,000 

   C. $60,000 

   D. $80,000 


[447] Source: CMA 1293 2-3 
An investment in trading securities is valued 
on the Statement of Financial Position at the 

   A. Cost to acquire the asset. 

   B. Accumulated income minus 
   accumulated dividends since 
   acquisition. 

   C. Lower of cost or market. 

   D. Fair value. 


[448] Source: CMA 1293 2-4 
An investment in available-for-sale 
securities is valued on the Statement of 
Financial Position at the 

   A. Cost to acquire the asset. 

   B. Accumulated income less 
   accumulated dividends since 
   acquisition. 

   C. Fair value. 

   D. Par or stated value of the securities. 


[449] Source: Publisher 
When a fixed plant asset with a 5-year 
estimated useful life is sold during the 
second year, how would the use of a 
decreasing-charge method of depreciation 
instead of the straight-line method affect the 
gain or loss on the sale of the fixed plant 
asset?

        Gain             Loss
      ---------        ----------
   A. 

      Increase          Increase
   B. 

      Increase          Decrease
   C. 

      Decrease          Increase
   D. 

      Decrease          Decrease


[450] Source: CMA 0695 2-10 
A steel press machine is purchased for 
$50,000 cash and a $100,000 interest 
bearing note payable. The cost to be 
recorded as an asset (in addition to the 
$150,000 purchase price) should include all 
of the following except 

   A. Freight and handling charges. 

   B. Insurance while in transit. 

   C. Interest on the note payable. 

   D. Assembly and installation costs. 


[451] Source: CMA 0695 2-11 
The value of property, plant, and equipment 
that is included in total assets on the 
statement of financial position is 

   A. Appraisal or market value. 

   B. Replacement cost. 

   C. Acquisition cost. 

   D. Cost minus accumulated 
   depreciation. 


[452] Source: CMA 1286 4-11 
WD Mining Company purchased a section 
of land for $600,000 in 1985 to develop a 
zinc mine. The mine began operating in 
1993. At that time, management estimated 
that the mine would produce 200,000 tons of 
quality ore. A total of 100,000 tons of ore 
was mined and processed from 1993 
through December 31, 2000. During January 
2001, a very promising vein was 
discovered. The revised estimate of ore still 
to be mined was 250,000 tons. Estimated 
salvage value for the mine land was 
$100,000 in both 1993 and 2001. Assuming 
that 10,000 tons of ore was mined in 2001, 
the computation WD Mining company 
should use to determine the amount of 
depletion to record in 2001 would be 

   A. 

        $600,000 - $100,000
        -------------------  x 10,000 tons
           450,000 tons
   B. 

        $600,000 - $100,000
        -------------------  x 10,000 tons
           350,000 tons
   C. 

        $600,000 - $100,000 - $250,000
        ------------------------------  x 10,000 tons
                 350,000 tons
   D. 

        $600,000 - $100,000 - $250,000
        ------------------------------  x 10,000 tons
                 250,000 tons


[453] Source: CMA 1286 4-10 
The Pryor Company uses the straight-line 
depreciation method based on the composite 
depreciation rate and the composite 
economic life for depreciating its machinery 
and equipment. An advantage of using the 
composite depreciation basis is that 

   A. Depreciation expense in the early 
   years of the assets' lives is higher than 
   if the individual assets were 
   depreciated. 

   B. Depreciation expense is matched 
   more accurately with the revenue 
   stream generated by the use of the 
   assets. 

   C. Salvage value for assets in the 
   composite group is ignored. 

   D. When an asset is retired from use or 
   is sold, no gain or loss will be 
   recognized in the accounting records. 


[454] Source: CMA 0694 2-25 
Assuming that Maple Industries recognizes 
one-half year's depreciation on all assets 
purchased or sold during the year, the 
amount of straight-line depreciation that 
would be taken for financial reporting 
purposes in the fiscal year ending May 31, 
Year 2 would be 

   A. $2,475 

   B. $2,700 

   C. $4,950 

   D. $5,400 


[455] Source: CMA 0694 2-26 
Assuming that Maple Industries recognizes a 
full year's depreciation on all assets 
purchased during the year but no 
depreciation on assets retired during the 
year, the amount of sum-of-the-years'-digits 
(SYD) depreciation that would be taken for 
financial reporting purposes in the fiscal 
year ending May 31, Year 2 would be 

   A. $1,100 

   B. $8,800 

   C. $9,600 

   D. $10,800 


[456] Source: CMA 0694 2-27 
Assuming that Maple Industries calculates 
depreciation to the nearest whole month on 
all assets purchased or sold during the year, 
the amount of double-declining-balance 
(DDB) depreciation that would be taken for 
financial reporting purposes in the fiscal 
year ending May 31, Year 3 in the second 
year of the asset life would be 

   A. $7,425 

   B. $8,100 

   C. $9,900 

   D. $10,800 


[457] Source: CMA 1286 4-12 
Costs that are capitalized with regard to a 
patent include 

   A. Legal fees of obtaining the patent, 
   incidental costs of obtaining the patent, 
   and costs of successful patent 
   infringement suits. 

   B. Legal fees of obtaining the patent, 
   incidental costs of obtaining the patent, 
   and research and development costs 
   incurred on the invention that is 
   patented. 

   C. Legal fees of obtaining the patent, 
   costs of successful patent infringement 
   suits, and research and development 
   costs incurred on the invention that is 
   patented. 

   D. Incidental costs of obtaining the 
   patent, costs of successful and 
   unsuccessful patent infringement suits, 
   and the value of any signed patent 
   licensing agreement. 


[458] Source: CMA 0695 2-12 
APB 17, Intangible Assets, provides 
guidelines for the accounting and reporting 
of specifically identifiable intangible assets. 
All of the following are specifically 
identifiable intangible assets except 

   A. Patents and trademarks. 

   B. Copyrights. 

   C. Goodwill. 

   D. Leaseholds. 


[459] Source: CMA 0695 2-13 
On September 1, year 1, for $4,000,000 
cash and $2,000,000 notes payable, 
Norbend Corporation acquired the net assets 
of Crisholm Company, which had a fair 
value of $5,496,000 on that date. Norbend's 
management is of the opinion that the 
goodwill generated has an indefinite life and 
should be amortized over the longest 
allowable period. During the December 31, 
year 3 year-end audit after all adjusting 
entries have been made, the goodwill is 
determined to be worthless. The amount of 
the write-off as of December 31, year 3 
should be 

   A. $504,000 

   B. $478,800 

   C. $466,200 

   D. $474,600 


[460] Source: CIA 0594 IV-7 
An imprest bank account is: 

   A. A difference between the amount on 
   deposit according to the company's 
   records and the amount of collected 
   cash according to the bank record. 

   B. The principal bank account through 
   which most companies' cash 
   transactions are cycled. 

   C. An account used to make a specific 
   amount of cash available for a limited 
   purpose. 

   D. A local post office box from which a 
   local bank is authorized to pick up and 
   deposit remittances. 


[461] Source: CIA 0594 IV-8 
Who is responsible, at all times, for the 
amount of the petty cash fund? 

   A. The president of the company. 

   B. The general office manager. 

   C. The general cashier. 

   D. The petty cash custodian. 


[462] Source: CIA 0594 IV-9 
Which of the following is not an appropriate 
procedure for controlling the petty cash 
fund? 

   A. The petty cash custodian files 
   receipts by category of expenditure 
   after their presentation to the general 
   cashier, so that variations in different 
   types of expenditures can be monitored. 

   B. Surprise counts of the fund are made 
   from time to time by a superior of the 
   petty cash custodian to determine that 
   the fund is being accounted for 
   satisfactorily. 

   C. The petty cash custodian obtains 
   signed receipts from each individual to 
   whom petty cash is paid. 

   D. Upon receiving petty cash receipts 
   as evidence of disbursements, the 
   general cashier issues a company check 
   to the petty cash custodian, rather than 
   cash, to replenish the fund. 


[463] Source: CIA 0594 IV-10 
The entry required at the end of January is: 

   A. 

        Office supplies expense       $173
        Postage expense                112
        Entertainment expense           42
            Cash                                 $327
   B. 

        Office supplies expense       $173
        Postage expense                112
        Entertainment expense           42
            Petty cash                           $327
   C. 

        Office supplies expense       $173
        Postage expense                112
        Entertainment expense           42
        Cash over and short             10
            Cash                                 $337
   D. 

        Office supplies expense       $173
        Postage expense                112
        Entertainment expense           42
            Cash                                 $317
            Cash over and short                    10


[464] Source: CIA 1196 IV-6 
On a company's December 31, year 1 
balance sheet, which of the following items 
should be included in the amount reported as 
cash?

 I. A check payable to the company, dated January 2, year 2, in payment
    of a sale made in December year 1.
II. A check drawn on the company's account, payable to a vendor, dated
    and recorded in the company's books on December 31, year 1 but not
    mailed until January 10, year 2.
   A. I only. 

   B. II only. 

   C. I and II only. 

   D. Neither I nor II. 


[465] Source: CIA 1196 IV-7 
The following information pertains to a 
checking account of a company at July 31:

Balance per bank statement         $40,000
Interest earned for July               100
Outstanding checks                   3,000
Customers' checks returned for
  insufficient funds                 1,000
Deposit in transit                   5,000
At July 31, the company's correct cash 
balance is 

   A. $41,100 

   B. $41,000 

   C. $42,100 

   D. $42,000 


[466] Source: CIA 1193 IV-41 
An internal auditor is deriving cash flow 
data based on an incomplete set of facts. 
Bad debt expense was $2,000. Additional 
data for this period follow:

Net income                                $100,000
Accounts receivable beginning balance        5,000
Allowance for bad debts beginning
 balance                                      (500)
Accounts receivable written off              1,000
Increase in net accounts receivable
 (after subtraction of allowance
  for bad debts)                            30,000
How much cash was collected this period? 

   A. $67,000 

   B. $68,500 

   C. $68,000 

   D. $70,000 


[467] Source: CIA 1196 IV-33 
An analysis of a company's $150,000 
accounts receivable at year-end resulted in a 
$5,000 ending balance for its allowance for 
uncollectible accounts and a bad debt 
expense of $2,000. During the past year, 
recoveries on bad debts previously written 
off were correctly recorded at $500. If the 
beginning balance in the allowance for 
uncollectible accounts was $4,700, what 
was the amount of accounts receivable 
written off as uncollectible during the year? 

   A. $1,200 

   B. $1,800 

   C. $2,200 

   D. $2,800 


[468] Source: CIA 1191 IV-34 
A company offers its customers credit terms 
of a 2% discount if paid within 10 days, or 
the full balance is due within 30 days (2/10, 
n/30). If some customers take advantage of 
the cash discount and others do not, which 
of the following accounts will appear on the 
income statement if the net method of 
recording receivables is employed?

                         Sales Discounts
      Sales Discounts       Forfeited
      ---------------    ---------------
   A. 

            Yes                Yes
   B. 

            Yes                No
   C. 

            No                 No
   D. 

            No                 Yes


[469] Source: CIA 1195 IV-15 
When a right of return exists, all of the 
following are conditions that must be met 
for a company to recognize revenue from a 
sales transaction at the time of sale, except 

   A. The amount of future returns is 
   known with certainty. 

   B. The buyer's obligation to the seller 
   would not be changed in the event of 
   theft or physical damage of the product. 

   C. The seller's price to the buyer is 
   substantially fixed or determinable at 
   the date of sale. 

   D. The buyer has paid the seller, or the 
   buyer is obligated to pay the seller and 
   the obligation is not contingent on 
   resale of the product. 


[470] Source: CIA 0591 IV-31 
Which of the following statements is false 
regarding disclosure of accounts 
receivable? 

   A. Valuation accounts may be deducted 
   from accounts receivable for loss 
   contingencies that exist on the 
   receivables. 

   B. Valuation accounts may be deducted 
   from accounts receivable for estimated 
   discounts and returns to be granted in 
   the future on existing accounts 
   receivable. 

   C. Accounts receivable should be 
   reported and identified on the balance 
   sheet as pledged receivables if they are 
   used as security for a loan that is shown 
   as a liability on the same balance sheet. 

   D. Accounts receivable from officers 
   and owners should be classified as 
   offsets to owners' equity. 


[471] Source: CIA 0594 IV-32 
A government has just levied $140,000 in 
taxes and estimates that $14,000 of the taxes 
will never be collected. The journal entry of 
the government at the time the taxes are 
levied is: 

   A. 

        Tax revenue               $140,000
            Tax receivable                    $140,000
   B. 

        Tax receivable            $140,000
            Tax revenue                       $140,000
   C. 

        Tax revenue               $126,000
        Allowance for
         uncollectible taxes       $14,000
            Tax receivable                    $140,000
   D. 

        Tax receivable            $140,000
            Tax revenue                       $126,000
            Allowance for
             uncollectible taxes               $14,000


[472] Source: CIA 0595 IV-28 
Which is not a correct description of the 
assignment of accounts receivable? 

   A. The lender has a claim against the 
   receivables and has recourse to the 
   borrower. 

   B. The risk of default on the pledged 
   accounts receivable remains with the 
   borrower. 

   C. In a general assignment of 
   receivables, the borrower can substitute 
   new receivables for accounts 
   receivable that are collected in cash. 

   D. In a specific assignment of 
   receivables, the borrower can substitute 
   new receivables for accounts 
   receivable that are collected in cash. 


[473] Source: CPA 0594 F-12 
The following information pertains to Grey 
Co. at December 31, 2000:

Checkbook balance                $12,000
Bank statement balance            16,000
Check drawn on Grey's account,
  payable to a vendor, dated
  and recorded 12/31/00 but
  not mailed until 1/10/01         1,800
On Grey's December 31, 2000 balance 
sheet, what amount should be reported as 
cash? 

   A. $12,000 

   B. $13,800 

   C. $14,200 

   D. $16,000 


[474] Source: CMA 0688 3-28 
To comply with SFAS 2, Accounting for 
Research and Development Costs, 
expenditures for research and development 

   A. Must be capitalized in the period 
   incurred and amortized over the 
   estimated life of the asset. 

   B. May be expensed in the period 
   incurred or capitalized if the 
   probability of future benefits can 
   readily be determined. 

   C. Must be expensed in the period 
   incurred, unless the costs are for testing 
   a prototype. 

   D. Must be expensed in the period 
   incurred unless the work performed is 
   for others as part of a contractual 
   agreement. 


[475] Source: CMA 0696 2-5 
All sales and purchases for the year at Ross 
Corporation are credit transactions. Ross 
uses a perpetual inventory system and 
shipped goods that were correctly excluded 
from ending inventory. However, in error, 
the sale was not recorded. Which one of the 
following statements is correct? 

   A. Accounts receivable was not 
   affected, inventory was not affected, 
   sales were understated, and cost of 
   goods sold was understated. 

   B. Accounts receivable was 
   understated, inventory was not affected, 
   sales were understated, and cost of 
   goods sold was understated. 

   C. Accounts receivable was 
   understated, inventory was overstated, 
   sales were understated, and cost of 
   goods sold was overstated. 

   D. Accounts receivable was 
   understated, inventory was not affected, 
   sales were understated, and cost of 
   goods sold was not affected. 


[476] Source: CMA 0696 2-3 
An item of inventory purchased in year 1 for 
$25.00 has been incorrectly written down to 
a current replacement cost of $17.50. The 
item is currently selling in year 2 for 
$50.00, its normal selling price. Which one 
of the following statements is correct? 

   A. The income for year 1 is overstated. 

   B. The cost of sales for year 2 will be 
   overstated. 

   C. The income for year 2 will be 
   overstated. 

   D. The closing inventory of year 1 is 
   overstated. 


[477] Source: CMA 0696 2-4 
All sales and purchases for the year at Ross 
Corporation are credit transactions. Ross 
shipped goods via FOB shipping point. In 
error, the goods were not recorded as a sale 
and were included in ending inventory. 
Which one of the following statements is 
correct? 

   A. Accounts receivable was not 
   affected, inventory was overstated, 
   sales were understated, and cost of 
   goods sold was understated. 

   B. Accounts receivable was 
   understated, inventory was not affected, 
   sales were understated, and cost of 
   goods sold was understated. 

   C. Accounts receivable was 
   understated, inventory was overstated, 
   sales were understated, and cost of 
   goods sold was overstated. 

   D. Accounts receivable was 
   understated, inventory was overstated, 
   sales were understated, and cost of 
   goods sold was understated. 


[478] Source: CMA 0696 2-12 
If Thomas uses a first-in, first-out perpetual 
inventory system, the total cost of the 
inventory for carburetor 2642J at March 31 
is 

   A. $196,115 

   B. $197,488 

   C. $201,300 

   D. $263,825 


[479] Source: CMA 0696 2-13 
If Thomas uses a last-in, first-out periodic 
inventory system, the total cost of the 
inventory for carburetor 2642J at March 31 
is 

   A. $196,115 

   B. $197,488 

   C. $201,300 

   D. $268,400 


[480] Source: CMA 0696 2-14 
If Thomas uses a last-in, first-out perpetual 
inventory system, the total cost of the 
inventory for carburetor 2642J at March 31 
is 

   A. $196,200 

   B. $197,488 

   C. $263,863 

   D. $268,400 


[481] Source: CMA 0696 2-15 
If Thomas uses a weighted-average periodic 
inventory system, the total cost of the 
inventory for carburetor 2642J at March 31 
is 

   A. $194,200 

   B. $198,301 

   C. $198,374 

   D. $199,233 


[482] Source: CMA 0696 2-16 
If Thomas uses a moving-average perpetual 
inventory system, the total cost of the 
inventory for carburetor 2642J at March 31 
is 

   A. $194,200 

   B. $198,301 

   C. $199,233 

   D. $265,960 


[483] Source: CMA 1296 2-1 
Bad debt expense must be estimated in order 
to satisfy the matching principle when 
expenses are recorded in the same periods 
as the related revenues. In estimating the 
provision for doubtful accounts for a period, 
companies generally accrue 

   A. Either an amount based on a 
   percentage of total sales or an amount 
   based on a percentage of accounts 
   receivable after adjusting for any 
   balance in the allowance for doubtful 
   accounts. 

   B. A percentage of total sales. 

   C. Either an amount based on a 
   percentage of credit sales or an amount 
   based on a percentage of accounts 
   receivable after adjusting for any 
   balance in the allowance for doubtful 
   accounts. 

   D. An amount equal to last year's bad 
   debt expense. 


[484] Source: CMA 1296 2-2 
Using the straight-line depreciation method, 
Ace Industries' year 3 depreciation expense 
is 

   A. $121,250 

   B. $233,750 

   C. $242,500 

   D. $246,400 


[485] Source: CMA 1296 2-3 
Using the double-declining-balance 
depreciation method, Ace Industries' year 3 
depreciation expense is 

   A. $121,250 

   B. $233,750 

   C. $242,500 

   D. $246,400 


[486] Source: CMA 1296 2-4 
Ace Industries has decided to simplify its 
recordkeeping in year 4 by changing to 
composite depreciation for its manufacturing 
equipment. The appropriate composite rate 
has been determined to be 16%. If no 
additional equipment is purchased in year 4, 
Ace Industries' year 4 depreciation expense 
will be 

   A. $121,250 

   B. $233,750 

   C. $242,500 

   D. $246,400 


[487] Source: CMA 1296 2-28 
According to SFAS 34, Capitalization of 
Interest Costs, interest should be capitalized 
for assets that are 

   A. Being constructed or otherwise 
   being produced as discrete projects for 
   an enterprise's own use. 

   B. Not being used in the earning 
   activities of the enterprise and not 
   undergoing the activities necessary to 
   get them ready for use. 

   C. Acquired with externally restricted 
   gifts or grants. 

   D. Routinely produced and are used in 
   the earning activities of the enterprise. 


[488] Source: CMA 0697 2-7 
The depreciation expense for the fiscal year 
ended May 31, 2001 using the 
units-of-output method for all years would 
be 

   A. $13,680 

   B. $14,880 

   C. $15,048 

   D. $18,750 


[489] Source: CMA 0697 2-8 
The depreciation expense for the fiscal year 
ended May 31, 1999 using the 
double-declining-balance (DDB) method for 
all years would be 

   A. $17,188 

   B. $25,000 

   C. $27,500 

   D. $41,250 


[490] Source: CMA 0697 2-9 
The depreciation expense for the fiscal year 
ended May 31, 2000 using the 
sum-of-the-years'-digits (SYD) method for 
all years would be 

   A. $17,679 

   B. $18,750 

   C. $21,429 

   D. $23,571 


[491] Source: CMA 0697 2-11 
Assuming that the securities are properly 
classified as available-for-sale securities 
under SFAS 115, Accounting for Certain 
Investments in Debt and Equity Securities, 
the unrealized holding gain or loss as of 
May 31, year 3 would be 

   A. Recognized as an $8,005 unrealized 
   holding gain on the income statement. 

   B. Recognized in other comprehensive 
   income by a year-end credit of $8,005. 

   C. Recognized in other comprehensive 
   income by a year-end debit of $8,005. 

   D. Not recognized. 


[492] Source: CMA 0697 2-12 
Assuming that the securities are properly 
classified as held-to-maturity securities 
under SFAS 115, Accounting for Certain 
Investments in Debt and Equity Securities, 
the unrealized holding gain or loss as of 
May 31, year 2 would be 

   A. Recognized as an $8,005 unrealized 
   holding gain on the income statement. 

   B. Recognized in other comprehensive 
   income by a year-end credit of $8,005. 

   C. Recognized in other comprehensive 
   income by a year-end debit of $8,005. 

   D. Not recognized. 


[493] Source: CMA 0697 2-27 
SFAS 121, Accounting for the Impairment of 
Long-Lived Assets and for Long-Lived 
Assets to Be Disposed Of, applies to all of 
the following except 

   A. Financial instruments. 

   B. Goodwill. 

   C. Minicomputers used to run a 
   production process. 

   D. Patents on a production process. 


[494] Source: CMA 0697 2-30 
According to SFAS 48, Revenue 
Recognition When Right of Return Exists, if 
a company sells its product but gives the 
buyer the right to return the product, the 
revenue from the sale will be recognized at 
the time of the sale only when all of the 
following conditions have been met except 
when the 

   A. Seller's price to the buyer is 
   determinable at the date of the sale. 

   B. Seller has significant obligations for 
   future performance to help the buyer 
   resell the product. 

   C. Buyer is obligated to pay the seller 
   and the obligation is not contingent on 
   resale of the product. 

   D. Buyer's obligation would not be 
   changed in the event of theft of the 
   product. 


[495] Source: Publisher 
Which of the following situations would not 
prevent a transfer of accounts receivable 
with recourse from being accounted for as a 
sale? 

   A. The transferee allowed the transferor 
   to maintain an insignificant beneficial 
   interest in the receivables. 

   B. Of the numerous willing buyers, the 
   transferor only prohibited the transferee 
   from selling the receivables to his/her 
   main competitor. 

   C. The transferor can regain the 
   receivables if the transferee files for 
   bankruptcy. 

   D. The transferor has an agreement that 
   entitles him/her to repurchase the 
   transferred receivables at the original 
   purchase amount prior to collection. 


[496] Source: CMA 0689 3-6 
According to SFAS 34, "Capitalization of 
Interest Costs," the types of assets that 
qualify for interest capitalization are 

   A. Assets that are being used in the 
   earning activities of the company. 

   B. Assets that are ready for their 
   intended use in the activities of the 
   company. 

   C. Assets that are excluded in the 
   consolidated financial statements of the 
   company. 

   D. Assets that are constructed for the 
   company's own use. 


[497] Source: CMA 1294 2-8 
If Devereaux Inc. uses the moving average 
method, the value of its inventory at 
November 30, 1994, would be 

   A. $4,400 

   B. $4,480 

   C. $4,785 

   D. $4,960 


[498] Source: CMA 0695 2-4 
The Year 3 depreciation expense for the 
vehicle using the sum-of-the-years'-digits 
(SYD) method was 

   A. $6,000 

   B. $8,000 

   C. $10,000 

   D. $13,333 


[499] Source: CMA 0695 2-5 
The fiscal Year 2 year-end accumulated 
depreciation balance, using the 
double-declining-balance method was 

   A. $8,000 

   B. $12,000 

   C. $16,000 

   D. $32,000 


[500] Source: CMA 0695 2-6 
Using the units-of-production method, what 
was the Year 5 depreciation expense? 

   A. $4,000 

   B. $4,800 

   C. $5,000 

   D. $6,000 


[501] Source: Publisher 
The 1999 depreciation expense for the truck 
using the sum-of-the-years'-digits (SYD) 
method was 

   A. $12,000 

   B. $16,000 

   C. $20,000 

   D. $26,667 


[502] Source: Publisher 
Assuming the company uses the 
double-declining-balance (DDB) method, 
the fiscal 1998 year-end accumulated 
depreciation was 

   A. $16,000 

   B. $24,000 

   C. $32,000 

   D. $64,000 


[503] Source: Publisher 
Using the units-of-production method, what 
is the 2001 depreciation expense? 

   A. $8,000 

   B. $9,600 

   C. $10,000 

   D. $12,000 


[504] Source: Publisher 
If the company uses the half-year convention 
in recording depreciation, how much 
depreciation was recorded in 1997 under 
the sum-of-the-years'-digits (SYD) method? 

   A. $13,333 

   B. $16,667 

   C. $26,667 

   D. $33,333 


[505] Source: Publisher 
If the company uses the half-year convention 
in recording depreciation, how much 
depreciation was recorded in 1998 under 
the sum-of-the-years'-digits (SYD) method? 

   A. $8,000 

   B. $10,667 

   C. $21,333 

   D. $24,000 


[506] Source: Publisher 
Assuming the half-year convention was not 
used, the fiscal 2000 depreciation expense 
under the double-declining-balance (DDB) 
method was 

   A. $1,600 

   B. $6,912 

   C. $8,640 

   D. $14,400 


[507] Source: Publisher 
Oxford Company sold $300,000 of its 
accounts receivables without recourse to a 
factoring agency. The purchaser assessed a 
finance charge of 5%. It also retained 5% to 
cover adjustments (sales returns, discounts, 
etc.). Oxford should record 

   A. A debit to cash of $300,000. 

   B. A credit to accounts receivable of 
   $300,000. 

   C. A credit to liability on transferred 
   accounts receivable of $300,000. 

   D. Interest expense of $15,000. 


[508] Source: Publisher 
If Farmers' uses a first-in, first-out (FIFO) 
perpetual inventory system, the total cost of 
the inventory for mower blades at May 31 is 

   A. $392,230 

   B. $394,975 

   C. $402,600 

   D. $536,800 


[509] Source: Publisher 
If Farmers' uses a first-in, first-out (FIFO) 
periodic inventory system, the total cost of 
the inventory for mower blades at May 31 is 

   A. $392,230 

   B. $394,975 

   C. $402,600 

   D. $536,800 


[510] Source: Publisher 
If Farmers' uses a last-in, first-out (LIFO) 
periodic inventory system, the total cost of 
the inventory for mower blades at May 31 is 

   A. $392,230 

   B. $394,975 

   C. $402,600 

   D. $536,800 


[511] Source: Publisher 
If Farmers' uses a last-in, first out (LIFO) 
perpetual inventory system, the total cost of 
the inventory for mower blades at May 31 is 

   A. $392,230 

   B. $392,400 

   C. $394,975 

   D. $402,600 


[512] Source: Publisher 
At May 31, if Farmers' uses a 
weighted-average periodic inventory 
system, the total cost of the inventory for 
mower blades (assuming all calculations are 
rounded to two decimal places) is 

   A. $393,633 

   B. $396,622 

   C. $396,744 

   D. $398,467 


[513] Source: Publisher 
At May 31, if Farmers' uses a 
moving-average perpetual inventory system, 
the total cost of the inventory for mower 
blades (assuming all calculations are 
rounded to two decimal places) is 

   A. $393,633 

   B. $396,622 

   C. $396,744 

   D. $398,452 


[514] Source: Publisher 
Price's Food Market's ending inventory as of 
December 31, year 2, computed by the 
dollar-value LIFO method, was 

   A. $480,000 

   B. $500,000 

   C. $502,000 

   D. $550,000 


[515] Source: Publisher 
Price's Food Market's ending inventory as of 
December 31, year 3, computed by the 
dollar-value LIFO method, is 

   A. $480,000 

   B. $500,000 

   C. $502,000 

   D. $600,000 


[516] Source: CMA 0697 2-19 
If Jensen Company uses the first-in, first-out 
(FIFO) method of inventory valuation, the 
May 31 inventory would be 

   A. $1,400 

   B. $1,460 

   C. $1,493 

   D. $1,680 


[517] Source: CMA 0697 2-20 
If Jensen Company uses the last-in, first-out 
(LIFO) method of inventory valuation, the 
May 31 inventory would be 

   A. $1,400 

   B. $1,460 

   C. $1,493 

   D. $1,562 


[518] Source: CMA 0690 3-3 
The following FCL Corporation inventory 
information is available for the year ended 
December 31:

                                   Cost        Retail
                                  -------     --------
Beginning inventory at 1/1        $35,000     $100,000
Net purchases                      55,000      110,000
Net markups                                     15,000
Net markdowns                                   25,000
Net sales                                      150,000
The December 31 ending inventory at cost 
using the conventional (lower of average 
cost or market) retail inventory method 
equals 

   A. $17,500 

   B. $20,000 

   C. $27,500 

   D. $50,000 


[519] Source: CIA 1196 IV-21 
A company started in 1997 with 200 scented 
candles on hand at a cost of $3.50 each. 
These candles sell for $7.00 each. The 
following schedule represents the purchases 
and sales of candles during 1997:

Transaction  Quantity      Unit     Quantity
   Number    Purchased     Cost       Sold
----------   ---------   --------   --------
     1          --           --        150
     2          250        $3.30       --
     3          --           --        100
     4          200        $3.10       --
     5          --           --        200
     6          350        $3.00       --
     7          --           --        300
If the company uses perpetual LIFO 
inventory pricing, the cost of goods sold for 
1997 is 

   A. $2,330 

   B. $2,805 

   C. $2,375 

   D. $2,445 


[520] Source: Publisher 
If Flesher uses the half-year convention to 
recognize depreciation expense on all 
depreciable assets bought during the year, 
the amount of depreciation expense using the 
straight-line method that would be projected 
for the fiscal year ending June 30, 2001 is 

   A. $27,000 

   B. $21,000 

   C. $ 9,000 

   D. $18,000 


[521] Source: Publisher 
If Flesher uses the full-year convention to 
recognize depreciation expense in the year 
of acquisition, the amount of the projected 
depreciation expense using the 
sum-of-the-years'-digits (SYD) method for 
the fiscal year ending June 30, 2001 is 

   A. $4,000 

   B. $4,667 

   C. $32,000 

   D. $37,333 


[522] Source: CMA 1290 2-14 
According to SFAS 2, Accounting for 
Research and Development Costs, all of the 
following types of activities qualify as 
research and development activities except 

   A. Design, construction, and testing of 
   preproduction models. 

   B. Laboratory research aimed at 
   discovery of a new knowledge. 

   C. Engineering activity required to 
   advance the design of a product to the 
   manufacturing stage. 

   D. Engineering follow-through in an 
   early phase of commercial production. 


[523] Source: CMA 0692 2-17 
When a company sells its products and 
gives the buyer the right to return the 
product, revenue from the sale should be 
recognized at the time of sale only if certain 
criteria are met. According to SFAS 48, 
Revenue Recognition When Right of Return 
Exists, which one of the following is not a 
criterion? 

   A. The seller does not have significant 
   obligations for future performance to 
   directly bring about the resale of the 
   product by the buyer. 

   B. The buyer acquiring the product for 
   resale has economic substance apart 
   from that provided by the seller. 

   C. The amount of future returns can be 
   reasonably estimated. 

   D. The seller's price to the buyer is 
   contingent upon the ultimate selling 
   price received when the product is 
   resold. 


[524] Source: CMA 1292 2-23 
APB 18, The Equity Method of Accounting 
for Investments in Common Stock, provided 
guidance that a company should apply the 
equity method whenever it could exercise 
significant influence over the investee. 
Significant influence is defined as 

   A. 25% ownership. 

   B. 10% ownership. 

   C. 20% ownership. 

   D. 50% ownership. 


[525] Source: CPA 0593 II-10 
Amble, Inc., exchanged a truck with a 
carrying amount of $12,000 and a fair value 
of $20,000 for a truck with a carrying 
amount of $12,000 and $5,000 cash. The 
fair value of the truck received was 
$15,000. At what amount should Amble 
record the truck received in the exchange? 

   A. $7,000 

   B. $9,000 

   C. $12,000 

   D. $15,000 


[526] Source: CMA 1292 2-13 
Roth Company is a distributor of perishable 
foods whose prices fluctuate seasonally and 
with agricultural growing conditions. Roth's 
customers have the right to return unsold 
goods within a specified period of time, and 
payment is contingent upon resale. As a 
result, Roth must 

   A. Use the cost recovery method of 
   revenue recognition. 

   B. Record sales when the return 
   privilege has expired. 

   C. Record sales that have been reduced 
   by an estimate of future returns. 

   D. Use the installment method of 
   revenue recognition. 


[527] Source: CMA 0691 2-21 
If Baron, Inc. exchanges its computer for 
Perlin Co.'s computer and also receives 
$600 cash, the gain that Baron should 
recognize from this transaction in its 
financial statements would be 

   A. $0 

   B. $61.22 

   C. $68.18 

   D. $350.00 


[528] Source: CMA 0691 2-22 
If Baron, Inc. exchanges its computer and 
$200 cash for Shaw, Inc.'s computer, the 
gain that Baron should recognize from this 
transaction in its financial statements would 
be 

   A. $0 

   B. $16 

   C. $18 

   D. $500 


[529] Source: CMA 0691 2-23 
If Baron, Inc. pays $5,350 cash for Foran 
Company's computer, the gain that Baron 
should recognize from this transaction in its 
financial statements would be 

   A. $0 

   B. $100 

   C. $240 

   D. $350 


[530] Source: CMA 0691 2-24 
Baron, Inc. donated one of its computers to a 
local grammar school. The gain (loss) that 
Baron should recognize from this transaction 
in its financial statements is 

   A. $0 

   B. $500 gain. 

   C. $500 loss. 

   D. $4,400 loss. 


[531] Source: CMA 0691 2-25 
During the demonstration of one of Baron, 
Inc.'s computers, the customer asked if a 
carrying case were available. When the 
salesman went to check the stock, the 
customer walked out of the store with the 
computer. The computer, which originally 
cost $4,400, was not recovered, and Baron 
received $4,675 from its insurance 
company. The computer was replaced at a 
cost of $4,730. The gain (loss) that Baron 
should recognize from this transaction in its 
financial statements is 

   A. $0 

   B. $55 loss. 

   C. $225 loss. 

   D. $275 gain. 


[532] Source: CPA 1188 I-1 
Burr Company had the following account 
balances at December 31, 2000:

Cash in banks                                        $2,250,000
Cash on hand                                            125,000
Cash legally restricted for additions to plant
  (expected to be disbursed in 2001)                  1,600,000
Cash in banks includes $600,000 of 
compensating balances against short-term 
borrowing arrangements. The compensating 
balances are not legally restricted as to 
withdrawal by Burr. In the current assets 
section of Burr's December 31, 2000 
balance sheet, total cash should be reported 
at 

   A. $1,775,000 

   B. $2,250,000 

   C. $2,375,000 

   D. $3,975,000 


[533] Source: CPA 1194 F-45 
Inge Co. determined that the net value of its 
accounts receivable at December 31, 2000, 
based on an aging of the receivables, was 
$325,000. Additional information is as 
follows:

Allowance for uncollectible accounts -- 1/1/00     $ 30,000
Uncollectible accounts written off during 2000       18,000
Uncollectible accounts recovered during 2000          2,000
Accounts receivable at 12/31/00                     350,000
For 2000, what would be Inge's 
uncollectible accounts expense? 

   A. $5,000 

   B. $11,000 

   C. $15,000 

   D. $21,000 


[534] Source: Publisher 
Seller Co. transfers loans to Buyer Co. in a 
transaction appropriately accounted for as a 
sale. The loans have a fair value of $1,650 
and a carrying amount of $1,500. Seller also 
receives an option to call (purchase) the 
same or similar loans from Buyer and 
undertakes to repurchase delinquent loans. 
Furthermore, the loans have a fixed rate, but 
Seller agrees to provide Buyer a return at a 
variable rate. Thus, the transaction 
effectively includes an interest rate swap. 
The following are the relevant fair values:

Cash received           $1,575
Interest rate swap          60
Recourse obligation         90
Call option                105
Seller should recognize a gain of 

   A. $45 

   B. $90 

   C. $150 

   D. $240 


[535] Source: CPA 1190 II-1 
On July 1, 2000, Kay Corp. sold equipment 
to Mando Co. for $100,000. Kay accepted a 
10% note receivable for the entire sales 
price. This note is payable in two equal 
installments of $50,000 plus accrued 
interest on December 31, 2000 and 
December 31, 2001. On July 1, 2001, Kay 
discounted the note at a bank at an interest 
rate of 12%. Kay's proceeds from the 
discounted note were 

   A. $48,400 

   B. $52,640 

   C. $52,250 

   D. $51,700 


[536] Source: CPA 1194 F-38 
Leaf Co. purchased from Oak Co. a 
$20,000, 8%, 5-year note that required five 
equal annual year-end payments of $5,009. 
The note was discounted to yield a 9% rate 
to Leaf. At the date of purchase, Leaf 
recorded the note at its present value of 
$19,485. What should be the total interest 
revenue earned by Leaf over the life of this 
note? 

   A. $5,045 

   B. $5,560 

   C. $8,000 

   D. $9,000 


[537] Source: CPA 1193 I-15 
Roth, Inc. received from a customer a 
1-year, $500,000 note bearing annual 
interest of 8%. After holding the note for 6 
months, Roth discounted the note at 
Regional Bank at an effective interest rate of 
10%. What amount of cash did Roth receive 
from the bank? 

   A. $540,000 

   B. $528,400 

   C. $513,000 

   D. $486,000 


[538] Source: CPA 1191 I-17 
On July 1, 2000, Lee Co. sold goods in 
exchange for a $200,000 8-month 
noninterest-bearing note receivable. At the 
time of the sale, the note's market rate of 
interest was 12%. What amount did Lee 
receive when it discounted the note at 10% 
on September 1, 2000? 

   A. $180,000 

   B. $186,667 

   C. $190,000 

   D. $188,000 


[539] Source: CPA 0588 I-22 
On January 1, 1999, Poe Company adopted 
the dollar-value LIFO inventory method. 
Poe's entire inventory constitutes a single 
pool. Inventory data for 1999 and 2000 are 
as follows:

 Inventory    Inventory   Relevant
at Current-   at Base-      Price
   Date       Year Cost   Year Cost   Index
-----------   ---------   ---------   -----
   1/1/99     $150,000    $150,000    1.00
 12/31/99      220,000     200,000    1.10
 12/31/00      276,000     230,000    1.20
Poe's LIFO inventory value at December 31, 
2000 is 

   A. $230,000 

   B. $241,000 

   C. $246,000 

   D. $276,000 


[540] Source: CPA 0590 I-13 
Union Corp. uses the first-in, first-out retail 
method of inventory valuation. The 
following information is available:

                           Cost        Retail
                          -------     --------
Beginning inventory       $12,000     $ 30,000
Purchases                  60,000      110,000
Net additional markups                  10,000
Net markdowns                           20,000
Sales revenue                           90,000
If the lower-of-cost-or-market rule is 
disregarded, what would be the estimated 
cost of the ending inventory? 

   A. $24,000 

   B. $20,000 

   C. $19,200 

   D. $18,000 


[541] Source: CPA 0589 I-22 
At December 31, 2000, the following 
information was available from Huff Co.'s 
accounting records:

                         Cost          Retail
                       --------      ----------
Inventory, 1/1/00      $147,000      $  203,000
Purchases               833,000       1,155,000
Additional markups        --             42,000
                       --------      ----------
Available for sale     $980,000      $1,400,000
                       ========      ==========
Sales for the year totaled $1,106,000. 
Markdowns amounted to $14,000. Under the 
approximate 
lower-of-average-cost-or-market retail 
method, Huff's inventory at December 31, 
2000 was 

   A. $280,000 

   B. $197,160 

   C. $196,000 

   D. $194,854 


[542] Source: CPA 1194 F-17 
On January 2, 2000, Paye Co. purchased 
Shef Co. at a cost that resulted in 
recognition of goodwill of $200,000 having 
an expected benefit period of 10 years. 
During the first quarter of 2000, Paye spent 
an additional $80,000 on expenditures 
designed to maintain goodwill. Due to these 
expenditures, at December 31, 2000, Paye 
estimated that the benefit period of goodwill 
was 40 years. In its December 31, 2000 
balance sheet, what amount should Paye 
report as goodwill? 

   A. $180,000 

   B. $195,000 

   C. $252,000 

   D. $273,000 


[543] Source: CPA 0FIN R98-11 
Aragon Co. purchased two machines for 
immediate use for $200,000 each on January 
2. Machine A has a useful life of 5 years and 
can be used in only one research project. 
Machine B will be used for 2 years on a 
research and development project and then 
used by the production division for an 
additional 8 years. Aragon uses the 
straight-line method of depreciation. What 
amount should Aragon include in this year's 
research and development expense? 

   A. $60,000 

   B. $220,000 

   C. $300,000 

   D. $400,000 


[544] Source: CPA 1191 I-47 
In the current year, Ball Labs incurred the 
following costs:

Direct costs of doing contract R&D work for the
  government to be reimbursed by governmental unit      $400,000
R&D costs not included above were
  Depreciation                                          $300,000
  Salaries                                               700,000
  Indirect costs appropriately allocated                 200,000
  Materials                                              180,000

What was Ball's total R&D expense? 

   A. $1,080,000 

   B. $1,380,000 

   C. $1,580,000 

   D. $1,780,000 


[545] Source: CPA 1192 I-20 
On July 1, 2001, Balt Co. exchanged a truck 
for 25 shares of Ace Corp.'s common stock. 
On that date, the truck's carrying amount was 
$2,500, and its fair value was $3,000. Also, 
the book value of Ace's stock was $60 per 
share. On December 31, 2001, Ace had 250 
shares of common stock outstanding and its 
book value per share was $50. What amount 
should Balt report in its December 31, 2001 
balance sheet as investment in Ace? 

   A. $3,000 

   B. $2,500 

   C. $1,500 

   D. $1,250 


[546] Source: CPA 0590 T-31 
Scott Co. exchanged similar nonmonetary 
assets with Dale Co. No cash was 
exchanged. The carrying amount of the asset 
surrendered by Scott exceeded both the fair 
value of the asset received and Dale's 
carrying amount of that asset. Scott should 
recognize the difference between the 
carrying amount of the asset it surrendered 
and 

   A. The fair value of the asset it 
   received as a loss. 

   B. The fair value of the asset it received 
   as a gain. 

   C. Dale's carrying amount of the asset it 
   received as a loss. 

   D. Dale's carrying amount of the asset it 
   received as a gain. 


[547] Source: CPA 1192 T-24 
Vik Auto and King Clothier exchanged 
goods, held for resale, with equal fair 
values. Each will use the other's goods to 
promote its own products. The retail price 
of the car that Vik gave up is less than the 
retail price of the clothes received. What 
gain should Vik recognize on the 
nonmonetary exchange? 

   A. A gain is not recognized. 

   B. A gain equal to the difference 
   between the retail prices of the clothes 
   received and the car. 

   C. A gain equal to the difference 
   between the retail price and the cost of 
   the car. 

   D. A gain equal to the difference 
   between the fair value and the cost of 
   the car. 


[548] Source: CPA 0593 T-16 
In an exchange of similar assets, Transit Co. 
received equipment with a fair value equal 
to the carrying amount of equipment given 
up. Transit also contributed cash. As a result 
of the exchange, Transit recognized 

   A. A loss equal to the cash given up. 

   B. A loss determined by the proportion 
   of cash paid to the total transaction 
   value. 

   C. A gain determined by the proportion 
   of cash paid to the total transaction 
   value. 

   D. Neither gain nor loss. 


[549] Source: CPA 0595 F-30 
Slate Co. and Talse Co. exchanged similar 
plots of land with fair values in excess of 
carrying amounts. In addition, Slate 
received cash from Talse to compensate for 
the difference in land values. As a result of 
the exchange, Slate should recognize 

   A. A gain equal to the difference 
   between the fair value and the carrying 
   amount of the land given up. 

   B. A gain in an amount determined by 
   the ratio of cash received to total 
   consideration. 

   C. A loss in an amount determined by 
   the ratio of cash received to total 
   consideration. 

   D. Neither a gain nor a loss. 


[550] Source: CMA 0688 3-25 
In Year 1, the Voorhees Corporation 
introduced a new line of computer products 
that carry a 2-year warranty against defects 
and workmanship. The company estimates 
that the total warranty cost will be 10% of 
sales, with 40% of the expenditures 
occurring during the first year and 60% 
during the second year. Sales and actual 
warranty expenditures for Year 1 and Year 
2 were as follows:

                                      Actual Warranty
   Year             Sales               Expenditures
   ----            --------           ---------------
    1              $300,000               $12,000
    2               400,000                30,000
At the end of Year 2, the balance in the 
estimated accrued warranty liability account 
will be 

   A. $24,000 

   B. $46,000 

   C. $58,000 

   D. $28,000 


[551] Source: CMA 0688 3-27 
On January 1, Year 1, Template Corporation 
issued $800,000 of 12%, 10-year bonds at 
101. The bonds are callable at Template's 
option at 105. Template uses the 
straight-line method to amortize bond 
premium since this method is not materially 
different from the effective interest method. 
On December 31, Year 5, Template 
repurchased $400,000 of the bonds in the 
open market at 99. All interest and 
amortization have been recorded for Year 5. 
Assuming that the gain is material and 
ignoring income taxes, Template must report 
the repurchase of its bonds as a(n) 

   A. Gain of $6,000. 

   B. Gain of $8,000. 

   C. Extraordinary gain of $6,000. 

   D. Extraordinary gain of $8,000. 


[552] Source: CMA 0689 3-12 
Which one of the following is not a 
characteristic of a noncompensatory stock 
purchase plan? 

   A. The market price of the stock is 
   known on the date the option is granted. 

   B. Substantially all full-time employees 
   that meet limited employment 
   qualifications may participate. 

   C. The stock is offered to eligible 
   employees equally. 

   D. The time permitted to exercise a 
   purchase right is limited to a reasonable 
   period. 


[553] Source: CMA 0689 4-16 
Trade accounts payable are valued on the 
statement of financial position at the 

   A. Historical cost. 

   B. Current cost. 

   C. Current market value. 

   D. Net settlement value. 


[554] Source: CMA 1289 3-1 
When applying SFAS 87, Employers' 
Accounting for Pensions, the accumulated 
benefit obligation (ABO) is best described 
as the 

   A. Present value of benefits accrued to 
   date based on future salary levels. 

   B. Present value of benefits accrued to 
   date based on current salary levels. 

   C. Increase in retroactive benefits at the 
   date of the amendment of the plan. 

   D. Amount of the adjustment necessary 
   to reflect the difference between actual 
   and estimated actuarial returns. 


[555] Source: CMA 1289 3-2 
On January 1, 1989, the first day of its fiscal 
year, Lucretia Corporation adopted the 
requirements of SFAS 87, Employers' 
Accounting for Pensions. On the date of 
adoption, the following information was 
available:

Accumulated benefit obligation (ABO)       $500,000
Projected benefit obligation (PBO)          650,000
Pension plan assets (fair value)            420,000
Average remaining service life of
  current employees                        20 years
The transition amount component of 
Lucretia's net periodic pension cost (NPPC) 
for the fiscal year ended December 31, 2001 
is 

   A. $4,000 

   B. $11,500 

   C. $80,000 

   D. $230,000 


[556] Source: CMA 1290 2-11 
If the discount is amortized by the 
straight-line method, Marquette, Inc.'s 
interest expense for the fiscal year ended 
November 30, Year 2 related to its 
$6,000,000 bond issue will be 

   A. $623,372 

   B. $720,000 

   C. $881,046 

   D. $960,000 


[557] Source: CMA 1290 2-12 
If the discount is amortized by the effective 
interest method, Marquette, Inc.'s interest 
expense for the fiscal year ended November 
30, Year 2 related to its $6,000,000 bond 
issue will be 

   A. $720,000 

   B. $831,163 

   C. $835,610 

   D. $881,046 


[558] Source: CPA 1192 I-24 
Case Cereal Co. frequently distributes 
coupons to promote new products. On 
October 1, Case mailed 1 million coupons 
for $.45 off each box of cereal purchased. 
Case expects 120,000 of these coupons to 
be redeemed before the December 31 
expiration date. It takes 30 days from the 
redemption date for Case to receive the 
coupons from the retailers. Case reimburses 
the retailers an additional $.05 for each 
coupon redeemed. As of December 31, Case 
had paid retailers $25,000 related to these 
coupons, and had 50,000 coupons on hand 
that had not been processed for payment. 
What amount should Case report as a 
liability for coupons in its December 31 
balance sheet? 

   A. $35,000 

   B. $29,000 

   C. $25,000 

   D. $22,500 


[559] Source: CMA 1290 2-21 
According to SFAS 87, Employers' 
Accounting for Pensions, the projected 
benefit obligation is best described as the 

   A. Present value of benefits accrued to 
   date based on future salary levels. 

   B. Present value of benefits accrued to 
   date based on current salary levels. 

   C. Increase in retroactive benefits at the 
   date of the amendment of the plan. 

   D. Amount of the adjustment necessary 
   to reflect the difference between actual 
   and estimated actuarial returns. 


[560] Source: CMA 1290 2-22 
Kronski Corporation's net minimum pension 
liability at October 31, Year 1 is 

   A. $59,875. 

   B. $517,500. 

   C. $523,750. 

   D. $592,500. 


[561] Source: CMA 1290 2-23 
The balance of the intangible asset, deferred 
pension cost, on Kronski Corporation's 
statement of financial position at October 
31, Year 1 should be 

   A. $172,375. 

   B. $190,000. 

   C. $411,250. 

   D. $480,000. 


[562] Source: CMA 1290 2-25 
According to SFAS 84, Induced 
Conversions of Convertible Debt, an issuer 
of a convertible security may attempt to 
induce prompt conversion of its convertible 
debt to equity securities by offering 
additional securities or other consideration 
as a "sweetener." The additional 
consideration used to induce conversion 
should be reported as a(n) 

   A. Reduction of paid-in capital of the 
   new equity securities. 

   B. Reduction of retained earnings. 

   C. Extraordinary item in the current 
   income statement. 

   D. Expense of the current period but not 
   an extraordinary item. 


[563] Source: CMA 1291 2-26 
DalCo, Inc. has 50 employees as of 
November 30, Year 1, the end of the current 
fiscal year. These employees earn an 
average of $400 per week and collectively 
have earned the right to 120 weeks of paid 
vacation time during the current fiscal year. 
This paid vacation time is to be taken in the 
coming fiscal year (December 1, Year 1 
through November 30, Year 2). Vacation not 
taken in 1 fiscal year can be carried forward 
to a future fiscal year upon approval of the 
employee's supervisor. These requests are 
almost always honored. There have been no 
requests for extensions of vacation as of 
November 30, Year 1. The appropriate 
accounting treatment for this vacation pay is 

   A. To accrue vacation pay as of 
   November 30, Year 1, with a debit to 
   wages expense for $48,000 and a credit 
   to vacation wages payable for $48,000. 

   B. Not to accrue the vacation pay as of 
   November 30, Year 1, but to record it 
   as of December 1, Year 1, with a debit 
   to wages expense for $48,000 and a 
   credit to vacation wages payable for 
   $48,000. 

   C. To record the vacation pay as a 
   deferred asset as of November 30, Year 
   1, with a debit to deferred wages 
   expense for $48,000 and a credit to 
   vacation wages payable for $48,000. 

   D. To do nothing in the current fiscal 
   year, but to record the vacation pay as a 
   deferred asset as of December 1, Year 
   1, with a debit to deferred wages 
   expense for $48,000 and a credit to 
   vacation wages payable for $48,000. 


[564] Source: CMA 0692 2-8 
According to APB 25, Accounting for Stock 
Issued to Employees, a stock option plan 
may or may not be intended to compensate 
employees for their work. The compensation 
expense for compensatory stock option 
plans should be recognized 

   A. In the periods the employees become 
   eligible to exercise the options. 

   B. In the periods the employees perform 
   services. 

   C. In the periods the stock is issued. 

   D. In the periods the options are 
   granted. 


[565] Source: CMA 0692 2-9 
According to APB 25, Accounting for Stock 
Issued to Employees, noncompensatory 
stock option plans have all of the following 
characteristics except 

   A. Participation by substantially all 
   full-time employees who meet limited 
   employment qualifications. 

   B. Equal offers of stock to all eligible 
   employees. 

   C. A limited amount of time permitted 
   to exercise the option. 

   D. A provision related to the 
   achievement of certain performance 
   criteria. 


[566] Source: CPA 0595 F-21 
In December, Mill Co. began including one 
coupon in each package of candy that it sells 
and offering a toy in exchange for $.50 and 
five coupons. The toys cost Mill $.80 each. 
Sixty percent of the coupons will eventually 
be redeemed. During December, Mill sold 
110,000 packages of candy, and no coupons 
were redeemed. In its December 31 balance 
sheet, what amount should Mill report as 
estimated liability for coupons? 

   A. $3,960 

   B. $10,560 

   C. $19,800 

   D. $52,800 


[567] Source: CMA 0692 2-20 
According to SFAS 5, Accounting for 
Contingencies, a loss contingency should be 
accrued on a company's records only if it is 

   A. Reasonably possible that a liability 
   has been incurred and the amount of the 
   loss is known. 

   B. Probable that a liability has been 
   incurred and the amount of the loss is 
   unknown. 

   C. Probable that a liability has been 
   incurred and the amount of the loss can 
   be reasonably estimated. 

   D. Remotely probable that a liability 
   has been incurred but the amount of the 
   loss can be reasonably estimated. 


[568] Source: CMA 0692 2-21 
According to SFAS 5, Accounting for 
Contingencies, a gain from contingencies is 

   A. Recorded when condemnation 
   awards are probable or can be 
   reasonably estimated. 

   B. Recorded when condemnation 
   awards are probable and can be 
   reasonably estimated. 

   C. Recorded when disclosure in the 
   notes to financial statements only could 
   be misleading. 

   D. Not recorded under any 
   circumstances. 


[569] Source: CMA 1292 2-22 
SFAS 87, Employers' Accounting for 
Pensions, requires companies to recognize 
the actuarial present value of the increase in 
pension benefits payable to employees 
because of their services rendered during 
the current period as a component of 
periodic pension expense. This cost is the 

   A. Amortization of prior service costs. 

   B. Accumulated benefit obligation 
   (ABO). 

   C. Projected benefit obligation (PBO). 

   D. Service cost. 


[570] Source: Publisher 
The Elam Company has reasonably 
estimated the following probable costs for 
the compensated absences of its employees:

Vacation pay (vested)                     $5,000
Vacation pay (accumulated but not vested)  3,000
Sick pay (vested)                          4,000
Sick pay (accumulated but not vested)      2,000
The costs are attributable to services that 
have already been rendered. In accordance 
with SFAS 43, Accounting for Compensated 
Absences, the minimum amount that Elam 
must accrue as its liability for compensated 
absences is 

   A. $5,000 

   B. $8,000 

   C. $12,000 

   D. $14,000 


[571] Source: Publisher 
Pine Company began operations on January 
1, Year 1. Pine employs 10 individuals who 
work 8-hour days and are paid hourly. Each 
employee earns 10 paid vacation days 
annually. Vacation days may be taken after 
January 1 of the year following the year in 
which they are earned. Additional 
information is as follows:

       Actual Hourly    Vacation Days Used
         Wage Rate       By Each Employee
       --------------   ------------------
       Year 1  Year 2     Year 1  Year 2
       --------------   ------------------
       $8.00   $8.00        0       8
The amounts of compensated absences 
liability that should have appeared on Pine's 
balance sheet at December 31, Year 1 and 
Year 2 were 

   A. $0 and $6,400. 

   B. $6,400 and $7,680. 

   C. $0 and $1,280. 

   D. $6,400 and $1,280 


[572] Source: CMA 1293 2-12 
As part of a program to increase sales, 
Chatham, Inc. began offering a 3-year 
warranty on all products sold after January 
11 of the current year. Chatham's actual 
current year sales were $3,850,000; the cost 
of the warranty is expected to be four 
percent of sales. The actual current year 
warranty expenditures consisted of $45,000 
in labor and $13,000 in parts. The amount of 
warranty expense that should appear on 
Chatham's Income Statement at December 
31 of the current year is 

   A. $58,000. 

   B. $96,000. 

   C. $109,000. 

   D. $154,000. 


[573] Source: CMA 1282 4-5 
The adjusting entry required to accrue the 
payroll as of November 30 would be to 

   A. Debit wage expense for $21,000 and 
   credit wages payable for $21,000. 

   B. Debit wage expense for $30,000 and 
   credit payroll tax expense for $1,950 
   and credit wages payable for $28,050. 

   C. Debit wage expense for $21,000 and 
   credit income tax withholding payable 
   for $3,150, credit payroll taxes payable 
   for $1,365, and credit wages payable 
   for $16,485. 

   D. Debit wage expense for $30,000 and 
   credit income tax withholding payable 
   for $4,500, credit payroll taxes payable 
   for $1,950, and credit wages payable 
   for $23,550. 


[574] Source: CMA 1282 4-6 
RAR Enterprises would also be required to 
record an accrual for the company's 
obligation for payroll tax expenses. This 
adjusting entry would be to 

   A. Debit payroll tax expense for $1,955 
   and credit payroll taxes payable for 
   $1,955. 

   B. Debit payroll tax expense for $1,365 
   and credit payroll taxes payable for 
   $1,365. 

   C. Debit payroll tax expense for $6,450 
   and credit payroll taxes payable for 
   $6,450. 

   D. Debit payroll tax expense for $4,515 
   and credit payroll taxes payable for 
   $4,515. 


[575] Source: CMA 1282 3-18 
An event that does not result in the recording 
of a liability is 

   A. The sale of New York Yankees' 
   season tickets during the month of 
   January. 

   B. The declaration of cash dividends to 
   be paid in 4 weeks. 

   C. A tax expense on the financial 
   statements that is greater than the taxes 
   payable on the income tax return. 

   D. The purchase of land for common 
   stock when the land is to be stated at 
   more than the par value of the stock. 


[576] Source: CMA 1284 3-29 
A loss from contingencies should be 
recognized on a company's books through an 
accrual only if it is 

   A. Probable that a liability has been 
   incurred. 

   B. Possible that a liability has been 
   incurred and the amount of the loss is 
   known. 

   C. Probable that a liability has been 
   incurred and the amount of loss can be 
   reasonably estimated. 

   D. Possible that a liability has been 
   incurred and the amount of loss can be 
   reasonably estimated. 


[577] Source: CMA 1284 3-30 
A gain from contingencies would 

   A. Not be recorded under any 
   circumstances. 

   B. Be recorded for possible receipts of 
   cash from gifts or donations. 

   C. Be recorded for probable 
   condemnation awards. 

   D. Be recorded for probable damages 
   to be awarded in a patent infringement 
   case. 


[578] Source: CMA 1286 4-20 
Using the effective interest method of 
premium amortization, the amount of interest 
expense (rounded to the nearest dollar) 
reported by Straf Company in Year 1 is 

   A. $1,488 

   B. $6,512 

   C. $8,000 

   D. $8,682 


[579] Source: CMA 1286 4-21 
Using the straight-line method of premium 
amortization, the carrying amount of the 
bonds (rounded to the nearest dollar) at 
December 31, Year 1 is 

   A. $100,000 

   B. $106,824 

   C. $108,530 

   D. $107,042 


[580] Source: CPA 1190 I-30 
During Year 1, Rex Co. introduced a new 
product carrying a two-year warranty 
against defects. The estimated warranty 
costs related to dollar sales are 2% within 
12 months following sale, and 4% in the 
second 12 months following sale. Sales and 
actual warranty expenditures for the years 
ended December 31, Year 1 and Year 2 are 
as follows:

                       Actual Warranty
              Sales     Expenditures
           ----------  ---------------
  Year 1   $  600,000     $ 9,000
  Year 2    1,000,000      30,000
           ----------     -------
           $1,600,000     $39,000
           ==========     =======
At December 31, Year 2, Rex should report 
an estimated warranty liability of 

   A. $0 

   B. $39,000 

   C. $57,000 

   D. $96,000 


[581] Source: CMA 1291 2-28 
Beginning January 1, Year 1, Center 
Company offered a 3-year warranty from 
date of sale on any of its products sold after 
January 1, Year 1. The warranty offer was 
part of a program to increase sales. Meeting 
the terms of the warranty was expected to 
cost Center 4% of sales. Sales made under 
warranty in Year 1 totaled $9,000,000, and 
one-fifth of the units sold were returned. 
These units were repaired or replaced at a 
cost of $65,000. The amount of warranty 
expense that should appear on Center's Year 
1 income statement is 

   A. $360,000 

   B. $137,000 

   C. $71,000 

   D. $65,000 


[582] Source: CIA 0594 IV-15 
Suppose that the company has paid one of its 
liabilities twice during the year, in error. 
The effects of this mistake would be 

   A. Assets, liabilities, and owners' 
   equity are understated. 

   B. Assets, net income, and owners' 
   equity are unaffected. 

   C. Assets and liabilities are 
   understated. 

   D. Assets and net income and owners' 
   equity are understated, and liabilities 
   are overstated. 


[583] Source: Publisher 
A company issues $100,000 of 8% bonds at 
par. Each $1,000 bond carries five 
detachable warrants, each of which allows 
the holder to acquire one share of $5 par 
value common stock for $30 a share. After 
issuance, the bonds were quoted at 98 
ex-rights, and the warrants were quoted at 
$6 each. The value assigned to the bonds at 
issuance should be 

   A. $97,000 

   B. $97,029.70 

   C. $98,000 

   D. $100,000 


[584] Source: CIA 0593 IV-42 
A plot of land is acquired in exchange for 
$250,000 cash and a non-interest-bearing 
note with a face amount of $1,000,000 on 
January 1, Year 1. The $1,000,000 is 
payable in installments of $250,000 each, 
with the first installment due December 31, 
Year 1. With regard to imputing interest on 
this note, (1) what market rate should be 
used to account for interest for Year 1 and 
(2) what should be done in future years 
when there is a change in prevailing interest 
rates?

                                       (2)
                                Impact of Change in
             (1)                Prevailing Interest
       Market Rate to Use         Rates in Future
      to Compute Interest       Periods on Rate Used
       Expense for Year 1     to Account for this Note
      --------------------    ------------------------
   A. 

      Rate prevailing at       Ignore change in rate
          January 2, Year 1
   B. 

      Rate prevailing at       Use new market rate
          January 2, Year 1
   C. 

      Rate prevailing at       Ignore change in rate
          December 31, Year 1
   D. 

      Rate prevailing at       Use new market rate
          December 31, Year 1


[585] Source: CIA 0593 IV-37 
A company issues bonds payable at a 
premium. You are analyzing the effects of 
using the effective interest (constant yield) 
method in accounting for the bonds over 
their ten-year life. Which of the following 
trends related to the reported amounts for 
(1) interest expense and (2) carrying amount 
of the bonds would you expect to find?

      Interest Expense      Carrying Amount
      -----------------    -----------------
   A. 

      Increasing amount    Decreasing amount
   B. 

      Decreasing amount    Decreasing amount
   C. 

      Decreasing amount    Constant amount
   D. 

      Increasing amount    Constant amount


[586] Source: CIA 1190 IV-46 
On January 1 of the current year, a company 
recorded the purchase of an asset correctly 
at $275,132. A down payment of $200,000 
was made with the balance of $100,000 due 
in 3 years at an imputed annual interest rate 
of 10%. What is the current year interest to 
record on the payable? 

   A. $7,513 

   B. $8,289 

   C. $24,868 

   D. $27,513 


[587] Source: CIA 0592 IV-30 
A company purchased $1,000 gross amount 
of inventory on account with terms of 2% 
discount if paid within 10 days, FOB 
shipping point, with freight of $30 prepaid 
by the seller. The company records 
purchases at the net amount. The journal 
entry to record payment 8 days after the 
invoice date is 

   A. 

        Accounts payable          $1,010
            Cash                             $1,010
   B. 

        Accounts payable            $980
        Freight-in                    30
            Cash                             $1,010
   C. 

        Purchases                 $1,000
        Freight-in                    30
            Accounts payable                 $1,030
   D. 

        Accounts payable            $980
            Cash                               $980


[588] Source: CIA 1190 IV-37 
A company allows customers to redeem 20 
coupons for a toy (cost $3.00). Estimates 
are that 40% of coupons distributed will 
result in redemption. Since beginning the 
promotion this year, 4,000,000 coupons 
were distributed and 1,000,000 coupons 
redeemed. The adjusting entry to accrue for 
unredeemed coupons at year-end is 

   A. 

        Premium expense             $90,000
          Estimated liability
           for premiums                        $90,000
   B. 

        Sales                       $90,000
          Estimated liability
           for premiums                        $90,000
   C. 

        Premium expense          $1,800,000
          Estimated liability
           for premiums                     $1,800,000
   D. 

        Sales                    $1,800,000
          Estimated liability
           for premiums                     $1,800,000


[589] Source: CIA 0594 IV-22 
Which of the following is required in order 
for a company to record an estimated loss 
contingency as a liability? 

   A. The exact payee must be known. 

   B. The exact date payable must be 
   known. 

   C. It must be considered reasonably 
   possible that a liability has been 
   incurred. 

   D. It must be possible to reasonably 
   estimate the amount of the loss. 


[590] Source: CIA 0593 IV-33 
An organization has the following 
contingencies at a balance sheet date:

  I. Threat of expropriation of assets; reasonable possibility of loss.
 II. Pending litigation; reasonable possibility of loss.
III. Risk of loss or damage of enterprise property by fire, explosion,
      or other hazards; likelihood of loss is remote.
Which of the above items must be disclosed 
in the notes to the financial statements? 

   A. I and II only. 

   B. II and III only. 

   C. I and III only. 

   D. I, II, and III. 


[591] Source: CIA 0591 IV-36 
At December 31, Year 1, a company had the 
following short-term obligations that were 
expected to be refinanced:

       17% note payable          $140,000
       15% note payable          $200,000
The 17% note payable was issued on 
October 1, Year 1 and matures on July 1, 
Year 2. The 15% note payable was issued 
on May 1, Year 1 and matures on May 1, 
Year 2. On February 1, Year 2, the 
$140,000 balance of the 17% note payable 
was refinanced by issuance of a long-term 
debt instrument. On February 7, Year 2, the 
company entered into a non-cancellable 
agreement with a lender to refinance the 
15% note payable on a long-term basis. On 
March 1, Year 2, the date of issuance of the 
December 31, Year 1 balance sheet, both 
parties are financially capable of honoring 
the agreement and there have been no 
violations of the provisions of the 
refinancing agreement. The total amount of 
short-term obligations that may be properly 
excluded from current liabilities on the 
company's December 31, Year 1 balance 
sheet is 

   A. $60,000 

   B. $140,000 

   C. $200,000 

   D. $340,000 


[592] Source: CIA 0592 IV-26 
Some years ago, a company borrowed 
$1,000,000 on a long-term note and bought 
treasury stock. The company has been able 
to pay all interest to date but finds it is 
unable to pay the principal according to the 
original terms. The creditor agrees to a 
modification of the terms such that the 
principal balance will be reduced to 
$900,000. This scenario is most closely 
associated with which of the following? 

   A. Retroactive-effect accounting change 
   and modified treasury stock method. 

   B. Treasury stock method and 
   extraordinary items. 

   C. Troubled debt restructure and 
   modified treasury stock method. 

   D. Troubled debt restructure and 
   extraordinary items. 


[593] Source: CIA 0594 IV-25 
Which of the following measures of an 
employer's pension obligation under a 
defined benefit plan will result in the largest 
measurement of the liability? 

   A. Vested benefits pension obligation. 

   B. Projected benefit obligation. 

   C. Accumulated benefit obligation. 

   D. Unfunded accumulated benefit 
   obligation. 


[594] Source: CIA 1191 IV-45 
The present value of future benefits payable 
as a result of work done before the start of 
or change in a pension plan is the definition 
of 

   A. Minimum liability. 

   B. Projected benefit obligation. 

   C. Prior service cost. 

   D. Unrecognized transition net asset or 
   obligation. 


[595] Source: CIA 0591 IV-30 
At December 31 of the current year, a 
company had the following data relating to 
its defined benefit pension plan:

Total fair value of plan assets          $1,800,000
Accumulated benefit obligation            2,600,000
Projected benefit obligation              3,100,000
In its December 31 balance sheet, the 
company should report a minimum liability 
relating to the pension plan of 

   A. $500,000 

   B. $800,000 

   C. $1,300,000 

   D. $2,600,000 


[596] Source: CIA 1189 IV-44 
An employee's right to obtain pension 
benefits regardless of whether (s)he remains 
employed is known as his/her 

   A. Prior service cost. 

   B. Defined benefit plan. 

   C. Vested interest. 

   D. Minimum liability. 


[597] Source: CMA 0694 2-19 
When applying SFAS 87, Employer's 
Accounting for Pension Plans, the 
accumulated benefit obligation (ABO) is 
best described as the 

   A. Present value of benefits accrued to 
   date based on future salary levels. 

   B. Present value of benefits accrued to 
   date based on current salary levels. 

   C. Increase in retroactive benefits at the 
   date of the amendment of the plan. 

   D. Amount of the adjustment necessary 
   to reflect the difference between actual 
   and estimated actuarial returns. 


[598] Source: CMA 1294 2-12 
As proceeds from this bond issuance, 
Garrett Corporation should record 

   A. $365,700. 

   B. $420,360. 

   C. $461,440. 

   D. $478,580. 


[599] Source: CMA 1294 2-13 
The interest expense that Garrett 
Corporation will incur on these bonds at 
December 31, Year 1 is 

   A. $23,072.00 

   B. $18,457.60 

   C. $25,000.00 

   D. $20,000.00 


[600] Source: CMA 1294 2-14 
The amount of discount that Garrett 
Corporation should amortize at December 
31, Year 1, is 

   A. $7,712.00 

   B. $3,856.00 

   C. $1,542.00 

   D. $3,072.00 


[601] Source: CMA 0695 2-15 
Equip Corp., a manufacturer of small 
commercial heating units, follows the 
generally accepted method of "expense 
warranty treatment" (accrual method) in 
accounting for estimated future warranty 
costs. The company recently designed and 
manufactured a new model, 250 units of 
which were sold (with a one-year warranty) 
for $6,000 per unit during November of the 
current year. Estimated future warranty costs 
($150 per unit, based on past experience) 
were not accounted for at the time of sale, 
and the company incurred no warranty cost 
during November and December of the 
current year. The year-end adjusting entry 
required at December 31 of the current year 
to account for estimated future warranty 
costs would be to 

   A. Debit sales for $37,500 and credit 
   unearned warranty revenue for $37,500. 

   B. Debit unearned warranty revenue for 
   $37,500 and credit revenue from 
   warranties for $37,500. 

   C. Debit sales for $37,500 and credit 
   estimated liability under warranties for 
   $37,500. 

   D. Debit warranty expense for $37,500 
   and credit estimated liability under 
   warranties for $37,500. 


[602] Source: CMA 1295 2-8 
Abernathy Corporation uses a calendar year 
for financial and tax reporting purposes and 
has $100 million of mortgage bonds due on 
January 15 of the current year. By January 
10 of the current year, Abernathy intends to 
refinance this debt with new long-term 
mortgage bonds. This debt is to be 

   A. Classified as a current liability on 
   the Statement of Financial Position at 
   December 31 of the previous year. 

   B. Classified as a long-term liability on 
   the Statement of Financial Position at 
   December 31 of the previous year. 

   C. Retired as of December 31 of the 
   previous year. 

   D. Considered off-balance-sheet debt. 


[603] Source: CIA 1193 IV-39 
A manufacturing company produces a 
quality product for which it charges a little 
more than its competitors but gives its 
consumers a more liberal warranty policy. 
The product carries a 5-year warranty that 
covers both labor and materials charges. 
Which of the following defines the 
appropriate method of accounting for the 
warranty costs? 

   A. Cash basis. 

   B. Expense warranty. 

   C. Sales warranty. 

   D. Tax basis. 


[604] Source: CIA 1191 IV-41 
A company estimates that long-term 
disability costs as a result of employment 
during the current period will be $100,000. 
How should this be accounted for? 

   A. Only a disclosure should be made, 
   with no journal entry. 

   B. An expense should be recorded for 
   $100,000. 

   C. An asset of $100,000 should be 
   recognized. 

   D. A direct reduction to retained 
   earnings of $100,000 should occur. 


[605] Source: CMA 1287 3-22 
A liability is required to be accrued for the 
cost of compensation for future absences if 
all of the following conditions are met 
except when 

   A. The employer's obligation is 
   attributable to employees' services 
   already rendered. 

   B. The amount can be reasonably 
   estimated. 

   C. Payment of the compensation is 
   probable. 

   D. The obligation relates to the rights 
   that accumulate but do not vest. 


[606] Source: CMA 1290 2-26 
According to SFAS 5, Accounting for 
Contingencies, an estimated loss 
contingency should be accrued as a charge 
to expense and a credit to a liability only if 
two stated conditions are met. All of the 
following loss contingencies are usually 
accrued except loss contingencies related to 

   A. Collectibility of receivables. 

   B. Risk of loss by fire or other hazards. 

   C. An obligation related to product 
   warranties. 

   D. A premium offer to customers. 


[607] Source: CMA 1292 2-24 
Lasser Corporation, which has been 
operating without a labor contract for the 
past year, determined at year-end that a new 
contract was likely to be signed in the near 
future. The company has estimated the effect 
of the new contract and believes that the 
likelihood of its being retroactive to the 
current year is reasonably possible. 
According to SFAS 5, Accounting for 
Contingencies, Lasser should 

   A. Record the best estimate of the effect 
   of the new contract in the current year. 

   B. Record the most conservative 
   estimate of the effect of the new 
   contract in the current year. 

   C. Do nothing because the contract has 
   not yet been signed. 

   D. Disclose in the financial statements 
   the best estimate of the contract change. 


[608] Source: CMA 0693 2-14 
When reporting contingencies 

   A. Guarantees of others' indebtedness 
   are reported as a loss contingency only 
   if the loss is considered imminent or 
   highly probable. 

   B. Disclosure of a loss contingency is 
   to be made if there is a remote 
   possibility that the loss has been 
   incurred. 

   C. Disclosure of a loss contingency 
   must include a dollar estimate of the 
   loss. 

   D. A loss that is probable but not 
   estimable must be disclosed with a 
   notation that the amount of the loss 
   cannot be estimated. 


[609] Source: CIA 0594 IV-27 
Which of the following is not an example of 
off-balance-sheet financing? 

   A. Transfers of receivables to third 
   parties with recourse that are deemed to 
   be sales 

   B. Guarantees of indebtedness. 

   C. Unconditional purchase obligations. 

   D. Capitalized leases. 


[610] Source: CMA 1293 2-5 
A bond issue sold at a premium is valued on 
the Statement of Financial Position at the 

   A. Maturity value. 

   B. Maturity value plus the unamortized 
   portion of the premium. 

   C. Cost at the date of investment. 

   D. Maturity value less the unamortized 
   portion of the premium. 


[611] Source: CMA 1287 3-23 
An employee has the right to receive 
compensation for future paid leave, and the 
payment of compensation is probable. If the 
obligation relates to rights that vest but the 
amount cannot be reasonably estimated, the 
employer should 

   A. Accrue a liability with proper 
   disclosure. 

   B. Not accrue a liability nor disclose 
   the situation. 

   C. Accrue a liability; however, the 
   additional disclosure is not required. 

   D. Not accrue a liability; however, 
   disclosure is required. 


[612] Source: CMA 1287 3-30 
Lister Company intends to refinance a 
portion of its short-term debt next year and 
is negotiating a long-term financing 
agreement with a local bank. This agreement 
will be noncancelable and will extend for 2 
years. The amount of short-term debt that 
Lister Company can exclude from its 
statement of financial position at December 
31 

   A. May exceed the amount available for 
   refinancing under the agreement. 

   B. Depends on the demonstrated ability 
   to consummate the refinancing. 

   C. Must be adjusted by the difference 
   between the present value and the 
   market value of the short-term debt. 

   D. Is reduced by the proportionate 
   change in the working capital ratio. 


[613] Source: CMA 1287 3-29 
According to SFAS 78, Classification of 
Obligations That Are Callable by the 
Creditor, long-term obligations that are or 
will become callable by the creditor 
because of the debtor's violation of a 
provision of the debt agreement at the 
balance sheet date should be classified as 

   A. Long-term liabilities. 

   B. Current liabilities unless the debtor 
   goes bankrupt. 

   C. Current liabilities unless the creditor 
   has waived the right to demand 
   repayment for more than 1 year from 
   balance sheet date. 

   D. Contingent liabilities until the 
   violation is corrected. 


[614] Source: CMA 0690 3-1 
For a direct-financing lease, the gross 
investment (lease payments receivable) 
recorded by the lessor is equal to the 

   A. Present value of the minimum lease 
   payments minus the unguaranteed 
   residual value accruing to the lessor at 
   the end of the lease term. 

   B. Lower of 90% of the present value 
   of the minimum lease payments or the 
   fair value of the leased asset. 

   C. Difference between the fair value of 
   the leased asset and the unearned 
   interest revenue. 

   D. Minimum lease payments plus the 
   unguaranteed residual value accruing to 
   the lessor at the end of the lease term. 


[615] Source: CMA 0686 3-10 
This data pertains to Lally Corporation for 
1993 and 1994.

                                 1994         1993
                              ----------   ----------
Income before income taxes    $5,000,000   $4,000,000
Interest income included
 above that was not subject
 to income taxes                 100,000      100,000
* Income before income taxes in 1993 included rent revenue of $80,000
  that was not subject to income tax until its receipt in 1994.
* Lally was subject to an effective income tax rate of 40% in 1993
  and 1994.
The deferred tax asset or liability reported 
on Lally Corporation's statement of financial 
position on December 31, 1994 is 

   A. $40,000. 

   B. $32,000. 

   C. $8,000. 

   D. $0. 


[616] Source: Publisher 
At the beginning of Year 1, the Wright 
Company's actuary estimated the company's 
total unrecognized prior service cost to be 
$180,000. Wright expected the following 
numbers of years of future service from its 
seven employees: A-2; B-2; C-6; D-8; E-10; 
F-5; G-3. Under the years-of-future-service 
method, the amount of amortization of 
unrecognized prior service cost to be 
included in pension expense in Year 3 is 

   A. $35,000 

   B. $25,000 

   C. $25,714 

   D. $36,000 


[617] Source: CIA 1192 IV-45 
A company is subject to warranty claims. It 
is estimated that between $1,000,000 and 
$3,000,000 will probably be paid out. No 
estimate of loss within this range is more 
likely than any other. The company should 

   A. Make no journal entry at this time. 

   B. Disclose only a possible loss. 

   C. Defer a loss of $1,000,000 to 
   $3,000,000. 

   D. Accrue a loss of $1,000,000. 


[618] Source: CIA 0596 IV-21 
The selling price of a new company's units 
is $10,000 each. The buyers are provided 
with a 2-year warranty that is expected to 
cost the company $250 per unit in the year 
of the sale and $750 per unit in the year 
following the sale. The company sold 80 
units in the first year of operation and 100 
units in the second year. Actual payments for 
warranty claims were $10,000 and $65,000 
in years one and two, respectively. The 
amount charged to warranty expense during 
the second year of operation is 

   A. $25,000 

   B. $65,000 

   C. $85,000 

   D. $100,000 


[619] Source: CIA 0596 IV-25 
Which one of the following loss 
contingencies would usually be accounted 
for by accruing the liability? 

   A. General or unspecified business 
   risks. 

   B. Risk of loss from catastrophes that 
   might occur to a manufacturing 
   company. 

   C. Risk of loss or damage of enterprise 
   property caused by fire, explosion, or 
   other hazards. 

   D. Premiums offered to customers. 


[620] Source: CIA 0595 IV-20 
Which of the following is not a factor, with 
respect to pending or threatened litigation, 
that must be considered in determining 
whether a liability should be recorded? 

   A. The time period in which the 
   underlying cause for action occurred. 

   B. The probability of an unfavorable 
   outcome. 

   C. The ability to make a reasonable 
   estimate of the amount of loss. 

   D. The number of parties involved in 
   the litigation. 


[621] Source: CIA 0591 IV-36 
At December 31, 2001, a company had the 
following short-term obligations that were 
expected to be refinanced:

       17% note payable     $140,000
       15% note payable     $200,000
The 17% note payable was issued on 
October 1, 2001 and matures on July 1, 
2002. The 15% note payable was issued on 
May 1, 2001 and matures on May 1, 2002. 
On February 1, 2002, the entire $140,000 
balance of the 17% note payable was 
refinanced by issuance of a long-term debt 
instrument. On February 7, 2002, the 
company entered into a noncancellable 
agreement with a lender to refinance the 
15% note payable on a long-term basis. On 
March 1, 2002, the date of issuance of the 
December 31, 2001 balance sheet, both 
parties are financially capable of honoring 
the agreement and there have been no 
violations of the provisions of the 
refinancing agreement. The total amount of 
short-term obligations that may be properly 
excluded from current liabilities on the 
company's December 31, 2001 balance 
sheet is 

   A. $0 

   B. $140,000 

   C. $200,000 

   D. $340,000 


[622] Source: CMA 0690 3-2 
Initial direct costs incurred by the lessor 
under a sales-type lease should be 

   A. Deferred and allocated over the 
   economic life of the leased property. 

   B. Expensed in the period incurred. 

   C. Deferred and allocated over the term 
   of the lease in proportion to the 
   recognition of rental income. 

   D. Added to the gross investment in the 
   lease and amortized over the term of the 
   lease as a yield adjustment. 


[623] Source: CIA 0589 IV-33 
A company has been sued for $100,000,000 
for producing and selling an unsafe product. 
Attorneys for the company cannot predict the 
outcome of the litigation. In its financial 
statements, the company should 

   A. 

        Make the following journal entry, and disclose the existence of
        the lawsuit in a footnote.
           Estimated loss from litigation      $100,000,000
                Estimated liability from
                  litigation loss                            $100,000,000
   B. Disclose the existence of the lawsuit 
   in a footnote without making a journal 
   entry. 

   C. Neither make a journal entry nor 
   disclose the lawsuits in a footnote, 
   because bad publicity will hurt the 
   company. 

   D. 

        Make the following journal entry, and disclose the existence of
        the lawsuit in a footnote.
           Cost of goods sold                  $100,000,000
                Estimated liability from
                  litigation loss                            $100,000,000


[624] Source: CIA 1192 IV-31 
On August 1, 1997, a company issued 5-year 
bonds with a face amount of $10,000,000. 
The bonds carry a stated interest rate of 
10% and interest is payable annually on July 
31. Which is the appropriate classification 
of bonds payable and the related accrued 
interest payable on the December 31, 2001 
balance sheet?

                    Classification Table
                    --------------------
                    Bonds Payable        Interest Payable
                    -------------------  -------------------
Classification A    Current liability    Current liability
Classification B    Current liability    Long-term liability
Classification C    Long-term liability  Current liability
Classification D    Long-term liability  Long-term liability
   A. Classification A. 

   B. Classification B. 

   C. Classification C. 

   D. Classification D. 


[625] Source: CIA 0596 IV-23 
On January 1, a company issued a 10-year 
$500,000 bond at 96% of face value. The 
bond bears interest at 12%, payable on 
January 1 and July 1. The entry to record the 
issuance of the bond on January 1 would be 

   A. 

        Cash                   $480,000
            Bonds payable                   $480,000
   B. 

        Cash                   $500,000
            Bonds payable                   $500,000
   C. 

        Cash                   $480,000
        Discount on bonds
         payable               $ 20,000
            Bonds payable                   $500,000
   D. 

        Cash                   $500,000
            Premium on bonds
             payable                        $ 20,000
            Bonds payable                   $480,000


[626] Source: CIA 0595 IV-19 
A company issues 10-year bonds with a face 
value of $1,000,000, dated January 1 and 
bearing interest at an annual rate of 12% 
payable semiannually on January 1 and July 
1. The full interest amount will be paid each 
due date. The market rate of interest on 
bonds of similar risk and maturity, with the 
same schedule of interest payments, is also 
12%. If the bonds are issued on February 1, 
the amount the issuing company receives 
from the buyers of the bonds on that date is 

   A. $990,000 

   B. $1,000,000 

   C. $1,010,000 

   D. $1,020,000 


[627] Source: CIA 0590 IV-34 
On December 31, 1997, XYZ Company 
issued 5-year bonds with a face amount of 
$1,000,000. The bonds carry a stated 
interest rate of 10% and were sold at par. 
Interest is payable annually on December 
31. According to the provisions of the bond 
indenture, XYZ is to make annual deposits 
into a bond sinking fund (beginning 
December 31, 1998) in order to accumulate 
the funds necessary to retire the bonds at 
their maturity. On December 31, 2001, all 
required interest payments and sinking fund 
payments due to date have been made on 
schedule. If it has been determined that 
sinking fund assets are to be reported in the 
long-term investment classification on the 
balance sheet, how should the balance of 
bonds payable be classified on the 
December 31, 2001 balance sheet? 

   A. Current liability. 

   B. Long-term liability. 

   C. Contra to long-term investments. 

   D. Deferred credit. 


[628] Source: CIA 1195 IV-21 
If the market rate of interest is [List A] the 
coupon rate when bonds are issued, then the 
bonds will sell in the market at a price [List 
B] the face value and the issuing firm will 
record a [List C] on bonds payable.

         List A         List B       List C
      ------------   ------------   --------
   A. 

      Equal to       Equal to       Premium
   B. 

      Greater than   Greater than   Premium
   C. 

      Greater than   Less than      Discount
   D. 

      Less than      Greater than   Discount


[629] Source: CIA 1191 IV-39 
If bonds payable with a carrying value equal 
to par value are refunded by use of a call 
provision, the call premium of the refunded 
issue should be 

   A. Amortized over the remaining 
   original life of the extinguished issue. 

   B. Amortized over the life of the new 
   issue. 

   C. Recognized currently in income as an 
   extraordinary loss. 

   D. Recognized currently as a loss and 
   reported as a component of income 
   before extraordinary items. 


[630] Source: CIA 1195 IV-33 
Which of the following statements does not 
describe a troubled debt restructuring? 

   A. The restructuring permits the debtor 
   either to defer or to reduce the interest 
   or the principal obligation. 

   B. The creditor grants concessions to 
   the debtor for economic or legal 
   reasons related to the debtor's financial 
   difficulty that it would not otherwise 
   consider. 

   C. The debt is settled at less than its 
   carrying amount or the debt is continued 
   with a modification of terms. 

   D. The concessions granted the debtor 
   by the creditor generally will result in a 
   gain to the creditor and a loss to the 
   debtor. 


[631] Source: CIA 1192 IV-44 
A company has a $100,000 liability on the 
books. In 1 year, $110,000 will be due, 
including 10% interest. The company 
negotiates settlement of the debt today by 
exchanging $90,000 of customer 
receivables. What is the journal entry today? 

   A. 

        Liability              110,000
            Receivables                      99,000
            Gain                             11,000
   B. 

        Liability              100,000
            Receivables                      99,000
            Gain                              1,000
   C. 

        Liability              110,000
            Receivables                      90,000
            Gain                             20,000
   D. 

        Liability              100,000
            Receivables                      90,000
            Gain                             10,000


[632] Source: CMA 0696 2-29 
Howell Corporation, a publicly traded 
corporation, is the lessee in a leasing 
agreement with Brandon Inc. to lease land 
and a building. If the lease contains a 
bargain purchase option, Howell should 
record the land and the building as a(n) 

   A. Operating lease and capital lease, 
   respectively. 

   B. Capital lease and operating lease, 
   respectively. 

   C. Capital lease but recorded as a 
   single unit. 

   D. Capital lease but separately 
   classified. 


[633] Source: CIA 0595 IV-23 
Companies participating in the approach to 
off-balance-sheet financing known as 
interest rate swaps 

   A. Report only original borrowings on 
   the balance sheet. 

   B. Report any rights to receive interest 
   payments in accordance with the swap 
   in the notes and not on the balance 
   sheet. 

   C. Report any obligations to make 
   interest payments in accordance with 
   the swap in the notes and not on the 
   balance sheet. 

   D. Report the effect of the swap on total 
   interest revenues or expenses on the 
   income statement. 


[634] Source: CIA 1195 IV-28 
If a lease agreement transfers substantially 
all of the benefits and risks incident to 
ownership of the asset to the lessee, then the 
asset value is recognized on the lessee's 
records as a(n) [List A] asset and the lease 
is referred to as a(n) [List B] lease.

        List A       List B
      ----------   ---------
   A. 

      Tangible     Capital
   B. 

      Intangible   Capital
   C. 

      Tangible     Operating
   D. 

      Intangible   Operating


[635] Source: CIA 0596 IV-32 
Capital and operating leases differ in that 
the lessor 

   A. Obtains use of the asset only under a 
   capital lease. 

   B. Is using the lease as a source of 
   financing only under an operating lease. 

   C. Makes rent payments that are 
   actually installment payments 
   constituting a payment of both principal 
   and interest only under a capital lease. 

   D. Finances the transaction through the 
   leased asset only under a capital lease. 


[636] Source: CIA 0595 IV-27 
Which of the following statements is not true 
of a capital lease? 

   A. The lessor capitalizes the present 
   value of the future rental payments. 

   B. The lessor records the leased item as 
   an asset. 

   C. The lessee records depreciation or 
   capital cost allowance on the leased 
   asset. 

   D. The lease arrangement represents a 
   form of financing. 


[637] Source: CIA 1191 IV-44 
At the inception of a capital lease, the 
guaranteed residual value should be 

   A. Included as part of minimum lease 
   payments at present value. 

   B. Included as part of minimum lease 
   payments at future value. 

   C. Included as part of minimum lease 
   payments at future value of an annuity 
   due. 

   D. Ignored because it is not part of the 
   lease contract. 


[638] Source: CIA 0596 IV-31 
Which of the following leases would be 
classified as a capital lease by the lessee?

                                          Lease A Lease B Lease C Lease D
                                          ------- ------- ------- -------
 Contains a bargain purchase option?        Yes     No      No      No
 Lease term portion of the
   economic life of the leased property      60%     70%     80%     90%
 Present value of the minimum lease
   payments as a portion of the fair
   value of the leased property              60%     70%     80%     90%
   A. Lease A only. 

   B. Lease B only. 

   C. Leases A, C, and D. 

   D. Leases C and D only. 


[639] Source: CIA 0596 IV-75 
Which one of the following statements 
describes the asset-liability method of 
accounting for deferred income taxes? 

   A. The amount of deferred income tax is 
   based on tax rates in effect when 
   temporary differences originate. 

   B. The amount of deferred income tax is 
   based on the tax rates expected to be in 
   effect during the periods in which the 
   temporary differences reverse. 

   C. The tax effects of temporary 
   differences are not reported separately 
   but are reported as adjustments to the 
   amounts of specific assets and 
   liabilities and the related revenues and 
   expenses. 

   D. The appropriate tax rate to be 
   reported on the income statement is the 
   tax actually levied in that year, meaning 
   no deferred taxes would be reported. 


[640] Source: Publisher 
SFAS 109, Accounting for Income Taxes, 
states that a deferred tax asset shall be 
reduced by a valuation allowance if it is 

   A. Probable that some portion will not 
   be realized. 

   B. Reasonably possible that some 
   portion will not be realized. 

   C. More likely than not that some 
   portion will not be realized. 

   D. Likely that some portion will not be 
   realized. 


[641] Source: CIA 0594 IV-73 
Temporary and permanent differences 
between taxable income and pre-tax 
financial income differ in that: 

   A. Temporary differences do not give 
   rise to future taxable or deductible 
   amounts. 

   B. Only permanent differences have 
   deferred tax consequences. 

   C. Only temporary differences have 
   deferred tax consequences. 

   D. Temporary differences include items 
   that enter into pre-tax financial income 
   but never into taxable income. 


[642] Source: CIA 1194 IV-69 
During the 10-year life of the asset, the 
company will report as deferred tax an 
amount that 

   A. Increases steadily for the 10 years. 

   B. Is constant. 

   C. Increases and then decreases. 

   D. Decreases and then increases. 


[643] Source: CIA 1194 IV-70 
When applying the indirect method of 
calculating an entity's net operating cash 
flows, using financial statements prepared 
for tax purposes rather than accrual 
accounting purposes will result in 

   A. No effect on cash flow amounts. 

   B. An overstatement of cash flows 
   throughout the economic life of 
   depreciable assets. 

   C. An understatement of cash flows 
   throughout the economic life of 
   depreciable assets. 

   D. An overstatement of cash flows in 
   the early years and then an 
   understatement of cash flows in the later 
   years of the economic life of 
   depreciable assets. 


[644] Source: Publisher 
When a change in the tax law or rates 
occurs, the effect of the change on a deferred 
tax liability or asset is 

   A. Not recognized. 

   B. Recognized as an adjustment as of 
   the effective date of the change. 

   C. Recognized as an adjustment as of 
   the enactment date of the change. 

   D. Recognized as a prior period 
   adjustment. 


[645] Source: Publisher 
According to SFAS 109, when a company 
reports deferred tax assets and liabilities for 
two consecutive years a deferred income tax 
benefit or expense should be reported equal 
to the 

   A. Decrease in the deferred tax assets. 

   B. Sum of the net changes in deferred 
   tax assets and deferred tax liabilities. 

   C. Increase in the deferred tax 
   liabilities. 

   D. Amount of the total income tax 
   liability. 


[646] Source: Publisher 
Barth and Garth, Inc. depreciate equipment 
over 15 years for financial purposes and 
over 7 years for federal income tax 
purposes. As a result of this temporary 
difference, the deferred income taxes will 
be reported in its first year of use as a 

   A. Noncurrent asset. 

   B. Noncurrent liability. 

   C. Current liability. 

   D. Current asset. 


[647] Source: Publisher 
Leases should be classified by the lessee as 
either operating leases or capital leases. 
Which of the following statements best 
characterizes operating leases? 

   A. The benefits and risks of ownership 
   are transferred from the lessor to the 
   lessee. 

   B. The lessee records leased property 
   as an asset and the present value of the 
   lease payments as a liability. 

   C. Operating leases transfer ownership 
   to the lessee, contain a bargain purchase 
   option, are for more than 75% of the 
   leased asset's useful life, or have lease 
   payments with a present value in excess 
   of 90% of the value of the leased asset. 

   D. The lessor records lease revenue, 
   asset depreciation, maintenance, etc., 
   and the lessee records lease payments 
   as rental expense. 


[648] Source: Publisher 
What is the difference between a 
direct-financing lease and a sales-type 
lease? 

   A. Lessees usually depreciate 
   direct-financing leases over the term of 
   the lease and sales-type leases over the 
   useful life of the leased asset. 

   B. The difference between the sum of 
   all lease payments and the cost of the 
   leased asset to the lessor is interest 
   income for direct-financing leases, and 
   is part interest and part sales income for 
   sales-type leases. 

   C. The lease payments receivable on 
   the books of a lessor are recorded at 
   their present value for sales-type leases 
   and at their gross value for 
   direct-financing leases. 

   D. The lessor records the present value 
   of the residual value of the leased asset 
   for direct-financing leases but records 
   the undiscounted (gross) residual value 
   for sales-type leases. 


[649] Source: J.O. Hall 
On August 1, Jones Corporation leased 
property to Smith Company for a 5-year 
period. The annual $20,000 lease payment 
is payable at the end of each year. The 
expected residual value at the end of the 
lease term is $10,000. Jones Company's 
implicit interest rate is 12%. The cost of the 
property to Jones was $50,000, which is the 
fair value at the lease date. The present 
value of an ordinary annuity of 1 for five 
periods is 3.605. The present value of 1 at 
the end of five periods is .567. At the 
inception of the lease, the recorded gross 
investment is 

   A. $110,000 

   B. $100,000 

   C. $72,100 

   D. $90,000 


[650] Source: CMA 1295 2-6 
Careful reading of an annual report will 
reveal that off-balance-sheet debt includes 

   A. Amounts due in future years under 
   operating leases. 

   B. Transfers of accounts receivable 
   without recourse. 

   C. Current portion of long-term debt. 

   D. Amounts due in future years under 
   capital leases. 


[651] Source: CMA 1293 2-27 
Plantation Restaurant should treat the lease 
agreement with Hadaway, Inc. as a(n) 

   A. Capital lease with an initial asset 
   value of $101,400. 

   B. Operating lease, charging $14,200 in 
   rental expense and $800 in executory 
   costs to annual operations. 

   C. Operating lease, charging the present 
   value of the yearly rental expense to 
   annual operations. 

   D. Operating lease, charging $15,000 in 
   rental expense and $800 in executory 
   costs to annual operations. 


[652] Source: CMA 1293 2-28 
Plantation Restaurant should treat the lease 
agreement with Cutter Electronics as a(n) 

   A. Capital lease with an initial asset 
   value of $10,960. 

   B. Capital lease with an initial asset 
   value of $10,200. 

   C. Operating lease, charging $3,500 in 
   rental expense and $500 in executory 
   costs to annual operations. 

   D. Capital lease with an initial asset 
   value of $9,590. 


[653] Source: Publisher 
If, in a business combination structured as a 
purchase, the acquired company sponsors a 
defined benefit pension plan, the acquiring 
company should 

   A. Recognize any previously existing 
   unrecognized net gain or loss. 

   B. Assign part of the purchase price to 
   the unrecognized prior service cost as 
   an intangible asset. 

   C. Assign part of the purchase price to 
   the excess of plan assets over the 
   projected benefit obligation. 

   D. Recognize a previously existing 
   unrecognized transition net asset or 
   obligation of the plan. 


[654] Source: A. Oddo 
The following information relates to the 
2001 activity of the defined benefit pension 
plan of Twain Publishers, Ltd., a company 
whose stock is publicly traded:

Service cost                                 $120,000
Return on plan assets                          30,000
Interest cost on pension benefit obligation    40,000
Amortization of actuarial loss                 10,000
Amortization of prior service cost              5,000
Amortization of transition obligation          15,000
Twain's 2001 pension cost is 

   A. $120,000 

   B. $140,000 

   C. $150,000 

   D. $160,000 


[655] Source: Publisher 
At end of the year, Penny Company's 
projected benefit obligation (PBO) was 
determined to be $1,500,000, which was 
$200,000 higher than had been expected. 
The market-related value of the defined 
benefit plan's assets was equal to its fair 
value of $1,250,000. No other gains and 
losses have occurred. If the average 
remaining service life is 20 years, the 
minimum required amortization of the 
unrecognized net gain (loss) in the next year 
will be 

   A. $20,000 

   B. $3,750 

   C. $2,500 

   D. $0 


[656] Source: Publisher 
At the start of its current fiscal year, Emper 
Co. amended its defined benefit pension 
plan, resulting in an increase of $600,000 in 
the PBO. As of the date of the amendment, 
Emper had 50 employees. Ten employees 
are expected to leave at the end of each of 
the next 5 years (including the current year). 
The minimum amortization of prior service 
cost in the first year is 

   A. $80,000 

   B. $120,000 

   C. $160,000 

   D. $200,000 


[657] Source: CMA 0694 2-20 
Deerfield Corporation has the following 
information available regarding its pension 
plan:

                        May 31, 2000   May 31, 2001
                        ------------   ------------
Accumulated benefit
 obligation (ABO)          $180,000       $280,000
Projected benefit
 obligation (PBO)           200,000        320,000
Fair value of plan
 assets                     162,000        180,000
Unrecognized prior
 service cost                68,000         52,000
Prepaid pension cost         30,000             --
Accrued pension cost             --         88,000
In accordance with the requirements of 
SFAS 87, Employer's Accounting for 
Pension Plans, Deerfield's minimum 
liability at May 31, 2000 and 2001, 
respectively, was 

   A. $38,000 and $140,000. 

   B. $98,000 and $0. 

   C. $48,000 and $12,000. 

   D. $18,000 and $100,000. 


[658] Source: CMA 0696 2-7 
What is the deferred tax liability at 
December 31, 2001 (rounded to the nearest 
whole dollar)? 

   A. $7,000 

   B. $33,330 

   C. $11,666 

   D. $4,666 


[659] Source: CMA 0696 2-8 
For Bearings Manufacturing Company Inc., 
assume that the following new corporate 
income tax rates will go into effect:

  2002-2004    40%
       2005    45%
What is the amount of the deferred tax 
asset/liability at December 31, 2001 
(rounded to the nearest whole dollar)? 

   A. $0 

   B. $9,000 

   C. $2,668 

   D. $6,332 


[660] Source: CMA 0696 2-9 
Which one of the following temporary 
differences will result in a deferred tax 
asset? 

   A. Use of the straight-line depreciation 
   method for financial statement purposes 
   and the Modified Accelerated Cost 
   Recovery System (MACRS) for income 
   tax purposes. 

   B. Installment sale profits accounted for 
   on the accrual basis for financial 
   statement purposes and on a cash basis 
   for income tax purposes. 

   C. Advance rental receipts accounted 
   for on the accrual basis for financial 
   statement purposes and on a cash basis 
   for tax purposes. 

   D. Investment gains accounted for under 
   the equity method for financial 
   statement purposes and under the cost 
   method for income tax purposes. 


[661] Source: CMA 0696 2-22 
Assume the bonds were issued on January 1 
for $1,062,809. Using the effective interest 
amortization method, Matthew Company 
recorded interest expense for the 6 months 
ended June 30 in the amount of 

   A. $35,000 

   B. $70,000 

   C. $63,769 

   D. $31,884 


[662] Source: CMA 0696 2-23 
The bonds were issued on January 1 at 

   A. A premium. 

   B. An amortized value. 

   C. Book value 

   D. A discount. 


[663] Source: CMA 1296 2-25 
According to SFAS 87, Employer's 
Accounting for Pension Plans, the projected 
benefit obligation (PBO) is best described 
as the 

   A. Present value of benefits accrued to 
   date based on future salary levels. 

   B. Present value of benefits accrued to 
   date based on current salary levels. 

   C. Increase in retroactive benefits at the 
   date of the amendment of the plan. 

   D. Amount of the adjustment necessary 
   to reflect the difference between actual 
   and estimated actuarial returns. 


[664] Source: CMA 1296 2-26 
Baldwin Corporation's minimum pension 
liability at November 30 is 

   A. $190,000 

   B. $405,000 

   C. $517,500 

   D. $523,850 


[665] Source: CMA 1296 2-27 
Using the straight-line method of 
amortization, the amount of prior service 
cost charged to expense during the year 
ended November 30 is 

   A. $9,500 

   B. $19,000 

   C. $30,250 

   D. $190,000 


[666] Source: CMA 1296 2-29 
For the past 3 months, Kenton Inc. has been 
negotiating a labor contract with potentially 
significant wage increases. Before 
completing the year-end financial statements 
on November 30, Kenton determined that the 
contract was likely to be signed in the near 
future. Kenton has estimated that the effect 
of the new contract will cost the company 
either $100,000, $200,000, or $300,000. 
Also, Kenton believes that each estimate has 
an equal chance of occurring and that the 
likelihood of the new contract being 
retroactive to the fiscal year ended 
November 30 is probable. According to 
SFAS 5, Kenton should 

   A. Do nothing because no loss will 
   occur if the contract is never signed. 

   B. Disclose each loss contingency 
   amount in the notes to the November 30 
   financial statements. 

   C. Accrue $100,000 in the income 
   statement, and disclose the nature of the 
   contingency and the additional loss 
   exposure. 

   D. Follow conservatism and accrue 
   $300,000 in the income statement, and 
   disclose the nature of the contingency. 


[667] Source: CMA 0688 3-26 
The accrual of a contingent liability and the 
related loss should be recorded when the 

   A. Loss resulting from a future event 
   may be material in relation to income. 

   B. Future event that gives rise to the 
   liability is unusual in nature and 
   nonrecurring. 

   C. Amount of the loss resulting from the 
   event is reasonably estimated and the 
   occurrence of the loss is probable. 

   D. Event that gives rise to the liability 
   is unusual and its occurrence is 
   probable. 


[668] Source: CMA 0697 2-22 
Paxton Company started offering a 3-year 
warranty on its products sold after June 1, 
2000. Paxton's actual sales for the year 
ended May 31, 2001 were $2,695,000. The 
total cost of the warranty is expected to be 
3% of sales. The actual 2001 warranty 
expenditures were $31,500 in labor and 
$9,100 in parts. The amount of warranty 
expense that should appear on Paxton's 
income statement for the year ended May 31, 
2001 is 

   A. $31,500 

   B. $40,250 

   C. $40,600 

   D. $80,850 


[669] Source: Publisher 
Felicity Press received a total of $180,000 
for 3-year subscriptions that began April 1, 
2001. It recorded this amount as unearned 
revenue. Assuming Felicity records 
adjustments only at the end of the calendar 
year, the adjusting entry required to reflect 
the proper balances in the accounts at 
December 31, 2001 is to 

   A. Debit subscription revenue for 
   $135,000 and credit unearned revenue 
   for $135,000. 

   B. Debit unearned revenue for 
   $135,000 and credit subscription 
   revenue for $135,000. 

   C. Debit subscription revenue for 
   $45,000 and credit unearned revenue 
   for $45,000. 

   D. Debit unearned revenue for $45,000 
   and credit subscription revenue for 
   $45,000. 


[670] Source: Publisher 
Flyn Press received a total of $180,000 for 
3-year subscriptions that began April 1, 
2001. It recorded this amount as 
subscription revenue. Assuming Flyn 
records adjustments only at the end of the 
calendar year, the adjusting entry required to 
reflect the proper balances in the accounts at 
December 31, 2001 is to 

   A. Debit subscription revenue for 
   $135,000 and credit unearned revenue 
   for $135,000. 

   B. Debit unearned revenue for 
   $135,000 and credit subscription 
   revenue for $135,000. 

   C. Debit subscription revenue for 
   $45,000 and credit unearned revenue 
   for $45,000. 

   D. Debit unearned revenue for $45,000 
   and credit subscription revenue for 
   $45,000. 


[671] Source: Publisher 
Hopkins Corporation, a manufacturer of 
industrial fans, accounts for warranty costs 
under the accrual method. During November 
2001, the company sold 500 units at $6,000 
each. Each unit had a 1-year warranty. 
Based on past experience, the company 
expects future warranty costs to be $150 per 
unit. As of December 31, 2001, no journal 
entries involving warranty costs related to 
these units had been made, and no warranty 
costs were incurred during November or 
December. The year-end adjusting entry 
required at December 31, 2001 to account 
for estimated future warranty costs is to 

   A. Make no entry until costs are 
   incurred. 

   B. Debit sales for $75,000 and credit 
   unearned warranty revenue for $75,000. 

   C. Debit warranty expenses for $62,500 
   and credit estimated liability under 
   warranties for $62,500. 

   D. Debit warranty expenses for $75,000 
   and credit estimated liability under 
   warranties for $75,000. 


[672] Source: Publisher 
Tonya Corporation's financial statements at 
December 31, 2001 should 

   A. Include a contingent liability of $1 
   million. 

   B. Disclose the purchase commitment. 

   C. Include a liability of $1,150,000. 

   D. Include a deferred liability of $1 
   million. 


[673] Source: Publisher 
Assume the goods were received and the 
market price of the raw materials is 
$900,000. For this transaction, Tonya 
Corporation's financial statements at 
December 31, 2001 should report 

   A. Nothing about this commitment. 

   B. A liability of $1 million. 

   C. A liability of $100,000. 

   D. A liability of $900,000. 


[674] Source: Publisher 
Assume the bonds were issued on January 1, 
2001 for $2,125,618. Using the effective 
interest amortization method, Nichols 
Company recorded interest expense for the 6 
months ended June 30, 2001 in the amount of 

   A. $70,000 

   B. $140,000 

   C. $127,537 

   D. $63,769 


[675] Source: Publisher 
Assume the bonds were issued on January 1, 
2001 for $2,125,618. Using the effective 
interest amortization method, Nichols 
Company recorded interest expense for the 6 
months ended December 31, 2001 in the 
amount of 

   A. $70,000 

   B. $140,000 

   C. $63,582 

   D. $63,769 


[676] Source: Publisher 
What is the book value of the bonds after the 
payment of interest on January 1, 2002? 

   A. $2,000,000 

   B. $2,125,618 

   C. $2,119,387 

   D. $2,112,969 


[677] Source: Publisher 
The bonds were issued on January 1, 2001 
at 

   A. A premium. 

   B. An amortized value. 

   C. Book value. 

   D. A discount. 


[678] Source: Publisher 
What is the deferred tax liability at 
December 31, 2001 (rounded to the nearest 
whole dollar)? 

   A. $14,000 

   B. $66,660 

   C. $23,331 

   D. $9,331 


[679] Source: Publisher 
Assuming no other transactions involving 
depreciable assets, what is the balance of 
the deferred tax liability at December 31, 
2002 (rounded to the nearest whole dollar)? 

   A. $17,115 

   B. $26,446 

   C. $ 7,784 

   D. $ 9,331 


[680] Source: Publisher 
Assume that new corporate income tax rates 
will go into effect as follows:

       2002-2004    40%
            2005    45%
What is the amount of the deferred tax 
liability at December 31, 2001 (rounded to 
the nearest whole dollar)? 

   A. $11,997 

   B. $10,664 

   C. $14,000 

   D. $12,664 


[681] Source: Publisher 
Beginning January 1, 2001, Stone Company 
offered a 3-year warranty from date of sale 
on any of its products sold after January 1, 
2001. The warranty offer was part of a 
program to increase sales. Meeting the terms 
of the warranty was expected to cost 4% of 
sales. Sales made under warranty in 2001 
totaled $18 million, and 20% of the units 
sold were returned. These units were 
repaired or replaced at a cost of $130,000. 
The warranty expense reported on Stone's 
2001 income statement is 

   A. $720,000 

   B. $202,000 

   C. $240,000 

   D. $130,000 


[682] Source: Publisher 
Based on its current operating levels, 
Glucose Corporation estimates that its 
annual level of taxable income in the 
foreseeable future will be $200,000 
annually. Enacted tax rates for the tax 
jurisdiction in which Glucose operates are 
15% for the first $50,000 of taxable income, 
25% for the next $50,000 of taxable income, 
and 35% for taxable income in excess of 
$100,000. Which tax rate should Glucose 
use to measure a deferred tax liability or 
asset in accordance with SFAS 109? 

   A. 15% 

   B. 25% 

   C. 27.5% 

   D. 35% 


[683] Source: Publisher 
In preparing its December 31 financial 
statements, Irene Corp. must determine the 
proper accounting treatment of a $180,000 
loss carryforward available to offset future 
taxable income. There are no temporary 
differences. The applicable current and 
future income tax rate is 30%. Available 
evidence is not conclusive as to the future 
existence of sufficient taxable income to 
provide for the future realization of the tax 
benefit of the $180,000 loss carryforward. 
However, based on the available evidence, 
Irene believes that it is more likely than not 
that future taxable income will be available 
to provide for the future realization of only 
$100,000 of this loss carryforward. In its 
statement of financial condition, Irene 
should recognize what amounts?

      Deferred   Valuation
      Tax Asset  Allowance
      ---------  ---------
   A. 

      $0         $0
   B. 

      $30,000    $0
   C. 

      $54,000    $24,000
   D. 

      $54,000    $30,000


[684] Source: CMA 0696 2-30 
Initial direct costs are incurred by the lessor 
and may be classified as incremental direct 
costs and internal direct costs. All of the 
following costs are examples of initial 
direct costs except the costs of 

   A. Closing the lease transaction. 

   B. Negotiating lease terms. 

   C. Establishing and monitoring credit 
   policies. 

   D. Evaluating collateral and security 
   arrangements. 


[685] Source: CMA 1289 3-10 
Assuming the lease is classified as an 
operating lease by Suki Corporation, the 
initial direct costs should be 

   A. Expensed in the year of incurrence 
   by including them in cost of goods sold 
   or by treating them as a selling expense. 

   B. Deferred and recognized as a 
   reduction in the interest rate implicit in 
   the lease. 

   C. Deferred and allocated over the 
   lease term in proportion to the 
   recognition of rental income. 

   D. Deferred and carried on the 
   statement of financial position until the 
   end of the lease term. 


[686] Source: CMA 1289 3-11 
Assuming the lease is classified as a 
direct-financing capital lease by Suki 
Corporation, the initial direct costs should 
be 

   A. Expensed in the year of incurrence 
   by including them in cost of goods sold 
   or by treating them as a selling expense. 

   B. Deferred and recognized as a 
   reduction in the interest rate implicit in 
   the lease. 

   C. Deferred and allocated over the 
   lease term in proportion to the 
   recognition of rental income. 

   D. Deferred and carried on the 
   statement of financial position until the 
   end of the lease term. 


[687] Source: CPA 0595 F-19 
On July 1, 20X0, Eagle Corp. issued 600 of 
its 10%, $1,000 bonds at 99 plus accrued 
interest. The bonds are dated April 1, 20X0 
and mature in ten years. Interest is payable 
semiannually on April 1 and October 1. 
What amount did Eagle receive from the 
bond issuance? 

   A. $579,000 

   B. $594,000 

   C. $600,000 

   D. $609,000 


[688] Source: CPA 0591 I-47 
Hancock Co.'s December 31, 20X0 balance 
sheet contained the following items in the 
long-term liabilities section:

Unsecured
---------
9.375% registered bonds ($25,000
  maturing annually beginning in 20X4)  $275,000
11.5% convertible bonds, callable
  beginning in 20X9, due in 20 years     125,000
Secured
-------
9.875% guaranty security bonds,
  due in 20 years                       $250,000
10.0% commodity backed bonds ($50,000
  maturing annually beginning in 20X4)   200,000
What are the total amounts of serial bonds 
and debenture bonds?

       Serial Bonds  Debenture Bonds
       ------------  ---------------
   A. 

        $475,000        $400,000
   B. 

        $475,000        $125,000
   C. 

        $450,000        $400,000
   D. 

        $200,000        $650,000


[689] Source: CPA 1193 I-37 
On July 1, 20X0, after recording interest and 
amortization, York Co. converted $1 million 
of its 12% convertible bonds into 50,000 
shares of $1 par value common stock. On 
the conversion date, the carrying amount of 
the bonds was $1.3 million, the market 
value of the bonds was $1.4 million, and 
York's common stock was publicly trading 
at $30 per share. Using the book-value 
method, what amount of additional paid-in 
capital should York record as a result of the 
conversion? 

   A. $950,000 

   B. $1,250,000 

   C. $1,350,000 

   D. $1,500,000 


[690] Source: CPA 1195 F-16 
On March 1, 20X0, Fine Co. borrowed 
$10,000 and signed a two-year note bearing 
interest at 12% per annum compounded 
annually. Interest is payable in full at 
maturity on February 28, 20X2. What 
amount should Fine report as a liability for 
accrued interest at December 31, 20X1? 

   A. $0 

   B. $1,000 

   C. $1,200 

   D. $2,320 


[691] Source: CPA 0593 II-18 
On December 30, 20X0, Hale Corp. paid 
$400,000 cash and issued 80,000 shares of 
its $1 par value common stock to its 
unsecured creditors on a pro rata basis 
pursuant to a reorganization plan under 
Chapter 11 of the bankruptcy statutes. Hale 
owed these unsecured creditors a total of 
$1.2 million. Hale's common stock was 
trading at $1.25 per share on December 30, 
20X0. As a result of this transaction, Hale's 
total shareholder's equity had a net increase 
of 

   A. $1,200,000 

   B. $800,000 

   C. $100,000 

   D. $80,000 


[692] Source: CPA 1192 I-57 
On January 1, 20X0, Harrow Co. as lessee 
signed a five-year noncancellable equipment 
lease with annual payments of $100,000 
beginning December 31, 20X0. Harrow 
treated this transaction as a capital lease. 
The five lease payments have a present 
value of $379,000 at January 1, 20X0, 
based on interest of 10%. What amount 
should Harrow report as interest for the year 
ended December 31, 20X0? 

   A. $37,900 

   B. $27,900 

   C. $24,200 

   D. $0 


[693] Source: CPA 0591 I-42 
On January 1, 20X0, Babson, Inc. leased 
two automobiles for executive use. The 
lease requires Babson to make five annual 
payments of $13,000 beginning January 1, 
20X0. At the end of the lease term, 
December 31, 20X4, Babson guarantees the 
residual value of the automobiles will total 
$10,000. The lease qualifies as a capital 
lease. The interest rate implicit in the lease 
is 9%. Present value factors for the 9% rate 
implicit in the lease are as follows:

For an annuity due with 5 payments       4.240
For an ordinary annuity with 5 payments  3.890
Present value of $1 for 5 periods        0.650
Babson's recorded capital lease liability 
immediately after the first required payment 
should be 

   A. $48,620 

   B. $44,070 

   C. $35,620 

   D. $31,070 


[694] Source: CPA 1193 I-44 
Howe Co. leased equipment to Kew Corp. 
on January 2, 20X0 for an eight-year period 
expiring December 31, 20X7. Equal 
payments under the lease are $600,000 and 
are due on January 2 of each year. The first 
payment was made on January 2, 20X0. The 
list selling price of the equipment is 
$3,520,000, and its carrying cost on Howe's 
books is $2.8 million. The lease is 
appropriately accounted for as a sales-type 
lease. The present value of the lease 
payments at an imputed interest rate of 12% 
(Howe's incremental borrowing rate) is 
$3.3 million. What amount of profit on the 
sale should Howe report for the year ended 
December 31, 20X0? 

   A. $720,000 

   B. $500,000 

   C. $90,000 

   D. $0 


[695] Source: CPA 1192 I-56 
On December 1, 20X0, Clark Company 
leased office space for five years at a 
monthly rental of $60,000. On that date, 
Clark paid the lessor the following amounts:

First month's rent                $ 60,000
Last month's rent                   60,000
Security deposit (refundable at
  lease expiration)                 80,000
Installation of new walls and
  offices                          360,000
Clark's December 20X0 expense relating to 
its use of this office space is 

   A. $60,000 

   B. $66,000 

   C. $126,000 

   D. $200,000 


[696] Source: CPA 0591 I-44 
On January 1, 20X0, Hooks Oil Co. sold 
equipment with a carrying amount of 
$100,000 and a remaining useful life of 10 
years to Maco Drilling for $150,000. Hooks 
immediately leased the equipment back 
under a 10-year capital lease with a present 
value of $150,000. It will depreciate the 
equipment using the straight-line method. 
Hooks made the first annual lease payment 
of $24,412 in December 20X0. In Hooks's 
December 31, 20X0 balance sheet, the 
unearned gain on the equipment sale should 
be 

   A. $50,000 

   B. $45,000 

   C. $25,588 

   D. $0 


[697] Source: Publisher 
The Rice Company sponsors a defined 
benefit pension plan for its employees. At 
the beginning of Year 1, Rice had prepaid 
pension cost of $15,000, pension plan assets 
with a fair value of $50,000, and a 
projected benefit obligation (PBO) of 
$35,000. The accumulated benefit obligation 
(ABO) equals the PBO. The service cost for 
Year 1 was $45,000, and the amount funded 
was $40,000. The discount rate and the 
expected rate of return on plan assets were 
10%. No amortization of prior service cost, 
previously unrecognized gains or losses, or 
transition amount is required to determine 
the minimum net periodic pension cost 
(NPPC). Thus, for Year 1, Rice reported 

   A. Interest cost of $5,000. 

   B. Prepaid pension cost of $15,000. 

   C. NPPC of $43,500. 

   D. Accrued pension cost of $16,500. 


[698] Source: CPA 0592 II-14 
The following information pertains to Lee 
Corp.'s defined benefit pension plan for 
20X0:

Service cost                   $160,000
Actual and expected gain
  on plan assets                 35,000
Unexpected loss on plan assets
  related to a 20X0 disposal
  of a subsidiary                40,000
Amortization of unrecognized
  prior service cost              5,000
Annual interest on pension
  obligation                     50,000
What amount should Lee report as pension 
expense in its 20X0 income statement? 

   A. $250,000 

   B. $220,000 

   C. $210,000 

   D. $180,000 


[699] Source: CPA 0595 F-39 
The following information pertains to Gali 
Co.'s defined benefit pension plan for 20X0:

Fair value of plan assets, beginning of year   $350,000
Fair value of plan assets, end of year          525,000
Employer contributions                          110,000
Benefits paid                                    85,000
In computing pension expense, what amount 
should Gali use as actual return on plan 
assets? 

   A. $65,000 

   B. $150,000 

   C. $175,000 

   D. $260,000 


[700] Source: Publisher 
At the end of the current year, its first year 
of operation, the Fratzie Corporation 
reported $45,000 taxable income and 
$38,000 pretax financial income as a result 
of a single temporary difference. Because of 
uncertain economic times, the company 
believes that only 75% of the deductible 
temporary difference is more likely than not 
to be realized. The tax rate for the current 
year is 30%, and no change has been 
enacted for future years. On the year-end 
balance sheet, the deferred tax asset will be 
reported at a net balance of 

   A. $7,000 

   B. $5,250 

   C. $2,100 

   D. $1,575 


[701] Source: CPA 1194 F-51 
In its 20X0 income statement, Cere Co. 
reported income before income taxes of 
$300,000. Cere estimated that, because of 
permanent differences, taxable income for 
20X0 would be $280,000. During 20X0, 
Cere made estimated tax payments of 
$50,000, which were debited to income tax 
expense. Cere is subject to a 30% tax rate. 
What amount should Cere report as income 
tax expense? 

   A. $34,000 

   B. $50,000 

   C. $84,000 

   D. $90,000 


[702] Source: CPA 0593 I-26 
West Corp. leased a building and received 
the $36,000 annual rental payment on June 
15, 20X0. The beginning of the lease was 
July 1, 20X0. Rental income is taxable when 
received. West's tax rates are 30% for 20X0 
and 40% thereafter. West had no other 
permanent or temporary differences. West 
determined that no valuation allowance was 
needed. What amount of deferred tax asset 
should West report in its December 31, 
20X0 balance sheet? 

   A. $5,400 

   B. $7,200 

   C. $10,800 

   D. $14,400 


[703] Source: CPA 0595 F-42 
Quinn Co. reported a net deferred tax asset 
of $9,000 in its December 31, 20X0 balance 
sheet. For 20X1, Quinn reported pretax 
financial statement income of $300,000. 
Temporary differences of $100,000 resulted 
in taxable income of $200,000 for 20X1. At 
December 31, 20X1, Quinn had cumulative 
taxable temporary differences of $70,000. 
Quinn's effective income tax rate is 30%. In 
its December 31, 20X1 income statement, 
what should Quinn report as deferred 
income tax expense? 

   A. $12,000 

   B. $21,000 

   C. $30,000 

   D. $60,000 


[704] Source: CPA 0595 F-16 
As a result of differences between 
depreciation for financial reporting 
purposes and tax purposes, the financial 
reporting basis of Noor Co.'s sole 
depreciable asset, acquired in 20X0, 
exceeded its tax basis by $250,000 at 
December 31, 20X0. This difference will 
reverse in future years. The enacted tax rate 
is 30% for 20X0 and 40% for future years. 
Noor has no other temporary differences. In 
its December 31, 20X0 balance sheet, how 
should Noor report the deferred tax effect of 
this difference? 

   A. As an asset of $75,000. 

   B. As an asset of $100,000. 

   C. As a liability of $75,000. 

   D. As a liability of $100,000. 


[705] Source: CPA 0593 I-35 
Taft Corp. uses the equity method to account 
for its 25% investment in Flame, Inc. During 
20X0, Taft received dividends of $30,000 
from Flame and recorded $180,000 as its 
equity in the earnings of Flame. Additional 
information follows:

- All the undistributed earnings of Flame will be distributed as
   dividends in future periods.
- The dividends received from Flame are eligible for the 80%
   dividends-received deduction.
- There are no other temporary differences.
- Enacted income tax rates are 30% for 20X0 and thereafter.
In its December 31, 20X0 balance sheet, 
what amount should Taft report for deferred 
income tax liability? 

   A. $9,000 

   B. $10,800 

   C. $45,000 

   D. $54,000 


[706] Source: CPA 1191 I-38 
Mill, which began operations on January 1, 
20X0, recognizes income from long-term 
construction contracts under the 
percentage-of-completion method in its 
financial statements and under the 
completed-contract method for income tax 
reporting. Income under each method 
follows:

         Completed-    Percentage-
  Year    Contract    of-Completion
  ----   ----------   -------------
  20X0    $     --      $300,000
  20X1     400,000       600,000
  20X2     700,000       850,000
There are no other temporary differences. If 
the applicable tax rate is 25%, Mill should 
report in its balance sheet at December 31, 
20X2 a deferred income tax liability of 

   A. $37,500 

   B. $105,000 

   C. $162,500 

   D. $195,000 


[707] Source: Publisher 
For which fiscal year, ended May 31, would 
the depreciation expense be the lowest? 
(Use the units-of-output method for all 
years.) 

   A. 1994 

   B. 1995 

   C. 1996 

   D. 1997 


[708] Source: Publisher 
Assuming the double-declining-balance 
method of depreciation is used for all years, 
the depreciation expense for the fiscal year 
ended May 31 would be greatest in 

   A. 1994 

   B. 1995 

   C. 1996 

   D. 1997 


[709] Source: CMA 0690 3-1 
For a direct financing lease, the gross 
investment, lease payments receivable, 
recorded by the lessor is equal to the 

   A. Present value of the minimum lease 
   payments minus the unguaranteed 
   residual value accruing to the lessor at 
   the end of the lease term. 

   B. Lower of 90% of the present value 
   of the minimum lease payments or the 
   fair value of the leased asset. 

   C. Difference between the fair value of 
   the leased asset and the unearned 
   interest revenue. 

   D. Minimum lease payments plus the 
   unguaranteed residual value accruing to 
   the lessor at the end of the lease term. 


[710] Source: CPA 0595 F-17 
At December 31, 2000, Bren Co. had the 
following deferred income tax items:

   A deferred income tax liability of $15,000 related to a
   noncurrent asset
   A deferred income tax asset of $3,000 related to a noncurrent
   liability
   A deferred income tax asset of $8,000 related to a current
   liability
Which of the following should Bren report 
in the noncurrent section of its December 
31, 2000 balance sheet? 

   A. A noncurrent asset of $3,000 and a 
   noncurrent liability of $15,000. 

   B. A noncurrent liability of $12,000. 

   C. A noncurrent asset of $11,000 and a 
   noncurrent liability of $15,000. 

   D. A noncurrent liability of $4,000. 


[711] Source: CMA 0691 2-19 
Garber Corporation is the lessee in a lease 
arrangement with Janos, Inc. to lease land 
and a building. If the lease contains a 
bargain purchase option, Garber should 
record the land and the building, in 
accordance with SFAS 13, Accounting for 
Leases, as a(n) 

   A. Operating lease and capital lease, 
   respectively. 

   B. Capital lease and operating lease, 
   respectively. 

   C. Capital lease but recorded as a 
   single unit. 

   D. Capital lease but separately 
   classified. 


[712] Source: CMA 0691 2-20 
Initial direct costs are incurred by the lessor 
and may be classified as incremental direct 
costs and internal direct costs. According to 
SFAS 13, Accounting for Leases, all of the 
following costs are examples of internal 
direct costs except the costs of 

   A. Evaluating the prospective lessee's 
   financial condition. 

   B. Evaluating collateral and security 
   arrangements. 

   C. Establishing and monitoring credit 
   policies. 

   D. Negotiating lease terms. 


[713] Source: CMA 1292 2-10 
There are many similarities between lessee 
and lessor accounting for the capitalization 
of leases. Which one of the following is a 
criterion for the capitalization of a lease by 
a lessee? 

   A. The lease transfers ownership of the 
   property to the lessee by the end of the 
   lease term. 

   B. The lease term is at least 90% of the 
   remaining life of the asset at the 
   beginning of the lease. 

   C. Future costs are reasonably 
   predictable. 

   D. Rent collectibility is reasonably 
   certain. 


[714] Source: CPA 0595 F-43 
Mobe Co. reported the following operating 
income (loss) for its first three years of 
operations:

    2000    $  300,000
    2001      (700,000)
    2002     1,200,000
For each year, there were no deferred 
income taxes, and Mobe's effective income 
tax rate was 30%. In its 2001 income tax 
return, Mobe elected to carry back the 
maximum amount of loss possible. In its 
2002 income statement, what amount should 
Mobe report as total income tax expense? 

   A. $120,000 

   B. $150,000 

   C. $240,000 

   D. $360,000 


[715] Source: CMA 1293 2-10 
For the past three years, Colbeth, Inc. has 
failed to accrue unpaid wages earned by 
workers during the last week of the year. 
The amounts omitted, which are considered 
material, were as follows:

   December 31, Year 1                  $56,000
   December 31, Year 2                   51,000
   December 31, Year 3                   64,000
The entry on December 31, Year 3 to 
correct for these omissions would include a 

   A. Credit to Wage Expense for 
   $64,000. 

   B. Debit to Wage Expense for $51,000. 

   C. Debit to Wage Expense for $13,000. 

   D. Credit to Retained Earnings for 
   $64,000. 


[716] Source: Publisher 
Equipment covered by a lease agreement is 
expected by the lessor to have a residual 
value at the end of the lease term of 
$20,000. As part of the lease agreement, the 
lessee guarantees a residual value of 
$12,000. In the case of excessive usage, the 
guaranteed residual value is $18,000. What 
is the amount of guaranteed residual value 
that should be included in the calculation of 
the minimum lease payments? 

   A. $0 

   B. $12,000 

   C. $18,000 

   D. $20,000 


[717] Source: CPA 1190 I-37 
On January 1, 20X0, Wren Company leased 
a building to Brill under an operating lease 
for 10 years at $50,000 per year, payable 
the first day of each lease year. Wren paid 
$15,000 to a real estate broker as a finder's 
fee. The annual depreciation on the building 
is $12,000. For 20X0, Wren incurred 
insurance and property tax expenses totaling 
$9,000. Wren's net rental income for 20X0 
should be 

   A. $27,500 

   B. $29,000 

   C. $35,000 

   D. $36,500 


[718] Source: CMA 0695 2-26 
SFAS 13, Accounting for Leases, requires 
disclosure of various information with 
respect to leases in the lessee's and lessor's 
financial statements or in the notes to the 
financial statements. Which one of the 
following is the lessor required to disclose 
with respect to sales-type and 
direct-financing leases? 

   A. The total of minimum sublease 
   rentals to be received in the future 
   under noncancellable subleases as of 
   the date of the latest balance sheet. 

   B. Total contingent rentals included in 
   income for each period for which an 
   income statement is presented. 

   C. Minimum future rentals on 
   noncancellable leases as of the date of 
   the latest balance sheet, in the aggregate 
   and for each of the five succeeding 
   fiscal years. 

   D. The cost and carrying amount, if 
   different, of property on lease or held 
   for leasing by major classes of property 
   according to function, and the amount of 
   accumulated depreciation in total as of 
   the date of the latest balance sheet. 


[719] Source: CMA 1295 2-7 
Jason Company's fiscal year ended on 
November 30 of the current year. Jason has 
an irrevocable contract to replace its 
mainframe computer system on December 
15 of the current year, at a net cost of 
$750,000, reflecting the trade-in of the old 
hardware for $10,000, the fair market value. 
The net book value of the old hardware on 
November 30 of the current year is $27,000. 
On its November 30 Statement of Financial 
Position for the current year, Jason should 
report the value of the old computer 
equipment as 

   A. $750,000 

   B. $10,000 

   C. $27,000 

   D. $760,000 


[720] Source: Publisher 
A regressive tax is a tax in which 

   A. Individuals with higher incomes pay 
   a higher percentage of their income in 
   tax. 

   B. The burden for payment falls 
   disproportionately on lower-income 
   persons. 

   C. The individual pays a constant 
   percentage in taxes, regardless of 
   income level. 

   D. Individuals with lower incomes pay 
   a lower percentage of their income in 
   tax. 


[721] Source: CMA 0686 1-20 
Two examples of indirect taxes are 

   A. Taxes on business and rental 
   property and personal income taxes. 

   B. Sales taxes and Social Security taxes 
   paid by employees. 

   C. Sales taxes and Social Security taxes 
   paid by employers. 

   D. Social Security taxes paid by 
   employees and personal income taxes. 


[722] Source: Publisher 
What is HCC's net tax liability? 

   A. $17,700 

   B. $15,300 

   C. $9,700 

   D. $2,000 


[723] Source: Publisher 
Which item reduces HCC's gross tax 
liability by the largest amount? 

   A. Gross income. 

   B. The tax-exempt interest exclusion. 

   C. The depreciation deduction. 

   D. The tax credit. 


[724] Source: CMA 1291 2-11 
None of the following items are deductible 
in calculating taxable income except 

   A. Estimated liabilities for product 
   warranties expected to be incurred in 
   the future. 

   B. Dividends on common stock 
   declared but not payable until next year. 

   C. Bonus accrued but not paid by the 
   end of the year to a cash-basis 90% 
   shareholder. 

   D. Vacation pay accrued on an 
   employee-by-employee basis. 


[725] Source: CMA 1291 2-12 
All of the following are 
adjustments/preference items to corporate 
taxable income in calculating alternative 
minimum taxable income except 

   A. All of the gain on an installment sale 
   of real property in excess of $150,000. 

   B. Mining exploration and development 
   costs. 

   C. A charitable contribution of 
   appreciated property. 

   D. Sales commission earned in the 
   current year but paid in the following 
   year. 


[726] Source: Publisher 
The deferral or nonrecognition of gains is 
not allowed for tax purposes when the 
transaction is a(n) 

   A. Reorganization that is a change in the 
   form of investment. 

   B. Exchange of property that is used in 
   a business for like-kind property. 

   C. Reorganization that is considered a 
   disposition of assets. 

   D. Involuntary conversion of property 
   into qualified replacement property. 


[727] Source: Publisher 
At the beginning of Year 1, the Wright 
Company's actuary estimated the company's 
total unrecognized prior service cost to be 
$180,000. Wright expected the following 
numbers of years of future service from its 
seven employees: A-2; B-2; C-6; D-8; E-10; 
F-5; G-3. Under the years-of-future-service 
method, the amount of amortization of 
unrecognized prior service cost to be 
included in pension expense in Year 3 is 

   A. $35,000 

   B. $25,000 

   C. $25,714 

   D. $36,000 


[728] Source: Publisher 
SFAS 114, Accounting by Creditors for 
Impairment of a Loan, requires recognition 
of an impairment when it is probable that a 
creditor will be unable to collect

         Contractual         Contractual
      Principal Payments   Interest Payments
      ------------------   -----------------
   A. 

              Yes                No
   B. 

              Yes                Yes
   C. 

              No                 Yes
   D. 

              No                 No


[729] Source: CPA 1193 I-30 
Eagle, Inc. is preparing its financial 
statements for the year ended December 31, 
Year 1. Accounts payable amounted to 
$200,000 before any necessary year-end 
adjustment related to the following:

   At December 31, Year 1, Eagle has a $50,000 debit balance in its
   accounts payable to Twist, a supplier, resulting from a $50,000
   advance payment for goods to be manufactured to Eagle's
   specifications.
   Checks in the amount of $25,000 were written to vendors and
   recorded on December 29, Year 1.  The checks were mailed on
   January 5, Year 2.
What amount should Eagle report as 
accounts payable in its December 31, Year 
1 balance sheet? 

   A. $275,000 

   B. $250,000 

   C. $200,000 

   D. $125,000 


[730] Source: CPA 1192 I-21 
Saddle Co. records its purchases at gross 
amounts but wishes to change to recording 
purchases net of purchase discounts. 
Discounts available on purchases recorded 
from October 1, Year 1 to September 30, 
Year 2 totaled $3,000. Of this amount, $800 
is still available in the accounts payable 
balance. The balances in Saddle's accounts, 
before conversion, for the year ended 
September 30, Year 2 are

Purchases                   $200,000
Purchase discounts taken         900
Accounts payable              50,000
What is Saddle's accounts payable balance 
as of September 30, Year 2, after the 
conversion? 

   A. $49,200 

   B. $49,100 

   C. $47,900 

   D. $47,800 


[731] Source: CPA 0591 I-34 
Kew Co.'s accounts payable balance at 
December 31, Year 1 was $2.2 million 
before considering the following data:

   Goods shipped to Kew FOB shipping point on December 22, Year 1
   were lost in transit.  The invoice cost of $40,000 was not
   recorded by Kew.  On January 7, Year 2, Kew filed a $40,000
   claim against the common carrier.
   On December 27, Year 1, a vendor authorized Kew to return, for
   full credit, goods shipped and billed at $70,000 on December 3,
   Year 1.  The returned goods were shipped by Kew on December 28,
   Year 1.  A $70,000 credit memo was received and recorded by Kew
   on January 5, Year 2.
   Goods shipped to Kew FOB destination on December 20, Year 1 were
   received on January 6, Year 2.  The invoice cost was $50,000.
What amount should Kew report as accounts 
payable in its December 31, Year 1 balance 
sheet? 

   A. $2,170,000 

   B. $2,180,000 

   C. $2,230,000 

   D. $2,290,000 


[732] Source: CPA 0591 I-37 
Kemp Co. must determine the December 31, 
Year 2 accruals for advertising and rent 
expenses. A $500 advertising bill was 
received January 7, Year 3. It related to 
costs of $375 for advertisements in 
December Year 2 issues and $125 for 
advertisements in January Year 3 issues of 
the newspaper. A store lease, effective 
December 16, Year 1, calls for fixed rent of 
$1,200 per month, payable one month from 
the effective date and monthly thereafter. In 
addition, rent equal to 5% of net sales over 
$300,000 per calendar year is payable on 
January 31 of the following year. Net sales 
for Year 2 were $550,000. In its December 
31, Year 2 balance sheet, Kemp should 
report accrued liabilities of 

   A. $12,500 

   B. $12,875 

   C. $13,100 

   D. $13,475 


[733] Source: CPA 1193 I-28 
Ross Co. pays all salaried employees on a 
Monday for the five-day workweek ended 
the previous Friday. The last payroll 
recorded for the year ended December 31, 
Year 2 was for the week ended December 
25, Year 2. The payroll for the week ended, 
Friday, January 1, Year 3 included regular 
weekly salaries of $80,000 and vacation 
pay of $25,000 for vacation time earned in 
Year 2 but not taken by December 31, Year 
2. Ross had accrued a liability of $20,000 
for vacation pay at December 31, Year 1. In 
its December 31, Year 2 balance sheet, 
what amount should Ross report as accrued 
salary and vacation pay? 

   A. $64,000 

   B. $69,000 

   C. $84,000 

   D. $89,000 


[734] Source: CPA 1194 F-18 
In its current year financial statements, Cris 
Co. reported interest expense of $85,000 in 
its income statement and cash paid for 
interest of $68,000 in its cash flow 
statement. There was no prepaid interest or 
interest capitalization at either the beginning 
or the end of the year. Accrued interest last 
year was $15,000. What amount should Cris 
report as accrued interest payable in its end 
of the year balance sheet? 

   A. $2,000 

   B. $15,000 

   C. $17,000 

   D. $32,000 


[735] Source: CPA 1193 I-31 
On September 1, Year 1, Brok Co. issued a 
note payable to Federal Bank in the amount 
of $900,000, bearing interest at 12% and 
payable in three equal annual principal 
payments of $300,000. The first interest and 
principal payment was made on September 
1, Year 2. At December 31, Year 2, Brok 
should record accrued interest payable of 

   A. $36,000 

   B. $33,000 

   C. $24,000 

   D. $22,000 


[736] Source: CPA 1190 I-12 
Bloy Corp.'s payroll for the pay period is 
summarized as follows:

                         Federal        Amount of Wages
                         Income     Subject to Payroll Taxes
Department     Total       Tax      -------------------------
 Payroll       Wages     Withheld      FICA     Unemployment
----------   --------   ---------     -------   ------------
Factory      $ 60,000    $ 7,000      $56,000     $18,000
Sales          22,000      3,000       16,000       2,000
Office         18,000      2,000        8,000
             --------    -------      -------     -------
             $100,000    $12,000      $80,000     $20,000
             ========    =======      =======     =======
Assume the following payroll tax rates:
  FICA for employer and employee    7% each
  Unemployment                      3%
What amount should Bloy accrue as its share 
of payroll taxes in its balance sheet? 

   A. $18,200 

   B. $12,600 

   C. $11,800 

   D. $6,200 


[737] Source: CPA 1195 F-13 
Lime Co.'s payroll for the month is 
summarized as follows:

Total wages                    $10,000
Federal income tax withheld      1,200
All wages paid were subject to FICA. FICA 
tax rates were 7% each for employee and 
employer. Lime remits payroll taxes on the 
15th of the following month. In its financial 
statements for the month, what amounts 
should Lime report as total payroll tax 
liability and as payroll tax expense?

      Liability    Expense
      ---------    -------
   A. 

       $1,200      $1,400
   B. 

       $1,900      $1,400
   C. 

       $1,900      $700
   D. 

       $2,600      $700


[738] Source: CPA 0594 F-22 
Under state law, Acme may pay 3% of 
eligible gross wages, or it may reimburse 
the state directly for actual unemployment 
claims. Acme believes that actual 
unemployment claims will be 2% of eligible 
gross wages and has chosen to reimburse the 
state. Eligible gross wages are defined as 
the first $10,000 of gross wages paid to 
each employee. Acme had five employees, 
each of whom earned $20,000 during the 
year. In its year-end balance sheet, what 
amount should Acme report as accrued 
liability for unemployment claims? 

   A. $1,000 

   B. $1,500 

   C. $2,000 

   D. $3,000 


[739] Source: CPA 1194 F-19 
On July 1, Year 1, Ran County issued realty 
tax assessments for its fiscal year ended 
June 30, Year 2. The assessments are to be 
paid in two equal installments. On 
September 1, Year 1, Day Co. purchased a 
warehouse in Ran County. The purchase 
price was reduced by a credit for accrued 
realty taxes. Day did not record the entire 
year's real estate tax obligation, but instead 
records tax expenses at the end of each 
month by adjusting prepaid real estate taxes 
or real estate taxes payable, as appropriate. 
On November 1, Year 1, Day paid the first 
installment of $12,000 for realty taxes. What 
amount of this payment should Day record 
as a debit to real estate taxes payable? 

   A. $4,000 

   B. $8,000 

   C. $10,000 

   D. $12,000 


[740] Source: CPA 0595 F-15 
Ivy Co. operates a retail store. All items are 
sold subject to a 6% state sales tax, which 
Ivy collects and includes in sales revenue. 
Ivy files quarterly sales tax returns when 
due, by the 20th day following the end of the 
sales quarter. However, in accordance with 
state requirements, Ivy remits sales tax 
collected by the 20th day of the month 
following any month such collections 
exceed $500. Ivy takes these payments as 
credits on the quarterly sales tax return. The 
sales taxes paid by Ivy are charged against 
sales revenue.

Following is a monthly summary appearing 
in Ivy's first quarter sales revenue account:

             Debit     Credit
             -----     ------
January      $ --      $10,600
February      600        7,420
March          --        8,480
             ----      -------
             $600      $26,500
             ====      =======
In its March 31 balance sheet, what amount 
should Ivy report as sales taxes payable? 

   A. $600 

   B. $900 

   C. $1,500 

   D. $1,590 


[741] Source: CPA 0594 F-21 
Hudson Hotel collects 15% in city sales 
taxes on room rentals, in addition to a $2 
per room, per night, occupancy tax. Sales 
taxes for each month are due at the end of 
the following month, and occupancy taxes 
are due 15 days after the end of each 
calendar quarter. On January 3, Year 2, 
Hudson paid its November Year 1 sales 
taxes and its fourth quarter Year 1 
occupancy taxes. Additional information 
pertaining to Hudson's operations is

 Year 1     Room Rentals    Room Nights
--------    ------------    -----------
October       $100,000         1,100
November       110,000         1,200
December       150,000         1,800
What amounts should Hudson report as sales 
taxes payable and occupancy taxes payable 
in its December 31, Year 1 balance sheet?

      Sales Taxes   Occupancy Taxes
      -----------   ---------------
   A. 

        $39,000         $6,000
   B. 

        $39,000         $8,200
   C. 

        $54,000         $6,000
   D. 

        $54,000         $8,200


[742] Source: CPA 1192 T-42 
Buc Co. receives deposits from its 
customers to protect itself against 
nonpayments for future services. These 
deposits should be classified by Buc as 

   A. A liability. 

   B. Revenue. 

   C. A deferred credit deducted from 
   accounts receivable. 

   D. A contra account. 


[743] Source: CPA 0592 T-26 
On March 31, Dallas Co. received an 
advance payment of 60% of the sales price 
for special order goods to be manufactured 
and delivered within five months. At the 
same time, Dallas subcontracted for 
production of the special order goods at a 
price equal to 40% of the main contract 
price. What liabilities should be reported in 
Dallas's March 31 balance sheet?

             Payables to
          Deferred Revenues              Subcontractor
      --------------------------   --------------------------
   A. 

      None                         None
   B. 

      60% of main contract price   40% of main contract price
   C. 

      60% of main contract price   None
   D. 

      None                         40% of main contract price


[744] Source: CPA 1192 I-26 
Barnel Corp. owns and manages 19 
apartment complexes. On signing a lease, 
each tenant must pay the first and last 
months' rent and a $500 refundable security 
deposit. The security deposits are rarely 
refunded in total because cleaning costs of 
$150 per apartment are almost always 
deducted. About 30% of the time, the tenants 
are also charged for damages to the 
apartment, which typically cost $100 to 
repair. If a one-year lease is signed on a 
$900 per month apartment, what amount 
would Barnel report as refundable security 
deposit? 

   A. $1,400 

   B. $500 

   C. $350 

   D. $320 


[745] Source: CPA 0590 I-30 
Marr Co. sells its products in reusable 
containers. The customer is charged a 
deposit for each container delivered and 
receives a refund for each container 
returned within two years after the year of 
delivery. Marr accounts for the containers 
not returned within the time limit as being 
retired by sale at the deposit amount. 
Information for Year 3:

Container deposits at December 31, Year 2 from deliveries in
    Year 1             $150,000
    Year 2              430,000              $580,000
                       --------
Deposits for containers delivered in Year 3  $780,000
Deposits for containers returned in Year 3 from deliveries in
    Year 1             $ 90,000
    Year 2              250,000
    Year 3              286,000              $626,000
                       --------
In Marr's December 31, Year 3 balance 
sheet, the liability for deposits on returnable 
containers should be 

   A. $494,000 

   B. $584,000 

   C. $674,000 

   D. $734,000 


[746] Source: CPA 0591 I-39 
Fell, Inc. operates a retail grocery store that 
is required by law to collect refundable 
deposits of $.05 on soda cans. Information 
for the current year follows:

Liability for returnable deposits, 12/31 of last year      $150,000
Cans of soda sold this year                              10,000,000
Soda cans returned this year                             11,000,000
On February 1 of this year, Fell subleased 
space and received a $25,000 deposit to be 
applied toward rent at the expiration of the 
lease in five years. In Fell's December 31 
balance sheet, the current and noncurrent 
liabilities for deposits were

      Current      Noncurrent
      --------    ------------
   A. 

      $125,000    $0
   B. 

      $100,000    $25,000
   C. 

      $100,000    $0
   D. 

      $25,000     $100,000


[747] Source: CPA 1190 I-28 
Dunn Trading Stamp Company records 
stamp service revenue and provides for the 
cost of redemptions in the year stamps are 
sold to licensees. Dunn's past experience 
indicates that only 80% of the stamps sold to 
licensees will be redeemed. Dunn's liability 
for stamp redemptions was $6 million last 
year. Additional information for the current 
year is as follows:

Stamp service revenue from stamps sold to licensees     $4,000,000
Cost of redemptions (stamps sold prior to 1/1)           2,750,000
If all the stamps sold in the current year 
were presented for redemption next year, the 
redemption cost would be $2,250,000. What 
amount should Dunn report as a liability for 
stamp redemptions at December 31 of the 
current year? 

   A. $7,250,000 

   B. $5,500,000 

   C. $5,050,000 

   D. $3,250,000 


[748] Source: CPA 1195 F-44 
Oak Co. offers a three-year warranty on its 
products. Oak previously estimated 
warranty costs to be 2% of sales. Due to a 
technological advance in production at the 
beginning of 2003, Oak now believes 1% of 
sales to be a better estimate of warranty 
costs. Warranty costs of $80,000 and 
$96,000 were reported in 2001 and 2002, 
respectively. Sales for 2003 were $5 
million. What amount should be disclosed in 
Oak's 2003 financial statements as warranty 
expense? 

   A. $ 50,000 

   B. $ 88,000 

   C. $100,000 

   D. $138,000 


[749] Source: CPA 0592 I-30 
The following information pertains to Camp 
Corp.'s issuance of bonds on July 1, 2001:

Face amount                           $800,000
Term                                  10 years
Stated interest rate                        6%
Interest payment dates      Annually on July 1
Yield                                       9%
                                     At 6%    At 9%
                                     -----    -----
Present value of 1 for 10 periods    0.558    0.422
Future value of 1 for 10 periods     1.791    2.367
Present value of ordinary annuity
  of 1 for 10 periods                7.360    6.418
What should the issue price be for each 
$1,000 bond? 

   A. $1,000 

   B. $943 

   C. $864 

   D. $807 


[750] Source: CPA 1190 I-24 
On June 30, 2001, Huff Corp. issued 1,000 
of its 8%, $1,000 bonds at 99. The bonds 
were issued through an underwriter to whom 
Huff paid bond issue costs of $35,000. On 
June 30, 2001, Huff should report the bond 
liability at 

   A. $955,000 

   B. $990,000 

   C. $1,000,000 

   D. $1,025,000 


[751] Source: CPA 1193 I-29 
On January 31, 2001, Beau Corp. issued 
$300,000 maturity value, 12% bonds for 
$300,000 cash. The bonds are dated 
December 31, 2000 and mature in ten years. 
Interest will be paid semiannually on June 
30 and December 31. What amount of 
accrued interest payable should Beau report 
in its September 30, 2001 balance sheet? 

   A. $27,000 

   B. $24,000 

   C. $18,000 

   D. $9,000 


[752] Source: CPA 1194 F-24 
On January 2, 2000, West Co. issued 9% 
bonds in the amount of $500,000. They 
mature in ten years. The bonds were issued 
for $469,500 to yield 10%. Interest is 
payable annually on December 31. West 
uses the interest method of amortizing bond 
discount. In its June 30, 2000 balance sheet, 
what amount should West report as bonds 
payable? 

   A. $469,500 

   B. $470,475 

   C. $471,025 

   D. $500,000 


[753] Source: CPA 1193 I-36 
Webb Co. has outstanding a 7%, 10-year 
bond with a $100,000 face value. The bond 
was originally sold to yield 6% annual 
interest. Webb uses the effective-interest 
method to amortize bond premium. On June 
30, 2000, the carrying amount of the 
outstanding bond was $105,000. What 
amount of unamortized premium on the bond 
should Webb report in its June 30, 2001 
balance sheet? 

   A. $1,050 

   B. $3,950 

   C. $4,300 

   D. $4,500 


[754] Source: CPA 0590 I-37 
During 2000, Eddy Corp. incurred the 
following costs in connection with the 
issuance of bonds:

Printing and engraving                   $ 30,000
Legal fees                                160,000
Fees paid to independent accountants
  for registration information             20,000
Commissions paid to underwriter           300,000
What amount should be recorded as a 
deferred charge to be amortized over the 
term of the bonds? 

   A. $510,000 

   B. $480,000 

   C. $300,000 

   D. $210,000 


[755] Source: CPA 1193 I-34 
On January 2, 2000, Gill Co. issued $2 
million of 10-year, 8% bonds at par. The 
bonds, dated January 1, 2000, pay interest 
semiannually on January 1 and July 1. Bond 
issue costs were $250,000. What amount of 
bond issue costs are unamortized at June 30, 
2001? 

   A. $237,500 

   B. $225,000 

   C. $220,800 

   D. $212,500 


[756] Source: CPA 1192 I-39 
Blue Corp.'s December 31, 2000 balance 
sheet contained the following items in the 
long-term liabilities section:

9.25% registered debentures, callable in 11 years,
  due in 16 years                                         $700,000
9.25% collateral trust bonds, convertible into common
  stock beginning in 2009, due in 19 years                 600,000
10% subordinated debentures ($30,000 maturing annually
  beginning in 2006)                                       300,000
What is the total amount of Blue's term 
bonds? 

   A. $600,000 

   B. $700,000 

   C. $1,000,000 

   D. $1,300,000 


[757] Source: CPA 0593 I-2 
On December 31, 2000, Largo, Inc. had a 
$750,000 note payable outstanding due July 
31, 2001. Largo borrowed the money to 
finance construction of a new plant. Largo 
planned to refinance the note by issuing 
long-term bonds. Because Largo temporarily 
had excess cash, it prepaid $250,000 of the 
note on January 12, 2001. In February 2001, 
Largo completed a $1.5 million bond 
offering. Largo will use the bond offering 
proceeds to repay the note payable at its 
maturity and to pay construction costs during 
2001. On March 3, 2001, Largo issued its 
2000 financial statements. What amount of 
the note payable should Largo include in the 
current liabilities section of its December 
31, 2000 balance sheet? 

   A. $750,000 

   B. $500,000 

   C. $250,000 

   D. $0 


[758] Source: CPA 1194 F-22 
House Publishers offered a contest in which 
the winner would receive $1 million, 
payable over 20 years. On December 31, 
2000, House announced the winner of the 
contest and signed a note payable to the 
winner for $1 million, payable in $50,000 
installments every January 2. Also on 
December 31, 2000, House purchased an 
annuity for $418,250 to provide the 
$950,000 prize monies remaining after the 
first $50,000 installment, which was paid on 
January 2, 2001. In its December 31, 2000 
balance sheet, at what amount should House 
measure the note payable, net of current 
portion? 

   A. $368,250 

   B. $418,250 

   C. $900,000 

   D. $950,000 


[759] Source: CPA 1193 I-27 
On December 31, 2000, Roth Co. issued a 
$10,000 face value note payable to Wake 
Co. in exchange for services rendered to 
Roth. The transaction was not in the normal 
course of business. The note, made at usual 
trade terms, is due in nine months and bears 
interest, payable at maturity, at the annual 
rate of 3%, a rate that is unreasonable in the 
circumstances. The market interest rate is 
8%, the prevailing rate for similar 
instruments of issuers with similar credit 
ratings. The compound interest factor of $1 
due in nine months at 8% is .944. At what 
amount should the note payable be credited 
in Roth's December 31, 2000 balance sheet? 

   A. $10,300 

   B. $10,000 

   C. $9,652 

   D. $9,440 


[760] Source: CPA 0FIN R99-14 
Casey Corp. entered into a troubled debt 
restructuring agreement with First State 
Bank. First State agreed to accept land with 
a carrying amount of $85,000 and a fair 
value of $120,000 in exchange for a note 
with a carrying amount of $185,000. 
Disregarding income taxes, what amount 
should Casey report as extraordinary gain in 
its income statement? 

   A. $0 

   B. $35,000 

   C. $65,000 

   D. $100,000 


[761] Source: CPA 1193 I-39 
Neal Corp. entered into a nine-year capital 
lease on a warehouse on December 31, 
2000. The land and building are capitalized 
as a single unit. Lease payments of $52,000, 
which include real estate taxes of $2,000, 
are due annually, beginning on December 
31, 2001 and every December 31 thereafter. 
Neal does not know the interest rate implicit 
in the lease; Neal's incremental borrowing 
rate is 9%. The rounded present value of an 
ordinary annuity for nine years at 9% is 5.6. 
What amount should Neal report as 
capitalized lease liability at December 31, 
2000? 

   A. $280,000 

   B. $291,200 

   C. $450,000 

   D. $468,000 


[762] Source: CPA 0590 I-35 
On January 1, 2000, Day Corp. entered into 
a 10-year lease agreement with Ward, Inc. 
for industrial equipment. Annual lease 
payments of $10,000 are payable at the end 
of each year. Day knows that the lessor 
expects a 10% return on the lease. Day has a 
12% incremental borrowing rate. The 
equipment is expected to have an estimated 
useful life of 10 years. In addition, a third 
party has guaranteed to pay Ward a residual 
value of $5,000 at the end of the lease.

The present value of an ordinary annuity of $1 at
  12% for 10 years is 5.6502
  10% for 10 years is 6.1446
The present value of $1 at
  12% for 10 years is .3220
  10% for 10 years is .3855
In Day's October 31, 2000 balance sheet, the 
principal amount of the lease obligation was 

   A. $63,374 

   B. $61,446 

   C. $58,112 

   D. $56,502 


[763] Source: CPA 0594 F-25 
In the long-term liabilities section of its 
balance sheet at December 31, 2000, Mene 
Co. reported a capital lease obligation of 
$75,000, net of current portion of $1,364. 
Payments of $9,000 were made on both 
January 2, 2001 and January 2, 2002. 
Mene's incremental borrowing rate on the 
date of the lease was 11% and the lessor's 
implicit rate, which was known to Mene, 
was 10%. In its December 31, 2001 balance 
sheet, what amount should Mene report as 
capital lease obligation, net of current 
portion? 

   A. $66,000 

   B. $73,500 

   C. $73,636 

   D. $74,250 


[764] Source: CPA 1193 I-55 
On January 1, 2000, Nori Mining Co. 
(lessee) entered into a five-year lease for 
drilling equipment. Nori accounted for the 
acquisition as a capital lease for $120,000, 
which includes a $5,000 bargain purchase 
option. At the end of the lease, Nori expects 
to exercise the bargain purchase option. 
Nori estimates that the equipment's fair 
value will be $10,000 at the end of its 
eight-year life. Nori regularly uses 
straight-line depreciation on similar 
equipment. For the year ended December 
31, 2000, what amount should Nori 
recognize as depreciation expense on the 
leased asset? 

   A. $13,750 

   B. $15,000 

   C. $23,000 

   D. $24,000 


[765] Source: CPA 1195 F-29 
Glade Co. leases computer equipment to 
customers under direct-financing leases. The 
equipment has no residual value at the end 
of the lease, and the leases do not contain 
bargain purchase options. Glade wishes to 
earn 8% interest on a five-year lease of 
equipment with a fair value of $323,400. 
The present value of an annuity due of $1 at 
8% for five years is 4.312. What is the total 
amount of interest revenue that Glade will 
earn over the life of the lease? 

   A. $51,600 

   B. $75,000 

   C. $129,360 

   D. $139,450 


[766] Source: CPA 0595 F-28 
Farm Co. leased equipment to Union Co. on 
July 1, 2000, and properly recorded the 
sales-type lease at $135,000, the present 
value of the lease payments discounted at 
10%. The first of eight annual lease 
payments of $20,000 due at the beginning of 
each year was received and recorded on 
July 3, 2000. Farm had purchased the 
equipment for $110,000. What amount of 
interest revenue from the lease should Farm 
report in its 2000 income statement? 

   A. $0 

   B. $5,500 

   C. $5,750 

   D. $6,750 


[767] Source: CPA 1190 I-46 
Kew Apparel, Inc. leases and operates a 
retail store. The following information 
relates to the lease for the year ended 
December 31, 2000:

 The store lease, an operating lease, calls for a base monthly rent of
   $1,500 due the first day of each month.
 Additional rent is computed at 6% of net sales over $300,000 up to
   $600,000 and 5% of net sales over $600,000, per calendar year.
 Net sales for 2000 were $900,000.
 Kew paid executory costs to the lessor for property taxes of $12,000
   and insurance of $5,000.
For 2000, Kew's expenses relating to the 
store lease are 

   A. $71,000 

   B. $68,000 

   C. $54,000 

   D. $35,000 


[768] Source: CPA 0588 I-32 
On December 31, 2000, Ruhl Corp. sold 
equipment to Dorr and simultaneously 
leased it back for three years. The following 
data pertain to the transaction at this date:

Sales price                        $220,000
Carrying amount                     150,000
Present value of lease rentals
  ($2,000 for 36 months at 12%)      60,800
Estimated remaining useful life    10 years
At December 31, 2000, what amount should 
Ruhl report as deferred revenue from the 
sale of the equipment? 

   A. $0 

   B. $9,200 

   C. $60,800 

   D. $70,000 


[769] Source: CPA 0590 I-31 
On December 31, 2000, Bain Corp. sold a 
machine to Ryan and simultaneously leased 
it back for one year. Pertinent information at 
this date follows:

Sales price                                   $360,000
Carrying amount                                330,000
Present value of reasonable lease rentals
  ($3,000 for 12 months at 12%)                 34,100
Estimated remaining useful life               12 years
In Bain's December 31, 2000 balance sheet, 
the deferred revenue from the sale of this 
machine should be 

   A. $34,100 

   B. $30,000 

   C. $4,100 

   D. $0 


[770] Source: CPA 0593 I-31 
On December 31, 2000, Dirk Corp. sold 
Smith Co. two airplanes and simultaneously 
leased them back. Additional information 
pertaining to the sale-leasebacks follows:

                                   Plane #1     Plane #2
                                   --------    ----------
Sales price                        $600,000    $1,000,000
Carrying amount, 12/31/00          $100,000    $550,000
Remaining useful life, 12/31/00    10 years    35 years
Lease term                         8 years     3 years
Annual lease payments              $100,000    $200,000
In its December 31, 2000 balance sheet, 
what amount should Dirk report as deferred 
gain on these transactions? 

   A. $950,000 

   B. $500,000 

   C. $450,000 

   D. $0 


[771] Source: CPA 1192 I-35 
On June 30, 2000, Lang Co. sold equipment 
with an estimated useful life of 11 years and 
immediately leased it back for 10 years. The 
equipment's carrying amount was $450,000; 
the sales price was $430,000; and the 
present value of the lease payments, which 
is equal to the fair value of the equipment, 
was $465,000. In its June 30, 2000 balance 
sheet, what amount should Lang report as 
deferred loss? 

   A. $35,000 

   B. $20,000 

   C. $15,000 

   D. $0 


[772] Source: CPA 1190 II-16 
The following information pertains to Seda 
Co.'s pension plan:

Actuarial estimate of projected
  benefit obligation at 1/1/00        $72,000
Assumed discount rate                     10%
Service cost for 2000                  18,000
Pension benefits paid during 2000      15,000
If no change in actuarial estimates occurred 
during 2000, Seda's PBO at December 31, 
2000 was 

   A. $67,800 

   B. $75,000 

   C. $79,200 

   D. $82,200 


[773] Source: CPA 0FIN R99-13 
Jan Corp. amended its defined benefit 
pension plan, granting a total credit of 
$100,000 to four employees for services 
rendered prior to the plan's adoption. The 
employees, A, B, C, and D, are expected to 
retire from the company as follows:

"A" will retire after three years.
"B" and "C" will retire after five years.
"D" will retire after seven years.
What is the amount of prior service cost 
amortization in the first year? 

   A. $0 

   B. $5,000 

   C. $20,000 

   D. $25,000 


[774] Source: CPA 0595 F-18 
The following information pertains to Kane 
Co.'s defined benefit pension plan:

Prepaid pension cost, January 1, 2000              $ 2,000
Service cost                                        19,000
Interest cost                                       38,000
Actual return on plan assets                        22,000
Amortization of unrecognized prior service cost     52,000
Employer contributions                              40,000
The fair value of plan assets exceeds the 
accumulated benefit obligation (ABO). In its 
December 31, 2000 balance sheet, what 
amount should Kane report as unfunded 
accrued pension cost? 

   A. $45,000 

   B. $49,000 

   C. $67,000 

   D. $87,000 


[775] Source: CPA 1195 F-14 
At December 31, 2000, what amount should 
Hall record as additional pension liability? 

   A. $5,000 

   B. $13,000 

   C. $17,000 

   D. $25,000 


[776] Source: CPA 1195 F-15 
In its December 31, 2000 statement of 
shareholders' equity, what amount should 
Hall report as excess of additional pension 
liability over unrecognized prior service 
cost? 

   A. $5,000 

   B. $13,000 

   C. $17,000 

   D. $25,000 


[777] Source: Publisher 
Joe Company, with a final pay, 
noncontributory, defined benefit pension 
plan, settled its vested benefit obligation of 
$1.5 million by purchasing participating 
annuity contracts for $1,650,000. 
Nonparticipating annuity contracts would 
have cost $1.5 million. The remaining 
unrecognized transition net asset is 
$180,000, the remaining unrecognized net 
loss since transition is $400,000, and the 
projected benefit obligation (PBO) is $2 
million. Prior service cost is $300,000. The 
settlement loss is 

   A. $135,000 

   B. $165,000 

   C. $277,500 

   D. $370,000 


[778] Source: CPA 0589 I-42 
Among the items reported on Cord Inc.'s 
income statement for the year ended 
December 31, 2000 were the following:

Amortization of goodwill acquired in 1992     $10,000
Insurance premium on life of an officer
  (Cord is the owner and beneficiary)           5,000
Temporary differences amount to 

   A. $0 

   B. $5,000 

   C. $10,000 

   D. $15,000 


[779] Source: CPA R98- 
Black Co., organized on January 2, 2000, 
had pretax financial statement income of 
$500,000 and taxable income of $800,000 
for the year ended December 31, 2000. The 
only temporary differences are accrued 
product warranty costs, which Black 
expects to pay as follows:

    2001    $100,000
    2002      50,000
    2003      50,000
    2004     100,000
The enacted income tax rates are 25% for 
2000, 30% for 2001 through 2003, and 35% 
for 2004. Black believes that future years' 
operations will produce profits. In its 
December 31, 2000 balance sheet, what 
amount should Black report as a deferred 
tax asset? 

   A. $50,000 

   B. $75,000 

   C. $90,000 

   D. $95,000 


[780] Source: CPA 1195 F-36 
On its December 31, 2001 balance sheet, 
Shin Co. had income taxes payable of 
$13,000 and a current deferred tax asset of 
$20,000 before determining the need for a 
valuation account. Shin had reported a 
current deferred tax asset of $15,000 at 
December 31, 2000. No estimated tax 
payments were made during 2001. At 
December 31, 2001, Shin determined that it 
was more likely than not that 10% of the 
deferred tax asset would not be realized. In 
its 2001 income statement, what amount 
should Shin report as total income tax 
expense? 

   A. $8,000 

   B. $8,500 

   C. $10,000 

   D. $13,000 


[781] Source: CPA 1195 F-37 
In its 2000 income statement, what amount 
should Zeff report as the current portion of 
income tax expense? 

   A. $52,000 

   B. $56,000 

   C. $62,000 

   D. $64,000 


[782] Source: CPA 1195 F-38 
In its December 31, 2000 balance sheet, 
what should Zeff report as deferred income 
tax liability? 

   A. $2,000 

   B. $4,000 

   C. $6,000 

   D. $8,000 


[783] Source: CPA 1194 F-6 
Thorn Co. applies SFAS 109. At the end of 
2000, the tax effects of temporary 
differences were as follows:

                                  Deferred
                                 Tax Assets       Related Asset
                                (Liabilities)     Classification
                                -------------    ----------------
Accelerated tax depreciation      ($75,000)      Noncurrent asset
Additional costs in inventory
  for tax purposes                  25,000       Current asset
                                   -------
                                  ($50,000)
A valuation allowance was not considered 
necessary. Thorn anticipates that $10,000 of 
the deferred tax liability will reverse in 
2001. In Thorn's December 31, 2000 
balance sheet, what amount should Thorn 
report as noncurrent deferred tax liability? 

   A. $40,000 

   B. $50,000 

   C. $65,000 

   D. $75,000 


[784] Source: CMA 1287 4-10 
Assuming the cost method of accounting for 
treasury stock was used to record the 
transaction, the entry would 

   A. Increase paid-in capital in excess of 
   par and increase retained earnings. 

   B. Increase paid-in capital in excess of 
   par and decrease retained earnings. 

   C. Decrease paid-in capital in excess of 
   par and decrease retained earnings. 

   D. Have no effect on either paid-in 
   capital in excess of par or retained 
   earnings. 


[785] Source: CMA 1287 4-11 
Assuming the par value method of 
accounting for treasury stock was used to 
record the transaction, the entry would 

   A. Increase paid-in capital in excess of 
   par and increase retained earnings. 

   B. Increase paid-in capital in excess of 
   par and decrease retained earnings. 

   C. Decrease paid-in capital in excess of 
   par and decrease retained earnings. 

   D. Decrease paid-in capital in excess of 
   par and increase retained earnings. 


[786] Source: CMA 0689 3-11 
On March 26 of the current year, Zepher 
Enterprises contracted with a consultant for 
services to be performed during the period 
from March 26 of the current year to April 
30 of the current year, in exchange for 
10,000 shares of treasury stock. The 
exchange of stock took place on April 30 of 
the current year. The treasury stock was 
acquired in January of the current year, 
when the market price of the stock was $25 
per share. The market value of the stock on 
March 26 of the current year was $21.50 per 
share and on April 30 of the current year 
was $23 per share. The per share amount 
recorded for the services should have been 

   A. $21.50 

   B. $22.25 

   C. $23.00 

   D. $25.00 


[787] Source: CMA 0689 3-13 
Muncie Co. sold 1,000 shares of its treasury 
stock at $33 per share. The stock had 
originally been issued at $12 per share and 
had been repurchased at $27 per share. The 
par value of the stock is $5 per share. The 
entry to record the reissuance using the cost 
method should include a credit to 

   A. Retained earnings of $6,000. 

   B. Treasury stock of $28,000. 

   C. Paid-in capital in excess of par of 
   $28,000. 

   D. Additional paid-in capital of $6,000. 


[788] Source: CMA 1289 4-13 
Landau Corporation's working capital was 

   A. Unchanged by the dividend 
   declaration and decreased by the 
   dividend payment. 

   B. Decreased by the dividend 
   declaration and increased by the 
   dividend payment. 

   C. Unchanged by either the dividend 
   declaration or the dividend payment. 

   D. Decreased by the dividend 
   declaration and unchanged by the 
   dividend payment. 


[789] Source: CMA 1289 4-14 
Landau Corporation's current ratio was 

   A. Decreased by the dividend 
   declaration and increased by the 
   dividend payment. 

   B. Unchanged by either the dividend 
   declaration or the dividend payment. 

   C. Decreased by the dividend 
   declaration and unchanged by the 
   dividend payment. 

   D. Increased by the dividend 
   declaration and unchanged by the 
   dividend payment. 


[790] Source: CMA 1289 4-15 
Landau Corporation's total equity was 

   A. Unchanged by the dividend 
   declaration and decreased by the 
   dividend payment. 

   B. Decreased by the dividend 
   declaration and increased by the 
   dividend payment. 

   C. Unchanged by either the dividend 
   declaration or the dividend payment. 

   D. Decreased by the dividend 
   declaration and unchanged by the 
   dividend payment. 


[791] Source: CMA 1289 4-16 
If the dividend declared by Landau 
Corporation had been a 10% stock dividend 
instead of a cash dividend, Landau's current 
liabilities would have been 

   A. Unchanged by the dividend 
   declaration and increased by the 
   dividend distribution. 

   B. Unchanged by the dividend 
   declaration and decreased by the 
   dividend distribution. 

   C. Increased by the dividend 
   declaration and unchanged by the 
   dividend distribution. 

   D. Unchanged by either the dividend 
   declaration or the dividend distribution. 


[792] Source: CMA 0692 2-2 
An appropriation of retained earnings by the 
board of directors of a corporation for 
bonded indebtedness will result in 

   A. The establishment of a sinking fund 
   to retire bonds when they mature. 

   B. A decrease in cash on the balance 
   sheet with an equal increase in the 
   investment and funds section of the 
   balance sheet. 

   C. A decrease in the total amount of 
   retained earnings presented on the 
   balance sheet. 

   D. The disclosure that management does 
   not intend to distribute assets, in the 
   form of dividends, equal to the amount 
   of the appropriation. 


[793] Source: CMA 0682 3-14 
Which one of the following is true regarding 
small stock dividends? 

   A. Retained earnings equal to the par 
   value of shares issued is converted to 
   contributed capital. 

   B. An amount equal to the current fair 
   value of shares issued is transferred 
   from retained earnings to contributed 
   capital. 

   C. The amount of equity capital 
   available for future dividends is 
   increased. 

   D. Each common shareholder's 
   percentage of ownership in the 
   corporation increases. 


[794] Source: CMA 1284 4-24 
If Paragon had declared a 10% stock 
dividend on November 30, 2001, retained 
earnings would have been 

   A. Reduced by $2,000,000. 

   B. Reduced by $8,000,000. 

   C. Reduced by $6,000,000. 

   D. Reduced by $1,600,000. 


[795] Source: CMA 1284 4-25 
Paragon employs the book value method to 
record the conversions of bonds into 
common stock. If all of Paragon's bonds 
payable had been converted into Paragon 
common stock on November 30, 2001, the 
retained earnings would have been 

   A. Increased by $13,800,000. 

   B. Reduced by $4,200,000. 

   C. Increased by $19,800,000. 

   D. Unchanged. 


[796] Source: CMA 1284 4-26 
A two-for-one common stock split by 
Paragon would 

   A. Result in each $1,000 bond being 
   convertible into 600 new shares of 
   Paragon common stock. 

   B. Decrease the retained earnings due 
   to the capitalization of retained 
   earnings. 

   C. Not affect the number of common 
   shares outstanding. 

   D. Increase the total equity. 


[797] Source: CMA 1284 4-27 
Paragon's building is being depreciated 
using the straight-line method. The building 
has a 20-year estimated useful life and an 
estimated salvage value of $6,000,000. The 
number of years the building has been 
depreciated by Paragon as of November 30, 
2001 is 

   A. 7.5 years. 

   B. 12.5 years. 

   C. 9.0 years. 

   D. 15.0 years. 


[798] Source: CMA 1284 4-28 
Paragon's book value per share of common 
stock as of November 30, 2001 is 

   A. $4.00. 

   B. $1.61. 

   C. $1.00. 

   D. $2.41. 


[799] Source: CMA 1284 4-30 
If Paragon has a payout ratio of 80% and 
declared and paid $4,000,000 of cash 
dividends during the current fiscal year 
ended November 30, 2001, the retained 
earnings balance on the preceding 
December 1, 2000 was 

   A. $20,000,000. 

   B. $17,000,000. 

   C. $15,000,000. 

   D. $11,000,000. 


[800] Source: CMA 0686 3-4 
Hessler received cash in the amount of 
$180,000 on March 11 for the 10,000 shares 
of common stock. The amount recorded as a 
credit to common stock for this transaction 
would have been 

   A. $50,000. 

   B. $80,000. 

   C. $130,000. 

   D. $180,000. 


[801] Source: CMA 0686 3-5 
Hessler received property in exchange for 
the 10,000 shares of common stock. The 
property had a fair market value of 
$175,000 on June 11, the date of the 
exchange. The amount recorded as a credit 
to paid-in capital in excess of par value for 
this transaction would have been 

   A. $50,000. 

   B. $125,000. 

   C. $130,000. 

   D. $175,000. 


[802] Source: CMA 0686 3-6 
Hessler received services from August 1 
through September 11 in exchange for the 
10,000 shares of common stock. The 
exchange of stock took place on September 
11. The market value of Hessler's common 
stock was $18 per share on August 1 and 
$20 per share on September 11. The amount 
recorded for the services would have been 

   A. $50,000. 

   B. $180,000. 

   C. $190,000. 

   D. $200,000. 


[803] Source: CMA 1288 4-22 
Holtrup Company had 100,000 shares of $4 
par value common stock outstanding on June 
12 of the current year. On this date, Holtrup 
acquired 1,000 of its own shares as treasury 
stock at a cost of $12 per share. The 
acquisition was accounted for by the cost 
method. As a result of this treasury stock 
purchase, 

   A. Total assets and total equity 
   decreased. 

   B. Total assets and total equity were 
   unaffected. 

   C. Total assets, retained earnings, and 
   total equity decreased. 

   D. Total assets and retained earnings 
   decreased. 


[804] Source: CMA 1288 4-30 
Morton Company declared and issued a 
10% stock dividend during the current year. 
The effect of this stock dividend on the 
following was

      Par Value    Retained       Total
      Per Share    Earnings       Equity
      ---------    ---------    ----------
   A. 

      No effect    Decrease     No effect
   B. 

      Decrease     Decrease     No effect
   C. 

      Decrease     No effect    No effect
   D. 

      No effect    Decrease     Decrease


[805] Source: CMA 0690 3-7 
An appropriation of retained earnings by the 
board of directors of a corporation for 
future plant expansion will result in 

   A. The establishment of a fund to help 
   finance future plant expansion. 

   B. A decrease in cash on the balance 
   sheet with an equal increase in the 
   investments and funds section of the 
   balance sheet. 

   C. The disclosure that management does 
   not intend to distribute, in the form of 
   dividends, assets equal to the amount of 
   the appropriation. 

   D. A decrease in the total amount of 
   retained earnings presented on the 
   balance sheet. 


[806] Source: CIA 0594 IV-11 
If cash dividends were paid, which of the 
following accounts would be affected? 

   A. Accounts receivable. 

   B. Retained earnings. 

   C. Fixed assets (net). 

   D. Inventory. 


[807] Source: CIA 0594 IV-12 
For the year just ended, the company has 
times-interest-earned of 

   A. 3.375 times. 

   B. 6.75 times. 

   C. 7.75 times. 

   D. 9.5 times. 


[808] Source: CIA 0594 IV-13 
At year-end, the company has a book value 
per share, to the nearest cent, of 

   A. $15.00 

   B. $21.63 

   C. $23.25 

   D. $25.00 


[809] Source: CIA 0593 IV-34 
An organization had the following account 
balances at December 31, Year 1:

Common stock, $10 par, 100,000 shares
  authorized, 80,000 shares issued and
  outstanding                              $800,000
Additional paid-in capital (in excess
  of par value)                             400,000
Retained earnings                           500,000
All shares outstanding were issued in a 
prior period for $15 per share. On January 
5, Year 2, 1,000 shares were purchased for 
the treasury for $17 per share. These 
treasury shares were sold on February 6, 
Year 2 for $18 per share. The effect of the 
purchase and sale of the 1,000 shares of 
treasury stock was to 

   A. Increase equity by $1,000. 

   B. Increase equity by $2,000. 

   C. Increase equity by $3,000. 

   D. Increase equity by $8,000. 


[810] Source: CMA 1294 2-17 
Stock options and warrants are 

   A. Always considered common stock 
   equivalents, but are only included in 
   fully diluted earnings per share. 

   B. Not always common stock 
   equivalents, and therefore may be 
   excluded from earnings per share 
   calculations. 

   C. Not always common stock 
   equivalents, and are generally 
   considered antidilutive. 

   D. Always considered common stock 
   equivalents, and must be included in 
   primary earnings per share if dilutive. 


[811] Source: CMA 0695 2-18 
When treasury stock is accounted for at cost, 
the cost is reported on the balance sheet as 
a(n) 

   A. Asset. 

   B. Reduction of retained earnings. 

   C. Reduction of additional 
   paid-in-capital. 

   D. Unallocated reduction of equity. 


[812] Source: CMA 0695 2-19 
Which one of the following transactions may 
result in a debit to additional paid-in 
capital? 

   A. Premiums on capital stock issued. 

   B. Sale of treasury stock below cost. 

   C. Additional assessments on 
   shareholders. 

   D. Conversion of convertible bonds. 


[813] Source: CMA 1289 4-17 
Excerpts from the statement of financial 
position for Landau Corporation as of 
September 30 of the current year are 
presented as follows.

 Cash                                  $  950,000
 Accounts receivable (net)              1,675,000
 Inventories                            2,806,000
                                       ----------
   Total current assets                $5,431,000
                                       ==========
 Accounts payable                      $1,004,000
 Accrued liabilities                      785,000
                                       ----------
   Total current liabilities           $1,789,000
                                       ==========
The board of directors of Landau 
Corporation met on October 4 of the current 
year and declared the regular quarterly cash 
dividend amounting to $750,000 ($.60 per 
share). The dividend is payable on October 
25 of the current year to all shareholders of 
record as of October 12 of the current year. 
Assume that the only transactions to affect 
Landau Corporation during October of the 
current year are the dividend transactions 
and that the closing entries have been made. 
If the dividend declared by Landau 
Corporation had been a 10% stock dividend 
instead of a cash dividend, Landau's total 
shareholders' equity would have been 

   A. Decreased by the dividend 
   declaration and increased by the 
   dividend distribution. 

   B. Unchanged by the dividend 
   declaration and increased by the 
   dividend distribution. 

   C. Increased by the dividend 
   declaration and unchanged by the 
   dividend distribution. 

   D. Unchanged by either the dividend 
   declaration or the dividend distribution. 


[814] Source: CIA 1193 IV-45 
At December 31, a company has total assets 
at book value of $300,000. Liabilities are 
$120,000. Also, on December 31, the stock 
is selling at $20 per share, and there are 
10,000 shares outstanding. As a result, the 
company should take the difference between 
the book value and fair value of the stock 
and 

   A. Capitalize as an asset (and amortize 
   over the estimated useful life not to 
   exceed 40 years), with the offset to 
   shareholders' equity. 

   B. Capitalize as an asset (and amortize 
   over the estimated useful life), with the 
   offset to revenue. 

   C. Capitalize as an asset (and amortize 
   over 5 years), with the offset to 
   shareholders' equity. 

   D. Not capitalize any asset, record any 
   revenue, or change shareholders' equity 
   at this time. 


[815] Source: CIA 1192 IV-36 
Issues of preferred stock that specify 
redemption of the issues over relatively 
short periods such as 5 to 10 years are 
called 

   A. Transient preferreds. 

   B. Short-term preferreds. 

   C. Preferred stock obligations. 

   D. Temporary preferreds. 


[816] Source: CIA 0592 IV-39 
The following excerpt was taken from a 
company's financial statements:

". . . 10% convertible participating . . . 
$10,000,000." What is most likely being 
referred to? 

   A. Bonds. 

   B. Common stock. 

   C. Stock options. 

   D. Preferred stock. 


[817] Source: CIA 0591 IV-37 
At December 31, 2000, a company had the 
following equity accounts:

Common stock, $10 par, 100,000 shares
  authorized, 40,000 shares issued
  and outstanding                          $  400,000
Additional paid-in capital from
  issuance of common stock                    640,000
Retained earnings                           1,000,000
                                           ----------
Total equity                               $2,040,000
                                           ==========
Each of the 40,000 shares of common stock 
outstanding was issued at a price of $26. On 
January 2, 2001, 2,000 shares were 
reacquired for $30 per share. The cost 
method is used in accounting for this 
treasury stock. Which of the following 
correctly describes the effect of the 
acquisition of the treasury stock? 

   A. Common stock is reduced by 
   $20,000. 

   B. Additional paid-in capital from 
   issuance of common stock is reduced by 
   $32,000. 

   C. The retained earnings account 
   balance is reduced by $8,000. 

   D. Total equity is reduced by $60,000. 


[818] Source: CIA 1196 IV-55 
Stock dividends and stock splits differ in 
that 

   A. Stock splits involve a bookkeeping 
   transfer from retained earnings to the 
   capital stock account. 

   B. Stock splits are paid in additional 
   shares of common stock, whereas a 
   stock dividend results in replacement of 
   all outstanding shares with a new issue 
   of shares. 

   C. In a stock split, a larger number of 
   new shares replaces the outstanding 
   shares. 

   D. A stock dividend results in a decline 
   in the par value per share. 


[819] Source: CIA 0596 IV-54 
On May 28, a company announced that its 
directors had met on May 26 and declared a 
dividend of 25 cents per share, payable to 
shareholders of record on June 20, with 
payment to be made on July 5. The date on 
which the declared dividend becomes a 
liability of the company is 

   A. May 26. 

   B. May 28. 

   C. June 20. 

   D. July 5. 


[820] Source: CIA 0596 IV-55 
If future earnings of the company are not 
affected by the form of the distribution to 
shareholders, stock repurchases provide 
shareholders with <List A> and cash 
dividends provide shareholders with <List 
B>.

           List A                List B
    -------------------   -------------------
   A. 

       Capital gain income   Capital gain income
   B. 

       Capital gain income   Ordinary income
   C. 

       Ordinary income       Capital gain income
   D. 

       Ordinary income       Ordinary income


[821] Source: CIA 0593 IV-58 
If a company uses the residual dividend 
policy, it will pay 

   A. A fixed cash dividend each quarter 
   and use the residual as retained 
   earnings. 

   B. A fixed stock dividend each quarter 
   and retain all earnings as a residual. 

   C. All earnings as dividends each year. 

   D. Dividends only if earnings exceed 
   the amount needed to support an optimal 
   capital budget. 


[822] Source: CMA 1292 2-7 
On December 1, Charles Company's board 
of directors declared a cash dividend of 
$1.00 per share on the 50,000 shares of 
common stock outstanding. The company 
also has 5,000 shares of treasury stock. 
Shareholders of record on December 15 are 
eligible for the dividend, which is to be 
paid on January 1. On December 1, the 
company should 

   A. Make no accounting entry. 

   B. Debit retained earnings for $50,000. 

   C. Debit retained earnings for $55,000. 

   D. Debit retained earnings for $50,000 
   and paid-in capital for $5,000. 


[823] Source: CMA 0695 2-16 
Unless specifically restricted, each share of 
common stock carries all of the following 
rights except the right to share 
proportionately in 

   A. The vote for directors. 

   B. Corporate assets upon liquidation. 

   C. Cumulative dividends. 

   D. New issues of stock of the same 
   class. 


[824] Source: Publisher 
In comparing an investment in preferred 
stock to an investment in bonds, one 
substantial advantage to a corporation 
investing in preferred stock is the 

   A. Taxable interest received. 

   B. Voting power acquired. 

   C. Set maturity date. 

   D. Dividends-received deduction. 


[825] Source: CIA 1188 IV-36 
At December 31, 2000, a corporation has 
the following account balances:

Common stock ($10 par, 50,000 shares
  issued)                                 $500,000
8% preferred stock ($50 par,
  10,000 shares issued)                    500,000
Paid-in capital in excess of
  par on common stock                      640,000
Paid-in capital in excess of par on
  preferred stock                           20,000
Retained earnings                          600,000
The preferred stock is cumulative, 
nonparticipating, and has a call price of $55 
per share. The journal entry to record the 
redemption of all preferred stock on January 
2, 2001 pursuant to the call provision is 

   A. 

        Preferred stock                  $500,000
        Paid-in capital in excess
         of par:  preferred                20,000
        Discount on preferred stock        30,000
             Cash                                     $550,000
   B. 

        Preferred stock                  $500,000
        Paid-in capital in excess
         of par:  preferred                20,000
        Loss on redemption of
         preferred stock                   30,000
             Cash                                     $550,000
   C. 

        Preferred stock                  $500,000
        Loss on redemption of
         preferred stock                   50,000
        Retained earnings                 300,000
            Cash                                      $550,000
            Paid-in capital in excess
             of par: preferred                         300,000
   D. 

        Preferred stock                  $500,000
        Paid-in capital in excess
         of par:  preferred                20,000
        Retained earnings                  30,000
            Cash                                      $550,000


[826] Source: CMA 0692 2-9 
According to APB 25, Accounting for Stock 
Issued to Employees, noncompensatory 
stock option plans have all of the following 
characteristics except 

   A. Participation by substantially all 
   full-time employees who meet limited 
   employment qualifications. 

   B. Equal offers of stock to all eligible 
   employees. 

   C. A limited amount of time permitted 
   to exercise the option. 

   D. A provision related to the 
   achievement of certain performance 
   criteria. 


[827] Source: CMA 0692 2-8 
According to APB 25, Accounting for Stock 
Issued to Employees, a stock option plan 
may or may not be intended to compensate 
employees for their work. The compensation 
expense for compensatory stock option 
plans should be recognized in the periods 
the 

   A. Employees become eligible to 
   exercise the options. 

   B. Employees perform services. 

   C. Stock is issued. 

   D. Options are granted. 


[828] Source: Publisher 
SFAS 123, Accounting for Stock-Based 
Compensation, applies to stock-based 
compensation arrangements involving 
employees and others. With regard to 
accounting for employee compensation, it 

   A. Requires a fair-value-based method. 

   B. Requires an intrinsic-value-based 
   method. 

   C. Measures compensation cost as the 
   difference between the quoted market 
   price and the exercise price at the grant 
   date. 

   D. Permits entities to continue 
   measuring compensation cost using 
   intrinsic values. 


[829] Source: CIA 1195 IV-10 
A company declares and pays both a 
$200,000 cash dividend and a 10% stock 
dividend. The effect of the <List A> 
dividend is to <List B>.

       List A                       List B
       ------   ----------------------------------------------
   A. 

       Cash     Increase retained earnings
   B. 

       Cash     Decrease retained earnings and increase equity
   C. 

       Stock    Decrease retained earnings
   D. 

       Stock    Decrease retained earnings and decrease equity


[830] Source: Publisher 
In applying a quasi-reorganization to a 
consolidated entity, 

   A. The quasi-reorganization may be 
   applied only to the parent company. 

   B. All losses should be written off 
   against paid-in capital prior to charging 
   retained earnings. 

   C. Contributed capital cannot arise as a 
   result of the transaction. 

   D. All consolidated retained earnings 
   should be eliminated if any part of a 
   loss is to be charged to contributed 
   capital. 


[831] Source: CMA 0693 2-9 
Items reported as prior-period adjustments 

   A. Do not include the effect of a mistake 
   in the application of accounting 
   principles as this is accounted for as a 
   change in accounting principle rather 
   than as a prior-period adjustment. 

   B. Do not affect the presentation of 
   prior-period comparative financial 
   statements. 

   C. Do not require further disclosure in 
   the body of the financial statements. 

   D. Are reflected as adjustments of the 
   opening balance of the retained earnings 
   of the earliest period presented. 


[832] Source: CMA 0694 2-30 
An appropriation of retained earnings by the 
board of directors of a corporation for 
future plant expansion will result in 

   A. The establishment of a fund to help 
   finance future plant expansion. 

   B. The setting aside of cash to be used 
   for future plant expansions. 

   C. A decrease in cash on the balance 
   sheet with an equal increase in the 
   investments and funds section of the 
   balance sheet. 

   D. The disclosure that management does 
   not intend to distribute, in the form of 
   dividends, assets equal to the amount of 
   the appropriation. 


[833] Source: CMA 0695 2-17 
Corporations purchase their outstanding 
stock for all of the following reasons except 
to 

   A. Meet employee stock compensation 
   contracts. 

   B. Increase earnings per share by 
   reducing the number of shares 
   outstanding. 

   C. Make a market in the stock. 

   D. Improve short-term cash flow. 


[834] Source: Publisher 
When bonds with detachable stock warrants 
are purchased, the price should be allocated 
between the warrants and the bonds based 
upon their relative fair values at issuance. 
The amount debited to investment in stock 
warrants relative to the total amount paid 

   A. Increases the premium on the 
   investment in bonds. 

   B. Increases the discount on investment 
   in bonds. 

   C. Increases either any premium on the 
   bonds or any discount on the bonds. 

   D. Has no effect on the investment of 
   bond premium or discount as the 
   warrants are purchased separately. 


[835] Source: Publisher 
Early in its fiscal year, Starr Co. purchased 
1,000 shares of Pack Co. common stock for 
$54,000. In the same transaction, Starr 
acquired 2,000 detachable stock warrants. 
Two of the warrants are required to 
purchase one additional share of Pack Co. 
common stock. The market price of the stock 
without the warrants was $49 per share. The 
market price of the warrants was $3.50 per 
warrant. Starr sold 50% of the warrants 
several weeks later. If the proceeds 
received by Starr equaled $4,000, it 
recognized a realized gain of 

   A. $3,000 

   B. $625 

   C. $500 

   D. $0 


[836] Source: Publisher 
When stock rights are issued without 
consideration and are allowed to lapse, the 
following occurs on the books of the issuing 
company: 

   A. Common stock at par value is 
   increased. 

   B. Additional paid-in capital is 
   credited. 

   C. Investment in stock warrants is 
   debited. 

   D. None of the answers are correct. 


[837] Source: CMA 0695 1-13 
The equity section of Smith Corporation's 
statement of financial position is presented 
below.

Preferred stock, $100 par           $12,000,000
Common stock, $5 par                 10,000,000
Paid-in capital in excess of par     18,000,000
Retained earnings                     9,000,000
                                    -----------
           Net worth                $49,000,000
                                    ===========
The common shareholders of Smith 
Corporation have preemptive rights. If 
Smith Corporation issues 400,000 
additional shares of common stock at $6 per 
share, a current holder of 20,000 shares of 
Smith Corporation's common stock must be 
given the option to buy 

   A. 1,000 additional shares. 

   B. 3,774 additional shares. 

   C. 4,000 additional shares. 

   D. 3,333 additional shares. 


[838] Source: CMA 0693 1-18 
The par value of a common stock represents 

   A. The estimated market value of the 
   stock when it was issued. 

   B. The liability ceiling of a shareholder 
   when a company undergoes bankruptcy 
   proceedings. 

   C. The total value of the stock that must 
   be entered in the issuing corporation's 
   records. 

   D. The amount that must be recorded on 
   the issuing corporation's record as 
   paid-in capital. 


[839] Source: CIA 0595 IV-48 
Preferred and common stock differ in that 

   A. Failure to pay dividends on common 
   stock will not force the firm into 
   bankruptcy, while failure to pay 
   dividends on preferred stock will force 
   the firm into bankruptcy. 

   B. Common stock dividends are a fixed 
   amount, while preferred stock 
   dividends are not. 

   C. Preferred stock has a higher priority 
   than common stock with regard to 
   earnings and assets in the event of 
   bankruptcy. 

   D. Preferred stock dividends are 
   deductible as an expense for tax 
   purposes, while common stock 
   dividends are not. 


[840] Source: CIA 1195 IV-47 
Which of the following is usually not a 
feature of cumulative preferred stock? 

   A. Has priority over common stock 
   with regard to earnings. 

   B. Has priority over common stock with 
   regard to assets. 

   C. Has voting rights. 

   D. Has the right to receive dividends in 
   arrears before common stock dividends 
   can be paid. 


[841] Source: CMA 0695 1-11 
Brady Corporation has 6,000 shares of 5% 
cumulative, $100 par value preferred stock 
outstanding and 200,000 shares of common 
stock outstanding. Brady's board of 
directors last declared dividends for the 
year ended May 31, 1999, and there were no 
dividends in arrears. For the year ended 
May 31, 2001, Brady had net income of 
$1,750,000. The board of directors is 
declaring a dividend for common 
shareholders equivalent to 20% of net 
income. The total amount of dividends to be 
paid by Brady at May 31, 2001 is 

   A. $350,000 

   B. $380,000 

   C. $206,000 

   D. $410,000 


[842] Source: CMA 0695 1-9 
In practice, dividends 

   A. Usually exhibit greater stability than 
   earnings. 

   B. Fluctuate more widely than earnings. 

   C. Tend to be a lower percentage of 
   earnings for mature firms. 

   D. Are usually set as a fixed percentage 
   of earnings. 


[843] Source: CMA 1291 1-11 
Treating dividends as an active policy 
strategy assumes that 

   A. Dividends provide information to the 
   market. 

   B. Dividends are irrelevant. 

   C. Dividend payments should be made 
   to common shareholders first. 

   D. Dividends are costly, and the firm 
   should retain earnings and issue stock 
   dividends. 


[844] Source: CIA 1195 IV-51 
If the capital gains were taxed at a lower 
rate than regular dividend income, then the 
<List A> the dividend payout percentage of 
a company, the <List B>, everything else 
equal.

    List A               List B
    ------   ---------------------------------
   A. 

       Higher   Higher would be its stock price
   B. 

       Higher   Lower would be its book value of equity
   C. 

       Lower    Lower would be its cost of equity
   D. 

       Lower    Lower would be its stock price


[845] Source: CIA 1195 IV-49 
A company following a residual dividend 
payout policy will pay higher dividends 
when, everything else equal, it has 

   A. Less attractive investment 
   opportunities. 

   B. Lower earnings available for 
   reinvestment. 

   C. A lower targeted debt-to-equity 
   ratio. 

   D. A lower opportunity cost of retained 
   earnings. 


[846] Source: CMA 0695 1-14 
Residco Inc. expects net income of 
$800,000 for the next fiscal year. Its 
targeted and current capital structure is 40% 
debt and 60% common equity. The director 
of capital budgeting has determined that the 
optimal capital spending for next year is 
$1.2 million. If Residco follows a strict 
residual dividend policy, what is the 
expected dividend payout ratio for next 
year? 

   A. 90.0% 

   B. 66.7% 

   C. 40.0% 

   D. 10.0% 


[847] Source: CIA 0590 IV-48 
The date when the right to a dividend 
expires is called the 

   A. Declaration date. 

   B. Ex-dividend date. 

   C. Holder-of-record date. 

   D. Payment date. 


[848] Source: CIA 0593 IV-46 
The policy decision that by itself is least 
likely to affect the value of the firm is the 

   A. Investment in a project with a large 
   net present value. 

   B. Sale of a risky division that will now 
   increase the credit rating of the entire 
   company. 

   C. Distribution of stock dividends to 
   shareholders. 

   D. Use of a more highly leveraged 
   capital structure that resulted in a lower 
   cost of capital. 


[849] Source: CIA 0595 IV-30 
Which of the following types of dividends 
do not reduce equity in the corporation? 

   A. Cash dividends. 

   B. Property dividends. 

   C. Liquidating dividends. 

   D. Stock dividends and split-ups in the 
   form of a dividend. 


[850] Source: CIA 1194 IV-50 
The stock split proposal will <List A> 
earnings per share by <List B> than will the 
proposal for a split-up effected in the form 
of a dividend.

     List A    List B
    --------   ------
   A. 

       Increase    More
   B. 

       Increase    Less
   C. 

       Decrease    More
   D. 

       Decrease    Less


[851] Source: CIA 1194 IV-51 
Under the <List A>, the par value per 
outstanding share will <List B>.

                       List A                          List B
      -------------------------------------------     --------
   A. 

      Split-up effected in the form of a dividend     Increase
   B. 

      Stock split                                     Increase
   C. 

      Split-up effected in the form of a dividend     Decrease
   D. 

      Stock split                                     Decrease


[852] Source: CMA 0693 1-7 
When a company desires to increase the 
market value per share of common stock, the 
company will 

   A. Sell treasury stock. 

   B. Implement a reverse stock split. 

   C. Sell preferred stock. 

   D. Split the stock. 


[853] Source: CMA 0689 1-7 
A stock dividend 

   A. Increases the debt-to-equity ratio of 
   a firm. 

   B. Decreases future earnings per share. 

   C. Decreases the size of the firm. 

   D. Increases shareholders' wealth. 


[854] Source: CMA 1291 1-5 
The purchase of treasury stock with a firm's 
surplus cash 

   A. Increases a firm's assets. 

   B. Increases a firm's financial leverage. 

   C. Increases a firm's interest coverage 
   ratio. 

   D. Dilutes a firm's earnings per share. 


[855] Source: Publisher 
Which of the following is the most accurate 
listing of the sources of shareholder rights? 

   A. The articles of incorporation, state 
   and federal statutes, and the common 
   law. 

   B. The articles of incorporation and 
   statutory law only. 

   C. State and federal statutes and the 
   common law only. 

   D. The articles of incorporation and 
   state law only. 


[856] Source: Publisher 
Which type of voting disallows a freeze-out 
of minority shareholders? 

   A. Straight voting. 

   B. Cumulative voting. 

   C. Proxy voting. 

   D. Trustee voting. 


[857] Source: Publisher 
The most accurate statement about 
managerial control of traditional 
corporations is that shareholders 

   A. Are similar to general partners in 
   that they have direct managerial 
   authority. 

   B. Have no legal power to exercise 
   effective control over management of 
   large corporations. 

   C. Can exert control over the 
   corporation only by choosing directors. 

   D. Have little operational control of a 
   corporation. 


[858] Source: Publisher 
Shareholders representing a majority of the 
voting shares of Nadier, Inc. have 
transferred their shares to Thomasina Trusty 
to hold and vote irrevocably for 10 years. 
Trusty has issued certificates to the 
shareholders and pays them the dividends 
received. The agreement 

   A. Is an illegal voting trust because it is 
   against public policy. 

   B. Is valid if entered into pursuant to a 
   written voting trust agreement. 

   C. Need not be filed with the 
   corporation. 

   D. May be revoked because it is in 
   essence a proxy. 


[859] Source: Publisher 
Shareholder voting 

   A. Is required to be cumulative in all 
   states. 

   B. May usually be accomplished by 
   oral or written proxy. 

   C. May usually be by proxy, but the 
   agency thus created is ordinarily limited 
   to a specific issue. 

   D. May be by proxy, but a proxy may be 
   revoked if the shareholder signs a later 
   proxy. 


[860] Source: Publisher 
The board of directors of the Garrett Co. 
wishes to call a special meeting of 
shareholders to consider a proposed merger. 

   A. The directors must give specific 
   notice of the meeting and the issues on 
   the agenda. 

   B. The directors are not empowered to 
   call a special meeting. 

   C. If notice is not given to shareholders 
   entitled to vote at the record date, 
   action taken will be invalid even if all 
   the shareholders attend and participate 
   in the meeting. 

   D. A majority of shareholders entitled 
   to vote must be represented in person at 
   the meeting to constitute a quorum, 
   unless otherwise provided in the 
   articles. 


[861] Source: Publisher 
Shareholder meetings must be held annually, 
but special meetings may also be convened. 
If a quorum is present at a meeting, the 
shareholders may act by voting to approve 
or disapprove resolutions. Which statement 
about this process is true? 

   A. Shareholders cannot act without a 
   meeting. 

   B. Notice of meetings must be given, 
   and a waiver of the requirement can be 
   effective only by a signed writing. 

   C. Certain shareholder actions may 
   require more than a simple majority. 

   D. All holders of voting shares at the 
   date of the meeting are entitled to vote. 


[862] Source: CMA 0688 4-19 
Which one of the following items would 
likely increase earnings per share (EPS) of 
a corporation? 

   A. Purchase of treasury stock. 

   B. Declaration of a stock split. 

   C. Declaration of a stock dividend. 

   D. A reduction in the amount of cash 
   dividends paid to common 
   shareholders. 


[863] Source: CPA 0593 I-6 
On February 1 of the current year, King 
Corp., a newly formed company, had the 
following stock issued and outstanding:

   - Common stock, no par, $1 stated value, 10,000 shares originally
      issued for $15 per share
   - Preferred stock, $10 par value, 3,000 shares originally issued for
      $25 per share
King's February 1 statement of shareholders' 
equity should report

                             Additional
       Common    Preferred    Paid-in
       Stock       Stock      Capital
       ------    ---------   ----------
   A. 

      $150,000    $30,000     $45,000
   B. 

      $150,000    $75,000     $0
   C. 

      $10,000     $75,000     $140,000
   D. 

      $10,000     $30,000     $185,000


[864] Source: Publisher 
Under the cost method of accounting for 
treasury stock, the amount debited to 
treasury stock is 

   A. $28,750 

   B. $25,000 

   C. $30,000 

   D. $3,750 


[865] Source: Publisher 
Under the par value method of accounting 
for treasury stock, the amount debited to 
treasury stock is 

   A. $28,750 

   B. $25,000 

   C. $30,000 

   D. $3,750 


[866] Source: CMA 0694 2-3 
Markham's total equity would be 

   A. Increased by the dividend 
   declaration and unchanged by the 
   dividend payment. 

   B. Unchanged by the dividend 
   declaration and decreased by the 
   dividend payment. 

   C. Unchanged by either the dividend 
   declaration or the dividend payment. 

   D. Decreased by the dividend 
   declaration and unchanged by the 
   dividend payment. 


[867] Source: CMA 0694 2-4 
If the dividend declared by Markham had 
been a 10% stock dividend instead of a cash 
dividend, Markham's current liabilities 
would have been 

   A. Decreased by the dividend 
   declaration and increased by the 
   dividend distribution. 

   B. Unchanged by the dividend 
   declaration and increased by the 
   dividend distribution. 

   C. Unchanged by the dividend 
   declaration and decreased by the 
   dividend distribution. 

   D. Unchanged by either the dividend 
   declaration or the dividend distribution. 


[868] Source: CMA 1289 4-17 
If the dividend declared by Markham 
Corporation had been a 10% stock dividend 
instead of a cash dividend, Markham's total 
equity would have been 

   A. Decreased by the dividend 
   declaration and increased by the 
   dividend distribution. 

   B. Unchanged by the dividend 
   declaration and increased by the 
   dividend distribution. 

   C. Increased by the dividend 
   declaration and unchanged by the 
   dividend distribution. 

   D. Unchanged by either the dividend 
   declaration or the dividend distribution. 


[869] Source: CMA 0696 2-10 
Under the cost method of accounting for 
treasury stock, the amount debited to the 
treasury stock account is 

   A. $57,500 

   B. $50,000 

   C. $60,000 

   D. $7,500 


[870] Source: CMA 0696 2-11 
Under the par value method of accounting 
for treasury stock, the amount debited to the 
treasury stock account is 

   A. $57,500 

   B. $50,000 

   C. $60,000 

   D. $10,000 


[871] Source: CPA 1194 F-28 
Mouse Co. issued 1,000 shares of its $5 par 
common stock to Howe as compensation for 
1,000 hours of legal services performed. 
Jason usually bills $160 per hour for legal 
services. On the date of issuance, the stock 
was trading on a public exchange at $140 
per share. By what amount should the 
additional paid-in capital account increase 
as a result of this transaction? 

   A. $135,000 

   B. $140,000 

   C. $155,000 

   D. $160,000 


[872] Source: CPA 1192 II-42 
Purple Corp. had outstanding 2,000 shares 
of 11% preferred stock, $50 par. On August 
8 of this year, Purple redeemed and retired 
25% of these shares for $22,500. On that 
date, Purple's additional paid-in capital 
from preferred stock totaled $30,000. To 
record this transaction, Purple should debit 
(credit) its capital accounts as follows:

      Preferred     Additional      Retained
        Stock     Paid-in Capital   Earnings
      ---------   ---------------   ---------
   A. 

       $25,000       $7,500         $(10,000)
   B. 

       $25,000         --           $ (2,500)
   C. 

       $25,000       $(2,500)          --
   D. 

       $22,500         --              --


[873] Source: CPA 0594 F-8 
At December 31, 20X1 and 20X2, Maui Co. 
had 3,000 shares of $100 par, 5% 
cumulative preferred stock outstanding. No 
dividends were in arrears as of December 
31, 20X0 Maui did not declare a dividend 
during 20X1. During 20X2, Maui paid a 
cash dividend of $10,000 on its preferred 
stock. Maui should report dividends in 
arrears in its 20X2 financial statements as 
a(n) 

   A. Accrued liability of $15,000. 

   B. Disclosure of $15,000. 

   C. Accrued liability of $20,000. 

   D. Disclosure of $20,000. 


[874] Source: CPA 1191 II-5 
Frasier Corp.'s outstanding capital stock at 
December 15 consisted of the following:

   - 30,000 shares of 5% cumulative preferred stock, par value $10 per
      share, fully participating as to dividends.  No dividends were in
      arrears.
   - 200,000 shares of common stock, par value $1 per share
On December 15, Frasier declared 
dividends of $100,000. What was the 
amount of dividends payable to Frasier's 
common shareholders? 

   A. $10,000 

   B. $34,000 

   C. $40,000 

   D. $60,000 


[875] Source: CPA 1194 F-31 
Natural Co. had 100,000 shares of common 
stock issued and outstanding at January 1, 
20X0. During 20X0, Natural took the 
following actions:

March 15     --  declared a 2-for-1 stock split, when the fair value of
                 the stock  was $80 per share
December 15  --  declared a $.50 per share cash dividend
In Natural's statement of shareholders' 
equity for 20X0, what amount should 
Natural report as dividends? 

   A. $50,000 

   B. $100,000 

   C. $850,000 

   D. $950,000 


[876] Source: Publisher 
Page Co. had retained earnings of $200,000 
on December 31, 20X0. On April 20, 20X1, 
Page reacquired 2,000 shares of its common 
stock at $10 per share. On October 3, 20X1, 
Page sold 500 of these shares of treasury 
stock for $12 per share. Page uses the cost 
method to record treasury stock. During 
20X1, Page had paid cash dividends of 
$70,000. Also, Page had distributed 
property dividends of $20,000. Its net 
income for the year ended December 31, 
20X1 was $80,000. On December 31, 
20X1, how much should Page report as 
retained earnings? 

   A. $190,000 

   B. $191,000 

   C. $210,000 

   D. $211,000 


[877] Source: Publisher 
Under the cost method of accounting for 
treasury stock, what amount should Plant 
report as total additional paid-in capital on 
its December 31, 20X1 balance sheet? 

   A. $20,500 

   B. $21,000 

   C. $22,000 

   D. $23,000 


[878] Source: Publisher 
Under the par-value method of accounting 
for treasury stock, what amount should Plant 
report as additional paid-in capital on its 
December 31, 20X1 balance sheet? 

   A. $15,000 

   B. $20,500 

   C. $21,000 

   D. $23,000 


[879] Source: CPA 0591 II-4 
The following accounts were among those 
reported on Kyser Corp.'s balance sheet at 
December 31, Year 1:

Securities (fair value $150,000)         $ 80,000
Preferred stock, $20 par value
   20,000 shares issued and outstanding   400,000
Additional paid-in capital on
   preferred stock                         30,000
Retained earnings                         900,000
On January 20, Year 2, Kyser exchanged all 
of the securities for 5,000 shares of Kyser's 
preferred stock. Fair values at the date of 
the exchange were $150,000 for the 
securities and $30 per share for the 
preferred stock. The 5,000 shares of 
preferred stock were retired immediately 
after the exchange. Which of the following 
journal entries should Kyser record in 
connection with this transaction?

                                    Debit    Credit
                                   --------  -------
   A. 

        Preferred stock                $100,000
        Additional paid-in capital
          on preferred stock              7,500
        Retained earnings                42,500
            Securities                           $80,000
            Gain on exchange of
             securities                           70,000
   B. 

        Preferred stock                 100,000
        Additional paid-in capital
         on preferred stock              30,000
           Securities                            80,000
           Additional paid-in capital
             from retirement of
             preferred stock                     50,000
   C. 

        Preferred stock                 150,000
            Securities                           80,000
            Additional paid-in capital
             on preferred stock                  70,000
   D. 

        Preferred stock                 150,000
           Securities                            80,000
           Gain on exchange of
             securities                          70,000


[880] Source: CPA 1192 II-44 
On July 1 of the current year, Boston Corp., 
a closely held corporation, issued 6% bonds 
with a maturity value of $60,000, together 
with 1,000 shares of its $5 par value 
common stock, for a combined cash amount 
of $110,000. The market value of Boston's 
stock cannot be ascertained. If the bonds had 
been issued separately, they would have 
sold at a discount for $40,000 on an 8% 
yield-to-maturity basis. What amount should 
Boston record for additional paid-in capital 
on the issuance of the stock? 

   A. $75,000 

   B. $65,000 

   C. $55,000 

   D. $45,000 


[881] Source: CPA 0591 II-4 
The following accounts were among those 
reported on Kyser Corp.'s balance sheet at 
December 31, Year 1:

Securities (fair value $150,000)                  $ 80,000
Preferred stock, $20 par value
  20,000 shares issued and outstanding             400,000
Additional paid-in capital on preferred stock       30,000
Retained earnings                                  900,000
On January 20, Year 2, Kyser exchanged all 
of the securities for 5,000 shares of Kyser's 
preferred stock. Fair values at the date of 
the exchange were $150,000 for the 
securities and $30 per share for the 
preferred stock. The 5,000 shares of 
preferred stock were retired immediately 
after the exchange. Which of the following 
journal entries should Kyser record in 
connection with this transaction?

                                              Debit      Credit
                                            --------     -------
   A. 

      Preferred stock                       $100,000
         Additional paid-in capital
           on preferred stock                     7,500
         Retained earnings                       42,500
             Securities                                     $80,000
             Gain on exchange of securities                  70,000
   B. 

      Preferred stock                        100,000
         Additional paid-in capital on
           preferred stock                       30,000
             Securities                                      80,000
             Additional paid-in capital from
             retirement of preferred stock                   50,000
   C. 

      Preferred stock                        150,000
             Securities                                      80,000
             Additional paid-in capital
               on preferred stock                            70,000
   D. 

      Preferred stock                        150,000
             Securities                                      80,000
             Gain on exchange of securities                  70,000


[882] Source: CPA 0592 II-4 
On December 1, Hawk Corp. declared a 
property dividend to be distributed on 
December 31 to shareholders of record on 
December 15. On December 1, the property 
to be transferred had a carrying amount of 
$60,000 and a fair value of $78,000. What 
is the effect of this property dividend on 
Hawk's retained earnings, after all nominal 
accounts are closed? 

   A. $0 

   B. $18,000 increase. 

   C. $60,000 decrease. 

   D. $78,000 decrease. 


[883] Source: CPA 0594 F-32 
On January 2, 2001, Simpson Co.'s board of 
directors declared a cash dividend of 
$400,000 to shareholders of record on 
January 18, 20X1, payable on February 10, 
2001. The dividend is permissible under 
law in Simpson's state of incorporation. 
Selected data from Simpson's December 31, 
2000 balance sheet are as follows:

Accumulated depletion         $100,000
Capital stock                  500,000
Additional paid-in capital     150,000
Retained earnings              300,000
The $400,000 dividend includes a 
liquidating dividend of 

   A. $0 

   B. $100,000 

   C. $150,000 

   D. $300,000 


[884] Source: CPA 0581 I-20 
Lutz Corporation has incurred losses from 
operations for several years. At the 
recommendation of the newly hired 
president, the board of directors voted to 
implement a quasi-reorganization, subject to 
shareholder approval. Immediately prior to 
the restatement, on June 30, Lutz's balance 
sheet was as follows:

Current assets                         $  550,000
Property, plant, and equipment (net)    1,350,000
Other assets                              200,000
                                       ----------
                                       $2,100,000
                                       ==========
Total liabilities                      $  600,000
Common stock                            1,600,000
Additional paid-in capital                300,000
Retained earnings (deficit)              (400,000)
                                       ----------
                                       $2,100,000
                                       ==========
The shareholders approved the 
quasi-reorganization effective July 1, to be 
accomplished by a reduction in other assets 
of $150,000; a reduction in property, plant, 
and equipment (net) of $350,000; and 
appropriate adjustment to the capital 
structure. To implement the 
quasi-reorganization, Lutz should reduce the 
common stock account in the amount of 

   A. $0 

   B. $100,000 

   C. $400,000 

   D. $600,000 


[885] Source: Publisher 
The Bust Card Company had the following 
income and payments in the previous year:

Income from
-----------
Operations                                    $224,000
Interest                                        32,000
Preferred dividends from public companies       40,000
Common dividends from public companies          40,000
                                              --------
                                              $336,000
                                              ========
Payments
--------
  Interest                                     $44,000
  Preferred dividends                           35,000
  Common dividends                              45,000
How much tax should it have paid if the tax 
rate is 35%? 

   A. $63,000 

   B. $74,200 

   C. $82,600 

   D. $102,200 


[886] Source: CMA 0688 4-19 
Which one of the following items would 
likely increase earnings per share (EPS) of 
a corporation? 

   A. Purchase of treasury stock. 

   B. Declaration of a stock split. 

   C. Declaration of a stock dividend. 

   D. An increase in the common stock 
   shares authorized to be issued. 


[887] Source: CMA 1289 3-7 
When computing earnings per share (EPS), 
the treasury stock method will increase the 
number of shares assumed to be outstanding 
whenever the exercise price of an option or 
warrant is 

   A. Below the market price of the 
   common stock. 

   B. Equal to the par value of the common 
   stock. 

   C. Below the par value of the common 
   stock. 

   D. Equal to the market price of the 
   common stock. 


[888] Source: CMA 0691 2-27 
On June 1, Year 1, Hamilton National Bank 
loaned $650,000 on a 6-year, 15% term note 
to Merle Corporation. Interest is payable in 
annual installments, with payments due May 
31 each year. Merle has experienced 
financial difficulty over the last year, and is 
not able to pay the note or the last annual 
interest payment of $97,500 due May 31, 
Year 7. Officials at Hamilton have agreed to 
accept 20,000 shares of Merle's treasury 
stock, with a par value of $25 per share and 
a market value of $700,000, in full 
settlement of the note and accrued interest. 
The treasury stock was acquired at a cost of 
$32 per share in July, Year 6. As a result of 
this agreement, for the year ended May 31, 
Year 7, Merle Corporation should recognize 
an 

   A. Ordinary loss of $50,000. 

   B. Extraordinary gain of $247,500. 

   C. Extraordinary gain of $47,500. 

   D. Ordinary gain of $107,500. 


[889] Source: CMA 1291 2-19 
The weighted-average number of common 
shares used in computing earnings per 
common share for Year 2 on the Year 3 
comparative income statement was 

   A. 1,100,000. 

   B. 1,050,000. 

   C. 1,025,000. 

   D. 2,100,000. 


[890] Source: CMA 1291 2-20 
The weighted-average number of common 
shares used in computing earnings per 
common share for Year 3 on the Year 3 
comparative income statement was 

   A. 1,600,000. 

   B. 1,850,000. 

   C. 2,100,000. 

   D. 3,700,000. 


[891] Source: CMA 1291 2-21 
The weighted-average number of common 
shares to be used on computing earnings per 
common share for Year 3 on the Year 4 
comparative income statement is 

   A. 1,850,000. 

   B. 2,100,000. 

   C. 3,700,000. 

   D. 4,200,000. 


[892] Source: CMA 1291 2-22 
The weighted-average number of common 
shares to be used in computing earnings per 
common share for Year 4 on the Year 4 
comparative income statement is 

   A. 2,100,000. 

   B. 3,150,000. 

   C. 3,675,000. 

   D. 4,200,000. 


[893] Source: CMA 0692 2-18 
According to SFAS 4, Reporting Gains and 
Losses from Extinguishment of Debt, as 
amended, all of the following gains or 
losses from extinguishment of debt should 
be classified in the income statement as 
extraordinary items except those arising 
from 

   A. The extinguishment of debt at less 
   than the net carrying amount. 

   B. The extinguishment of debt to satisfy 
   sinking-fund requirements to be met 
   within 1 year. 

   C. The extinguishment of debt by 
   exchanging common shares of stock. 

   D. The extinguishment of debt at more 
   than the net carrying amount. 


[894] Source: CMA 0692 2-24 
According to SFAS 15, Accounting by 
Debtors and Creditors for Troubled Debt 
Restructurings, all of the following 
disclosures are required by debtors 
involved in a troubled debt restructure 
except disclosure of 

   A. A description of the major changes 
   in terms, major features of settlement, 
   or both. 

   B. The aggregate gain on restructuring 
   and the related tax effect. 

   C. The per-share amount of the 
   aggregate gain on restructuring, net of 
   tax effect. 

   D. The gross interest revenue that 
   would have been recorded in the 
   period. 


[895] Source: CMA 0693 2-15 
Material gains or losses from 
extinguishment of debt are 

   A. Reported on the face of the income 
   statement as extraordinary items. 

   B. Not reported as extraordinary items. 

   C. Reported only in the notes to the 
   financial statements. 

   D. Not reported in the earnings per 
   share format. 


[896] Source: CMA 0693 2-16 
When reporting a troubled debt restructuring 
in the current financial statements, 

   A. Debtors must disclose only the 
   aggregate net loss on transfers of assets 
   recognized during the period of 
   restructuring; net gains need not be 
   disclosed. 

   B. Debtors need not disclose the 
   aggregate gain on restructuring of 
   payables, nor the related income tax 
   effect. 

   C. Debtors must describe the principal 
   changes in the terms, the major features 
   of settlement, or both. 

   D. If the terms of an impaired loan have 
   been modified, the creditor may not 
   elect to report interest income from an 
   increase in the present value of the loan 
   attributable to the passage of time. 


[897] Source: CMA 0681 3-17 
James Corporation reported earnings for 
calendar year Year 1 of $3 per common 
share based on net income of $3,000,000 
and 1,000,000 average shares of common 
stock outstanding. There were 1,000,000 
common shares outstanding on December 
31, Year 1. In Year 2 the common stock was 
split on a two-for-one basis, and a 20% 
stock dividend was distributed in Year 3. 
The EPS reported in the Year 4 annual 
report for Year 1 should be reported as 

   A. $1.50. 

   B. $3.00. 

   C. $1.25. 

   D. $2.50. 


[898] Source: CMA 1286 3-16 
Extraordinary items are to be disclosed 

   A. Separately in the income statement 
   but not net of applicable income taxes. 

   B. Separately in the income statement 
   net of applicable income taxes. 

   C. With the normal, recurring revenues, 
   costs, and expenses. 

   D. As an adjustment to beginning 
   retained earnings. 


[899] Source: CMA 0690 3-6 
Which one of the following material events 
would be classified as an extraordinary item 
on an income statement? 

   A. A write-down of inventories. 

   B. A loss from the effects of a strike 
   against a major supplier. 

   C. A gain or loss on the disposal of a 
   portion of the business. 

   D. A gain or loss from the 
   extinguishment of debt. 


[900] Source: CMA 1290 2-10 
Gains or losses from extinguishment of debt 
should be aggregated and, if material, 
treated in the financial statements as 

   A. Ordinary income or loss. 

   B. An extraordinary item. 

   C. A prior period adjustment. 

   D. A change in accounting estimate. 


[901] Source: CMA 0691 2-29 
According to SFAS 15, Accounting by 
Debtors and Creditors for Troubled Debt 
Restructurings, all of the following 
disclosures are required by creditors 
involved in a troubled debt restructure 
except disclosure of the 

   A. Aggregate recorded investment in 
   receivables. 

   B. Aggregate gain or loss on transfers 
   of assets. 

   C. Gross interest revenue that would 
   have been recorded in the period 
   ignoring restructure. 

   D. Gross interest revenue on 
   receivables that was recorded in the 
   period. 


[902] Source: CMA 1290 2-9 
Defeasance, as it relates to long-term debt, 
is 

   A. The refinancing of debt with similar 
   debt. 

   B. A form of troubled debt 
   restructuring. 

   C. Long-term debt not secured by 
   collateral. 

   D. The retirement of debt in substance, 
   but not form. 


[903] Source: CIA 1193 IV-32 
Which of the following describes the proper 
treatment of a loss that is material, unusual 
in nature, and infrequent in occurrence? 

   A. Report as part of continuing 
   operations. 

   B. Report as an extraordinary item. 

   C. Report as a prior period item. 

   D. Report as an ordinary item. 


[904] Source: CIA 0592 IV-39 
The following excerpt was taken from a 
company's financial statements:

". . . 10% convertible participating . . . $10,000,000."
What is most likely being referred to? 

   A. Bonds. 

   B. Common stock. 

   C. Stock options. 

   D. Preferred stock. 


[905] Source: CIA 0592 IV-25 
A company issues financial statements in 
which conversion of warrants and options 
into common stock is assumed. Moreover, 
repayment of debt relating to the assumed 
conversion is assumed. This scenario is 
most closely associated with which of the 
following? 

   A. Computation of diluted earnings per 
   share. 

   B. Extraordinary items and 
   cumulative-effect changes. 

   C. Retroactive-effect changes and 
   common stock equivalents. 

   D. Application of the if-converted 
   method. 


[906] Source: CIA 0594 IV-31 
A company has net income for the current 
year of $120,000 and pays $5,000 in 
dividends to its preferred shareholders and 
$20,000 in dividends to its common 
shareholders. The weighted average number 
of common shares outstanding for the year is 
1,500, and the weighted average number of 
preferred shares outstanding for the year is 
2,500. Earnings per share for this company 
for the current year, to the nearest cent, is 

   A. $40.00 

   B. $60.00 

   C. $66.67 

   D. $76.67 


[907] Source: CMA 0694 2-15 
At the beginning of the fiscal year, June 1, 
Year 1, Boyd Corporation had 80,000 
shares of common stock outstanding. Also 
outstanding was $200,000 of 8% 
convertible bonds that had been issued at 
$1,000 par. The bonds were convertible 
into 20,000 shares of common stock; 
however, no bonds were converted during 
the year. The company's tax rate is 34%, and 
the Aa bond interest rate has been 10%. 
Boyd's net income for the year was 
$107,000. The fully diluted earnings per 
share (rounded to the nearest cent) of Boyd 
common stock for the fiscal year ended May 
31, Year 2 was 

   A. $1.07 

   B. $1.12 

   C. $1.18 

   D. $1.20 


[908] Source: CMA 1295 2-9 
In a troubled debt restructuring, if the 
pre-restructure carrying amount of the debt 
(including any accrued interest) exceeds the 
total future cash flows after the modification 
of the debt terms, 

   A. The debtor records a gain on the 
   restructured debt. 

   B. The debtor records a loss on the 
   restructured debt. 

   C. The creditor need not treat the loan 
   as impaired. 

   D. The debt is swapped. 


[909] Source: CMA 0687 3-5 
When reporting the discontinuance of a 
business segment, APB 30, Reporting the 
Results of Operations, specifies that 

   A. The results of the segment operations 
   during the phase-out period are 
   reported as part of the gain or loss from 
   continuing operations. 

   B. The income (loss) from segment 
   operations is calculated from the date 
   the segment started operations. 

   C. The gain or loss on discontinued 
   operations should be reported net of tax 
   as a separate item before extraordinary 
   items. 

   D. The costs directly associated with 
   discontinuance should be included as an 
   expense of continuing operations. 


[910] Source: CMA 0693 2-24 
When reporting extraordinary items, 

   A. Each item (net of tax) is presented on 
   the face of the income statement 
   separately as a component of net 
   income for the period. 

   B. Each item is presented exclusive of 
   any related income tax. 

   C. Each item is presented as an unusual 
   item within income from continuing 
   operations. 

   D. All extraordinary gains or losses that 
   occur in a period are summarized as 
   total gains and total losses, then offset 
   to present the net extraordinary gain or 
   loss. 


[911] Source: CIA 0590 IV-35 
Assuming all of the following involve 
material amounts, which is most likely to be 
classified as an extraordinary item in the 
income statement? 

   A. A loss because of an expropriation 
   of assets by a foreign government. 

   B. A loss because of adjustments of 
   accruals on long-term contracts. 

   C. A gain because of the disposal of 
   assets associated with a discontinued 
   segment of business. 

   D. A loss because of a lawsuit that 
   resulted from charges of patent 
   infringement. The company had 
   unsuccessfully defended a similar suit 5 
   years ago. 


[912] Source: CMA 0695 2-28 
When reporting gains and losses from 
extinguishment of debt that are treated as 
extraordinary items, all of the following 
disclosures on the face of, or in the notes to, 
the financial statements are required except 

   A. A description of the extinguishment 
   transactions, including the sources, if 
   practicable, of the cash used to 
   extinguish the debt. 

   B. The interest expense that would have 
   been recorded in the period ignoring 
   extinguishment. 

   C. The income tax effect in the period 
   of extinguishment. 

   D. The per-share amount of the 
   aggregate gain or loss, net of related tax 
   effect. 


[913] Source: CMA 1282 3-20 
On July 1, Year 3, R&R Company's 
accountants discovered several accounting 
errors made in prior years. The firm's fiscal 
year ends on December 31. A description of 
the errors follows:

  The ending inventory taken in Year 1 failed to include some units
   that were on hand.  As a result, the inventory was undervalued by
   $43,000.
  The ending inventory taken in Year 2 included 5,000 items that were
   priced in error at $10.00 each rather than the correct amount of
   $1.00 each.
  There were accrued salaries totaling $5,000 that should have been
   recorded as salary expense and recognized as a liability at the end
   of Year 2.  This accrual was not made due to an oversight.
Ignoring any income tax effect, the result of 
the above errors is that Year 2 reported 
income before taxes was 

   A. Overstated by $93,000. 

   B. Overstated by $7,000. 

   C. Overstated by $3,000. 

   D. Understated by $83,000. 


[914] Source: CMA 1282 4-7 
BNJ Company employs a perpetual FIFO 
inventory system for its raw materials. The 
perpetual inventory records reflect a 
balance of $245,975 as of October 31 of the 
current year. A physical inventory taken on 
October 31 of the current year revealed that 
the actual dollar value of raw materials on 
hand is $240,845. The $5,130 difference 
results in an entry required as of October 31 
to

            Debit                 Credit
      ------------------    ------------------
   A. 

      Stores Inventory      Cost of Goods Sold
   B. 

      Purchases             Stores Inventory
   C. 

      Cost of Goods Sold    Stores Inventory
   D. 

      Cost of Goods Sold    Purchases


[915] Source: CPA 0585 I-41 
A wholly owned subsidiary of Ward, Inc. 
has certain expense accounts for the year 
ended December 31, 2000 stated in local 
currency units (LCU) as follows:

                                      LCU
                                    -------
Depreciation of equipment
  (related assets were purchased
  Jan. 1, 1998)                     120,000
Provision for doubtful accounts      80,000
Rent                                200,000
The exchange rates at various dates are as follows:
                                Dollar Equivalent
                                     of 1 LCU
                                -----------------
December 31, 2000                      $.40
Average for year ended 12/31/00         .44
January 1, 1998                         .50
Assume that the LCU is the subsidiary's 
functional currency and that the charges to 
the expense accounts occurred 
approximately evenly during the year. What 
total dollar amount should be included in 
Ward's 2000 consolidated income statement 
to reflect these expenses? 

   A. $160,000 

   B. $168,000 

   C. $176,000 

   D. $183,200 


[916] Source: CMA 0685 4-7 
A company failed to record the purchase of 
merchandise received from a supplier at the 
end of the current year, but properly 
included the merchandise in year-end 
inventory. This error would 

   A. Understate total expenses for the 
   current year. 

   B. Understate net income for the current 
   year. 

   C. Overstate total liabilities at the end 
   of the current year. 

   D. Overstate total assets at the end of 
   the current year. 


[917] Source: CMA 0685 4-8 
Failure to accrue interest on a note 
receivable at the end of the current year 
would 

   A. Overstate total revenue for the 
   current year. 

   B. Not affect total assets at the end of 
   the current year. 

   C. Understate total liabilities at the end 
   of the current year. 

   D. Understate stockholders' equity at the 
   end of the current year. 


[918] Source: CMA 0685 4-9 
Charging the cost of ordinary repairs to the 
machinery and equipment asset account 
during the current year would 

   A. Understate net income for the current 
   year. 

   B. Understate total liabilities at the end 
   of the current year. 

   C. Not affect the total assets at the end 
   of the current year. 

   D. Not affect the total liabilities at the 
   end of the current year. 


[919] Source: CMA 1288 4-11 
Antil Company reported net income before 
taxes of $400,000 in Year 1 and $563,000 
in Year 2. During the Year 3 audit, the 
following was discovered.

(1) A piece of equipment acquired on 
January 1, Year 1 at a cost of $120,000 was 
reported as advertising expense in Year 1. 
At the time of purchase, the equipment had a 
salvage value of $5,000 and a useful life of 
10 years. Antil depreciates all equipment 
using the straight-line method.

(2) In both Year 1 and Year 2, Antil did not 
accrue the year-end salary expense, which 
was $2,400 at the end of Year 1 and $5,100 
at the end of Year 2.

Antil's net income before taxes in Year 1 
and Year 2 should have been 

   A. $508,500 for Year 1 and $548,800 
   for Year 2. 

   B. $529,100 for Year 1 and $553,900 
   for Year 2. 

   C. $506,100 for Year 1 and $546,400 
   for Year 2. 

   D. $506,100 for Year 1 and $548,800 
   for Year 2. 


[920] Source: CMA 1288 4-12 
The following inventory valuation errors 
have been discovered for Nivelle Company:

  The Year 1 year-end inventory was overstated by $23,000.
  The Year 2 year-end inventory was understated by $61,000.
  The Year 3 year-end inventory was understated by $17,000.
The reported income before taxes for Nivelle Company was
        Year       Income before Taxes
       ------      -------------------
       Year 1           $138,000
       Year 2            254,000
       Year 3            168,000
Reported income before taxes for Year 1, 
Year 2, and Year 3 should have been 

   A. $161,000, $170,000, and $212,000, 
   respectively. 

   B. $115,000, $338,000, and $124,000, 
   respectively. 

   C. $161,000, $338,000, and $90,000, 
   respectively. 

   D. $115,000, $338,000, and $212,000, 
   respectively. 


[921] Source: CMA 1288 4-20 
During the Year 1 year-end physical 
inventory count at Grove Company, $25,000 
worth of inventory was counted twice. As a 
result of this error, 

   A. Year 1 cost of goods sold was 
   overstated, and Year 2 income was 
   understated. 

   B. Year 1 income was overstated, and 
   Year 2 ending inventory was 
   overstated. 

   C. Year 1 retained earnings was 
   overstated, and Year 2 retained 
   earnings was understated. 

   D. Year 1 cost of goods sold was 
   understated, and Year 2 retained 
   earnings was correct. 


[922] Source: CMA 1288 4-21 
A restatement of financial statements of 
prior years would be required for a change 
in 

   A. Method of accounting for long-term 
   contracts. 

   B. The lives assigned to classes of 
   operating assets. 

   C. The amount of ore believed to 
   remain in a long-operating mine. 

   D. The completion date of a 
   shipbuilding contract for which 
   percentage-of-completion accounting is 
   used. 


[923] Source: CMA 0693 2-29 
In-substance defeasance, as it relates to 
long-term debt, is 

   A. The refinancing of debt with similar 
   debt. 

   B. Long-term debt not secured by 
   collateral. 

   C. The retirement of debt in substance, 
   but not form. 

   D. Not permitted by generally accepted 
   accounting principles. 


[924] Source: CMA 0692 2-14 
According to APB 20, Accounting Changes, 
a change in the liability for warranty costs is 
an example of a(n) 

   A. Accounting estimate change. 

   B. Accounting method change. 

   C. Accounting principle change. 

   D. Prior period adjustment. 


[925] Source: CMA 1292 2-11 
Wydner Company has decided to change in 
the current year from the straight-line 
method to the sum-of-the-years'-digits 
method for recording depreciation expense 
for certain assets. The cumulative effect of 
this change should be 

   A. Reflected in the income of the 
   current period. 

   B. Reflected in the income of both 
   current and prior periods. 

   C. Spread over the remaining life of the 
   assets involved. 

   D. Recorded as an adjustment to the 
   beginning balance of retained earnings. 


[926] Source: CMA 0693 2-7 
When reporting a change in accounting 
principle, 

   A. The change is recognized by 
   including the cumulative effect of the 
   change in the net income of the period 
   of change for all but a few specific 
   cases. 

   B. The change is recognized by 
   retroactively adjusting the financial 
   statements for all but a few specific 
   cases. 

   C. Income before extraordinary items is 
   reported in the year of the change 
   reflecting the application of the new 
   principal, but on a basis that includes 
   the cumulative adjustment. 

   D. The pro forma effects of retroactive 
   application of the new principle upon 
   income before extraordinary items and 
   net income are not to be disclosed on 
   the face of the income statement or in 
   the notes to the financial statements. 


[927] Source: CIA 1188 IV-45 
A retroactive accounting change in the 
current period should be accounted for in 
comparative reports by 

   A. An adjustment directly to retained 
   earnings and restatement of prior years' 
   statements. 

   B. A line item below extraordinary 
   items on the current income statement. 

   C. Pro forma amounts for key figures 
   shown supplementary on the income 
   statement for all periods presented. 

   D. Footnote disclosure only in the 
   current period. 


[928] Source: CIA 0593 IV-36 
In auditing your organization's records for 
the current year, the first year of operations, 
you discover the following errors were 
made at December 31:

Failed to accrue $50,000 interest expense.
Failed to record depreciation expense on office equipment of $80,000.
Failed to amortize prepaid rent expense of $100,000.
Failed to defer recognition of prepaid advertising expense of $60,000.
The net effect of these errors was to 
overstate net income for the current year by 

   A. $120,000 

   B. $130,000 

   C. $170,000 

   D. $230,000 


[929] Source: CIA 0591 IV-45 
The errors cause the reported net income for 
the year ending December 31, Year 2 to be 

   A. Overstated by $72,000. 

   B. Overstated by $65,000. 

   C. Overstated by $55,000. 

   D. Understated by $28,000. 


[930] Source: CIA 0591 IV-46 
The errors cause the reported retained 
earnings at December 31, Year 2 to be 

   A. Overstated by $32,000. 

   B. Overstated by $25,000. 

   C. Overstated by $17,000. 

   D. Understated by $18,000. 


[931] Source: CIA 0594 IV-23 
Which of the following errors is not 
self-correcting over two accounting 
periods? 

   A. Failure to record accrued wages. 

   B. Failure to record depreciation. 

   C. Overstatement of inventory 
   purchases. 

   D. Failure to record prepaid expenses. 


[932] Source: CIA 0594 IV-24 
When a company changes to the last-in, 
first-out (LIFO) method of inventory 
valuation, there is no restatement of prior 
years' income because 

   A. Restatement would be impracticable. 

   B. Restatement would reduce the 
   usefulness of prior period statements. 

   C. Restatement would not change the 
   reported result. 

   D. Restatement would reduce prior 
   years' income. 


[933] Source: CMA 0692 2-12 
According to APB 20, Accounting Changes, 
a change from the cash basis of accounting 
to the accrual basis for financial statement 
purposes requires 

   A. Retroactive treatment in the financial 
   statements. 

   B. Prospective treatment in the financial 
   statements. 

   C. An entry in the income statement 
   recording the cumulative effect of the 
   change. 

   D. Retroactive treatment on a pro forma 
   basis only. 


[934] Source: CMA 0692 2-13 
According to APB 20, a change from last-in, 
first-out (LIFO) costing to first-in, first-out 
(FIFO) costing requires 

   A. Retroactive treatment in the financial 
   statements. 

   B. Prospective treatment in the financial 
   statements. 

   C. An entry in the income statement 
   recording the cumulative effect of the 
   change. 

   D. Disclosure in the notes only. 


[935] Source: CMA 0693 2-9 
Items reported as prior period adjustments 

   A. Do not include the effect of a mistake 
   in the application of accounting 
   principles as this is accounted for as a 
   change in accounting principle rather 
   than as a prior period adjustment. 

   B. Do not affect the presentation of 
   prior period comparative financial 
   statements. 

   C. Do not require further disclosure in 
   the body of the financial statements. 

   D. Are reflected as adjustments of the 
   opening balance of the retained earnings 
   of the earliest period presented. 


[936] Source: CMA 1293 2-21 
According to APB 20, a change in 
realizability of accounts receivable is an 
example of a(n) 

   A. Prior period adjustment. 

   B. Accounting estimate change. 

   C. Accounting principle change. 

   D. Accounting method change. 


[937] Source: CMA 0694 2-28 
Roberts Inc. has decided to change in the 
current year from the straight-line method to 
the sum-of-the-years'-digits method for 
recording depreciation expense for certain 
assets. The cumulative effect of this change 
should be 

   A. Reflected in the income of the 
   current period and disclosed as a 
   change in estimate. 

   B. Recorded as an adjustment to the 
   beginning balance of retained earnings. 

   C. Spread over the remaining life of the 
   assets involved. 

   D. Reflected in the income of the 
   current period. 


[938] Source: CMA 0681 3-24 
An accounting change requiring the 
cumulative effect of the adjustment to be 
presented on the income statement is a 
change in the 

   A. Life of equipment from 10 to 7 years. 

   B. Depreciation method from 
   straight-line to 
   double-declining-balance. 

   C. Specific subsidiaries included in the 
   group for which consolidated 
   statements are presented. 

   D. Estimated liability for warranty 
   costs. 


[939] Source: C.J. Skender 
The Brinjac Company owns a foreign 
subsidiary. Included among the subsidiary's 
liabilities for the year just ended are 
400,000 LCU of revenue received in 
advance, recorded when $.50 was the dollar 
equivalent per LCU, and a deferred tax 
liability for 187,500 LCU, recognized when 
$.40 was the dollar equivalent per LCU. 
The rate of exchange in effect at year-end 
was $.35 per LCU. If the accounting is in 
accordance with SFAS 52 and SFAS 109 
and the dollar is the functional currency, 
what total should be included for these two 
liabilities on Brinjac's consolidated balance 
sheet at year-end? 

   A. $205,625 

   B. $215,000 

   C. $265,625 

   D. $275,000 


[940] Source: CMA 1291 2-5 
SFAS 52 states that transaction gains and 
losses have direct cash flow effects when 
foreign-denominated monetary assets are 
settled in amounts greater or less than the 
functional currency equivalent of the 
original transactions. These transaction 
gains and losses should be reflected in 
income 

   A. At the date the transaction 
   originated. 

   B. On a retroactive basis. 

   C. In the period the exchange rate 
   changes. 

   D. Only at the year-end balance sheet 
   date. 


[941] Source: CMA 1288 3-28 
SFAS 52, Foreign Currency Translation, 
requires that, in a highly inflationary 
economy, the financial statements of a 
foreign entity be remeasured as if the 
functional currency were the reporting 
currency. For this requirement, a highly 
inflationary economy is one that has 

   A. An inflation rate of at least 33% in 
   the most recent past year. 

   B. An inflation rate of at least 50% in 
   the most recent past year. 

   C. An inflation rate of at least 100% in 
   the most recent past year. 

   D. A cumulative inflation rate of at least 
   100% over a 3-year period. 


[942] Source: CMA 1291 2-6 
Prior to SFAS 52, there was significant 
disagreement among informed observers 
regarding the basic nature, information 
content, and meaning of results produced by 
various methods of translating amounts from 
foreign currencies into the reporting 
currency. SFAS 52 directs that organizations 

   A. Change the accounting model to 
   recognize currently the effects of all 
   changing prices in the primary 
   statements. 

   B. Defer any recognition of changing 
   currency prices until they are realized 
   by an actual exchange of foreign 
   currency into the reporting currency. 

   C. Recognize currently the effect of 
   changing currency prices on the 
   carrying amounts of designated foreign 
   assets and liabilities. 

   D. Recognize currently the effect of 
   changing currency prices on the 
   carrying amounts of all foreign assets, 
   liabilities, revenues, expenses, gains, 
   and losses. 


[943] Source: CMA 0692 2-15 
SFAS 52, Foreign Currency Translation, 
provides specific guidelines for translating 
foreign currency financial statements. The 
translation process begins with a 
determination of whether a foreign affiliate's 
functional currency is also its local 
reporting currency. Which one of the 
following factors indicates that a foreign 
affiliate's functional currency is the U.S. 
dollar? 

   A. Cash flows are primarily in foreign 
   currency and do not affect parent's cash 
   flows. 

   B. Financing is primarily obtained from 
   local foreign sources and from the 
   affiliate's operations. 

   C. Sales prices are responsive to 
   short-term changes in exchange rates 
   and worldwide competition. 

   D. Labor, materials, and other costs 
   consist primarily of local costs to the 
   foreign affiliate. 


[944] Source: CMA 0692 2-16 
If an entity's books of account are not 
maintained in its functional currency, SFAS 
52, Foreign Currency Translation, requires 
remeasurement into the functional currency 
prior to the translation process. An item that 
should be remeasured by use of the current 
exchange rate is 

   A. An investment in bonds to be held 
   until maturity. 

   B. A plant asset and the associated 
   accumulated depreciation. 

   C. A patent and the associated 
   accumulated amortization. 

   D. The revenue from a long-term 
   construction contract. 


[945] Source: CMA 0693 2-21 
When restating financial statements 
originally recorded in a foreign currency, 

   A. Income taxes are ignored in 
   calculating and disclosing the results of 
   foreign currency translations. 

   B. A component of annual net income, 
   "Adjustment from Foreign Currency 
   Translation, should be presented in the 
   notes to the financial statements or in a 
   separate schedule. 

   C. The aggregate transaction gain or 
   loss included in net income should be 
   disclosed in the financial statements or 
   in the notes to the financial statements. 

   D. The financial statements should be 
   adjusted for a rate change that occurs 
   after the financial statement date but 
   prior to statement issuance. 


[946] Source: CIA 0593 IV-41 
The financial statements of a foreign 
subsidiary are to be measured by use of the 
subsidiary's functional currency. The 
functional currency of an entity is defined as 
the currency of the 

   A. Parent company. 

   B. United States. 

   C. Primary economic environment in 
   which the entity operates. 

   D. Geographic location in which the 
   entity's headquarters are located. 


[947] Source: CIA 0591 IV-41 
On December 9, Year 1, domestic Company 
X acquired inventory from a British supplier 
for 100,000, with payment due in pounds 
on January 8, Year 2. Direct exchange rates 
for the pound were: December 9, Year 1 
($1.50), December 31, Year 1 ($1.55), and 
January 8, Year 2 ($1.57). For Company X 
with a December 31, Year 1 closing, these 
transactions resulted in a foreign currency 
transaction 

   A. Loss of $0 in Year 1 and loss of 
   $7,000 in Year 2. 

   B. Loss of $5,000 in Year 1 and loss of 
   $2,000 in Year 2. 

   C. Gain of $5,000 in Year 1 and gain of 
   $2,000 in Year 2. 

   D. Gain of $0 in Year 1 and gain of 
   $7,000 in Year 2. 


[948] Source: CMA 0694 2-29 
Which one of the following material events 
would be classified as an extraordinary item 
on an income statement? 

   A. A write-down of inventories. 

   B. A loss due to the effects of a strike 
   against a major supplier. 

   C. A gain or loss on the disposal of a 
   portion of the business. 

   D. A gain or loss from the 
   extinguishment of debt. 


[949] Source: CIA 1191 IV-42 
A gain is both unusual and infrequent, and 
occurs in the second fiscal quarter. How 
should the gain be accounted for? 

   A. Recognized in full in the second 
   quarter. 

   B. Recognized equally over the second, 
   third, and fourth quarters. 

   C. Recognized only in the annual 
   financial statements. 

   D. Recognized equally in each quarter, 
   by restating the first quarter. 


[950] Source: CIA 1195 IV-23 
In the prior accounting period, an 
organization incorrectly expensed a newly 
purchased piece of equipment rather than 
establishing an asset balance and beginning 
to depreciate it over the estimated useful life 
of the item. To correct this error in the 
current period, the organization would 
record a prior-period adjustment of the form 

   A. 

        Debit Equipment
           Credit Retained Earnings
           Credit Accumulated Depreciation - Equipment
   B. 

        Debit Retained Earnings
        Debit Accumulated Depreciation - Equipment
           Credit Equipment
   C. 

        Debit Equipment
        Debit Retained Earnings
           Credit Accumulated Depreciation - Equipment
   D. 

        Debit Equipment
        Debit Accumulated Depreciation - Equipment
           Credit Equipment


[951] Source: CMA 1288 4-28 
Separate disclosure in the statement of 
retained earnings would be required for 

   A. Repurchase and cancellation of 
   long-term debt at an amount different 
   from its carrying value. 

   B. An extraordinary loss. 

   C. Resale of treasury stock at an amount 
   greater than the price at which it was 
   purchased. 

   D. Discovery that estimated warranty 
   expense for machines sold last year was 
   recorded twice. 


[952] Source: CIA 1196 IV-3 
The failure to record an accrued expense at 
year-end will result in which of the 
following overstatement errors in the 
financial statements prepared at that date?

      Net Income   Working Capital   Cash
      ----------   ---------------   ----
   A. 

         No             No           Yes
   B. 

         No             Yes          No
   C. 

         Yes            No           No
   D. 

         Yes            Yes          No


[953] Source: CIA 1196 IV-31 
Which of the following errors is not 
self-correcting over two accounting 
periods? 

   A. Failure to record accrued wages. 

   B. Failure to record depreciation. 

   C. Overstatement of inventory. 

   D. Failure to record prepaid expenses. 


[954] Source: CIA 0595 IV-8 
Suppose that a company pays one of its 
liabilities twice during the year, in error. 
What are the effects of this mistake? 

   A. Assets, liabilities, and owners' 
   equity will be understated. 

   B. Assets, net income, and owners' 
   equity will be unaffected. 

   C. Assets and liabilities will be 
   understated. 

   D. Assets and net income and owners' 
   equity will be understated, and 
   liabilities are overstated. 


[955] Source: CIA 1195 IV-24 
Changes in accounting estimates are viewed 
as 

   A. Extraordinary items. 

   B. Errors in reported amounts in prior 
   periods. 

   C. Catch-up adjustments related to 
   amounts reported in prior periods. 

   D. Normal recurring corrections and 
   adjustments. 


[956] Source: CIA 1195 IV-25 
Because changes in accounting estimates 
relate to changes in circumstances in the 
[List A] period, they should be reported 
[List B].

      List A       List B
      -------   -------------
   A. 

      Current   Not at all
   B. 

      Current   Prospectively
   C. 

      Prior     Retroactively
   D. 

      Prior     Not at all


[957] Source: CIA 1194 IV-39 
Which of the following irregular income 
statement items is considered to be a change 
in an accounting estimate? 

   A. Gains or losses resulting from an 
   expropriation. 

   B. A change from accelerated to 
   straight-line depreciation. 

   C. Transaction gains or losses resulting 
   from a change in foreign exchange rates. 

   D. A change in the collectibility of 
   receivables. 


[958] Source: CIA 0596 IV-28 
When financial statements are being 
prepared, which of the following items 
requires that accountants estimate the effects 
of future conditions and events? 

   A. The purchase price for an acquired 
   building. 

   B. The price of a marketable security. 

   C. The amount of recoverable mineral 
   reserves. 

   D. The physical quantity of inventory. 


[959] Source: CIA 1194 IV-40 
A change in an accounting estimate is shown 
on the income statement 

   A. Only in the relevant account. 

   B. In a separate section entitled 
   extraordinary items. 

   C. In a separate section after continuing 
   operations but before extraordinary 
   items. 

   D. Between the captions extraordinary 
   items and net income, where the 
   cumulative effect of the change is 
   shown. 


[960] Source: CIA 0596 IV-27 
On January 1, 1998, a company purchased a 
piece of equipment for $250,000 which was 
originally estimated to have a useful life of 
10 years with no salvage value. 
Depreciation has been recorded for 3 years 
on a straight-line basis. On January 1, 2001, 
the estimated useful life was revised so that 
the equipment is considered to have a total 
life of 20 years. Assume that the 
depreciation method and the useful life for 
financial reporting and tax purposes are the 
same. The depreciation expense in 2001 on 
this equipment would be 

   A. $8,750 

   B. $10,294 

   C. $12,500 

   D. $14,706 


[961] Source: Publisher 
A widely diversified U.S. corporation sold 
portions of three wholly owned foreign 
subsidiaries in the same year. The functional 
currency of each subsidiary was the 
currency of the country in which it was 
located. The percentage sold and the amount 
of the translation adjustment attributable to 
each subsidiary at the time of sale follow:

                    Translation
           % Sold    Adjustment
           ------  --------------
Sub A       100%   $90,000 credit
Sub B        50%    40,000 debit
Sub C        10%    25,000 debit
What total amount of the translation 
adjustment should be reported as part of the 
gain on sale of the three subsidiaries? 

   A. $90,000 credit. 

   B. $70,000 net credit. 

   C. $67,500 net credit. 

   D. $0 


[962] Source: CIA 1190 IV-58 
A U.S. company and a German company 
purchased the same stock on the German 
stock exchange and held the stock for 1 year. 
The value of the German mark weakened 
against the dollar over this period. 
Comparing the returns of the two companies, 
the United States company's return will be 

   A. Lower. 

   B. Higher. 

   C. The same. 

   D. Indeterminate from the information 
   provided. 


[963] Source: CMA 0693 2-22 
The gain or loss from disposal of a segment 

   A. Includes the operating gain or loss 
   realized by the segment from the 
   beginning of the fiscal year to the 
   disposal date. 

   B. Is reported as an addition or 
   subtraction for the beginning balance of 
   retained earnings on the statement of 
   retained earnings. 

   C. Is reported as an extraordinary item 
   on the income statement. 

   D. Is reported as a component of net 
   income and distinguished from the 
   operating gain or loss realized by the 
   segment prior to the measurement date. 


[964] Source: CPA 0593 I-57 
In its 2001 income statement, what amount 
should Gator report as loss from 
discontinued operations? 

   A. $1,105,000 

   B. $1,690,000 

   C. $1,700,000 

   D. $2,600,000 


[965] Source: CPA 0593 I-58 
In its 2001 income statement, what amount 
should Gator report as loss on disposal of 
discontinued operations? 

   A. $260,000 

   B. $400,000 

   C. $845,000 

   D. $1,300,000 


[966] Source: CMA 0681 3-23 
An example of an item that should be 
reported as a prior-period adjustment in a 
company's annual financial statements is 

   A. A settlement resulting from 
   litigation. 

   B. An adjustment of income taxes. 

   C. A correction of an error that 
   occurred in a prior period. 

   D. An adjustment of utility revenue 
   because of rate revisions ordered by a 
   regulatory commission. 


[967] Source: Publisher 
A liability may be derecognized in the 
financial statements in all of the following 
situations except 

   A. The debtor pays off the obligation 
   with financial assets (other than cash) 
   and is relieved of its obligation for the 
   liability. 

   B. The debtor places purchased 
   securities into an irrevocable trust and 
   uses the principal and interest to pay off 
   the liability as it matures. 

   C. The judicial system legally releases 
   the debtor from being the primary 
   obligor of the liability. 

   D. The debtor reacquires the 
   outstanding debt from the creditor and 
   holds the securities as treasury bonds. 


[968] Source: Publisher 
Before being superseded by SFAS 125 on 
January 1, 1997, SFAS 76, Extinguishment 
of Debt, allowed for the derecognition of 
debt on the financial statements for 
in-substance defeasance. How should a 
company that previously extinguished its 
debt through in-substance defeasance treat 
that transaction starting January 1, 1997? 

   A. The company can disregard the law 
   change because in-substance defeasance 
   was a valid method for derecognizing 
   debt prior to January 1, 1997. 

   B. The company should disclose a 
   specific description of the transaction 
   and the total amount of debt 
   extinguished in the 1997 financial 
   statements. 

   C. The company should disclose a 
   general description of the transaction 
   and the amount of debt that is 
   considered extinguished at the year end 
   until the debt is no longer outstanding. 

   D. Since the debt is not paid off, the 
   company should retroactively apply 
   SFAS 125. 


[969] Source: CMA 1287 3-20 
According to SFAS 4, Reporting Gains and 
Losses from Extinguishment of Debt, gains 
or losses from extinguishment of debt should 
be aggregated and, if material, classified in 
the income statement as an extraordinary 
item, net of related income tax effect. Which 
one of the following types of 
extinguishments would not be classified as 
an extraordinary item? 

   A. Extinguishment of debt at more than 
   the net carrying amount. 

   B. Cash purchases of debt made to 
   satisfy current sinking-fund 
   requirements. 

   C. Refinancing existing debt with new 
   debt. 

   D. Extinguishment of debt at less than 
   the net carrying amount. 


[970] Source: Publisher 
An entity should not derecognize an existing 
liability under which of the following 
circumstances? 

   A. The entity exchanges convertible 
   preferred stock for its outstanding debt 
   securities. The debt securities are not 
   canceled but are held as treasury bonds. 

   B. Because of financial difficulties 
   being experienced by the entity, a 
   creditor accepts a parcel of land as full 
   satisfaction of an overdue loan. The 
   value of the land is less than 50% of the 
   loan balance. 

   C. The entity irrevocably places cash 
   into a trust that will be used solely to 
   satisfy scheduled principal and interest 
   payments of a specific bond obligation. 
   Because the trust investments will 
   generate a higher return, the amount of 
   cash is less than the carrying amount of 
   the debt. 

   D. As part of the agreement to purchase 
   a shopping center from the entity, the 
   buyer assumes without recourse the 
   mortgage for which the center serves as 
   collateral. 


[971] Source: Publisher 
On January 2, 2001, Wright Corporation 
entered into an in-substance debt defeasance 
transaction by placing cash of $875,000 into 
an irrevocable trust. The trust assets are to 
be used solely for satisfying the interest and 
principal payments on Wright's 6%, 
$1,100,000, 30-year bond payable. Wright 
has not been legally released under the bond 
agreement, but the probability is remote that 
Wright will be required to place additional 
cash in the trust. On December 31, 2000, the 
bond's carrying amount was $1,050,000; its 
fair value was $800,000. Disregarding 
income taxes, what amount of extraordinary 
gain (loss) should Wright report in its 2001 
income statement? 

   A. $(75,000) 

   B. $0 

   C. $175,000 

   D. $225,000 


[972] Source: CMA 0687 3-6 
FASB 52, Foreign Currency Translation, 
defines foreign currency transactions as 
those denominated in other than an entity's 
functional currency. Transaction gains and 
losses are reported as 

   A. Extraordinary items. 

   B. Adjustments to the beginning balance 
   of retained earnings. 

   C. A component of equity. 

   D. A component of income from 
   continuing operations. 


[973] Source: CMA 1288 3-30 
According to SFAS 52, foreign currency 
transaction gains and losses should usually 
be included in income 

   A. For the period in which the exchange 
   rate changes. 

   B. For the period in which the 
   transaction originated. 

   C. For foreign currency transactions that 
   are designated as economic hedges of a 
   net investment in a foreign entity. 

   D. For intercompany foreign currency 
   transactions that are of a long-term 
   investment nature. 


[974] Source: CMA 0688 4-20 
Which foreign currency items are reported 
exclusively in the equity section of a 
consolidated balance sheet? 

   A. Foreign currency transaction gains 
   and losses. 

   B. Amounts resulting from translating 
   foreign currency financial statements to 
   U.S. dollars. 

   C. Hedging gains and losses. 

   D. Only items not accounted for in 
   accordance with GAAP. 


[975] Source: CMA 0697 2-23 
In a review of the May 31, 2001 financial 
statements during the normal year-end 
closing process, it was discovered that the 
interest income accrual on Simpson 
Company's notes receivable was omitted. 
The amounts omitted were calculated as 
follows:

    May 31, 2000     $ 91,800
    May 31, 2001      100,200
The May 31, 2001 entry to correct for these 
errors, ignoring the effect of income taxes, 
includes a 

   A. Credit to retained earnings for 
   $91,800. 

   B. Credit to interest revenue for 
   $91,800. 

   C. Debit to interest revenue for 
   $100,200. 

   D. Credit to interest receivable for 
   $100,200. 


[976] Source: CMA 0697 2-24 
Jordan Company signed a new $136,800 
3-year lease beginning March 1, 2001 for a 
storage facility for finished goods inventory. 
Jordan recorded the first year's payment of 
$45,600 in the prepaid rent account. The 
balance in the prepaid rent account prior to 
this entry was $30,780. This prior balance 
relates to the previous lease for this facility 
that had expired February 28, 2001. Jordan 
records adjustments only at May 31, the end 
of the fiscal year. At May 31, 2001, the 
adjusting entry needed to reflect the correct 
balances in the prepaid rent and rent 
expense accounts is to debit 

   A. Prepaid rent for $11,400 and credit 
   rent expense for $11,400. 

   B. Rent expense for $11,400 and credit 
   prepaid rent for $11,400. 

   C. Prepaid rent for $42,180 and credit 
   rent expense for $42,180. 

   D. Rent expense for $42,180 and credit 
   prepaid rent for $42,180. 


[977] Source: CMA 0697 2-25 
According to APB 20, Accounting Changes, 
a change from the sum-of-the-years'-digits 
depreciation method to the straight-line 
depreciation method is an example of a(n) 

   A. Accounting estimate change. 

   B. Accounting principle change. 

   C. Error correction. 

   D. Prior-period adjustment. 


[978] Source: CMA 0697 2-26 
According to APB 20, Accounting Changes, 
a change in the liability for warranty costs 
requires 

   A. Presenting prior-period financial 
   statements as previously reported. 

   B. Presenting the effect of pro forma 
   data on income and earnings per share 
   for all prior periods presented. 

   C. Reporting an adjustment to the 
   beginning retained earnings balance in 
   the statement of retained earnings. 

   D. Reporting current and future 
   financial statements on the new basis. 


[979] Source: CMA 0697 2-28 
SFAS 52, Foreign Currency Translation, 
requires the application of the functional 
currency concept. Before the financial 
statements of a foreign subsidiary may be 
translated into the parent company's 
currency, the functional currency of the 
foreign subsidiary must be determined. All 
of the following factors indicate that a 
foreign subsidiary's functional currency is 
the foreign currency rather than the parent's 
currency except when 

   A. Its cash flows are primarily in 
   foreign currency and do not affect the 
   parent's cash flows. 

   B. Its sales prices are responsive to 
   exchange rate changes and to 
   international competition. 

   C. Its labor, material, and other costs 
   are obtained in the local market of the 
   foreign subsidiary. 

   D. Its financing is primarily obtained 
   from local foreign sources and from the 
   subsidiary's operations. 


[980] Source: Publisher 
A company had sales in both 2000 and 2001 
of $100,000. Cost of sales for 2000 was 
$70,000. In computing cost of sales for 
2000, an item of inventory purchased in 
2000 for $50 was incorrectly written down 
to current replacement cost of $35. The item 
is currently selling in 2001 for $100, its 
normal selling price. As a result of this 
error, 

   A. Income for 2000 is overstated. 

   B. Cost of sales for 2001 will be 
   overstated. 

   C. Income for 2001 will be overstated. 

   D. Income for 2001 will be unaffected. 


[981] Source: Publisher 
The weighted-average number of common 
shares used in computing basic earnings per 
common share for 1999 on the 2000 
comparative income statement was 

   A. 2,200,000 

   B. 2,100,000 

   C. 2,050,000 

   D. 4,200,000 


[982] Source: Publisher 
The weighted-average number of common 
shares used in computing basic earnings per 
common share for 2000 on the 2000 
comparative income statement was 

   A. 3,150,000 

   B. 3,700,000 

   C. 4,200,000 

   D. 7,400,000 


[983] Source: Publisher 
The weighted-average number of common 
shares to be used in computing basic 
earnings per common share for 2000 on the 
2001 comparative income statement is 

   A. 3,700,000 

   B. 4,200,000 

   C. 7,400,000 

   D. 8,400,000 


[984] Source: Publisher 
The weighted-average number of common 
shares to be used in computing basic 
earnings per common share for 2001 on the 
2001 comparative income statement is 

   A. 4,200,000 

   B. 6,300,000 

   C. 7,350,000 

   D. 8,400,000 


[985] Source: Publisher 
The weighted-average number of shares 
used to calculate BEPS amounts for the first 
quarter is 

   A. 444,000 

   B. 372,000 

   C. 344,000 

   D. 300,000 


[986] Source: Publisher 
The control number for determining whether 
potential common shares are dilutive or 
antidilutive is 

   A. $1,000,000 

   B. $994,000 

   C. $(206,000) 

   D. $(1,200,000) 


[987] Source: Publisher 
The BEPS amount for the net income or loss 
available to common shareholders after the 
extraordinary item is 

   A. $2.89 

   B. $(0.46) 

   C. $(0.60) 

   D. $(3.49) 


[988] Source: Publisher 
The weighted-average number of shares 
used to calculate DEPS amounts for the first 
quarter is 

   A. 444,000 

   B. 438,000 

   C. 372,000 

   D. 344,000 


[989] Source: Publisher 
The effect of assumed conversions on the 
numerator of the DEPS fraction is 

   A. $31,000 

   B. $25,000 

   C. $23,500 

   D. $17,500 


[990] Source: Publisher 
The difference between BEPS and DEPS for 
the extraordinary item is 

   A. $2.89 

   B. $2.10 

   C. $.79 

   D. $.60 


[991] Source: Publisher 
The DEPS amount for the net income or loss 
available to common shareholders after the 
extraordinary item is 

   A. $2.29 

   B. $(0.41) 

   C. $(0.53) 

   D. $(2.70) 


[992] Source: CIA 1196 IV-2 
If ending inventory is underestimated due to 
an error in the physical count of items on 
hand, the cost of goods sold for the period 
will be <List A>, and net earnings will be 
<List B>.

          List A                List B
      --------------        --------------
   A. 

      Underestimated        Underestimated
   B. 

      Underestimated        Overestimated
   C. 

      Overestimated         Underestimated
   D. 

      Overestimated         Overestimated


[993] Source: Publisher 
In periods when earnings include special 
transactions, the different per-share amounts 
must be shown. Which one of the following 
per-share amounts is not required for 
financial reporting? 

   A. Income from continuing operations. 

   B. Cash flows. 

   C. An extraordinary item. 

   D. The cumulative effect of a change in 
   accounting principle. 


[994] Source: CIA 1191 IV-39 
If bonds payable with a carrying value equal 
to par value are refunded by use of a call 
provision, the call premium of the refunded 
issue should be 

   A. Amortized over the remaining 
   original life of the extinguished issue. 

   B. Amortized over the life of the new 
   issue. 

   C. Recognized currently in income as an 
   extraordinary loss. 

   D. Recognized currently as a loss and 
   reported as a component of income 
   before extraordinary items. 


[995] Source: CMA 1288 3-27 
SFAS 52, Foreign Currency Translation, 
requires the use of different methods to 
translate or remeasure foreign currency 
financial statements. When the foreign 
affiliate's functional currency is not the 
reporting currency of the parent (or 
investor), the 

   A. Current/noncurrent method should be 
   used to translate the foreign affiliate's 
   financial statements. 

   B. Monetary/nonmonetary method 
   should be used to translate the foreign 
   affiliate's financial statements. 

   C. Temporal method should be used to 
   remeasure the foreign affiliate's 
   financial statements. 

   D. Current exchange rate method should 
   be used to translate the foreign 
   affiliate's financial statements. 


[996] Source: CMA 1288 3-29 
The premium or discount on a forward 
exchange contract is calculated using the 
difference between the 

   A. Spot rate at the balance sheet date 
   and the spot rate at the date of inception 
   of the forward contract. 

   B. Spot rate at the balance sheet date 
   and the spot rate last used to measure a 
   gain or loss on that contract for an 
   earlier period. 

   C. Spot rate at the date of inception of 
   the forward contract and the spot rate 
   last used to measure a gain or loss on 
   that contract for an earlier period. 

   D. Contracted forward rate and the spot 
   rate at the date of inception of the 
   contract. 


[997] Source: Publisher 
For which kind of forward foreign exchange 
contracts are both the receivable and the 
liability recorded at the forward exchange 
rate? 

   A. Speculative forward contract. 

   B. Hedge of a net investment. 

   C. Hedge of an identifiable foreign 
   currency commitment. 

   D. Hedge of an exposed liability 
   position. 


[998] Source: Publisher 
On December 1, 1998, Catfish Company 
issued its 10%, $2 million face value bonds 
for $2.3 million. Interest is payable on 
November 1 and May 1. On December 31, 
2000, the book value of the bonds, inclusive 
of the unamortized premium, was $2.1 
million. On July 1, 2001, Catfish reacquired 
the bonds at 97, plus accrued interest. 
Catfish appropriately uses the straight-line 
method of amortization. The gain on 
Catfish's extinguishment of debt is 

   A. $48,000 

   B. $52,000 

   C. $112,000 

   D. $160,000 


[999] Source: CPA 1195 F-39 
During January 1999, Doe Corp. agreed to 
sell the assets and product line of its Hart 
division. The sale was completed on 
January 15, 2000, and resulted in a gain on 
disposal of $900,000. Hart's operating 
losses were $600,000 for 1999 and $50,000 
for the period January 1 through January 15, 
2000. Disregarding income taxes, what 
amount of net gain (loss) should be reported 
in Doe's comparative 2000 and 1999 
income statements?

         2000         1999
       --------    ----------
   A. 

       $0          $250,000
   B. 

       $250,000    $0
   C. 

       $850,000    $(600,000)
   D. 

       $900,000    $(650,000)


[1000] Source: CPA 0595 F-44 
On October 1, 2000, Host Co. approved a 
plan to dispose of a segment of its business. 
Host expected that the sale would occur on 
April 1, 2001 at an estimated gain of 
$350,000. The segment had actual and 
estimated operating losses as follows:

1/1/00 to 9/30/00      $(300,000)
10/1/00 to 12/31/00     (200,000)
1/1/01 to 3/31/01       (400,000)
In its 2000 income statement, what should 
Host report as a loss on disposal of the 
segment before income taxes? 

   A. $200,000 

   B. $250,000 

   C. $500,000 

   D. $600,000 


[1001] Source: CPA 1190 I-50 
On January 1, 2000, Hart, Inc. redeemed its 
15-year bonds of $500,000 par value for 
102. They were originally issued on January 
1, 1988 at 98 with a maturity date of January 
1, 2003. The bond issue costs relating to this 
transaction were $20,000. Hart amortizes 
discounts, premiums, and bond issue costs 
using the straight-line method. What amount 
of extraordinary loss should Hart recognize 
on the redemption of these bonds? 

   A. $16,000 

   B. $12,000 

   C. $10,000 

   D. $0 


[1002] Source: CPA 1190 I-47 
Strand, Inc. incurred the following 
infrequent losses during 2000:

   -   A $90,000 write-down of equipment leased to others
   -   A $50,000 adjustment of accruals on long-term contracts
   -   A $75,000 write-off of obsolete inventory
In its 2000 income statement, what amount 
should Strand report as total infrequent 
losses that are not considered 
extraordinary? 

   A. $215,000 

   B. $165,000 

   C. $140,000 

   D. $125,000 


[1003] Source: CPA 0593 I-59 
Midway Co. had the following transactions 
during 2000:

   -  $1.2 million pretax loss on foreign currency
      exchange caused by a major unexpected
      devaluation by a foreign government
   -  $500,000 pretax loss from discontinued
      operations of a division
   -  $800,000 pretax loss on equipment damaged by
      a hurricane.  This was the first hurricane ever
      to strike in Midway's area.  Midway also
      received $1 million from its insurance
      company to replace a building, with a
      carrying value of $300,000, that had been
      destroyed by the hurricane.
What amount should Midway report in its 
2000 income statement as extraordinary loss 
before income taxes? 

   A. $100,000 

   B. $1,300,000 

   C. $1,800,000 

   D. $2,500,000 


[1004] Source: CPA 1190 I-51 
On January 1, 1997, Flax Co. purchased a 
machine for $528,000 and depreciated it by 
the straight-line method, using an estimated 
useful life of 8 years with no salvage value. 
On January 1, 2000, Flax determined that the 
machine had a useful life of 6 years from the 
date of acquisition and will have a salvage 
value of $48,000. An accounting change was 
made in 2000 to reflect the additional data. 
The accumulated depreciation for this 
machine should have a balance at December 
31, 2000 of 

   A. $292,000 

   B. $308,000 

   C. $320,000 

   D. $352,000 


[1005] Source: CPA 0595 F-45 
During 2000, Orca Corp. decided to change 
from the FIFO method of inventory valuation 
to the weighted-average method. Inventory 
balances under each method were as 
follows:

                       FIFO     Weighted-Average
                     -------    ----------------
January 1, 2000      $71,000        $77,000
December 31, 2000     79,000         83,000
Orca's income tax rate is 30%. In its 2000 
financial statements, what amount should 
Orca report as the cumulative effect of this 
accounting change? 

   A. $2,800 

   B. $4,000 

   C. $4,200 

   D. $6,000 


[1006] Source: CPA 1192 I-60 
Milton Co. began operations on January 1, 
1998. On January 1, 2000, Milton changed 
its inventory method from LIFO to FIFO for 
both financial and income tax reporting. If 
FIFO had been used in prior years, Milton's 
inventories would have been higher by 
$60,000 and $40,000 at December 31, 2000 
and 1999, respectively. Milton has a 30% 
income tax rate. What amount should Milton 
report as the cumulative effect of this 
accounting change in its income statement 
for the year ended December 31, 2000? 

   A. $0 

   B. $14,000 

   C. $28,000 

   D. $42,000 


[1007] Source: CPA 0FIN R99-12 
At December 31, 2000, Off-Line Co. 
changed its method of accounting for demo 
costs from writing off the costs over two 
years to expensing the costs immediately. 
Off-Line made the change in recognition of 
an increasing number of demos placed with 
customers that did not result in sales. 
Off-Line had deferred demo costs of 
$500,000 at December 31, 1999, $300,000 
of which were to be written off in 2000 and 
the remainder in 2001. Off-Line's income 
tax rate is 30%. In its 2000 income 
statement, what amount should Off-Line 
report as cumulative effect of a change in 
accounting principle? 

   A. $140,000 

   B. $200,000 

   C. $350,000 

   D. $500,000 


[1008] Source: CPA 0592 II-2 
While preparing its 2000 financial 
statements, Dek Corp. discovered 
computational errors in its 1999 and 1998 
depreciation expense. These errors resulted 
in overstatement of each year's income by 
$25,000, net of income taxes. The following 
amounts were reported in the previously 
issued financial statements:

                            1999      1998
                          --------  --------
Retained earnings, 1/1    $700,000  $500,000
Net income                 150,000   200,000
                          --------  --------
Retained earnings, 12/31  $850,000  $700,000
                          ========  ========
Dek's 2000 net income is correctly reported 
at $180,000. Which of the following 
amounts should be reported as prior-period 
adjustments and net income in Dek's 2000 
and 1999 comparative financial statements?

       Prior-Period
Year    Adjustment    Net Income
----   ------------   ----------
   A. 

   1999           --      $150,000
   2000     $(50,000)      180,000
   B. 

   1999     $(50,000)     $150,000
   2000           --       180,000
   C. 

   1999     $(25,000)     $125,000
   2000           --       180,000
   D. 

   1999           --      $125,000
   2000           --       180,000


[1009] Source: CPA 0FIN R97-6 
Troop Co. frequently borrows from the bank 
to maintain sufficient operating cash. The 
following loans were at a 12% interest rate, 
with interest payable at maturity. Troop 
repaid each loan on its scheduled maturity 
date.

  Date of
    Loan    Amount  Maturity Date  Term of Loan
  -------  -------  -------------  ------------
  11/1/99  $10,000    10/31/00        1 year
   2/1/00   30,000     7/31/00        6 months
   5/1/00   16,000     1/31/01        9 months
Troop records interest expense when the 
loans are repaid. Accordingly, an interest 
expense of $3,000 was recorded in 2000. If 
no correction is made, by what amount 
would 2000 interest expense be 
understated? 

   A. $1,080 

   B. $1,240 

   C. $1,280 

   D. $1,440 


[1010] Source: CPA 0590 II-51 
If net income for 2000 is $350,000, Peters 
should report DEPS as 

   A. $3.20 

   B. $2.95 

   C. $2.92 

   D. $2.75 


[1011] Source: Publisher 
If net income for 2000 is $245,000, Peters 
should report DEPS as 

   A. $2.15 

   B. $2.14 

   C. $2.05 

   D. $2.04 


[1012] Source: Publisher 
If net income for 2000 is $170,000, Peters 
should report DEPS as 

   A. $1.40 

   B. $1.42 

   C. $1.55 

   D. $1.70 


[1013] Source: CPA 0595 F-32 
On September 22, 2000, Yumi Corp. 
purchased merchandise from an unaffiliated 
foreign company for 10,000 units of the 
foreign company's local currency. On that 
date, the spot rate was $.55. Yumi paid the 
bill in full on March 20, 2001, when the 
spot rate was $.65. The spot rate was $.70 
on December 31, 2000. What amount should 
Yumi report as a foreign currency 
transaction loss in its income statement for 
the year ended December 31, 2000? 

   A. $0 

   B. $500 

   C. $1,000 

   D. $1,500 


[1014] Source: CMA 0688 4-20 
Unrealized foreign currency gains and 
losses included in the other comprehensive 
income section of a consolidated balance 
sheet represent 

   A. Foreign currency transaction gains 
   and losses. 

   B. The amount resulting from translating 
   foreign currency financial statements 
   into the reporting currency. 

   C. Remeausurement gains and losses. 

   D. Accounting not in accordance with 
   generally accepted accounting 
   principles. 


[1015] Source: CPA 0593 I-57 
In its 2000 income statement, what amount 
should Maxx report as loss from operations 
of discontinued division Alpha? 

   A. $980,000 

   B. $1,330,000 

   C. $1,400,000 

   D. $1,900,000 


[1016] Source: CPA 0593 I-58 
In its 2000 income statement, what amount 
should Maxx report as loss on disposal of 
division Alpha? 

   A. $210,000 

   B. $300,000 

   C. $560,000 

   D. $800,000 


[1017] Source: CPA 1189 I-46 
On January 1, 2000, Dart, Inc. entered into 
an agreement to sell the assets and product 
line of its Jay Division, considered a 
segment of the business. The sale was 
consummated on December 31, 2000 and 
resulted in a gain on disposition of 
$400,000. The division's operations 
resulted in losses before income tax of 
$225,000 in 2000 and $125,000 in 1999. 
Dart's income tax rate is 30% for both years. 
In a comparative statement of income for 
2000 and 1999, as components under the 
caption discontinued operations, Dart 
should report a gain (loss) amounting to

         2000          1999
      ----------     ---------
   A. 

      $122,500       $(87,500)
   B. 

      $122,500       $0
   C. 

      $(157,500)     $(87,500)
   D. 

      $(157,500)     $0


[1018] Source: CPA 0592 I-57 
On December 31, 1999, Greer Co. entered 
into an agreement to sell its Hart segment's 
assets. On that date, Greer estimated the 
gain from the disposition of the assets in 
2000 would be $700,000 and Hart's 2000 
operating losses would be $200,000. Hart's 
actual operating losses were $300,000 in 
both 1999 and 2000, and the actual gain on 
disposition of Hart's assets in 2000 was 
$650,000. Disregarding income taxes, what 
net gain (loss) should be reported for 
discontinued operations in Greer's 
comparative 2000 and 1999 income 
statements?

         2000         1999
      ----------   ----------
   A. 

      $50,000      $(300,000)
   B. 

      $0           $50,000
   C. 

      $350,000     $(300,000)
   D. 

      $(150,000)   $200,000


[1019] Source: CPA 0593 I-59 
Midway Co. had the following transactions 
during 2000:

   $1.2 million pretax loss on foreign currency exchange caused by
   a major unexpected devaluation by a foreign government
   $500,000 pretax loss from discontinued operations of a division
   $800,000 pretax loss on equipment damaged by a hurricane.  This
   was the first hurricane ever to strike in Midway's area.  Midway
   also received $1 million from its insurance company to replace a
   building, with a carrying value of $300,000, that had been
   destroyed by the hurricane.
What amount should Midway report in its 
2000 income statement as extraordinary loss 
before income taxes? 

   A. $100,000 

   B. $1,300,000 

   C. $1,800,000 

   D. $2,500,000 


[1020] Source: CPA 0FIN R99-12 
At December 31, 2000, Off-Line Co. 
changed its method of accounting for demo 
costs from writing off the costs over two 
years to expensing the costs immediately. 
Off-Line made the change in recognition of 
an increasing number of demos placed with 
customers that did not result in sales. 
Off-Line had deferred demo costs of 
$500,000 at December 31, 1999, $300,000 
of which were to be written off in 2000 and 
the remainder in 2001. Off-Line's income 
tax rate is 30%. In its 2000 income 
statement, what amount should Off-Line 
report as cumulative effect of a change in 
accounting principle? 

   A. $140,000 

   B. $200,000 

   C. $350,000 

   D. $500,000 


[1021] Source: CPA 0FIN R97-6 
Troop Co. frequently borrows from the bank 
to maintain sufficient operating cash. The 
following loans were at a 12% interest rate, 
with interest payable at maturity. Troop 
repaid each loan on its scheduled maturity 
date.

Date of
 Loan     Amount    Maturity Date   Term of Loan
-------   -------   -------------   ------------
11/1/99   $10,000      10/31/00       1 year
 2/1/00    30,000      7/31/00        6 months
 5/1/00    16,000      1/31/01        9 months
Troop records interest expense when the 
loans are repaid. Accordingly, an interest 
expense of $3,000 was recorded in 2000. If 
no correction is made, by what amount 
would 2000 interest expense be 
understated? 

   A. $1,080 

   B. $1,240 

   C. $1,280 

   D. $1,440 


[1022] Source: CPA 0585 I-41 
A wholly owned subsidiary of Ward, Inc. 
has certain expense accounts for the year 
ended December 31, 2000 stated in local 
currency units (LCU) as follows:

                                                  LCU
                                                -------
Depreciation of equipment (related assets
  were purchased Jan. 1, 1998)                  120,000
Provision for doubtful accounts                  80,000
Rent                                            200,000
The exchange rates at various dates are as follows:
                                   Dollar Equivalent
                                       of 1 LCU
                                   -----------------
December 31, 2000                         $.40
Average for year ended 12/31/00            .44
January 1, 1998                            .50
Assume that the LCU is the subsidiary's 
functional currency and that the charges to 
the expense accounts occurred 
approximately evenly during the year. What 
total dollar amount should be included in 
Ward's 2000 consolidated income statement 
to reflect these expenses? 

   A. $160,000 

   B. $168,000 

   C. $176,000 

   D. $183,200 


[1023] Source: CIA 0591 IV-39 
In a business combination, the purchasing 
company's acquisitions on January 1, Year 1 
included $100,000 of debenture bonds 
paying 8% annual interest and maturing 
December 31, Year 3. If the current interest 
rate at January 1, Year 1 is 12%, the 
formula to compute the recorded basis of the 
bonds is 

   A. ($100,000 x the present value of $1 
   at 8% for 3 periods) + ($8,000 x the 
   present value of an ordinary annuity at 
   8% for 3 periods). 

   B. ($100,000 x the present value of $1 
   at 8% for 3 periods) + ($8,000 x the 
   present value of an ordinary annuity at 
   12% for 3 periods). 

   C. ($100,000 x the present value of $1 
   at 12% for 3 periods) + ($8,000 x the 
   present value of an ordinary annuity at 
   12% for 3 periods). 

   D. ($100,000 x the present value of $1 
   at 12% for 3 periods) + ($8,000 x the 
   present value of an ordinary annuity at 
   8% for 3 periods). 


[1024] Source: CIA 0591 IV-34 
When the equity method is used to account 
for the investment in common stock of 
another corporation, the recording of the 
receipt of a cash dividend from the investee 
will result in 

   A. The recognition of investment 
   income. 

   B. A reduction in the investment 
   account. 

   C. An increase in a liability account. 

   D. An increase in a special owners' 
   equity account. 


[1025] Source: CMA 1291 2-7 
APB 16 contains conditions that must be met 
for the pooling-of-interests method of 
accounting to be used. Which one of the 
following is not a condition that must be met 
to use the pooling-of-interests method to 
record a business combination? 

   A. No constituent company may have 
   more than a 10% ownership of the 
   outstanding voting common stock of 
   another constituent company. 

   B. At least 90% of the combining 
   company's outstanding voting common 
   stock must be exchanged for the issuing 
   company's majority voting common 
   stock. 

   C. No additional capital stock must be 
   contingently issuable to former 
   shareholders of a combinee after a 
   combination has been initiated. 

   D. A majority of the officers of the 
   combining company must also be 
   officers in the combined enterprise after 
   the combination. 


[1026] Source: CMA 1292 2-9 
In a business combination that is accounted 
for as a purchase and does not create 
negative goodwill, the assets of the acquired 
company are to be recorded on the books of 
the acquiring company at 

   A. Original cost minus accumulated 
   depreciation. 

   B. Fair value. 

   C. Replacement cost. 

   D. Book value. 


[1027] Source: CMA 0693 2-11 
The disclosures required for a business 
combination concluded in the current year 
and accounted for as a pooling of interests 
include all of the following except 

   A. A description of the stock 
   transaction along with the number of 
   shares of stock issued in the 
   combination. 

   B. The names and descriptions of the 
   enterprises combined, except an 
   enterprise whose name is carried 
   forward to the combined enterprise. 

   C. The names of the finance companies 
   cooperating in or providing funds to the 
   acquiring company to facilitate the 
   acquisition. 

   D. Detailed operational results of the 
   previously separate enterprises for the 
   period before the combination that are 
   included in the current combined net 
   income. 


[1028] Source: CMA 0693 2-30 
The purpose of consolidated financial 
statements is to present the financial 
position and the results of operations of a 
parent company and its subsidiaries as if the 
group were a single company. To 
accomplish this goal, the majority-owned 
subsidiaries must be 

   A. Consolidated. 

   B. Consolidated, unless control is 
   temporary. 

   C. Consolidated, unless the subsidiary 
   engages in "non-homogenous" 
   operations. 

   D. Consolidated, unless the minority 
   interest in the subsidiary is very large. 


[1029] Source: CIA 0591 IV-42 
When a parent corporation acquires a new 
subsidiary and the pooling of interests 
method is used to account for the 
combination, the retained earnings balance 
of the combined entity immediately after 
acquisition is normally equal to 

   A. The retained earnings balance of the 
   parent company immediately prior to 
   the acquisition. 

   B. The sum of the retained earnings 
   balances of the combining companies. 

   C. The sum of the retained earnings 
   balances of the combining companies 
   plus the amount of the goodwill 
   originating from the business 
   combination. 

   D. The retained earnings balance of the 
   parent company immediately prior to 
   acquisition plus the amount of goodwill 
   originating from the business 
   combination. 


[1030] Source: CIA 0591 IV-29 
In preparing consolidated financial 
statements for a parent company and two 
subsidiary companies, a major difference 
between the pooling and purchase 
accounting treatments is that 

   A. The fair values of the assets of the 
   subsidiaries at the time of acquisition 
   are used in purchase accounting but are 
   not used in pooling accounting. 

   B. The fair values of the assets of the 
   subsidiaries at the time of acquisition 
   are used in pooling accounting but are 
   not used in purchase accounting. 

   C. Recognition of consolidated 
   goodwill can result under pooling 
   accounting but not under purchase 
   accounting. 

   D. Comparative financial statements 
   that pertain to pre-combination periods 
   must be restated on the combined basis 
   under purchase accounting but not under 
   the pooling treatment. 


[1031] Source: CIA 0592 IV-54 
An internal auditor is asked to assist the 
organization by reviewing the terms of a 
tentative merger. A review of the financial 
statements of the firm that the organization 
wishes to acquire reveals an asset recorded 
for goodwill. This account indicates that the 
firm under review had previously acquired 
another organization, and the 

   A. Pooling-of-interests method of 
   recording was used, and that assets 
   were valued at their estimated market 
   value at the time of the merger. 

   B. Purchase method of recording was 
   used, and that assets were valued at 
   their estimated market value at the time 
   of the merger. 

   C. Pooling-of-interests method of 
   recording was used, and that the assets 
   of the merging firms were added, 
   without adjustment, at the time of the 
   merger. 

   D. Purchase method of recording was 
   used and that the assets of the merging 
   firms were added, without adjustment, 
   at the time of the merger. 


[1032] Source: CIA 0593 IV-43 
MNO Company purchased all 100,000 
outstanding shares of XYZ Company's stock 
for $40 per share on August 31 of the 
current year. On this date, XYZ's balance 
sheet showed total assets of $5,000,000 and 
total liabilities of $2,000,000. The fair 
value of XYZ's identifiable assets on this 
date was $550,000 greater than their 
carrying amount. The amount that should be 
reported on MNO's consolidated balance 
sheet on August 31 of the current year for 
goodwill is 

   A. $450,000 

   B. $550,000 

   C. $1,000,000 

   D. $3,000,000 


[1033] Source: CIA 1192 IV-35 
A business combination during the current 
year resulted in purchased goodwill of 
$200,000. Subsequently, the combined entity 
spent an additional $80,000 during the 
current year on activities that were designed 
to maintain the collective goodwill of the 
combined entity. Management looks upon 
goodwill as having an indefinite life. The 
amount of goodwill to be capitalized during 
the current year is 

   A. $120,000 

   B. $80,000 

   C. $200,000 

   D. $280,000 


[1034] Source: CMA 1286 4-22 
Assuming that this business combination is 
appropriately accounted for as a purchase, 
the amount charged to the expenses of 
business combination account is 

   A. $40,000. 

   B. $60,000. 

   C. $100,000. 

   D. $120,000. 


[1035] Source: CMA 1286 4-23 
Assuming that this business combination is 
appropriately accounted for as a pooling of 
interests, the amount charged to the expenses 
of business combination account is 

   A. $40,000 

   B. $60,000 

   C. $100,000 

   D. $220,000 


[1036] Source: CMA 0695 2-7 
Under accounting for consolidations, the 
purchase method is characterized by all of 
the following attributes except that the 

   A. Assets and liabilities are recorded at 
   fair value or the purchase price of the 
   acquired company, whichever is less. 

   B. Excess of the purchase price over the 
   fair value of identifiable assets and 
   liabilities is recorded as goodwill. 

   C. Goodwill of the acquired company is 
   always carried forward to the balance 
   sheet of the consolidated entity. 

   D. Fair value of the shares issued by the 
   acquiring company is added to the 
   paid-in capital of the consolidated 
   entity. 


[1037] Source: CMA 0695 2-8 
Under accounting for consolidations, the 
pooling method is characterized by all of the 
following attributes except that the 

   A. Assets and liabilities of the acquired 
   company are recorded at book value for 
   consolidation reporting purposes. 

   B. Business combination expenses for 
   acquiring a company under the pooling 
   method are capitalized. 

   C. Newly created goodwill, rather than 
   goodwill that was already on the books 
   of the subsidiary, is not recognized. 

   D. Retained earnings of the acquired 
   company are carried forward to the 
   consolidated financial statements. 


[1038] Source: CMA 0695 2-9 
Under the purchase method of accounting, 
the value of long-lived assets of the 
acquired company 

   A. Is the book value in the ledger and 
   the consolidated financial statements. 

   B. Is the fair value in the ledger and 
   book value in the consolidated financial 
   statements. 

   C. Is the current fair value. 

   D. Depends upon the purchase price 
   paid for the assets on the date of 
   acquisition. 


[1039] Source: CMA 1291 2-8 
APB 16 states the principles to be followed 
in allocating the cost of an acquired 
company when using the purchase method 
for a business combination. If the current 
fair value of the net assets acquired exceeds 
the total cost, the difference should be 

   A. Added directly to shareholders' 
   equity at the date of acquisition. 

   B. Treated as goodwill to be amortized 
   over the period benefitted, not to 
   exceed 40 years. 

   C. Allocated on a pro rata basis to the 
   assets acquired. 

   D. Applied pro rata to reduce, but not 
   below zero, the amounts initially 
   assigned to noncurrent assets other than 
   long-term investments in marketable 
   securities. 


[1040] Source: CMA 0687 3-13 
Assuming the business combination is 
appropriately accounted for as a purchase, 
consolidated depreciation expense reported 
for the year of the combination would have 
been 

   A. $400,000. 

   B. $500,000. 

   C. $510,000. 

   D. $460,000. 


[1041] Source: CMA 0687 3-14 
Assuming the business combination is 
appropriately accounted for as a pooling of 
interests, consolidated depreciation expense 
reported for the year of the combination 
would have been 

   A. $400,000. 

   B. $500,000. 

   C. $510,000. 

   D. $520,000. 


[1042] Source: CMA 1287 4-12 
Panco, Inc. owns 90% of the voting stock of 
Spany Corporation. After consolidated 
financial statements have been prepared, the 
entries to eliminate intercompany payables 
and receivables will 

   A. Be reflected only in the accounts of 
   Panco. 

   B. Be reflected only in the accounts of 
   Spany. 

   C. Be reflected in the accounts of both 
   Panco and Spany. 

   D. Not be reflected in the accounts of 
   either company. 


[1043] Source: CMA 1287 4-13 
Allocation of the differential in connection 
with the investment elimination for 
preparing consolidated statements is 
unnecessary if 

   A. The elimination entry is being made 
   in the first year after the business 
   combination. 

   B. The business combination was 
   recorded as a pooling of interests. 

   C. The cost method of accounting for 
   the investment has been used. 

   D. The equity method of accounting for 
   the investment has been used. 


[1044] Source: CMA 0688 4-22 
When preparing consolidated financial 
statements, the entity being accounted for is 
the 

   A. Legal entity. 

   B. Parent company. 

   C. Minority interest. 

   D. Economic entity. 


[1045] Source: CMA 0688 4-23 
In the preparation of consolidated financial 
statements, the investment in subsidiary 
account should not be eliminated against the 

   A. Retained earnings of the subsidiary. 

   B. Par value of capital stock of the 
   subsidiary. 

   C. Paid-in capital above par value of 
   the subsidiary. 

   D. Intercompany accounts receivable. 


[1046] Source: CMA 0688 4-24 
In the process of preparing consolidated 
financial statements, which one of the 
following items does not need to be 
eliminated? 

   A. Intercompany profit in beginning 
   inventory. 

   B. Intercompany profit on intercompany 
   sale of a fixed asset. 

   C. Intercompany dividends 
   receivable/payable. 

   D. Intercompany profit on inventory 
   sold to a nonaffiliated company. 


[1047] Source: CMA 0688 4-25 
If a parent company purchases a 90% 
interest in a subsidiary accounted for by the 
"entity theory," and if the investment cost 
exceeds book value of the subsidiary's net 
assets, the minority interest will 

   A. Be the same amount as if the parent 
   company used the proprietary theory in 
   preparing consolidated financial 
   statements. 

   B. Be less in amount than if the parent 
   company used the proprietary theory in 
   preparing consolidated financial 
   statements. 

   C. Be more in amount than if the parent 
   company used the proprietary theory in 
   preparing consolidated financial 
   statements. 

   D. Not be separately disclosed in the 
   consolidated financial statements. 


[1048] Source: CMA 1288 4-26 
Palmer, Inc. purchased 75% of the 
outstanding shares of Weller, Inc. for 
$3,900,000. At that time, Weller had 
$7,200,000 of total recorded liabilities, and 
total recorded assets of $10,500,000, while 
the fair value of all Weller's assets was 
$11,800,000. The amount of goodwill 
purchased by Palmer, Inc. is 

   A. $1,425,000. 

   B. $1,500,000. 

   C. $975,000. 

   D. $450,000. 


[1049] Source: CMA 0693 2-12 
When issuing consolidated financial 
statements, 

   A. The notes must show how the gross 
   consolidated income tax return expense 
   is allocated to the entities comprising 
   the consolidation. 

   B. The consolidation policy must be 
   disclosed either in the body of the 
   financial statements or in a note to the 
   financial statements. 

   C. Parent company statements and 
   consolidated statements should not be 
   presented in the same set of statements 
   in a comparative format. 

   D. The consolidation policy must be 
   presented in the notes to the financial 
   statements as the first item in the 
   accounting policies note. 


[1050] Source: CMA 0687 3-3 
SFAS 14, Financial Reporting for Segments 
of a Business Enterprise, requires certain 
minimum disclosures for the reportable 
segments of diversified companies. All of 
the following are included in the operating 
profit (loss) of a reportable segment except 

   A. Revenue from unaffiliated 
   customers. 

   B. Intersegment sales. 

   C. Interest expense. 

   D. Indirect operating expenses that are 
   incurred by the company and can be 
   allocated on a reasonable basis to all 
   segments for whose benefit they were 
   incurred. 


[1051] Source: Publisher 
A business combination may be legally 
structured as a merger, a consolidation, or 
an acquisition. Which of the following 
describes a business combination that is 
legally structured as a merger? 

   A. The surviving company is one of the 
   two combining companies. 

   B. The surviving company is neither of 
   the two combining companies. 

   C. An investor-investee relationship is 
   established. 

   D. A parent-subsidiary relationship is 
   established. 


[1052] Source: CMA 1293 1-6 
A horizontal merger is a merger between 

   A. Two or more firms from different 
   and unrelated markets. 

   B. Two or more firms at different stages 
   of the production process. 

   C. A producer and its supplier. 

   D. Two or more firms in the same 
   market. 


[1053] Source: Publisher 
Which type of acquisition does not require 
shareholders to have a formal vote to 
approve? 

   A. Merger. 

   B. Acquisition of stock. 

   C. Acquisition of all of the firm's 
   assets. 

   D. Consolidation. 


[1054] Source: Publisher 
When firm B merges with firm C to create 
firm BC, what has occurred? 

   A. A tender offer. 

   B. An acquisition of assets. 

   C. An acquisition of stock. 

   D. A consolidation. 


[1055] Source: Publisher 
All of the following are true of mergers 
except 

   A. Mergers are legally straightforward. 

   B. Approval by shareholder vote of 
   each firm involved in the merger is 
   required. 

   C. The acquiring firm maintains its 
   name and identity in a merger. 

   D. A merger may never result from a 
   public offer to the shareholders of the 
   target firm to buy its shares directly. 


[1056] Source: Publisher 
Which of the following is a combination 
involving the absorption of one firm by 
another? 

   A. Merger. 

   B. Consolidation. 

   C. Proxy fight. 

   D. Acquisition. 


[1057] Source: Publisher 
The merger of General Motors and Ford 
would be categorized as a 

   A. Diversifying merger. 

   B. Horizontal merger. 

   C. Conglomerate merger. 

   D. Vertical merger. 


[1058] Source: Publisher 
When choosing a merger over an acquisition 
of stock to accomplish a business 
combination, which of the following is 
irrelevant to the decision? 

   A. Dealing directly with shareholders 
   in an acquisition of stock. 

   B. Absence of tender by some minority 
   shareholders in a tender offer. 

   C. Resistance to an acquisition by the 
   target's management usually causing an 
   increase in the stock price. 

   D. Whether the companies are in the 
   same industry. 


[1059] Source: Publisher 
The merger of an oil refinery by a chain of 
gasoline stations is an example of a 

   A. Conglomerate merger. 

   B. White knight. 

   C. Vertical merger. 

   D. Horizontal merger. 


[1060] Source: Publisher 
All of the following statements about 
acquisition of stock through tender offers is 
true except 

   A. Shareholder meetings do not need to 
   be held. 

   B. A vote is not required. 

   C. The acquiring firm directly deals 
   with the target firm's shareholders. 

   D. All of the outstanding stock of the 
   target firm must be tendered. 


[1061] Source: CMA 1295 1-25 
The acquisition of a retail shoe store by a 
shoe manufacturer is an example of 

   A. Vertical integration. 

   B. A conglomerate. 

   C. Market extension. 

   D. Horizontal integration. 


[1062] Source: Publisher 
Business combinations are accomplished 
either through a direct acquisition of assets 
and liabilities by a surviving corporation or 
by stock investments in one or more 
companies. A parent-subsidiary relationship 
always arises from a 

   A. Tax-free reorganization. 

   B. Vertical combination. 

   C. Horizontal combination. 

   D. Greater than 50% stock investment 
   in another company. 


[1063] Source: Publisher 
What form of accounting is used when the 
assets of the acquired firm are added to the 
assets of the acquiring firm at book value 
after business combination? 

   A. Consolidation. 

   B. Aggregation. 

   C. Purchase. 

   D. Pooling. 


[1064] Source: Publisher 
Which form of accounting for a business 
combination must result in recognition of 
goodwill when the amount paid exceeds the 
fair value of the identifiable net assets? 

   A. Consolidation. 

   B. Aggregation. 

   C. Purchase. 

   D. Pooling. 


[1065] Source: Publisher 
Which of the following is a true statement 
about the accounting treatment of business 
combinations? 

   A. The excess amount paid over the 
   book value of the target's assets is 
   added to retained earnings under the 
   pooling method. 

   B. The purchase method results in 
   higher taxes on the transaction. 

   C. The purchase method is preferable to 
   the pooling method because it 
   eliminates any minority interest. 

   D. Purchase accounting results in a 
   write-up of the assets of the acquired 
   firm when their book value is less than 
   fair value. 


[1066] Source: CMA 0697 2-21 
In a business combination that is accounted 
for as a purchase and does not create 
negative goodwill, the acquiring company 
records the assets of the acquired company 
at the 

   A. Original cost. 

   B. Original cost minus accumulated 
   depreciation. 

   C. Fair market value. 

   D. Book value. 


[1067] Source: Publisher 
On September 1, 1999, Mickey Corporation 
acquired the net assets of Smith 
Corporation. Smith had a fair value of 
$10,992,000 on the acquisition date. The 
purchase price was paid in the form of $8 
million of cash and $4 million of notes 
payable. Mickey's management believes that 
the goodwill acquired has an indefinite life 
and should be amortized over the longest 
allowable period. During the December 31, 
2001 year-end audit after all adjusting 
entries have been made, the remaining 
goodwill is determined to be worthless. The 
amount of the write-off as of December 31, 
2001 should be 

   A. $1,008,000 

   B. $957,600 

   C. $932,400 

   D. $949,200 


[1068] Source: Publisher 
SFAS 131, Disclosures about Segments of 
an Enterprise and Related Information, 
requires reporting of information about 

   A. Industry segments. 

   B. Operating segments. 

   C. For-profit and not-for-profit 
   organizations. 

   D. Public and nonpublic enterprises. 


[1069] Source: Publisher 
Company M has identified four operating 
segments. Which of the following segments 
meet(s) the quantitative threshold for 
reported profit or loss?

     Segment      Reported Profit (Loss)
     -------      ----------------------
        S            $  90,000
        T             (100,000)
        U              910,000
        V             (420,000)
   A. Segment U only. 

   B. Segments U and V. 

   C. Segments T, U, and V. 

   D. Segments S, T, U, and V. 


[1070] Source: Publisher 
In accordance with SFAS 131, Disclosures 
about Segments of an Enterprise and Related 
Information, what ordinarily must be 
reported for each reportable segment? 

   A. Segment cash flow. 

   B. Interest revenue net of interest 
   expense. 

   C. A measure of profit or loss. 

   D. External revenues from export sales 
   if they are 10% or more of consolidated 
   sales. 


[1071] Source: Publisher 
For each of the following groups of 
customers, purchases amounted to 10% or 
more of the revenue of a publicly held 
company. For which of these groups must 
the company disclose information about 
major customers? 

   A. Federal governmental agencies, 6%; 
   state governmental agencies, 4%. 

   B. French governmental agencies, 6%; 
   German governmental agencies, 4%. 

   C. Parent company, 6%; subsidiary of 
   parent company, 4%. 

   D. Federal governmental agencies, 6%; 
   foreign governmental agencies, 4%. 


[1072] Source: CPA 0590 II-56 
Correy Corp. and its divisions are engaged 
solely in manufacturing operations. The 
following data (consistent with prior years' 
data) pertain to the industries in which 
operations were conducted for the year 
ended December 31:

Operating         Total                         Assets
 Segment         Revenue         Profit        at 12/31
---------      -----------     ----------     -----------
    A          $10,000,000     $1,750,000     $20,000,000
    B            8,000,000      1,400,000      17,500,000
    C            6,000,000      1,200,000      12,500,000
    D            3,000,000        550,000       7,500,000
    E            4,250,000        675,000       7,000,000
    F            1,500,000        225,000       3,000,000
               -----------     ----------     -----------
               $32,750,000     $5,800,000     $67,500,000
               ===========     ==========     ===========
In its segment information for the year, how 
many reportable operating segments does 
Correy have? 

   A. Three. 

   B. Four. 

   C. Five. 

   D. Six. 


[1073] Source: CPA 0590 II-54 
Hyde Corp. has three manufacturing 
divisions, each of which has been 
determined to be a reportable operating 
segment. In the year just ended, Clay 
division had sales of $3,000,000, which 
was 25% of Hyde's total sales, and had 
traceable operating costs of $1,900,000. 
Hyde incurred operating costs of $500,000 
that were not directly traceable to any of the 
divisions. In addition, Hyde incurred 
interest expense of $300,000. The 
calculation of the measure of segment profit 
or loss reviewed by Hyde's chief operating 
decision maker does not include an 
allocation of interest expense incurred by 
Hyde. However, it does include traceable 
costs. It also includes nontraceable 
operating costs allocated based on the ratio 
of divisional sales to aggregate sales. In 
reporting segment information, what amount 
should be shown as Clay's profit for the 
year? 

   A. $875,000 

   B. $900,000 

   C. $975,000 

   D. $1,100,000 


[1074] Source: Publisher 
To the extent the hedge is effective, a loss 
arising from the decrease in fair value of a 
derivative is included in current earnings if 
the derivative qualifies and is designated as 
a

      Fair-value    Cash-flow
        Hedge         Hedge
      ----------    ---------
   A. 

         Yes           No
   B. 

         No            Yes
   C. 

         Yes           Yes
   D. 

         No            No


[1075] Source: Publisher 
Herbert Corporation was a party to the 
following transactions during November and 
December 2001. Which of these transactions 
most likely resulted in an investment in a 
derivative subject to the accounting 
prescribed by SFAS 133, Accounting for 
Derivative Instruments and Hedging 
Activities? 

   A. Purchased 1,000 shares of common 
   stock of a public corporation based on 
   the assumption that the stock would 
   increase in value. 

   B. Purchased a term life insurance 
   policy on the company's chief executive 
   officer to protect the company from the 
   effects of an untimely demise of this 
   officer. 

   C. Agreed to cosign the note of its 
   100%-owned subsidiary to protect the 
   lender from the possibility that the 
   subsidiary might default on the loan. 

   D. Based on its forecasted need to 
   purchase 300,000 bushels of wheat in 3 
   months, entered into a 3-month forward 
   contract to purchase 300,000 bushels of 
   wheat to protect itself from changes in 
   wheat prices during the period. 


[1076] Source: Publisher 
Garcia Corporation has entered into a 
binding agreement with Hernandez Company 
to purchase 400,000 pounds of Colombian 
coffee at $2.53 per pound for delivery in 90 
days. This contract is accounted for as a 

   A. Financial instrument. 

   B. Firm commitment. 

   C. Forecasted transaction. 

   D. Fair value hedge. 


[1077] Source: Publisher 
On October 1, 2001, Bordeaux, Inc., a 
calendar-year-end firm, invested in a 
derivative designed to hedge the risk of 
changes in fair value of certain assets, 
currently valued at $1.5 million. The 
derivative is structured to result in an 
effective hedge. However, some 
ineffectiveness may result. On December 
31, 2001, the fair value of the hedged assets 
has decreased by $350,000; the fair value of 
the derivative has increased by $325,000. 
Bordeaux should recognize a net effect on 
2001 earnings of 

   A. $0 

   B. $25,000 

   C. $325,000 

   D. $350,000 


[1078] Source: Publisher 
On March 31, the mid-June commodity 
exchange futures price is $0.85/lb. In the 
March 31 statement of financial position, the 
company should record the value of the 
futures contracts as a(n) 

   A. $100,000 asset. 

   B. $100,000 liability. 

   C. $4,250,000 liability. 

   D. $4,250,000 asset. 


[1079] Source: Publisher 
If, on March 31, the company concluded that 
the hedge was 100% effective, the company 
should record the value of the hedged 
copper inventory in the March 31 statement 
of financial position at 

   A. $4,350,000 

   B. $4,250,000 

   C. $3,000,000 

   D. $2,900,000 


[1080] Source: Publisher 
At the beginning of period 1, Forecast 
Corporation enters into a qualifying cash 
flow hedge of a transaction it expects to 
occur at the beginning of period 4. Forecast 
assesses hedge effectiveness by comparing 
the change in present value (PV) of the 
expected cash flows associated with the 
forecasted transaction with all of the 
hedging derivative's gain or loss (change in 
fair value). The change in those cash flows 
that occurs for any reason has been 
designated as the hedged risk. The following 
information about the periodic changes 
hedging relationship is available:

            Change in       Change in PV of Expected
          Fair Value of       Cash Flows from the
Period    the Derivative     Forecasted Transaction
------    --------------    ------------------------
  1          $50,000              $(48,000)
  2           47,000               (51,000)
  3          (81,000)               80,000
Given that the hedge is effective to the extent 
it offsets the change in the present value of 
the expected cash flows on the forecasted 
transaction, Forecast should 

   A. Recognize a loss of $2,000 in 
   earnings for period 1. 

   B. Report a balance in other 
   comprehensive income (OCI) of 
   $16,000 at the end of period 3. 

   C. Recognize a gain of $47,000 in 
   earnings for period 2. 

   D. Record other comprehensive income 
   of $97,000 for period 2. 


[1081] Source: Publisher 
According to SFAS 133, Accounting for 
Derivative Instruments and Hedging 
Activities, as amended by SFAS 138, 
Accounting for Certain Derivative 
Instruments and Certain Hedging Activities, 
the effective portion of a loss associated 
with a change in fair value of a derivative 
instrument shall be reported as a component 
of other comprehensive income only if the 
derivative is appropriately designated as a 

   A. Cash flow hedge of the foreign 
   currency exposure of a forecasted 
   transaction. 

   B. Fair value hedge of the foreign 
   currency exposure of an unrecognized 
   firm commitment. 

   C. Fair value hedge of the foreign 
   currency exposure of a recognized asset 
   or liability for which a foreign currency 
   transaction gain or loss is recognized in 
   earnings. 

   D. Speculation in a foreign currency. 


[1082] Source: Publisher 
The effective portion of a gain arising from 
an increase in the fair value of a derivative 
is included in earnings in the period of 
change if the derivative is appropriately 
designated and qualifies as a hedge of 

   A. A foreign currency exposure of a net 
   investment in a foreign operation. 

   B. A foreign currency exposure of a 
   forecasted transaction. 

   C. A foreign currency exposure of an 
   available-for-sale security. 

   D. The variable cash flows of a 
   forecasted transaction. 


[1083] Source: Publisher 
The contract signed by Hector Corp. to 
purchase the equipment from Diego Corp. 
meets the definition of a

         Firm     Forecasted
      Commitment  Transaction
      ---------   -----------
   A. 

         Yes          Yes
   B. 

         No           No
   C. 

         Yes          No
   D. 

         No           Yes


[1084] Source: Publisher 
What are the amounts reported for the 
forward contract receivable and the firm 
commitment liability at December 31, 2001 
and February 15, 2002 (prior to the 
settlement of the contract)?

      12/31/01   02/15/02
      --------   --------
   A. 

      $10,000    $40,000
   B. 

      $19,600    $30,000
   C. 

      $19,600    $10,400
   D. 

      $20,000    $30,000


[1085] Source: Publisher 
As a result of this hedging transaction, at 
what amount should Hector recognize the 
equipment on February 15, 2002? 

   A. $350,000 

   B. $360,000 

   C. $390,000 

   D. $420,000 


[1086] Source: Publisher 
On October 1, 2001, Weeks Co., a 
calendar-year-end U.S. company, forecasts 
that, near the end of March 2002, Sullivan 
Corp., a foreign entity, will purchase 50,000 
gallons of Weeks's primary product for 
FC500,000. Sullivan has not firmly 
committed to the purchase. However, based 
on Sullivan's purchasing pattern, Weeks 
believes that the sale is probable. Weeks's 
risk-management policy includes avoiding 
foreign currency exposure through the use of 
foreign currency forward contracts. Thus, on 
October 1, Weeks enters into a 6-month 
foreign currency forward contract to sell 
FC500,000 to a dealer on March 31. Weeks 
designates the contract as a hedge and 
determines that hedge effectiveness will be 
based on changes in forward rates. The 
following information is available:

                                          Incremental
                                          Discounted
                          Value of         Changes in
            Value of      FC500,000     Value of Forward
            FC500,000     Based on       Contract Based
            Based on    Forward Rates    on Changes in
           Spot Rates   for 03/31/02      Forward Rates
           ----------   -------------   ----------------
10/01/01    $570,000      $500,000          $0
12/31/01    $540,000      $490,000          $9,800
03/31/02    $475,000      $475,000          $15,200
At what amounts should Weeks record the 
forward contract on December 31, 2002 and 
March 31, 2001?

      12/31/01     03/31/02
      --------     --------
   A. 

      $9,800       $25,000
   B. 

      $10,000      $25,000
   C. 

      $540,000     $475,000
   D. 

      $490,000     $475,000


[1087] Source: CPA 0595 F-54 
Poe, Inc. acquired 100% of Shaw Co. in a 
business combination on September 30, 
2000. During 2000, Poe declared quarterly 
dividends of $25,000, and Shaw declared 
quarterly dividends of $10,000. Under each 
of the following methods of accounting for 
the business combination, what amount 
should be reported as dividends declared in 
the December 31, 2000 consolidated 
statement of retained earnings?

        Purchase  Pooling of Interests
        --------  --------------------
   A. 

        $100,000       $130,000
   B. 

        $100,000       $140,000
   C. 

        $130,000       $130,000
   D. 

        $130,000       $140,000


[1088] Source: CPA 0593 I-7 
If the business combination is accounted for 
as a pooling of interests, what amount of 
retained earnings would Pane report in its 
June 30, 2000 consolidated balance sheet? 

   A. $5,200,000 

   B. $4,450,000 

   C. $3,525,000 

   D. $3,250,000 


[1089] Source: CPA 0593 I-8 
If the business combination is accounted for 
as a purchase, what amount of retained 
earnings would Pane report in its June 30, 
2000 consolidated balance sheet? 

   A. $5,200,000 

   B. $4,450,000 

   C. $3,525,000 

   D. $3,250,000 


[1090] Source: CPA 1189 I-10 
Assume that the merger qualifies for 
treatment as a purchase. In the December 31, 
2000 consolidated balance sheet, additional 
paid-in capital should be reported at 

   A. $950,000 

   B. $1,300,000 

   C. $1,450,000 

   D. $2,900,000 


[1091] Source: CPA 1189 I-11 
Assume that the merger qualifies for 
treatment as a pooling of interests. In the 
December 31, 2000 consolidated balance 
sheet, additional paid-in capital should be 
reported at 

   A. $950,000 

   B. $1,300,000 

   C. $1,450,000 

   D. $2,900,000 


[1092] Source: CPA 1194 F-56 
Sun, Inc. is a wholly owned subsidiary of 
Patton, Inc. On June 1, 2000, Patton 
declared and paid a $1 per share cash 
dividend to shareholders of record on May 
15, 2000. On May 1, 2000, Sun bought 
10,000 shares of Patton's common stock for 
$700,000 on the open market, when the book 
value per share was $30. What amount of 
gain should Patton report from this 
transaction in its consolidated income 
statement for the year ended December 31, 
2000? 

   A. $0 

   B. $390,000 

   C. $400,000 

   D. $410,000 


[1093] Source: CPA 0595 F-50 
What was the amount of intercompany sales 
from Pare to Shel during 2000? 

   A. $6,000 

   B. $12,000 

   C. $58,000 

   D. $64,000 


[1094] Source: CPA 0595 F-51 
At December 31, 2000, what was the 
amount of Shel's payable to Pare for 
intercompany sales? 

   A. $6,000 

   B. $12,000 

   C. $58,000 

   D. $64,000 


[1095] Source: CPA 0595 F-52 
In Pare's consolidating worksheet, what 
amount of unrealized intercompany profit 
was eliminated? 

   A. $6,000 

   B. $12,000 

   C. $58,000 

   D. $64,000 


[1096] Source: CPA 0593 I-9 
Clark Co. had the following transactions 
with affiliated parties during 2000:

  -  Sales of $50,000 to Dean, Inc., with $20,000 gross profit.  Dean
     had $15,000 of this inventory on hand at year-end.  Clark owns a
     15% interest in Dean and does not exert significant influence.
  -  Purchases of raw materials totaling $240,000 from Kent Corp., a
     wholly owned subsidiary.  Kent's gross profit on the sale was
     $48,000.  Clark had $60,000 of this inventory remaining on
     December 31, 2000.
Before eliminating entries, Clark had 
consolidated current assets of $320,000. 
What amount should Clark report in its 
December 31, 2000 consolidated balance 
sheet for current assets? 

   A. $320,000 

   B. $314,000 

   C. $308,000 

   D. $302,000 


[1097] Source: CPA 1195 F-8 
Terra Co.'s total revenues from its three 
operating segments were as follows:

              Sales to
              External   Intersegment    Total
Segment       Customers     Sales      Revenues
-------       ---------  ------------  --------
Lion          $ 70,000     $30,000     $100,000
Monk            22,000       4,000       26,000
Nevi             8,000      16,000       24,000
-------       ---------  ------------  --------
Combined      $100,000     $50,000     $150,000
Elimination       -        (50,000)     (50,000)
-------       ---------  ------------  --------
Consolidated  $100,000     $   -       $100,000
              =========  ============  ========
Which operating segment(s) is (are) deemed 
to be (a) reportable segment(s)? 

   A. None. 

   B. Lion only. 

   C. Lion and Monk only. 

   D. Lion, Monk, and Nevi. 


[1098] Source: Publisher 
A common argument against corporate 
involvement in socially responsible 
behavior is that 

   A. It encourages government intrusion 
   in decision making. 

   B. As a legal person, a corporation is 
   accountable for its conduct. 

   C. It creates goodwill. 

   D. In a competitive market, such 
   behavior incurs costs that place the 
   company at a disadvantage. 


[1099] Source: CPA 0591 II-13 
On August 31, 2000, Wood Corp. issued 
100,000 shares of its $20 par value common 
stock for the net assets of Pine, Inc., in a 
business combination accounted for by the 
purchase method. The market value of 
Wood's common stock on August 31 was 
$36 per share. Wood paid a fee of $160,000 
to the consultant who arranged this 
acquisition. Costs of registering and issuing 
the equity securities amounted to $80,000. 
No goodwill was involved in the purchase. 
What amount should Wood capitalize as the 
cost of acquiring Pine's net assets? 

   A. $3,600,000 

   B. $3,680,000 

   C. $3,760,000 

   D. $3,840,000 


[1100] Source: CPA 0596 F-3 
Mega, Inc. was organized to consolidate the 
resources of Lone Co. and Small Co. in a 
business combination accounted for by the 
pooling-of-interests method. Mega issued 
31,000 shares of its $10 par voting stock in 
exchange for all the outstanding capital 
stock of Lone and Small. The equity 
accounts of Lone and Small on the date of 
the exchange were

                               Lone      Small      Total
                             --------   --------   --------
Common stock                 $100,000   $200,000   $300,000
Additional paid-in capital     12,500     17,500     30,000
Retained earnings              60,000    105,000    165,000
                             --------   --------   --------
                             $172,500   $322,500   $495,000
                             ========   ========   ========
What is the balance in Mega's additional 
paid-in capital account immediately after the 
business combination? 

   A. $0 

   B. $20,000 

   C. $30,000 

   D. $195,000 


[1101] Source: CPA 0593 I-14 
Wright Corp. has several subsidiaries that 
are included in its consolidated financial 
statement. In its December 31, 2000 trial 
balance, Wright had the following 
intercompany balances before eliminations:

                                        Debit       Credit
                                       --------    --------
Current receivable due from Main Co.   $ 32,000
Noncurrent receivable from Main         114,000
Cash advance to Corn Corp.                6,000
Cash advance from King Co.                         $ 15,000
Intercompany payable to King                        101,000
In its December 31, 2000 consolidated 
balance sheet, what amount should Wright 
report as intercompany receivables? 

   A. $152,000 

   B. $146,000 

   C. $36,000 

   D. $0 


[1102] Source: CMA 0696 2-6 
The 12 conditions established by the 
Accounting Principles Board (APB) that 
must be present in order to use the pooling 
accounting method for business 
combinations include all of the following 
except 

   A. Each of the constituent companies is 
   independent of the other companies. 

   B. The constituent companies combine 
   in a single transaction or in accordance 
   with a specific plan within 1 year of 
   initiating the plan. 

   C. None of the constituent companies 
   change the equity interest of their voting 
   common stock either within 2 years of 
   initiating the combination or between 
   the date of initiation and consummation 
   of the combination. 

   D. The combined enterprise agrees to 
   retire or acquire all of the common 
   stock issued to effect the combination. 


[1103] Source: CPA 1195 F-49 
In its December 31, 2000, consolidated 
statement of retained earnings, what amount 
should Pare report as dividends paid? 

   A. $5,000 

   B. $25,000 

   C. $26,250 

   D. $30,000 


[1104] Source: CPA 1195 F-50 
In Pare's December 31, 2000 consolidated 
balance sheet, what amount should be 
reported as minority interest in net assets? 

   A. $0 

   B. $30,000 

   C. $45,000 

   D. $105,000 


[1105] Source: CPA 1195 F-51 
In its December 31, 2000 consolidated 
balance sheet, what amount should Pare 
report as common stock? 

   A. $50,000 

   B. $100,000 

   C. $137,500 

   D. $150,000 


[1106] Source: Publisher 
On December 1, 2001, Lombardi Company, 
a calendar-year-end firm, enters into a 
derivative contract designed to hedge the 
risk of cash flows associated with the 
forecast future sale of 300,000 bushels of 
wheat. The anticipated sales date is 
February 1, 2002. The notional amount of 
the derivative contract is 300,000 bushels, 
the underlying is the price of the same 
variety and grade of wheat that Lombardi 
expects to sell, and the settlement date of the 
derivative is February 1, 2002. The fair 
value of the derivative contract on 
December 31, 2001 increased by $30,000, 
an amount equal to the decrease in the fair 
value of the wheat. The fair value of the 
derivative contract had increased by an 
additional $25,000 on February 1, 2002, 
also an amount equal to the decrease in the 
fair value of the wheat. On February 1, the 
wheat was sold and the derivative contract 
was settled. The gains attributable to the 
increase in the fair value of the derivative 
that should be recognized in 2001 and 2002 
earnings, respectively, are

        2001      2002
      -------    -------
   A. 

      $30,000    $25,000
   B. 

      $0         $55,000
   C. 

      $55,000    $0
   D. 

      $0         $0


[1107] Source: Publisher 
All or a portion of a loss associated with a 
change in fair value of a derivative 
instrument may be reported in other 
comprehensive income. This accounting 
method is applied when the derivative is 
appropriately designated as a 

   A. Hedge of a foreign currency 
   exposure of a forecasted 
   foreign-currency-denominated 
   transaction. 

   B. Hedge of a foreign currency 
   exposure of a 
   foreign-currency-denominated firm 
   commitment. 

   C. Hedge of a foreign currency 
   exposure of an available-for-sale 
   security. 

   D. Speculation in a foreign currency. 


=================================================================================================
=================================================================================================
[1] Source: CMA 0688 3-22 

   Answer (A) is incorrect because an 
   unqualified opinion can be expressed 
   only when statements are fairly 
   presented in accordance with GAAP. 

   Answer (B) is incorrect because a 
   qualified opinion is expressed when, 
   except for the matter to which the 
   qualification relates, the financial 
   statements are presented fairly, in all 
   material respects, in conformity with 
   GAAP. 

   Answer (C) is incorrect because an 
   except for opinion is expressed when, 
   except for the matter to which the 
   qualification relates, the financial 
   statements are presented fairly, in all 
   material respects, in conformity with 
   GAAP. 

   Answer (D) is correct. An auditor must 
   express an adverse opinion when the 
   financial statements taken as a whole 
   are not presented fairly in conformity 
   with GAAP. "An adverse opinion states 
   that the financial statements do not 
   present fairly the financial position or 
   the results of operations or cash flows 
   in conformity with GAAP" (AU 508). 


[2] Source: Publisher 

   Answer (A) is correct. The fourth 
   generally accepted auditing standard of 
   reporting states: The report shall either 
   contain an expression of opinion 
   regarding the financial statements, taken 
   as a whole, or an assertion to the effect 
   that an opinion cannot be expressed. 
   When an overall opinion cannot be 
   expressed, the reasons therefor should 
   be stated. In all cases in which an 
   auditor's name is associated with 
   financial statements, the report should 
   contain a clear-cut indication of the 
   character of the auditor's work, if any, 
   and the degree of responsibility the 
   auditor is taking. 

   Answer (B) is incorrect because, 
   according to the third reporting 
   standard, "Informative disclosures in 
   the financial statements are to be 
   regarded as reasonably adequate unless 
   otherwise stated in the report." 

   Answer (C) is incorrect because, 
   according to the second reporting 
   standard, "The report shall identify 
   circumstances in which GAAP have not 
   been consistently observed in the 
   current period in relation to the 
   preceding period." 

   Answer (D) is incorrect because, 
   according to the fourth reporting 
   standard, "In all cases in which an 
   auditor's name is associated with 
   financial statements, the report should 
   contain a clear-cut indication of the 
   character of the auditor's work, if any, 
   and the degree of responsibility the 
   auditor is taking." 


[3] Source: CMA 0694 2-16 

   Answer (A) is incorrect because the 
   SEC regulates both quarterly and annual 
   reporting. 

   Answer (B) is incorrect because the 
   SEC has no jurisdiction over state and 
   municipal reporting. 

   Answer (C) is correct. The SEC has 
   authority to regulate external financial 
   reporting. Nevertheless, its traditional 
   role has been to promote disclosure 
   rather than to exercise its power to 
   establish accounting recognition and 
   measurement principles. Its objective is 
   to allow the accounting profession 
   (through the FASB) to establish 
   principles and then to ensure that 
   corporations abide by those principles. 
   This approach allows investors to 
   evaluate investments for themselves. 

   Answer (D) is incorrect because the 
   SEC has allowed the accounting 
   profession to develop and promulgate 
   GAAP. 


[4] Source: CMA 0696 2-25 

   Answer (A) is incorrect because the 
   required data are for prior periods. 

   Answer (B) is correct. The information 
   required by the SEC to be reported in 
   Part II of Form 10-K and in the annual 
   report includes a 5-year summary of 
   selected financial data. If trends are 
   relevant, management's discussion and 
   analysis should emphasize the summary. 
   Favorable and unfavorable trends and 
   significant events and uncertainties 
   should be identified. 

   Answer (C) is incorrect because the 
   required data include net sales or 
   operating revenues, income from 
   continuing operations, total assets, 
   long-term obligations, redeemable 
   preferred stock, and cash dividends per 
   share. 

   Answer (D) is incorrect because the 
   data are required by the SEC. 


[5] Source: CMA 1295 2-15 

   Answer (A) is incorrect because the 
   MD&A is required by the SEC. 

   Answer (B) is correct. The content of 
   the MD&A section is mandated by 
   regulations of the SEC. The MD&A, 
   standard financial statements, 
   summarized financial data for at least 5 
   years, and other matters must be 
   included in annual reports to 
   shareholders and in Form 10-K filed 
   with the SEC. Forward-looking 
   information in the form of forecasts is 
   encouraged in the MD&A but not 
   required. 

   Answer (C) is incorrect because 
   auditors are expected to read (not 
   review or audit) the contents of the 
   MD&A to be certain it contains no 
   material inconsistencies with the 
   financial statements. 

   Answer (D) is incorrect because the 
   MD&A is required by the SEC. 


[6] Source: CMA 1295 2-14 

   Answer (A) is incorrect because the 
   MD&A section may be separate from 
   the president's letter. 

   Answer (B) is correct. The MD&A 
   section is included in SEC filings. It 
   addresses in a nonquantified manner the 
   prospects of a company. The SEC 
   examines it with care to determine that 
   management has disclosed material 
   information affecting the company's 
   future results. Disclosures about 
   commitments and events that may affect 
   operations or liquidity are mandatory. 
   Thus, the MD&A section pertains to 
   liquidity, capital resources, and results 
   of operations. 

   Answer (C) is incorrect because a 
   technical analysis and a defense are not 
   required in the MD&A section; it is 
   more forward looking. 

   Answer (D) is incorrect because the 
   MD&A section does not have to include 
   marketing and product line issues. 


[7] Source: CMA 1295 2-11 

   Answer (A) is correct. The SEC does 
   not require forecasts but encourages 
   companies to issue projections of future 
   economic performance. To encourage 
   the publication of such information in 
   SEC filings, the safe harbor rule was 
   established to protect a company that 
   prepares a forecast on a reasonable 
   basis and in good faith. 

   Answer (B) is incorrect because both 
   the company and management are 
   protected if the forecast is made in good 
   faith. 

   Answer (C) is incorrect because the 
   objective is to encourage forecasts, not 
   to delay them. 

   Answer (D) is incorrect because 
   anyone may use the forecast 
   information. 


[8] Source: CMA 1284 3-21 

   Answer (A) is correct. Management has 
   the responsibility to adopt sound 
   accounting policies and to establish and 
   maintain internal controls that will 
   record, process, summarize, and report 
   transactions, events, and conditions 
   consistent with the assertions in the 
   financial statements. The fairness of the 
   representations made therein is the 
   responsibility of management alone 
   because the transactions and the related 
   assets, liabilities, and equity reflected 
   are within management's direct 
   knowledge and control. 

   Answer (B) is incorrect because 
   management is ultimately responsible 
   for the assertions in the financial 
   statements. 

   Answer (C) is incorrect because 
   management is ultimately responsible 
   for the assertions in the financial 
   statements. 

   Answer (D) is incorrect because 
   management is ultimately responsible 
   for the assertions in the financial 
   statements. 


[9] Source: CMA 0685 3-20 

   Answer (A) is correct. The fourth 
   standard of reporting requires the 
   auditor to express an opinion regarding 
   the financial statements taken as a 
   whole or to assert that an opinion 
   cannot be expressed. The opinion 
   concerns the fairness with which the 
   statements have been presented in 
   conformity with GAAP. 

   Answer (B) is incorrect because the 
   external auditor does not interpret the 
   financial statement data for investment 
   purposes. 

   Answer (C) is incorrect because the 
   external audit normally cannot be so 
   thorough as to permit a guarantee of 
   correctness. 

   Answer (D) is incorrect because the 
   independent audit attests to the fair 
   presentation of the data in the financial 
   statements, not an evaluation of 
   management decisions. 


[10] Source: CMA 0692 2-30 

   Answer (A) is incorrect because a 
   departure from GAAP may justify an 
   adverse opinion. 

   Answer (B) is incorrect because a 
   departure from GAAP may justify a 
   qualified opinion. 

   Answer (C) is incorrect because a 
   disclaimer states that the auditor does 
   not express an opinion. A disclaimer is 
   not appropriate given a material 
   departure from GAAP. 

   Answer (D) is correct. A qualified 
   opinion states that the financial 
   statements are fairly presented except 
   for the effects of a certain matter. It is 
   expressed when the statements contain a 
   material, unjustified departure from 
   GAAP, but only if an adverse opinion is 
   not appropriate. An adverse opinion is 
   expressed when the financial 
   statements, taken as a whole, are not 
   presented fairly in accordance with 
   GAAP. 


[11] Source: CMA 1288 3-17 

   Answer (A) is incorrect because Form 
   8-K is filed to report changes in, and 
   disagreements with, accountants. 

   Answer (B) is incorrect because 
   Regulation S-X does not cover these 
   matters. Regulation S-K governs 
   required disclosures other than those in 
   financial statements. 

   Answer (C) is correct. The SEC 
   requires registrations and annual 
   reports to comply with certain 
   accounting standards and policies. 
   Regulation S-X governs reporting in the 
   financial statements, including footnotes 
   and schedules. Both annual reports and 
   quarterly statements are covered by 
   Regulation S-X. 

   Answer (D) is incorrect because 
   Regulation S-X does not cover these 
   matters. Regulation S-K governs 
   required disclosures other than those in 
   financial statements. 


[12] Source: CMA 1288 3-19 

   Answer (A) is incorrect because the 
   filing deadline for Form 8-K is 15 days 
   after the occurrence of a significant 
   event (5 business days after the 
   resignation of a director or a change of 
   external auditors). 

   Answer (B) is incorrect because the 
   filing deadline for Form 8-K is 15 days 
   after the occurrence of a significant 
   event (5 business days after the 
   resignation of a director or a change of 
   external auditors). 

   Answer (C) is incorrect because the 
   filing deadline for Form 8-K is 15 days 
   after the occurrence of a significant 
   event (5 business days after the 
   resignation of a director or a change of 
   external auditors). 

   Answer (D) is correct. Form 8-K is a 
   current report used to disclose material 
   events affecting a company. It must be 
   filed within 15 days after the 
   occurrence of a material event that is 
   required to be reported. However, the 
   resignation of a director or a change in 
   external auditors must be reported 
   within 5 business days. An extension of 
   up to 60 days may be obtained for filing 
   financial statements and pro forma 
   information required for an acquisition. 
   Other material events include changes 
   in control, bankruptcy, and acquisition 
   or disposition of significant assets not 
   in the ordinary course of business. 


[13] Source: CMA 0694 2-18 

   Answer (A) is incorrect because a 
   registrant has 45 days after the end of 
   each quarter to file Form 10-Q. 

   Answer (B) is correct. Form 10-Q is a 
   quarterly report to the SEC that includes 
   condensed unaudited interim financial 
   statements. It must be filed for each of 
   the first three quarters of the year within 
   45 days after the end of the quarter. 
   Form 10-Q need not be filed after the 
   fourth quarter because Form 10-K is 
   due within 90 days after year-end. 

   Answer (C) is incorrect because a 
   registrant has 45 days after the end of 
   each quarter to file Form 10-Q. 

   Answer (D) is incorrect because Form 
   10-Q has to be filed for the first three 
   quarters of the year. Form 10-K is filed 
   90 days after year-end. 


[14] Source: Publisher 

   Answer (A) is correct. In 1984, the 
   FASB created the Emerging Issues Task 
   Force (EITF) to develop principles of 
   accounting for new and unusual 
   accounting issues. The EITF is 
   composed of 13 members with the 
   FASB director of research and 
   technical activities serving as the 
   chairman. To reach a consensus, at least 
   10 of the 13 members must agree on 
   how to account for new types of 
   transactions. The purpose of the EITF is 
   to resolve new accounting issues 
   quickly. Essentially, the EITF identifies 
   controversial accounting issues as they 
   arise and determines whether it is 
   necessary for the FASB to become 
   involved in solving them. The EITF 
   works on short-term issues, leaving the 
   FASB with more time to concentrate on 
   long-term issues. 

   Answer (B) is incorrect because, 
   following the demise of the APB, the 
   AICPA created the AcSEC to act as its 
   official representative in regard to 
   accounting and reporting issues. The 
   AcSEC now focuses on releasing issues 
   papers that identify current accounting 
   issues and present alternative 
   treatments. 

   Answer (C) is incorrect because the 
   IASC was established to harmonize 
   accounting standards used by member 
   countries. Currently, 13 nations are 
   voting members, and 41 standards have 
   been issued. An affirmative vote by 
   three-fourths of the IASC members is 
   required to pass a standard. However, 
   IASC pronouncements are not binding. 

   Answer (D) is incorrect because in 
   1988 Congress reestablished the CASB 
   as an independent body. It has 
   "exclusive authority to make, 
   promulgate, amend, and rescind cost 
   accounting standards and interpretations 
   thereof" for negotiated contracts and 
   subcontracts over $500,000. 


[15] Source: Publisher 

   Answer (A) is incorrect because FASB 
   Concepts Statements are neither 
   officially established accounting 
   principles nor established accounting 
   principles. They are classified as other 
   accounting literature. 

   Answer (B) is incorrect because GASB 
   Statements are neither officially 
   established accounting principles nor 
   established accounting principles. They 
   are classified as other accounting 
   literature. 

   Answer (C) is correct. The FASB is the 
   body designated by the AICPA Council, 
   and the pronouncements in the highest 
   category of the GAAP hierarchy for 
   nongovernmental entities (officially 
   established accounting principles) 
   constitute principles as contemplated by 
   Conduct Rule 203. Officially 
   established accounting principles 
   include FASB Standards and 
   Interpretations, APB Opinions, and 
   AICPA Accounting Research Bulletins. 

   Answer (D) is incorrect because 
   AICPA Technical Practice Aids are 
   neither officially established accounting 
   principles nor established accounting 
   principles. They are classified as other 
   accounting literature. 


[16] Source: CMA 0696 1-21 

   Answer (A) is incorrect because the 
   SEC does not have to approve a trust 
   indenture. 

   Answer (B) is incorrect because the 
   1933 act requires disclosure of 
   nonexempted new issuances of 
   securities, including those of public 
   utility holding companies, not 
   registration of particular entities. 

   Answer (C) is correct. The Securities 
   Act of 1933 was designed to provide 
   complete and fair disclosure to 
   potential investors. The 1933 act 
   applies only to the initial issuance of 
   securities. Disclosure is accomplished 
   through the requirement that a 
   registration statement be filed with the 
   SEC. Once potential investors have 
   complete disclosure, the assumption is 
   that they can make a reasonable 
   decision. 

   Answer (D) is incorrect because the 
   Securities Exchange Act of 1934 
   requires registration of brokers. 


[17] Source: Publisher 

   Answer (A) is incorrect because 
   financial advisers have indirect 
   interests. 

   Answer (B) is incorrect because 
   regulatory bodies have indirect 
   interests. 

   Answer (C) is incorrect because stock 
   markets have indirect interests. 

   Answer (D) is correct. Users with 
   direct interests include investors or 
   potential investors, suppliers and 
   creditors, employees, and management. 


[18] Source: Publisher 

   Answer (A) is incorrect because 
   financial advisers use financial 
   statements for evaluating investments. 

   Answer (B) is correct. Investors' 
   purchases and sales set stock prices. 
   Stock exchanges need financial 
   statements to evaluate whether to accept 
   a firm's stock for listing or whether to 
   suspend trading in the stock. 

   Answer (C) is incorrect because 
   regulatory agencies use financial 
   statements for rate making. 

   Answer (D) is incorrect because 
   employees use financial statements for 
   labor negotiations. 


[19] Source: Publisher 

   Answer (A) is incorrect because the 
   IASC has no direct influence on 
   governmental legislation. 

   Answer (B) is incorrect because the 
   IASC's authority is restricted to the 
   willingness of participating and other 
   countries to adopt its standards. 

   Answer (C) is incorrect because the 
   IASC is composed of members from 
   various national professional 
   accounting organizations, such as the 
   AICPA. 

   Answer (D) is correct. The IASC was 
   established to harmonize accounting 
   standards used by member countries. 
   Currently, representatives of 
   professional accounting bodies in 13 
   nations (or groups of nations) and up to 
   four other organizations are voting 
   members of the IASC's Board, and 36 
   standards have been issued. An 
   affirmative vote by three-fourths of the 
   IASC's Board is required to publish a 
   standard. However, IASC 
   pronouncements are not binding. 


[20] Source: CMA 1295 2-12 

   Answer (A) is incorrect because, 
   although the SEC was granted the 
   authority to establish accounting 
   practices and procedures in 1934, it 
   delegated this authority to the 
   accounting profession. Accounting 
   Series Release 150 acknowledged that 
   the SEC would continue to look to the 
   private sector for leadership in 
   establishing and improving accounting 
   principles. 

   Answer (B) is correct. Accounting 
   standards for nongovernmental entities 
   in the United States are set primarily by 
   the private sector. The principal 
   standard setters are the FASB and the 
   AICPA's AcSEC. The SEC and the IRS 
   have the authority to set accounting 
   standards, but neither has exercised 
   significant authority. 

   Answer (C) is incorrect because the 
   public sector, through the SEC, has 
   delegated accounting standard setting to 
   the private sector. 

   Answer (D) is incorrect because the 
   IASC works to encourage uniform 
   accounting principles worldwide, but it 
   has no authority in a particular country. 


[21] Source: Publisher 

   Answer (A) is incorrect because the 
   exposure draft is usually amended 
   following evaluation of public 
   comment. 

   Answer (B) is correct. After a group of 
   experts has defined specific problems 
   and a range of solutions for an agenda 
   item, the FASB's staff conducts 
   research and analysis and drafts a 
   discussion memorandum. The FASB 
   then holds a public hearing usually 60 
   days after the discussion memorandum 
   is released. 

   Answer (C) is incorrect because all 
   interested parties have an opportunity to 
   comment. 

   Answer (D) is incorrect because the 
   SEC has effectively delegated 
   standard-setting authority to the FASB. 


[22] Source: Publisher 

   Answer (A) is incorrect because the 
   SEC retains the ultimate power to set 
   accounting standards. 

   Answer (B) is incorrect because 
   audited financial statements must be 
   submitted by publicly traded 
   companies. 

   Answer (C) is correct. With the 
   creation of the FASB, the SEC issued 
   Accounting Series Release No. 150, 
   which acknowledged that the SEC 
   would continue to look to the private 
   sector (through the FASB) for 
   leadership in establishing and 
   improving accounting principles. 
   However, the release also stated that 
   the SEC would identify areas for which 
   additional information is needed and 
   would determine the appropriate 
   methods of disclosure to meet those 
   needs. 

   Answer (D) is incorrect because 
   GAAP, which are set primarily but not 
   exclusively by the FASB, apply to firms 
   subject to the securities acts. 


[23] Source: CMA 0696 2-17 

   Answer (A) is incorrect because SFAC 
   1 states that financial reporting is not 
   designed to measure directly the value 
   of a business. 

   Answer (B) is correct. According to the 
   FASB's Statement of Financial 
   Accounting Concepts (SFAC) 1, the 
   objectives are to provide information 
   that (1) is useful to present and potential 
   investors, creditors, and others in 
   making rational financial decisions 
   regarding the enterprise; (2) helps those 
   parties in assessing the amounts, timing, 
   and uncertainty of prospective cash 
   receipts from dividends or interest and 
   the proceeds from sale, redemption, or 
   maturity of securities or loans; and (3) 
   concerns the economic resources of an 
   enterprise, the claims thereto, and the 
   effects of transactions, events, and 
   circumstances that change its resources 
   and claims thereto. 

   Answer (C) is incorrect because while 
   rules for accruing liabilities are a 
   practical concern, the establishment of 
   such rules is not a primary objective of 
   external reporting. 

   Answer (D) is incorrect because the 
   objectives of financial accounting are 
   unrelated to the measurement of stock 
   prices; stock prices are a product of 
   stock market forces. 


[24] Source: CMA 1283 3-21 

   Answer (A) is incorrect because the 
   Securities Investor Protection Act of 
   1970 created the Securities Investor 
   Protection Corporation (SIPC) to 
   intercede when brokers or dealers 
   encounter financial difficulty 
   endangering their customers. 

   Answer (B) is incorrect because the 
   Securities Act of 1933 requires 
   registration of securities involved in 
   initial public offerings but does not 
   apply to subsequent trading. 

   Answer (C) is correct. The Securities 
   Exchange Act of 1934 generally 
   regulates the trading markets in 
   securities. It requires the registration of 
   brokers, dealers, and securities 
   exchanges. 

   Answer (D) is incorrect because the 
   Investment Company Act of 1940 deals 
   narrowly with the registration of 
   investment companies. 


[25] Source: CMA 1283 3-22 

   Answer (A) is incorrect because it is 
   imposed by the Securities Exchange Act 
   of 1934. 

   Answer (B) is correct. Prospectus 
   requirements are imposed by the 
   Securities Act of 1933. Prospectuses 
   are used to sell securities, and the 
   Securities Act of 1933 regulates the 
   initial sale of securities. 

   Answer (C) is incorrect because it is 
   imposed by the Securities Exchange Act 
   of 1934. 

   Answer (D) is incorrect because it is 
   imposed by the Securities Exchange Act 
   of 1934. 


[26] Source: CMA 1285 3-26 

   Answer (A) is incorrect because 
   financial statement disclosures are 
   specified in Regulation S-X, not S-K. 

   Answer (B) is incorrect because 
   financial statement disclosures are 
   specified in Regulation S-X, not S-K. 

   Answer (C) is incorrect because 
   unofficial interpretations and practices, 
   if codified at all, are made public 
   through the issuance of Staff Accounting 
   Bulletins (SABs). 

   Answer (D) is correct. In addition to 
   those items mentioned in the body of the 
   question, Regulation S-K also provides 
   guidelines for the filing of projections 
   of future economic performance 
   (financial projections). The SEC 
   encourages but does not require, the 
   filing of management's projections as a 
   supplement to the historical financial 
   statements. 


[27] Source: CMA 1286 3-21 

   Answer (A) is incorrect because 
   audited statements are not required in 
   quarterly reports. 

   Answer (B) is incorrect because a 
   compilation provides no assurance and 
   would thus not satisfy the SEC 
   requirement stated in the correct answer 
   discussion. 

   Answer (C) is incorrect because 
   comfort letters are addressed to 
   underwriters, not the SEC. 

   Answer (D) is correct. Form 10-Q is 
   the quarterly report to the SEC. It must 
   be filed for each of the first three 
   quarters of the year within 45 days after 
   the end of the quarter. It need not 
   contain audited financial statements, but 
   it should be prepared in accordance 
   with APB 28, Interim Financial 
   Reporting. A review by an accountant 
   based on inquiries and analytical 
   procedures permits an expression of 
   limited assurance that no material 
   modifications need to be made to 
   interim information for it to be in 
   conformity with GAAP. A review helps 
   satisfy the SEC requirement of 
   "accurate, representative, and 
   meaningful" quarterly information. 
   Thus, an SEC registrant must obtain a 
   review by an independent auditor of its 
   interim financial information that is to 
   be included in a quarterly report to the 
   SEC. 


[28] Source: CMA 1286 3-20 

   Answer (A) is correct. Form 10-K is 
   the annual report to the SEC. It must be 
   filed within 90 days after the 
   corporation's year-end. It must contain 
   audited financial statements and be 
   signed by the principal executive, 
   financial, and accounting officers and 
   by a majority of the board. The content 
   is essentially that required in the Basic 
   Information Package. 

   Answer (B) is incorrect because Form 
   10-K is an annual report. 

   Answer (C) is incorrect because Form 
   10-Q is filed quarterly within 45 days 
   of the end of each quarter except for the 
   fourth quarter. 

   Answer (D) is incorrect because no 
   monthly reports are required. 


[29] Source: CMA 1286 3-22 

   Answer (A) is incorrect because the 
   language of the requirement is that a 
   company may use Form S-3 if 
   nonaffiliates hold "at least 
   $50,000,000" of the company's stock 
   (not "less than $150,000,000"). 

   Answer (B) is correct. Form S-1 is 
   used for a first registration. Form S-2 is 
   used by companies that have filed 
   timely reports for 3 years. Incorporation 
   by reference from the annual 
   shareholders' report of Basic 
   Information Package disclosures is 
   allowed in Form S-2. If a company 
   meets the requirements for use of Form 
   S-2 and at least $50,000,000 in value of 
   its stock is held by nonaffiliates (or at 
   least $100,000,000 is outstanding and 
   annual trading volume is at least 
   3,000,000 shares), Form S-3 may be 
   used. It allows most information to be 
   incorporated by reference to other SEC 
   filings. 

   Answer (C) is incorrect because it is 
   not a requirement for use of Form S-3. 

   Answer (D) is incorrect because it is 
   not a requirement for use of Form S-3. 


[30] Source: CMA 1288 3-20 

   Answer (A) is correct. Form S-4 is a 
   simplified form for business 
   combinations, such as mergers. It is part 
   of the integrated disclosure system 
   established to simplify reporting 
   requirements under the Securities Act of 
   1933 and the Securities Exchange Act 
   of 1934. Thus, Form S-4 may 
   incorporate much information by 
   reference to other reports already filed 
   with the SEC. The integrated disclosure 
   system permits many companies to use 
   the required annual report to 
   shareholders (if prepared in conformity 
   with Regulations S-X and S-K) as the 
   basis for the annual report to the SEC 
   on Form 10-K. Some may even use this 
   report as the basis for registration 
   statements. 

   Answer (B) is incorrect because Form 
   S-1 may be used by any registrant. 

   Answer (C) is incorrect because the 
   filing of Form 8-K to report certain 
   material events has no effect on the 
   subsequent filing of the S forms. 

   Answer (D) is incorrect because Form 
   S-11 is used by REITs and real estate 
   companies. 


[31] Source: CMA 1289 3-28 

   Answer (A) is incorrect because Form 
   S-1 is a long form than includes all 
   possible required information. It can be 
   used by any company. Forms S-2 and 
   S-3 may be used as a substitute by 
   companies that have been timely 
   reporting to the SEC for 3 years. 

   Answer (B) is correct. SEC Form S-8 
   is used when securities are to be 
   offered to employees under any stock 
   option or other employee benefit plan. It 
   has become more commonly used in 
   recent years because of the adoption of 
   employee stock ownership plans 
   (ESOPs). 

   Answer (C) is incorrect because Form 
   S-11 is used by REITs and real estate 
   companies. 

   Answer (D) is incorrect because the 
   filing of Form 8-K to report certain 
   material events has no effect on the 
   subsequent filing of the S forms. 


[32] Source: CMA 0694 2-17 

   Answer (A) is incorrect because a 
   major acquisition, the resignation of 
   several directors, and a change in the 
   registrant's certifying accountant are 
   events that must be reported on Form 
   8-K. 

   Answer (B) is incorrect because a 
   major acquisition, the resignation of 
   several directors, and a change in the 
   registrant's certifying accountant are 
   events that must be reported on Form 
   8-K. 

   Answer (C) is incorrect because a 
   major acquisition, the resignation of 
   several directors, and a change in the 
   registrant's certifying accountant are 
   events that must be reported on Form 
   8-K. 

   Answer (D) is correct. Form 8-K is a 
   current report to disclose material 
   events. It must be filed within 15 days 
   after the material event takes place. 
   However, a change in independent 
   accountants or the resignation of a 
   director must be reported within 5 
   business days. Material events that must 
   be reported include a change in control; 
   acquisition or disposition of a 
   significant amount of assets not in the 
   ordinary course of business; bankruptcy 
   or receivership; resignation of 
   directors; and the resignation or 
   dismissal of the firm's independent 
   accountants. Reposting of other material 
   events that are deemed by the registrant 
   to be of importance to security holders 
   is optional. A change in accounting 
   principle does not require reporting on 
   Form 8-K. 


[33] Source: Publisher 

   Answer (A) is incorrect because, when 
   an operation is relatively 
   self-contained, the assumption is that 
   translation adjustments do not affect 
   cash flows. 

   Answer (B) is incorrect because, when 
   an operation is relatively 
   self-contained, the assumption is that 
   translation adjustments do not affect 
   cash flows; and translation adjustments 
   should be included in other 
   comprehensive income, not recognized 
   in income. 

   Answer (C) is correct. SFAS 52, 
   Foreign Currency Translation, 
   concludes that foreign currency 
   translation adjustments for a foreign 
   operation that is relatively 
   self-contained and integrated within its 
   environment do not affect cash flows of 
   the reporting enterprise and should be 
   excluded from net income. When an 
   operation is relatively self-contained, 
   the cash generated and expended by the 
   entity is normally in the currency of the 
   foreign country, and that currency is 
   deemed to be the operation's functional 
   currency. 

   Answer (D) is incorrect because 
   translation adjustments should be 
   included in other comprehensive 
   income, not recognized in income. 


[34] Source: CMA 0696 2-26 

   Answer (A) is incorrect because 
   Regulation S-X requires more than 
   summary information. 

   Answer (B) is correct. Regulation S-X 
   governs the reporting of financial 
   statements, including footnotes and 
   schedules. Both interim and annual 
   statements are covered by Regulation 
   S-X. 

   Answer (C) is incorrect because 
   Regulation S-X concerns financial 
   statement reporting, not securities. 

   Answer (D) is incorrect because the 
   MD&A is part of the corporate annual 
   report. Disclosure standards for annual 
   reports are covered by Regulation S-K. 


[35] Source: CMA 0696 2-27 

   Answer (A) is incorrect because Form 
   S-8 must be filed within 90 days after 
   the end of an employee stock purchase 
   plan's fiscal year. 

   Answer (B) is correct. Form 8-K is a 
   current report to disclose material 
   events. For specified events, it must be 
   filed within 15 days after the material 
   event occurs. However, a change in 
   independent accountants or the 
   resignation of a director must be 
   reported within 5 business days. Other 
   material events that must be reported on 
   Form 8-K are a change in control, 
   bankruptcy or receivership, and the 
   acquisition or disposition of a 
   significant amount of assets not in the 
   ordinary course of business. 

   Answer (C) is incorrect because Form 
   10-K must be filed within 90 days after 
   the end of the fiscal year covered by the 
   report. 

   Answer (D) is incorrect because Form 
   10-Q must be filed within 45 days after 
   the end of each of the first three quarters 
   of each fiscal year. 


[36] Source: CMA 0696 2-28 

   Answer (A) is incorrect because Form 
   10-Q is the regular quarterly financial 
   report; it is not a specific report for 
   employee stock purchase plans. 

   Answer (B) is incorrect because Form 
   10-Q is a quarterly financial report. It is 
   not related to specific events. 

   Answer (C) is incorrect because Form 
   10-Q is a quarterly report, not an annual 
   report. 

   Answer (D) is correct. Form 10-Q is a 
   quarterly report to the SEC. It must be 
   filed for each of the first three quarters 
   of the year within 45 days after the end 
   of each quarter. Quarterly financial 
   statements need not be audited, but they 
   must be prepared in accordance with 
   APB 28, Interim Financial Reporting. 
   Moreover, an SEC registrant must 
   obtain a review by an independent 
   auditor of its interim financial 
   information that is to be included in a 
   quarterly report to the SEC. 


[37] Source: CMA 1290 2-24 

   Answer (A) is incorrect because 
   disclosure of the nature of the 
   relationship involved is required. 

   Answer (B) is incorrect because 
   disclosure of a description of the 
   transactions for each period an income 
   statement is presented is required. 

   Answer (C) is incorrect because 
   disclosure of the dollar amounts of 
   transactions for each period an income 
   statement is presented is required. 

   Answer (D) is correct. SFAS 57 
   requires disclosure of related-party 
   transactions except for compensation 
   agreements, expense allowances, and 
   transactions eliminated in consolidated 
   working papers. Required disclosures 
   include the relationship(s) of the related 
   parties; a description and dollar 
   amounts of transactions for each period 
   presented and the effects of any change 
   in the method of establishing their 
   terms; and amounts due to or from the 
   related parties and, if not apparent, the 
   terms and manner of settlement. The 
   effect on the cash flow statement need 
   not be disclosed. 


[38] Source: CMA 1291 2-4 

   Answer (A) is incorrect because loss 
   contingencies are liabilities covered by 
   SFAS 5. 

   Answer (B) is correct. SFAS 47 
   requires disclosure of unconditional 
   purchase obligations associated with 
   suppliers' financing arrangements and 
   future payments required by long-term 
   debt and redeemable stock agreements. 
   Unconditional purchase obligations are 
   commitments to transfer funds in the 
   future for fixed or minimum amounts of 
   goods or services at fixed or minimum 
   prices. SFAS 47 provides the standards 
   of accounting for an unconditional 
   purchase obligation that was negotiated 
   as part of the financing arrangement for 
   facilities that will provide contracted 
   goods or services or for costs related to 
   those goods or services, has a 
   remaining term of more than 1 year, and 
   is either noncancelable or cancellable 
   only under specific terms. 

   Answer (C) is incorrect because 
   severance pay is a form of deferred 
   compensation, a topic not addressed by 
   SFAS 47. 

   Answer (D) is incorrect because 
   pension liabilities are covered by 
   SFASs 87 and 88. 


[39] Source: CIA 0593 IV-26 

   Answer (A) is correct. APB 22 
   requires that all significant accounting 
   principles and methods that involve 
   selection from among alternatives, are 
   peculiar to a given industry, or are 
   innovative or unusual applications be 
   specifically identified and described in 
   an initial note to the financial statements 
   or in a separate summary. The 
   disclosure should include accounting 
   principles adopted and the method of 
   applying them. This summary of 
   significant accounting policies should 
   not duplicate other facts to be disclosed 
   elsewhere in the statements. The 
   valuation method for inventory is one 
   example of an accounting method 
   (policy) that should be disclosed. 

   Answer (B) is incorrect because the 
   summary of significant accounting 
   policies should not duplicate facts 
   required to be disclosed elsewhere in 
   the financial statements. 

   Answer (C) is incorrect because the 
   summary of significant accounting 
   policies should not duplicate facts 
   required to be disclosed elsewhere in 
   the financial statements. 

   Answer (D) is incorrect because the 
   summary of significant accounting 
   policies should not duplicate facts 
   required to be disclosed elsewhere in 
   the financial statements. 


[40] Source: CMA 0693 2-27 

   Answer (A) is incorrect because BEPS 
   and DEPS; sales; income taxes; 
   extraordinary items; the effect of a 
   change in accounting principles; net 
   income; comprehensive income; 
   disposal of a segment; and 
   extraordinary, unusual, and infrequent 
   items are disclosed. 

   Answer (B) is incorrect because BEPS 
   and DEPS; sales; income taxes; 
   extraordinary items; the effect of a 
   change in accounting principles; net 
   income; comprehensive income; 
   disposal of a segment; and 
   extraordinary, unusual, and infrequent 
   items are disclosed. 

   Answer (C) is correct. APB 28 does 
   not require presentation of interim 
   income statements, statements of 
   financial position, or statements of cash 
   flows. Although interim financial 
   statements may be presented, minimum 
   disclosures required when a publicly 
   held company does issue summarized 
   financial information include

   1) Sales or gross revenues, provision for income taxes, extraordinary
      items, cumulative effect of changes in accounting principles,
      net income, and comprehensive income
   2) Basic and diluted EPS
   3) Seasonal revenues, costs, or expenses
   4) Significant changes in estimates or provisions for income taxes
   5) Disposal of a segment and extraordinary, unusual, or infrequent
      items
   6) Contingent items
   7) Changes in accounting principles or estimates
   8) Significant changes in financial position
   9) Certain information about reportable operating segments

   Answer (D) is incorrect because BEPS 
   and DEPS; sales; income taxes; 
   extraordinary items; the effect of a 
   change in accounting principles; net 
   income; comprehensive income; 
   disposal of a segment; and 
   extraordinary, unusual, and infrequent 
   items are disclosed. 


[41] Source: CMA 0695 2-23 

   Answer (A) is incorrect because 
   inventory details should be disclosed in 
   the footnotes. 

   Answer (B) is incorrect because 
   financing agreements should be 
   disclosed in the footnotes. 

   Answer (C) is incorrect because 
   valuation methods should be disclosed 
   in the footnotes. 

   Answer (D) is correct. APB 22 
   requires disclosure of accounting 
   policies in a separate summary of 
   significant policies or as the first 
   footnote to the financial statements. The 
   disclosure should specify accounting 
   principles adopted and the method of 
   applying those principles. Examples 
   include inventory valuation methods; 
   inventory details, such as the mix of 
   finished goods, work-in-progress, and 
   raw materials; methods used in 
   determining costs; and any significant 
   financing agreements, such as leases, 
   related party transactions, product 
   financing arrangements, firm purchase 
   commitments, pledging of inventories, 
   and involuntary liquidation of LIFO 
   layers. Unrealized profit on inventories 
   is not reported because the company 
   usually has no assurance that the 
   inventories will be sold. 


[42] Source: Publisher 

   Answer (A) is incorrect because it is a 
   condition indicating that the obligation 
   is noncancelable. 

   Answer (B) is incorrect because it is a 
   condition indicating that the obligation 
   is noncancelable. 

   Answer (C) is incorrect because it is a 
   condition indicating that the obligation 
   is noncancelable. 

   Answer (D) is correct. SFAS 47 
   provides the standards of accounting for 
   an unconditional purchase obligation 
   that

   1) Was negotiated as part of the financing arrangement for facilities
      that will provide contracted goods or services
   2) Has a remaining term of more than 1 year
   3) Is either noncancelable or cancellable only under specific terms
   Excluded from these terms and from the 
   provisions of SFAS 47 is a purchase 
   obligation cancellable upon the payment 
   of a nominal penalty. 


[43] Source: Publisher 

   Answer (A) is incorrect because each 
   disclosure is explicitly required by 
   SFAS 47 when an unconditional 
   purchase obligation is not recorded in 
   the balance sheet. SFAS 47 also 
   requires disclosure of the amount of the 
   fixed and determinable portion of the 
   obligation in the aggregate as of the 
   latest balance sheet date and the 
   amounts due in each of the next 5 years. 

   Answer (B) is incorrect because each 
   disclosure is explicitly required by 
   SFAS 47 when an unconditional 
   purchase obligation is not recorded in 
   the balance sheet. SFAS 47 also 
   requires disclosure of the amount of the 
   fixed and determinable portion of the 
   obligation in the aggregate as of the 
   latest balance sheet date and the 
   amounts due in each of the next 5 years. 

   Answer (C) is correct. When an 
   unconditional purchase obligation is not 
   recorded in the balance sheet, SFAS 47 
   encourages, but does not require, the 
   disclosure of the amount of imputed 
   interest necessary to reduce the 
   unconditional purchase obligation to its 
   present value. 

   Answer (D) is incorrect because each 
   disclosure is explicitly required by 
   SFAS 47 when an unconditional 
   purchase obligation is not recorded in 
   the balance sheet. SFAS 47 also 
   requires disclosure of the amount of the 
   fixed and determinable portion of the 
   obligation in the aggregate as of the 
   latest balance sheet date and the 
   amounts due in each of the next 5 years. 


[44] Source: Publisher 

   Answer (A) is incorrect because, 
   although the sale of inventory could 
   result in the receipt of cash, the holder 
   of the inventory has no current 
   contractual right to receive cash. 

   Answer (B) is incorrect because this 
   obligation will result in the delivery of 
   goods or services. 

   Answer (C) is correct. SFAS 107 
   defines a financial instrument as cash, 
   evidence of an ownership interest in an 
   entity, or a contract that both (1) 
   imposes on one entity a contractual 
   obligation (A) to deliver cash or 
   another financial instrument to a second 
   entity or (B) to exchange other financial 
   instruments on potentially unfavorable 
   terms with the second entity, and (2) 
   conveys to that second entity a 
   contractual right (A) to receive cash or 
   another financial instrument from the 
   first entity or (B) to exchange other 
   financial instruments on potentially 
   favorable terms with the first entity. A 
   note payable in U.S. Treasury bonds 
   gives the holder the contractual right to 
   receive, and imposes on the issuer the 
   contractual obligation to deliver, bonds 
   that are themselves financial 
   instruments. Thus, given that one entity 
   has a contractual obligation to deliver 
   another financial instrument and the 
   second entity has a contractual right to 
   receive another financial instrument, the 
   note payable in U.S. Treasury bonds 
   meets the definition of a financial 
   instrument. 

   Answer (D) is incorrect because this 
   obligation will result in the delivery of 
   goods or services. 


[45] Source: CMA 0695 2-30 

   Answer (A) is incorrect because 
   depreciation and amortization methods 
   are required disclosures. 

   Answer (B) is incorrect because 
   inventory valuation and costing methods 
   are required disclosures. 

   Answer (C) is incorrect because 
   accounting for long-term construction 
   contracts are required disclosures. 

   Answer (D) is correct. APB 22 
   requires disclosure of accounting 
   policies in a separate summary of 
   significant accounting policies or in the 
   initial footnote to the financial 
   statements. The disclosures should 
   identify the principles followed and the 
   methods of applying them that 
   materially affect the statements. 
   Moreover, the disclosures should 
   encompass principles and methods 
   involving a selection from acceptable 
   alternatives, accounting principles 
   peculiar to a particular industry, and 
   innovative or unusual applications of 
   GAAP. However, the disclosures 
   should not repeat details presented 
   elsewhere, e.g., the estimated lives of 
   depreciable assets. 


[46] Source: CMA 1295 2-18 

   Answer (A) is incorrect because the 
   names of directors are not shown in the 
   footnotes. 

   Answer (B) is correct. APB 22 requires 
   disclosure of accounting policies in a 
   separate summary of significant 
   accounting policies or as the initial 
   footnote to the financial statements. The 
   disclosure should emphasize selection 
   of alternative accounting principles, 
   accounting principles peculiar to a 
   particular situation or industry, and 
   innovative or unusual applications. The 
   disclosure should include accounting 
   principles adopted and the method of 
   applying them. Examples include 
   depreciation and amortization methods, 
   inventory valuation methods, 
   consolidation methods, and franchising 
   and leasing activities. 

   Answer (C) is incorrect because there 
   is no requirement to show the market 
   value of fixed assets. 

   Answer (D) is incorrect because the 
   IRS requires not-for-profit 
   organizations to identify the five highest 
   paid employees. 


[47] Source: CMA 0689 3-5 

   Answer (A) is incorrect because 
   disclosure of inventory composition is 
   important for manufacturers, not 
   merchandisers. A retailer does not 
   carry raw materials and 
   work-in-process. 

   Answer (B) is incorrect because it does 
   not state accounting policies. 

   Answer (C) is incorrect because it does 
   not state accounting policies. 

   Answer (D) is correct. Because several 
   options are available for pricing 
   inventories, such as LIFO, FIFO, and 
   weighted average, the method used 
   should be disclosed to external users of 
   financial statements. APB 22, 
   Disclosure of Accounting Policies, 
   requires that significant accounting 
   policies of the reporting entity be 
   included as an integral part of the 
   statements. 


[48] Source: CMA 0685 4-32 

   Answer (A) is incorrect because 
   interim reporting disclosures should 
   include primary and fully diluted 
   earnings per share. 

   Answer (B) is incorrect because 
   interim reporting disclosures should 
   include significant changes in estimates 
   or provisions for income tax. 

   Answer (C) is incorrect because 
   interim reporting disclosures should 
   include contingent items. 

   Answer (D) is correct. APB 28 does 
   not require presentation of interim 
   income statements and statements of 
   financial position, or of changes in 
   investment policy. Although interim 
   financial statements may be presented, 
   minimum disclosures required when a 
   publicly held company does issue a 
   financial summary of interim operations 
   include

   1. Sales or gross revenues, provision for taxes, extraordinary items,
      cumulative effect of accounting changes, and net income.
   2. Primary and fully diluted EPS.
   3. Seasonal revenues and costs.
   4. Significant changes in estimates or provisions for income taxes.
   5. Disposal of a segment and extraordinary, unusual, or infrequent
      items.
   6. Contingent items.
   7. Changes in accounting principles or estimates.
   8. Significant cash flows.


[49] Source: CMA 1286 3-15 

   Answer (A) is incorrect because the 
   specific accounting policies and 
   methods considered appropriate by 
   management and used for reporting 
   purposes should be disclosed in a 
   separate summary of significant 
   accounting policies preceding the notes 
   to the financial statements or in the 
   initial note to the financial statements. 

   Answer (B) is correct. APB 22 requires 
   that all significant accounting policies 
   of a reporting entity be disclosed as an 
   integral part of its financial statements. 
   The APB expresses a preference for a 
   statement of accounting policies in a 
   separate section preceding the footnotes 
   or as the initial note. This requirement 
   is based upon the obvious difficulty of 
   making economic decisions about the 
   reporting entity without an 
   understanding of the accounting policies 
   used in preparing the financial 
   statements. Disclosure should 
   encompass those principles and 
   methods which involve a selection from 
   existing acceptable alternatives, those 
   methods peculiar to the industry in 
   which the entity operates, and any 
   unusual or innovative applications of 
   GAAP. 

   Answer (C) is incorrect because the 
   specific accounting policies and 
   methods considered appropriate by 
   management and used for reporting 
   purposes should be disclosed in a 
   separate summary of significant 
   accounting policies preceding the notes 
   to the financial statements or in the 
   initial note to the financial statements. 

   Answer (D) is incorrect because the 
   specific accounting policies and 
   methods considered appropriate by 
   management and used for reporting 
   purposes should be disclosed in a 
   separate summary of significant 
   accounting policies preceding the notes 
   to the financial statements or in the 
   initial note to the financial statements. 


[50] Source: CPA 0590 II-44 

   Answer (A) is incorrect because 
   $450,000 reflects translation at 
   historical rates. 

   Answer (B) is incorrect because the 
   note and patent are translated at 
   historical rates. 

   Answer (C) is correct. When the 
   currency used to prepare a foreign 
   entity's financial statements is its 
   functional currency, SFAS 52 specifies 
   that the current rate method be used to 
   translate the foreign entity's financial 
   statements into the reporting currency. 
   The translation gains and losses arising 
   from applying this method are included 
   in other comprehensive income in the 
   owners' equity section of the 
   consolidated balance sheet. Thus, 
   Rowan's listed assets translated at 
   current rates should be included in the 
   consolidated balance sheet at $475,000. 

   Answer (D) is incorrect because the 
   patent is translated at historical rates. 


[51] Source: CPA 0FIN R99-15 

   Answer (A) is correct. SFAS 107, 
   Disclosures about Fair Value of 
   Financial Instruments, as amended by 
   SFAS 133, requires certain entities to 
   disclose the fair value of financial 
   instruments, whether or not they are 
   recognized in the balance sheet, if it is 
   practicable to estimate such fair values. 
   If estimating fair value is not 
   practicable, disclosures include 
   information pertinent to estimating the 
   fair value of the financial instrument or 
   class of financial instruments, such as 
   the carrying amount, effective interest 
   rate, and maturity. The reasons that 
   estimating the fair value is not 
   practicable should also be disclosed. 

   Answer (B) is incorrect because the 
   disclosure requirement is based on a 
   practicability standard, not record 
   keeping. 

   Answer (C) is incorrect because the 
   disclosure requirement is based on a 
   practicability standard, not materiality. 

   Answer (D) is incorrect because the 
   disclosure requirement is based on a 
   practicability standard, not materiality. 


[52] Source: CMA 0692 2-11 

   Answer (A) is incorrect because 
   interim and annual statements use the 
   same principles for reporting EPS. 

   Answer (B) is incorrect because taxes 
   are based on the expected annual 
   effective rate after all tax planning tools 
   are implemented and include the effect 
   of credits and special deductions. Each 
   interim period's tax expense is the 
   revised annual tax rate times 
   year-to-date income, minus tax expense 
   recognized in prior interim periods. 

   Answer (C) is incorrect because APB 
   28 allows the gross profit method to be 
   used for interim valuation of 
   inventories. 

   Answer (D) is correct. SFAS 3, 
   Reporting Accounting Changes in 
   Interim Financial Statements, covers 
   cumulative-effect-type accounting 
   changes. If an accounting change occurs 
   in other than the first quarter of the 
   enterprise's fiscal year, the proper 
   treatment is to calculate the cumulative 
   effect on retained earnings at the 
   beginning of the year and include it in 
   restated net income presented in the 
   first quarter financial statements. In 
   addition, all previously issued interim 
   financial statements of the current year 
   must be restated to reflect the new 
   accounting method. 


[53] Source: CMA 0687 3-1 

   Answer (A) is correct. APB 28 
   requires companies to use basically the 
   same reporting methods for interim and 
   annual financial statements. However, 
   one exception is that the gross profit 
   method may be used for interim 
   inventory valuation even though it is not 
   used for year-end statements. 

   Answer (B) is incorrect because tax 
   expense is based on the expected annual 
   effective rate after all credits and 
   special deductions have been 
   considered. 

   Answer (C) is incorrect because an 
   extraordinary item is to be reported in 
   the interim period in which the gain or 
   loss occurred. 

   Answer (D) is incorrect because SFAS 
   128 requires that basic and diluted EPS 
   be reported by an entity with a complex 
   capital structure if it has publicly traded 
   common stock or potential common 
   stock. 


[54] Source: CMA 0688 4-30 

   Answer (A) is correct. With few 
   exceptions, APB 28, Interim Financial 
   Reporting, specifies that interim 
   statements are to follow the same 
   principles as those for annual reports. 
   APB 28 views each interim period 
   primarily as an integral part of an 
   annual period. Certain principles and 
   practices used for annual reporting, 
   however, may require modification at 
   interim dates so interim reports may 
   relate more closely to the results of 
   operations for the annual period. 

   Answer (B) is incorrect because tax 
   expense is to be recorded based on the 
   expected annual effective rate after all 
   tax-planning tools are implemented 
   (according to FASB Interpretation No. 
   18). 

   Answer (C) is incorrect because 
   interim periods of any length may be 
   used. 

   Answer (D) is incorrect because APB 
   28 requires interim statements to be 
   similar to annual reports, including such 
   items as extraordinary gains and losses 
   and the effects of changes in accounting 
   principle. The all-inclusive income 
   statement approach is required by 
   GAAP for both annual and interim 
   statements. 


[55] Source: CMA 1285 3-27 

   Answer (A) is incorrect because the 
   replacement of the registrant company's 
   external auditor is an event that would 
   be reported by Form 8-K. 

   Answer (B) is correct. Form 8-K is 
   used to report material events such as 
   replacement of the external auditor, 
   resignation of directors, significant 
   changes in assets not in the ordinary 
   course of business, changes in control 
   of the company, bankruptcy or 
   receivership, major legal proceedings, 
   default on securities, changes of more 
   than 5% ownership of a class of 
   security, and other events. It must be 
   submitted within 15 days after the 
   occurrence (5 business days after a 
   change in external auditors or the 
   resignation of a director). Changes in 
   accounting principles are shown on the 
   annual financial report to shareholders 
   and on Form 10-K. 

   Answer (C) is incorrect because the 
   resignation of one of the directors of the 
   registrant company is an event that 
   would be reported by Form 8-K. 

   Answer (D) is incorrect because a 
   significant acquisition or disposition of 
   assets is an event that would be 
   reported by Form 8-K. 


[56] Source: CMA 1285 3-30 

   Answer (A) is incorrect because the 
   responsibility is placed on companies, 
   not individuals. 

   Answer (B) is incorrect because the 
   responsibility is placed on companies, 
   not individuals. 

   Answer (C) is incorrect because the 
   responsibility is placed on companies, 
   not individuals. 

   Answer (D) is correct. The accounting 
   requirements apply to all public 
   companies that must register under the 
   Securities Exchange Act of 1934. The 
   responsibility is thus placed on 
   companies, not individuals. 


[57] Source: CMA 1286 3-19 

   Answer (A) is incorrect because it is 
   acceptable. 

   Answer (B) is incorrect because the 
   flow-through method concerns 
   accounting for the investment tax credit. 

   Answer (C) is incorrect because it is 
   acceptable. 

   Answer (D) is correct. The full-cost 
   method capitalizes the entire cost of 
   acquiring, exploring, and developing oil 
   and gas properties in very large 
   geographical areas whether the costs 
   are related to successful or unsuccessful 
   projects. The rationale is that the costs 
   of unsuccessful efforts are necessary to 
   the discovery of recoverable deposits. 
   The successful-efforts method 
   capitalizes costs of acquiring, 
   exploiting, and developing specific 
   properties where recoverable oil and 
   gas are found and expenses the costs of 
   unsuccessful efforts. SFAS 19, 
   Financial Accounting and Reporting by 
   Oil and Gas Producing Companies, 
   required the successful-efforts method 
   of accounting. SFAS 25, Suspension of 
   Certain Accounting Requirements for 
   Oil and Gas Producing Companies, 
   amended SFAS 19 to permit the 
   full-cost accounting method as well as 
   the successful-efforts method. The SEC 
   accepts both methods. 


[58] Source: CMA 1289 3-27 

   Answer (A) is incorrect because the 
   SEC does regulate annual and quarterly 
   reports to shareholders, although not 
   with respect to specific accounting 
   principles. 

   Answer (B) is incorrect because the 
   SEC may adopt whatever principles it 
   desires. Normally, these include all 
   pronouncements of the FASB, but there 
   can be exceptions. For example, SFAS 
   19, Financial Accounting and Reporting 
   by Oil and Gas Producing Companies, 
   was not accepted by the SEC. 

   Answer (C) is incorrect because the 
   SEC does not regulate state and 
   municipal reporting. 

   Answer (D) is correct. The SEC has 
   delegated the role of developing and 
   promulgating accounting principles to 
   the accounting profession, in particular 
   to the FASB. The SEC is concerned 
   more with disclosure outside the 
   financial statements than with the 
   establishment of principles. 


[59] Source: CMA 1289 3-29 

   Answer (A) is incorrect because it is an 
   event that must be reported on Form 
   8-K. 

   Answer (B) is incorrect because it is an 
   event that must be reported on Form 
   8-K. 

   Answer (C) is incorrect because it is an 
   event that must be reported on Form 
   8-K. 

   Answer (D) is correct. Form 8-K is a 
   current report to disclose material 
   events. It must be filed within 15 days 
   (5 business days for the resignation of a 
   director or a change of external 
   auditors) after the material event takes 
   place, but an extension of up to 60 days 
   may be had for filing financial 
   statements and pro forma financial 
   information for an acquisition. Material 
   events that are to be reported on Form 
   8-K include changes in control, 
   acquisition, or disposition of a 
   significant amount of assets not in the 
   ordinary course of business, filing for 
   bankruptcy or receivership, resignation 
   of directors, change in independent 
   accountants, major legal proceedings, 
   default on securities or debt, 
   write-down or write-off of assets, and a 
   change of more than 5% ownership of a 
   security. A change in accounting 
   principle, such as from the 
   percentage-of-completion method to the 
   completed-contract method, would be 
   reported in the financial statements and 
   not require a special report. 


[60] Source: CMA 1289 3-30 

   Answer (A) is correct. Form 10-Q is a 
   quarterly report that includes interim 
   statements. It must be filed for each of 
   the first 3 quarters of the year within 45 
   days after the end of each quarter. A 
   fourth quarter report is unnecessary. 

   Answer (B) is incorrect because Form 
   10-Q is filed 45 days after the end of 
   the first three quarters. 

   Answer (C) is incorrect because Form 
   10-Q is filed 45 days after the end of 
   the first three quarters. 

   Answer (D) is incorrect because Form 
   10-Q is filed 45 days after the end of 
   the first three quarters. 


[61] Source: CMA 1285 3-29 

   Answer (A) is incorrect because a 
   registration statement is the document 
   submitted to the SEC when a new issue 
   of securities is being registered prior to 
   sale. 

   Answer (B) is correct. Under the 
   Securities Exchange Act of 1934, 
   Section 14 seeks to ensure that proxy 
   solicitations are accompanied by 
   adequate disclosure of information 
   about the agenda items for which 
   authority to vote is being sought. One 
   requirement is that the proxy statement 
   be filed with the SEC at least 10 days 
   prior to mailing proxy materials to 
   shareholders. The proxy statement must 
   identify the party making the solicitation 
   and details about the matters to be voted 
   on such as mergers, authorizations to 
   issue new stock, or election of 
   directors. 

   Answer (C) is incorrect because public 
   companies must submit an annual 10-K 
   report to the SEC. 

   Answer (D) is incorrect because a 
   prospectus is sent to potential investors 
   to provide them with information about 
   the investment potential of a new issue 
   of securities. The prospectus is very 
   similar to the registration statement. 


[62] Source: CPA 0595 F-4 

   Answer (A) is correct. SFAS 107 
   requires the disclosure of information 
   about the fair value of financial 
   instruments, whether recognized or not 
   (certain nonpublic entities and certain 
   instruments, such as leases and 
   insurance contracts, are exempt from the 
   disclosure requirements). SFAS 107 
   also requires disclosure of all 
   significant concentrations of credit risk 
   for most financial instruments (except 
   for obligations for deferred 
   compensation, certain instruments of a 
   pension plan, insurance contracts, 
   warranty obligations and rights, and 
   unconditional purchase obligations). 

   Answer (B) is incorrect because 
   disclosure of significant concentrations 
   of credit risk is required for most 
   financial instruments. 

   Answer (C) is incorrect because 
   disclosure of significant concentrations 
   of credit risk is required for most 
   financial instruments. 

   Answer (D) is incorrect because 
   disclosure of significant concentrations 
   of credit risk is required for most 
   financial instruments. 


[63] Source: CMA 1296 2-14 

   Answer (A) is incorrect because it is a 
   required disclosure for undisclosed 
   obligations under SFAS 47. 

   Answer (B) is incorrect because it is a 
   required disclosure for undisclosed 
   obligations under SFAS 47. 

   Answer (C) is incorrect because it is a 
   required disclosure for undisclosed 
   obligations under SFAS 47. 

   Answer (D) is correct. SFAS 47 
   requires disclosure of unconditional 
   purchase obligations associated with 
   suppliers' financing arrangements (e.g., 
   in the form of take-or-pay and 
   throughput contracts) and future 
   payments required by long-term debt 
   and redeemable stock agreements. 
   Unrecorded unconditional purchase 
   obligations are those requiring payment 
   for future goods or services and are not 
   cancellable or, if so, provide for a 
   substantial penalty. Disclosures 
   required for unrecorded obligations 
   include the nature and term of the item, 
   fixed and determinable payments in 
   total and for each of the next 5 years, 
   the nature of any variable payments, and 
   amounts purchased in the periods for 
   which an income statement is being 
   prepared. Sources of funds to be used 
   for payments need not be disclosed. 


[64] Source: CMA 1296 1-28 

   Answer (A) is incorrect because shelf 
   registration does not stipulate the price 
   that will be charged for securities. 

   Answer (B) is correct. Shelf 
   registration under SEC Rule 415 allows 
   corporations to file registration 
   statements covering a stipulated amount 
   of securities that may be issued on a 
   piecemeal basis over the two-year 
   effective period of the statement. The 
   securities are essentially placed on the 
   shelf and issued at an opportune 
   moment without the necessity of filing a 
   new registration statement, observing a 
   20-day waiting period, or preparing a 
   new prospectus. The issuer is only 
   required to provide updating 
   amendments or to refer investors to 
   quarterly and annual statements filed 
   with the SEC. Shelf registration is most 
   advantageous to large corporations that 
   frequently offer securities to the public. 

   Answer (C) is incorrect because shelf 
   registration has nothing to do with the 
   bidding by underwriters. 

   Answer (D) is incorrect because the 
   detailed financial analysis is required 
   as a part of a shelf registration. 


[65] Source: CMA 0693 1-12 

   Answer (A) is incorrect because a red 
   herring prospectus is not misleading or 
   false; it is simply subject to change. 

   Answer (B) is incorrect because a red 
   herring prospectus has been filed with 
   the SEC. 

   Answer (C) is incorrect because a red 
   herring prospectus is filed with the 
   SEC, but is neither approved or 
   disapproved. 

   Answer (D) is correct. A red herring 
   prospectus is a preliminary prospectus 
   filed with the SEC. The red herring 
   prospectus contains the same 
   information as a regular prospectus, but 
   prices are omitted and the information 
   is subject to change. The prospectus is 
   clearly marked in red to indicate that it 
   is preliminary. 


[66] Source: CPA 0577 A-16 

   Answer (A) is incorrect because 
   interpretations of GAAP made by CPAs 
   on audit engagements are judgments 
   about the application of GAAP to 
   particular circumstances. 

   Answer (B) is incorrect because GAAP 
   include but are not limited to 
   pronouncements of the APB and FASB. 

   Answer (C) is incorrect because, 
   although the federal government can 
   require disclosures by public 
   companies, for example, through 
   regulations of the SEC, GAAP are much 
   broader. They apply to all entities, 
   whether public or private and 
   regardless of size. 

   Answer (D) is correct. GAAP are the 
   "conventions, rules, and procedures 
   necessary to define accepted accounting 
   practice at a particular time." They 
   include both the broad guidelines and 
   the detailed practices and procedures 
   promulgated by the profession that 
   provide uniform standards to measure 
   financial presentations (AU 411). 


[67] Source: Publisher 

   Answer (A) is incorrect because 
   International Accounting Standards is 
   considered other accounting literature 
   rather than established accounting 
   principles. 

   Answer (B) is incorrect because FASB 
   Concepts Statements is considered 
   other accounting literature rather than 
   established accounting principles. 

   Answer (C) is correct. AU 411 presents 
   GAAP hierarchies for nongovernmental 
   entities, state and local governments, 
   and federal governmental entities. The 
   nongovernmental hierarchy has five 
   tiers. The first tier [category (A)] 
   consists of sources of officially 
   established accounting principles 
   (FASB Statements and Interpretations, 
   APB Opinions, and AICPA Accounting 
   Research Bulletins). The next three tiers 
   [categories (B), (C), and (D)] contain 
   other sources of established accounting 
   principles. The fifth tier includes other 
   accounting literature. 

   Answer (D) is incorrect because 
   AICPA Issues Papers is considered 
   other accounting literature rather than 
   established accounting principles. 


[68] Source: Publisher 

   Answer (A) is incorrect because a 
   perfectly competitive market was 
   envisioned by classical economics. 

   Answer (B) is incorrect because the 
   concept embraces the public or societal 
   interest. 

   Answer (C) is correct. The concept of 
   corporate social responsibility involves 
   more than serving the interests of the 
   organization and its shareholders. 
   Rather, it is an extension of 
   responsibility to embrace service to the 
   public interest in such matters as 
   environmental protection, employee 
   safety, civil rights, and community 
   involvement. 

   Answer (D) is incorrect because the 
   concept embraces the public or societal 
   interest. 


[69] Source: Publisher 

   Answer (A) is incorrect because each 
   applies to external auditors. The IMA 
   Code of Ethics does not expressly use 
   such language. 

   Answer (B) is correct. The preamble to 
   the IMA Code of Ethics states, 
   "Practitioners of management 
   accounting and financial management 
   have an obligation to the public, their 
   profession, the organizations they serve, 
   and themselves, to maintain the highest 
   standards of ethical conduct. In 
   recognition of this obligation, the 
   Institute of Management Accountants 
   has promulgated the following 
   standards of ethical conduct for 
   practitioners of management accounting 
   and financial management. Adherence 
   to these standards, both domestically 
   and internationally, is integral to 
   achieving the Objectives of 
   Management Accounting. Practitioners 
   of management accounting and financial 
   management shall not commit acts 
   contrary to these standards nor shall 
   they condone the commission of such 
   acts by others within their 
   organizations." 

   Answer (C) is incorrect because each 
   applies to external auditors. The IMA 
   Code of Ethics does not expressly use 
   such language. 

   Answer (D) is incorrect because each 
   applies to external auditors. The IMA 
   Code of Ethics does not expressly use 
   such language. 


[70] Source: Publisher 

   Answer (A) is incorrect because each 
   states an aspect of the competence 
   requirement. 

   Answer (B) is correct. According to the 
   IMA Code of Ethics, financial 
   managers/management accountants must 
   "avoid actual or apparent conflicts of 
   interest and advise all appropriate 
   parties of any potential conflict." 

   Answer (C) is incorrect because it 
   states an aspect of the confidentiality 
   requirement. 

   Answer (D) is incorrect because each 
   states an aspect of the competence 
   requirement. 


[71] Source: CMA 2 

   Answer (A) is incorrect because the 
   competence standard pertains to the 
   financial manager/management 
   accountant's responsibility to maintain 
   his/her professional skills and 
   knowledge. It also pertains to the 
   performance of activities in a 
   professional manner. 

   Answer (B) is incorrect because the 
   confidentiality standard concerns the 
   financial manager/management 
   accountant's responsibility not to 
   disclose or use the firm's confidential 
   information. 

   Answer (C) is correct. The integrity 
   standard requires the financial 
   manager/management accountant to 
   "refuse any gift, favor, or hospitality 
   that would influence or would appear to 
   influence his/her actions. 

   Answer (D) is incorrect because 
   objectivity is the fourth part of the IMA 
   Code of Ethics. It requires that 
   information be communicated "fairly 
   and objectively," and that all 
   information that could reasonably 
   influence users be fully disclosed. 


[72] Source: CMA 3 

   Answer (A) is correct. One of the 
   responsibilities of the financial 
   manager/management accountant under 
   the competence standard is to "maintain 
   an appropriate level of professional 
   competence by ongoing development of 
   his/her knowledge and skills." (S)he 
   must also "perform professional duties 
   in accordance with relevant laws, 
   regulations, and technical standards." 
   The third requirement under this 
   standard is to "prepare complete and 
   clear reports and recommendations 
   after appropriate analyses of relevant 
   and reliable information." 

   Answer (B) is incorrect because the 
   confidentiality standard concerns the 
   financial manager/management 
   accountant's responsibility not to 
   disclose or use the firm's confidential 
   information. 

   Answer (C) is incorrect because the 
   integrity standard pertains to conflicts 
   of interest, refusal of gifts, professional 
   limitations, professional 
   communications, avoidance of acts 
   discreditable to the profession, and 
   refraining from activities that prejudice 
   the ability to carry out duties ethically. 

   Answer (D) is incorrect because 
   objectivity is the fourth part of the IMA 
   Code of Ethics. It requires that 
   information be communicated "fairly 
   and objectively," and that all 
   information that could reasonably 
   influence users be fully disclosed. 


[73] Source: CMA 0695 2-21 

   Answer (A) is incorrect because 
   issuance of common stock is classified 
   as a financing activity. 

   Answer (B) is incorrect because 
   purchase of treasury stock is classified 
   as a financing activity. 

   Answer (C) is incorrect because 
   payment of dividends is classified as a 
   financing activity. 

   Answer (D) is correct. SFAS 95 
   defines financing activities to include 
   obtaining resources from owners and 
   providing them with a return on, and a 
   return of, their investment. Cash inflows 
   from financing activities include 
   proceeds from issuing equity 
   instruments. Cash outflows include 
   outlays to reacquire the enterprise's 
   equity instruments, and outlays to pay 
   dividends. However, an income tax 
   refund is an operating activity. 


[74] Source: CIA 1192 IV-32 

   Answer (A) is incorrect because only 
   the direct method supplies information 
   about individual classes of gross cash 
   receipts and payments related to 
   operating activities. 

   Answer (B) is correct. The statement of 
   cash flows may report cash flows from 
   operating activities in either an indirect 
   (reconciliation) or a direct format. The 
   direct format reports the major classes 
   of operating cash receipts and cash 
   payments as gross amounts. The indirect 
   presentation reconciles net income to 
   the same amount of net cash flow from 
   operations that would be determined in 
   accordance with the direct method. To 
   arrive at net operating cash flow, the 
   indirect method adjusts net income by 
   removing the effects of (1) all deferrals 
   of past operating cash receipts and 
   payments, (2) all accruals of expected 
   future operating cash receipts and 
   payments, (3) all financing and 
   investing activities, and (4) all noncash 
   operating transactions. 

   Answer (C) is incorrect because the 
   direct method, rather than the indirect 
   method, supplies information about 
   individual classes of gross cash 
   receipts and payments related to 
   operating activities. 

   Answer (D) is incorrect because the 
   direct method reports major classes of 
   gross cash receipts and payments from 
   operating activities. 


[75] Source: CIA 1191 IV-32 

   Answer (A) is incorrect because 
   depreciation does not involve an inflow 
   or outflow of cash. The purchase and 
   the sale of property, plant, and 
   equipment constitute investing 
   activities, but the process of 
   depreciating such assets is not defined 
   as an investing activity. Depreciation is 
   a noncash operating expense. 

   Answer (B) is incorrect because 
   depreciation is a noncash operating 
   expense. 

   Answer (C) is correct. Net cash flow 
   from operating activities may be 
   reported indirectly by removing from 
   net income the effects of (1) all 
   deferrals of past cash receipts and cash 
   payments, (2) all accruals of expected 
   future cash receipts and cash payments, 
   (3) all financing and investing 
   activities, and (4) all noncash operating 
   transactions. These adjustments include 
   such items as depreciation, amortization 
   of patents, amortization of bond 
   discount and bond premium, gains and 
   losses, changes during the period in 
   trade receivables, changes in inventory, 
   and changes in accounts payable and 
   accrued liabilities. In the reconciliation 
   of net income to net cash provided by 
   operations, depreciation (a noncash 
   charge to income) is added to net 
   income. 

   Answer (D) is incorrect because 
   depreciation should be added. 


[76] Source: CMA 1294 2-21 

   Answer (A) is correct. Investing 
   activities include the lending of money 
   and the collecting of those loans, and 
   the acquisition, sale, or other disposal 
   of securities that are not cash 
   equivalents and of productive assets 
   that are expected to generate revenue 
   over a long period of time. Financing 
   activities include the issuance of stock, 
   the payment of dividends, treasury stock 
   transactions, the issuance of debt, the 
   receipt of donor-restricted resources to 
   be used for long-term purposes, and the 
   repayment or other settlement of debt 
   obligations. Investing activities would 
   include the purchase of machinery and 
   the sale of a building. The net inflow 
   from these activities is $700,000 
   ($1,200,000 - $500,000). Financing 
   activities include the issuance of 
   preferred stock and the payment of 
   dividends. The net inflow is $3,600,000 
   ($4,000,000 - $400,000). The 
   conversion of bonds into common stock 
   and the stock dividend do not affect 
   cash. 

   Answer (B) is incorrect because the 
   stock dividend has no effect on cash 
   flows from financing activities. 

   Answer (C) is incorrect because the 
   gain on the sale of the building is 
   double counted in determining the net 
   cash flow from investing activities. 

   Answer (D) is incorrect because the 
   gain on the sale of the building is 
   double counted in determining the net 
   cash flow from investing activities. 


[77] Source: Publisher 

   Answer (A) is incorrect because the 
   balance sheet is a picture of the firm's 
   financial position at a particular point 
   in time. 

   Answer (B) is incorrect because the 
   balance presents the firm's assets and 
   claims against those assets. 

   Answer (C) is incorrect because the 
   balance sheet helps users assess the 
   firm's liquidity. 

   Answer (D) is correct. According to 
   SFAC 5, the balance sheet presents 
   information on a firm's assets, 
   liabilities, and equity and their 
   relationships to each other at a 
   particular point in time. It is essentially 
   a picture, or snapshot, of the entity. In 
   contrast, the income statement reflects a 
   period of time. The balance sheet also 
   helps users assess the entity's financial 
   flexibility, liquidity, profitability, and 
   risk. Sources and uses of cash are 
   shown in the statement of cash flows. 


[78] Source: Publisher 

   Answer (A) is incorrect because 
   goodwill is an intangible asset and is 
   classified in the long-term assets 
   section of the balance sheet. 

   Answer (B) is incorrect because land is 
   included in property, plant, and 
   equipment and is not readily 
   convertible to cash. 

   Answer (C) is incorrect because 
   inventory takes longer to convert to 
   cash than accounts receivable. 

   Answer (D) is correct. Assets 
   presented on the balance sheet are 
   listed in descending order of liquidity, 
   which allows users of financial 
   statements to identify the assets that will 
   be available first to meet current 
   liabilities. An asset that is readily 
   convertible to cash is considered very 
   liquid. Accounts receivable typically 
   has more liquidity than inventory and 
   therefore is listed above inventory in 
   the current assets section of the balance 
   sheet. 


[79] Source: Publisher 

   Answer (A) is incorrect because 
   intangible assets have considerable 
   uncertainty surrounding their future 
   benefits. 

   Answer (B) is incorrect because 
   intangible assets may be developed 
   internally or acquired externally. 

   Answer (C) is correct. Intangible assets 
   are long-term assets ordinarily used in 
   operations. They lack physical 
   substance, and their future benefits are 
   usually uncertain. They may be acquired 
   externally or developed internally, and 
   may be identifiable or unidentifiable. 
   Intangible assets are recorded at cost 
   and shown net of accumulated 
   amortization. 

   Answer (D) is incorrect because 
   intangible assets are shown net of 
   accumulated amortization, not 
   depreciation. 


[80] Source: Publisher 

   Answer (A) is correct. Under ARB 43, 
   current liabilities are obligations that 
   are reasonably expected to be 
   liquidated in the ordinary course of 
   business during the longer of 1 year or 
   the operating cycle. If the operating 
   cycle is less than 1 year, then the 
   current designation will be based on 
   whether the liabilities are liquidated 
   within 1 year. 

   Answer (B) is incorrect because 
   noncurrent liabilities are not liquidated 
   within 1 year when the operating cycle 
   is less than 1 year. 

   Answer (C) is incorrect because 
   obligations is not the title of a section of 
   the balance sheet. 

   Answer (D) is incorrect because cash 
   flows from financing activities is a 
   section in the statement of cash flows. 


[81] Source: Publisher 

   Answer (A) is incorrect because 
   accrued wages is an example of a 
   current liability. 

   Answer (B) is incorrect because 
   newspaper subscription revenue 
   collected in advance is an example of a 
   current liability. 

   Answer (C) is correct. Current 
   liabilities are obligations that are 
   liquidated with the use of current assets 
   or the creation of other current 
   liabilities (ARB 43). They include 
   payables arising from operations 
   directly related to the operating cycle of 
   the entity, such as wages payable. 
   Collections made in advance of 
   delivering goods are also considered 
   current liabilities, such as revenue from 
   newspaper subscriptions. Additionally, 
   amounts expected to be required within 
   a relatively short time are included in 
   current liabilities even though the 
   amount can only be approximated. For 
   example, estimated bonus payments are 
   current liabilities because they are due 
   within a short period of time. Advances 
   from affiliated companies are properly 
   included as noncurrent liabilities. 

   Answer (D) is incorrect because 
   estimated accrued bonus payments is an 
   example of a current liability. 


[82] Source: Publisher 

   Answer (A) is correct. The 
   multiple-step income statement 
   separates operating items from 
   nonoperating items and enhances 
   disclosure by presenting intermediary 
   totals rather than one net income figure. 
   The intermediary totals include gross 
   profit, operating profit, and pretax 
   income from continuing operations. 
   Gross profit is calculated by subtracting 
   cost of goods sold from sales. 

   Answer (B) is incorrect because 
   operating profit is gross profit less 
   selling and administrative expenses. 

   Answer (C) is incorrect because net 
   income from continuing operations is 
   the final result of subtracting expenses 
   from revenues. 

   Answer (D) is incorrect because pretax 
   income from continuing operations is 
   the intermediary total calculated by 
   adjusting operating profit for other 
   revenues (expenses) and gains (losses). 


[83] Source: Publisher 

   Answer (A) is incorrect because 
   extraordinary items is an example of a 
   nonrecurring item. 

   Answer (B) is incorrect because 
   discontinued operations is an example 
   of a nonrecurring item. 

   Answer (C) is incorrect because the 
   cumulative effect of accounting changes 
   is an example of a nonrecurring item. 

   Answer (D) is correct. The 
   all-inclusive approach to reporting net 
   income includes the effects of recurring 
   and nonrecurring transactions. In this 
   way, the income statement reflects the 
   items that are an appropriate part of the 
   earnings history. To ensure that the 
   statement's ability to predict future 
   income will not be impaired, full 
   disclosure must be made of unusual, 
   irregular, or nonrecurring items. 




[85] Source: Publisher 

   Answer (A) is incorrect because 
   $18,020 is the net income if the full 
   $13,000 earthquake loss is subtracted 
   from the income before extraordinary 
   items without regard to the tax 
   associated with it. 

   Answer (B) is incorrect because 
   $31,020 is the income before 
   extraordinary items. 

   Answer (C) is correct. Net income, 
   under the all-inclusive approach, takes 
   into account all transactions affecting 
   the net change in proprietorship equity 
   during the period except transactions 
   with owners and prior-period 
   adjustments. Superclean Inc.'s Year 1 
   net income is calculated as follows 
   using the multiple-step income 
   statement:

   Sales                                         $154,000
   Cost of goods sold                             (90,000)
                                                   ------
        Gross profit                               64,000
   Operating expenses
     Selling expense                    $5,000
     Administrative expense              6,000
                                         -----
                                                  (11,000)
                                                   ------
         Operating income                          53,000
   Other income                                     8,000
                                                   ------
                                                   61,000
   Other expense                                  (14,000)
                                                   ------
   Income before tax                               47,000
   Income tax                                     (15,980)
                                                   ------
   Income before extraordinary items               31,020
   Earthquake loss, net of $4,420 tax              (8,580)
                                                 --------
         Net income                              $ 22,440
                                                 ========

   Answer (D) is incorrect because 
   $47,000 is the income before tax and 
   extraordinary items. 


[86] Source: Publisher 

   Answer (A) is correct. Extraordinary 
   items are material items that are both 
   unusual in nature and infrequent in the 
   environment in which the entity 
   operates. They should be reported, net 
   of tax, on the face of the income 
   statement after income from continuing 
   operations. However, if the item is 
   either unusual in nature or infrequent in 
   the environment in which the entity 
   operates, but not both, then it should be 
   reported as a separate component of 
   income from continuing operations (not 
   net of tax). If earthquakes occur 
   frequently in the area where Superclean 
   Inc. is located, then the loss caused by 
   an earthquake is not an extraordinary 
   item. In this case, Superclean Inc.'s net 
   income would be the same as if the 
   event were considered an extraordinary 
   item. The only difference is in how the 
   loss is classified on the income 
   statement. 

   Answer (B) is incorrect because 
   $25,357 is the net income if the 
   earthquake loss is reported (net of tax) 
   as a separate component of income from 
   continuing operations. In this case, the 
   earthquake loss is taxed twice. 

   Answer (C) is incorrect because 
   $31,020 is the net income without 
   regard to the earthquake loss. 

   Answer (D) is incorrect because 
   $22,440 is the net income whether the 
   earthquake loss is extraordinary or not. 


[87] Source: Publisher 

   Answer (A) is correct. Under APB 30, 
   Reporting the Results of Operations, the 
   income or loss from operations of a 
   discontinued segment up to the 
   measurement date and the gain or loss 
   on disposal should both be shown net of 
   tax. The gain or loss on disposal 
   includes estimated operating income or 
   loss of the segment from the 
   measurement date to the disposal date, 
   any direct disposal costs incurred 
   during the phase-out period, and the 
   estimated gain or loss on the actual 
   disposal. The measurement date is the 
   date management commits itself to a 
   plan to dispose of a segment by either 
   sale or abandonment. 

   Answer (B) is incorrect because a gain 
   or loss on disposal includes the 
   estimated gain or loss on the actual 
   disposal. 

   Answer (C) is incorrect because a gain 
   or loss on disposal includes the 
   estimated operating income or loss of 
   the segment from the measurement date 
   to the disposal date. 

   Answer (D) is incorrect because a gain 
   or loss on disposal includes any direct 
   disposal costs incurred during the 
   phase-out period. 


[88] Source: Publisher 

   Answer (A) is incorrect because an 
   extraordinary item is a material item 
   that is both unusual in nature and 
   infrequent in the environment in which 
   the entity operates. Extraordinary items 
   are presented on the face of the income 
   statement after results from 
   discontinued operations. 

   Answer (B) is correct. APB 30 requires 
   certain items to be reported separately 
   and in a particular order on the face of 
   the income statement. Amounts 
   pertaining to discontinued operations 
   should be presented after income from 
   continuing operations but before 
   extraordinary items. The gain or loss on 
   the disposal, as well as the income or 
   loss from operations of the discontinued 
   segment up to the measurement date, 
   should both be shown net of tax. 

   Answer (C) is incorrect because a 
   cumulative effect of an accounting 
   change results from a change in 
   accounting principle. This amount is 
   shown on the face of the income 
   statement after results from 
   discontinued operations and 
   extraordinary items. 

   Answer (D) is incorrect because gain 
   or loss from the disposal of a segment 
   is not reported in the other gains or 
   losses section of the income statement. 
   Instead, it is reported separately after 
   income from continuing operations and 
   before extraordinary items. 


[89] Source: Publisher 

   Answer (A) is incorrect because 
   $85,000 is the cost of goods 
   manufactured without regard to the 
   overhead. 

   Answer (B) is incorrect because 
   $155,000 is the cost of goods 
   manufactured without subtracting the 
   ending work-in-process. 

   Answer (C) is incorrect because 
   $140,000 is the cost of goods 
   manufactured without adding the 
   beginning work-in-process. 

   Answer (D) is correct. Cost of goods 
   manufactured is a necessary component 
   of calculating cost of goods sold. Cost 
   of goods manufactured is equivalent to 
   a retailer's purchases. It equals all 
   manufacturing costs incurred during the 
   period, plus beginning work-in-process, 
   minus ending work-in-process. For Log 
   Cabin Corp., cost of goods 
   manufactured equals $150,000 
   [$145,000 of manufacturing costs 
   ($30,000 direct materials + $50,000 
   direct labor + $65,000 manufacturing 
   overhead), plus $10,000 beginning 
   work-in-process, minus $5,000 ending 
   work-in-process]. 


[90] Source: Publisher 

   Answer (A) is incorrect because 
   $74,000 is the cost of goods sold based 
   on an understated cost of goods 
   manufactured of $85,000. 

   Answer (B) is correct. Cost of goods 
   sold equals cost of goods manufactured 
   adjusted for the change in finished 
   goods inventory. For Log Cabin Corp., 
   cost of goods sold equals $139,000 
   [$150,000 costs of goods manufactured 
   ($145,000 of manufacturing costs + 
   $10,000 beginning work-in-process - 
   $5,000 ending work-in-process), plus 
   $4,000 beginning finished goods, minus 
   $15,000 ending finished goods]. 

   Answer (C) is incorrect because 
   $144,000 is the cost of goods sold 
   based on an overstated cost of goods 
   manufactured of $155,000. 

   Answer (D) is incorrect because 
   $129,000 is the cost of goods sold 
   based on an understated cost of goods 
   manufactured of $140,000. 


[91] Source: Publisher 

   Answer (A) is correct. The statement of 
   cash flows displays the changes in cash 
   (and in cash equivalents) during the 
   period. By analyzing the beginning and 
   ending balances of accounts listed on 
   the balance sheet and adjusting current 
   net income for all noncash transactions, 
   the changes in cash can be explained. 
   Therefore, the current and previous year 
   balance sheet and the current year 
   income statement are necessary to 
   prepare the statement of cash flows. 

   Answer (B) is incorrect because the 
   current year income statement is 
   necessary to prepare the statement of 
   cash flows. 

   Answer (C) is incorrect because the 
   prior year balance sheet is necessary to 
   prepare the statement of cash flows. 

   Answer (D) is incorrect because the 
   current year balance sheet is necessary 
   to prepare the statement of cash flows. 


[92] Source: Publisher 

   Answer (A) is incorrect because 
   depreciation does not generate a cash 
   inflow. 

   Answer (B) is incorrect because 
   depreciation is an expense, but it is 
   added back to net income because it 
   does not affect cash. 

   Answer (C) is correct. Under the 
   indirect presentation of operating 
   activities, net income is reconciled to 
   net operating cash flow by removing 
   from net income the effects of deferrals, 
   accruals, items whose cash effects are 
   investing or financing cash flows, and 
   items that do not have cash effects. 
   Depreciation does not affect cash, but 
   rather it decreases the book value of an 
   asset as it is held over time. Because 
   depreciation is a noncash reduction, it 
   must be added back to net income. 

   Answer (D) is incorrect because, even 
   though depreciation does reduce the net 
   book value of the equipment it relates 
   to, it is added back to net income 
   because it is a noncash expense. 


[93] Source: Publisher 

   Answer (A) is incorrect because 
   $120,000 is calculated by adding the 
   increase in accounts payable to the 
   sales figure. The change in accounts 
   payable has no effect on the cash 
   collected from customers. 

   Answer (B) is incorrect because 
   $93,000 is determined by subtracting 
   the $7,000 decline in accounts 
   receivable from the $100,000 sales 
   figure. 

   Answer (C) is incorrect because 
   $87,000 is calculated by subtracting the 
   increase in accounts payable from sales 
   and then adding the decrease in 
   accounts receivable. The change in 
   accounts payable has no effect on the 
   cash collected from customers. 

   Answer (D) is correct. Cash collected 
   from customers can be determined by 
   adjusting sales for the changes in 
   customer receivables. In Jim's 
   Landscaping Co., the accounts 
   receivable balance declined by $7,000, 
   implying that cash collections exceeded 
   net income. By adding the $7,000 
   decline in accounts receivables to the 
   $100,000 of sales, cash collected from 
   customers is $107,000. 


[94] Source: Publisher 

   Answer (A) is incorrect because 
   supplementary information is not an 
   integral part of the financial statements. 

   Answer (B) is correct. The footnotes 
   are considered part of the basic 
   financial statements. They amplify or 
   explain information recognized in the 
   statements and are an integral part of 
   statements prepared in accordance with 
   GAAP. Footnotes should not be used to 
   correct improper presentations. 

   Answer (C) is incorrect because 
   footnotes should not be used to correct 
   improper presentations. 

   Answer (D) is incorrect because 
   footnotes are management's 
   responsibility. 


[95] Source: Publisher 

   Answer (A) is correct. The operating 
   cycle is the average time between the 
   acquisition of resources and the final 
   receipt of cash from their sale as the 
   culmination of the entity's 
   revenue-generating activities. If the 
   operating cycle is less than a year, 1 
   year is the basis for defining current and 
   noncurrent assets. 

   Answer (B) is incorrect because the 
   operating cycle relates to the duration 
   of revenue-generating activities, not an 
   arbitrary time period. 

   Answer (C) is incorrect because, if the 
   operating cycle is less than a year, 1 
   year is the basis for defining current and 
   noncurrent assets. 

   Answer (D) is incorrect because the 
   distinction between current and 
   noncurrent liabilities is tied to the 
   distinction between current and 
   noncurrent assets. 


[96] Source: Publisher 

   Answer (A) is incorrect because more 
   liquid assets are presented first. 

   Answer (B) is incorrect because current 
   liabilities are presented first. 

   Answer (C) is incorrect because more 
   permanent items are presented first. 

   Answer (D) is correct. In the 
   classification scheme, assets are usually 
   presented in descending order of 
   liquidity; for example, inventory (a 
   current asset) is more liquid than 
   property, plant, and equipment. 
   Liabilities are shown in ascending 
   order of time to maturity. Thus, trade 
   payables (a current liability) will 
   appear before bonds payable (a 
   long-term liability). Items in the 
   owners' equity section are presented in 
   descending order of permanence, e.g., 
   common stock before retained earnings. 


[97] Source: Publisher 

   Answer (A) is incorrect because cash 
   surrender value of life insurance is 
   included in the long-term investment 
   and funds category. 

   Answer (B) is incorrect because land 
   held for speculation is included in the 
   long-term investment and funds 
   category. 

   Answer (C) is correct. Intangible assets 
   are long-term assets ordinarily used in 
   operations. Intangible assets lack 
   physical substance, and there is usually 
   great uncertainty about their future 
   benefits. They may be acquired 
   externally or developed internally, and 
   may be identifiable or unidentifiable. 
   Intangibles are recorded at cost and 
   shown net of accumulated amortization. 
   Examples are patents, copyrights, 
   trademarks, trade names, franchises, 
   organization costs, and purchased 
   goodwill. 

   Answer (D) is incorrect because 
   internally generated goodwill is not 
   capitalized. 


[98] Source: Publisher 

   Answer (A) is incorrect because 
   organization costs is classified as an 
   intangible asset, other noncurrent asset, 
   or deferred charge. 

   Answer (B) is incorrect because a 
   separate category is often presented for 
   deferred charges. 

   Answer (C) is correct. Property, plant, 
   and equipment (PP&E) are tangible 
   assets used in operations. They are 
   recorded at cost and are shown net of 
   accumulated depreciation if 
   depreciable. They include land and 
   depletable natural resources (e.g., oil 
   and gas reserves), buildings, machinery, 
   equipment, furniture, fixtures, leasehold 
   improvements, land improvements, 
   leased assets held under capital leases, 
   and other depreciable assets. 

   Answer (D) is incorrect because capital 
   assets not used in current operations are 
   included in long-term investments and 
   funds. 


[99] Source: Publisher 

   Answer (A) is incorrect because 
   revenue and expense accounts are 
   closed to real accounts. 

   Answer (B) is incorrect because 
   revenue and expense accounts are 
   closed to permanent accounts. 

   Answer (C) is correct. Revenue and 
   expense (nominal) accounts are 
   temporary holding accounts, which are 
   periodically closed to permanent (real) 
   accounts. The accountant need not close 
   each revenue and expense transaction 
   directly to capital. 

   Answer (D) is incorrect because capital 
   accounts are real (permanent) accounts. 


[100] Source: Publisher 

   Answer (A) is incorrect because EPS 
   data are presented for cumulative effect 
   of accounting changes. 

   Answer (B) is incorrect because EPS 
   data are presented for discontinued 
   operations. 

   Answer (C) is incorrect because EPS 
   data are presented for extraordinary 
   items. 

   Answer (D) is correct. Earnings per 
   share data are presented for both 
   primary and fully diluted EPS for each 
   period presented for each of the 
   following, if they exist: income from 
   continuing operations, discontinued 
   operations, extraordinary items, 
   cumulative effect of accounting changes, 
   and net income. 




[102] Source: Publisher 

   Answer (A) is correct. Information 
   about transactions that do not directly 
   affect cash flow for the period must be 
   disclosed. These transactions are 
   excluded from the body of the statement 
   to avoid undue complexity and 
   detraction from the objective of 
   providing information about cash flows. 
   Examples of noncash investing and 
   financing activities to be reported in 
   related disclosures but not in the 
   statement include converting debt to 
   equity, obtaining assets by assuming 
   liabilities or entering into a capital 
   lease, obtaining a building or 
   investment asset by receiving a gift, and 
   exchanging a noncash asset or liability 
   for another. 

   Answer (B) is incorrect because 
   collection of a loan is a cash inflow 
   from an investing activity. 

   Answer (C) is incorrect because cash 
   flows from a futures, forward, option, 
   or swap contract accounted for as a 
   hedge of an identifiable transaction or 
   event may be classified in the same 
   category as the flows from the hedged 
   item, provided that this policy is 
   disclosed (SFAS 104). 

   Answer (D) is incorrect because 
   issuance of stock results in a cash 
   inflow. 


[103] Source: Publisher 

   Answer (A) is incorrect because 
   investing activities exclude transactions 
   in cash equivalents and in certain loans 
   or other debt or equity instruments 
   acquired specifically for resale. 

   Answer (B) is incorrect because cash 
   equivalents are readily convertible to 
   known amounts of cash and are so near 
   their maturity that they present 
   insignificant risk of changes in value 
   because of changes in interest rates. 
   Thus, an exchange of cash for cash 
   equivalents has no effect on the 
   statement of cash flows. 

   Answer (C) is correct. Investing 
   activities include making and collecting 
   loans and acquiring and disposing of 
   debt or equity instruments and property, 
   plant, and equipment and other 
   productive assets, that is, assets held 
   for or used in the production of goods 
   or services (other than the materials 
   held in inventory). Cash flows from 
   purchases, sales, and maturities of 
   available-for-sale and held-to-maturity 
   securities are cash flows from investing 
   activities and are reported gross for 
   each classification of security in the 
   cash flows statement (SFAS 115). 

   Answer (D) is incorrect because 
   financing activities include the issuance 
   of stock, the payment of dividends, 
   treasury stock transactions, the issuance 
   of debt, and the repayment or other 
   settlement of debt obligations. It also 
   includes receiving restricted resources 
   that by donor stipulation must be used 
   for long-term purposes. 


[104] Source: CMA 0685 4-29 

   Answer (A) is incorrect because the 
   basic statements include the statements 
   of financial position, income, cash 
   flows, and retained earnings. 

   Answer (B) is incorrect because the 
   basic statements include the statements 
   of financial position, income, cash 
   flows, and retained earnings. 

   Answer (C) is incorrect because the 
   basic statements include the statements 
   of financial position, income, cash 
   flows, and retained earnings. 

   Answer (D) is correct. Under GAAP, 
   the basic required statements are the 
   statements of financial position, income, 
   cash flows, and retained earnings. 
   Changes in shareholder's equity must be 
   disclosed in the basic statements, the 
   notes thereto, or a separate statement. A 
   statement of cash flows is now a 
   required part of a full set of financial 
   statements of all business entities (both 
   publicly held and privately held) 
   (SFAS 95). The statement of cash flows 
   has replaced the statement of changes in 
   financial position. Moreover, 
   comprehensive income must be 
   displayed in a financial statement given 
   the same prominence as other 
   statements, but no specific format is 
   required as long as net income is 
   displayed as a component of 
   comprehensive income in the statement. 


[105] Source: Publisher 

   Answer (A) is correct. APB 12, 
   Omnibus Opinion-1967, requires 
   disclosure both of changes in the 
   separate accounts appearing in equity 
   (in addition to retained earnings) and of 
   changes in the number of shares of 
   equity securities when both the balance 
   sheet and the income statement are 
   presented. This disclosure may be in 
   separate statements, the basic financial 
   statements, or the notes. 

   Answer (B) is incorrect because the 
   requirement applies only when both the 
   balance sheet and the income statement 
   are presented. 

   Answer (C) is incorrect because the 
   requirement applies only when both the 
   balance sheet and the income statement 
   are presented. 

   Answer (D) is incorrect because there 
   is a specific disclosure requirement 
   with respect to the changes in the 
   capital accounts. 


[106] Source: CMA 0680 4-15 

   Answer (A) is incorrect because the 
   measurement attributes of assets include 
   but are not limited to fair value. 

   Answer (B) is incorrect because 
   financial statements reflect the going 
   concern assumption. Hence, they 
   usually do not report forced liquidation 
   values. 

   Answer (C) is incorrect because the 
   income statement provides this type of 
   information. 

   Answer (D) is correct. The balance 
   sheet presents three major financial 
   accounting elements: assets (items of 
   value), liabilities (debts), and equity 
   (net worth). According to SFAC 6, 
   Elements of Financial Statements, 
   assets are probable future economic 
   benefits resulting from past transactions 
   or events. Liabilities are probable 
   future sacrifices of economic benefits 
   arising from present obligations as a 
   result of past transactions or events. 
   Equity is the residual interest in the 
   assets after deduction of liabilities. 


[107] Source: CMA Samp Q. 

   Answer (A) is incorrect because 
   efficiency of asset use is assessed by 
   calculating liquidity, leverage, and 
   asset management ratios. These ratios 
   require balance sheet data. 

   Answer (B) is incorrect because 
   liquidity and financial flexibility are 
   assessed by calculating liquidity, 
   leverage, and asset management ratios. 
   These ratios require balance sheet data. 

   Answer (C) is incorrect because the 
   capital structure of the enterprise is 
   reported in the equity section of the 
   statement of financial position. 

   Answer (D) is correct. Assets are 
   usually valued at original historical cost 
   in a statement of financial position, 
   although some exceptions exist. For 
   example, some short-term receivables 
   are reported at their net realizable 
   value. Thus, the statement of financial 
   position cannot be relied upon to assess 
   NRV. 


[108] Source: CMA 0676 3-29 

   Answer (A) is incorrect because it 
   describes an appropriate and required 
   disclosure that should appear in the 
   notes to the financial statements (APB 
   22, Disclosure of Accounting Policies). 

   Answer (B) is incorrect because it 
   describes an appropriate and required 
   disclosure that should appear in the 
   notes to the financial statements (APB 
   22, Disclosure of Accounting Policies). 

   Answer (C) is incorrect because it 
   describes an appropriate and required 
   disclosure that should appear in the 
   notes to the financial statements (APB 
   22, Disclosure of Accounting Policies). 

   Answer (D) is correct. Financial 
   statement notes should not be used to 
   correct improper presentations. The 
   financial statements should be presented 
   correctly on their own. Notes should be 
   used to explain the methods used to 
   prepare the financial statements and the 
   amounts shown. 


[109] Source: CMA 0684 3-13 

   Answer (A) is incorrect because the 
   entity concept limits accounting 
   information to that related to a specific 
   entity (possibly not the same as the 
   legal entity). 

   Answer (B) is incorrect because fund 
   theory stresses that assets equal 
   obligations (equity and liabilities are 
   sources of assets). 

   Answer (C) is correct. The equation is 
   based on the proprietary theory. Equity 
   in an enterprise is what remains after 
   the economic obligations of the 
   enterprise are deducted from its 
   economic resources. 

   Answer (D) is incorrect because the 
   enterprise concept stresses ownership 
   of the assets; that is, the emphasis is on 
   the credit side of the balance sheet. 


[110] Source: CMA 0693 2-10 

   Answer (A) is incorrect because 
   current assets are measured using 
   different attributes, for example, lower 
   of cost or market for inventory and net 
   realizable value for accounts 
   receivable. 

   Answer (B) is incorrect because 
   prepayments may qualify as current 
   assets. They often will be consumed 
   during the operating cycle. 

   Answer (C) is incorrect because the 
   classification criterion is based on the 
   normal operating cycle regardless of the 
   seasonality of the business. 

   Answer (D) is correct. Under ARB 43, 
   current assets are cash and other assets 
   or resources expected to be realized in 
   cash, sold, or consumed during the 
   longer of 1 year or the normal operating 
   cycle of the business. 


[111] Source: CMA 1295 2-8 

   Answer (A) is incorrect because the 
   company intends to refinance the debt 
   on a long-term basis. 

   Answer (B) is correct. SFAS 6 states 
   that short-term obligations expected to 
   be refinanced should be reported as 
   current liabilities unless the firm both 
   plans to refinance and has the ability to 
   refinance the debt on a long-term basis. 
   The ability to refinance on a long-term 
   basis is evidenced by a 
   post-balance-sheet date issuance of 
   long-term debt or a financing 
   arrangement that will clearly permit 
   long-term refinancing. 

   Answer (C) is incorrect because the 
   debt has not been retired. 

   Answer (D) is incorrect because the 
   debt is on the balance sheet. 


[112] Source: CMA 1287 3-30 

   Answer (A) is incorrect because the 
   amount excluded cannot exceed the 
   amount available for refinancing. 

   Answer (B) is correct. If an enterprise 
   intends to refinance short-term 
   obligations on a long-term basis and 
   demonstrates an ability to consummate 
   the refinancing, the obligations should 
   be excluded from current liabilities and 
   classified as noncurrent (SFAS 6, 
   Classification of Short-Term 
   Obligations Expected to Be 
   Refinanced). The ability to consummate 
   the refinancing may be demonstrated by 
   a post-balance-sheet-date issuance of a 
   long-term obligation or equity 
   securities, or by entering into a 
   financing agreement that meets certain 
   criteria. These criteria are that the 
   agreement does not expire within 1 
   year, it is noncancellable by the lender, 
   no violation of the agreement exists at 
   the balance sheet date, and the lender is 
   financially capable of honoring the 
   agreement. 

   Answer (C) is incorrect because SFAS 
   6 has no provision for adjustments or 
   reductions. 

   Answer (D) is incorrect because the 
   refinancing need not have occurred if 
   the firm intends and demonstrates an 
   ability to consummate such refinancing. 


[113] Source: CMA 0695 2-18 

   Answer (A) is incorrect because 
   treasury stock is not an asset. A 
   corporation cannot own itself. 

   Answer (B) is incorrect because 
   treasury stock accounted for at cost is 
   subtracted from the total of the other 
   equity accounts. 

   Answer (C) is incorrect because 
   treasury stock accounted for at cost is 
   subtracted from the total of the other 
   equity accounts. 

   Answer (D) is correct. Treasury stock 
   is a corporation's own stock that has 
   been reacquired but not retired. The 
   entry to record the acquisition of 
   treasury stock accounted for at cost is to 
   debit a contra equity account and to 
   credit cash. In the balance sheet, 
   treasury stock recorded at cost is 
   subtracted from the total of the capital 
   stock balances, additional paid-in 
   capital, retained earnings, and 
   accumulated other comprehensive 
   income. It is not allocated. If treasury 
   stock is recorded at par, it is a direct 
   reduction of common stock, not total 
   equity. 


[114] Source: Publisher 

   Answer (A) is incorrect because the 
   current operating concept is not 
   consistent with GAAP. 

   Answer (B) is correct. In the 
   calculation of net income, the 
   all-inclusive concept of income 
   includes all income transactions that 
   either increase or decrease owners' 
   equity during the current period. The 
   current operating concept only includes 
   ordinary, normal, recurring operations 
   in the net income of the current period. 
   Other items are direct adjustments to 
   retained earnings. APB 9 follows the 
   all-inclusive concept except for the rare 
   transaction treated as a prior-period 
   adjustment. 

   Answer (C) is incorrect because the 
   current operating concept is not 
   consistent with GAAP. 

   Answer (D) is incorrect because an 
   "interactive income statement" does not 
   exist in financial accounting. 


[115] Source: CMA 0684 3-15 

   Answer (A) is correct. The current 
   operating performance concept 
   emphasizes the ordinary, normal, 
   recurring operations of the entity during 
   the current period. Inclusion of 
   extraordinary items or prior-period 
   adjustments is believed to impair the 
   significance of net income. The current 
   operating performance concept is not 
   consistent with GAAP. 

   Answer (B) is incorrect because 
   extraordinary items are excluded under 
   the current operating performance 
   concept. 

   Answer (C) is incorrect because 
   prior-period adjustments are excluded 
   under the current operating performance 
   concept. 

   Answer (D) is incorrect because gains 
   and losses from extinguishment of debt 
   are extraordinary. 


[116] Source: Publisher 

   Answer (A) is incorrect because net 
   income is the final amount presented, 
   and dividends and prior-period 
   adjustments are not included in the 
   income statement. Moreover, certain 
   items are in the wrong order and some 
   are missing. 

   Answer (B) is incorrect because net 
   income is the final amount presented, 
   and dividends and prior-period 
   adjustments are not included in the 
   income statement. Moreover, certain 
   items are in the wrong order and some 
   are missing. 

   Answer (C) is incorrect because net 
   income is the final amount presented, 
   and dividends and prior-period 
   adjustments are not included in the 
   income statement. Moreover, certain 
   items are in the wrong order and some 
   are missing. 

   Answer (D) is correct. The order of 
   income statement items is

    9. Revenues
   10. Expenses
   11. Income from continuing operations before income tax
    6. Taxes on income from continuing operations
    3. Income from continuing operations
    4. Discontinued operations
    2. Extraordinary items
    1. Cumulative effect of change in accounting principle
    8. Net income
   Prior-period adjustments (5) and 
   dividends (7) appear only in retained 
   earnings statements. 


[117] Source: CIA 0592 IV-36 

   Answer (A) is incorrect because gain 
   or loss from discontinued operations 
   appears on the income statement. 

   Answer (B) is incorrect because 
   discontinued operations is a separate 
   caption in the income statement just 
   before extraordinary items. 

   Answer (C) is correct. The results of 
   operations of a segment that has been or 
   will be discontinued, together with any 
   gain or loss on disposal, should be 
   reported separately as a component of 
   income before extraordinary items and 
   the cumulative effect of accounting 
   changes. Income from discontinued 
   operations and the gain or loss on 
   disposal should each be disclosed net 
   of tax. 

   Answer (D) is incorrect because 
   disposal of a segment is not a change in 
   accounting principle. 


[118] Source: CMA 0693 2-22 

   Answer (A) is incorrect because the 
   operating gain or loss for the partial 
   period is not combined with the gain or 
   loss on disposal. 

   Answer (B) is incorrect because a prior 
   period adjustment is an adjustment to 
   beginning retained earnings. 

   Answer (C) is incorrect because gain or 
   loss on disposal is reported in a 
   discontinued operations section prior to 
   extraordinary items. 

   Answer (D) is correct. Discontinued 
   operations should be presented as two 
   subcategories. The first is operating 
   income or loss of the segment prior to 
   the measurement date. The second is the 
   gain or loss on disposal. The gain or 
   loss on disposal includes estimated 
   operating income or loss of the segment 
   from the measurement date to the 
   disposal date, any direct disposal costs 
   incurred during the phase-out period, 
   and the estimated gain or loss on the 
   actual disposal. 


[119] Source: CMA 0687 3-5 

   Answer (A) is incorrect because 
   operating results during the phase-out 
   period are part of the gain (loss) on 
   disposal. 

   Answer (B) is correct. The results of 
   operations of a segment that has been or 
   will be discontinued, together with any 
   gain or loss on disposal, should be 
   reported separately as a component of 
   income before extraordinary items and 
   the cumulative effect of accounting 
   changes. Income from discontinued 
   operations and the gain or loss on 
   disposal should each be disclosed net 
   of tax. 

   Answer (C) is incorrect because the 
   direct costs of discontinuance are 
   included in the gain (loss) on the actual 
   disposal. 

   Answer (D) is incorrect because losses 
   are to be reported at the measurement 
   date even if the disposal date is in a 
   subsequent period. Gains are not to be 
   recognized until realized. 


[120] Source: CIA 1193 IV-32 

   Answer (A) is incorrect because the 
   loss should be treated as extraordinary. 
   It is both infrequent and unusual. 

   Answer (B) is incorrect because no 
   operations have been discontinued. 

   Answer (C) is correct. APB 30 defines 
   an extraordinary item as one that occurs 
   infrequently and is unusual in nature in 
   the environment in which the entity 
   operates. It must also be material to 
   merit separate classification. 

   Answer (D) is incorrect because errors 
   are accounted for as prior-period 
   adjustments. Furthermore, this item is 
   presumably current. 


[121] Source: CMA 0694 2-29 

   Answer (A) is incorrect because APB 
   30 specifically excludes a loss due to 
   the effects of a strike against a major 
   supplier from the definition of 
   extraordinary items. 

   Answer (B) is incorrect because APB 
   30 specifically excludes a gain or loss 
   on the disposal of a portion of the 
   business from the definition of 
   extraordinary items. 

   Answer (C) is correct. APB 30 gives 
   examples of certain transactions that are 
   not to be considered extraordinary 
   items. These include write-downs of 
   receivables and inventories, translation 
   of foreign currency amounts, disposal of 
   a business segment, disposal of 
   productive assets, the effects of strikes, 
   and the adjustments of accruals on 
   long-term contracts. A gain or loss on 
   the early extinguishment of debt is to be 
   shown as an extraordinary item under 
   the provisions of SFAS 4. 

   Answer (D) is incorrect because APB 
   30 specifically excludes a gain or loss 
   from the translation of foreign currency 
   due to a major devaluation from the 
   definition of extraordinary items. 


[122] Source: CMA 0693 2-24 

   Answer (A) is correct. Extraordinary 
   items should be presented net of tax 
   after income from operations. APB 30 
   states, "Descriptive captions and the 
   amounts for individual extraordinary 
   events or transactions should be 
   presented, preferably on the face of the 
   income statement, if practicable; 
   otherwise, disclosure in related notes is 
   acceptable." 

   Answer (B) is incorrect because 
   extraordinary items are to be reported 
   net of the related tax effect. 

   Answer (C) is incorrect because 
   extraordinary items are not reported in 
   the continuing operations section of the 
   income statement. 

   Answer (D) is incorrect because each 
   extraordinary item is to be reported 
   separately. 


[123] Source: CMA 0688 4-18 

   Answer (A) is incorrect because 
   discontinued operations are reported 
   separately from income from continuing 
   operations. 

   Answer (B) is incorrect because 
   extraordinary loss is reported 
   separately from income from continuing 
   operations. 

   Answer (C) is incorrect because a 
   cumulative effect of a change in an 
   accounting principle is reported 
   separately from income from continuing 
   operations. 

   Answer (D) is correct. APB 30 
   specifies certain items that are not to be 
   treated as extraordinary gains and 
   losses. Rather, they are included in the 
   determination of income from 
   continuing operations. These gains and 
   losses include those from write-downs 
   of receivables and inventories, 
   translation of foreign currency amounts, 
   disposal of a business segment, sale of 
   productive assets, strikes, and accruals 
   on long-term contracts. A write-down 
   of inventory is therefore included in the 
   computation of income from continuing 
   operations. 


[124] Source: CIA 0590 IV-32 

   Answer (A) is correct. Within the 
   income from continuing operations 
   classification, the single-step income 
   statement provides one grouping for 
   revenue items and one for expense 
   items. The single-step is the one 
   subtraction necessary to arrive at 
   income from continuing operations 
   prior to the effect of income taxes. In 
   contrast, the multiple-step income 
   statement matches operating revenues 
   and expenses separately from 
   nonoperating items. This format 
   emphasizes subtotals such as gross 
   margin, operating income, and 
   nonoperating income within 
   presentation of income from continuing 
   operations. 

   Answer (B) is incorrect because the 
   major distinction is the separation of 
   operating and nonoperating data. 

   Answer (C) is incorrect because the 
   major distinction is the separation of 
   operating and nonoperating data. 

   Answer (D) is incorrect because the 
   major distinction is the separation of 
   operating and nonoperating data. 


[125] Source: CMA 0690 3-5 

   Answer (A) is incorrect because sales 
   is part of the normal operations of a 
   retailer. 

   Answer (B) is incorrect because cost of 
   goods sold is part of the normal 
   operations of a retailer. 

   Answer (C) is correct. The operating 
   section of a retailer's income statement 
   includes all revenues and costs 
   necessary for the operation of the retail 
   establishment, e.g., sales, cost of goods 
   sold, administrative expenses, and 
   selling expenses. Dividend revenue, 
   however, is classified under other 
   revenues. In a statement of cash flows, 
   cash dividends received are considered 
   an operating cash flow. 

   Answer (D) is incorrect because 
   administrative and selling expenses are 
   part of the normal operations of a 
   retailer. 


[126] Source: CMA 1287 3-29 

   Answer (A) is incorrect because SFAS 
   78 requires classification as a current 
   liability. 

   Answer (B) is incorrect because 
   bankruptcy is not an exception. 

   Answer (C) is correct. In these 
   circumstances, the obligation should be 
   classified as current. However, the debt 
   need not be reclassified if the violation 
   will be cured within a specified grace 
   period or if the creditor formally 
   waives or subsequently loses the right 
   to demand repayment for a period of 
   more than a year from the balance sheet 
   date. Also, reclassification is not 
   required if the debtor expects and has 
   the ability to refinance the obligation on 
   a long-term basis. 

   Answer (D) is incorrect because SFAS 
   78 concerns callable, not contingent, 
   liabilities. 


[127] Source: Publisher 

   Answer (A) is incorrect because all 
   business entities and not-for-profit 
   organizations are required to present a 
   statement of cash flows. 

   Answer (B) is incorrect because all 
   business entities and not-for-profit 
   organizations are required to present a 
   statement of cash flows. 

   Answer (C) is incorrect because all 
   business entities and not-for-profit 
   organizations are required to present a 
   statement of cash flows. 

   Answer (D) is correct. SFAS 95 as 
   amended by SFAS 117 requires a 
   statement of cash flows as part of a full 
   set of financial statements of all 
   business entities (both publicly held and 
   privately held) and not-for-profit 
   organizations. Defined benefit pension 
   plans, certain other employee benefit 
   plans, and certain highly liquid 
   investment companies, however, are 
   exempted from this requirement by 
   SFAS 102. 


[128] Source: Publisher 

   Answer (A) is incorrect because a 
   statement of cash flows must be 
   provided for all 3 years. 

   Answer (B) is incorrect because a 
   statement of cash flows must be 
   provided for all 3 years. 

   Answer (C) is correct. When a business 
   enterprise provides a set of financial 
   statements that reports both financial 
   position and results of operations, it 
   must also present a statement of cash 
   flows for each period for which the 
   results of operations are provided. 

   Answer (D) is incorrect because the 
   statement of cash flows is not optional 
   in these circumstances. 


[129] Source: CIA 1192 IV-30 

   Answer (A) is incorrect because the 
   statement of income is prepared on an 
   accrual basis and is not meant to report 
   cash flows. 

   Answer (B) is incorrect because the 
   statement of retained earnings merely 
   shows the reasons for changes in 
   retained earnings during the reporting 
   period. 

   Answer (C) is correct. The primary 
   purpose of a statement of cash flows is 
   to provide information about the cash 
   receipts and cash payments of a 
   business enterprise during a period. 
   This information helps investors, 
   creditors, and other users to assess (1) 
   the enterprise's ability to generate net 
   cash inflows; (2) its ability to meet its 
   obligations, and pay dividends; (3) its 
   needs for external financing; (4) the 
   reasons for the differences between net 
   income and net cash flow; and (5) the 
   effects of cash and noncash financing 
   and investing activities (SFAS 95). 

   Answer (D) is incorrect because the 
   balance sheet reports on financial 
   position at a moment in time. It does not 
   provide information about future cash 
   flows. 


[130] Source: CMA 1295 2-5 

   Answer (A) is correct. The primary 
   purpose of a statement of cash flows is 
   to provide information about the cash 
   receipts and payments of an entity 
   during a period. If used with 
   information in the other financial 
   statements, the statement of cash flows 
   should help users to assess the entity's 
   ability to generate positive future net 
   cash flows (liquidity), its ability to 
   meet obligations (solvency) and pay 
   dividends, the need for external 
   financing, the reasons for differences 
   between income and cash receipts and 
   payments, and the cash and noncash 
   aspects of the investing and financing 
   activities. 

   Answer (B) is incorrect because the 
   statement of cash flows deals with only 
   one resource--cash. 

   Answer (C) is incorrect because the 
   income statement shows the components 
   of income from operations. 

   Answer (D) is incorrect because the 
   identity of stock buyers and sellers is 
   not shown. 


[131] Source: CMA 1288 4-19 

   Answer (A) is correct. SFAS 95 
   excludes all noncash transactions from 
   the body of the statement of cash flows 
   to avoid undue complexity and 
   detraction from the objective of 
   providing information about cash flows. 
   Information about all noncash financing 
   and investing activities affecting 
   recognized assets and liabilities shall 
   be reported in related disclosures. 

   Answer (B) is incorrect because SFAS 
   95 specifically excludes noncash 
   transactions from the body of the 
   statement of cash flows. 

   Answer (C) is incorrect because SFAS 
   95 specifically excludes noncash 
   transactions from the body of the 
   statement of cash flows. 

   Answer (D) is incorrect because SFAS 
   95 specifically excludes noncash 
   transactions from the body of the 
   statement of cash flows. 


[132] Source: CIA 0592 IV-35 

   Answer (A) is incorrect because the 
   balance sheet does not include periodic 
   net income or depreciation expense. 

   Answer (B) is incorrect because the 
   income statement does not have 
   captions for operating and financing 
   activities. 

   Answer (C) is correct. A statement of 
   cash flows is a required financial 
   statement. Its primary purpose is to 
   provide information about cash receipts 
   and payments by reporting the cash 
   effects of an enterprise's operating, 
   investing, and financing activities. 
   Related disclosures report the effects of 
   noncash investing and financing 
   activities. Because the statement or a 
   separate schedule reconciles net income 
   and net operating cash flow, 
   depreciation, a noncash expense, is 
   included in the presentation. 

   Answer (D) is incorrect because equity 
   does not include captions for operating 
   and investing activities, depreciation, 
   and net income. 


[133] Source: CIA 1193 IV-33 

   Answer (A) is incorrect because credit 
   card interest charges reduce equity, and 
   interest payments are classified as an 
   operating outflow on the statement of 
   cash flows. 

   Answer (B) is correct. Credit card 
   interest incurred is classified as interest 
   expense on the income statement, which 
   in turn reduces equity on the balance 
   sheet by reducing retained earnings. 
   Cash payments to lenders and other 
   creditors for interest, e.g., credit card 
   interest payments, are to be classified 
   on the statement of cash flows as an 
   outflow of cash from operating 
   activities. 

   Answer (C) is incorrect because credit 
   card interest charges reduce equity, and 
   interest payments are classified as an 
   operating outflow on the statement of 
   cash flows. 

   Answer (D) is incorrect because credit 
   card interest charges reduce equity, and 
   interest payments are classified as an 
   operating outflow on the statement of 
   cash flows. 


[134] Source: CMA 1293 2-29 

   Answer (A) is incorrect because the 
   purchase of equipment is an investing 
   activity. 

   Answer (B) is incorrect because the 
   sale of bonds issued by another entity is 
   an investing activity. 

   Answer (C) is correct. Investing 
   activities include the lending of money 
   and the collecting of those loans; the 
   acquisition, sale, or other disposal of 
   debt or equity instruments; and the 
   acquisition, sale, or other disposition of 
   assets (excluding inventory) that are 
   held for or used in the production of 
   goods or services. Investing activities 
   do not include acquiring and disposing 
   of certain loans or other debt or equity 
   instruments that are acquired 
   specifically for resale. Cash outflows to 
   lenders for interest are cash from an 
   operating, not an investing, activity. 

   Answer (D) is incorrect because the 
   sale of a plant is an investing activity. 


[135] Source: CIA 1195 IV-34 

   Answer (A) is incorrect because 
   payment of cash dividends is a use of 
   cash for a financing activity. 

   Answer (B) is correct. Financing 
   activities include, among other things, 
   obtaining resources from owners and 
   providing them with a return on, and a 
   return of, their investment. 
   Consequently, the payment of cash 
   dividends to providers of common 
   equity financing is a use of cash that 
   appears in the financing section of the 
   statement of cash flows. 

   Answer (C) is incorrect because 
   payment of cash dividends is a use of 
   cash for a financing activity. 

   Answer (D) is incorrect because 
   payment of cash dividends is a use of 
   cash for a financing activity. 


[136] Source: Publisher 

   Answer (A) is correct. In general, cash 
   inflows and cash outflows from 
   operating, investing, and financing 
   activities should be reported separately 
   at gross amounts in a statement of cash 
   flows. In certain instances, however, 
   the net amount of related cash receipts 
   and cash payments may provide 
   sufficient information about particular 
   classes of cash flows. For example, 
   SFAS 104 permits banks, saving 
   institutions, and credit unions to report 
   net amounts for (1) the placement and 
   withdrawal of deposits with other 
   financial institutions, (2) the acceptance 
   and repayment of time deposits, and (3) 
   the making of loans to customers and the 
   collection of principal. 

   Answer (B) is incorrect because 
   changes in cash and cash equivalents 
   are classes of related cash flows that 
   may be presented as net amounts. 

   Answer (C) is incorrect because the 
   purchase and sale of federal funds is a 
   class of related cash flows that may be 
   presented as net amounts. 

   Answer (D) is incorrect because the 
   receipts and payments from demand 
   deposits are classes of related cash 
   flows that may be presented as net 
   amounts. 


[137] Source: Publisher 

   Answer (A) is incorrect because an 
   entity with a simple capital structure 
   (one with only common stock 
   outstanding) must also make EPS 
   disclosures if it is within the scope of 
   SFAS 128. 

   Answer (B) is incorrect because 
   whether an entity's capital structure has 
   changed does not determine the need for 
   EPS disclosures. 

   Answer (C) is correct. SFAS 128, 
   Earnings per Share, applies to all 
   entities that have issued publicly traded 
   common stock or potential common 
   stock (e.g., options, warrants, 
   convertible securities, or contingent 
   stock agreements). SFAS 128 also 
   applies if an entity has made, or is in 
   the process of making, a filing with a 
   regulatory body to prepare for the 
   public sale of such securities. It does 
   not apply to investment companies or to 
   statements of wholly owned 
   subsidiaries. 

   Answer (D) is incorrect because SFAS 
   128 does not apply to statements of 
   wholly owned subsidiaries. 


[138] Source: CMA 1295 2-2 

   Answer (A) is incorrect because 
   interest paid on bonds is an operating 
   cash flow. 

   Answer (B) is correct. Payment of 
   interest on debt is considered an 
   operating activity, although repayment 
   of debt principal is a financing activity. 

   Answer (C) is incorrect because 
   investing activities include the lending 
   of money and the acquisition, sale, or 
   other disposal of securities that are not 
   cash equivalents and the acquisition, 
   sale, or other disposal of long-lived 
   productive assets. 

   Answer (D) is incorrect because SFAS 
   95 does not provide for a debt section. 


[139] Source: CMA 1295 2-3 

   Answer (A) is incorrect because, under 
   the provisions of SFAS 95, the $5,000 
   inflow would be shown in the investing 
   section. 

   Answer (B) is incorrect because no 
   outflow of cash dividends occurred in 
   year 2. 

   Answer (C) is incorrect because the 
   decrease in receivables should be 
   added to net income. 

   Answer (D) is correct. The indirect 
   method determines net operating cash 
   flow by adjusting net income. Under the 
   indirect method, the $5,000 cash inflow 
   from the sale of the truck is shown in 
   the investing section. A $2,000 loss 
   was recognized and properly deducted 
   to determine net income. This loss, 
   however, did not require the use of cash 
   and should be added to net income in 
   the operating section. 


[140] Source: CMA 1295 2-4 

   Answer (A) is incorrect because 
   $284,000 is the ending cash balance, 
   not the change in the cash balance; it 
   ignores the beginning balance. 

   Answer (B) is correct. The total of cash 
   provided (used) by the three activities 
   (operating, investing, and financing) 
   should equal the increase or decrease in 
   cash for the year. During year 2, the 
   cash balance increased from $106,000 
   to $284,000. Thus, the sources of cash 
   must have exceeded the uses by 
   $178,000. 

   Answer (C) is incorrect because the 
   cash balance increased during the year. 

   Answer (D) is incorrect because net 
   income must be adjusted for noncash 
   expenses and other accruals and 
   deferrals. 


[141] Source: CMA 0693 2-13 

   Answer (A) is incorrect because SFAS 
   95 encourages use of the direct method. 

   Answer (B) is incorrect because the 
   indirect method reconciles net income 
   with the net cash flow from operations. 

   Answer (C) is correct. SFAS 95 
   encourages use of the direct method of 
   reporting major classes of operating 
   cash receipts and payments, but the 
   indirect method may be used. The 
   minimum disclosures of operating cash 
   flows under the direct method are cash 
   collected from customers, interest and 
   dividends received, other operating 
   cash receipts, cash paid to employees 
   and other suppliers of goods or 
   services, interest paid, income taxes 
   paid, and other operating cash 
   payments. 

   Answer (D) is incorrect because the 
   reconciliation is required regardless of 
   the method used. 


[142] Source: R. O'Keefe 

   Answer (A) is incorrect because only 
   the direct method format for the 
   statement of cash flows presents cash 
   collected from customers as a gross 
   amount. 

   Answer (B) is incorrect because only 
   the direct method format for the 
   statement of cash flows presents cash 
   collected from customers as a gross 
   amount. 

   Answer (C) is incorrect because only 
   the direct method format for the 
   statement of cash flows presents cash 
   collected from customers as a gross 
   amount. 

   Answer (D) is correct. The statement of 
   cash flows may report cash flows from 
   operating activities in either an indirect 
   (reconciliation) or a direct format. The 
   direct format reports the major classes 
   of operating cash receipts and cash 
   payments as gross amounts. The indirect 
   presentation reconciles net income to 
   the same amount of net cash flow from 
   operations that would be determined in 
   accordance with the direct method. To 
   arrive at net operating cash flow, the 
   indirect method adjusts net income by 
   removing the effects of (1) all deferrals 
   of past operating cash receipts and 
   payments, (2) all accruals of expected 
   future operating cash receipts and 
   payments, (3) all financing and 
   investing activities, and (4) all noncash 
   operating transactions. 


[143] Source: CMA 0695 2-20 

   Answer (A) is incorrect because a 
   decrease in inventory is a reconciling 
   item. It indicates that cost of goods sold 
   exceeded purchases. Purchases is then 
   adjusted for the change in accounts 
   payable to determine cash paid to 
   suppliers. 

   Answer (B) is incorrect because a 
   decrease in prepaid insurance is a 
   reconciling item. It implies that 
   insurance expense was greater than cash 
   paid to insurers. 

   Answer (C) is correct. The purchase of 
   land and a building in exchange for a 
   long-term note is a noncash investing 
   activity that does not affect net income. 
   Thus, it is reported in the related 
   disclosures section of the cash flow 
   statement but is not a reconciling item. 

   Answer (D) is incorrect because an 
   increase in income tax payable is a 
   reconciling item. It means that income 
   tax expense exceeded cash paid for 
   income taxes. 


[144] Source: CMA 1293 2-30 

   Answer (A) is incorrect because an 
   increase in accrued liabilities is added 
   to net income. It implies that cash paid 
   to suppliers of goods and services was 
   less than the costs included in the 
   determination of net income. 

   Answer (B) is correct. The indirect 
   presentation begins with net income. It 
   then removes from net income the 
   effects of all past deferrals of operating 
   cash receipts and payments, all accruals 
   of expected future operating cash 
   receipts and payments, and net income 
   items not affecting operating cash flows 
   to arrive at the net cash flow from 
   operating activities. For example, the 
   amortization of bond premium by the 
   issuer involves a debit to premium on 
   bonds payable and a credit to interest 
   expense. Hence, the issuer's income is 
   greater because of the amortization (a 
   noncash item). (For the investor, 
   however, the amortization of premium 
   is a noncash reduction of interest 
   income that must be added back to net 
   income in the reconciliation.) On the 
   cash flow statement, the amortization 
   must be subtracted from net income to 
   arrive at the net operating cash flow. 

   Answer (C) is incorrect because the 
   loss is from an investing, not an 
   operating activity. 

   Answer (D) is incorrect because a 
   decrease in accounts receivable is 
   added to net income. It indicates that 
   cash collections from receivables 
   exceeded sales. 


[145] Source: CMA 1294 2-18 

   Answer (A) is incorrect because 
   goodwill amortization is not a cash 
   flow. 

   Answer (B) is incorrect because 
   goodwill amortization is added to net 
   income. 

   Answer (C) is correct. The statement of 
   cash flows may report operating 
   activities in the form of either an 
   indirect or a direct presentation. The 
   indirect presentation removes from net 
   income the effects of past deferrals of 
   past operating cash flows, all accruals 
   of expected future operating cash flows, 
   and net income items not affecting 
   operating cash flows. The result is net 
   operating cash flow. Goodwill 
   amortization is a noncash expense and 
   should be added to net income. 

   Answer (D) is incorrect because 
   goodwill amortization must be included 
   in the reconciliation of net income to net 
   operating cash flow. 


[146] Source: CMA 1295 2-1 

   Answer (A) is incorrect because assets 
   other than cash are not shown on the 
   statement of cash flows. 

   Answer (B) is incorrect because 
   depreciation is recorded on the income 
   statement. On the statement of cash 
   flows, depreciation is added back to net 
   income because it was previously 
   deducted on the income statement. 

   Answer (C) is correct. The indirect 
   method begins with net income and then 
   removes the effects of past deferrals of 
   operating cash receipts and payments, 
   accruals of expected future operating 
   cash receipts and payments, and net 
   income items not affecting operating 
   cash flows (e.g., depreciation). 

   Answer (D) is incorrect because net 
   book value of assets is shown on the 
   balance sheet, not the statement of cash 
   flows. 


[147] Source: CIA 0593 IV-44 

   Answer (A) is incorrect because both 
   the increase in prepaid expenses and 
   amortization of premium on bonds 
   payable require a deduction from net 
   income in the reconciliation. 

   Answer (B) is incorrect because both 
   the increase in prepaid expenses and 
   amortization of premium on bonds 
   payable require a deduction from net 
   income in the reconciliation. 

   Answer (C) is incorrect because both 
   the increase in prepaid expenses and 
   amortization of premium on bonds 
   payable require a deduction from net 
   income in the reconciliation. 

   Answer (D) is correct. An increase in 
   prepaid expenses indicates that cash 
   outlays for expenses exceeded the 
   related expense incurred; thus, net 
   income exceeded net cash provided by 
   operations and a deduction is needed in 
   the reconciliation. Also, the 
   amortization of premium on bonds 
   payable causes a reduction of interest 
   expense but does not increase cash; 
   therefore, net income exceeds net cash 
   from operating activities, and a 
   deduction is needed in the 
   reconciliation. 


[148] Source: Publisher 

   Answer (A) is correct. To derive net 
   income from net cash inflow from 
   operating activities, various 
   adjustments are necessary. The 
   depreciation of $38,000 should be 
   subtracted because it is a noncash item 
   included in the determination of net 
   income. The increase in net accounts 
   receivable of $31,000 should be added 
   because it signifies that sales revenue 
   was greater than the cash collections 
   from customers. The increase in 
   accounts payable should be subtracted 
   because it indicates that purchases were 
   $48,000 greater than cash 
   disbursements to suppliers. The second 
   step of the transformation from cash 
   paid to suppliers to cost of goods sold 
   is to subtract the decrease in inventory. 
   This change means that cost of goods 
   sold was $27,000 greater than 
   purchases. The $12,000 increase in 
   interest payable should also be 
   subtracted because it indicates that 
   interest expense was greater than the 
   cash paid to the lenders. Thus, the net 
   adjustment to net cash inflow from 
   operating activities is -$94,000 
   (-$38,000 + $31,000 - $27,000 - 
   $48,000 - $12,000). Net income is 
   $29,000 ($123,000 net cash inflow - 
   $94,000 net adjustment). 

   Answer (B) is incorrect because the 
   increase in interest payable is not 
   subtracted. 

   Answer (C) is incorrect because 
   depreciation and the increase in interest 
   payable are not subtracted. 

   Answer (D) is incorrect because 
   depreciation, the increase in accounts 
   payable, the decrease in inventory, and 
   the increase in interest payable should 
   be subtracted, and the increase in net 
   accounts receivable should be added. 


[149] Source: CIA 1188 IV-33 

   Answer (A) is correct. Depreciation 
   and amortization are noncash expenses 
   and are added to net income. A 
   decrease in receivables indicates that 
   cash collections exceed sales on an 
   accrual basis, so it is added to net 
   income. To account for the difference 
   between cost of goods sold (a 
   deduction from income) and cash paid 
   to suppliers, a two-step adjustment of 
   net income is necessary. The difference 
   between cost of goods sold and 
   purchases is the change in inventory. 
   The difference between purchases and 
   the amount paid to suppliers is the 
   change in accounts payable. 
   Accordingly, the conversion of cost of 
   goods sold to cash paid to suppliers 
   requires deducting the inventory 
   increase and adding the accounts 
   payable increase. An increase in plant 
   assets indicates an acquisition of plant 
   assets, causing a decrease in cash, so it 
   is deducted. An increase in contributed 
   capital represents a cash inflow and is 
   added to net income. A decrease in 
   short-term notes payable is deducted 
   from net income because it reflects a 
   cash outflow. Thus, cash increased by 
   $11,000 ($70,000 NI + $14,000 + 
   $1,000 + $2,000 - $9,000 + $4,000 - 
   $47,000 + $31,000 - $55,000). 

   Answer (B) is incorrect because 
   $17,000 results from subtracting the 
   amortization and the decrease in 
   receivables and adding the increase in 
   inventories. 

   Answer (C) is incorrect because 
   $54,000 results from adjusting net 
   income for the increase in plant assets 
   and the increase in contributed capital 
   only. 

   Answer (D) is incorrect because 
   $69,000 results from not making the 
   adjustments for receivables, 
   inventories, notes payable, and accounts 
   payable. 


[150] Source: CMA 1294 2-20 

   Answer (A) is incorrect because 
   $4,200,000 equals net cash provided by 
   operating activities minus the $400,000 
   financing activity. 

   Answer (B) is incorrect because 
   $4,500,000 equals net income, plus 
   depreciation. 

   Answer (C) is correct. Net operating 
   cash flow may be determined by 
   adjusting net income. Depreciation is an 
   expense not directly affecting cash 
   flows that should be added back to net 
   income. The increase in accounts 
   payable is added to net income because 
   it indicates that an expense has been 
   recorded but not paid. The gain on the 
   sale of land is an inflow from an 
   investing, not an operating, activity and 
   should be subtracted from net income. 
   The dividends paid on preferred stock 
   are cash outflows from financing, not 
   operating, activities and do not require 
   an adjustment. Thus, net cash flow from 
   operations is $4,600,000 ($3,000,000 + 
   $1,500,000 - $200,000 + $300,000). 

   Answer (D) is incorrect because 
   $4,800,000 equals net income, plus 
   depreciation, plus the increase in 
   accounts payable. 


[151] Source: Publisher 

   Answer (A) is incorrect because the 
   reconciliation may be presented in a 
   related disclosure. 

   Answer (B) is incorrect because the 
   reconciliation may be reported in the 
   statement of cash flows. 

   Answer (C) is correct. When an 
   indirect presentation of net cash flows 
   from operating activities is made, a 
   reconciliation with net income must be 
   provided for all noncash revenues, 
   gains, expenses, and losses. This 
   reconciliation may be either reported in 
   the statement of cash flows or provided 
   separately in related disclosures, with 
   the statement of cash flows presenting 
   only the net cash flows from operating 
   activities. 

   Answer (D) is incorrect because a 
   reconciliation must be reported in an 
   indirect presentation of the statement of 
   cash flows. 


[152] Source: CMA 1286 3-14 

   Answer (A) is incorrect because the 
   write-down is taken to income in the 
   period in which the loss occurs. 

   Answer (B) is incorrect because the 
   write-down is taken to income in the 
   period in which the loss occurs. 

   Answer (C) is incorrect because the 
   loss is ordinary. 

   Answer (D) is correct. If a separate 
   loss account is not used, the ending 
   inventory will be reduced directly and 
   the result will be an increase in cost of 
   goods sold. No separate disclosure of 
   the inventory write-down will appear in 
   the income statement. The effect is to 
   hide the loss in cost of goods sold. If 
   the separate loss account is used, it 
   appears on the income statement as a 
   deduction from gross profit (sales - cost 
   of goods sold). One advantage is that 
   cost of goods sold is not misstated. 


[153] Source: CMA 1287 3-28 

   Answer (A) is incorrect because 
   recognition of an ordinary gain or loss 
   would be appropriate for a sale. 

   Answer (B) is incorrect because 
   recognition of an ordinary gain or loss 
   would be appropriate for a sale. 

   Answer (C) is correct. When the 
   transfer does not qualify as a sale, a 
   liability is credited for the total 
   proceeds. Cash is debited for the 
   amount received, a receivable is 
   debited for any amount still due from 
   the transferee, and the balance is treated 
   as a cost of borrowing by debiting it to 
   discount on transferred receivables. 
   This cost is amortized to interest 
   expense over the life of the receivables. 

   Answer (D) is incorrect because 
   recognition of an ordinary gain or loss 
   would be appropriate for a sale. 


[154] Source: CMA 0688 4-28 

   Answer (A) is correct. The debtor 
   (issuer) on a bond sold at a premium 
   debits or reduces the bond premium for 
   the excess of cash interest paid over 
   interest expense recognized under the 
   effective interest method. The lender 
   (buyer) likewise reduces the bond 
   premium (by a credit) for the excess of 
   cash interest received over interest 
   income recognized. Interest paid 
   (received) is a cash outflow (inflow) 
   from an operating activity. In a 
   reconciliation of net income to net cash 
   flow from operating activities, both the 
   issuer of the bond and the purchaser 
   must make an adjustment for the 
   difference between the cash flow and 
   the effect on net income. Because the 
   issuer's cash outflow exceeded interest 
   expense, it must deduct the difference 
   (premium amortization) from net 
   income in performing the reconciliation. 
   The purchaser's cash inflow is greater 
   than interest income, so it must add the 
   difference (premium amortization) to 
   net income to arrive at net cash flow 
   from operating activities. 

   Answer (B) is incorrect because the 
   sale of equipment is an investing 
   activity, not an operating activity. 

   Answer (C) is incorrect because a cash 
   dividend paid is a cash outflow from a 
   financing activity. 

   Answer (D) is incorrect because the 
   purchase of treasury stock is a financing 
   activity since it involves a change in the 
   amount of capital stock outstanding. 


[155] Source: CMA 0691 2-9 

   Answer (A) is incorrect because the 
   holder of discounted notes can resort to 
   the company for payment if the maker 
   defaults. 

   Answer (B) is incorrect because 
   contingent liabilities do not appear on 
   the financial statements unless they are 
   both probable and reasonably 
   estimable, but they must be disclosed if 
   the likelihood of payment is reasonably 
   possible. Moreover, some remote 
   contingencies, e.g., guarantees of the 
   indebtedness of others, must also be 
   disclosed. Contingent liabilities would 
   reduce a company's apparent liquidity. 

   Answer (C) is incorrect because 
   guarantees of the indebtedness of others 
   are contingent liabilities that decrease 
   apparent liquidity. 

   Answer (D) is correct. The only item 
   listed that increases rather than 
   decreases the company's apparent 
   liquidity is the unused bank credit. 
   These credit lines do not appear on the 
   financial statements, but they can be 
   used to obtain immediate cash if 
   needed. 


[156] Source: CMA 1292 2-6 

   Answer (A) is incorrect because the 
   information should be disclosed if its 
   omission would cause the statements 
   not to be fairly presented. 

   Answer (B) is correct. Material 
   subsequent events that provide 
   additional evidence about conditions 
   existing at year-end result in 
   adjustments of financial statements. 
   However, a material subsequent event 
   that provides evidence about a 
   condition not existing at year-end, e.g., 
   the loss of a plant in a fire that occurred 
   after the balance sheet date, does not 
   affect the year-end account balances but 
   should be disclosed. (AU 560). 

   Answer (C) is incorrect because the 
   loss should not be reflected in the 
   previous year's financial statements. 

   Answer (D) is incorrect because use of 
   pro forma financial statements to 
   disclose subsequent events is only 
   occasionally necessary. 


[157] Source: CMA 0693 2-8 

   Answer (A) is incorrect because the 
   footnote supplements the information 
   appearing on the face of the financial 
   statements but should not duplicate 
   details found elsewhere. 

   Answer (B) is incorrect because APB 
   22 states that "the disclosure should 
   encompass important judgments about 
   the appropriateness of principles 
   relating to recognition of revenue and 
   allocation of asset costs to current and 
   future periods". 

   Answer (C) is correct. APB 22 requires 
   that all significant accounting principles 
   of a reporting entity and the methods of 
   their application be disclosed as an 
   integral part of its financial statements. 
   APB 22 expresses a preference for 
   including a summary of accounting 
   policies in a separate section preceding 
   the footnotes or in the initial note. The 
   requirement is based upon the obvious 
   difficulty of making economic decisions 
   about the reporting entity without an 
   understanding of the accounting policies 
   used in preparing the financial 
   statements. 

   Answer (D) is incorrect because APB 
   22 specifically states that disclosure 
   should encompass those principles and 
   methods that involve a selection from 
   existing acceptable alternatives, those 
   methods peculiar to the industry in 
   which the entity operates, and any 
   unusual or innovative applications of 
   GAAP. 


[158] Source: CMA 1285 3-6 

   Answer (A) is incorrect because the net 
   amount of unrealized gains and losses 
   ($62,500 loss) is recognized in a 
   separate component of shareholders' 
   equity. 

   Answer (B) is correct. SFAS 115, 
   Accounting for Certain Investments in 
   Debt and Equity Securities, establishes 
   accounting and reporting standards for 
   investments in equity securities with 
   readily determinable fair values. Equity 
   securities should be classified as 
   trading or available-for-sale. Equity 
   securities are measured at fair value at 
   the balance sheet date, and unrealized 
   gains and losses are recorded in the 
   financial statements. For securities 
   classified as available-for-sale, 
   unrealized gains and losses are reported 
   as a net amount in a separate component 
   of shareholder's equity. Thus, the 
   $62,500 net unrealized loss ($50,000 + 
   $100,000 - $62,500 - $25,000) is 
   reported on the 1994 balance sheet. 

   Answer (C) is incorrect because 
   $(87,500) does not consider the 
   increase in fair value of the Krull stock. 

   Answer (D) is incorrect because 
   $(150,000) is the unrealized loss on the 
   Apel and Bauer stock. 


[159] Source: CMA 1285 3-7 

   Answer (A) is incorrect because 
   $25,000 is the unrealized gain on the 
   Cain stock in Year 3. 

   Answer (B) is incorrect because 
   $(37,500) is the difference between the 
   fair value in Year 2 and the fair value in 
   Year 3 of the Cain stock. 

   Answer (C) is correct. Previous 
   fair-value adjustments in the carrying 
   value of available-for-sale securities 
   do not affect the amount of realized gain 
   or loss recognized on subsequent sales. 
   Accordingly, the realized loss that 
   should be reported on the Year 3 
   income statement is the $60,000 
   realized loss ($250,000 cost - $190,000 
   selling price) on the sale of 50% of the 
   Bauer stock. All unrealized gains and 
   losses should be reported in a separate 
   component of shareholder's equity, not 
   in earnings. 

   Answer (D) is incorrect because 
   $125,000 is the net amount of 
   unrealized gains and losses that should 
   be reported on the Year 3 balance 
   sheet. 


[160] Source: CMA 0690 4-23 

   Answer (A) is incorrect because the 
   weighted average unit cost equals the 
   total cost of goods available for sale 
   divided by the number of units 
   available for sale. There were 400 units 
   available at a cost of $78. Unit cost is 
   therefore $.195 ($78  400) and cost of 
   goods sold is $48.75 (250 units x 
   $.195). 

   Answer (B) is incorrect because the 
   weighted average unit cost equals the 
   total cost of goods available for sale 
   divided by the number of units 
   available for sale. There were 400 units 
   available at a cost of $78. Unit cost is 
   therefore $.195 ($78  400) and cost of 
   goods sold is $48.75 (250 units x 
   $.195). 

   Answer (C) is correct. The weighted 
   average inventory pricing system is 
   applicable to a periodic inventory 
   system. The weighted average unit cost 
   is equal to the total cost of goods 
   available for sale divided by the 
   number of units available for sale. 
   Microdisks had 400 units available for 
   sale at a cost of $78.

   Beginning inventory     200 units x $.18  = $36.00
   May 14 purchase         100 units x $.20  =  20.00
   May 29 purchase         100 units x $.22  =  22.00
                           ---                 ------
        Total available    400                 $78.00
                           ===                 ======
   The unit cost is therefore $.195 ($78  
   400), and cost of goods sold is $48.75 
   (250 units x $.195). 

   Answer (D) is incorrect because the 
   weighted average unit cost equals the 
   total cost of goods available for sale 
   divided by the number of units 
   available for sale. There were 400 units 
   available at a cost of $78. Unit cost is 
   therefore $.195 ($78  400) and cost of 
   goods sold is $48.75 (250 units x 
   $.195). 


[161] Source: CMA 0690 4-24 

   Answer (A) is incorrect because, under 
   LIFO, the latest goods purchased are 
   assumed to be the earliest goods sold. 
   The 150 units sold on May 12 cost $27 
   ($.18 x 150). The cost of the 100 disks 
   sold on May 30 was $22 ($.22 x 100). 
   Therefore, the total cost of goods sold 
   for 250 units was $49 ($27 + $22). 

   Answer (B) is incorrect because, under 
   LIFO, the latest goods purchased are 
   assumed to be the earliest goods sold. 
   The 150 units sold on May 12 cost $27 
   ($.18 x 150). The cost of the 100 disks 
   sold on May 30 was $22 ($.22 x 100). 
   Therefore, the total cost of goods sold 
   for 250 units was $49 ($27 + $22). 

   Answer (C) is correct. In a perpetual 
   inventory system, purchases are directly 
   recorded in the inventory account, and 
   cost of goods sold is determined as the 
   goods are sold. Under LIFO, the latest 
   goods purchased are assumed to be the 
   earliest goods sold. The 150 units sold 
   on May 12 came from the beginning 
   inventory. Their cost was $27 ($.18 x 
   150). The cost of the 100 disks sold on 
   May 30 was $22 ($.22 x 100) because 
   they are assumed to be the last-in units 
   (May 29). Hence, the total cost of goods 
   sold for 250 units was $49 ($27 + $22). 

   Answer (D) is incorrect because, under 
   LIFO, the latest goods purchased are 
   assumed to be the earliest goods sold. 
   The 150 units sold on May 12 cost $27 
   ($.18 x 150). The cost of the 100 disks 
   sold on May 30 was $22 ($.22 x 100). 
   Therefore, the total cost of goods sold 
   for 250 units was $49 ($27 + $22). 


[162] Source: CMA 0690 4-25 

   Answer (A) is incorrect because the 
   gross profit under the FIFO periodic 
   method equals sales ($240), minus 
   goods available for sale ($78), plus 
   FIFO ending inventory ($32), or $194. 

   Answer (B) is incorrect because the 
   gross profit under the FIFO periodic 
   method equals sales ($240), minus 
   goods available for sale ($78), plus 
   FIFO ending inventory ($32), or $194. 

   Answer (C) is incorrect because the 
   gross profit under the FIFO periodic 
   method equals sales ($240), minus 
   goods available for sale ($78), plus 
   FIFO ending inventory ($32), or $194. 

   Answer (D) is correct. The easiest way 
   to solve this problem is to determine the 
   cost of the most recently acquired 150 
   units (the ending inventory). The 100 
   disks bought on May 29 had a cost of 
   $22 (100 x $.22). An additional 50 
   units are assumed to come from the May 
   14 purchase. Their cost was $10 (50 x 
   $.20). Thus, the ending inventory is $32 
   ($22 + $10), and gross profit is 
   calculated as shown below:

    Sales ($150 + $90)                                 $240
    Beginning inventory (200 x $.18)            $ 36
    Purchases ($20 + $22)                         42
                                                -----
    Goods available for sale                    $ 78
    Minus FIFO ending inventory ($22 + $10)      (32)
                                                -----
    Cost of goods sold                                  (46)
                                                       ====
   Gross profit                                        $194


[163] Source: CMA 0690 4-26 

   Answer (A) is incorrect because gross 
   profit under the moving average 
   perpetual inventory method is 
   determined as follows: after the May 12 
   sale, the company had 50 units at $.18 
   each. After the May 14 and May 29 
   purchases, goods on hand equaled 250 
   units valued at $51, a unit cost of $.204. 
   The sale of 100 units reduced inventory 
   to $30.60 [(250 - 100) x $.204]. Goods 
   available for sale were $78, so cost of 
   goods sold were $47.40. Gross profit 
   was therefore $192.60. 

   Answer (B) is incorrect because gross 
   profit under the moving average 
   perpetual inventory method is 
   determined as follows: after the May 12 
   sale, the company had 50 units at $.18 
   each. After the May 14 and May 29 
   purchases, goods on hand equaled 250 
   units valued at $51, a unit cost of $.204. 
   The sale of 100 units reduced inventory 
   to $30.60 [(250 - 100) x $.204]. Goods 
   available for sale were $78, so cost of 
   goods sold were $47.40. Gross profit 
   was therefore $192.60. 

   Answer (C) is correct. The moving 
   average system is only applicable to 
   perpetual inventories. It requires that a 
   new weighted average be computed 
   after every purchase. This moving 
   average is based on remaining 
   inventory held and the new inventory 
   purchased. After the May 12 sale, the 
   company had 50 units at $.18 each. 
   After the May 14 purchase at $20 and 
   the May 29 purchase at $22, goods on 
   hand equaled 250 units valued at $51, a 
   unit cost of $.204. The sale of 100 units 
   reduced the inventory to $30.60 [(250 - 
   100) x $.204]. Given that the goods 
   available for sale during the month 
   amounted to $78, cost of goods sold 
   must have been $47.40 ($78 - $30.60 
   EI). Gross profit was therefore $192.60 
   ($240 Sales - $47.40). 

   Answer (D) is incorrect because gross 
   profit under the moving average 
   perpetual inventory method is 
   determined as follows: after the May 12 
   sale, the company had 50 units at $.18 
   each. After the May 14 and May 29 
   purchases, goods on hand equaled 250 
   units valued at $51, a unit cost of $.204. 
   The sale of 100 units reduced inventory 
   to $30.60 [(250 - 100) x $.204]. Goods 
   available for sale were $78, so cost of 
   goods sold were $47.40. Gross profit 
   was therefore $192.60. 


[164] Source: CIA 1191 IV-34 

   Answer (A) is incorrect because the net 
   method requires a sales discount 
   forfeited but not a sales discount 
   account. Sales discounts deferred is not 
   an account used with the net method. 

   Answer (B) is incorrect because the net 
   method requires a sales discount 
   forfeited but not a sales discount 
   account. Sales discounts deferred is not 
   an account used with the net method. 

   Answer (C) is correct. The gross 
   method accounts for receivables at their 
   face value. If a discount is taken, a sales 
   discount is recorded and classified as 
   an offset to sales in the income 
   statement to yield net sales. The net 
   method records receivables net of the 
   applicable discount. If the payment is 
   not received during the discount period, 
   an interest revenue account such as 
   sales discounts forfeited is credited at 
   the end of the discount period or when 
   the payment is received. Accordingly, 
   the application of the net method 
   requires a sales discount forfeited but 
   not a sales discount account. 

   Answer (D) is incorrect because the net 
   method requires a sales discount 
   forfeited but not a sales discount 
   account. Sales discounts deferred is not 
   an account used with the net method. 


[165] Source: CMA 1286 4-30 

   Answer (A) is incorrect because the 
   statement prepared by the trustee in 
   bankruptcy to reconcile the book 
   amounts to his/her administration of the 
   estate is the statement of realization and 
   liquidation. 

   Answer (B) is incorrect because a 
   charge and discharge statement is 
   prepared by the personal representative 
   of a decedent's estate. 

   Answer (C) is incorrect because the 
   statement prepared by the trustee in 
   bankruptcy to reconcile the book 
   amounts to his/her administration of the 
   estate is the statement of realization and 
   liquidation. 

   Answer (D) is correct. A statement of 
   affairs is prepared for a company in the 
   process of liquidation. It reflects the 
   financial condition of the company on a 
   going out of business rather than a going 
   concern basis. Liquidation value 
   instead of historical cost is used to 
   value assets. Moreover, assets are not 
   classified as current or noncurrent but 
   according to the extent to which they are 
   subject to secured claims. Liabilities 
   are shown based on categories of 
   creditors, and shareholders' equity may 
   become shareholders' deficiency 
   because a liquidating company may 
   have a negative net worth. 


[166] Source: CMA 0687 4-4 

   Answer (A) is incorrect because it 
   omits net income, the one item that 
   always appears on the retained earnings 
   statement. 

   Answer (B) is incorrect because 
   after-tax income (loss) is included in 
   the statement. 

   Answer (C) is incorrect because 
   after-tax income (loss) is included in 
   the statement. 

   Answer (D) is correct. The statement of 
   retained earnings is a basic financial 
   statement. APB 9, Reporting the Results 
   of Operations, states that the income 
   statement and the statement of retained 
   earnings (presented separately or 
   combined) are designed to broadly 
   reflect the "results of operations." The 
   statement of retained earnings consists 
   of beginning retained earnings adjusted 
   for any prior period adjustment (net of 
   tax), with further adjustments for 
   income (loss), dividends, and in certain 
   other rare adjustments, e.g., 
   quasi-reorganizations. The final figure 
   is ending retained earnings. 


[167] Source: CMA 1288 4-28 

   Answer (A) is incorrect because it 
   would appear on the income statement. 

   Answer (B) is incorrect because it 
   would appear on the income statement. 

   Answer (C) is incorrect because the 
   resale of treasury stock at a price 
   greater than cost would result in a 
   credit to a paid-in capital account, not 
   to retained earnings. Thus, this 
   transaction would not appear on the 
   retained earnings statement. 

   Answer (D) is correct. The only items 
   that appear on a retained earnings 
   statement are dividends, net income, 
   and prior period adjustments. Prior 
   period adjustments are essentially 
   defined as clerical errors. Thus, the 
   discovery that estimated warranty 
   expense had been recorded twice 
   would result in a prior period 
   adjustment. 


[168] Source: CMA 1296 2-5 

   Answer (A) is incorrect because 
   $32,500 is the actual cash outlay. 

   Answer (B) is incorrect because 
   $147,500 is the additional amount to be 
   accrued. 

   Answer (C) is correct. Warranty 
   expense should be accrued based on the 
   amount of sales for the period. Thus, the 
   total estimated expense is $180,000 
   (4% x $4,500,000 sales). The amount to 
   be accrued equals total estimated 
   expense minus amounts already paid. 

   Answer (D) is incorrect because 
   $212,500 is the sum of the $32,500 paid 
   and the $180,000 total estimated 
   expense. 


[169] Source: CMA 1296 2-21 

   Answer (A) is incorrect because a 
   decrease in inventory is an operating 
   item. 

   Answer (B) is incorrect because 
   depreciation expense is an operating 
   item. 

   Answer (C) is incorrect because a 
   decrease in prepaid insurance is an 
   operating item. 

   Answer (D) is correct. Operating 
   activities include all transactions and 
   other events not classified as investing 
   and financing activities. Operating 
   activities include producing and 
   delivering goods and providing 
   services. Cash flows from such 
   activities are usually included in the 
   determination of net income. However, 
   the purchase of land and a building in 
   exchange for a long-term note is an 
   investing activity. Because this 
   transaction does not affect cash, it is 
   reported in related disclosures of 
   noncash investing and financing 
   activities. 


[170] Source: CMA 1296 2-22 

   Answer (A) is incorrect because the 
   purchase of equipment is an investing 
   activity. 

   Answer (B) is correct. Under SFAS 95, 
   financing activities are defined to 
   include the issuance of stock, the 
   payment of dividends, the receipt of 
   donor-restricted resources to be used 
   for long-term purposes, treasury stock 
   transactions (purchases or sales), the 
   issuance of debt, the repayment of 
   amounts borrowed, and obtaining and 
   paying for other resources obtained 
   from creditors on long-term credit. 

   Answer (C) is incorrect because the 
   sale of trademarks, like the sale of any 
   long-lived asset, is an investing 
   activity. 

   Answer (D) is incorrect because the 
   payment of interest on a mortgage note 
   is an operating activity. 


[171] Source: CMA 1296 2-23 

   Answer (A) is incorrect because the 
   purchase or sale of long-lived 
   equipment or intangibles is an investing 
   activity. Cash flows from the purchase, 
   sale, or maturities of available-for-sale 
   and held-to-maturity of securities are 
   also considered to be from investing 
   activities. 

   Answer (B) is incorrect because the 
   purchase or sale of long-lived 
   equipment or intangibles is an investing 
   activity. Cash flows from the purchase, 
   sale, or maturities of available-for-sale 
   and held-to-maturity of securities are 
   also considered to be from investing 
   activities. 

   Answer (C) is correct. Under SFAS 95, 
   investing activities are defined to 
   include the lending of money and the 
   collecting of those loans. They also 
   include the acquisition, sale, or other 
   disposal of securities that are not cash 
   equivalents and of productive assets 
   that are expected to generate revenue 
   over a long period of time. However, 
   interest payments to creditors are cash 
   flows from operating activities. 

   Answer (D) is incorrect because the 
   purchase or sale of long-lived 
   equipment or intangibles is an investing 
   activity. Cash flows from the purchase, 
   sale, or maturities of available-for-sale 
   and held-to-maturity of securities are 
   also considered to be from investing 
   activities. 


[172] Source: CMA 1296 2-24 

   Answer (A) is incorrect because an 
   increase in accrued liabilities reflects 
   an increase in noncash expenses and is 
   added to net income. 

   Answer (B) is correct. The indirect 
   method reconciles the net income of a 
   business with the net operating cash 
   flow. The indirect method removes the 
   effects of all past deferrals of operating 
   cash receipts and payments, all accruals 
   of expected future operating cash 
   receipts and payments, and all items not 
   affecting operating cash flows to arrive 
   at the net cash flow from operating 
   activities. Hence, the amortization of 
   the premium on bonds payable is 
   deducted from net income in the 
   reconciliation because it represents a 
   noncash decrease in interest expense 
   (an increase in net income). 

   Answer (C) is incorrect because a loss 
   on the sale of plant assets is from an 
   investing activity. Thus, it should be 
   added to net income to determine net 
   operating cash flow. 

   Answer (D) is incorrect because 
   depreciation is a noncash expense that 
   should be added to net income. 


[173] Source: CMA 0697 2-2 

   Answer (A) is incorrect because 
   interest received from investments is an 
   operating cash flow. 

   Answer (B) is incorrect because 
   interest paid on bonds is an operating 
   cash flow. 

   Answer (C) is incorrect because 
   customer collections is an operating 
   cash flow. 

   Answer (D) is correct. Under SFAS 95, 
   a statement of cash flows should report 
   as operating activities all transactions 
   and other events not classified as 
   investing or financing activities. In 
   general, the cash flows from 
   transactions and other events that enter 
   into the determination of income are to 
   be classified as operating. Cash 
   receipts from sales of goods and 
   services, from interest on loans, and 
   from dividends on equity securities are 
   from operating activities. Cash 
   payments to suppliers for inventory; to 
   employees for wages; to other suppliers 
   and employees for other goods and 
   services; to governments for taxes, 
   duties, fines, and fees; and to lenders 
   for interest are also from operating 
   activities. However, distributions to 
   owners (cash dividends on a company's 
   own stock) are cash flows from 
   financing, not operating, activities. 


[174] Source: Publisher 

   Answer (A) is incorrect because 
   $484,000 results from reversing the 
   effect of the change in WIP. 

   Answer (B) is incorrect because 
   $494,000 does not consider the change 
   in WIP. 

   Answer (C) is correct. CGM equals all 
   manufacturing costs incurred during the 
   period, plus BWIP, minus EWIP. 
   Materials used equals $144,000 
   ($30,000 BI + $160,000 purchased - 
   $2,000 discounts - $44,000 EI). Thus, 
   manufacturing costs incurred during the 
   period equal $494,000 ($144,000 
   materials used + $200,000 DL + 
   $150,000 OH), and CGM equals 
   $504,000 ($494,000 + $80,000 BWIP - 
   $70,000 EWIP). 

   Answer (D) is incorrect because 
   $518,000 does not consider the change 
   in materials inventory. 


[175] Source: Publisher 

   Answer (A) is incorrect because 
   $500,000 results from reversing the 
   treatment of purchase discounts. 

   Answer (B) is incorrect because 
   $504,000 is the CGM. 

   Answer (C) is incorrect because 
   $508,000 results from assuming that no 
   beginning or ending inventories of 
   materials, WIP, or finished goods 
   existed. 

   Answer (D) is correct. CGS equals 
   CGM adjusted for the change in 
   finished goods inventory. CGM equals 
   all manufacturing costs incurred during 
   the period, plus BWIP, minus EWIP. 
   Materials used equals $144,000 
   ($30,000 BI + $160,000 purchased - 
   $2,000 discounts - $44,000 EI). Thus, 
   manufacturing costs incurred during the 
   period equal $494,000 ($144,000 
   materials used + $200,000 DL + 
   $150,000 OH), and CGM equals 
   $504,000 ($494,000 + $80,000 BWIP - 
   $70,000 EWIP). Accordingly, CGS 
   equals $496,000 ($504,000 CGM + 
   $16,000 BFG - $24,000 EFG). 


[176] Source: Publisher 

   Answer (A) is incorrect because 
   $44,000 is the ending materials 
   inventory. 

   Answer (B) is incorrect because 
   $70,000 is the EWIP. 

   Answer (C) is incorrect because 
   $24,000 is the finished goods inventory. 

   Answer (D) is correct. The ending 
   inventory consists of three elements: 
   materials of $44,000, WIP of $70,000, 
   and finished goods of $24,000, a total 
   of $138,000. 


[177] Source: Publisher 

   Answer (A) is incorrect because EPS 
   amounts may be presented either on the 
   face of the income statement or in the 
   notes. 

   Answer (B) is incorrect because 
   extraordinary items should be presented 
   individually, rather than in the 
   aggregate, and on the face of the income 
   statement, if practicable; otherwise, 
   disclosure in related notes is acceptable 
   (APB 30). 

   Answer (C) is incorrect because 
   income taxes applicable to 
   extraordinary items should be presented 
   on the face of the income statement or in 
   a related note. 

   Answer (D) is correct. Basic and 
   diluted per-share amounts for 
   extraordinary items are presented either 
   on the face of the income statement or in 
   the related notes. Prior to the issuance 
   of SFAS 128, APB 15 required 
   presentation of EPS amounts for income 
   before extraordinary items and net 
   income on the face of the income 
   statement. 


[178] Source: Publisher 

   Answer (A) is incorrect because the 
   discount on bonds payable is 
   erroneously deducted from the total. 

   Answer (B) is correct. Current 
   liabilities consist of those debts that 
   will have to be paid in the coming year 
   or the normal operating cycle, 
   whichever period is longer. Examples 
   include accounts payable, wages 
   payable, interest payable, and income 
   taxes payable. Bonds payable and its 
   contra account, discount on bonds 
   payable, would both be shown under 
   the long-term liability classification. 
   The total current liabilities would be 
   $319,000 ($250,000 + $29,000 + 
   $14,000 + $26,000). 

   Answer (C) is incorrect because 
   $353,000 includes discount on bonds 
   payable. 

   Answer (D) is incorrect because 
   $819,000 includes bonds payable. 


[179] Source: Publisher 

   Answer (A) is incorrect because 
   deducting accounts payable from the 
   current assets results in the amount of 
   working capital, rather than the total of 
   current assets. 

   Answer (B) is incorrect because it fails 
   to include prepaid insurance in the total. 

   Answer (C) is correct. Current assets 
   consist of cash, certain marketable 
   securities, receivables, inventories, and 
   prepaid expenses. Adding these 
   elements together produces a total of 
   $407,500 ($28,000 cash + $110,000 
   receivables + $250,000 inventories + 
   $19,500 prepaid insurance). 

   Answer (D) is incorrect because it 
   erroneously includes accounts payable. 


[180] Source: Publisher 

   Answer (A) is incorrect because 
   retained earnings should be included in 
   shareholders' equity. 

   Answer (B) is correct. Shareholders' 
   equity consists of paid-in capital, 
   retained earnings, and comprehensive 
   income. Shareholders' equity accounts 
   may therefore include retained earnings, 
   preferred stock, common stock, and 
   additional paid-in capital. Moreover, 
   treasury stock is a contra account in the 
   shareholders' equity section of the 
   balance sheet. The total would be 
   $514,000 ($141,000 + $175,000 + 
   $50,000 + $196,000 - $48,000 of 
   treasury stock). 

   Answer (C) is incorrect because 
   $562,000 results from a failure to 
   deduct treasury stock. 

   Answer (D) is incorrect because 
   treasury stock should be deducted from, 
   not added to, shareholders' equity. 


[181] Source: Publisher 

   Answer (A) is incorrect because 
   $217,800 equals $215,400 reported 
   total revenues, plus the $2,400 loss 
   from operations of the segment. 

   Answer (B) is incorrect because 
   $215,400 reflects no adjustment for 
   results from discontinued operations 
   and the cumulative-effect type change. 

   Answer (C) is incorrect because 
   $203,700 improperly subtracts interest 
   revenue and does not adjust for the 
   results from discontinued operations. 

   Answer (D) is correct. Revenue is a 
   component of income from continuing 
   operations. Results of discontinued 
   operations and the cumulative effect of 
   a change in accounting principle are 
   classifications in the income statement 
   separate from continuing operations. 
   Hence, total revenues were $201,900 
   ($215,400 - $12,000 results from 
   discontinued operations - $1,500 
   cumulative-effect type change). 
   Alternatively, total revenues consist of 
   net sales of $187,000, plus interest 
   revenue of $10,200, plus gain on sale of 
   equipment (which is not an 
   extraordinary item) of $4,700. 


[182] Source: Publisher 

   Answer (A) is incorrect because 
   $1,696,000 does not include the 
   beginning balance. 

   Answer (B) is correct. Dividends 
   declared but not paid reduce retained 
   earnings. Thus, the year-end balance of 
   retained earnings is calculated as 
   follows:

   January 1 balance                      $  529,000
   Net income                              2,496,000
                                          ----------
   Retained earnings available            $3,025,000
   Dividends                   $750,000
                                 50,000     (800,000)
                               --------   ----------
                                          $2,225,000
                                          ==========

   Answer (C) is incorrect because 
   $2,275,000 results from a failure to 
   deduct the dividend that was unpaid; 
   such a dividend would be a liability of 
   the corporation. 

   Answer (D) is incorrect because 
   $3,025,000 results from a failure to 
   deduct dividends. 


[183] Source: Publisher 

   Answer (A) is incorrect because 
   $16,000 is the excess of the sum of the 
   increases in the capital accounts other 
   than retained earnings over the increase 
   in net assets. 

   Answer (B) is correct. To calculate net 
   income, the dividend payment 
   ($52,000) should be added to the 
   increase in assets ($356,000). The 
   excess of this sum ($408,000) over the 
   increase in liabilities ($108,000) gives 
   the total increase in owners' equity 
   ($300,000). The excess of this amount 
   over the combined increases in the 
   capital accounts ($264,000) equals the 
   increase in retained earnings ($36,000) 
   arising from net income. 

   Answer (C) is incorrect because 
   $52,000 is the dividend. 

   Answer (D) is incorrect because 
   $68,000 equals the sum of the dividend 
   and the excess of the sum of the 
   increases in the capital accounts other 
   than retained earnings over the increase 
   in net assets. 


[184] Source: Publisher 

   Answer (A) is incorrect because 
   $165,000 results from a failure to add 
   back depreciation--a noncash expense. 

   Answer (B) is incorrect because 
   $189,500 results from deducting the 
   inventory change rather than adding it. 

   Answer (C) is correct. The net income 
   of $161,000 must be adjusted by 
   noncash expenses (such as 
   depreciation) and the amount of changes 
   in current assets. The calculation would 
   be:

   Net income                  $161,000
   Depreciation expense          40,000
   Increase in receivables      (14,000)
   Increase in payables          10,500
   Decrease in inventories        8,000
                               --------
                               $205,500
                               ========

   Answer (D) is incorrect because 
   $212,500 results from reversing the 
   treatment of receivables and payables. 


[185] Source: Publisher 

   Answer (A) is incorrect because 
   $280,000 results from a failure to 
   deduct the uses of cash. 

   Answer (B) is correct. Investing 
   activities include making and collecting 
   loans and acquiring and disposing of 
   debt or equity instruments; property, 
   plant, and equipment; and other 
   productive assets. The calculation is

   Sale of land and building     $ 280,000
   Purchase of land               (137,000)
   Purchase of equipment          (153,000)
                                 ---------
   Net cash provided (used)      $(10,000)
                                 =========

   Answer (C) is incorrect because 
   ($210,000) results from deducting the 
   retirement of bonds. 

   Answer (D) is incorrect because 
   ($350,000) results from deducting the 
   purchase of treasury stock, which 
   would be a financing activity, not an 
   investing activity. 


[186] Source: Publisher 

   Answer (A) is incorrect because 
   $247,000 results from a failure to 
   deduct the uses of cash. 

   Answer (B) is incorrect because 
   ($78,000) results from a failure to 
   deduct the retirement of bonds. 

   Answer (C) is incorrect because 
   ($138,000) results from a failure to 
   deduct for the purchase of treasury 
   stock. 

   Answer (D) is correct. Financing 
   activities include the issuance of stock, 
   the payment of dividends, treasury stock 
   transactions, and the issuance and 
   repayment of debt. They also include 
   receiving restricted resources that are 
   donor-stipulated for long-term 
   purposes. The calculation is

   Issuance of common stock     $ 247,000
   Purchase of treasury stock    (140,000)
   Payment of cash dividend      (185,000)
   Retirement of bonds           (200,000)
                                ---------
   Cash provided (used)         $(278,000)
                                 =========


[187] Source: Publisher 

   Answer (A) is correct. A statement of 
   cash flows reports cash flows from 
   operating activities, investing activities, 
   and financing activities. Combining the 
   $400,000 of cash provided by operating 
   activities with the $10,000 use for 
   investing activities and $278,000 use 
   for financing activities (see solutions to 
   two preceding questions) results in a 
   net source of cash of $112,000 
   ($400,000 - $10,000 - $278,000). 

   Answer (B) is incorrect because 
   $252,000 results from a failure to 
   deduct the purchase of treasury stock. 

   Answer (C) is incorrect because 
   $392,000 results from adding rather 
   than deducting the treasury stock 
   purchase. 

   Answer (D) is incorrect because 
   $688,000 results from adding the uses 
   of cash rather than deducting them. 


[188] Source: Publisher 

   Answer (A) is correct. The net income 
   of $290,000 must be adjusted for 
   depreciation expense and changes in 
   current assets. The calculation is

   Net income                  $290,000
   Depreciation expense          20,000
   Increase in receivables      (22,000)
   Decrease in payables          (5,500)
   Increase in inventories      (11,000)
                               ---------
                               $271,500
                               =========

   Answer (B) is incorrect because 
   $293,500 is the result of adding the 
   inventory increase rather than deducting 
   it. 

   Answer (C) is incorrect because 
   $310,000 occurs by failing to adjust for 
   the changes in current assets. 

   Answer (D) is incorrect because 
   $348,500 is the result of reversing the 
   treatment of all of the current asset 
   changes. 


[189] Source: Publisher 

   Answer (A) is incorrect because 
   $185,000 results from deducting the 
   retirement of bonds, which is a 
   financing activity. 

   Answer (B) is incorrect because 
   $225,0000 results from deducting the 
   purchase of common stock, which is a 
   financing activity. 

   Answer (C) is correct. Investing 
   activities include buying and selling 
   investments and property, plant, and 
   equipment. However, entering into a 
   capital lease is a noncash investing 
   activity. The calculation is

   Sale of land and building   $450,000
   Purchase of land             (45,000)
   Purchase of equipment       (120,000)
                               ---------
                               $ 285,000
                               =========

   Answer (D) is incorrect because 
   $351,000 results from adding in the 
   issuance of preferred stock, which is a 
   financing activity. 


[190] Source: Publisher 

   Answer (A) is incorrect because 
   $66,000 results from a failure to deduct 
   the uses of cash. 

   Answer (B) is incorrect because 
   ($24,000) results from a failure to 
   deduct the purchase of common stock 
   and the retirement of bonds. 

   Answer (C) is incorrect because 
   ($84,000) results from a failure to 
   deduct the retirement of bonds. 

   Answer (D) is correct. Financing 
   activities include the issuance of stock, 
   payment of dividends, treasury stock 
   transactions, and the issuance and 
   retirement of debt. They also include 
   receiving restricted resources that are 
   donor-stipulated to be used for 
   long-term purposes. However, the stock 
   dividend is a noncash financing activity. 
   The calculation is

   Issuance of preferred stock    $ 66,000
   Purchase of common stock        (60,000)
   Payment of cash dividend        (90,000)
   Repurchase of bonds            (100,000)
                                  --------
   Cash provided (used)          ($184,000)
                                  ========


[191] Source: CMA Samp Q2-7 

   Answer (A) is incorrect because 
   $2,900 excludes the adjustments for 
   depreciation and accruals of liabilities 
   other than accounts payable. 

   Answer (B) is incorrect because $3,050 
   excludes the adjustments for inventory, 
   accounts payable, and accruals. 

   Answer (C) is correct. The net profit 
   after taxes equals the change in retained 
   earnings divided by 1 minus the 
   dividend payout ratio, or $2,750 
   [$2,200  (1 - .2)]. Adjusting this 
   amount for noncash items yields the net 
   cash provided by operations. 
   Depreciation is a noncash expense that 
   should be added. To adjust for the 
   difference between cost of goods sold 
   and purchases, the inventory decrease is 
   added (CGS exceeded purchases). To 
   adjust for the difference between 
   purchases and cash paid to suppliers, 
   the increase in accounts payable is also 
   added (purchases exceeded cash paid to 
   suppliers). The increase in accounts 
   receivable is subtracted because it 
   indicates that accrued revenues were 
   greater than cash collections. Finally, 
   the increase in accrued liabilities is 
   added. Thus, the net cash provided by 
   operations is $3,450 ($2,750 + $500 + 
   $100 + $250 - $200 + $50). 

   Answer (D) is incorrect because 
   $4,050 results from adding the $600 
   decrease in cash and marketable 
   securities. 


[192] Source: CPA 0591 I-6 

   Answer (A) is incorrect because 
   $150,400 results from omitting the 
   adjustment for the equity-based 
   investment. 

   Answer (B) is incorrect because 
   $148,300 results from omitting the 
   adjustment for the equity-based 
   investment and improperly subtracting 
   the decrease in accumulated 
   depreciation. 

   Answer (C) is correct. The increase in 
   the equity-based investment reflects the 
   investor's share of the investee's net 
   income after adjustment for dividends 
   received. Hence, this increase is a 
   noncash revenue and should be 
   subtracted in the reconciliation of net 
   income to net operating cash inflow. A 
   major repair provides benefits to more 
   than one period and therefore should not 
   be expensed. One method of accounting 
   for a major repair is to charge 
   accumulated depreciation if the useful 
   life of the asset has been extended, with 
   the offsetting credit to cash, a payable, 
   etc. However, the cash outflow, if any, 
   is from an investing activity. The item 
   has no effect on net income and no 
   adjustment is necessary. Amortization 
   of bond premium means that interest 
   expense is less than cash paid out for 
   interest, and should be subtracted in the 
   reconciliation. The increase in the 
   deferred tax liability is a noncash item 
   that reduces net income and should be 
   added in the reconciliation. 
   Accordingly, net cash provided by 
   operations is $144,900 ($150,000 - 
   $5,500 - $1,400 + $1,800). 

   Answer (D) is incorrect because 
   $142,800 results from improperly 
   subtracting the decrease in accumulated 
   depreciation. 


[193] Source: CPA 0FIN R97-7 

   Answer (A) is incorrect because cash 
   inflows and outflows ordinarily are not 
   netted. 

   Answer (B) is incorrect because an 
   outflow of $42,000 assumes netting and 
   a $5,000 inflow. 

   Answer (C) is incorrect because the 
   cash inflow was $15,000. Beck 
   received the $10,000 carrying value 
   and a $5,000 gain. 

   Answer (D) is correct. Investing 
   activities include making and collecting 
   loans and acquiring and disposing of 
   debt or equity instruments and property, 
   plant, and equipment and other 
   productive assets, that is, assets held 
   for or used in the production of goods 
   or services (other than the materials 
   held in inventory). Thus, the cash 
   effects of purchases and sales of 
   equipment should be reported in the 
   investing cash flows section of the 
   statement of cash flows. Moreover, 
   cash inflows and outflows ordinarily 
   are not netted. They should be reported 
   separately at gross amounts. 
   Accordingly, Beck should report a cash 
   inflow of $15,000 ($10,000 carrying 
   value + $5,000 gain) for the sale of 
   equipment and a $47,000 outflow for 
   the purchase. In adjusting accrual-based 
   net income to net operating cash flow, 
   the $5,000 gain on the sale of equipment 
   should be subtracted to prevent double 
   counting. 


[194] Source: Publisher 

   Answer (A) is incorrect because a 
   liability should be recorded for the 24 
   unplayed games. 

   Answer (B) is incorrect because $8 
   million is the revenue that would be 
   reported for the 16 games already 
   played. 

   Answer (C) is correct. Each $1,000 
   season ticket represents the revenue for 
   40 games, or $25 per game. Since 16 
   games have been played, revenue 
   would amount to $400 per season 
   ticket, or $8 million for all 20,000 
   tickets. The team still owes the ticket 
   holders 24 games' worth of 
   entertainment, which amounts to $600 
   per season ticket (24 x $25), or $12 
   million in total. 

   Answer (D) is incorrect because $20 
   million is the cash collected for 40 
   games, which should be allocated 
   between revenue for the 16 games 
   played and liability for the 24 games 
   unplayed. 


[195] Source: Publisher 

   Answer (A) is incorrect because 
   held-to-maturity securities should be 
   included in long-term investments. 

   Answer (B) is incorrect because it fails 
   to include land held for investment. 

   Answer (C) is incorrect because 
   $182,000 results from not including the 
   cash surrender value of life insurance. 

   Answer (D) is correct. The investments 
   classification includes a variety of 
   nonoperating assets intended to be held 
   beyond the period of current assets. 
   These would include:

   Held-to-maturity securities              $ 62,000
   Land held for investment                   39,000
   Long-term receivables                      44,000
   Cash surrender value of life insurance     37,000
                                            --------
                                            $182,000
                                            ========
   Unearned fees would be a current 
   liability, and prepaid rent is a current 
   asset. 


[196] Source: Publisher 

   Answer (A) is incorrect because only 
   buildings and equipment are included in 
   property, plant, and equipment. 

   Answer (B) is incorrect because 
   $469,000 does not include capital 
   leases. 

   Answer (C) is correct. Property, plant, 
   and equipment is an asset category 
   consisting of those long-term assets 
   used in the business. Therefore, 
   inventories and land held for investment 
   would not be included. Capital leases 
   would be included since they represent 
   assets used in the business. The total 
   property, plant, and equipment would 
   be $549,000, consisting of $217,000 for 
   buildings, $180,000 for equipment, 
   $72,000 for land, and $80,000 for 
   capital leases. 

   Answer (D) is incorrect because land 
   held for investment should not be 
   included in property, plant, and 
   equipment. It should be categorized 
   under the investment section of the 
   balance sheet. 


[197] Source: Publisher 

   Answer (A) is incorrect because 
   $394,000 does not include franchises. 

   Answer (B) is correct. Intangibles are 
   those assets lacking physical substance 
   which provide a benefit to the business. 
   Examples include goodwill, patents, 
   copyrights, licenses, franchises, and 
   trademarks. The total would be 
   $524,000, consisting of $152,000 for 
   goodwill, $222,000 for patents, 
   $130,000 for franchises, and $20,000 
   for trademarks. 

   Answer (C) is incorrect because 
   $526,000 erroneously includes trading 
   securities and excludes trademarks. 

   Answer (D) is incorrect because 
   prepaid insurance, which is a current 
   asset, should not be included. 


[198] Source: Publisher 

   Answer (A) is incorrect because 
   $138,000 results from deducting income 
   tax expense, and the question asked for 
   income before taxes. 

   Answer (B) is incorrect because 
   $179,000 results from a failure to use 
   interest expense and investment 
   revenue. 

   Answer (C) is correct. Total revenues 
   were $2,085,000. Expenses, other than 
   income taxes, totaled $1,897,000 
   ($1,290,000 + $290,000 + $221,000 + 
   $96,000), leaving a difference of 
   $188,000. 

   Answer (D) is incorrect because 
   $284,000 results from a failure to 
   deduct interest expense. 


[199] Source: Publisher 

   Answer (A) is incorrect because 
   $65,000 fails to consider that 
   depreciation is a noncash expense. 

   Answer (B) is correct. The tax on 
   $100,000 would be $35,000. Note that 
   depreciation would have already been 
   deducted in calculating the $100,000 of 
   before-tax profit. Thus, cash flows from 
   operations must have been $120,000. 
   Deducting the $35,000 of taxes from the 
   $120,000 leaves net cash inflows of 
   $85,000. 

   Answer (C) is incorrect because 
   $92,000 based taxes on $120,000 rather 
   than $100,000. 

   Answer (D) is incorrect because 
   $98,000 based taxes on $80,000 rather 
   than $100,000. 


[200] Source: CMA 1292 2-3 

   Answer (A) is correct. SFAC 5 states 
   that an item and information about the 
   item should be recognized when the 
   following four fundamental recognition 
   criteria are met: (1) the item meets the 
   definition of an element of financial 
   statements; (2) it has a relevant attribute 
   measurable with sufficient reliability 
   (measurability); (3) the information 
   about the item is capable of making a 
   difference in user decisions 
   (relevance); and (4) the information is 
   representationally faithful, verifiable, 
   and neutral (reliability). 

   Answer (B) is incorrect because the 
   information must be measurable. 

   Answer (C) is incorrect because 
   timeliness is an aspect of relevance. 

   Answer (D) is incorrect because items 
   must also meet the relevance criterion. 


[201] Source: Publisher 

   Answer (A) is incorrect because the 
   second ingredient of reliability is 
   verifiability, which is "the ability 
   through consensus among measures to 
   ensure that information represents what 
   it purports to represent or that the 
   chosen method of measurement has been 
   used without error or bias." 

   Answer (B) is correct. The primary 
   decision-specific qualities are 
   relevance and reliability. Relevance is 
   "the capacity of information to make a 
   difference in a decision by helping 
   users to form predictions about the 
   outcomes of past, present, and future 
   events or to confirm or correct prior 
   expectations." SFAC 2 describes 
   timeliness as an ancillary aspect of 
   relevance. Timeliness means "having 
   information available to a decision 
   maker before it loses its capacity to 
   influence decisions." 

   Answer (C) is incorrect because 
   neutrality is "absence in reported 
   information of bias intended to attain a 
   predetermined result or to induce a 
   particular mode of behavior." 
   Neutrality interacts with the other 
   ingredients of reliability. 

   Answer (D) is incorrect because 
   comparability is a secondary and 
   interactive quality. 


[202] Source: Publisher 

   Answer (A) is incorrect because 
   materiality is the threshold for 
   recognition. 

   Answer (B) is incorrect because 
   understandability is a user-specific 
   quality. 

   Answer (C) is correct. Comparability is 
   "the quality of information that enables 
   users to identify similarities in and 
   differences between two sets of 
   economic phenomena." Comparability 
   interacts with the primary 
   decision-specific qualities to enhance 
   the usefulness of accounting 
   information. Comparability is not a 
   quality of information in the same sense 
   as relevance and reliability. Rather, it 
   is a quality of the relationship among 
   items of information. Comparability 
   includes consistency, which is 
   "conformity from period to period with 
   unchanging policies and procedures." 

   Answer (D) is incorrect because 
   conservatism is "a prudent reaction to 
   uncertainty to try to ensure that 
   uncertainty and risks inherent in 
   business situations are adequately 
   considered." 


[203] Source: Publisher 

   Answer (A) is correct. Conservatism is 
   "a prudent reaction to uncertainty to try 
   to ensure that uncertainty and risks 
   inherent in business situations are 
   adequately considered." Conservatism 
   does not mean a deliberate 
   understatement of net assets and net 
   income. Thus, if estimates of future 
   amounts to be paid or received differ 
   but are equally likely, conservatism 
   requires using the least optimistic 
   estimate. However, if the estimates are 
   not equally likely, conservatism does 
   not necessarily require use of the 
   estimate that results in understatement 
   rather than the estimate that is the most 
   likely. 

   Answer (B) is incorrect because 
   comparability is "the quality of 
   information that enables users to 
   identify similarities in and differences 
   between two sets of economic 
   phenomena." 

   Answer (C) is incorrect because 
   comparability includes consistency, 
   which is "conformity from period to 
   period with unchanging policies and 
   procedures." 

   Answer (D) is incorrect because 
   neutrality is "absence in reported 
   information of bias intended to attain a 
   predetermined result or to induce a 
   particular mode of behavior." 


[204] Source: Publisher 

   Answer (A) is incorrect because 
   liabilities are found in the financial 
   statements of for-profit and 
   not-for-profit entities. 

   Answer (B) is incorrect because assets 
   are found in the financial statements of 
   for-profit and not-for-profit entities. 

   Answer (C) is incorrect because 
   revenues are found in the financial 
   statements of for-profit and 
   not-for-profit entities. 

   Answer (D) is correct. Equity or net 
   assets is "the residual interest in the 
   assets of an entity that remains after 
   deducting its liabilities." Equity of a 
   business enterprise, in contrast with the 
   net assets of a nonprofit entity, is 
   changed by investments by, and 
   distributions to, owners. 


[205] Source: Publisher 

   Answer (A) is incorrect because the 
   cumulative effects of a change in 
   accounting principle are presented in a 
   separate caption of the income 
   statement. 

   Answer (B) is incorrect because 
   extraordinary gains and losses are 
   presented in a separate caption of the 
   income statement. 

   Answer (C) is correct. Comprehensive 
   income is "the change in equity of a 
   business enterprise during a period 
   from transactions and other events and 
   circumstances from nonowner sources." 
   Comprehensive income differs from 
   measures of net income in current 
   practice because it encompasses certain 
   changes in equity recognized in the 
   equity section of the balance sheet but 
   not in the income statement. These 
   changes primarily include holding gains 
   and losses, such as changes in the fair 
   values of available-for-sale securities, 
   adjustments arising from translating an 
   entity's financial statements from its 
   functional currency into the reporting 
   currency, and the excess of an 
   additional minimum pension liability 
   over any unrecognized prior service 
   cost. 

   Answer (D) is incorrect because results 
   of discontinued operations are 
   presented in a separate caption of the 
   income statement. 


[206] Source: Publisher 

   Answer (A) is incorrect because 
   expenses are outflows or other using up 
   of assets or incurrences of liabilities. 

   Answer (B) is correct. Revenues are 
   "inflows or other enhancements of 
   assets of an entity or settlements of its 
   liabilities (or a combination of both) 
   from delivering or producing goods, 
   rendering services, or other activities 
   that constitute the entity's ongoing major 
   or central operations." 

   Answer (C) is incorrect because 
   expenses are "outflows or other using 
   up of assets or incurrences of liabilities 
   (or a combination of both) from 
   delivering or producing goods, 
   rendering services, or carrying out other 
   activities that constitute the entity's 
   ongoing major or central operations." 

   Answer (D) is incorrect because gains 
   (losses) are increases (decreases) in 
   equity "from peripheral or incidental 
   transactions of an entity and from all 
   other transactions and other events and 
   circumstances affecting the entity except 
   those that result from revenues 
   (expenses) or investments by 
   (distributions to) owners." 


[207] Source: Publisher 

   Answer (A) is correct. Net settlement 
   value is the cash or equivalent that the 
   entity expects to pay to satisfy the 
   obligation in the due course of business. 
   It is used to measure such items as trade 
   payables and warranty obligations. Net 
   settlement value ignores present value 
   considerations. The amounts that will 
   be realized in a liquidation are usually 
   less than those that would have been 
   received in the due course of business. 

   Answer (B) is incorrect because 
   present value is used for long-term 
   receivables and payables. 

   Answer (C) is incorrect because net 
   realizable value is used for short-term 
   receivables and some inventories. 

   Answer (D) is incorrect because 
   replacement cost may be reflected in 
   inventory valued at the lower of cost or 
   market. 


[208] Source: Publisher 

   Answer (A) is incorrect because net 
   settlement value measures such items as 
   trade payables and warranty 
   obligations. 

   Answer (B) is incorrect because 
   present value measures long-term 
   receivables and payables. 

   Answer (C) is correct. Historical 
   proceeds is the cash or equivalent 
   actually received when an obligation 
   was created and may be subsequently 
   amortized. It is the relevant attribute for 
   liabilities incurred to provide goods or 
   services to customers. An example is a 
   magazine subscription. 

   Answer (D) is incorrect because 
   historical cost measures plant assets 
   and most inventories. 


[209] Source: Publisher 

   Answer (A) is incorrect because 
   revenues and gains but not expenses and 
   losses are subject to the realization 
   criterion. 

   Answer (B) is correct. As a reflection 
   of the profession's conservatism, 
   expenses and losses have historically 
   been subject to less stringent 
   recognition criteria than revenues and 
   gains. Expenses and losses are not 
   subject to the realization criterion. 
   Rather, expenses and losses are 
   recognized when a consumption of 
   economic benefits occurs during the 
   entity's primary activities or when the 
   ability of existing assets to provide 
   future benefits has been impaired. An 
   expense or loss may also be recognized 
   when a liability has been incurred or 
   increased without the receipt of 
   corresponding benefits; a probable and 
   reasonably estimable contingent loss is 
   an example. 

   Answer (C) is incorrect because 
   revenues and gains but not expenses and 
   losses are subject to the realization 
   criterion. 

   Answer (D) is incorrect because 
   revenues and gains but not expenses and 
   losses are subject to the realization 
   criterion. 


[210] Source: Publisher 

   Answer (A) is incorrect because the 
   percentage-of-completion method 
   allows for revenue to be recognized at 
   various stages of the contract although 
   the entire job is not complete. 

   Answer (B) is incorrect because, if the 
   collectibility of assets is relatively 
   uncertain, revenues and gains may be 
   recognized as cash is received using the 
   installment sales method. 

   Answer (C) is incorrect because the 
   completion-of-production method is an 
   appropriate basis for recognition if 
   products or other assets are readily 
   realizable, e.g., precious metals and 
   some agricultural products. 

   Answer (D) is correct. According to the 
   revenue recognition principle, revenue 
   should be recognized when (1) realized 
   or realizable and (2) earned. Under the 
   completed-contract method, revenue is 
   not recognized until a long-term 
   construction contract is complete. At 
   this stage, the entity is most clearly 
   entitled to the resulting revenues and is 
   most likely to have been involved in an 
   exchange. 


[211] Source: Publisher 

   Answer (A) is incorrect because the 
   cost-benefit criterion is the pervasive 
   constraint. 

   Answer (B) is incorrect because 
   understandability is a user-specific 
   quality. 

   Answer (C) is correct. Materiality is 
   the threshold for recognition. 
   Materiality is "the magnitude of an 
   omission or misstatement of accounting 
   information that, in the light of 
   surrounding circumstances, makes it 
   probable that the judgment of a 
   reasonable person relying on the 
   information would have been changed 
   or influenced by the omission or 
   misstatement." The importance of 
   materiality is emphasized by the 
   exemption of immaterial items from the 
   application of GAAP. 

   Answer (D) is incorrect because 
   consistency is a secondary and 
   interactive quality. It is included in 
   comparability. 


[212] Source: Publisher 

   Answer (A) is incorrect because 
   investments by owners and distributions 
   to owners involve transactions, events, 
   and circumstances during intervals of 
   time. 

   Answer (B) is incorrect because 
   investments by owners and 
   comprehensive income involve 
   transactions, events, and circumstances 
   during intervals of time. 

   Answer (C) is incorrect because 
   comprehensive income involves 
   transactions, events, and circumstances 
   during intervals of time. 

   Answer (D) is correct. Assets, 
   liabilities, and equity or net assets 
   reflect resources and claims thereto at a 
   moment in time. Assets are "probable 
   future economic benefits obtained or 
   controlled by a particular entity as a 
   result of past transactions or events." 
   Liabilities are "probable future 
   sacrifices of economic benefits arising 
   from present obligations of a particular 
   entity to transfer assets or provide 
   services to other entities in the future as 
   a result of past transactions or events." 
   Equity or net assets is "the residual 
   interest in the assets of an entity that 
   remains after deducting its liabilities." 


[213] Source: CMA 0684 4-3 

   Answer (A) is incorrect because 
   historical cost is part of the basic 
   structure of accrual accounting. 

   Answer (B) is incorrect because 
   realization is part of the basic structure 
   of accrual accounting. 

   Answer (C) is incorrect because the 
   transaction approach is part of the basic 
   structure of accrual accounting. 

   Answer (D) is correct. Financial 
   accounting principles assume that a 
   business entity is a going concern in the 
   absence of evidence to the contrary. 
   The concept justifies the use of 
   depreciation and amortization 
   schedules, and the recording of assets 
   and liabilities using attributes other than 
   liquidation value. 


[214] Source: CMA 0685 3-30 

   Answer (A) is correct. Materiality is 
   the recognition threshold (see SFAC 2). 
   Thus, it is not a principle per se, but a 
   cost-benefit guideline for the 
   application of accounting principles. 
   The materiality constraint provides a 
   threshold for recognition below which 
   inaccuracies are unimportant because 
   they will not affect the decisions made 
   by financial statement users. 

   Answer (B) is incorrect because 
   historical cost is part of the basic 
   structure of accrual accounting. 

   Answer (C) is incorrect because 
   revenue recognition is part of the basic 
   structure of accrual accounting. 

   Answer (D) is incorrect because 
   matching is part of the basic structure of 
   accrual accounting. 


[215] Source: CIA 0590 IV-26 

   Answer (A) is incorrect because the 
   revenue has not been earned at this 
   point. 

   Answer (B) is correct. The revenue 
   recognition principle provides that 
   revenue is ordinarily recognized when 
   (1) realized or realizable and (2) 
   earned. Revenue is realized when 
   goods or services are exchanged for 
   cash or claims to cash. Revenue is 
   considered earned when the entity has 
   substantially accomplished what it must 
   do to be entitled to the benefits 
   represented by the revenue. In this case, 
   the performance of the service (serving 
   a luncheon) is so essential to the 
   completion of the earning process that 
   revenue should not be recognized until 
   delivery occurs. At the point of delivery 
   (serving the luncheon), the revenue has 
   been realized and earned and should be 
   recognized. 

   Answer (C) is incorrect because the 
   date for billing is a matter of 
   administrative procedure and 
   convenience. The revenue was earned 
   at the date the service was performed 
   and should be recognized at that time. 

   Answer (D) is incorrect because the 
   revenue has been realized and earned 
   and should be recognized at the point of 
   performance of the service. To wait 
   until the receivable is collected is to 
   ignore the accrual basis of accounting. 
   The cash basis is not in accordance 
   with GAAP (unless the amount of 
   potentially uncollectible accounts is not 
   reasonably estimable). 


[216] Source: CIA 1193 IV-32 

   Answer (A) is incorrect because the 
   loss should be treated as extraordinary. 
   It is both infrequent and unusual. 

   Answer (B) is incorrect because no 
   operations have been discontinued. 

   Answer (C) is correct. APB 30 defines 
   an extraordinary item as one that occurs 
   infrequently and is unusual in nature in 
   the environment in which the entity 
   operates. It must also be material to 
   merit separate classification. 

   Answer (D) is incorrect because only 
   errors are accounted for as prior-period 
   adjustments. Furthermore, this item is 
   presumably current. 


[217] Source: CIA 1190 IV-27 

   Answer (A) is correct. According to 
   SFAC 1, the objectives of financial 
   reporting are concerned with the 
   underlying goals and purposes of 
   accounting. They are to provide (1) 
   information useful to those making 
   investment and credit decisions, 
   assuming that those individuals have a 
   reasonable understanding of business 
   and economic activities; (2) help to 
   current and potential investors and 
   creditors and other users in assessing 
   the amount, timing, and uncertainty of 
   future cash flows; and (3) knowledge 
   about economic resources, claims to 
   those resources, and the changes 
   therein. 

   Answer (B) is incorrect because 
   assessing the adequacy of internal 
   control is a function of internal auditing, 
   not financial reporting. 

   Answer (C) is incorrect because 
   evaluating management results 
   compared with standards is a function 
   of internal auditing, not financial 
   reporting. 

   Answer (D) is incorrect because 
   providing information on compliance 
   with established procedures is a 
   function of internal auditing, not 
   financial reporting. 


[218] Source: CMA 1286 4-24 

   Answer (A) is incorrect because the 
   company is not required to present 
   information about the effects of price 
   level changes. 

   Answer (B) is incorrect because such 
   information will be communicated if the 
   three broad purposes stated in SFAC 1 
   are satisfied. 

   Answer (C) is incorrect because 
   required financial statements for the 
   most part reflect historical costs. 

   Answer (D) is correct. According to 
   SFAC 1, Objectives of Financial 
   Reporting by Business Enterprises, 
   "Financial reporting should provide 
   information to help present and 
   potential investors and creditors and 
   other users in assessing the amounts, 
   timing, and uncertainty of prospective 
   cash receipts from dividends or interest 
   and the proceeds from the sale, 
   redemption, or maturity of securities or 
   loans. Since investors' and creditors' 
   cash flows are related to enterprise 
   cash flows, financial reporting should 
   provide information to help investors, 
   creditors, and others assess the 
   amounts, timing, and uncertainty of 
   prospective net cash inflows to the 
   related enterprise." 


[219] Source: Publisher 

   Answer (A) is incorrect because some 
   external users (e.g., taxing authorities) 
   have the authority to obtain desired 
   information, but most do not. The 
   objectives are based on the needs of the 
   latter class of users. 

   Answer (B) is incorrect because 
   financial information involves 
   estimation and judgment. 

   Answer (C) is incorrect because 
   financial reporting is usually based on 
   individual entities. 

   Answer (D) is correct. Financial 
   reporting furnishes information that 
   helps to identify the financial strengths 
   and weaknesses of an enterprise, to 
   assess its liquidity and solvency, and to 
   evaluate its performance during a 
   period of time. However, financial 
   accounting does not directly measure 
   the value of an enterprise, although it 
   may provide information to those who 
   wish to do so. 


[220] Source: CMA 0684 4-1 

   Answer (A) is incorrect because the 
   first objective of the internal accounting 
   and reporting system must be to provide 
   relevant and reliable information for 
   management decision making. 

   Answer (B) is correct. One of the 
   characteristics and limitations of the 
   kind of information that financial 
   reporting can provide is that the 
   information is provided and used at a 
   cost (see SFAC 1). All accounting 
   information is subject to two 
   quantitative constraints: materiality and 
   cost-benefit. If a reasonable person 
   relying on the information would not 
   have changed his/her judgment as a 
   result of an omission or misstatement, it 
   is not considered material. The 
   cost-benefit constraint states that the 
   benefits of information must exceed the 
   cost of obtaining it. 

   Answer (C) is incorrect because the 
   control of fraud is only an objective to 
   the extent that the system is cost 
   beneficial. 

   Answer (D) is incorrect because those 
   who best know the information needs 
   should design the system. 


[221] Source: CMA 0684 4-2 

   Answer (A) is incorrect because it 
   concerns the matching principle. 

   Answer (B) is incorrect because it 
   refers to the consistency principle. 

   Answer (C) is correct. Accounting 
   information is reliable if it is verifiable, 
   is a faithful representation, and is 
   reasonably free of error or bias. 
   Verifiability is demonstrated when 
   independent measurers use the same 
   methods and obtain similar results. So, 
   when the auditor verifies the 
   accountant's results, (s)he is showing 
   that part of the definition of reliability 
   is met. 

   Answer (D) is incorrect because it 
   refers to the full disclosure principle. 


[222] Source: CMA 0689 4-30 

   Answer (A) is correct. Under the 
   going-concern, or business continuity, 
   assumption, a financial statement user is 
   to presume that a company will continue 
   operating indefinitely in the absence of 
   indications to the contrary. The essence 
   of this assumption is that liquidation 
   values are not used in the financial 
   statements because the firm is unlikely 
   to liquidate in the near future. When the 
   going-concern assumption is not valid, 
   it is necessary to make appropriate 
   disclosures and to report assets at their 
   liquidation values. For instance, land 
   would no longer be reported at cost but 
   at its liquidation value. 

   Answer (B) is incorrect because some 
   prepaid assets may have a liquidation 
   value. For example, supplies can be 
   sold and prepaid insurance can be 
   redeemed. 

   Answer (C) is incorrect because capital 
   would change to equalize the 
   write-downs and write-ups on the asset 
   side of the balance sheet. 

   Answer (D) is incorrect because the 
   allowance would still exist because 
   many of the accounts may never be 
   paid. 


[223] Source: CMA 1290 2-19 

   Answer (A) is incorrect because a gain 
   on discontinued operations is included 
   in both earnings and comprehensive 
   income. 

   Answer (B) is correct. SFAC 5 defines 
   earnings as a measure of entity 
   performance during a period similar to, 
   but distinct from, present net income. It 
   excludes certain accounting adjustments 
   of prior periods that are currently 
   recognized, such as the cumulative 
   effect of a change in principle. 
   Comprehensive income is "a broad 
   measure of the effects of transactions 
   and other events on an entity, including 
   all recognized changes in equity (net 
   assets) of the entity during a period 
   from transactions and other events and 
   circumstances except those resulting 
   from investments by owners and 
   distribution to owners." Certain gains 
   and losses included in comprehensive 
   income (referred to as "cumulative 
   accounting adjustments" and "other 
   nonowner changes in equity") are 
   excluded from earnings. 

   Answer (C) is incorrect because a loss 
   from the obsolescence of a material 
   amount of inventory is included in both 
   earnings and comprehensive income. 

   Answer (D) is incorrect because an 
   extraordinary gain is included in both 
   earnings and comprehensive income. 


[224] Source: CMA 1290 2-20 

   Answer (A) is incorrect because 
   absolute assurance of collectibility is 
   not required. 

   Answer (B) is correct. Recognition is 
   the process of recording an item in the 
   financial records. Revenue should not 
   be recognized until it is (1) realized or 
   realizable and (2) earned. Revenues are 
   realized in an exchange for cash or 
   claims to cash. Revenues are realizable 
   when "related assets received or held 
   are readily convertible to known 
   amounts of cash or claims to cash." 
   Revenues are earned "when the entity 
   has substantially accomplished what it 
   must do to be entitled to the benefits 
   represented by the revenues" (SFAC 5). 

   Answer (C) is incorrect because some 
   exchange may occur before the earning 
   process is substantially complete. 

   Answer (D) is incorrect because 
   recognition also requires that revenue 
   be realized or realizable as well as 
   earned. 


[225] Source: CMA 1286 4-25 

   Answer (A) is incorrect because 
   perfect matching of expenses with 
   revenues is often impossible. 

   Answer (B) is correct. According to 
   SFAC 1, "Accrual accounting attempts 
   to record the financial effects on an 
   enterprise of transactions and other 
   events and circumstances that have cash 
   consequences for an enterprise in the 
   periods in which those transactions, 
   events, and circumstances occur rather 
   than only in the periods in which cash is 
   received or paid by the enterprise." 

   Answer (C) is incorrect because the 
   accrual basis is principally used to 
   match the occurrence and the effects of 
   transactions. Economic reality is more 
   difficult to express in historical 
   cost/nominal dollar financial 
   statements. 

   Answer (D) is incorrect because it is a 
   function of matching (depreciation is an 
   allocation). 


[226] Source: CMA 1292 2-2 

   Answer (A) is incorrect because 
   relevant accounting information must be 
   capable of making a difference in a 
   decision. 

   Answer (B) is incorrect because 
   timeliness is an element of relevance. 

   Answer (C) is incorrect because 
   feedback value is an element of 
   relevance. 

   Answer (D) is correct. Reliability and 
   relevance are the two primary 
   decision-specific accounting qualities. 
   Reliability is defined as the quality of 
   information that provides assurance that 
   the information is reasonably free from 
   error and bias and faithfully represents 
   what it purports to represent. The 
   ingredients of reliability are 
   verifiability, neutrality, and 
   representational faithfulness (SFAC 2). 


[227] Source: CIA 0593 IV-27 

   Answer (A) is incorrect because the 
   earning process is not complete when 
   the reservations are booked. 

   Answer (B) is incorrect because the 
   earning process is not complete when 
   the reservations are confirmed. 

   Answer (C) is incorrect because the 
   earning process is not complete when 
   the ticket is issued. 

   Answer (D) is correct. Revenue is 
   recognized when it is realized or 
   realizable and earned. The critical 
   event in the earning process for the 
   airline is the delivery of the service to 
   the customer, which occurs when the 
   related flight takes place. 


[228] Source: CIA 1190 IV-28 

   Answer (A) is correct. Revenue is 
   recognized when it is realized or 
   realizable and the earning process is 
   substantially complete. Delivery is the 
   usual time at which recognition is 
   appropriate. Because delivery occurred 
   in year 2, no revenue should be 
   recognized in year 1. 

   Answer (B) is incorrect because no 
   revenue should be recognized until 
   realized or realizable. 

   Answer (C) is incorrect because no 
   revenue should be recognized until 
   realized or realizable. 

   Answer (D) is incorrect because no 
   revenue should be recognized until 
   realized or realizable. 


[229] Source: CIA 1192 IV-27 

   Answer (A) is incorrect because the 
   revenue has not been earned when the 
   cash is collected. 

   Answer (B) is correct. In accordance 
   with SFAC 5, revenues should be 
   recognized when they are realized or 
   realizable and earned. Revenues are 
   realized when products, merchandise, 
   or other assets are exchanged for cash 
   or claims to cash. Revenues are 
   realizable when related assets received 
   or held are readily convertible to 
   known amounts of cash or claims to 
   cash. Revenues are earned when the 
   entity has substantially accomplished 
   what it must do to be entitled to the 
   benefits represented by the revenues. 
   The most common time at which these 
   two conditions are met is when the 
   product or merchandise is delivered or 
   services are rendered to customers. In 
   the situation presented, the performance 
   of the service (monthly spraying) is so 
   significant to completing the earning 
   process that revenue should not be 
   recognized until delivery occurs. At the 
   time of performing the service (monthly 
   spraying and any special visits), the 
   revenue has been realized and earned 
   and should be recognized. 

   Answer (C) is incorrect because 
   revenue from services rendered is 
   recognized when the services have been 
   performed. A portion of the services is 
   performed monthly. Thus, a portion of 
   the related revenue should be 
   recognized monthly rather than when the 
   contract year or the fiscal year is 
   complete. 

   Answer (D) is incorrect because 
   revenue from services rendered is 
   recognized when the services have been 
   performed. A portion of the services is 
   performed monthly. Thus, a portion of 
   the related revenue should be 
   recognized monthly rather than when the 
   contract year or the fiscal year is 
   complete. 


[230] Source: CMA 1292 2-1 

   Answer (A) is incorrect because 
   verifiability is one of the ingredients of 
   reliability. 

   Answer (B) is correct. Relevance and 
   reliability are the two decision-specific 
   primary qualities of accounting 
   information. Relevant information is 
   capable of making a difference in a 
   decision. The ingredients of relevance 
   are predictive value, timeliness, and 
   feedback value. Predictive value is the 
   quality "that helps users to increase the 
   likelihood of correctly forecasting the 
   outcome of past and present events" 
   (SFAC 2). 

   Answer (C) is incorrect because 
   neutrality is one of the ingredients of 
   reliability. 

   Answer (D) is incorrect because due 
   process is a nonsense answer. 


[231] Source: CMA 1292 2-17 

   Answer (A) is incorrect because, 
   depending upon the terms of the 
   contract, the assets may not be readily 
   convertible into cash. 

   Answer (B) is incorrect because, on a 
   large construction project, the 
   production process often cannot be 
   easily divided into definite stages. 

   Answer (C) is incorrect because cash is 
   sometimes not received until the project 
   is completed. 

   Answer (D) is correct. SFAC 5 states 
   that revenue should be recognized when 
   it is both realized or realizable and 
   earned. If a project is contracted for 
   before production and covers a long 
   time period in relation to reporting 
   periods, revenues may be recognized by 
   a percentage-of-completion method as 
   they are earned (as production occurs), 
   provided reasonable estimates of 
   results at completion and reliable 
   measures of progress are available. 
   Thus, contractors traditionally use the 
   percentage-of-completion method 
   because some revenue can be 
   recognized during each period of the 
   production process. In a sense, the 
   earning process is completed in various 
   stages; thus, revenues should be 
   recorded in each stage. 


[232] Source: CMA 1292 2-18 

   Answer (A) is correct. Recognizing 
   revenue at the time goods are produced 
   is appropriate when the assets are 
   readily realizable (convertible) because 
   they are salable at reliably 
   determinable prices without significant 
   effort. Readily realizable assets are 
   fungible and quoted prices are 
   available in an active market that can 
   rapidly absorb the quantity produced 
   (SFAC 5). Examples include some 
   agricultural products and rare minerals. 
   That production costs can be readily 
   determined is not a justification for 
   immediate recognition. Production costs 
   can be readily determined for almost 
   any product manufactured. 

   Answer (B) is incorrect because 
   recognition at the time of production is 
   appropriate if assets are readily 
   realizable, i.e., if they are salable at 
   reliably determinable prices without 
   significant effort. 

   Answer (C) is incorrect because 
   recognition at the time of production is 
   appropriate if assets are readily 
   realizable, i.e., if they are salable at 
   reliably determinable prices without 
   significant effort. 

   Answer (D) is incorrect because 
   interchangeability (fungibility) is a 
   requirement for recognition at the time 
   of production. 


[233] Source: CMA 1294 2-1 

   Answer (A) is incorrect because 
   predictive value enables users to 
   predict the outcome of future events. 

   Answer (B) is incorrect because 
   materiality is a constraint on the 
   reporting of accounting information. 

   Answer (C) is incorrect because 
   representational faithfulness is the 
   agreement between a measure or 
   description and the phenomenon that it 
   purports to represent. 

   Answer (D) is correct. One of the 
   qualitative characteristics of accounting 
   information is relevance. Relevant 
   information is capable of making a 
   difference in a decision. Relevance has 
   three elements: predictive value, 
   feedback value, and timeliness. 
   Feedback value permits users to 
   confirm or correct prior expectations 
   (SFAC 2). 


[234] Source: CMA 1294 2-2 

   Answer (A) is correct. The qualitative 
   characteristics of accounting 
   information include reliability. Reliable 
   information is reasonably free from 
   error and bias and faithfully represents 
   what it purports to represent. According 
   to SFAC 2, the three elements of 
   reliability are verifiability, neutrality, 
   and representational faithfulness. 
   Verifiability means that the information 
   can be verified by independent 
   measurers using the same methods. 
   Historical cost is a fixed amount arising 
   from a past transaction and therefore is 
   an objective measure. Neutrality means 
   that information should be neutral; it 
   cannot favor one statement user over 
   another. Historical cost is neutral 
   because it was determined by two 
   individuals--a buyer and a seller--in an 
   arm's-length transaction. 
   Representational faithfulness means that 
   financial statements accurately 
   represent the events reported. Using 
   historical cost results in an accurate 
   depiction of the transaction that 
   occurred. 

   Answer (B) is incorrect because some 
   would argue that historical costs are not 
   always relevant. 

   Answer (C) is incorrect because 
   historical costs may not possess 
   decision usefulness. 

   Answer (D) is incorrect because some 
   would argue that historical costs are not 
   always relevant. 


[235] Source: CMA 1294 2-3 

   Answer (A) is incorrect because 
   revenue is recognized when the item 
   meets the definition of revenue, the item 
   is measurable, the information is 
   relevant and reliable, and the item is 
   realized or realizable. 

   Answer (B) is incorrect because 
   revenue is recognized when the item 
   meets the definition of revenue, the item 
   is measurable, the information is 
   relevant and reliable, and the item is 
   realized or realizable. 

   Answer (C) is correct. Recognition 
   means incorporating transactions into 
   the accounting system so as to report 
   them in the financial statements as 
   assets, liabilities, revenues, expenses, 
   gains, or losses. When items meet the 
   criteria for recognition, disclosure by 
   other means is not a substitute for 
   recognition in the financial statements. 
   The four fundamental recognition 
   criteria are (1) the item meets the 
   definition of an element of financial 
   statements, (2) the item has an attribute 
   measurable with sufficient reliability, 
   (3) the information is relevant, and (4) 
   the information is reliable (SFAC 5). In 
   addition, revenue should be recognized 
   when it is realized or realizable and 
   earned. Materiality is not a recognition 
   criterion. An immaterial item that meets 
   the criteria for recognition may be 
   recognized. 

   Answer (D) is incorrect because 
   revenue is recognized when the item 
   meets the definition of revenue, the item 
   is measurable, the information is 
   relevant and reliable, and the item is 
   realized or realizable. 


[236] Source: CMA 1294 2-5 

   Answer (A) is incorrect because 
   present value, current cost, and net 
   realizable value are measurement 
   attributes that may be used in 
   appropriate circumstances. 

   Answer (B) is incorrect because 
   present value, current cost, and net 
   realizable value are measurement 
   attributes that may be used in 
   appropriate circumstances. 

   Answer (C) is incorrect because 
   present value, current cost, and net 
   realizable value are measurement 
   attributes that may be used in 
   appropriate circumstances. 

   Answer (D) is correct. According to 
   SFAC 5, items appearing in financial 
   statements may, under certain 
   circumstances, be measured by different 
   attributes. The attributes used in current 
   practice are historical cost (historical 
   proceeds), current cost, current market 
   value, net realizable (settlement) value, 
   and the present value of future cash 
   flows. For example, the present value 
   of future cash flows is used to value 
   long-term payables; current cost is the 
   method used to measure and report 
   some inventories; and net realizable 
   value is used to measure short-term 
   receivables. 


[237] Source: CMA 1290 2-17 

   Answer (A) is incorrect because 
   reporting of financial position at the end 
   of the period is required by SFAC 5. 

   Answer (B) is incorrect because 
   earnings for the period is required by 
   SFAC 5. 

   Answer (C) is incorrect because 
   comprehensive income for the period is 
   required by SFAC 5. 

   Answer (D) is correct. According to 
   SFAC 5, a complete set of financial 
   statements includes a balance sheet, an 
   earnings (net income) statement, a cash 
   flow statement, a statement of 
   comprehensive income, and an 
   explanation of investments by, and 
   distributions to, owners during the 
   period. Management's discussion and 
   analysis of financial condition and 
   results of operations is included in the 
   Basic Information Package (BIP) 
   required as part of the Integrated 
   Disclosure System used in filings with 
   the Securities and Exchange 
   Commission. 


[238] Source: CMA 0691 2-10 

   Answer (A) is incorrect because 
   amortization is an allocation process 
   that is not cash-based. 

   Answer (B) is correct. SFAC 6 defines 
   amortization as "the accounting process 
   of reducing an amount by periodic 
   payments or write-downs. Specifically, 
   amortization is the process of reducing 
   a liability recorded as a result of a cash 
   receipt by recognizing revenues or 
   reducing an asset recorded as a result of 
   a cash payment by recognizing expenses 
   or costs of production." Amortization is 
   a means of allocating an initial cost to 
   the periods that benefit from that cost. It 
   is similar to depreciation, a term 
   associated with long-lived tangible 
   assets, and depletion, which is 
   associated with natural resources. 

   Answer (C) is incorrect because no 
   funding is associated with amortization. 

   Answer (D) is incorrect because 
   amortization has nothing to do with 
   changes in price levels. 


[239] Source: CMA 0691 2-18 

   Answer (A) is incorrect because exit 
   value is used to measure proceeds from 
   an orderly liquidation. 

   Answer (B) is incorrect because exit 
   value is used to measure proceeds from 
   an orderly liquidation. 

   Answer (C) is incorrect because exit 
   value is used to measure proceeds from 
   an orderly liquidation. 

   Answer (D) is correct. According to 
   SFAC 5, current market value (exit 
   value) is used to measure the cash or 
   equivalent that is realizable when 
   selling assets in an orderly liquidation. 


[240] Source: CMA 1292 2-19 

   Answer (A) is incorrect because, 
   although the cash basis is theoretically 
   acceptable only when the collection is 
   not assured, the method has traditionally 
   been used in many service industries. 

   Answer (B) is incorrect because 
   revenue may meet the criteria of being 
   realized or realizable and earned when 
   specific performance of a service has 
   occurred. 

   Answer (C) is incorrect because it is 
   valid to record service revenue at the 
   completion of performance. 

   Answer (D) is correct. The accretion 
   method records revenue as the product 
   grows. For example, it is theoretically 
   feasible to record a timber company's 
   revenue as the trees grow because the 
   product is increasing in value each 
   year. This kind of phenomenon does not 
   occur in the service industries. Hence, 
   the accretion method is not applicable. 


[241] Source: CIA 1193 IV-30 

   Answer (A) is correct. Under the 
   revenue recognition principle, revenue 
   is recognized in the period in which it 
   is earned; therefore, when it is received 
   in advance of its being earned, the 
   amount applicable to future periods is 
   deferred. The amount unearned is 
   considered a liability because it 
   represents an obligation to perform a 
   service in the future arising from a past 
   transaction. Unearned revenue is 
   revenue that has been received but not 
   earned. 

   Answer (B) is incorrect because the 
   revenue is not earned. The exterminator 
   has not performed the related services 
   for the customer. 

   Answer (C) is incorrect because 
   accrued revenue is revenue that has 
   been earned but not received. 

   Answer (D) is incorrect because the 
   customer has a prepaid expense 
   (expense paid but not incurred); the 
   exterminator has unearned revenue 
   (revenue received but not earned). 


[242] Source: CMA 1294 2-4 

   Answer (A) is incorrect because 
   historical cost may not be an accurate 
   valuation of a balance sheet item. 
   Changing prices and other factors are 
   not recognized in the basic financial 
   statements. 

   Answer (B) is correct. The basic 
   financial statements are prepared using 
   the concept of financial capital 
   maintenance. A return on financial 
   capital results only if the financial 
   (money) amount of net assets at the end 
   of the period exceeds the amount at the 
   beginning. Hence, inclusion of 
   information on capital maintenance is a 
   fundamental approach to financial 
   reporting, not a limitation (SFAC 5). 

   Answer (C) is incorrect because not all 
   assets and liabilities are included in the 
   balance sheet; for example, certain 
   contingencies and pension obligations 
   are not included. 

   Answer (D) is incorrect because 
   measurement in financial statements 
   tends to be approximate rather than 
   exact. Estimates are commonly used to 
   determine reported amounts, e.g., 
   depreciation and present value. 


[243] Source: CMA 0691 2-11 

   Answer (A) is incorrect because the 
   assumed continuity of the business is the 
   basis for reporting financial statement 
   items at other than liquidation value. 

   Answer (B) is incorrect because 
   conservatism is a prudent reaction to 
   uncertainty. For example, if different 
   estimates are available and none is 
   more likely than another, the least 
   optimistic should be used. However, 
   conservatism is not a bias toward 
   understatement. 

   Answer (C) is incorrect because the 
   affairs of an economic entity are distinct 
   from those of its owners. 

   Answer (D) is correct. Assets are 
   normally listed in the order of their 
   importance, with current assets 
   typically being the most important. For 
   a public utility, the physical plant is the 
   most important asset. Thus, public 
   utilities often report their noncurrent 
   assets as the first item on the balance 
   sheet. This departure from the 
   customary presentation in accordance 
   with GAAP is justified by the 
   peculiarities of the industry. 


[244] Source: CMA 1290 2-15 

   Answer (A) is incorrect because 
   neutrality is an ingredient of reliability. 

   Answer (B) is incorrect because 
   timeliness is only one ingredient of 
   relevance. It is the availability of 
   information at a time when the user still 
   has the capacity to influence decisions. 

   Answer (C) is incorrect because 
   reliability is the other decision-specific 
   quality of accounting information. 
   Reliable information "is reasonably 
   free from error and bias and faithfully 
   represents what it purports to represent" 
   (SFAC 2). 

   Answer (D) is correct. Relevance and 
   reliability are the primary 
   decision-specific qualities of 
   accounting information. Relevant 
   information is capable of making a 
   difference in a decision by assisting 
   users to form predictions about the 
   outcomes of events or to confirm or 
   correct expectations. Its ingredients are 
   predictive value, feedback value, and 
   timeliness. 


[245] Source: CMA 1290 2-16 

   Answer (A) is correct. Reliable 
   information "is reasonably free from 
   error and bias and faithfully represents 
   what it purports to represent" (SFAC 
   2). The ingredients of reliability are 
   verifiability, neutrality, and 
   representational faithfulness. Verifiable 
   information involves measurements that 
   are capable of independent replication. 

   Answer (B) is incorrect because 
   feedback value is an ingredient of 
   relevance. 

   Answer (C) is incorrect because 
   comparability (including consistency) is 
   a secondary quality that interacts with 
   relevance and reliability. It "enables 
   users to identify similarities in and 
   differences between two sets of 
   economic phenomena." 

   Answer (D) is incorrect because 
   comparability (including consistency) is 
   a secondary quality that interacts with 
   relevance and reliability. Consistency 
   is "conformity from period to period 
   with unchanging policies and 
   procedures" (SFAC 2). 


[246] Source: CMA 1290 2-18 

   Answer (A) is incorrect because 
   measurability with sufficient reliability 
   is a fundamental criterion for 
   recognition of an item in the financial 
   statements, subject to the cost-benefit 
   constraint and the materiality threshold. 

   Answer (B) is incorrect because 
   meeting a definition of an element of 
   financial statements is a fundamental 
   criterion for recognition of an item in 
   the financial statements. 

   Answer (C) is correct. Decision 
   usefulness is not a recognition criterion. 
   According to SFAC 2, it is the most 
   important characteristic of information 
   in the hierarchy of accounting qualities. 
   Usefulness provides the benefits that 
   offset the costs of information. 

   Answer (D) is incorrect because 
   relevance is a fundamental criterion for 
   recognition of an item in the financial 
   statements. 


[247] Source: CMA 0691 2-15 

   Answer (A) is incorrect because the 
   percentage-of-completion method 
   attempts a more accurate association of 
   cost incurrence and revenue 
   recognition. 

   Answer (B) is incorrect because the 
   percentage-of-completion method is 
   completely consistent with the going 
   concern assumption. 

   Answer (C) is incorrect because the 
   percentage-of-completion method is 
   completely consistent with the 
   historical cost principle. 

   Answer (D) is correct. Revenue is 
   recognized when realized or realizable 
   and the earning process is substantially 
   complete. This ordinarily occurs at the 
   time of sale and delivery of goods or 
   services. Thus, the 
   percentage-of-completion method is 
   essentially an exception to the revenue 
   recognition principle. Production rather 
   than sale and delivery is considered to 
   be the culmination of the earning 
   process. 


[248] Source: CMA 0692 2-1 

   Answer (A) is incorrect because 
   representational faithfulness is an 
   ingredient of reliability. 

   Answer (B) is incorrect because 
   neutrality is an ingredient of reliability. 

   Answer (C) is incorrect because 
   verifiability is an ingredient of 
   reliability. 

   Answer (D) is correct. Relevance and 
   reliability are the two decision-specific 
   primary qualities of accounting 
   information. Relevant information is 
   capable of making a difference in a 
   decision. The ingredients of relevance 
   are predictive value, timeliness, and 
   feedback value. Feedback value permits 
   users to confirm or correct their prior 
   expectations. 


[249] Source: CMA 0684 4-4 

   Answer (A) is incorrect because 
   generally accepted revenue recognition 
   methods do include end of production. 

   Answer (B) is incorrect because 
   generally accepted revenue recognition 
   methods include recognition during 
   production. 

   Answer (C) is incorrect because 
   generally accepted revenue recognition 
   methods do include receipt of cash. 

   Answer (D) is correct. In accordance 
   with SFAS 5, Recognition and 
   Measurement in Financial Statements of 
   Business Enterprises, revenues and 
   gains should be recognized when they 
   are realized or realizable and earned. 
   The most common time at which these 
   two conditions are met is usually when 
   the product or merchandise is delivered 
   or services are rendered to customers 
   (point of sale). The receipt of cash 
   method is also used quite often. For 
   example, the installment method is a 
   cash method. Also, doctors, lawyers, 
   and accountants all use the cash method. 
   Construction contractors use the 
   percentage-of-completion method, 
   which is a means of recognizing 
   revenue during production. Revenue is 
   also occasionally recognized at the end 
   of production by farmers and miners of 
   precious metals such as gold. Using the 
   present value of a contract to sell 
   merchandise, however, is not 
   acceptable. 


[250] Source: CMA 0685 3-26 

   Answer (A) is correct. ARB 43, 
   Chapter 4, requires the accrual of a loss 
   in the current year's income statement 
   on goods subject to a firm purchase 
   commitment if the market price of these 
   goods declines below the commitment 
   price. The loss should be measured in 
   the same manner as inventory losses. 
   Disclosure of the loss is also required. 

   Answer (B) is incorrect because, if the 
   loss arises out of a firm, 
   noncancellable, and unhedged 
   commitment, it should be recognized in 
   the current year. 

   Answer (C) is incorrect because, if the 
   loss arises out of a firm, 
   noncancellable, and unhedged 
   commitment, it should be recognized in 
   the current year. 

   Answer (D) is incorrect because, if the 
   loss arises out of a firm, 
   noncancellable, and unhedged 
   commitment, it should be recognized in 
   the current year. 


[251] Source: CMA 1284 4-6 

   Answer (A) is incorrect because 
   consulting revenue receivable should be 
   debited. 

   Answer (B) is correct. Revenues should 
   be recognized when they are realized or 
   realizable and earned. Consulting 
   revenue is realized and earned when the 
   consulting service has been performed. 
   Therefore, for a consulting project that 
   has been started and completed during 
   Year 1, an adjusting entry should be 
   made at year-end to record both a 
   receivable and the related revenue. The 
   journal entry is a debit to consulting 
   revenue receivable and a credit to 
   consulting revenue. 

   Answer (C) is incorrect because the 
   entry should be to debit consulting 
   revenue receivable and credit 
   consulting revenue. 

   Answer (D) is incorrect because the 
   entry should be a debit to consulting 
   revenue receivable because the revenue 
   has been earned. 


[252] Source: CMA 1289 4-18 

   Answer (A) is incorrect because, under 
   the installment method, no revenue 
   should be recognized for any of the 
   units of work-in-process. 

   Answer (B) is correct. Under the 
   installment method, revenue is 
   recognized only when cash has been 
   collected. Thus, Matson should record 
   revenue for the six units that were 
   installed and for which proceeds were 
   collected. In addition, the company 
   should recognize 30% of the revenue on 
   the eight units for which only a down 
   payment was received. The first six 
   units produced revenue of $840,000 (6 
   x $140,000). The revenue that should be 
   recognized for the other eight units is 
   $336,000 (30% x $140,000 x 8). 
   Hence, total revenue is $1,176,000 
   ($840,000 + $336,000). 

   Answer (C) is incorrect because 
   $3,248,000 is the amount of revenue 
   recognized using the 
   percentage-of-completion method. The 
   installment method recognizes revenue 
   equal to the selling price times the 
   percentage of the account collected 
   [($140,000 x 6 units) + ($140,000 x 8 
   units x 30% collected)]. 

   Answer (D) is incorrect because 
   $1,960,000 is the amount of revenue 
   recognized using the completed-contract 
   method. The installment method 
   recognizes revenue equal to the selling 
   price times the percentage of the 
   account collected [($140,000 x 6 units) 
   + ($140,000 x 8 units x 30% 
   collected)]. 


[253] Source: CMA 1289 4-19 

   Answer (A) is incorrect because each 
   unit installed on account is recognized 
   in revenue at the $140,000 selling price 
   and not at 30% of the account collected. 
   These units are fully completed. 

   Answer (B) is incorrect because 
   $1,176,000 is the amount of revenue 
   recognized under the installment 
   method. The percentage-of-completion 
   method recognizes revenue based on the 
   percentage amount of completion for 
   each unit [($140,000 x 14 units) + 
   ($140,000 x 10 units x 80% completed) 
   + ($140,000 x 6 units x 20% 
   completed)]. 

   Answer (C) is correct. Under the 
   percentage-of-completion method, 
   revenue is recognized in proportion to 
   the amount of work completed during 
   the period. Recognition is appropriate 
   under this method even though 
   collections have not been made, the 
   units have not been installed, and work 
   remains to be done. For the 14 units 
   completed, the full $140,000 per unit is 
   recognized, or $1,960,000. For the 10 
   units that are 80% complete, revenue is 
   recognized to the extent of 80% of the 
   contract price. Thus, these 10 units 
   provide $1,120,000 of revenue (80% x 
   $140,000 x 10). The six units that are 
   20% complete produce revenue of 
   $168,000 (20% x $140,000 x 6). Total 
   revenue is therefore $3,248,000 
   ($1,960,000 + $1,120,000 + $168,000). 

   Answer (D) is incorrect because the 
   percentage-of-completion method 
   recognizes revenue based on the 
   percentage amount of completion for 
   each unit [($140,000 x 14 units) + 
   ($140,000 x 10 units x 80% completed) 
   + ($140,000 x 6 units x 20% 
   completed)]. 


[254] Source: CMA 1289 4-20 

   Answer (A) is incorrect because the 
   revenue for each of the 8 units that were 
   installed on account is recognized at the 
   full $140,000 selling price and not at 
   30% of the account collected. No 
   revenue should be recognized for any of 
   the units of work-in-process. 

   Answer (B) is incorrect because 
   $1,176,000 is the amount of revenue 
   recognized under the installment 
   method. The completed contract method 
   recognizes revenue according to the 
   sales price of units that are fully 
   completed ($140,000 x 14 units). 

   Answer (C) is incorrect because the 
   completed contract method recognizes 
   revenue according to the sales price of 
   units that are fully completed ($140,000 
   x 14 units). 

   Answer (D) is correct. Under the 
   completed-contract method, revenue is 
   recognized when the job is completed, 
   that is, when the product has been 
   installed. Because 14 units have been 
   installed, the full $140,000 is 
   recognized for each of the 14 units, for 
   a total of $1,960,000. 


[255] Source: CMA 0691 2-13 

   Answer (A) is correct. Total expected 
   costs at May 31, Year 3 are $9,000,000 
   ($6,750,000 incurred to date + 
   $2,250,000 estimated costs to 
   complete). Expected total gross profit 
   over the life of the contract is 
   $1,000,000 ($10,000,000 contract price 
   - $9,000,000). However, the project is 
   only 75% complete ($6,750,000  
   $9,000,000). Thus, the gross profit to 
   be recognized at May 31, Year 3 is 
   $750,000 (75% x $1,000,000). Of that 
   amount, $500,000 was recognized in 
   Year 2 (25% X $2,000,000). The gross 
   profit remained to be recognized in 
   Year 3 is $250,000 ($750,000 - 
   $500,000). 

   Answer (B) is incorrect because the 
   gross profit for the year ended May 31, 
   Year 3 is $250,000. 

   Answer (C) is incorrect because the 
   gross profit for the year ended May 31, 
   Year 3 is $250,000. 

   Answer (D) is incorrect because the 
   gross profit for the year ended May 31, 
   Year 3 is $250,000. 


[256] Source: CMA 0691 2-14 

   Answer (A) is incorrect because 
   inventory is $1,500,000. 

   Answer (B) is incorrect because the 
   accounts receivable balance is 
   $500,000. 

   Answer (C) is incorrect because the 
   accounts receivable balance is 
   $500,000 and inventory is $1,500,000. 

   Answer (D) is correct. Under the 
   percentage-of-completion method, the 
   typical assets reported are accounts 
   receivable (representing unpaid 
   progress billings) and construction in 
   progress (an inventory account 
   representing the expected gross profit 
   recognized and the unbilled portion of 
   the costs). Progress billings at May 31, 
   Year 3 were $6,000,000, and cash 
   collections were $5,500,000, so the 
   remaining $500,000 should be in 
   accounts receivable. The inventory 
   (construction in progress) consists of 
   the $6,750,000 of costs incurred to 
   date, plus the $750,000 gross profit 
   recognized to date minus the progress 
   billings of $6,000,000 (progress 
   billings is an offset to construction in 
   progress on the balance sheet). Hence, 
   inventory is $1,500,000 ($6,750,000 + 
   $750,000 - $6,000,000). 


[257] Source: CPA 0592 I-21 

   Answer (A) is incorrect because 
   $1,100,000 equals the total gross profit 
   (both realized and unrealized) for 1999 
   and 2000. 

   Answer (B) is incorrect because 
   $1,300,000 is the total cash collected. 

   Answer (C) is correct. Gross profit 
   realized equals the gross profit 
   percentage times cash collected. Hence, 
   cash collected on 1999 sales was 
   $800,000 [($150,000 + $90,000)  
   30%], and cash collected on 2000 sales 
   was $500,000 ($200,000  40%). The 
   remaining balance of installment 
   receivables is therefore $1,700,000 
   ($1,000,000 + $2,000,000 - $800,000 - 
   $500,000). 

   Answer (D) is incorrect because 
   $1,900,000 equals total sales minus 
   total gross profit for 1999 and 2000. 


[258] Source: CPA 0FIN R98-8 

   Answer (A) is incorrect because 
   $600,000 equals cash collections for 
   the year. 

   Answer (B) is incorrect because 
   $600,000 equals cash collections for 
   the year, and $360,000 is the difference 
   between cash collections and realized 
   gross profit. 

   Answer (C) is correct. The installment 
   method recognizes income on a sale 
   when the related receivable is 
   collected. The amount recognized each 
   period is the gross profit percentage 
   (gross profit  selling price) on the sale 
   multiplied by the cash collected. Given 
   realized gross profit on installment 
   sales of $240,000 and a gross profit 
   percentage on sales of 40%, cash 
   collections must have been $600,000 
   ($240,000  40%). The accounts 
   receivable at year-end is the difference 
   between total installment sales and cash 
   collected; therefore, accounts 
   receivable must be $1,200,000 
   ($1,800,000 - $600,000) on December 
   31, 2000. Deferred gross profit on the 
   year-end accounts receivable is 
   $480,000 ($1,200,000 x 40%). 

   Answer (D) is incorrect because 
   $720,000 is the total of realized and 
   unrealized gross profit. 


[259] Source: CPA 1192 I-43 

   Answer (A) is incorrect because 
   $2,000 excludes the profit on 2000 
   sales. 

   Answer (B) is incorrect because $3,000 
   excludes the profit on 1999 sales. 

   Answer (C) is correct. The 
   cost-recovery method recognizes profit 
   only after collections exceed the cost of 
   the item sold, that is, when the full cost 
   has been recovered. Subsequent 
   amounts collected are treated entirely 
   as revenue (debit cash and deferred 
   gross profit, credit the receivable and 
   realized gross profit). The sum of 
   collections in excess of costs to be 
   recognized as gross profit is $5,000 
   {[$3,000 for 2000 collections on 1999 
   sales - ($8,000 cost - $7,000 in 1999 
   collections on 1999 sales)] + ($12,000 
   collections on 2000 sales - $9,000 
   cost)}. 

   Answer (D) is incorrect because 
   $15,000 equals 2000 sales. 


[260] Source: Publisher 

   Answer (A) is incorrect because 
   $100,000 is the apparent gross profit on 
   the sale, not the revenue. 

   Answer (B) is incorrect because 
   $400,000 was the original cost of the 
   machine to Dogg. 

   Answer (C) is correct. Revenue is 
   recognized when it is realized or 
   realizable and the earning process is 
   substantially complete. Thus, a sale is 
   recorded when title to goods passes or 
   when services are performed. At the 
   date of the sale, May 28, Dogg would 
   have recorded a revenue of $500,000, 
   which was received in the form of 
   $250,000 in cash and a receivable for 
   the same amount. 

   Answer (D) is incorrect because, at 
   May 28, a sale appeared to have been 
   consummated in the amount of 
   $500,000. 


[261] Source: Publisher 

   Answer (A) is incorrect because the 
   $250,000 receivable is not considered 
   collectible; thus the sale was not for 
   $500,000. 

   Answer (B) is incorrect because 
   $100,000 would have been the gross 
   profit if the receivable had been 
   collectible. 

   Answer (C) is correct. Gross profit is 
   the difference between the selling price 
   and the cost of goods sold. The balance 
   sheet presentation should be based on 
   the net realizable value of the 
   receivable. Because that amount is 
   assumed to be zero, the machine was 
   actually sold for $250,000, not 
   $500,000. Thus, a loss of $150,000 is 
   reported in the financial statements. 

   Answer (D) is incorrect because 
   $250,000 was the amount of cash 
   collected. 


[262] Source: Publisher 

   Answer (A) is incorrect because 
   shareholders' equity is not affected by 
   the transaction; instead, a liability 
   should be credited. 

   Answer (B) is correct. The purchase of 
   the machine would have involved a 
   debit to fixed assets of $500,000, a 
   credit to cash of $250,000, and a credit 
   to a current liability of $250,000. 

   Answer (C) is incorrect because the 
   machine is valued at $500,000, and that 
   amount should be debited to a fixed 
   asset account. 

   Answer (D) is incorrect because the 
   transaction increased fixed assets. 


[263] Source: CPA 0595 F-33 

   Answer (A) is incorrect because 
   $507,000 does not include $5,000 for 
   transportation to consignees. 

   Answer (B) is correct. Cost of goods 
   sold is equal to the cost of goods 
   available for sale minus the ending 
   inventory. Cost of goods available for 
   sale is equal to beginning inventory, 
   plus purchases, plus additional costs 
   (such as freight-in and transportation to 
   consignees) that are necessary to 
   prepare the inventory for sale. The cost 
   of goods sold for Kam Co. is $512,000 
   [($122,000 beginning inventory + 
   $540,000 purchases + $10,000 
   freight-in + $5,000 transportation to 
   consignees) - ($145,000 Kam's ending 
   inventory + $20,000 consignee ending 
   inventory)]. Freight-out is a selling cost 
   and is not included in cost of goods 
   sold. 

   Answer (C) is incorrect because 
   $527,000 does not include $5,000 for 
   transportation to consignees or reflect 
   the $20,000 of inventory held by 
   consignees. 

   Answer (D) is incorrect because 
   $547,000 includes $35,000 of 
   freight-out. 


[264] Source: CMA 1292 2-14 

   Answer (A) is incorrect because 
   $12,000,000 is the total profit. 

   Answer (B) is correct. Under the 
   percentage-of-completion method, the 
   revenue to be recognized is based on a 
   project's percentage of completion. By 
   the end of the project's first year, 
   $12,000,000 of cost had been incurred. 
   Estimated cost to complete was 
   $24,000,000 and the project was 1/3 
   complete ($12,000,000  $36,000,000 
   total cost). Thus, 1/3 of the project 
   revenue should be recorded. 
   Accordingly, gross profit is $4,000,000 
   [($48,000,000 price x 1/3) - 
   $12,000,000 cost incurred]. 

   Answer (C) is incorrect because the 
   gross profit is $4,000,000. The 
   relationships among costs incurred, 
   progress billings, and cash collected 
   have no effect on the answer. 

   Answer (D) is incorrect because the 
   gross profit is $4,000,000. The 
   relationships among costs incurred, 
   progress billings, and cash collected 
   have no effect on the answer. 


[265] Source: CMA 1292 2-15 

   Answer (A) is incorrect because the 
   total gross profit on the project is 
   expected to be $8,000,000. 

   Answer (B) is incorrect because the 
   project is expected to be profitable. 

   Answer (C) is correct. The gross profit 
   to be recognized is based upon the 
   project's percentage of completion. 
   Actual costs to date have been 
   $30,000,000, and an additional 
   $10,000,000 is expected to be incurred. 
   Hence, the project has now incurred 3/4 
   of the $40 million of expected costs, 
   and 3/4 of the $48,000,000 of revenue 
   should be recorded, or $36,000,000. 
   The gross profit earned through the end 
   of the second year is $6,000,000 
   ($36,000,000 revenue - $30,000,000 
   costs). Because $4,000,000 of that was 
   recorded in the prior year 
   [($48,000,000 price X 1/3) - $12,000 
   cost incurred], an additional 
   $2,000,000 should be recorded in the 
   current year. 

   Answer (D) is incorrect because 
   $6,000,000 is the total gross profit for 
   the first two years. 


[266] Source: CMA 1292 2-16 

   Answer (A) is incorrect because the 
   total loss is only $2,000,000. 

   Answer (B) is incorrect because the 
   entire loss should be recognized as 
   soon as it is known. Even though the 
   project is 60% complete, 100% of the 
   loss is recorded. The rules for losses 
   and gains differ. 

   Answer (C) is correct. If actual costs to 
   date are $30,000,000, and another 
   $20,000,000 are expected to be 
   incurred, the gross loss will be 
   $2,000,000 given a contract price of 
   $48,000,000. The entire loss should be 
   recorded as soon as it is known. Thus, 
   the $2,000,000 loss should be 
   recognized at November 30, year 3 
   even though the project is incomplete. 
   Immediate recognition of loss 
   characterizes the completed-contract 
   method as well as the 
   percentage-of-completion method. 

   Answer (D) is incorrect because the 
   loss recognized is that expected for the 
   entire project, not just for the current 
   year. 


[267] Source: CMA 1284 4-8 

   Answer (A) is incorrect because the 
   recognition of the earned portion of 
   unearned revenues previously recorded 
   requires a credit to a revenue account. 

   Answer (B) is incorrect because the 
   recognition of the earned portion of 
   unearned revenues previously recorded 
   requires a credit to a revenue account. 

   Answer (C) is incorrect because the 
   recognition of the earned portion of 
   unearned revenues previously recorded 
   requires a credit to a revenue account. 

   Answer (D) is correct. When cash from 
   customers is collected in advance, a 
   credit is made to the unearned revenue 
   account. When the revenue is then 
   earned, usually on the basis of 
   production and delivery, the unearned 
   revenue account must then be debited, 
   with a corresponding credit to a 
   revenue account (an owners' equity 
   account). 


[268] Source: CMA 0685 4-33 

   Answer (A) is incorrect because, while 
   it represents a point at which revenues 
   are realized or realizable and earned in 
   certain instances, it does not fulfill the 
   criterion for earliest recognition in the 
   incident described. 

   Answer (B) is correct. Revenue is to be 
   recognized when the conditions of 
   "realized or realizable" and "earned" 
   are met. If products or other assets are 
   readily realizable because they are 
   salable at reliably determinable prices 
   without significant effort, revenues may 
   be recognized at completion of 
   production or when prices of the asset 
   change. 

   Answer (C) is incorrect because, while 
   it represents a point at which revenues 
   are realized or realizable and earned in 
   certain instances, it does not fulfill the 
   criterion for earliest recognition in the 
   incident described. 

   Answer (D) is incorrect because, while 
   it represents a point at which revenues 
   are realized or realizable and earned in 
   certain instances, it does not fulfill the 
   criterion for earliest recognition in the 
   incident described. 


[269] Source: CMA 1288 4-24 

   Answer (A) is incorrect because the 
   amount of future returns can be 
   reasonably estimated is a criterion for 
   revenue recognition. 

   Answer (B) is incorrect because the 
   seller's price to the buyer being 
   substantially fixed at the date of the sale 
   is a criterion for revenue recognition. 

   Answer (C) is correct. SFAS 48, 
   Revenue Recognition When Right of 
   Return Exists, requires sales revenue 
   and cost of sales to be reduced by 
   expected returns when goods are sold 
   with a right of return. Before revenue 
   can be recognized, the following 
   conditions must exist: the buyer must be 
   independent of the seller (have 
   economic substance apart from the 
   seller), the price must be determined 
   (substantially fixed), risk of loss must 
   rest with the buyer, the buyer must have 
   paid or be obligated to pay and the 
   obligation is not contingent on resale, 
   the seller has no significant future 
   obligation to bring about resale, and 
   returns can be reasonably estimated. No 
   time limit for liquidation of the buyer's 
   obligation is established; the buyer 
   should simply have an obligation to pay 
   at some future time. 

   Answer (D) is incorrect because the 
   buyer being obligated to pay the seller 
   and the obligation not being contingent 
   on the resale of the product is a 
   criterion for revenue recognition. 


[270] Source: CIA 0594 IV-26 

   Answer (A) is incorrect because 
   progress billings are accumulated in the 
   billings on construction in progress 
   account under both methods. 

   Answer (B) is incorrect because 
   accumulated construction costs are 
   included in the construction in progress 
   inventory account under both methods. 

   Answer (C) is incorrect because the 
   percentage-of-completion method 
   recognizes a percentage of revenues and 
   gross profit each period. 

   Answer (D) is correct. The 
   completed-contract method does not 
   recognize any gross profit until the 
   contract is completed. The 
   percentage-of-completion method 
   recognizes a portion of revenues and 
   gross profit each period, based upon the 
   ratio of costs incurred to date to total 
   estimated costs of completion. 
   Accumulated gross profit and 
   accumulated construction costs are 
   included in the construction in progress 
   inventory account under the 
   percentage-of-completion method. 


[271] Source: CMA 0695 2-14 

   Answer (A) is incorrect because 
   $67,500 would be the debit to the 
   revenue account if it had been credited 
   initially. 

   Answer (B) is incorrect because a 
   $67,500 debit to the liability account 
   would be appropriate if 75% of the 
   subscription period had elapsed. 

   Answer (C) is incorrect because 
   $30,000 assumes the subscriptions have 
   been outstanding for 12 months. 

   Answer (D) is correct. The company 
   initially debited cash and credited 
   unearned revenue, a liability account, 
   for $90,000. Subscriptions revenue 
   should be recognized when it is 
   realized or realizable and the earning 
   process is substantially complete. 
   Because 25% (9 months  36 months) 
   of the subscription period has expired, 
   25% of the realized but unearned 
   revenue should be recognized. Thus, the 
   adjusting entry is to debit unearned 
   revenue and credit subscription revenue 
   for $22,500. 


[272] Source: CIA 0593 IV-25 

   Answer (A) is correct. Matching is the 
   simultaneous or combined recognition 
   of revenues and expenses resulting 
   directly and jointly from the same 
   transactions or other events. Expenses 
   should be associated with the revenues 
   that they help to create. Because the 
   catalogues are still on hand at the 
   balance sheet date, they will not 
   contribute to the earning process until 
   the next period. Hence, the cost should 
   be deferred and matched with the 
   revenues of the following period. 

   Answer (B) is incorrect because the 
   revenue recognition principle 
   determines the period in which revenue 
   is recognized. 

   Answer (C) is incorrect because the 
   cost principle states that cost is the 
   usual basis for recording most assets 
   and liabilities. 

   Answer (D) is incorrect because a 
   basic feature of financial accounting is 
   that the business entity is assumed to be 
   a going concern in the absence of 
   evidence to the contrary. 


[273] Source: CMA 1285 4-12 

   Answer (A) is incorrect because $0 is 
   the gross profit realized in the current 
   year under the cost recovery method. 

   Answer (B) is correct. Since the 
   equipment had a book value of $80,000 
   and a selling price of $200,000, the 
   gain was $120,000, or 60% of the 
   selling price. Under the installment 
   method, the company recognizes profit 
   each period equal to 60% of the cash 
   received that period. The company 
   received an initial payment of $20,000 
   and a December 1 payment of $60,000 
   ($180,000 x 1/3). Thus, total cash 
   receipts in the current year were 
   $80,000. Gross profit is thus $48,000 
   ($80,000 x 60%). 

   Answer (C) is incorrect because 
   $80,000 is the book value on the date of 
   sale. 

   Answer (D) is incorrect because 
   $120,000 is the total gain. 


[274] Source: CMA 1285 4-13 

   Answer (A) is correct. Under the cost 
   recovery method of revenue 
   recognition, no gross profit is 
   recognized until the cost of the item 
   sold has been recovered. Since the 
   equipment's book value was $80,000, 
   and only $20,000 was received in the 
   current period, no gross profit should 
   be recognized. The cost recovery 
   method is only acceptable when the 
   total recovery of the selling price is 
   highly questionable. 

   Answer (B) is incorrect because 
   $48,000 is the gross profit realized 
   under the installment sales method. 

   Answer (C) is incorrect because 
   $80,000 is the book value on the date of 
   sale. 

   Answer (D) is incorrect because 
   $120,000 is the total gain. 


[275] Source: CMA 1292 2-20 

   Answer (A) is incorrect because the 
   amount of gross profit to be deferred 
   must be known to allocate it over future 
   periods. 

   Answer (B) is incorrect because the 
   amount of cash collected each year is 
   used to allocate gross profit to the 
   proper periods. 

   Answer (C) is correct. The accounting 
   treatment of installment sales 
   recognizes gross profit as cash is 
   received. Gross profit is deferred at the 
   time of sale and recognized as income 
   in the accounting periods in which cash 
   is received. Thus, the accountant must 
   know the amount of gross profit to be 
   deferred, the cash collected each year, 
   and perhaps the costs associated with 
   default and repossession. When goods 
   are repossessed, they are returned to 
   inventory at net realizable value 
   (selling price - costs of completion, 
   reconditioning, and selling) minus 
   normal profit. The interest costs on the 
   funds tied up in receivables are also a 
   consideration. However, no operating 
   costs are deferred as a result of 
   installment sales. 

   Answer (D) is incorrect because default 
   and repossession often occur as a result 
   of installment sales. 


[276] Source: CIA 0590 IV-31 

   Answer (A) is incorrect because the 
   revenue has not been realized or earned 
   at this time and should not be 
   recognized. 

   Answer (B) is incorrect because the 
   revenue has not been realized or earned 
   at this time and should not be 
   recognized. 

   Answer (C) is incorrect because the 
   revenue has not been realized or earned 
   at this time and should not be 
   recognized. 

   Answer (D) is correct. Under a 
   consignment sales arrangement, the 
   consignor ships merchandise to the 
   consignee who acts as agent for the 
   consignor in selling the goods. The 
   goods are in the physical possession of 
   the consignee but remain the property of 
   the consignor and are included in the 
   consignor's inventory count. Sales 
   revenue and the related cost of goods 
   sold from these consigned goods should 
   only be recognized by the consignor 
   when the merchandise is sold and 
   delivered to the final customer. 
   Accordingly, recognition occurs when 
   notification is received that the 
   consignee has sold the goods. 


[277] Source: CIA 0592 IV-34 

   Answer (A) is incorrect because $14 is 
   the accrued interest. 

   Answer (B) is incorrect because $33 is 
   the net income effect excluding interest 
   revenue of $14 [.01 x ($1,500 - $100)]. 

   Answer (C) is correct. The gross profit 
   margin is 33-1/3% [($1,500 - $1,000)  
   $1,500], so the amount of profit from 
   the $100 down payment recognizable in 
   Year 1 is $33 (rounded). Interest 
   accrued on the $1,400 ($1,500 - $100) 
   balance for 1 month is $14. 
   Consequently, the effect on profit is $47 
   ($33 + $14). 

   Answer (D) is incorrect because $67 is 
   the cost of goods sold [($1,000  
   $1,500) x $100]. 


[278] Source: CIA 1195 IV-27 

   Answer (A) is incorrect because the 
   going-concern assumption is that the 
   business will have an indefinite life. 

   Answer (B) is incorrect because the 
   monetary-unit assumption is that money 
   is the common denominator by which 
   economic activity is conducted, and that 
   the monetary unit provides an 
   appropriate basis for accounting 
   measurement and analysis. 

   Answer (C) is incorrect because the 
   historical cost principle is the 
   requirement that most assets and 
   liabilities be accounted for and 
   reported on the basis of acquisition 
   price. 

   Answer (D) is correct. Revenue should 
   not be recognized until it is realized or 
   realizable and earned. Thus, if the 
   amounts received in cash have not yet 
   been earned, they should be recorded as 
   liabilities of the company. 


[279] Source: CIA 1192 IV-26 

   Answer (A) is incorrect because the 
   economic-entity assumption provides 
   that economic activity can be identified 
   with a particular unit of accountability. 

   Answer (B) is incorrect because the 
   monetary-unit assumption provides that 
   all transactions and events can be 
   measured in terms of a common 
   denominator, for instance, the dollar. 

   Answer (C) is incorrect because the 
   materiality assumption simply implies 
   that items of insignificant value can be 
   expensed rather than capitalized and 
   depreciated or amortized. 

   Answer (D) is correct. A basic feature 
   of financial accounting is that the 
   business entity is assumed to be a going 
   concern in the absence of evidence to 
   the contrary. The going-concern concept 
   is based on the empirical observation 
   that many enterprises have an indefinite 
   life. The reporting entity is assumed to 
   have a life long enough to fulfill its 
   objectives and commitments and 
   therefore to depreciate wasting assets 
   over their useful lives. 


[280] Source: CIA 1192 IV-37 

   Answer (A) is correct. According to 
   SFAC 6, "Gains are increases in equity 
   (net assets) from peripheral or 
   incidental transactions of an entity and 
   from all other transactions and other 
   events and circumstances affecting the 
   entity except those that result from 
   revenues or investments by owners." 
   Thus, the gain on the sale of an asset is 
   not an operating item and should be 
   classified in a multiple-step income 
   statement in the other revenues and 
   gains section. 

   Answer (B) is incorrect because the 
   asset sold was not stock in trade and the 
   sale of plant assets does not constitute 
   the entity's major or central operations, 
   so the proceeds should not be classified 
   as sales revenue. 

   Answer (C) is incorrect because the 
   transaction does not meet the criteria of 
   an extraordinary item (unusual in nature 
   and infrequent in occurrence in the 
   environment in which the entity 
   operates). 

   Answer (D) is incorrect because the 
   transaction is not a prior-period 
   adjustment. It is not the correction of an 
   error in the financial statements of a 
   prior period. 


[281] Source: CIA 0595 IV-29 

   Answer (A) is correct. SFAC 6, 
   Elements of Financial Statements, 
   defines losses as "decreases in equity 
   (net assets) from peripheral or 
   incidental transactions of an entity and 
   from all other transactions and other 
   events and circumstances affecting the 
   entity except those that result from 
   expenses or distributions to owners." 
   An expense is an outflow or other 
   consumption of resources or an 
   incurrence of a liability as a result of 
   carrying out activities that constitute the 
   entity's ongoing major or central 
   operations. The unreimbursed theft is a 
   loss because it is an event that 
   decreases equity but is not an expense 
   or a distribution to owners. It should be 
   reported in the nonoperating section of 
   a multiple-step income statement under 
   other expenses and losses. 

   Answer (B) is incorrect because no 
   restitution will be made. Thus, 
   recording the item as a receivable, then 
   writing it off, is not consistent with the 
   substance of the event. 

   Answer (C) is incorrect because, 
   although some inventory shrinkage is 
   expected in the normal course of 
   processing, fraud is abnormal. Hence, 
   the item should be recorded as a loss. 

   Answer (D) is incorrect because losses 
   are included in the determination of net 
   income. 


[282] Source: CIA 0592 IV-29 

   Answer (A) is incorrect because the 
   going-concern principle relates to 
   circumstances in which there is doubt 
   as to the viability of the enterprise. 

   Answer (B) is incorrect because SFAC 
   2 identifies relevance and reliability as 
   the two primary qualities that make 
   accounting information useful for 
   decision making. Relevance is the 
   capacity of information to make a 
   difference in the user's decision. 
   Reliability provides assurance that the 
   information is reasonably free from 
   error and bias, and that it represents 
   what it purports to represent. Neutrality 
   is an ingredient of reliability. 

   Answer (C) is incorrect because 
   reliability relates to using reproducible 
   accounting numbers, such as historical 
   cost to record assets. 
   Comparability/consistency relates to 
   using the same accounting principles 
   from period to period. Comparability 
   (including consistency) is an interactive 
   quality that relates to both primary 
   qualities of relevance and reliability. 

   Answer (D) is correct. In principle, 
   wasting assets should be capitalized 
   and depreciated. However, the effect on 
   the financial statements of expensing 
   rather than capitalizing and depreciating 
   the staplers is clearly not material given 
   that they cost $1,000 and the company 
   has total assets of $100,000,000. The 
   cost-benefit concept is tied to 
   materiality, and relates to the cost of 
   information. Specifically, the cost of 
   producing the information about 
   depreciation expense over 10 years for 
   the staplers probably is higher than the 
   benefits of the information for decision 
   making. Thus, the expedient procedure 
   of expensing the $1,000 should be 
   followed. 


[283] Source: CIA 0591 IV-44 

   Answer (A) is incorrect because a 
   going concern should report assets at 
   their undepreciated historical cost. 
   When liquidation appears imminent, 
   historical cost is inappropriate for 
   balance sheet reporting. 

   Answer (B) is incorrect because a 
   company facing liquidation is expected 
   to dispose of its assets in a "forced" or 
   "distressed" sale. Current market value 
   (exit value) may occur if the liquidation 
   is orderly. 

   Answer (C) is correct. When forced 
   liquidation of a company is imminent, 
   and the going-concern assumption is no 
   longer valid, the most appropriate 
   valuation method for assets is net 
   realizable value, which is the estimated 
   selling price upon disposal minus costs 
   of disposal. 

   Answer (D) is incorrect because 
   current cost is appropriate only when 
   the going-concern assumption is 
   applicable and the effects of changing 
   prices are to be measured and reported 
   in the financial statements. 


[284] Source: CIA 0593 IV-42 

   Answer (A) is correct. Determination 
   of the imputed interest rate is made at 
   the time the debt instrument is issued, 
   assumed, or acquired. Any subsequent 
   changes in prevailing interest rates are 
   ignored (APB 21). 

   Answer (B) is incorrect because any 
   subsequent changes in prevailing 
   interest rates are ignored. 

   Answer (C) is incorrect because 
   determination of the imputed interest 
   rate is made at the time the debt 
   instrument is issued. 

   Answer (D) is incorrect because 
   determination of the imputed interest 
   rate is made at the time the debt 
   instrument is issued, and any subsequent 
   changes in prevailing interest rates are 
   ignored. 


[285] Source: CIA 1196 IV-19 

   Answer (A) is correct. The entry is to 
   debit interest expense, debit bond 
   premium, and credit cash paid. Thus, 
   the amortization of a premium on bonds 
   payable reduces the interest expense, 
   thereby increasing net income. 

   Answer (B) is incorrect because the 
   amortization of a premium on bonds 
   payable reduces interest expense. 

   Answer (C) is incorrect because 
   interest revenue is not affected by the 
   amortization of a premium on bonds 
   payable. 

   Answer (D) is incorrect because 
   interest revenue is not affected by the 
   amortization of a premium on bonds 
   payable. 


[286] Source: CIA 0596 IV-24 

   Answer (A) is incorrect because the 
   two methods of amortization result in 
   the same total interest expense over the 
   term of the bonds. 

   Answer (B) is correct. Under the 
   effective-interest method, interest 
   expense for each period equals the 
   effective interest rate times the carrying 
   value of the bond issue. As the discount 
   is amortized, the carrying value rises 
   and interest expense increases. 

   Answer (C) is incorrect because annual 
   interest expense would decrease if a 
   premium were being amortized. 

   Answer (D) is incorrect because the 
   straight-line method results in constant 
   annual interest expense. 


[287] Source: CIA 1195 IV-16 

   Answer (A) is incorrect because, under 
   the percentage-of-completion method, a 
   current-period loss on a profitable 
   contract requires a current-period 
   adjustment. 

   Answer (B) is correct. Under the 
   percentage-of-completion method, a 
   current-period loss on a profitable 
   contract is treated as a change in 
   accounting estimate. Thus, a 
   current-period adjustment is required. 
   Prior-period adjustments are made to 
   correct errors, not to reflect changes in 
   estimates. 

   Answer (C) is incorrect because, under 
   the completed-contract method, no 
   profit is recognized until the contract is 
   completed. Cost estimate adjustments 
   while construction is in progress do not 
   result in profit or loss recognition prior 
   to completion unless an overall loss is 
   expected on the contract. 

   Answer (D) is incorrect because, under 
   the completed-contract method, no 
   profit is recognized until the contract is 
   completed. Cost estimate adjustments 
   while construction is in progress do not 
   result in profit or loss recognition prior 
   to completion unless an overall loss is 
   expected on the contract. 


[288] Source: CIA 1196 IV-11 

   Answer (A) is incorrect because 
   ($100,000) is the difference between 
   costs incurred and collections. 

   Answer (B) is incorrect because 
   $100,000 is the difference between 
   billings and costs incurred. 

   Answer (C) is incorrect because 
   $200,000 is the difference between 
   billings and collections. 

   Answer (D) is correct. The 
   percentage-of-completion method 
   recognizes income based on the ratio of 
   the costs incurred to date to the 
   estimated total costs. Billings and 
   collections are irrelevant information 
   when using the 
   percentage-of-completion method. The 
   percentage-of-completion at year-end is 
   35% ($700,000  $2,000,000). The 
   gross profit for year 1 is the anticipated 
   gross profit on the contract times the 
   completion percentage. Thus, gross 
   profit for year 1 is $350,000 
   [($3,000,000 - $2,000,000) x 35%]. 


[289] Source: CIA 1196 IV-12 

   Answer (A) is incorrect because 
   $200,000 is the difference between 
   collections and billings in year 3. 

   Answer (B) is incorrect because 
   $600,000 is the difference between 
   billings and costs incurred in year 3. 

   Answer (C) is incorrect because 
   $800,000 is the difference between 
   estimated total cost and collections. 

   Answer (D) is correct. Under the 
   completed-contract method, profit is 
   recognized as being realized or 
   realizable and earned only when the 
   contract is complete. The total contract 
   price and total contract costs are 
   recognized as revenue and cost of 
   goods sold, respectively, in the year of 
   completion of the contract. The gross 
   profit in year 3 is $1,000,000 
   ($3,000,000 revenue - $2,000,000 cost 
   of goods sold). 


[290] Source: CIA 1196 IV-30 

   Answer (A) is incorrect because 
   $3,000 does not include the 40 barrels 
   consigned in July. 

   Answer (B) is incorrect because $4,000 
   does not include the 40 barrels 
   consigned in July or deduct the five 
   barrels returned. 

   Answer (C) is correct. Consignment 
   does not meet the criteria for 
   recognition of revenue. The barrels 
   have not been sold, so revenue has not 
   been realized or earned. However, 30 
   barrels have been paid for. Thus, the 
   revenue is recognized for these barrels. 
   The five barrels returned are not 
   included in unearned revenue because 
   they constitute a return of consigned 
   goods. Accordingly, the amount of 
   inappropriately recognized revenue is 
   $11,000 [(40 consigned + 50 consigned 
   - 30 paid for - 5 returns) x $200]. 

   Answer (D) is incorrect because 
   $12,000 does not reflect the five barrels 
   returned. 


[291] Source: CIA 1193 IV-37 

   Answer (A) is incorrect because the 
   freight was paid earlier in the period 
   and would have been recorded then by 
   a credit to cash and a debit to inventory. 
   Thus, the freight costs will be released 
   to income via cost of goods sold. 

   Answer (B) is correct. ABC debits the 
   cash received $43,000 [$50,000 sales - 
   $2,000 advertising - (.10 x $50,000) 
   sales commission]. The advertising and 
   commission expenses are debited for 
   $2,000 and $5,000, respectively. 
   Finally, $50,000 of gross revenue is 
   credited. 

   Answer (C) is incorrect because the 
   10% commission and the advertising 
   costs are ignored in this answer. 

   Answer (D) is incorrect because the 
   reimbursable advertising costs are 
   ignored in this answer. 


[292] Source: CIA 0595 IV-11 

   Answer (A) is incorrect because sales 
   and cost of sales are recognized in 
   proportion to cash collections. 

   Answer (B) is correct. Under the 
   installment method, the gross profit on 
   sales (sales - cost of sales) is not 
   recognized until cash is collected. The 
   proportion of cash collected on the 
   sales during the accounting period 
   determines the proportion of the gross 
   profit on those sales that is recognized 
   during the period. Hence, both sales and 
   cost of sales are deferred. 

   Answer (C) is incorrect because only 
   the gross profit (sales - cost of sales) is 
   deferred on sales for which cash has not 
   yet been collected. 

   Answer (D) is incorrect because only 
   the gross profit (sales - cost of sales) is 
   deferred on sales for which cash has not 
   yet been collected. 


[293] Source: CIA 0596 IV-1 

   Answer (A) is correct. The rate of 
   gross profit on year 2 installment sales 
   is 20% [($5,000 of year 2 installment 
   sales - $4,000 cost of year 2 installment 
   sales)  $5,000 of year 2 installment 
   sales]. 

   Answer (B) is incorrect because 40% 
   is the gross profit on year 1 installment 
   sales. 

   Answer (C) is incorrect because 50% 
   is the gross profit on year 3 installment 
   sales. 

   Answer (D) is incorrect because 80% 
   is the ratio of the cost of year 2 
   installment sales to year 2 installment 
   sales. 


[294] Source: CIA 0596 IV-2 

   Answer (A) is correct. In year 1, the 
   company had cash receipts of $2,000 
   from its year 1 installment sales. The 
   gross profit realized is the gross profit 
   on the portion of sales for which 
   payment has been received. This 
   amount equals the year 1 gross profit 
   percentage multiplied by the cash 
   receipts, or $800 {[($10,000 - $6,000) 
    $10,000] x $2,000}. 

   Answer (B) is incorrect because $2,000 
   is the amount of cash receipts during 
   year 1 on year 1 installment sales. 

   Answer (C) is incorrect because $3,200 
   is the amount of the total gross profit on 
   year 1 installment sales that is deferred 
   to future periods. 

   Answer (D) is incorrect because 
   $4,000 is the total gross profit on year 1 
   installment sales. 


[295] Source: CIA 0596 IV-3 

   Answer (A) is incorrect because 
   $2,000 is the realized gross profit on 
   year 3 sales. 

   Answer (B) is incorrect because $3,000 
   equals total receipts for year 2 and year 
   3 on year 2 sales. 

   Answer (C) is correct. The total gross 
   profit on year 3 sales is $10,000 
   ($20,000 sales - $10,000 cost), and the 
   amount realized is $2,000 {[($20,000 - 
   $10,000)  $20,000] x $4,000 of year 3 
   cash receipts}. Accordingly, the amount 
   deferred is $8,000 ($10,000 - $2,000). 

   Answer (D) is incorrect because 
   $10,000 is the total gross profit on year 
   3 sales. 


[296] Source: CIA 0595 IV-12 

   Answer (A) is incorrect because, under 
   the cost recovery method, profit is 
   recognized in the second year when 
   cash payments by the buyer exceed the 
   seller's cost of merchandise. 

   Answer (B) is incorrect because $5,000 
   is the profit to be recognized without 
   consideration of the payment received 
   in the first year. 

   Answer (C) is correct. The profit 
   recognized in the second year equals the 
   cumulative payments received minus the 
   seller's cost, or $15,000 [($10,000 + 
   $45,000) - $40,000]. 

   Answer (D) is incorrect because 
   $45,000 is the payment received in the 
   second year. 


[297] Source: CMA 0696 2-1 

   Answer (A) is correct. By the end of 
   year 1, the company had incurred costs 
   of $900,000 and expected to incur 
   additional costs of $2,700,000. 
   Therefore, the total cost of completing 
   the job was estimated to be the total of 
   the two amounts, or $3,600,000. The 
   $900,000 incurred in year 1 represents 
   25% of the total costs expected to be 
   incurred. If 25% of the work has been 
   completed, then the company should 
   recognize 25% of the expected revenue. 
   Because the total contract price is 
   $5,000,000, the revenue associated 
   with the 25% point is $1,250,000. 
   Subtracting the $900,000 of costs 
   incurred from the $1,250,000 of 
   revenue produces a gross profit for year 
   1 of $350,000. 

   Answer (B) is incorrect because the 
   $700,000 represents the cash collected 
   for the year, which is irrelevant to the 
   gross profit to be recognized. 

   Answer (C) is incorrect because the 
   $1,400,000 is the amount of gross profit 
   that is expected over the life of the 
   project. 

   Answer (D) is incorrect because 
   $766,667 is based on a percentage of 
   completion greater than 25%. 


[298] Source: CMA 0696 2-2 

   Answer (A) is incorrect because 
   $1,400,000 was the estimated profit 
   based on the costs incurred in year 1; 
   ultimately those expectations proved 
   erroneous since actual costs in year 2 
   were less than those estimated to 
   complete the project at the end of year 
   1. 

   Answer (B) is correct. Under the 
   completed-contract method, no income 
   is recognized until the year the project 
   is completed. In this case, the costs 
   incurred over 2 years ($900,000 + 
   $2,350,000), or $3,250,000, are 
   subtracted from the total contract price 
   of $5,000,000 to arrive at income of 
   $1,750,000. There would have been 
   zero income in year 1 since the contract 
   had not been completed during that 
   year. 

   Answer (C) is incorrect because the 
   $2,650,000 overlooks the $900,000 of 
   costs incurred during year 1. 

   Answer (D) is incorrect because 
   $700,000 was the cash collected during 
   year 1, not the profit for any year. 


[299] Source: CMA 0696 2-19 

   Answer (A) is incorrect because 
   $200,000 is the apparent gross profit on 
   the sale, not the revenue. 

   Answer (B) is incorrect because 
   $800,000 was the original cost of the 
   machine to Arens. 

   Answer (C) is correct. Revenue is 
   recognized when (1) realized or 
   realizable and (2) earned. On May 28, 
   $500,000 of the sales price was 
   realized while the remaining $500,000 
   was realizable in the form of a 
   receivable. The revenue was earned on 
   May 28 since the title of the goods 
   passed to the purchaser. The 
   cost-recovery method is not used 
   because the receivable was not deemed 
   uncollectible until June 10. 

   Answer (D) is incorrect because at May 
   28 a sale appeared to have been 
   consummated in the amount of 
   $1,000,000. 


[300] Source: CMA 0696 2-20 

   Answer (A) is incorrect because the 
   last $500,000 is not considered 
   collectible; thus the sale was not for 
   $1,000,000. 

   Answer (B) is incorrect because 
   $200,000 would have been the gross 
   profit if the last $500,000 had been 
   collectible. 

   Answer (C) is correct. Gross profit is 
   defined as the difference between 
   selling price and the cost of goods sold. 
   The balance sheet presentation should 
   be based on the net realizable value of 
   the receivable. Because that amount is 
   assumed to be zero, the machine was 
   actually sold for $500,000, not for 
   $1,000,000. Therefore, no gross profit 
   is shown on the financial statements. 

   Answer (D) is incorrect because 
   $500,000 was the amount of cash 
   collected, not the amount of gross 
   profit. 


[301] Source: CMA 0696 2-21 

   Answer (A) is incorrect because the 
   contract price of the machine was 
   $1,000,000, and that amount should be 
   recorded as a fixed asset; Markal is 
   liable for the remaining $500,000 
   unless it declares bankruptcy. 

   Answer (B) is correct. The purchase of 
   the machine involves a debit to fixed 
   assets of $1,000,000, a credit to cash of 
   $500,000, and a credit to a current 
   liability of $500,000. 

   Answer (C) is incorrect because the 
   machine is valued at $1,000,000, and 
   that amount should be debited to a fixed 
   asset account. 

   Answer (D) is incorrect because there 
   is an increase in fixed assets. 


[302] Source: CMA 1296 2-6 

   Answer (A) is correct. SFAC 5 states 
   that an item and information about the 
   item should be recognized when the 
   following four fundamental recognition 
   criteria are met: (1) the item meets the 
   definition of an element of financial 
   statements; (2) it has a relevant attribute 
   measurable with sufficient reliability 
   (measurability); (3) the information 
   about the item is capable of making a 
   difference in user decisions 
   (relevance); and (4) the information is 
   representationally faithful, verifiable, 
   and neutral (reliability). 

   Answer (B) is incorrect because 
   usefulness is not one of the criteria for 
   recognition stated in SFAC 5. 

   Answer (C) is incorrect because 
   timeliness is not a criterion for 
   recognition under SFAC 5. 

   Answer (D) is incorrect because 
   usefulness is not one of the criteria for 
   recognition stated in SFAC 5. 


[303] Source: CMA 1296 2-7 

   Answer (A) is incorrect because 
   historical cost, although used for many 
   types of assets and liabilities, is not 
   permitted for valuation of long-term 
   payables under SFAC 5. 

   Answer (B) is incorrect because current 
   market value measures liabilities for 
   certain marketable commodities and 
   securities, e.g., obligations of writers of 
   options or sellers of shares who do not 
   own the underlying assets. 

   Answer (C) is incorrect because net 
   realizable value is the undiscounted 
   amount of cash into which an asset is 
   expected to be converted in due course 
   of business minus direct costs necessary 
   to make that conversion. Net settlement 
   value is the equivalent term for 
   liabilities but is applicable only to 
   short-term payables. 

   Answer (D) is correct. Under SFAC 5, 
   long-term payables and receivables are 
   measured and reported at the present, or 
   discounted, value of future cash flows. 
   For payables, this amount is the present 
   value of future cash outflows expected 
   to be required to satisfy the liability in 
   due course of business. 


[304] Source: CMA 1296 2-8 

   Answer (A) is incorrect because 
   historical cost is not appropriate for 
   damaged inventories. They are likely to 
   be worth less than their original cost. 

   Answer (B) is incorrect because current 
   or replacement cost is the cash 
   equivalent that would have to be paid if 
   the same assets were acquired 
   currently. The company is unlikely to 
   purchase damaged goods, so current 
   cost is irrelevant. 

   Answer (C) is correct. Net realizable 
   value is the undiscounted amount of 
   cash into which an asset is expected to 
   be converted in due course of business, 
   minus the direct costs necessary to 
   make that conversion. Short-term 
   receivables and damaged inventories 
   are examples of assets commonly 
   valued at net realizable value. 

   Answer (D) is incorrect because the 
   present value of future cash flows is not 
   appropriate. The company presumably 
   will sell the goods soon. 


[305] Source: CMA 1296 2-9 

   Answer (A) is correct. Land is 
   normally carried in the accounting 
   records at historical cost. According to 
   SFAC 5, historical cost is the amount of 
   cash or its equivalent paid to acquire an 
   asset. Historical cost is the attribute at 
   which assets such as property, plant, 
   and equipment are measured. 

   Answer (B) is incorrect because current 
   or replacement cost is difficult to 
   measure for an asset such as land. Some 
   inventories are carried at current cost. 

   Answer (C) is incorrect because current 
   market value is used to measure certain 
   investments, such as trading securities. 

   Answer (D) is incorrect because net 
   realizable value is applicable only to 
   assets that are to be disposed of in the 
   near future. Land does not meet that 
   criterion. 


[306] Source: CMA 1296 2-10 

   Answer (A) is incorrect because the 
   percentage-of-completion method 
   attempts to match revenues and 
   expenses with the appropriate periods. 

   Answer (B) is incorrect because the 
   going-concern assumption is 
   appropriate for a contractor using the 
   percentage-of-completion method, as 
   for any other type of company. 

   Answer (C) is incorrect because the 
   economic-entity assumption is 
   appropriate for a contractor using the 
   percentage-of-completion method, as 
   for any other type of company. 

   Answer (D) is correct. The revenue 
   recognition principle states that revenue 
   should be recognized (recorded) when 
   realized or realizable and earned. 
   Revenue is earned when the earning 
   process is essentially complete. In 
   effect, revenue is recorded when the 
   most important event in the earning of 
   that revenue has occurred. Thus, 
   revenue is normally recorded at the 
   time of the sale or, occasionally, at the 
   time cash is collected. However, 
   sometimes neither the sales basis nor 
   the cash basis is appropriate, such as 
   when a construction contract extends 
   over several accounting periods. As a 
   result, contractors ordinarily recognize 
   revenue using the 
   percentage-of-completion method so 
   that some revenue is recognized each 
   year over the life of the contract. Hence, 
   this method is an exception to the 
   general principle of revenue 
   recognition, primarily because it better 
   matches revenues and expenses. 


[307] Source: CMA 1296 2-11 

   Answer (A) is incorrect because 
   revenue need not be collected to be 
   recorded. For example, revenues may 
   be recorded when assets are exchanged 
   for cash, claims to cash, or assets 
   readily convertible to cash or claims 
   thereto. 

   Answer (B) is correct. According to 
   SFAC 5, the revenue recognition 
   principle states that recognition is the 
   process of incorporating transactions 
   into the accounting system so as to 
   report them in the financial statements. 
   Revenue should be recognized 
   (recorded) when it is realized or 
   realizable and earned. Revenue is 
   earned when the entity has substantially 
   done what it must do to be entitled to 
   the benefits from the revenues. 

   Answer (C) is incorrect because 
   sometimes even a binding contract does 
   not culminate an earning process. The 
   revenue must also be earned. 

   Answer (D) is incorrect because 
   substantial accomplishment is 
   insufficient if the likelihood of 
   collection is remote. 


[308] Source: CMA 1296 2-12 

   Answer (A) is incorrect because the 
   market value is not a cost. 

   Answer (B) is incorrect because the 
   floor amount is net realizable value 
   minus a normal profit margin. 

   Answer (C) is correct. In the phrase 
   "lower of cost or market," the term 
   "market" means the replacement cost of 
   the inventory as determined in the 
   market in which the company buys its 
   inventory, not the market in which it 
   sells to customers. Market is limited to 
   a ceiling amount equal to net realizable 
   value and a floor amount equal to net 
   realizable value minus a normal profit 
   margin. 

   Answer (D) is incorrect because 
   original cost minus cost to dispose 
   equals net realizable value. 


[309] Source: CMA 0697 2-3 

   Answer (A) is incorrect because the 
   primary purpose of a statement of cash 
   flows is to provide information about 
   the cash receipts and payments of an 
   entity during a period. A secondary 
   purpose is to provide information about 
   investing and financing activities. The 
   statement should help users to assess 
   the entity's ability to generate positive 
   future net cash flows, the ability to meet 
   its obligations and pay dividends, the 
   need for external financing, the reasons 
   for differences between income and 
   associated cash receipts and payments, 
   and the cash and noncash aspects of the 
   entity's investing and financing 
   activities. 

   Answer (B) is incorrect because the 
   primary purpose of a statement of cash 
   flows is to provide information about 
   the cash receipts and payments of an 
   entity during a period. A secondary 
   purpose is to provide information about 
   investing and financing activities. The 
   statement should help users to assess 
   the entity's ability to generate positive 
   future net cash flows, the ability to meet 
   its obligations and pay dividends, the 
   need for external financing, the reasons 
   for differences between income and 
   associated cash receipts and payments, 
   and the cash and noncash aspects of the 
   entity's investing and financing 
   activities. 

   Answer (C) is incorrect because the 
   primary purpose of a statement of cash 
   flows is to provide information about 
   the cash receipts and payments of an 
   entity during a period. A secondary 
   purpose is to provide information about 
   investing and financing activities. The 
   statement should help users to assess 
   the entity's ability to generate positive 
   future net cash flows, the ability to meet 
   its obligations and pay dividends, the 
   need for external financing, the reasons 
   for differences between income and 
   associated cash receipts and payments, 
   and the cash and noncash aspects of the 
   entity's investing and financing 
   activities. 

   Answer (D) is correct. The statement of 
   cash flows is not designed to provide 
   information with respect to the efficient 
   and profitable use of the firm's 
   resources. Financial reporting provides 
   information about an enterprise's 
   performance during a period when it 
   was under the direction of a particular 
   management but does not directly 
   provide information about that 
   management's performance. Financial 
   reporting does not try to separate the 
   impact of a particular management's 
   performance from the effects of prior 
   management actions, general economic 
   conditions, the supply and demand for 
   an enterprise's inputs and outputs, price 
   changes, and other events. 


[310] Source: CMA 0697 2-4 

   Answer (A) is incorrect because 
   providing information to help assess the 
   amount, timing, and uncertainty of cash 
   flows is an objective of the statement of 
   cash flows. 

   Answer (B) is correct. The statement of 
   financial position, or balance sheet, 
   provides information about an entity's 
   resource structure (assets) and financing 
   structure (liabilities and equity) at a 
   moment in time. The statement of 
   financial position does not purport to 
   show the value of a business, but it 
   enables investors, creditors, and other 
   users to make their own estimates of 
   value. It helps users to assess liquidity, 
   financial flexibility, profitability, and 
   risk (SFAC 5). 

   Answer (C) is incorrect because the 
   primary focus of financial reporting is 
   information about an enterprise's 
   performance provided by measures of 
   earnings and its components. Hence, an 
   income statement is more directly useful 
   to investors and creditors for evaluating 
   economic performance. 

   Answer (D) is incorrect because 
   disclosures of changes in shareholders' 
   equity, in either the basic statements, the 
   notes thereto, or a separate statement, 
   help users to evaluate changes in the 
   ownership equity of a firm. 


[311] Source: Publisher 

   Answer (A) is correct. The freight term 
   was FOB shipping point, so title to the 
   goods passed to the buyer in December. 
   Thus, the $150,000 sale should have 
   been recorded in December. At 
   December 31, the inventory included 
   the merchandise at its cost of $120,000 
   ($150,000 price  1.25). Because of the 
   failure to record the sale, the seller 
   reported inventory of $120,000 instead 
   of an account receivable of $150,000. 
   Assets were therefore understated by 
   $30,000. Moreover, income was 
   understated by $30,000 because of the 
   failure to report the $150,000 sale and 
   the $120,000 of cost of goods sold. 

   Answer (B) is incorrect because 
   revenue, not net income, is understated 
   by $150,000. The net effect of the 
   revenue and cost errors misstates 
   income. 

   Answer (C) is incorrect because 
   $37,500 is the markup on selling price, 
   not cost. 

   Answer (D) is incorrect because the 
   omission of $150,000 of revenue and 
   $120,000 of cost of goods sold 
   understated income. 


[312] Source: Publisher 

   Answer (A) is incorrect because 
   historical cost is used unless the asset's 
   market value is lower. 

   Answer (B) is incorrect because current 
   (replacement) cost is used to measure 
   market value. 

   Answer (C) is correct. Present value is 
   not used for valuing assets under the 
   lower-of-cost-or-market method. 
   Present value incorporates 
   time-value-of-money concepts into an 
   asset valuation by discounting future 
   cash flows at the appropriate interest 
   rate. The lower-of-cost-or-market 
   method values an asset at historical cost 
   unless the market value of the asset is 
   less than original cost. The value used 
   for market is subject to ceiling and floor 
   amounts. 

   Answer (D) is incorrect because the 
   market valuation is subject to ceiling 
   and floor values. The ceiling is NRV, 
   and the floor is NRV minus a normal 
   profit. 


[313] Source: Publisher 

   Answer (A) is correct. By the end of 
   year 1, the company had incurred costs 
   of $1.8 million and expected to incur 
   additional costs of $5.4 million. Thus, 
   the total cost of the job was estimated to 
   be $7.2 million. The $1.8 million 
   incurred in year 1 represents 25% of the 
   total costs expected to be incurred. If 
   25% of the work has been completed, 
   the company should recognize 25% of 
   the expected revenue. Hence, gross 
   profit for year 1 is $700,000 [25% x 
   ($10,000,000 contract price - 
   $7,200,000 total estimated costs)]. 

   Answer (B) is incorrect because the 
   $1,400,000 equals the cash collected 
   for the year. 

   Answer (C) is incorrect because 
   $2,800,000 is the total estimated gross 
   profit for the project. 

   Answer (D) is incorrect because 
   $2,500,000 is the total revenue to be 
   recognized during year 1. 


[314] Source: Publisher 

   Answer (A) is incorrect because 
   $2,100,000 is based on the total 
   estimated gross profit at the end of year 
   1. 

   Answer (B) is correct. By the end of 
   year 2, the company had incurred costs 
   of $1.8 million in year 1 and $4.7 
   million in year 2. Consequently, the 
   total cost of completing the job was 
   $6.5 million. Given a total contract 
   price of $10 million, the total gross 
   profit over the life of the contract is 
   $3.5 million. The gross profit 
   recognized in year 1 was $700,000 
   {[$1,800,000 year 1 costs  
   ($1,800,000 + $5,400,000 estimated 
   costs to complete)] x [$10,000,000 
   contract price - ($1,800,000 + 
   $5,400,000)]}. The gross profit 
   recognized in year 2 is therefore 
   $2,800,000 ($3,500,000 total - 
   $700,000 recognized in year 1). 

   Answer (C) is incorrect because 
   $3,500,000 is the total gross profit over 
   2 years. 

   Answer (D) is incorrect because 
   $3,900,000 is the difference between 
   collections and costs in year 2. 


[315] Source: Publisher 

   Answer (A) is incorrect because 
   $2,800,000 was the estimated gross 
   profit at the end of year 1. 

   Answer (B) is correct. Under the 
   completed-contract method, no income 
   is recognized until the project is 
   completed. In this case, the costs 
   incurred over 2 years ($1,800,000 + 
   $4,700,000), or $6.5 million, are 
   subtracted from the total contract price 
   of $10 million to arrive at income of 
   $3.5 million. No income would have 
   been reported in year 1 because the 
   contract had not been completed by the 
   end of that year. 

   Answer (C) is incorrect because 
   $5,300,000 does not consider the 
   $1,800,000 of costs incurred during 
   year 1. 

   Answer (D) is incorrect because 
   $1,400,000 was the cash collected 
   during year 1. 


[316] Source: Publisher 

   Answer (A) is incorrect because 
   $100,000 is the apparent gross profit on 
   the sale, not the revenue. 

   Answer (B) is incorrect because 
   $400,000 was the original cost of the 
   machine to Dogg. 

   Answer (C) is correct. Revenue is 
   recognized when it is realized or 
   realizable and the earning process is 
   substantially complete. Thus, a sale is 
   recorded when title to goods passes or 
   when services are performed. At the 
   date of the sale, May 28, Dogg would 
   have recorded a revenue of $500,000, 
   which was received in the form of 
   $250,000 in cash and a receivable for 
   the same amount. 

   Answer (D) is incorrect because, at 
   May 28, a sale appeared to have been 
   consummated in the amount of 
   $500,000. 


[317] Source: Publisher 

   Answer (A) is incorrect because the 
   $250,000 receivable is not considered 
   collectible; thus the sale was not for 
   $500,000. 

   Answer (B) is incorrect because 
   $100,000 would have been the gross 
   profit if the receivable had been 
   collectible. 

   Answer (C) is correct. Gross profit is 
   the difference between the selling price 
   and the cost of goods sold. The balance 
   sheet presentation should be based on 
   the net realizable value of the 
   receivable. Because that amount is 
   assumed to be zero, the machine was 
   actually sold for $250,000, not 
   $500,000. Thus, a loss of $150,000 is 
   reported in the financial statements. 

   Answer (D) is incorrect because 
   $250,000 was the amount of cash 
   collected. 


[318] Source: Publisher 

   Answer (A) is incorrect because 
   shareholders' equity is not affected by 
   the transaction; instead, a liability 
   should be credited. 

   Answer (B) is correct. The purchase of 
   the machine would have involved a 
   debit to fixed assets of $500,000, a 
   credit to cash of $250,000, and a credit 
   to a current liability of $250,000. 

   Answer (C) is incorrect because the 
   machine is valued at $500,000, and that 
   amount should be debited to a fixed 
   asset account. 

   Answer (D) is incorrect because the 
   transaction increased fixed assets. 


[319] Source: Publisher 

   Answer (A) is incorrect because the 
   objective of present value in both 
   initial-recognition and fresh-start 
   measurements is to estimate fair value. 

   Answer (B) is correct. SFAC 7 states 
   that the objective of present value in 
   initial-recognition or fresh-start 
   measurements is to estimate fair value. 
   "Present value should attempt to capture 
   the elements that taken together would 
   comprise a market price if one existed, 
   that is, fair value." A present value 
   measurement includes five elements: 
   estimates of cash flows, expectations 
   about their variability, the time value of 
   money (the risk-free interest rate), the 
   price of uncertainty inherent in an asset 
   or liability, and other factors (e.g., 
   illiquidity or market imperfections). 
   Fair value encompasses all these 
   elements using the estimates and 
   expectations of participants in the 
   market. 

   Answer (C) is incorrect because the 
   objective of present value in both 
   initial-recognition and fresh-start 
   measurements is to estimate fair value. 

   Answer (D) is incorrect because the 
   objective of present value in both 
   initial-recognition and fresh-start 
   measurements is to estimate fair value. 


[320] Source: Publisher 

   Answer (A) is incorrect because the 
   traditional present value measurement 
   approach uses a single set of estimated 
   cash flows and a single interest rate. 

   Answer (B) is incorrect because the 
   expected cash flow approach may also 
   apply when the timing of cash flows is 
   uncertain or when nonfinancial assets 
   and liabilities are to be measured and 
   no market or comparable item exists for 
   them. 

   Answer (C) is correct. The traditional 
   approach to calculating present value 
   employs one set of estimated cash flows 
   and one interest rate. This approach is 
   expected to continue to be used in many 
   cases, for example, when contractual 
   cash flows are involved. However, 
   SFAC 7 describes the expected cash 
   flow approach, which is applicable in 
   more complex circumstances, such as 
   when no market or no comparable item 
   exists for an asset or liability. The 
   expected cash flow results from 
   multiplying each possible estimated 
   amount by its probability and adding the 
   products. The expected cash flow 
   approach emphasizes explicit 
   assumptions about the possible 
   estimated cash flows and their 
   probabilities. The traditional method 
   merely includes those uncertainties in 
   the choice of interest rate. Moreover, by 
   allowing for a range of possibilities, the 
   expected cash flow method permits the 
   use of present value when the timing of 
   cash flows is uncertain. 

   Answer (D) is incorrect because some 
   current accounting applications use the 
   estimated mode (single most likely 
   amount or best estimate), but the 
   expected cash flow approach arrives at 
   an estimated mean by probabilistically 
   weighting a range of possible estimated 
   amounts. 


[321] Source: CPA 1191 I-31 

   Answer (A) is incorrect because 
   $450,000 is the amount received. 

   Answer (B) is incorrect because 
   $495,000 is based on production of 
   4,500 desks. 

   Answer (C) is correct. Dell has done 
   what it was required to do under the 
   contract, that is, produce desks for 
   Little. Thus, it has substantially 
   accomplished what it must do to be 
   entitled to the benefits represented by 
   the revenues. Dell should therefore 
   recognize as earned an amount equaling 
   $550,000 (5,000 desks produced for 
   Little x $110 fixed price per desk). 

   Answer (D) is incorrect because 
   $605,000 is based on production of 
   5,500 desks. 


[322] Source: CPA 0592 I-37 

   Answer (A) is incorrect because 
   $75,000 was the amount due on first 
   delivery. 

   Answer (B) is correct. Revenue is 
   recognized when it is realized or 
   realizable and earned. Revenue is 
   ordinarily earned upon delivery. Given 
   that 50% of the heating oil was 
   delivered in 2000, 50% of the price 
   was earned in 2000. Thus, Acme should 
   recognize $150,000 (50% x $300,000) 
   of revenue from the sale. 

   Answer (C) is incorrect because 
   $225,000 was the amount due in 2000. 

   Answer (D) is incorrect because 
   $300,000 is the total price, but this 
   amount has not been earned because the 
   last 50,000 gallons were not delivered 
   in 2000. 


[323] Source: CPA 1190 II-5 

   Answer (A) is incorrect because 
   $140,000 is the revenue on 2000 sales. 

   Answer (B) is incorrect because 
   $144,000 equals 200,000 pounds times 
   $.72 per pound. 

   Answer (C) is correct. According to 
   SFAC 5, "If products or other assets are 
   readily realizable because they are 
   salable at reliably determinable prices 
   without significant effort (for example, 
   certain agricultural products, precious 
   metals, and marketable securities), 
   revenues and some gains or losses may 
   be recognized at completion of 
   production or when prices of the assets 
   change." The cotton is readily 
   realizable (convertible) because it 
   consists of interchangeable (fungible) 
   units and can be sold at a guaranteed 
   price. Thus, Amar should recognize 
   revenue at the completion of production 
   in 2000 based on the guaranteed price 
   (300,000 lbs. x $.70 = $210,000). 

   Answer (D) is incorrect because 
   $216,000 is based on the 2001 price. 
   However, in 2000, the price had not yet 
   changed. 


[324] Source: CPA 1194 F-58 

   Answer (A) is incorrect because 
   $76,000 equals net cash sales. 

   Answer (B) is incorrect because 
   $170,000 equals total gross sales minus 
   ending accounts receivable. 

   Answer (C) is incorrect because 
   $190,000 does not reflect an adjustment 
   for the change in receivables. 

   Answer (D) is correct. Under the 
   cash-basis of accounting, revenue is 
   recognized when cash is received. 
   Eagle had $76,000 ($80,000 - $4,000) 
   in net cash sales and $114,000 
   ($120,000 - $6,000) in net credit sales. 
   Given that accounts receivable 
   decreased, cash collections thereon 
   must have exceeded net credit sales by 
   $10,000 ($40,000 - $30,000). 
   Accordingly, net revenue is $200,000 
   ($76,000 + $114,000 + $10,000). 


[325] Source: CPA 0595 F-25 

   Answer (A) is incorrect because 
   $175,000 equals $200,000 collections, 
   minus $20,000 change in accounts 
   receivable, minus $5,000 unearned 
   fees. 

   Answer (B) is incorrect because 
   $180,000 equals $200,000 collections, 
   minus $20,000 change in accounts 
   receivable. 

   Answer (C) is correct. Of the $200,000 
   in fees collected during 2000, $5,000 
   was unearned; therefore, $195,000 
   reflected collections of earned fees. 
   Given that the ending balance in 
   accounts receivable was $20,000 
   higher than the beginning balance 
   ($60,000 - $40,000), and that $195,000 
   in fees were collected, service revenue 
   on the accrual basis was $215,000 
   ($20,000 + $195,000). 

   Answer (D) is incorrect because 
   $225,000 is the result of assuming that 
   the unearned fees were added to the 
   $200,000 of fees collected. 


[326] Source: CMA 1293 2-11 

   Answer (A) is incorrect because 
   $90,000 is the understatement of sales. 

   Answer (B) is incorrect because 
   $72,000 is the understatement of cost of 
   goods sold. 

   Answer (C) is incorrect because 
   $67,500 is the cost based on a 25% 
   markup on sales. 

   Answer (D) is correct. Given that terms 
   were FOB shipping point, the title 
   passed to the buyer at the time and 
   place of shipment, i.e., on December 
   31. Thus, the sale should have been 
   recorded and the inventory should not 
   have been shown on Occident's 
   financial statements. The failure to 
   record the sale understated revenues by 
   $90,000. Cost of goods sold would also 
   have been understated by the cost of the 
   inventory. Because the goods were sold 
   at a 25% markup (125% of cost), cost 
   must have been $72,000 ($90,000  
   125%). The net effect on income is 
   $18,000 ($90,000 - $72,000 CGS). 


[327] Source: CPA 0592 I-39 

   Answer (A) is correct. Under the cash 
   basis, sales equal the cash collected. 
   Assuming all sales are on credit, 
   collections are equal to the accrual 
   sales revenue, minus the increase in 
   gross accounts receivable (a noncash 
   amount included in sales), minus the 
   accounts written off. As shown below, 
   collections are equal to $2,140,000.

                  Accounts Receivable
   --------------------------------------------------
   12/31/99       $  500,000
   Sales revenue   2,300,000      10,000  Write-off
                               2,140,000  Collections
   --------------------------------------------------
     12/31/00     $  650,000
                  ==========
   The change in the allowance account 
   has no effect on receivables until there 
   is a write-off. 

   Answer (B) is incorrect because 
   $2,150,000 excludes the write-offs of 
   uncollectible accounts from the 
   calculation. 

   Answer (C) is incorrect because 
   $2,175,000 equals sales revenue minus 
   the increase in net accounts receivable. 

   Answer (D) is incorrect because 
   $2,450,000 equals sales revenue plus 
   the increase in gross accounts 
   receivable. 


[328] Source: CPA 0590 I-45 

   Answer (A) is correct. Under the 
   installment method, interest income 
   must be accounted for separately from 
   the gross profit to be recognized. The 
   gross profit margin on the sale is equal 
   to 331/3%. This rate is determined by 
   dividing the $600,000 gross profit 
   ($1,800,000 selling price - $1,200,000 
   cost) by the $1,800,000 selling price. 
   Based on collection of $300,000 of 
   principal on December 31, 2000, Mill 
   should recognize $100,000 ($300,000 x 
   331/3% gross profit margin) of realized 
   gross profit from the construction 
   equipment sale. In addition, Mill should 
   recognize $150,000 ($1,500,000 note x 
   10% interest) as interest income from 
   the financing. Thus, the total revenue for 
   2000 from this transaction is $250,000 
   ($100,000 + $150,000). 

   Answer (B) is incorrect because 
   $150,000 excludes the realized gross 
   profit. 

   Answer (C) is incorrect because 
   $120,000 is 10% of the seller's carrying 
   amount. 

   Answer (D) is incorrect because 
   $100,000 excludes the interest income. 


[329] Source: Publisher 

   Answer (A) is incorrect because the 
   percentage of completion at year end in 
   1995 is 28% ($700,000  $2,500,000), 
   and the gross profit for 1995 is the 
   anticipated gross profit on the contract 
   multiplied by the completion 
   percentage. Thus, gross profit for 1995 
   is $140,000 [($3,000,000 - $2,500,000) 
   x 28%]. 

   Answer (B) is correct. The 
   percentage-of-completion method 
   recognizes income based on the ratio of 
   the costs incurred to date to the 
   estimated total costs. Billings and 
   collections are irrelevant information 
   when using the 
   percentage-of-completion method. The 
   percentage of completion at year end in 
   1996 is 36% ($900,000  $2,500,000), 
   and the gross profit for 1996 is thus 
   $180,000 [($3,000,000 - $2,500,000) x 
   36%]. 

   Answer (C) is incorrect because the 
   percentage of completion at year end in 
   1997 is 16% ($400,000  $2,500,000), 
   and the gross profit for 1997 is thus 
   $80,000 [($3,000,000 - $2,500,000) x 
   16%]. 

   Answer (D) is incorrect because the 
   percentage of completion at year end in 
   1998 is 20% ($500,000  $2,500,000), 
   and the gross profit for 1998 is thus 
   $100,000 [($3,000,000 - $2,500,000) x 
   20%]. 


[330] Source: CMA 1286 4-8 

   Answer (A) is correct. Under the 
   straight-line method, depreciation 
   expense is a constant amount for each 
   period of the estimated useful life of the 
   asset. The straight-line method ignores 
   fluctuations in the use of an asset and in 
   maintenance and service charges. The 
   book value is dependent upon the length 
   of time the asset has been held rather 
   than the amount of use. Physical wear 
   and tear is a justification for an activity 
   method of depreciation, e.g., 
   depreciation based on hours of machine 
   use. If technological developments are a 
   primary factor in determining the period 
   of use of an asset, a write-down method 
   of depreciation based on market values 
   may be appropriate. 

   Answer (B) is incorrect because the 
   lives that are acceptable for tax 
   purposes may not always be used for 
   financial accounting purposes. 

   Answer (C) is incorrect because the 
   lives that are acceptable for tax 
   purposes may not always be used for 
   financial accounting purposes. 

   Answer (D) is incorrect because the 
   SEC has not issued depreciation life 
   guidelines. 


[331] Source: CPA 1194 F-44 

   Answer (A) is incorrect because 
   $150,000 does not include design, 
   construction, and testing of 
   preproduction prototypes or testing in 
   search of new products. 

   Answer (B) is incorrect because 
   $200,000 does not include R&D 
   performed under contract by others or 
   testing in search for new products. 

   Answer (C) is incorrect because 
   $350,000 does not include testing in 
   search for new products. 

   Answer (D) is correct. Research is 
   planned search or critical investigation 
   aimed at discovery of new knowledge 
   useful in developing a new product, 
   service, process, or technique, or in 
   bringing about a significant 
   improvement to an existing product, etc. 
   Development is translation of research 
   findings or other knowledge into a plan 
   or design for a new or improved 
   product or process. R&D expenses 
   include R&D performed under contract 
   by others; design, construction, and 
   testing of prototypes; and testing in 
   search for new products (SFAS 2). 
   Thus, all $525,000 should be expensed. 


[332] Source: CPA 0592 I-51 

   Answer (A) is incorrect because 
   $280,000 does not include the cost of 
   the special equipment. 

   Answer (B) is incorrect because 
   $295,000 includes 1 year's straight-line 
   depreciation on the special equipment 
   instead of the full cost. 

   Answer (C) is correct. R&D costs are 
   expensed as incurred. However, SFAS 
   2 specifically excludes legal work in 
   connection with patent applications or 
   litigation and the sale or licensing of 
   patents from the definition of R&D. The 
   legal costs of filing a patent should be 
   capitalized. West's R&D costs include 
   those incurred for the design, 
   construction, and testing of 
   preproduction prototypes. Moreover, 
   the cost of equipment used solely for a 
   specific project is also expensed 
   immediately. Thus, the total amount of 
   costs that will be expensed when 
   incurred is $340,000. 

   Answer (D) is incorrect because 
   $350,000 includes the legal costs of 
   filing a patent. 


[333] Source: CMA 0689 3-1 

   Answer (A) is incorrect because $217 
   and $198 are the selling price and the 
   ceiling. Gross profit of $32 is 
   subtracted from the ceiling to find the 
   floor ($166). 

   Answer (B) is incorrect because $217 
   and $185 are the selling price and the 
   selling price minus the profit margin. 
   The ceiling is found by subtracting 
   selling costs from the selling price 
   ($217 - $19). The floor is found by 
   subtracting the profit margin per unit 
   from the ceiling ($198 - $32). 

   Answer (C) is correct. Inventory is 
   valued at the lower of cost or market 
   (LCM). Market is typically defined as 
   replacement cost. However, to avoid 
   showing either a loss or a greater than 
   normal profit in future periods, the 
   amount used for market must fall 
   between a ceiling and a floor. The 
   ceiling is the net realizable value from 
   selling an item of inventory (selling 
   price - selling costs). The floor is the 
   net realizable value (ceiling) minus the 
   normal profit. For cameras, the 
   replacement cost is $203. The ceiling is 
   $198 ($217 selling price - $19 selling 
   costs). The floor is $166 ($198 ceiling 
   - $32 normal profit). Thus, the amount 
   used in the LCM comparison is the 
   ceiling of $198 because it is lower than 
   replacement cost. 

   Answer (D) is incorrect because $185 
   and $166 are the selling price minus the 
   profit margin and the floor. The ceiling 
   is found by subtracting selling costs 
   from the selling price ($217 - $19). 


[334] Source: CMA 0689 3-2 

   Answer (A) is incorrect because $105 
   is the replacement cost, which 
   represents market value but is restricted 
   by the ceiling and floor amounts. The 
   ceiling is found by subtracting selling 
   costs from the selling price ($145 - $8). 
   The floor is found by subtracting the 
   profit margin per unit from the ceiling 
   ($137 - $29). The replacement cost of 
   $105 is below the floor of $108, so the 
   floor is used as the market value. The 
   historical cost of $106 is lower than the 
   market value of $108, so $106 should 
   be used to value the lenses. 

   Answer (B) is correct. The figure used 
   for market is typically the replacement 
   cost ($105). However, market must fall 
   between a ceiling and a floor. The 
   ceiling is selling price minus normal 
   selling costs ($145 - $8 = $137). The 
   floor is the ceiling minus normal profit 
   margin ($137 - $29 = $108). Hence, the 
   market value must fall between $108 
   and $137. Since replacement cost 
   ($105) is lower than the floor, the floor 
   of $108 is used in the LCM comparison. 
   Because the $106 historical cost is 
   lower than market, it is used as the 
   inventory valuation. 

   Answer (C) is incorrect because $108 
   is the floor which, in this example, is 
   used as the market value. However, the 
   historical cost of $106 is lower than the 
   market value of $108, so $106 should 
   be used to value the lenses. 

   Answer (D) is incorrect because $137 
   is the ceiling on the market value. The 
   floor is found by subtracting the profit 
   margin per unit from the ceiling ($137 - 
   $29). The replacement cost of $105 is 
   below the floor of $108, so the floor is 
   used as the market value. The historical 
   cost of $106 is lower than the market 
   value of $108, so $106 should be used 
   to value the lenses. 


[335] Source: CMA 0689 3-3 

   Answer (A) is correct. Market must fall 
   between the ceiling and the floor. The 
   ceiling is $71.25 ($73.75 selling price - 
   $2.50 selling costs). The floor is $50 
   ($71.25 ceiling - $21.25 normal profit). 
   The amount used for market is the $51 
   replacement cost because it falls 
   between the floor and the ceiling. 
   Inventory valuation is the lower of cost 
   ($53) or market ($51), so the unit value 
   of the tripods is $51. 

   Answer (B) is incorrect because $53 is 
   the historical cost. The replacement 
   cost of $51, which represents market 
   value, is lower than the historical cost 
   and falls between the ceiling and floor 
   restrictions on market value, so the 
   replacement cost should be used to 
   value the tripods. 

   Answer (C) is incorrect because the 
   replacement cost of $51, which 
   represents market value, is lower than 
   the historical cost and falls between the 
   ceiling and floor restrictions on market 
   value, so the replacement cost should 
   be used to value the tripods. 

   Answer (D) is incorrect because 
   $71.25 is the ceiling restriction on 
   market value. The replacement cost of 
   $51, which represents market value, is 
   lower than the historical cost and falls 
   between the ceiling and floor 
   restrictions on market value, so the 
   replacement cost should be used to 
   value the tripods. 


[336] Source: CMA 0689 4-6 

   Answer (A) is incorrect because 
   balance sheet amounts are customarily 
   measured at historical cost. 

   Answer (B) is correct. Depreciation for 
   accounting purposes is assumed to be 
   an allocation process. Accounting 
   depreciation allocates the cost of a 
   long-lived asset over its productive life 
   in a systematic and rational manner. The 
   objective is to match the expense with 
   the periods in which economic benefits 
   are received from use of the asset. 
   There is no intent to value the fixed 
   asset. The net asset amount on the 
   balance sheet is nothing more than 
   undepreciated historical cost. 

   Answer (C) is incorrect because no 
   cash flow occurs when depreciation is 
   recorded. 

   Answer (D) is incorrect because the 
   basic financial statements are not 
   adjusted for changing prices. They are 
   presented in nominal dollars. 


[337] Source: CMA 0689 4-7 

   Answer (A) is incorrect because it is a 
   factor affecting the life of a plant asset. 

   Answer (B) is incorrect because it is a 
   factor affecting the life of a plant asset. 

   Answer (C) is incorrect because it is a 
   factor affecting the life of a plant asset. 

   Answer (D) is correct. The useful life 
   of a plant asset can be affected by both 
   physical and economic factors, e.g., 
   wear and tear from usage, deterioration 
   and decay as the asset ages, inadequacy 
   to meet the changing needs of the 
   enterprise, and obsolescence as a result 
   of technological advances. Tax 
   regulations may make it more or less 
   desirable to acquire a new plant asset, 
   but once the asset has been acquired, 
   the tax laws have no effect on useful life 
   for financial accounting purposes. 


[338] Source: CPA 0586 I-12 

   Answer (A) is correct. The ending 
   inventory at retail end-of-year prices 
   must first be transformed to ending 
   inventory at retail base year prices to 
   determine whether a liquidation has 
   occurred or a layer has been added. The 
   layers are then restated by multiplying 
   each by its specific price index. Finally, 
   these amounts are transformed from 
   retail prices to estimated cost prices by 
   multiplying the layers by the 
   appropriate cost-retail ratios. The 
   12/31/00 inventory in base year (1999) 
   prices is $600,000 ($660,000  1.10). 
   Thus, a $100,000 layer was added in 
   2000.

   Layers at      Specific     Cost-Retail      Layers
     Retail     Price Index       Ratio         at Cost
   ---------    -----------    -----------      --------
   $500,000  x      1.0     x ($360  $500)  =  $360,000
   $100,000  x      1.1     x           70%  =    77,000
                                                --------
   Ending inventory                             $437,000
                                                ========

   Answer (B) is incorrect because 
   $462,000 equals 70% of inventory on 
   12/31/00. 

   Answer (C) is incorrect because 
   $472,000 assumes the 2000 layer is 
   $160,000 and that no price-index 
   adjustment is made. 

   Answer (D) is incorrect because 
   $483,200 assumes the 2000 layer is 
   $160,000. 


[339] Source: CMA Samp Q2-5 

   Answer (A) is correct. The costs of 
   fixed assets (plant and equipment) are 
   all costs necessary to acquire these 
   assets and to bring them to the condition 
   and location required for their intended 
   use. These costs include shipping, 
   installation, pre-use testing, sales taxes, 
   interest capitalization, etc. Thus, the 
   original cost of the machinery to be 
   recorded in the books is the sum of the 
   purchase price, installation, and 
   delivery charges, or $9,500 ($9,000 + 
   $300 + $200). 

   Answer (B) is incorrect because $9,300 
   does not include the delivery charges. 

   Answer (C) is incorrect because $9,200 
   omits the installation charges. 

   Answer (D) is incorrect because 
   $9,000 does not include the delivery 
   and installation charges. 


[340] Source: CMA 1289 4-21 

   Answer (A) is correct. Credit sales 
   were $5,525,000 (85% x $6,500,000 
   total sales). Thus, the charge to expense 
   is $82,875 (1.5% x $5,525,000). The 
   percentage-of-credit-sales method is an 
   income statement-oriented or matching 
   approach. Thus, the current balance in 
   the allowance account is ignored when 
   making the entry to record bad debt 
   expense. 

   Answer (B) is incorrect because the 
   $3,400 debit balance in the allowance 
   for uncollectible accounts is not added 
   to the bad debt expense calculated by 
   using the historical percentage of credit 
   sales. 

   Answer (C) is incorrect because 
   $66,950 is the bad debt expense 
   calculated by using the aging schedule 
   of accounts receivable. The bad debt 
   expense calculated by using the 
   historical percentage of credit sales is 
   $82,875 ($6,500,000 x 85% x 1.5%). 

   Answer (D) is incorrect because 
   $70,350 is the bad debt expense for the 
   year using the aging schedule of 
   accounts receivable. The bad debt 
   expense calculated by using the 
   historical percentage of credit sales is 
   $82,875 ($6,500,000 x 85% x 1.5%). 




[342] Source: CMA 1289 4-23 

   Answer (A) is incorrect because 
   $76,500 is the credit balance in the 
   allowance for uncollectible accounts at 
   the beginning of the year. The change in 
   this account, as reflected by the ending 
   debit balance, is the book value of the 
   net accounts receivable written off 
   during the fiscal year. 

   Answer (B) is correct. The company 
   began the year with a credit balance of 
   $76,500 in the allowance account, and 
   ended the year with a debit balance of 
   $3,400. Accordingly, write-offs during 
   the year must have totaled $79,900 
   ($76,500 + $3,400). 

   Answer (C) is incorrect because the 
   ending debit balance in the allowance 
   for uncollectible accounts must be 
   added, not subtracted, from the 
   beginning credit balance to find the 
   change in this account which is the book 
   value of the net accounts receivable 
   written off during the fiscal year. 

   Answer (D) is incorrect because the 
   $3,400 debt balance in the allowance 
   for uncollectible accounts is not 
   subtracted from the bad debt expense 
   calculated by using the historical 
   percentage of credit sales. The book 
   value of the net accounts receivable 
   written off during the fiscal year is the 
   change in the allowance for 
   uncollectible accounts from the 
   beginning to ending balances. 


[343] Source: CPA 1193 I-21 

   Answer (A) is incorrect because 
   $28,000 is the NRV. 

   Answer (B) is incorrect because 
   $26,000 is the cost. 

   Answer (C) is correct. Market equals 
   current replacement cost subject to 
   maximum and minimum values. The 
   maximum is net realizable value 
   (NRV), and the minimum is NRV minus 
   normal profit. When replacement cost is 
   within this range, it is used as the 
   market value. Cost is given as $26,000. 
   NRV is $28,000 ($40,000 selling price 
   - $12,000 additional processing costs), 
   and NRV minus a normal profit equals 
   $24,000 [$28,000 - (10% x $40,000)]. 
   Because the lowest value in the range 
   ($24,000) exceeds replacement cost 
   ($20,000), it is used as the market 
   value. Because market value ($24,000) 
   is less than cost ($26,000), it is also the 
   inventory valuation. 

   Answer (D) is incorrect because 
   $20,000 is the replacement cost. 


[344] Source: CPA 1180 II-11 

   Answer (A) is incorrect because 
   $700,000 does not include freight-in 
   from the calculation. 

   Answer (B) is correct. If the gross 
   profit margin is 25% of sales, cost of 
   goods sold equals 75% of sales. Ending 
   inventory is equal to goods available 
   for sale minus cost of goods sold.

     Beginning inventory           $  900,000
     Purchases                      3,400,000
     Freight-in                       200,000
                                   ----------
     Goods available for sale      $4,500,000
     CGS (1 - .25) x ($4,800,000)  (3,600,000)
                                   ----------
     Ending inventory              $  900,000
                                   ==========

   Answer (C) is incorrect because 
   $1,125,000 is 25% of goods available 
   for sale. 

   Answer (D) is incorrect because 
   $1,200,000 is the gross margin. 


[345] Source: CMA 0690 3-4 

   Answer (A) is correct. Under the LIFO 
   retail inventory method, the cost 
   percentage is computed using only the 
   purchases, markups, and markdowns for 
   the current year (not the beginning 
   inventory). Hence, FCL's cost-retail 
   ratio is 55% ($55,000  $100,000). 
   However, the $50,000 of ending 
   inventory at retail ($225,000 total 
   goods available - $150,000 sales - 
   $25,000 markdowns) is less than the 
   beginning inventory of $100,000. Thus, 
   no increment was added during the 
   year, and the remainder is assumed to 
   come from the beginning inventory. 
   Ending inventory at cost is therefore 
   based on the cost-retail ratio for the 
   beginning inventory ($35,000  
   $100,000 = 35%). Consequently, 
   ending inventory at cost is $17,500 
   (35% x $50,000).

                                             Cost      Retail
                                           -------    --------
   Purchases                               $55,000    $110,000
   Markups                                              15,000
   Markdowns                                           (25,000)
                                           -------    --------
   Components of cost percentage           $55,000    $100,000
                                           =======    ========

   Answer (B) is incorrect because 
   $20,000 is ending inventory at cost 
   using the conventional (lower of 
   average cost or market) retail inventory 
   method. 

   Answer (C) is incorrect because 
   $50,000 is the calculated retail value of 
   ending inventory. 

   Answer (D) is incorrect because 
   $90,000 is the sum of the beginning 
   inventory and purchases at cost. 


[346] Source: CPA 0593 I-18 

   Answer (A) is incorrect because 
   $1,300 is based on the periodic LIFO 
   method. 

   Answer (B) is incorrect because $2,640 
   is based on the weighted-average 
   method. 

   Answer (C) is correct. The 
   moving-average system is only 
   applicable to perpetual inventories. It 
   requires that a new weighted average 
   be computed after every purchase. This 
   moving average is based on remaining 
   inventory held and the new inventory 
   purchased. Based on the calculations 
   below, the moving-average cost per unit 
   for the 1/20/00 sale is $1.75, and the 
   cost of goods sold (CGS) for January is 
   $1,575 ($1.75 x 900 units sold). Thus, 
   ending inventory is $3,225 ($1,000 
   beginning balance + $1,800 purchase on 
   1/7/00 - $1,575 CGS on 1/20/00 + 
   $2,000 purchase on 1/25/00).

                           Moving-Average
                   Units     Cost/Unit      Total Cost
                   -----   --------------   ----------
   Balance 1/1     1,000       $1.00          $1,000
   Purchase 1/7      600        3.00           1,800
                   -----       -----          ------
                   1,600       $1.75          $2,800

   Answer (D) is incorrect because 
   $3,900 is based on the FIFO method. 


[347] Source: CPA 0593 I-19 

   Answer (A) is incorrect because 
   $3,225 is based on the moving-average 
   method. 

   Answer (B) is incorrect because $1,300 
   is based on the periodic LIFO method. 

   Answer (C) is correct. In a perpetual 
   inventory system, purchases are directly 
   recorded in the inventory account, and 
   cost of goods sold (CGS) is determined 
   as the goods are sold. Under LIFO, the 
   latest goods purchased are assumed to 
   be the first to be sold. Using LIFO 
   perpetual, 600 of the 900 units sold on 
   1/20/00 are assumed to have come from 
   the last purchase. Their cost was 
   $1,800 ($3 x 600). The remaining 300 
   came from the beginning balance at a 
   cost of $300 ($1 x 300). Hence, the 
   total CGS for January was $2,100, and 
   ending inventory must equal $2,700 
   ($1,000 beginning inventory + $1,800 
   purchase on 1/7/00 + $2,000 purchase 
   on 1/25/00 - $2,100 CGS). 

   Answer (D) is incorrect because 
   $3,900 is based on the periodic FIFO 
   method. 


[348] Source: CMA 1291 2-25 

   Answer (A) is incorrect because the 
   objective is to reduce inventory, not 
   increase it. 

   Answer (B) is incorrect because the 
   debit is to cost of goods sold. 

   Answer (C) is incorrect because the 
   LIFO reserve already has a $30,000 
   balance. 

   Answer (D) is correct. LIFO reserve is 
   a contra account to inventory. At 
   year-end, it should reflect the difference 
   between LIFO and the other inventory 
   valuation method used. This LIFO effect 
   is $50,000 ($500,000 specific 
   identification - $450,000 LIFO). Given 
   an original credit balance of $30,000 in 
   the LIFO reserve, the required adjusting 
   entry is a credit for an additional 
   $20,000. The offsetting debit is to cost 
   of goods sold. 


[349] Source: CMA 1291 2-27 

   Answer (A) is correct. The shipping 
   term was FOB shipping point. Hence, 
   title to the goods passed to the buyer on 
   December 31, year 1, and the $75,000 
   sale should have been recorded on that 
   date. Given a selling price of $75,000 
   and a markup on cost of 25%, cost must 
   have been $60,000 ($75,000  1.25) 
   and gross profit $15,000 ($75,000 - 
   $60,000). Because the sale was 
   unrecorded, the seller's balance sheet 
   reflected inventory of $60,000 instead 
   of an account receivable of $75,000. 
   Thus, assets were understated by 
   $15,000. Also, income was understated 
   by $15,000 because of the failure to 
   credit sales for $75,000 and debit cost 
   of goods sold for $60,000. 

   Answer (B) is incorrect because 
   income was understated by $15,000. 

   Answer (C) is incorrect because 
   income was understated by $15,000. 

   Answer (D) is incorrect because 
   income was understated by $15,000. 


[350] Source: CMA 1291 2-29 

   Answer (A) is incorrect because 
   dollar-value LIFO valuation is 
   $251,000. 

   Answer (B) is incorrect because 
   dollar-value LIFO valuation is 
   $251,000. 

   Answer (C) is correct. The first step is 
   to convert the Year 2 ending inventory 
   into base-year prices. Dividing by the 
   price index for Year 2 results in an 
   inventory value of $250,000 ($275,000 
    1.1). This amount consists of two 
   layers: $240,000 purchased during the 
   base year (Year 1) and $10,000 
   acquired in the current year (Year 2). 
   The latter amount must be converted 
   back into year-end prices because this 
   merchandise was not purchased during 
   the base year. The Year 2 increment 
   therefore has a dollar-value LIFO 
   valuation of $11,000 ($10,000 x 1.1). 
   Total inventory is $251,000 ($240,000 
   + $11,000). 

   Answer (D) is incorrect because 
   dollar-value LIFO valuation is 
   $251,000. 


[351] Source: CMA 1291 2-30 

   Answer (A) is incorrect because 
   dollar-value LIFO ending inventory is 
   $251,000. 

   Answer (B) is incorrect because 
   dollar-value LIFO ending inventory is 
   $251,000. 

   Answer (C) is correct. The first step is 
   to convert the Year 3 ending inventory 
   at year-end prices into base-year 
   prices. Dividing by the price index for 
   Year 3 results in an inventory value at 
   base-year prices of $250,000 
   ($300,000  1.2). This figure is exactly 
   the same as that for Year 2. Thus, no 
   increment was added during Year 3, 
   and the dollar-value LIFO ending 
   inventory for Year 3 is the same as at 
   the end of Year 2 ($251,000). This 
   amount consists of a $240,000 layer 
   purchased in Year 1 and an $11,000 
   layer purchased in Year 2. Under LIFO, 
   the assumption is that nothing is still on 
   hand from Year 3 purchases because the 
   inventory stated in base-year prices is 
   the same as at the end of the preceding 
   year. 

   Answer (D) is incorrect because 
   dollar-value LIFO ending inventory is 
   $251,000. 


[352] Source: CMA 0692 2-3 

   Answer (A) is incorrect because 
   providing management with information 
   about the fair value of the inventory and 
   consistency are less significant 
   objectives than clearly reflecting 
   income. 

   Answer (B) is incorrect because 
   inventory is valued at lower of cost or 
   market, not replacement cost. 

   Answer (C) is incorrect because there 
   may be no correlation between reported 
   value and liquidation value. 

   Answer (D) is correct. ARB 43, Chap. 
   4 states that the inventory cost flow 
   method used by a firm should be the one 
   that most clearly reflects periodic 
   income. Periodic income is best 
   reflected when costs are recognized in 
   the same period as the related revenues. 
   In other words, inventory accounting is 
   an income-statement-based activity as 
   opposed to a balance-sheet-based 
   activity. 


[353] Source: CMA 1292 2-4 

   Answer (A) is incorrect because a 
   company may also use a percentage of 
   receivables to determine the bad debt 
   write-off. Additionally, a percentage of 
   credit sales is preferable to a 
   percentage of total sales. 

   Answer (B) is incorrect because a 
   percentage of credit sales is an 
   alternative to a percentage of 
   receivables. 

   Answer (C) is correct. Bad debt 
   expense can be estimated on either an 
   income statement basis or a balance 
   sheet basis. Under the income statement 
   basis, the expense is equal to a 
   percentage of credit sales. Under the 
   balance sheet approach, the balance in 
   the allowance account is determined by 
   taking a percentage of accounts 
   receivable. Any existing balance in the 
   allowance account is an adjustment to 
   the amount computed to arrive at the 
   expense for the period. Either method is 
   acceptable. 

   Answer (D) is incorrect because a 
   percentage of credit sales is preferable 
   to a percentage of total sales. 


[354] Source: CMA 1292 2-5 

   Answer (A) is incorrect because 
   $74,000 assumes that the depreciable 
   cost is the invoice price minus salvage 
   value. 

   Answer (B) is correct. The acquisition 
   cost of the machine includes all costs 
   necessary to prepare it for its intended 
   use. Hence, the depreciable cost is 
   $210,000 ($200,000 invoice price + 
   $2,000 delivery expense + $4,500 site 
   preparation + $3,500 electrical work). 
   Under the DDB method, salvage value 
   is ignored at the beginning. Thus, the 
   full $210,000 will be subject to 
   depreciation. Given a 5-year life, the 
   annual straight-line rate is 20%, and the 
   DDB rate will be 40%. Depreciation 
   for the first year is therefore $84,000 
   (40% x $210,000). 

   Answer (C) is incorrect because 
   $80,800 assumes a depreciable cost of 
   $202,000, but the site preparation and 
   electrical costs are part of that cost. 

   Answer (D) is incorrect because 
   $78,000 assumes salvage value was 
   subtracted from the $210,000 
   depreciable cost. 


[355] Source: CMA 1292 2-8 

   Answer (A) is incorrect because market 
   means replacement cost. 

   Answer (B) is incorrect because 
   original cost plus a normal profit 
   margin is greater than cost. 

   Answer (C) is correct. Market is 
   usually defined as the replacement cost 
   of the inventory. Thus, the rule is really 
   "the lower of cost or replacement cost." 
   Replacement cost is subject to a ceiling 
   (net realizable value) and floor (net 
   realizable value - normal profit). 

   Answer (D) is incorrect because 
   replacement cost is more important than 
   the original cost minus cost to dispose. 


[356] Source: CPA 1193 I-20 

   Answer (A) is incorrect because 
   $80,000 is the current-year cost at 
   year-end. 

   Answer (B) is incorrect because 
   $74,000 is the beginning inventory at 
   current-year cost plus the 2000 layer at 
   dollar-value LIFO. 

   Answer (C) is correct. To compute the 
   ending inventory under dollar-value 
   LIFO, the ending inventory stated in 
   year-end or current-year cost must be 
   restated at base-year cost. The layers at 
   base-year cost are computed using a 
   LIFO flow assumption and then 
   weighted (multiplied) by the relevant 
   indexes to price the ending inventory. 
   The relevant price index for the 2000 
   layer is 1.331/3 ($80,000 current-year 
   cost  $60,000 base-year cost). The 
   2000 layer at base-year cost is 
   multiplied by this index to translate it to 
   the price in effect when the layer was 
   added. Accordingly, the 2000 layer at 
   dollar-value LIFO is $20,000 (1.331/3 
   x $15,000), and ending inventory is 
   $66,000 ($46,000 at 12/31/99 + 
   $20,000). 

   Answer (D) is incorrect because 
   $60,000 is the base-year cost at 
   year-end. 


[357] Source: CMA 1292 2-21 

   Answer (A) is incorrect because 
   interest is not capitalized for assets in 
   use or ready for use. 

   Answer (B) is correct. SFAS 34 
   requires capitalization of material 
   interest costs for assets constructed for 
   internal use and those constructed for 
   sale or lease as discrete projects. It 
   does not apply to products routinely 
   produced for inventory, assets in use or 
   ready for use, assets not being used or 
   being prepared for use, and idle land. 

   Answer (C) is incorrect because assets 
   not being used and being prepared for 
   use are not subject to interest 
   capitalization rules. 

   Answer (D) is incorrect because 
   capitalized interest should not be added 
   to routinely produced inventory. 


[358] Source: CMA 1292 2-25 

   Answer (A) is incorrect because $936 
   is based on periodic LIFO. 

   Answer (B) is incorrect because $1,012 
   is based on the weighted-average unit 
   cost of $4.40, not $4.80. 

   Answer (C) is incorrect because $1,046 
   is the ending inventory under perpetual 
   LIFO. 

   Answer (D) is correct. Under FIFO, the 
   ending inventory consists of the most 
   recent inventory purchased. The 
   beginning inventory included 150 units 
   and purchases totaled 650 units, a total 
   of 800 units. Sales equaled 570 units 
   (100 + 150 + 220 + 100). Thus, ending 
   inventory was 230 units (800 - 570). 
   Under FIFO, these units are valued at 
   the cost of the most recent 230 units 
   purchased, or $4.80. Ending inventory 
   is therefore $1,104 (230 x $4.80). 


[359] Source: CMA 1292 2-27 

   Answer (A) is correct. The value of the 
   total goods available for sale is 
   determined as follows:

      Beginning inventory        150 x $4.00  = $  600.00
      Nov. 7 purchase            200 x $4.20  =    840.00
      Nov. 11 purchase           200 x $4.40  =    880.00
      Nov. 22 purchase           250 x $4.80  =  1,200.00
                                 ---            ---------
      Total available            800            $3,520.00
                                 ===            =========
   The weighted-average unit cost is $4.40 
   ($3,520  800 units available). The 
   cost of goods sold and total sales are 
   therefore $2,508 ($4.40 x 570 units 
   sold) and $3,990 ($7 x 570 units), 
   respectively. Consequently, gross profit 
   is $1,482 ($3,990 - $2,508). 

   Answer (B) is incorrect because $1,516 
   is based on perpetual LIFO. 

   Answer (C) is incorrect because $1,528 
   is based on the moving average method. 

   Answer (D) is incorrect because 
   $1,574 is based on FIFO. 


[360] Source: CMA 1292 2-28 

   Answer (A) is incorrect because 
   $2,416 is based on the FIFO method. 

   Answer (B) is incorrect because 
   periodic LIFO produces a cost of goods 
   sold of $2,584 based on the costs of the 
   last 570 units purchased. 

   Answer (C) is incorrect because $2,474 
   is based on perpetual LIFO. 

   Answer (D) is correct. The value of the 
   goods available for sale is as follows:

      Beginning inventory        150 x $4.00  = $  600.00
      Nov. 7 purchase            200 x $4.20  =    840.00
      Nov. 11 purchase           200 x $4.40  =    880.00
      Nov. 22 purchase           250 x $4.80  =  1,200.00
                                 ---            ---------
      Total available            800            $3,520.00
                                 ===            =========
   The ending inventory consists of 230 
   units. Under periodic LIFO, these are 
   costed at the prices paid for the earliest 
   230 units purchased, or 150 units at 
   $4.00 and 80 units at $4.20, a total of 
   $936. Hence, cost of goods sold is 
   $2,584 ($3,520 goods available - $936 
   EI). 


[361] Source: CMA 1292 2-29 

   Answer (A) is incorrect because $936 
   is based on periodic LIFO. 

   Answer (B) is incorrect because $1,012 
   is based on the weighted-average 
   method. 

   Answer (C) is correct. Under perpetual 
   LIFO, the inventory valuation is 
   recalculated as follows after every 
   purchase and sale. The 230 units in 
   ending inventory consist of 150 units at 
   $4.80 each and 30 units at $4.20 each, 
   and 50 units from the beginning 
   inventory at $4.00 each.

   Date        Receipts               Sales            Ending
                                                      Inventory
   ----   ------------------    ------------------    ---------
   11-1   150 @ $4.00 = $600                          $  600.00
   11-5                         100 @ $4.00 = $400       200.00
   11-7   200 @ $4.20 = $840                           1,040.00
   11-9                         150 @ $4.20 = $630       410.00
   11-11  200 @ $4.40 = $880                           1,290.00
   11-17                        200 @ $4.40 = $880
                                 20 @ $4.20 = $ 84       326.00
   11-22  250 @ $4.80 = $1,200                         1,526.00
   11-29                        100 @ $4.80 = $480     1,046.00

   Answer (D) is incorrect because 
   $1,076 is based on the moving-average 
   method. 


[362] Source: CPA 1193 I-18 

   Answer (A) is correct. The aging 
   schedule determines the balance in the 
   allowance for uncollectible accounts. 
   Of the accounts that are no more than 30 
   days old, the amount uncollectible is 
   $3,000 ($60,000 x 5%). Accounts that 
   are 31-60 days old and over 60 days 
   old have estimated uncollectible 
   balances of $400 ($4,000 x 10%) and 
   $1,400, respectively. Hence, the amount 
   that should be in the allowance for 
   uncollectible accounts is $4,800 
   ($3,000 + $400 + $1,400). The $1,000 
   balance already in the account is 
   disregarded because the aging schedule 
   determines the balance that should be in 
   the account. 

   Answer (B) is incorrect because $4,000 
   equals the existing balance plus the 
   estimated uncollectible amount for the 
   newest receivables. 

   Answer (C) is incorrect because $3,800 
   is the credit to the allowance account. 

   Answer (D) is incorrect because 
   $3,000 is the estimated uncollectible 
   amount for the newest receivables. 


[363] Source: CPA 0595 F-11 

   Answer (A) is incorrect because 
   $525,000 is the base-year cost. 

   Answer (B) is correct. A price index 
   for the current year may be calculated 
   by dividing the ending inventory at 
   current-year cost by the ending 
   inventory at base-year cost. This index 
   is then applied to the current-year 
   inventory layer stated at base-year cost. 
   Consequently, the index for 2000 is 1.1 
   ($577,500  $525,000), and the 
   dollar-value LIFO cost at December 31, 
   2000 is $527,500 [$500,000 base layer 
   + 1.1($525,000 - $500,000)]. 

   Answer (C) is incorrect because 
   $552,500 results from using $525,000 
   as the base layer. 

   Answer (D) is incorrect because 
   $577,500 is the year-end inventory at 
   current cost. 


[364] Source: CMA 0693 2-17 

   Answer (A) is incorrect because the 
   security should be written down to fair 
   value as a new cost basis. Furthermore, 
   if a valuation allowance is used, it 
   reflects changes in fair value, not the 
   passage of time. 

   Answer (B) is correct. Any permanent 
   decline in the value of 
   available-for-sale securities should be 
   considered as a realized loss without 
   any subsequent write-up for cost 
   recoveries. Realized gains and losses 
   should be included in income in the 
   period in which they occur. 

   Answer (C) is incorrect because a 
   nontemporary decline in value of an 
   available-for-sale security is treated as 
   a realized loss without regard to 
   whether the investment has been sold. 

   Answer (D) is incorrect because a 
   nontemporary decline in value is to be 
   considered a realized loss. However, a 
   subsequent recovery is credited to other 
   comprehensive income. 


[365] Source: CMA 0693 2-23 

   Answer (A) is incorrect because costs 
   are capitalized once the product has 
   proven to be technologically feasible. 

   Answer (B) is incorrect because costs 
   incurred prior to establishment of 
   technological feasibility are expensed. 

   Answer (C) is incorrect because costs 
   incurred prior to establishment of 
   technological feasibility are expensed. 

   Answer (D) is correct. SFAS 86 
   specifies that the cost of computer 
   software that is to be sold, leased, or 
   otherwise marketed is to be expensed 
   until technological feasibility has been 
   established for the product. Thereafter, 
   all costs should be capitalized (but 
   subject to a net realizable value 
   limitation). The capitalized costs should 
   be amortized over the estimated 
   remaining life of the product. 
   Capitalization ends when the product is 
   available for general release. 


[366] Source: CMA 0693 2-28 

   Answer (A) is incorrect because 
   disclosures should include the use of 
   the LCM method. 

   Answer (B) is incorrect because 
   disclosures should include the method 
   of determining inventory cost. 

   Answer (C) is incorrect because 
   disclosures should include the use of 
   the LCM method, classifications based 
   on any changes in determining inventory 
   cost. 

   Answer (D) is correct. ARB 43 states 
   the required disclosures regarding 
   inventories: the basis of stating 
   inventories (e.g., lower of cost or 
   market) and, if a significant change is 
   made, the nature of the change and the 
   effect on income; any goods stated 
   above cost; and accrued net losses on 
   firm purchase commitments. Moreover, 
   APB 22 states that disclosures required 
   regarding accounting policies include 
   those relating to inventory pricing and 
   composition (classification) of 
   inventories. 


[367] Source: CMA 1293 2-1 

   Answer (A) is incorrect because 
   current market value is not used for 
   receivables. It is difficult to determine 
   and often is not relevant given that a 
   company has no immediate plans to 
   market its receivables. 

   Answer (B) is correct. The 
   measurement attribute for accounts 
   receivable is net realizable value. Thus, 
   receivables are reported at their gross 
   value minus an allowance for 
   uncollectible accounts. 

   Answer (C) is incorrect because the 
   original cost of receivables must be 
   adjusted for possible uncollectible 
   accounts. 

   Answer (D) is incorrect because the 
   amount payable, in total, must be 
   reduced by an allowance for 
   uncollectible accounts. 


[368] Source: CMA 1293 2-2 

   Answer (A) is incorrect because the 
   cost must be reduced by the expired or 
   used portion of the prepaid asset. 

   Answer (B) is incorrect because 
   prepaid expenses will not be collected 
   at maturity. 

   Answer (C) is incorrect because 
   prepaid expenses are not depreciated, 
   they expire. 

   Answer (D) is correct. Prepaid 
   expenses, such as supplies, prepaid 
   rent, and prepaid insurance, are 
   reported on the balance sheet at cost 
   minus the expired or used portion. 
   These are typically current assets. 


[369] Source: CMA 1293 2-6 

   Answer (A) is incorrect because 
   $36,464 is based on the 
   double-declining-balance method but 
   with salvage value deducted from the 
   initial depreciable base. 

   Answer (B) is correct. The straight-line 
   method allocates the depreciation 
   evenly over the estimated useful life of 
   an asset. The depreciable cost equals 
   cost minus salvage value for each asset, 
   and dividing that amount by the life of 
   the asset gives the periodic 
   depreciation as follows:

   Asset     Cost     Salvage      C - S    Life     Expense
   -----   --------   -------    --------   ----     -------
   Forge   $120,000   $10,000    $110,000      5     $22,000
   Grind     45,000     5,000      40,000      5       8,000
   Lathe     60,000     7,000      53,000      5      10,600
                                                     -------
     Total                                           $40,600
                                                     =======

   Answer (C) is incorrect because 
   $40,848 is based on the 
   double-declining-balance method. 

   Answer (D) is incorrect because 
   $45,000 fails to consider the deduction 
   for salvage value. 


[370] Source: CMA 1293 2-7 

   Answer (A) is incorrect because 
   $36,464 is based on the 
   double-declining-balance method but 
   with salvage value deducted from the 
   initial depreciable base. 

   Answer (B) is incorrect because 
   $40,334 is based on the 
   sum-of-the-years'-digits method. 

   Answer (C) is correct. The DDB 
   method allocates a series of decreasing 
   depreciation charges over an asset's 
   life. A percentage that is double the 
   straight-line rate is multiplied each year 
   times an asset's remaining book value at 
   the beginning of the year. Given that 
   each asset has a 5-year life, the 
   straight-line rate is 20%. The DDB rate 
   is therefore 40%. The forge was 
   purchased in Year 1 at a total cost of 
   $120,000. The depreciation for each 
   year is calculated as follows:

    Year      Book Value      %       Expense
   ------     ----------     ---      -------
   Year 1     $120,000       40%      $48,000
   Year 2      72,000        40%       28,800
   Year 3      43,200        40%       17,280
   Year 4      25,920        40%       10,368
   For the grinding machine, the calculations are:
    Year      Book Value      %       Expense
   ------     ----------     ---      -------
   Year 2      $45,000       40%      $18,000
   Year 3       27,000       40%       10,800
   Year 4       16,200       40%        6,480
   The Year 4 calculation for the new 
   lathe requires multiplying the $60,000 
   cost times 40% to yield a $24,000 
   expense. Adding the Year 4 expense for 
   each of the three machines ($10,368 + 
   $6,480 + $24,000) produces total 
   depreciation of $40,848. 

   Answer (D) is incorrect because 
   $45,000 is based on the straight-line 
   method, but ignores salvage value. 


[371] Source: CMA 1293 2-8 

   Answer (A) is incorrect because 
   $36,464 is based on the 
   double-declining-balance method but 
   with salvage value deducted from the 
   initial depreciable base. 

   Answer (B) is correct. The SYD 
   method is an accelerated depreciation 
   method that gives results somewhat 
   similar to those of the declining-balance 
   methods. The depreciation base (cost - 
   salvage value) is allocated based on a 
   fraction. The numerator of the fraction 
   equals the years remaining in the asset's 
   life. The denominator is the sum of all 
   of the years in the asset's life. For an 
   asset with a 5-year life, the denominator 
   is 15 (5 + 4 + 3 + 2 + 1). For the first 
   year, the numerator is five, for the 
   second year the numerator is four, etc. 
   The calculations for year 4 are:

   Asset     Cost     Salvage     C - S   Fraction    Expense
   -----   --------   -------   --------  --------    -------
   Forge   $120,000   $10,000   $110,000      2/15    $14,667
   Grind     45,000     5,000     40,000      3/15      8,000
   Lathe     60,000     7,000     53,000      5/15     17,667
                                                      -------
     Total                                            $40,334
                                                      =======

   Answer (C) is incorrect because 
   $40,600 is based on the straight-line 
   method. 

   Answer (D) is incorrect because 
   $40,848 is based on the 
   double-declining balance method. 


[372] Source: CMA 1293 2-9 

   Answer (A) is incorrect because 
   $9,000 is the expense for only 4 months. 

   Answer (B) is incorrect because, if the 
   initial payment is debited to a real 
   account, the adjustment requires a debit 
   to a nominal account and a credit to the 
   real account. 

   Answer (C) is incorrect because 
   $72,000 is the ending balance in 
   prepaid insurance. 

   Answer (D) is correct. The $57,600 
   premium paid 3 years ago would have 
   been at the rate of $1,600 per month 
   ($57,600  36 months). On January 1, 
   Year 1, the prepaid insurance account 
   would have had a balance of $12,800 
   ($1,600 x 8 months). On September 1, 
   the prepaid insurance account would 
   have been debited for an additional 
   $81,000 covering the next 36 months at 
   a monthly rate of $2,250 ($81,000  36 
   months). The expense for Year 1 is 
   therefore $21,800 [$12,800 + (4 x 
   $2,250)]. The adjusting entry is to debit 
   insurance expense and credit prepaid 
   insurance for $21,800. 


[373] Source: CPA 0595 F-9 

   Answer (A) is correct. The beginning 
   balance in the allowance account is 
   $260,000, write-offs equal $325,000, 
   and bad debt expense is $180,000 
   ($9,000,000 x .02). Thus, the ending 
   balance in the allowance account is 
   $115,000.

                      Allowance
    -----------------------------------------------
    Write-offs  $325,000 |$260,000 1/1/00
                         | 180,000 Bad debt expense
    -----------------------------------------------
                         |$115,000 12/31/00
                          ========

   Answer (B) is incorrect because 
   $180,000 equals the bad debt expense 
   ($9,000,000 x .02). 

   Answer (C) is incorrect because 
   $245,000 results from debiting 
   $180,000 instead of crediting the 
   allowance account for that amount. 

   Answer (D) is incorrect because 
   $440,000 ignores the write-offs. 


[374] Source: CPA 0593 I-51 

   Answer (A) is incorrect because 
   $23,000 assumes that $20,000 is the 
   required ending balance in the 
   allowance account (expense = 
   write-offs + the change in the 
   allowance). 

   Answer (B) is correct. When bad debt 
   expense is estimated on the basis of net 
   credit sales, a cost (bad debt expense) 
   is being directly associated with a 
   revenue of the period (net credit sales). 
   Thus, uncollectible accounts expense is 
   $20,000 (2% x $1,000,000 credit 
   sales). 

   Answer (C) is incorrect because 
   $18,000 equals the write-offs for 2000. 

   Answer (D) is incorrect because 
   $17,000 is the ending balance in the 
   allowance account. 


[375] Source: CPA 0588 I-51 

   Answer (A) is incorrect because 
   $51,000 equals 2% of credit sales plus 
   the balance of the allowance account, 
   and $45,000 equals 5% of gross 
   accounts receivable. 

   Answer (B) is incorrect because 
   $51,000 equals 2% of credit sales plus 
   the balance of the allowance account. 

   Answer (C) is incorrect because 
   $45,000 equals 5% of gross accounts 
   receivable. 

   Answer (D) is correct. Doubtful 
   accounts expense is estimated in two 
   ways. The first, which emphasizes asset 
   valuation, is based on an aging of the 
   receivables to determine the balance in 
   the allowance for uncollectible 
   accounts. Bad debt expense is the 
   amount necessary to adjust the 
   allowance account to this estimated 
   balance. The second, which emphasizes 
   income measurement, recognizes bad 
   debt expense as a percentage of sales. 
   The corresponding credit is to the 
   allowance for uncollectible accounts. 
   Under the first method, if doubtful 
   accounts are estimated to be 5% of 
   gross accounts receivable, the 
   allowance account should have a 
   balance of $45,000 (5% x $900,000), 
   and the entry is to debit doubtful 
   accounts expense and credit the 
   allowance for $29,000 ($45,000 - 
   $16,000 existing balance). Under the 
   second method, bad debt expense is 
   $35,000 (2% x $1,750,000). 


[376] Source: CMA 0684 3-14 

   Answer (A) is incorrect because the 
   firm's activities are viewed as a 
   continual series of transactions. 

   Answer (B) is incorrect because the 
   firm's activities are viewed as a 
   continual series of transactions. 

   Answer (C) is incorrect because the 
   firm's activities are viewed as a 
   continual series of transactions. 

   Answer (D) is correct. When specific 
   inventory is clearly identified from the 
   time of purchase through the time of 
   sale and is costed on that basis, the 
   firm's operations may be viewed as a 
   series of separate ventures or 
   transactions. Much business activity, 
   however, involves goods whose 
   identity is lost between the time of 
   acquisition and the time of sale. 
   Moreover, if items of inventory are 
   interchangeable, the use of specific 
   identification may not result in the most 
   useful financial information. For these 
   reasons, other inventory cost flow 
   assumptions essentially view the 
   operations of a firm as a continual 
   series of transactions. 


[377] Source: CMA 1284 4-7 

   Answer (A) is incorrect because 
   $8,750 represents the insurance expense 
   for August-December (5 months x 
   $1,750). The $7,000 for the first 7 
   months must be included. Also, the 
   entry should be a debit to insurance 
   expense and a credit to prepaid 
   insurance. 

   Answer (B) is incorrect because 
   $54,250 is the balance in prepaid 
   insurance after the $8,750 (5 months x 
   $1,750) has been credited. 

   Answer (C) is correct. The insurance 
   policy that expired on July 31 initially 
   cost $36,000. This $36,000 should be 
   allocated on a systematic and rational 
   basis over the 3-year period covered by 
   the policy, i.e., $1,000 a month 
   ($36,000  36). Similarly, the renewal 
   policy cost of $63,000 should be 
   allocated over 36 months, or $1,750 per 
   month ($63,000  36). Insurance 
   expense for the year was $7,000 (7 
   months x $1,000) plus $8,750 (5 months 
   x $1,750), or $15,750. Since prepaid 
   insurance is debited when an insurance 
   policy is purchased or renewed, the 
   journal entry to record the $15,750 total 
   expense would require a debit to 
   insurance expense and a credit to 
   prepaid insurance, both in the amount of 
   $15,750. 

   Answer (D) is incorrect because the 
   entry should be a debit to insurance 
   expense and a credit to prepaid 
   insurance. 


[378] Source: CMA 1286 4-13 

   Answer (A) is incorrect because the 
   cost should be amortized over the useful 
   life of 8 years. 

   Answer (B) is incorrect because an 
   intangible asset acquired from another 
   enterprise or individual should be 
   recorded as an asset and amortized over 
   its useful life. 

   Answer (C) is incorrect because the 
   cost should be amortized over the useful 
   life of the recipes. 

   Answer (D) is correct. APB 17 states 
   that an intangible asset acquired from 
   another enterprise or individual should 
   be recorded as an asset regardless of 
   whether it has a determinate life, is 
   specifically identifiable, or is inherent 
   in a continuing business. Goodwill and 
   other intangible assets acquired by 
   purchase are thus recorded as assets. 
   Intangibles acquired singly should be 
   recorded at their cost of acquisition per 
   APB 17. Cost may be measured by the 
   amount of cash disbursed, the fair value 
   of other assets distributed, the present 
   value of amounts to be paid for 
   liabilities incurred, or the fair value of 
   the consideration received for stock 
   issued as described in APB 16, 
   Business Combinations. An intangible 
   asset should be amortized over its 
   useful economic life, but in no case 
   more than 40 years. Since the recipe is 
   only expected to provide economic 
   benefits for 8 years, that period should 
   be used for amortization purposes. 


[379] Source: CMA 1287 4-14 

   Answer (A) is incorrect because the 
   cost of goods sold using periodic LIFO 
   is $1,292. The ending inventory is $468 
   [(150 x $2) + (80 x $2.10)]. Cost of 
   goods sold is therefore $1,292 ($1,760 
   goods available - $468 ending 
   inventory). 

   Answer (B) is incorrect because the 
   cost of goods sold using periodic LIFO 
   is $1,292. The ending inventory is $468 
   [(150 x $2) + (80 x $2.10)]. Cost of 
   goods sold is therefore $1,292 ($1,760 
   goods available - $468 ending 
   inventory). 

   Answer (C) is incorrect because the 
   cost of goods sold using periodic LIFO 
   is $1,292. The ending inventory is $468 
   [(150 x $2) + (80 x $2.10)]. Cost of 
   goods sold is therefore $1,292 ($1,760 
   goods available - $468 ending 
   inventory). 

   Answer (D) is correct. The cost of the 
   goods available for sale consists of the 
   beginning inventory plus all purchases:

                               Unit        Total
                    Units      Cost        Cost
                    -----     -----       ------
   BI                150   x  $2.00  =    $  300
   Purchases:        200   x   2.10  =       420
                     200   x   2.20  =       440
                     250   x   2.40  =       600
                     ---                  ------
   Goods Available:  800                  $1,760
                     ===                  ======
   Since 570 units were sold, the ending 
   inventory must have been 230 units 
   (800 - 570). Under periodic LIFO, the 
   ending inventory is assumed to consist 
   of the earliest acquired 230 units with a 
   value of $468 [(150 x $2) + (80 x 
   $2.10)]. Cost of goods sold is therefore 
   $1,292 ($1,760 goods available - $468 
   EI). 


[380] Source: CMA 1287 4-15 

   Answer (A) is incorrect because $468 
   is the ending inventory using periodic 
   LIFO pricing. 

   Answer (B) is incorrect because using 
   the perpetual LIFO pricing, the 
   inventory is valued at $523. 

   Answer (C) is correct. The ending 
   inventory under perpetual LIFO will 
   differ from that computed under 
   periodic LIFO. The perpetual method 
   recomputes the inventory after every 
   purchase or sale instead of at year-end. 
   Thus, LIFO perpetual reflects the 
   reductions during the year in the base 
   layers.

                        Unit    Total
             Units      Cost     Cost
   BI         150   x  $2.00  =  $300
   Sale      (100)  x   2.00  =  (200)
             -------------------------
               50   x  $2.00  =  $100
   Purchase   200   x  $2.10  =   420
   Sale      (150)  x   2.10  =  (315)
             -------------------------
              100                $205     (50 x $2) +
                                          (50 x $2.10)
   Purchase   200   x  $2.20  =   440
   Sale      (200)  x   2.20
   Sale      ( 20)  x   2.10  =  (482)
             -------------------------
               80                $163     (50 x $2) +
                                          (30 x $2.10)
   Purchase   250   x  $2.40  =   600
   Sale      (100)  x   2.40  =  (240)
             -------------------------
              230             =  $523   (50 x $2) +
              ===                ====   (30 x $2.10) +
                                        (150 x $2.40)

   Answer (D) is incorrect because $552 
   results from using FIFO instead of 
   LIFO. 


[381] Source: CMA 1287 4-17 

   Answer (A) is incorrect because $2.10 
   is the unit cost of the purchase on 
   November 6. 

   Answer (B) is incorrect because $2.08 
   is the unit cost after the purchase on 
   November 6. 

   Answer (C) is correct. Under the 
   moving average method, the average 
   cost per unit must be recomputed after 
   each purchase. The inventory is 
   therefore costed at $2.16 per unit just 
   prior to the November 16 sale.

   BI           150  x  $2.00  =  $300
   Sale        (100) x   2.00  =  (200)
               --------------     -----
                 50  x  $2.00  =   100
   Purchase     200  x   2.10  =   420
               --------------     -----
                250  x  $2.08      520
                ($520  250 units = $2.08)
   Sale        (150) x   2.08  =  (312)
               --------------     -----
                100  x  $2.08  =   208
   Purchase     200  x   2.20  =   440
               --------------     -----
                300  x  $2.16  =  $648
                                  =====
                ($648  300 units = $2.16)

   Answer (D) is incorrect because $2.20 
   is the unit cost of the purchase on 
   November 10. 


[382] Source: CMA 1287 4-18 

   Answer (A) is correct. The cost of 
   goods available for sale is $1,760, and 
   the average unit cost is $2.20 ($1,760  
   800 units). The unit gross profit is 
   $1.30 ($3.50 sales price - $2.20 cost), 
   so total gross profit is $741 ($1.30 x 
   570 unit sales). 

   Answer (B) is incorrect because the 
   gross profit is $741. The cost of goods 
   available for sale is $1,760 and the 
   average unit cost is $2.20 ($1,760  
   800). The unit gross profit is $1.30 
   ($3.50 - $2.20), so total gross profit is 
   $741 ($1.30 x 570 unit sales). 

   Answer (C) is incorrect because the 
   gross profit is $741. The cost of goods 
   available for sale is $1,760 and the 
   average unit cost is $2.20 ($1,760  
   800). The unit gross profit is $1.30 
   ($3.50 - $2.20), so total gross profit is 
   $741 ($1.30 x 570 unit sales). 

   Answer (D) is incorrect because the 
   gross profit is $741. The cost of goods 
   available for sale is $1,760 and the 
   average unit cost is $2.20 ($1,760  
   800). The unit gross profit is $1.30 
   ($3.50 - $2.20), so total gross profit is 
   $741 ($1.30 x 570 unit sales). 




[384] Source: CMA 1287 4-22 

   Answer (A) is incorrect because Year 1 
   book depreciation under the 
   units-of-production method is 
   calculated as follows: the unit cost is 
   $.675 [($300,000 - $30,000)  400,000 
   life in units]. For Year 1, depreciation 
   is $22,950 (34,000 units x $.675). 

   Answer (B) is incorrect because Year 1 
   book depreciation under the 
   units-of-production method is 
   calculated as follows: the unit cost is 
   $.675 [($300,000 - $30,000)  400,000 
   life in units]. For Year 1, depreciation 
   is $22,950 (34,000 units x $.675). 

   Answer (C) is incorrect because Year 1 
   book depreciation under the 
   units-of-production method is 
   calculated as follows: the unit cost is 
   $.675 [($300,000 - $30,000)  400,000 
   life in units]. For Year 1, depreciation 
   is $22,950 (34,000 units x $.675). 

   Answer (D) is correct. Under the 
   units-of-production method, 
   depreciation is computed per unit 
   produced. Hence, the unit cost is $.675 
   [($300,000 - $30,000) cost minus 
   salvage  400,000 life in units]. For 
   Year 1, depreciation is therefore 
   $22,950 (34,000 units x $.675). No 
   adjustment is needed for use for part of 
   a year because the life is not stated in 
   years. 


[385] Source: CMA 1287 4-23 

   Answer (A) is incorrect because in a 
   like-kind exchange, no gain is to be 
   recognized unless boot is received. The 
   party giving boot does not recognize 
   any gain. 

   Answer (B) is incorrect because the 
   transaction resulted in a gain ($280,000 
   - $120,000 acc. dep. = $160,000). 
   However, the party giving boot in a 
   like-kind exchange does not recognize a 
   gain. 

   Answer (C) is incorrect because the 
   transaction resulted in a gain ($280,000 
   - $120,000 acc. dep. = $160,000). 
   However, the party giving boot in a 
   like-kind exchange does not recognize a 
   gain. 

   Answer (D) is correct. The transaction 
   resulted in a gain because the trade-in 
   allowance ($180,000) exceeded the 
   book value ($280,000 - $120,000 acc. 
   dep. = $160,000) of the asset given up. 
   Under APB 29, however, gains are not 
   to be recognized in a like-kind exchange 
   unless boot is received. A nonmonetary 
   exchange of similar inventory or 
   productive assets should be recorded at 
   the book values of the assets transferred 
   because the transaction does not 
   culminate an earning process. If 
   monetary consideration (boot) is given, 
   the recipient must recognize a partial 
   gain up to the amount of boot received 
   in the transaction. The party who gave 
   boot should not recognize any gain but 
   should record the asset received at the 
   sum of the boot ($500,000 fair value - 
   $180,000 trade-in allowance = 
   $320,000) plus the book value of the 
   nonmonetary asset transferred 
   ($160,000) or $480,000. 


[386] Source: CMA 1288 4-13 

   Answer (A) is incorrect because 
   $56,000 is calculated by adding 1% of 
   sales, $42,000, to the debit balance of 
   $14,000. 

   Answer (B) is correct. The aging 
   method of estimating bad debts is a 
   balance-sheet-oriented approach. The 
   objective of the adjusting entry is to 
   establish a balance in the allowance 
   account that is sufficiently large to 
   absorb any future bad debt write-offs. 
   The aging method determines the 
   balance in the account following the 
   entry. This balance should be

   Under 60 days             $730,000  x    1% =   $ 7,300
   61-90 days                  40,000  x    6% =     2,400
   91-120 days                 18,000  x    9% =     1,620
   Over 120 days               72,000  x   25% =    18,000
                                                   -------
   Total bad debts expected                        $29,320
                                                   =======
   Since bad debts of $29,320 are 
   expected, the journal entry should result 
   in a credit balance equal to that amount. 
   The amount of the entry is therefore 
   dependent on the existing balance. 
   Given a $14,000 debit balance, the 
   amount of the debit to bad debt expense 
   and the credit to the allowance account 
   will be $43,320 ($29,320 + $14,000). 

   Answer (C) is incorrect because 
   $29,320 does not take into account the 
   $14,000 debit balance already in the 
   allowance account. 

   Answer (D) is incorrect because 
   $15,320 is calculated by subtracting the 
   $14,000 debit from the $29,320 balance 
   in the allowance for uncollectible 
   accounts. 


[387] Source: CMA 1288 4-14 

   Answer (A) is incorrect because 
   $56,000 is the sum of the expected bad 
   debts and the $14,000 debit balance 
   ($42,000 + $14,000) instead of the 
   difference. 

   Answer (B) is incorrect because 
   $29,320 is the balance in the allowance 
   account under the aging method. 

   Answer (C) is incorrect because 
   $42,000 is the expected bad debt (1% x 
   $4,200,000). The $14,000 debit 
   balance needs to be subtracted. 

   Answer (D) is correct. The 
   percentage-of-sales method is an 
   income-statement-oriented approach. 
   The objective is to record an expense 
   based on the sales of the current year. 
   The amount computed will be the 
   amount of the journal entry. This method 
   results in expected bad debts of 
   $42,000 (1% x $4,200,000 sales). 
   Since the allowance account already 
   has a debit balance of $14,000, the 
   balance after the entry will be $28,000 
   ($42,000 credit - $14,000 debit). 


[388] Source: CMA 1288 4-29 

   Answer (A) is incorrect because 
   $51,000 is the sum of the receivables 
   written off of $34,500 and the adjusting 
   entry of $16,500. The $34,500 written 
   off decreased receivables and 
   increased the contra asset. Thus, 
   working capital was not affected by that 
   amount. 

   Answer (B) is incorrect because the 
   $34,500 written off decreased 
   receivables and increased the contra 
   asset. Thus, working capital was not 
   affected by the write-offs. 

   Answer (C) is incorrect because the 
   adjusting entry consisted of a debit to 
   expense and a credit to a contra asset, 
   thereby reducing net current assets. 
   Given that no offsetting decrease in 
   current liabilities occurred, working 
   capital was decreased by $16,500. 

   Answer (D) is correct. Working capital 
   is defined as current assets minus 
   current liabilities. Writing off 
   receivables against the allowance 
   account has no effect on working 
   capital. By establishing an allowance 
   (contra asset account), the company had 
   already provided for the uncollectible 
   accounts. Hence, net assets had already 
   been reduced in a previous year when 
   the allowance was established. 
   Debiting the allowance account and 
   crediting a receivable at the time of the 
   write-off have no effect on net assets. 
   The year-end journal entry required a 
   debit to an expense account and a credit 
   to a contra-asset account. Its effect was 
   to increase the allowance by $16,500 
   and to decrease net current assets. Since 
   no offsetting decrease in current 
   liabilities or increase in current assets 
   occurred, the net change in working 
   capital was a decrease of $16,500. 


[389] Source: CMA 0689 3-7 

   Answer (A) is correct. APB 29, 
   Accounting for Nonmonetary 
   Transactions, requires that an enterprise 
   recognize losses but not gains on 
   like-kind exchanges unless boot (cash) 
   is received. The justification for this 
   conservative view is that the exchange 
   of similar nonmonetary assets is not the 
   culmination of an earning process. 
   Harper's used machine has a book value 
   of $64,000 ($162,500 cost - $98,500 
   accumulated depreciation). The book 
   value surrendered is thus $79,000 
   ($64,000 + $15,000 cash). The 
   transaction is valued at the fair value of 
   the consideration given ($80,000 + 
   $15,000 = $95,000), a gain of $16,000 
   ($95,000 - $79,000). But gains may not 
   be recognized on a like-kind exchange 
   under APB 29 if boot is not received. 
   The result for financial reporting 
   purposes is a zero gain. 

   Answer (B) is incorrect because no 
   gain is recognized. 

   Answer (C) is incorrect because no 
   gain is recognized. 

   Answer (D) is incorrect because no 
   gain is recognized. 


[390] Source: CMA 0689 3-8 

   Answer (A) is incorrect because the 
   gain is $4,000. 

   Answer (B) is correct. In a like-kind 
   exchange a portion of gains is recorded 
   when boot (monetary assets) is 
   received in the transaction, but the gain 
   recognized cannot exceed the amount of 
   boot received. The gain is recognized in 
   the same proportion that the cash 
   received bears to the total consideration 
   received.

   Harper's used machine has a book value 
   of $64,000, and the fair value of the 
   consideration received is $80,000 
   ($60,000 machine + $20,000 cash). 
   Consequently, Harper's gain is $16,000 
   ($80,000 - $64,000). Of the total 
   consideration, cash (boot) is 25% 
   ($20,000  $80,000). Thus, 25% of the 
   gain is recognized because Harper has 
   realized gain on the transaction to the 
   extent that the cash received exceeds a 
   proportionate share of the book value of 
   the asset given up. The recognizable 
   gain is $4,000 (25% x $16,000 total 
   gain). 

   Answer (C) is incorrect because the 
   gain is $4,000. 

   Answer (D) is incorrect because the 
   gain is $4,000. 


[391] Source: CMA 0689 3-10 

   Answer (A) is incorrect because 
   Austin's machine has a book value of 
   $110,000. Austin will receive $15,000 
   cash plus Harper's machine with a fair 
   value of $80,000. Therefore, Austin 
   will incur a $15,000 loss ($110,000 - 
   $95,000). Losses can be recognized in 
   full under APB 29. 

   Answer (B) is incorrect because 
   Austin's machine has a book value of 
   $110,000. Austin will receive $15,000 
   cash plus Harper's machine with a fair 
   value of $80,000. Therefore, Austin 
   will incur a $15,000 loss ($110,000 - 
   $95,000). Losses can be recognized in 
   full under APB 29. 

   Answer (C) is correct. Austin's machine 
   has a book value of $110,000 
   ($180,000 - $70,000). In return for this 
   $110,000 machine, Austin will receive 
   $15,000 in cash plus Harper's machine, 
   which has a fair value of $80,000, for a 
   total of $95,000. Consequently, Austin 
   will incur a $15,000 loss ($110,000 - 
   $95,000). Losses can be recognized in 
   full under APB 29 whether or not boot 
   is transferred. Hence, the full amount of 
   the loss will be recognized. 

   Answer (D) is incorrect because 
   Austin's machine has a book value of 
   $110,000. Austin will receive $15,000 
   cash plus Harper's machine with a fair 
   value of $80,000. Therefore, Austin 
   will incur a $15,000 loss ($110,000 - 
   $95,000). Losses can be recognized in 
   full under APB 29. 


[392] Source: CMA 0690 4-28 

   Answer (A) is incorrect because the 
   appropriate percentage for the 
   double-declining-balance is 40%. The 
   second year's depreciation is $4,800 
   [40% x ($20,000 - $8,000 first year's 
   depreciation)]. 

   Answer (B) is correct. The appropriate 
   percentage is 40% (double the 
   straight-line rate of 20% for a 5-year 
   life). Thus, depreciation for the first 
   year is $8,000 (40% x $20,000). For 
   the second year, depreciation is $4,800 
   [40% x ($20,000 - $8,000)]. 

   Answer (C) is incorrect because the 
   appropriate percentage for the 
   double-declining-balance is 40%. The 
   second year's depreciation is $4,800 
   [40% x ($20,000 - $8,000 first year's 
   depreciation)]. 

   Answer (D) is incorrect because the 
   appropriate percentage for the 
   double-declining-balance is 40%. The 
   second year's depreciation is $4,800 
   [40% x ($20,000 - $8,000 first year's 
   depreciation)]. 


[393] Source: CMA 0690 4-29 

   Answer (A) is correct. The SYD 
   method applies a declining percentage 
   to a fixed depreciable base (cost - 
   salvage value). The denominator of the 
   SYD fraction is the 
   sum-of-the-years'-digits for the life of 
   the car. Given a 3-year life, the total is 
   6 (3 + 2 + 1). The numerator of the 
   fraction is the number of years 
   remaining. The third year's fraction is 
   thus 1  6, and depreciation expense is 
   $700 [(1  6) x ($4,800 cost - $600 
   salvage)]. 

   Answer (B) is incorrect because the 
   denominator of the SYD fraction is the 
   sum-of-the-years'-digits for the life of 
   the car which equals 6 (3 + 2 + 1). The 
   numerator is the number of years 
   remaining. The third year's fraction is 1 
    6, so depreciation expense is $700 
   [(1  6) x ($4,800 cost - $600 
   salvage)]. 

   Answer (C) is incorrect because the 
   denominator of the SYD fraction is the 
   sum-of-the-years'-digits for the life of 
   the car which equals 6 (3 + 2 + 1). The 
   numerator is the number of years 
   remaining. The third year's fraction is 1 
    6, so depreciation expense is $700 
   [(1  6) x ($4,800 cost - $600 
   salvage)]. 

   Answer (D) is incorrect because the 
   denominator of the SYD fraction is the 
   sum-of-the-years'-digits for the life of 
   the car which equals 6 (3 + 2 + 1). The 
   numerator is the number of years 
   remaining. The third year's fraction is 1 
    6, so depreciation expense is $700 
   [(1  6) x ($4,800 cost - $600 
   salvage)]. 


[394] Source: CMA 0691 2-1 

   Answer (A) is incorrect because total 
   inventory is $3,770. 

   Answer (B) is incorrect because total 
   inventory is $3,770. 

   Answer (C) is incorrect because total 
   inventory is $3,770. 

   Answer (D) is correct. Under FIFO, the 
   ending inventory will be the same 
   whether a perpetual or periodic system 
   is used. Thus, in either case, the number 
   of units in ending inventory is costed at 
   the price of the most recently acquired 
   inventory. If 4,700 units were available 
   during the period (1,400 + 1,800 + 
   1,500) and 3,400 units (2,000 + 1,400) 
   were sold, ending inventory included 
   1,300 units. The most recent acquisition 
   consisted of 1,500 units purchased on 
   May 20 at $2.90 each. Consequently, 
   total inventory is $3,770 (1,300 x 
   $2.90). 


[395] Source: CMA 0691 2-2 

   Answer (A) is correct. The ending 
   inventory contains 1,300 units (1,400 
   units beginning inventory + 3,300 units 
   purchased - 3,400 units sold). Under a 
   periodic LIFO system, the ending 
   inventory is valued at the cost of the 
   earliest purchases without regard to any 
   temporary liquidation of LIFO layers 
   during the period. The earliest units 
   purchased were included in the 
   beginning inventory of 1,400 units at 
   $2.45 each. The total inventory value is 
   therefore $3,185 (1,300 units x $2.45). 

   Answer (B) is incorrect because total 
   inventory value is $3,185. 

   Answer (C) is incorrect because total 
   inventory value is $3,185. 

   Answer (D) is incorrect because total 
   inventory value is $3,185. 


[396] Source: CMA 0691 2-3 

   Answer (A) is incorrect because ending 
   inventory is $3,230. 

   Answer (B) is correct. Perpetual LIFO 
   normally provides a result different 
   from periodic LIFO because it gives 
   effect to LIFO liquidations during the 
   period. The May 16 sale of 2,000 units 
   consisted of the most recent (May 7) 
   purchase of 1,800 units, plus 200 of 
   those from the beginning inventory. 
   Thus, the May 7 layer was wholly 
   liquidated and beginning inventory was 
   partially liquidated. Following the May 
   16 sale, the inventory consisted of 
   1,200 units at $2.45 each. The 1,400 
   units sold on May 28 are deemed to 
   have come from the 1,500 units 
   purchased on May 20 (the most recent 
   purchase). Accordingly, the 1,300 units 
   in ending inventory also include 100 
   units from the May 20 purchase at $2.90 
   each. Ending inventory is therefore 
   $3,230 [(1,200 x $2.45) + (100 x 
   $2.90)]. 

   Answer (C) is incorrect because ending 
   inventory is $3,230. 

   Answer (D) is incorrect because ending 
   inventory is $3,230. 


[397] Source: CMA 1291 2-2 

   Answer (A) is incorrect because SFAS 
   34 specifically does not apply to assets 
   in use or ready for their intended use in 
   the earning activities of the enterprise. 

   Answer (B) is correct. In accordance 
   with SFAS 34, interest should be 
   capitalized for two types of assets: 
   those constructed or otherwise 
   produced for an enterprise's own use, 
   including those constructed or produced 
   by others, and those intended for sale or 
   lease that are constructed or produced 
   as discrete products (e.g., ships). SFAS 
   58, Capitalization of Interest Cost in 
   Financial Statements That Include 
   Investments Accounted for by the Equity 
   Method, adds equity based investments 
   to the list of qualifying assets. The 
   investee must have activities in 
   progress necessary to commence its 
   planned principal operations and be 
   expending funds to obtain qualifying 
   assets for its operations. SFAS 34 does 
   not apply to products routinely 
   produced for inventory or assets in use 
   or ready for use. 

   Answer (C) is incorrect because SFAS 
   34 specifically does not apply to assets 
   not being used in the earning activities 
   of the enterprise and not undergoing the 
   activities necessary to get them ready 
   for use. 

   Answer (D) is incorrect because SFAS 
   34 specifically does not apply to assets 
   that are routinely produced but require 
   an extended period of time and are used 
   in the earning activities of the 
   enterprise. 


[398] Source: CMA 1291 2-23 

   Answer (A) is correct. The market 
   values on December 31, Year 1 are 
   irrelevant because the question does not 
   involve valuation of the entire portfolio. 
   Under SFAS 12, Accounting for Certain 
   Marketable Securities, the accounting 
   treatment of marketable securities 
   requires examining the total portfolio at 
   each balance sheet date. The recorded 
   amounts of individual stocks at a 
   balance sheet date are usually not 
   adjusted for temporary changes in 
   market values. The Pulp Corp. shares 
   were recorded at $20 per share 
   ($12,000  600 shares). Because the 
   stock was sold for $19 per share, the 
   realized loss per share was $1, and the 
   total realized loss was $100. This 
   amount should be included in the 
   determination of net income. 

   Answer (B) is incorrect because the 
   investment account should be reduced 
   by the $2,000 cost of the shares sold, 
   and a realized loss should be 
   recognized in the income statement. 

   Answer (C) is incorrect because the 
   investment account should be reduced 
   by the $2,000 cost of the shares sold, 
   and a realized loss should be 
   recognized in the income statement. 

   Answer (D) is incorrect because a 
   realized loss must be recognized. Also, 
   the unrealized loss account is unaffected 
   by transactions; it changes only as a 
   result of adjusting entries at the balance 
   sheet date. 


[399] Source: CMA 1291 2-24 

   Answer (A) is incorrect because an 
   unrealized loss is recognized on the 
   income statement for a loss on 
   marketable securities; a loss on a 
   long-term investment in stock is shown 
   as a separate item in the shareholders' 
   equity section. 

   Answer (B) is incorrect because the 
   aggregate unrealized loss in the 
   portfolio was only $900. 

   Answer (C) is incorrect because the 
   unrealized losses and gains are netted. 
   The rules of SFAS 12 apply to the 
   portfolio value as a whole, not 
   individual stocks. 

   Answer (D) is correct. The aggregate 
   market value of the current marketable 
   equity securities portfolio declined to 
   $49,700. Thus, the allowance account 
   must be credited in the amount of $900 
   ($50,600 recorded cost - $49,700) to 
   reduce the carrying value of the asset, 
   and an unrealized loss must be 
   recognized on the income statement. 


[400] Source: CIA 0594 IV-1 

   Answer (A) is incorrect because the 
   balance of accumulated depreciation is 
   higher in the tax basis financial 
   statements. 

   Answer (B) is correct. Because the tax 
   basis uses an accelerated method, 
   depreciation expense and accumulated 
   depreciation will be greater. Moreover, 
   taxable income will be lower than 
   financial net income. Consequently, tax 
   basis retained earnings will be less than 
   that in the general purpose financial 
   statements. 

   Answer (C) is incorrect because the 
   historical cost of fixed assets is 
   recorded in the gross fixed assets 
   account. This amount is unaffected by 
   depreciation. 

   Answer (D) is incorrect because the 
   accounts receivable balance is 
   unaffected by the depreciation method 
   used. 


[401] Source: CIA 0594 IV-2 

   Answer (A) is correct. Cost of goods 
   sold equals beginning inventory, plus 
   purchases, minus ending inventory. 
   Hence, cost of goods old is $440,000 
   ($140,000 + $530,000 - $230,000). 

   Answer (B) is incorrect because 
   $530,000 equals purchases. 

   Answer (C) is incorrect because 
   $620,000 is obtained by reversing the 
   opening and closing inventory figures. 

   Answer (D) is incorrect because 
   $670,000 omits closing inventory from 
   the calculation. 


[402] Source: CIA 0594 IV-5 

   Answer (A) is incorrect because 
   $800,000 uses the beginning balance of 
   inventory. 

   Answer (B) is correct. The year-end 
   total assets can be determined by 
   summing all of the assets and deducting 
   accumulated depreciation (including the 
   current year's depreciation). Total 
   accumulated depreciation at the end of 
   the second year is $120,000 [($600,000 
    10 years) x 2 years]. Total assets 
   equal $890,000 ($80,000 cash + 
   $100,000 A/R + $230,000 EI + 
   $600,000 gross fixed assets - $120,000 
   accumulated depreciation). 

   Answer (C) is incorrect because 
   $950,000 omits second-year 
   depreciation from the calculation. 

   Answer (D) is incorrect because 
   $1,010,000 omits total accumulated 
   depreciation from the calculation. 


[403] Source: CIA 0594 IV-3 

   Answer (A) is correct. The accounting 
   cycle can be summarized into nine 
   steps: record the period's transactions 
   in the appropriate journals, post to the 
   ledger(s) from the journals, prepare an 
   unadjusted trial balance, prepare and 
   post adjusting journal entries, prepare 
   an adjusted trial balance, prepare the 
   financial statements, prepare and post 
   the closing entries, take a post-closing 
   trial balance, and prepare reversing 
   entries (optional). 

   Answer (B) is incorrect because the 
   preparation of reversing entries is the 
   last step in the accounting cycle. 

   Answer (C) is incorrect because the 
   adjusted trial balance is prepared after 
   adjusting entries are made. 

   Answer (D) is incorrect because the 
   post-closing trial balance is prepared 
   after adjusting entries and the adjusted 
   trial balance are completed. 


[404] Source: CIA 0594 IV-4 

   Answer (A) is incorrect because the 
   debt has been outstanding for only 6 
   months so accrued interest is only 
   $50,000. 

   Answer (B) is incorrect because the 
   debt pays annual interest on July 1, and 
   no cash outlay is required at year-end. 

   Answer (C) is incorrect because 
   accrued interest is $50,000. Also, 
   interest expense and interest payable is 
   debited credit. 

   Answer (D) is correct. The debt was 
   issued on July 1 and has only been 
   outstanding for 6 months. Interest 
   expense equals the face amount of the 
   debt multiplied by the interest rate and 
   the fraction of the year ($1,000,000 x 
   10% x 6/12 = $50,000). Because 
   interest is payable on July 1, 6 months' 
   interest is accrued and expensed in the 
   current period. The payable is also 
   recognized in the current period. Thus, 
   the adjusting entry should be

        Interest expense                 $50,000
            Interest payable                          $50,000


[405] Source: CIA 0594 IV-6 

   Answer (A) is correct. Current period 
   pre-tax net income equals $280,000 
   ($750,000 sales - $200,000 CGS - 
   $60,000 depreciation - $10,000 interest 
   - $200,000 administrative expenses). 
   Thus, after-tax net income credited to 
   retained earnings equals $140,000 [(1.0 
   - .5) x $280,000]. 

   Answer (B) is incorrect because 
   income taxes are omitted and the 
   journal entry is reversed. 

   Answer (C) is incorrect because 
   administrative expenses were omitted. 

   Answer (D) is incorrect because 
   administrative expenses were omitted 
   and the journal entry is reversed. 


[406] Source: CIA 1192 IV-26 

   Answer (A) is incorrect because the 
   monetary unit assumption provides that 
   all transactions and events can be 
   measured in terms of a common 
   denominator, for instance, the dollar. 

   Answer (B) is incorrect because the 
   materiality assumption simply implies 
   that items of insignificant value can be 
   expensed rather than capitalized and 
   depreciated or amortized. 

   Answer (C) is correct. A basic feature 
   of financial accounting is that the 
   business entity is assumed to be a going 
   concern in the absence of evidence to 
   the contrary. The going concern concept 
   is based on the empirical observation 
   that many enterprises have an indefinite 
   life. The reporting entity is assumed to 
   have a life long enough to fulfill its 
   objectives and commitments and 
   therefore to depreciate wasting assets 
   over their useful lives. 

   Answer (D) is incorrect because the 
   revenue recognition principle 
   determines the period in which revenue 
   is recognized. 


[407] Source: CIA 1192 IV-37 

   Answer (A) is correct. According to 
   SFAC 6, "Gains are increases in equity 
   (net assets) from peripheral or 
   incidental transactions of an entity and 
   from all other transactions and other 
   events and circumstances affecting the 
   entity except those that result from 
   revenues or investments by owners." 
   Thus, the gain on the sale of an asset is 
   not an operating item and should be 
   classified in a multiple-step income 
   statement in the other revenues and 
   gains section. 

   Answer (B) is incorrect because the 
   asset sold was not stock in trade and the 
   sale of plant assets does not constitute 
   the entity's major or central operations, 
   so the proceeds should not be classified 
   as sales revenue. 

   Answer (C) is incorrect because the 
   transaction does not meet the criteria of 
   an extraordinary item (unusual in nature 
   and infrequent in occurrence in the 
   environment in which the entity 
   operates). 

   Answer (D) is incorrect because the 
   transaction is not a prior period 
   adjustment. It is not the correction of an 
   error in the financial statements of a 
   prior period. 


[408] Source: CIA 0594 IV-16 

   Answer (A) is correct. Because the 
   error occurred in the prior period's 
   physical count, only beginning inventory 
   is affected. Thus, cost of goods sold 
   (beginning inventory, plus purchases, 
   minus ending inventory) is overstated 
   because beginning inventory is 
   overstated. 

   Answer (B) is incorrect because an 
   inventory error does not affect net sales. 

   Answer (C) is incorrect because the 
   overstatement of beginning inventory 
   caused cost of goods sold to be 
   overstated. Thus, net income is 
   understated, not overstated. 

   Answer (D) is incorrect because the 
   overstatement of beginning inventory 
   caused cost of goods sold to be 
   overstated. Thus, retained earnings are 
   understated, not overstated. 


[409] Source: CPA 0593 II-9 

   Answer (A) is incorrect because 
   $2,000 equals the fair value of the 
   inventory acquired minus the book 
   value of the inventory transferred. 

   Answer (B) is incorrect because $1,000 
   equals the fair value of the inventory 
   acquired minus the book value of the 
   inventory transferred and the boot 
   given. However, no gain is recognized 
   because boot was given. 

   Answer (C) is correct. The exchange of 
   similar productive assets or similar 
   items of inventory is not the culmination 
   of an earning process and should be 
   recorded at the book value of the assets 
   given up. No gain is recognized unless 
   boot is received, but a loss is 
   recognized if the book value of the 
   assets given up exceeds the fair value of 
   the assets received regardless of 
   whether cash is involved. The book 
   value of the assets relinquished was 
   $21,000 ($20,000 + $1,000). Hence, no 
   gain or loss is recognized because (1) 
   boot was given, and (2) the fair value 
   received ($22,000) was greater than the 
   book value given up. 

   Answer (D) is incorrect because a 
   $1,000 loss assumes that the inventory 
   acquired is debited for the book value 
   of the inventory transferred. 


[410] Source: CIA 0591 IV-32 

   Answer (A) is incorrect because 
   interest receivable should be debited 
   and interest income credited. 

   Answer (B) is incorrect because 
   interest receivable should be debited 
   and interest income credited. 

   Answer (C) is incorrect because 
   interest receivable should be debited 
   and interest income credited. 

   Answer (D) is correct. Interest 
   receivable should be debited and 
   interest income credited for the interest 
   on the note accrued (earned but not 
   paid) at year-end [(10% x $120,000)  
   12 = $1,000]. 


[411] Source: CIA 0594 IV-29 

   Answer (A) is incorrect because the 
   lender has recourse against the 
   manufacturing firm under an assignment, 
   not under a factoring arrangement. 

   Answer (B) is incorrect because 
   assignment provides collateral for the 
   firm, whereas factoring provides direct 
   financing. 

   Answer (C) is incorrect because an 
   assignment involves no change in the 
   relationship between the firm and its 
   customers. 

   Answer (D) is correct. In a factoring 
   arrangement, the customers of the 
   manufacturing firm are notified that they 
   are to pay the factor directly to settle 
   their invoices. The assignment of 
   receivables does not affect the 
   relationship between the manufacturing 
   firm and its customers. Customers 
   continue to make payment to the 
   manufacturing firm. 


[412] Source: CIA 1191 IV-31 

   Answer (A) is correct. The entry to 
   record a writedown is a debit to 
   inventory over and short and a credit to 
   inventory. This amount is reported as an 
   adjustment of cost of goods sold or as 
   an other expense on the income 
   statement. 

   Answer (B) is incorrect because a 
   difference between a physical count and 
   a perpetual inventory balance is 
   common. Reasons include normal and 
   expected shrinkage, breakage, 
   shoplifting, and incorrect record 
   keeping. Thus, it is not an extraordinary 
   item. 

   Answer (C) is incorrect because a 
   difference between a physical count and 
   a perpetual inventory balance is 
   common. Reasons include normal and 
   expected shrinkage, breakage, 
   shoplifting, and incorrect record 
   keeping. Thus, it is not an extraordinary 
   item. 

   Answer (D) is incorrect because, 
   although the debit to cost of goods sold 
   is acceptable, the credit should be to 
   inventory. Also, any appropriation of 
   retained earnings would also have to 
   involve the unappropriated retained 
   earnings account. 


[413] Source: CIA 1190 IV-32 

   Answer (A) is correct. Temporary 
   investments are held temporarily in 
   place of cash and can be readily 
   converted into cash when needed. They 
   must be (1) readily marketable, and (2) 
   intended to be converted into cash as 
   needed within 1 year or the operating 
   cycle, whichever is longer. I and III 
   satisfy these two criteria. II does not. 

   Answer (B) is incorrect because the 
   T-bills mature in less than 1 year, and 
   the bonds are readily marketable and 
   intended to be used for current needs, 
   but the shares of stock are a long-term 
   investment. 

   Answer (C) is incorrect because the 
   T-bills mature in less than 1 year, and 
   the bonds are readily marketable and 
   intended to be used for current needs, 
   but the shares of stock are a long-term 
   investment. 

   Answer (D) is incorrect because the 
   T-bills mature in less than 1 year, and 
   the bonds are readily marketable and 
   intended to be used for current needs, 
   but the shares of stock are a long-term 
   investment. 


[414] Source: CIA 0594 IV-30 

   Answer (A) is incorrect because the 
   purchase price, freight costs, and 
   installation costs of a productive asset 
   are included in the asset's cost. 

   Answer (B) is correct. Under the 
   historical cost principle, the exchange 
   price established or cost incurred at the 
   time a transaction occurs is the basis for 
   initially recording assets and liabilities. 
   The historical cost of land includes the 
   cost of obtaining the land and readying 
   it for its intended use. Thus, it is 
   inappropriate to recognize such 
   proceeds immediately in income. They 
   should be treated as reductions in the 
   price of the land. 

   Answer (C) is incorrect because the 
   cost of improvements to equipment 
   should be capitalized if they improve 
   future service potential. 

   Answer (D) is incorrect because 
   special assessments are for permanent 
   improvements that are maintained by the 
   local government entity. Hence, they 
   should be charged to the land account. 


[415] Source: CIA 0594 IV-19 

   Answer (A) is incorrect because the 
   straight-line method results in a constant 
   depreciation expense. 

   Answer (B) is correct. Under the 
   activity method, depreciation is a 
   function of use, not the passage of time. 
   If the estimated activity level (stated, 
   for example, in units of production) is 
   higher in the later years of the asset's 
   useful life, depreciation expense will 
   be higher. 

   Answer (C) is incorrect because 
   depreciation expense diminishes over 
   time when an accelerated method, e.g., 
   SYD or declining balance method, is 
   used. 

   Answer (D) is incorrect because 
   weighted average is an inventory 
   valuation method. 


[416] Source: CIA 0594 IV-20 

   Answer (A) is incorrect because 
   straight-line depreciation expense is 
   $20,000. 

   Answer (B) is incorrect because the 
   units of production method results in 
   depreciation expense of $30,000. 

   Answer (C) is correct. SYD 
   depreciation is based on a constant 
   depreciable base equal to the original 
   cost minus the salvage value multiplied 
   by the SYD fraction. The SYD 
   fraction's numerator is the number of 
   years of remaining useful life of the 
   asset. The denominator is the sum of the 
   digits of the total years of the expected 
   useful life. Thus, first year SYD 
   depreciation is $33,333 [($100,000 - 
   $0) x (5 years  15)]. 

   Answer (D) is incorrect because 
   declining balance depreciation at a 
   30% (20% straight-line rate x 150%) 
   rate is $30,000. 


[417] Source: CIA 0594 IV-21 

   Answer (A) is incorrect because 
   depreciation must be taken up to the 
   date of disposition and all amounts 
   relating to the retired asset should be 
   eliminated. 

   Answer (B) is incorrect because the 
   gain should be recorded as a credit. 

   Answer (C) is incorrect because the 
   machinery account should be credited, 
   and accumulated depreciation should be 
   debited. 

   Answer (D) is correct. The journal 
   entry to record the sale of a plant asset 
   for cash in excess of its net book value 
   should debit the cash account to record 
   the sale proceeds received. 
   Accumulated depreciation should be 
   eliminated by debiting an amount equal 
   to depreciation accumulated up to the 
   start of the current accounting period 
   plus any depreciation that has 
   accumulated between the start of the 
   current period and the date of disposal. 
   Finally, the machinery account should 
   be credited to eliminate the original 
   cost of the asset. The gain should be 
   recorded as a credit-entry. 


[418] Source: CIA 0593 IV-30 

   Answer (A) is incorrect because the 
   salvage value is ignored in computing 
   depreciation by use of a 
   declining-balance method until the later 
   years of the life. The asset should not be 
   depreciated below its residual value. 

   Answer (B) is incorrect because the 
   salvage value is ignored. Furthermore, 
   the rate used should be twice the 
   straight-line rate. 

   Answer (C) is correct. When using a 
   declining-balance method, a constant 
   rate is applied to the changing carrying 
   value of the asset. The carrying value 
   for the first period's calculation is the 
   acquisition cost ($108,000). The 
   constant rate for the 
   double-declining-balance method is 
   twice the straight-line rate [(100%  4 
   years) x 2]. 

   Answer (D) is incorrect because the 
   rate used should be twice the 
   straight-line rate. 


[419] Source: CIA 0592 IV-37 

   Answer (A) is incorrect because 
   $40,000 is the amortization for the year. 

   Answer (B) is incorrect because 
   $60,000 is based on the full cost 
   method [(10,000  25,000) x ($100,000 
   + $50,000)]. 

   Answer (C) is correct. Under the 
   successful-efforts method, exploration 
   costs are capitalized and subsequently 
   amortized for the cost of finding 
   recoverable oil and gas. This method 
   expenses costs of unsuccessful efforts in 
   the year incurred. Under the full-cost 
   method, all of the costs of acquiring, 
   exploring, and developing oil and gas 
   properties in very large geographical 
   areas are capitalized and subsequently 
   amortized, whether the costs are related 
   to successful or unsuccessful projects. 
   Thus, the successful-efforts method 
   capitalizes the $100,000 cost of the 
   second well, expenses the $50,000 cost 
   of the first well, and amortizes an 
   amount of the capitalized cost of the 
   second well that is proportionate to the 
   oil produced. Amortization for the year 
   equals $40,000 [$100,000 capitalized 
   cost x (10,000 barrels sold  25,000 
   barrels of resources)]. Consequently, 
   the total expense is $90,000 ($50,000 + 
   $40,000). 

   Answer (D) is incorrect because 
   $150,000 equals the cost of both wells. 


[420] Source: CMA 0694 2-21 

   Answer (A) is incorrect because all 
   R&D costs, unless for the benefit of 
   others, are to be expensed as incurred. 

   Answer (B) is incorrect because R&D 
   costs are to be expensed, regardless of 
   the probability of future benefits. 

   Answer (C) is incorrect because 
   prototype costs are also R&D costs that 
   must be expensed. 

   Answer (D) is correct. SFAS 2 requires 
   all R&D costs to be expensed as 
   incurred. However, if those costs are 
   for work performed for others as part of 
   a contractual agreement providing for 
   reimbursements, they should be charged 
   to a receivable. The party for whom the 
   work is performed should record R&D 
   expense. 


[421] Source: CMA 0694 2-22 

   Answer (A) is incorrect because $217 
   is the selling price, and $198 is the 
   NRV. 

   Answer (B) is incorrect because $217 
   is the selling price, and $185 is the 
   selling price minus normal profit. 

   Answer (C) is correct. ARB 43, Chap. 
   4 defines market as current replacement 
   cost subject to a maximum equal to net 
   realizable value and a minimum equal 
   to net realizable value minus a normal 
   profit. Net realizable value is equal to 
   selling price minus costs of completion 
   and disposal. For Sportaway's Skis, the 
   net realizable value is $198 ($217 
   selling price - $19 distribution cost). 
   Net realizable value minus normal 
   profit is $166 ($198 net realizable 
   value - $32 normal profit). 

   Answer (D) is incorrect because the 
   ceiling equals the net realizable value, 
   not selling price minus normal profit. 


[422] Source: CMA 0694 2-23 

   Answer (A) is incorrect because $105 
   is the current replacement cost, not the 
   historical cost. 

   Answer (B) is correct. The cost amount 
   used in the lower of cost or market 
   comparison is the historical cost of an 
   item. Thus, for ski boots, the historical 
   cost of $106 is compared with the 
   market figure. 

   Answer (C) is incorrect because neither 
   costs to distribute nor normal profit 
   margin are needed to determine the 
   historical cost. 

   Answer (D) is incorrect because net 
   realizable value ($137) is not used in 
   the calculation of historical cost. 


[423] Source: CMA 0694 2-24 

   Answer (A) is correct. Net realizable 
   value for parkas is $71.25 ($73.75 
   selling price - $2.50 distribution cost). 
   The net realizable value minus normal 
   profit is $50 ($71.25 net realizable 
   value - $21.25 normal profit margin). 
   The $51 replacement cost falls between 
   the $71.25 ceiling and the $50 floor and 
   is the appropriate market value. 
   Because the $51 market value is lower 
   than the $53 historical cost, it should be 
   the basis of valuation for the parkas. 

   Answer (B) is incorrect because $53 is 
   the historical cost. 

   Answer (C) is incorrect because $50 is 
   the floor. It is used only if replacement 
   cost is lower. 

   Answer (D) is incorrect because 
   $71.25 is the net realizable value. It is 
   used only as the market amount if 
   replacement cost is greater than the 
   ceiling amount. 


[424] Source: CMA 0695 2-23 

   Answer (A) is incorrect because 
   inventory details should be disclosed in 
   the footnotes. 

   Answer (B) is incorrect because 
   financing agreements should be 
   disclosed in the footnotes. 

   Answer (C) is incorrect because 
   valuation methods should be disclosed 
   in the footnotes. 

   Answer (D) is correct. APB 22 
   requires disclosure of accounting 
   policies in a separate summary of 
   significant policies or as the first 
   footnote to the financial statements. The 
   disclosure should specify accounting 
   principles adopted and the method of 
   applying those principles. Examples 
   include inventory valuation methods; 
   inventory details, such as the mix of 
   finished goods, work-in-progress, and 
   raw materials; methods used in 
   determining costs; and any significant 
   financing agreements, such as leases, 
   related party transactions, product 
   financing arrangements, firm purchase 
   commitments, pledging of inventories, 
   and involuntary liquidation of LIFO 
   layers. Unrealized profit on inventories 
   is not reported because the company 
   usually has no assurance that the 
   inventories will be sold. 


[425] Source: CPA 0FIN R99-5 

   Answer (A) is incorrect because 
   $110,000 excludes the T-bill maturing 
   on 1/31/2000. 

   Answer (B) is incorrect because 
   $385,000 excludes the cash in the 
   money market account. 

   Answer (C) is correct. Cash is an asset 
   that must be readily available for use by 
   the business. It normally consists of (1) 
   coin and currency on hand, (2) demand 
   deposits (checking accounts), (3) time 
   deposits (savings accounts), and (4) 
   near-cash assets (e.g., money market 
   accounts). In this case, cash equivalents 
   include investments with original 
   maturities of 3 months or less. The 
   original maturity is the date on which 
   the obligation becomes due. 
   Accordingly, the amount to be reported 
   as cash and cash equivalents is 
   $460,000 ($35,000 + $75,000 + 
   $350,000). 

   Answer (D) is incorrect because 
   $860,000 includes the T-bill maturing 
   on 3/31/2000. 


[426] Source: CPA 1189 II-1 

   Answer (A) is correct. The December 
   31 checkbook balance is $5,000. The 
   $2,000 check dated January 2, 2001 is 
   properly not included in this balance 
   because it is not negotiable at year-end. 
   The $500 NSF check should not be 
   included in cash because it is a 
   receivable. The $300 check that was 
   not mailed until January 10 should be 
   added to the balance. This predated 
   check is still within the control of the 
   company and should not decrease the 
   cash account. Consequently, the cash 
   balance to be reported on the December 
   31, 2000 balance sheet is $4,800.

   Balance per checkbook    $5,000
   Add:  Predated check        300
   Deduct:  NSF check         (500)
                            ------
   Cash balance 12/31/00    $4,800
                            ======

   Answer (B) is incorrect because $5,300 
   does not include deduction of the NSF 
   check. 

   Answer (C) is incorrect because $6,500 
   includes the postdated check but not the 
   predated check. 

   Answer (D) is incorrect because 
   $6,800 includes the postdated check. 


[427] Source: CMA 1295 2-22 

   Answer (A) is incorrect because both 
   methods allow for discrepancies; an 
   expense is recorded when 
   uncollectibility of the bad debt becomes 
   apparent under the direct write-off 
   method. 

   Answer (B) is incorrect because its 
   greater flexibility is the main argument 
   against the direct write-off method. 

   Answer (C) is correct. The direct 
   write-off method records bad debts as 
   uncollectible when they are determined 
   to be uncollectible. The direct write-off 
   method is subject to manipulation 
   because the decision to recognize bad 
   debt expense is subjective and thus can 
   be moved from one period to another at 
   the discretion of management. Under the 
   allowance method, bad debt expense is 
   recorded systematically as a percentage 
   of either sales or accounts receivable. 
   The allowance method better matches 
   the expense with the cause of the 
   expense (granting credit). 

   Answer (D) is incorrect because the 
   direct write-off method is easier to 
   implement. 


[428] Source: CMA 1295 2-23 

   Answer (A) is incorrect because an 
   aging schedule is used to determine the 
   age of receivables, not workers. 

   Answer (B) is incorrect because an 
   aging schedule is used to determine the 
   net realizable value of receivables, not 
   fixed assets. 

   Answer (C) is correct. A common 
   method of estimating bad debt expense 
   is to develop an analysis of accounts 
   receivable known as an aging schedule. 
   Stratifying the receivables according to 
   the time they have been outstanding 
   permits the use of different percentages 
   for each category. The result should be 
   a more accurate estimate of bad debts 
   and the net realizable value of 
   receivables than if a single rate is used. 

   Answer (D) is incorrect because an 
   aging schedule is not used with 
   inventories. 


[429] Source: CMA 1295 2-24 

   Answer (A) is incorrect because cash is 
   debited for $142,500, the amount 
   remaining after deduction of the 5% 
   finance charge. 

   Answer (B) is correct. The entry to 
   record a non-recourse sale of 
   receivables involves a debit to cash for 
   the proceeds of the sale, in this case 
   $142,500 (95% x $150,000), and a 
   credit to accounts receivable for the 
   face value of the receivables 
   transferred, or $150,000. The 
   difference of $7,500 is recorded as a 
   loss on sale of receivables. 

   Answer (C) is incorrect because the 
   receivables were sold without 
   recourse. 

   Answer (D) is incorrect because the 
   firm did not borrow money; instead, it 
   sold an asset and should record a loss. 


[430] Source: CMA 1295 2-27 

   Answer (A) is incorrect because, in a 
   period of rising prices, LIFO leads to a 
   lower inventory valuation and lower 
   taxes, thus conserving cash. 

   Answer (B) is correct. LIFO is 
   commonly adopted because it reports a 
   lower inventory value (when prices are 
   rising) and a lower income. The result 
   is that the company pays lower taxes on 
   the lower income and cash flow is 
   maximized. When prices are falling, 
   however, LIFO reports a higher 
   inventory value and higher income. The 
   higher income results in higher income 
   taxes and lower cash flows. 

   Answer (C) is incorrect because the 
   level of administrative costs does not 
   affect the inventory method selected. 

   Answer (D) is incorrect because the 
   reduction effect occurs only after LIFO 
   has been used for a long time. 


[431] Source: CMA 1295 2-25 

   Answer (A) is incorrect because a 
   perpetual system is more costly to 
   administer. Records of all increases 
   and decreases in inventory must be 
   kept. 

   Answer (B) is correct. A perpetual 
   inventory system keeps a running total 
   of inventory on hand. Extra record 
   keeping is required, but control is 
   improved. A perpetual system is much 
   easier to use when a company has only 
   a small number of inventory items and 
   those items are of high value. For a 
   small auto parts business, a perpetual 
   inventory system might not be 
   appropriate because of the large number 
   of low-value items that would have to 
   be stocked. Consequently, the cost of a 
   perpetual system would probably 
   exceed any savings from better control. 

   Answer (C) is incorrect because a 
   physical inventory is still needed on at 
   least an annual basis to check the 
   accuracy of the perpetual system. 

   Answer (D) is incorrect because a 
   perpetual inventory system does not 
   require daily reconciliation between 
   goods sold and goods remaining in 
   stock. 


[432] Source: CMA 1295 2-26 

   Answer (A) is incorrect because, under 
   the FIFO cost flow assumption, both 
   periodic and perpetual systems will 
   show the same ending inventory, cost of 
   goods sold, and net income. 

   Answer (B) is correct. Under the 
   first-in, first-out (FIFO) method of 
   inventory valuation, inventory valuation 
   will be the same regardless of whether 
   a periodic or perpetual system is used. 
   In either case, the ending inventory will 
   consist of the most recent goods 
   purchased, and the cost of goods sold 
   will consist of the earliest goods 
   purchased. 

   Answer (C) is incorrect because, under 
   the FIFO cost flow assumption, both 
   periodic and perpetual systems will 
   show the same ending inventory, cost of 
   goods sold, and net income. 

   Answer (D) is incorrect because, under 
   the FIFO cost flow assumption, both 
   periodic and perpetual systems will 
   show the same ending inventory, cost of 
   goods sold, and net income. 


[433] Source: CMA 1288 4-24 

   Answer (A) is incorrect because the 
   amount of future returns can be 
   reasonably estimated is a criterion for 
   revenue recognition. 

   Answer (B) is incorrect because the 
   seller's price to the buyer being 
   substantially fixed at the date of the sale 
   is a criterion for revenue recognition. 

   Answer (C) is correct. SFAS 48, 
   Revenue Recognition When Right of 
   Return Exists, requires sales revenue 
   and cost of sales to be reduced by 
   expected returns when goods are sold 
   with a right of return. Before revenue 
   can be recognized, the following 
   conditions must exist: The buyer must 
   be independent of the seller (have 
   economic substance apart from the 
   seller), the price must be determined 
   (substantially fixed), risk of loss must 
   rest with the buyer, the buyer must have 
   paid or be obligated to pay with the 
   obligation not being contingent on 
   resale, the seller has no significant 
   future obligation to bring about resale, 
   and returns can be reasonably 
   estimated. No time limit for liquidation 
   of the buyer's obligation is established; 
   the buyer should simply have an 
   obligation to pay at some future time. 

   Answer (D) is incorrect because the 
   buyer being obligated to pay the seller 
   and the obligation not being contingent 
   on the resale of the product is a 
   criterion for revenue recognition. 


[434] Source: CMA 0694 2-5 

   Answer (A) is incorrect because year 1 
   income of $161,000 results from 
   adding, not subtracting, the $23,000 
   overstatement of ending inventory. 
   Similarly, year 2 income of $170,000 
   results from subtracting, not adding, the 
   $23,000 overstatement of beginning 
   inventory and the $61,000 
   understatement of ending inventory. 
   Finally, year 3 income of $212,000 
   results from adding, not subtracting, the 
   $61,000 understatement of beginning 
   inventory and subtracting, not adding, 
   the understatement of ending inventory. 

   Answer (B) is correct. Cost of sales 
   equals beginning inventory, plus 
   purchases or cost of goods 
   manufactured, minus ending inventory. 
   Hence, over (under) statement of 
   inventory affects cost of sales and 
   income. The year 1 pretax income was 
   affected by the $23,000 year 1 
   overstatement of year-end inventory. 
   This error understated year 1 cost of 
   sales and overstated pretax income. The 
   corrected income is $115,000 
   ($138,000 - $23,000). The same 
   $23,000 error caused year 2 income to 
   be understated by overstating beginning 
   inventory. In addition, the $61,000 
   understatement of year 2 year-end 
   inventory also caused year 2 income to 
   be understated. Thus, the corrected year 
   2 pretax income is $338,000 ($254,000 
   + $23,000 + $61,000). The $61,000 
   understatement at the end of year 2 
   caused year 3 income to be overstated 
   by understating beginning inventory. 
   Income for year 3 is understated by the 
   $17,000 of year-end inventory 
   understatement. Accordingly, the 
   corrected income is $124,000 
   ($168,000 - $61,000 + $17,000). 

   Answer (C) is incorrect because year 3 
   income of $90,000 results from 
   subtracting, not adding, the $17,000 
   understatement of ending inventory. 

   Answer (D) is incorrect because year 3 
   pre-tax income should be $124,000. 


[435] Source: CMA 1287 3-25 

   Answer (A) is incorrect because the 
   transferor must surrender control. 

   Answer (B) is incorrect because the 
   transferee must have the unconstrained 
   right to pledge or exchange the 
   receivables. 

   Answer (C) is correct. The transferor of 
   a financial asset surrenders control and 
   the transaction is treated as a sale only 
   if three conditions are met: (1) The 
   assets have been isolated from the 
   transferor (i.e., they are beyond the 
   reach of the transferor and its 
   creditors); (2) neither a regular 
   transferee nor a holder of a beneficial 
   interest in a qualifying special-purpose 
   entity (e.g., certain trusts) is subject to a 
   condition that both constrains its right to 
   pledge or exchange those interests and 
   provides more than a trivial benefit to 
   the transferor; and (3) the transferor 
   does not maintain effective control over 
   the transferred assets through certain 
   repurchase or redemption agreements or 
   the ability unilaterally to cause the 
   holder to return specific assets (SFAS 
   140). 

   Answer (D) is incorrect because the 
   transferred assets must be isolated from 
   the transferor. 


[436] Source: CMA 1287 3-26 

   Answer (A) is incorrect because the 
   proceeds of the sale are reduced by the 
   fair value of the recourse obligation. 

   Answer (B) is incorrect because the 
   proceeds of the sale are reduced by the 
   fair value of the recourse obligation. 

   Answer (C) is incorrect because the 
   proceeds of the sale are reduced by the 
   fair value of the recourse obligation. 

   Answer (D) is correct. When a transfer 
   of receivables with recourse meets the 
   criteria to be accounted for as a sale, 
   the proceeds of the sale are reduced by 
   the fair value of the recourse obligation. 
   When the transfer does not meet these 
   criteria, the transfer is accounted for as 
   a secured borrowing. 


[437] Source: CMA 1290 2-4 

   Answer (A) is incorrect because assets 
   and income will be unchanged. 

   Answer (B) is incorrect because assets 
   and income will be unchanged. 

   Answer (C) is incorrect because 
   income will be unchanged. 

   Answer (D) is correct. If a company 
   uses the allowance method, the 
   write-off of a receivable has no effect 
   on total assets. The journal entry 
   involves a debit to the allowance 
   account (a contra asset) and a credit to 
   accounts receivable (an asset). The net 
   effect is that the asset section is both 
   debited and credited for the same 
   amount. Thus, there will be no effect on 
   either total assets or net income. 


[438] Source: CMA 1290 2-5 

   Answer (A) is incorrect because the 
   allowance account is increased by 
   $22,500. 

   Answer (B) is incorrect because the 
   allowance account is increased by 
   $22,500. 

   Answer (C) is correct. The entry is to 
   debit bad debt expense and credit the 
   allowance account. Net credit sales 
   were $1,500,000 ($1,800,000 - 
   $125,000 of discounts - $175,000 of 
   returns). Thus, the expected bad debt 
   expense is $22,500 (1.5% x 
   $1,500,000). This amount is recorded 
   regardless of the balance remaining in 
   the allowance account from previous 
   periods. The net effect is that the 
   allowance account is increased by 
   $22,500. 

   Answer (D) is incorrect because the 
   allowance account is increased by 
   $22,500. 


[439] Source: CMA 1290 2-6 

   Answer (A) is incorrect because the 
   entry is to debit bad debt expense and 
   credit (increase) the allowance for 
   $22,150. 

   Answer (B) is incorrect because the 
   entry is to debit bad debt expense and 
   credit (increase) the allowance for 
   $22,150. 

   Answer (C) is incorrect because the 
   entry is to debit bad debt expense and 
   credit (increase) the allowance for 
   $22,150. 

   Answer (D) is correct. The balance 
   sheet approach emphasizes asset 
   valuation. Hence, it determines the 
   amount that should be in the allowance 
   (valuation) account to absorb future bad 
   debts. This process may be 
   accomplished by preparing an aging 
   schedule and multiplying each column 
   by the expected uncollectibility rate.

          Receivables         Rate           Expected Bad Debt
          -----------         ----           -----------------
           $390,000             1%                 $ 3,900
            115,000             5%                   5,750
            210,000            15%                  31,500
             25,000            40%                  10,000
                                                   -------
                                                   $51,150
                                                   =======
   Accordingly, the allowance account 
   should have a credit balance of 
   $51,150. After recording the entries in 
   the two preceding questions, the 
   account balance was $29,000 ($16,500 
   beginning balance - $10,000 written off 
   + $22,500 adjustment). The allowance 
   account should have a $51,150 credit 
   balance. Hence, the necessary 
   correction is to debit bad debt expense 
   and credit (increase) the allowance for 
   $22,150 ($51,150 - $29,000). 


[440] Source: CMA 1288 4-15 

   Answer (A) is incorrect because 
   $63,000 equals the price. 

   Answer (B) is incorrect because 
   $65,000 equals the price plus shipping. 

   Answer (C) is incorrect because 
   $69,500 equals the price plus shipping 
   and installation. 

   Answer (D) is correct. The initial cost 
   of a machine consists of all costs 
   necessary to prepare it for operation. 
   These include the purchase price minus 
   any discounts ($63,000), shipping costs 
   ($2,500), installation costs ($4,000), 
   and pre-use testing ($3,000). Interest is 
   capitalized only in the case of 
   construction of assets for an enterprise's 
   own use, and then only for the interest 
   incurred during construction. Total 
   acquisition cost is therefore $72,500. 


[441] Source: Publisher 

   Answer (A) is correct. The transferor 
   of a financial asset surrenders control 
   and the transaction is treated as a sale 
   only if three conditions are met: (1) The 
   assets have been isolated from the 
   transferor (i.e., they are beyond the 
   reach of the transferor and its 
   creditors); (2) neither a regular 
   transferee nor a holder of a beneficial 
   interest in a qualifying special-purpose 
   entity (e.g., certain trusts) is subject to a 
   condition that both constrains its right to 
   pledge or exchange those interests and 
   provides more than a trivial benefit to 
   the transferor; and (3) the transferor 
   does not maintain effective control over 
   the transferred assets through certain 
   repurchase or redemption agreements or 
   the ability unilaterally to cause the 
   holder to return specific assets (SFAS 
   140). 

   Answer (B) is incorrect because the 
   assets should be isolated from the 
   transferor and its creditors. 

   Answer (C) is incorrect because the 
   transferor should not have effective 
   control through repurchase or 
   redemption agreements. 

   Answer (D) is incorrect because the 
   transfer is a sale only to the extent the 
   transferor receives consideration other 
   than beneficial interests. 


[442] Source: CMA 0694 2-6 

   Answer (A) is incorrect because the 
   year 1 overstatement in inventory 
   caused income and retained earnings to 
   be overstated. 

   Answer (B) is incorrect because year 1 
   costs were understated given that 
   inventory was overstated. 

   Answer (C) is incorrect because the 
   year 2 ending inventory was given as 
   correct. 

   Answer (D) is correct. The 
   overstatement (double counting) of 
   inventory at the end of year 1 caused 
   year 1 cost of goods sold (BI + 
   Purchases - EI) to be understated and 
   both inventory and income to be 
   overstated. The year 1 ending inventory 
   equals year 2 beginning inventory. 
   Thus, the same overstatement caused 
   year 2 beginning inventory and cost of 
   goods sold to be overstated and income 
   to be understated. This is an example of 
   a self-correcting error; by the end of 
   year 2, the balance sheet is correct. 


[443] Source: CMA 0697 2-19 

   Answer (A) is incorrect because 
   $4,400 assumes all items cost $20. It is 
   the value under periodic LIFO. 

   Answer (B) is incorrect because $4,480 
   assumes that the ending inventory 
   consists of 200 units at $20 and 20 units 
   at $24. 

   Answer (C) is incorrect because $4,560 
   is the value under perpetual LIFO. 

   Answer (D) is correct. The number of 
   units in ending inventory is 220 (200 + 
   160 - 180 + 140 - 100). Under FIFO, 
   these units are assumed to have come 
   from the most recent purchase. Thus, the 
   value of the inventory is $4,960 [(140 x 
   $24) + (80 x $20)]. This calculation 
   ignores the use of the perpetual 
   inventory system because FIFO 
   valuation is the same regardless of 
   whether a perpetual or periodic system 
   is used. 


[444] Source: CMA 0697 2-20 

   Answer (A) is incorrect because 
   $4,400 assumes all items cost $20. It is 
   the value under periodic LIFO. 

   Answer (B) is incorrect because $4,480 
   assumes that the ending inventory 
   consists of 200 units at $20 and 20 units 
   at $24. 

   Answer (C) is correct. The number of 
   units in ending inventory is 220 (200 + 
   160 - 180 + 140 - 100). Under LIFO, 
   these 220 units are valued at the earliest 
   costs incurred. Under a perpetual LIFO 
   system, the inventory is $4,560.

      + 200 x $20 =  $4,000
      + 160 x $20 =   3,200 equals an inventory of $7,200
      - 180 x $20 =   3,600 equals an inventory of $3,600
      + 140 x $24 =   3,360 equals an inventory of $6,960
      - 100 x $24 =   2,400 equals an inventory of $4,560

   Answer (D) is incorrect because 
   $4,785 is the value under the moving 
   average method. 


[445] Source: CMA 0687 3-11 

   Answer (A) is incorrect because 
   $30,000 is the amount reported under 
   the cost method. Since Boggs exercises 
   significant influence over Mattly, the 
   equity method must be used. Boggs 
   should recognize $90,000 (30% x 
   $300,000) of Mattly's net income less 
   $10,000 ($200,000  20 years) of 
   annual goodwill amortization under the 
   equity method. 

   Answer (B) is incorrect because 
   $60,000 equals 30% of the investee's 
   net income minus 30% of the dividends 
   paid. Boggs should recognize $90,000 
   (30% x $300,000) of Mattly's net 
   income less $10,000 ($200,000  20 
   years) of annual goodwill amortization 
   under the equity method. 

   Answer (C) is correct. Under the equity 
   method, Boggs should recognize 30% of 
   Mattly's reported income of $300,000, 
   or $90,000. However, the annual 
   goodwill amortization ($200,000  20 
   years = $10,000) reduces that amount. 
   Thus, net investment income is $80,000 
   ($90,000 - $10,000). Dividends 
   received from an investee must be 
   recorded in the books of the investor as 
   a decrease in the carrying value of the 
   investment and an increase in assets 
   (cash). 

   Answer (D) is incorrect because 
   $90,000 is the amount of Mattly's 
   reported income that Boggs should 
   recognize. However, this amount should 
   be reduced by $10,000 ($200,000  20 
   years) of annual goodwill amortization 
   under the equity method. 


[446] Source: CMA 0687 3-12 

   Answer (A) is incorrect because the 
   cost method involves no write-off of 
   goodwill; therefore, Boggs should 
   report the entire $30,000 received as 
   dividends. 

   Answer (B) is correct. Under the fair 
   value method or the cost method (the 
   latter is appropriate if the equity method 
   is not applicable, and the equity 
   securities do not have readily 
   determinable fair values), the investor 
   records as revenue only the amount 
   actually received as dividends. Boggs 
   receives 30% of the $100,000 total 
   dividend and records $30,000 of 
   investment revenue. The cost method 
   involves no write-off of goodwill. 

   Answer (C) is incorrect because Boggs 
   should record $30,000 (30% x 
   $100,000) of net investment revenue 
   because, under the cost method, the 
   investor records only the amount 
   actually received as dividends. 

   Answer (D) is incorrect because 
   $80,000 is the amount reported under 
   the equity method. Boggs should record 
   $30,000 (30% x $100,000) of net 
   investment revenue because, under the 
   cost method, the investor records only 
   the amount actually received as 
   dividends. 


[447] Source: CMA 1293 2-3 

   Answer (A) is incorrect because cost is 
   adjusted for changes in fair value. 

   Answer (B) is incorrect because an 
   equity-based investment is adjusted for 
   the investor's share of the investee's 
   earnings, minus dividends received. 
   However, SFAS 115 does not apply to 
   investments accounted for using the 
   equity method. 

   Answer (C) is incorrect because lower 
   of cost or market was the measurement 
   basis prescribed by SFAS 12, a 
   pronouncement superseded by SFAS 
   115. 

   Answer (D) is correct. Under SFAS 
   115, trading securities are those held 
   principally for sale in the near term. 
   They are classified as current and 
   consist of debt securities and equity 
   securities with readily determinable 
   fair values. Unrealized holding gains 
   and losses on trading securities are 
   reported in earnings. Hence, these 
   securities are reported at fair value, 
   which is "the amount at which a 
   financial instrument could be exchanged 
   in a current transaction between willing 
   parties, other than in a forced or 
   liquidation sale." 


[448] Source: CMA 1293 2-4 

   Answer (A) is incorrect because cost is 
   adjusted for changes in fair value. 

   Answer (B) is incorrect because an 
   equity-based investment is adjusted for 
   the investor's share of the investee's 
   earnings, minus dividends received. 
   However, SFAS 115 does not apply to 
   investments accounted for using the 
   equity method. 

   Answer (C) is correct. According to 
   SFAS 115, available-for-sale securities 
   are investments in debt securities that 
   are not classified as held-to-maturity or 
   trading securities and in equity 
   securities with readily determinable 
   fair values that are not classified as 
   trading securities. They are measured at 
   fair value in the balance sheet. 

   Answer (D) is incorrect because the par 
   or stated value is an arbitrary amount. 


[449] Source: Publisher 

   Answer (A) is incorrect because using 
   the decreasing-charge method of 
   depreciation instead of the straight-line 
   method will increase the gain and 
   decrease the loss on the sale of a fixed 
   plant asset. 

   Answer (B) is correct. An accelerated 
   (decreasing-charge) method reduces the 
   book value of the asset more rapidly in 
   the early years of the useful life than 
   does the straight-line method. Hence, 
   the effect of an early sale is to increase 
   the gain or decrease the loss that would 
   have been recognized under the 
   straight-line method. 

   Answer (C) is incorrect because using 
   the decreasing-charge method of 
   depreciation instead of the straight-line 
   method will increase the gain and 
   decrease the loss on the sale of a fixed 
   plant asset. 

   Answer (D) is incorrect because using 
   the decreasing-charge method of 
   depreciation instead of the straight-line 
   method will increase the gain and 
   decrease the loss on the sale of a fixed 
   plant asset. 


[450] Source: CMA 0695 2-10 

   Answer (A) is incorrect because freight 
   and handling charges are elements 
   included in the cost of a fixed asset. 

   Answer (B) is incorrect because 
   insurance while in transit are elements 
   included in the cost of a fixed asset. 

   Answer (C) is correct. The capitalized 
   cost of fixed assets includes all costs 
   necessary to acquire them and to bring 
   them to the condition and location 
   required for their intended use. Costs of 
   acquisition include shipping, assembly 
   and installation, insurance while in 
   transit, pre-use testing, trial runs, and 
   sales taxes. Interest can also be a cost 
   when assets are self constructed. 
   However, capitalized interest is not a 
   cost of acquisition when long-lived 
   assets are purchased from outside 
   vendors. 

   Answer (D) is incorrect because 
   assembly and installation costs are 
   elements included in the cost of a fixed 
   asset. 


[451] Source: CMA 0695 2-11 

   Answer (A) is incorrect because 
   appraisal values are specifically 
   excluded under ARB 43. 

   Answer (B) is incorrect because 
   replacement cost (current cost) is not 
   acceptable for external financial 
   reporting purposes. However, GAAP 
   formerly required presentation of 
   supplementary current cost information. 

   Answer (C) is incorrect because 
   acquisition cost should be reduced by 
   periodic depreciation. 

   Answer (D) is correct. Fixed assets are 
   reported at their cost minus 
   accumulated depreciation. The 
   capitalized cost of fixed assets includes 
   all costs necessary to acquire them and 
   to bring them to the condition and 
   location required for their intended use. 


[452] Source: CMA 1286 4-11 

   Answer (A) is incorrect because the 
   denominator should include only 
   250,000 tons. This answer also fails to 
   deduct prior depletion. 

   Answer (B) is incorrect because the 
   denominator should include only 
   250,000 tons. This answer also fails to 
   deduct prior depletion.. 

   Answer (C) is incorrect because the 
   denominator should include only 
   250,000 tons. 

   Answer (D) is correct. Because 50% of 
   the original estimate of quality ore was 
   recovered during the years 1993 
   through 2000, recorded depletion must 
   have been $250,000 [50% x ($600,000 
   - $100,000 salvage value)]. In 2001, the 
   earlier depletion of $250,000 is 
   deducted from the $600,000 cost along 
   with the $100,000 salvage value. The 
   remaining depletable cost of $250,000 
   will be allocated over the 250,000 tons 
   believed to remain in the mine. The $1 
   per ton depletion is then multiplied 
   times the tons mined each year. 


[453] Source: CMA 1286 4-10 

   Answer (A) is incorrect because 
   composite depreciation approximates 
   total straight-line depreciation of 
   individual assets. 

   Answer (B) is incorrect because 
   composite depreciation approximates 
   total straight-line depreciation of 
   individual assets. 

   Answer (C) is incorrect because 
   salvage value is considered under 
   composite depreciation in the same way 
   as under individual asset depreciation. 

   Answer (D) is correct. Both composite 
   and group depreciation utilize the 
   straight-line method. Both methods 
   aggregate groups of assets. The 
   composite method relates to groups of 
   dissimilar assets with varying useful 
   lives, while the group method deals 
   with similar assets. Each method 
   involves the calculation of a total 
   depreciable cost for all the assets 
   lumped into one account and a 
   weighted-average estimated useful life. 
   Because both composite and group 
   methods use weighted averages of 
   useful lives and depreciation rates, 
   early and late retirements are expected 
   to offset each other. Therefore, gains 
   and losses on retirements of single 
   assets are not recognized but are treated 
   as adjustments of accumulated 
   depreciation. The entry is to credit the 
   asset at cost, debit cash for any 
   proceeds received, and debit 
   accumulated depreciation for the 
   difference. Because the accumulated 
   depreciation account is decreased by a 
   lesser amount than the asset account, the 
   net book value of the composite or 
   group assets is decreased. The net book 
   value of total assets is unchanged. 


[454] Source: CMA 0694 2-25 

   Answer (A) is correct. Straight-line 
   depreciation is calculated by dividing 
   the depreciable base (cost - salvage 
   value) by the life of the asset. 
   Depreciable cost is $39,600 ($43,200 - 
   $3,600). Annual depreciation is $4,950 
   (39,600  8). Because the company has 
   a half-year policy, the first year's 
   depreciation is $2,475 ($4,950  2). 

   Answer (B) is incorrect because $2,700 
   ignores salvage value. 

   Answer (C) is incorrect because $4,950 
   equals a full year's depreciation. 

   Answer (D) is incorrect because 
   $5,400 equals a full year's depreciation 
   if salvage value is not considered. 


[455] Source: CMA 0694 2-26 

   Answer (A) is incorrect because 
   $1,100 is the depreciation for the final 
   year of the asset's life. 

   Answer (B) is correct. Under the SYD 
   method, depreciation is calculated by 
   multiplying the depreciable base (cost - 
   salvage value) by a declining fraction. 
   The numerator equals the estimated 
   remaining useful life, and the 
   denominator is determined from the 
   formula ([n x (n + 1)]  2), if n is the 
   life of the asset. The denominator of the 
   fraction for an asset with an 8-year life 
   is 36 [(8 x 9)  2]. Hence, the 
   depreciation for the first year is $8,800 
   [(8  36) x ($43,200 - $3,600)]. 

   Answer (C) is incorrect because $9,600 
   assumes no salvage value. 

   Answer (D) is incorrect because 
   $10,800 is the 
   double-declining-balance depreciation 
   for the first year. 


[456] Source: CMA 0694 2-27 

   Answer (A) is incorrect because 
   $7,425 assumes salvage value is 
   deducted before the calculations are 
   made. 

   Answer (B) is correct. Under the DDB 
   method, the book value of the asset is 
   multiplied by a percentage that is 
   double the straight-line rate. For an 
   8-year life, the straight-line rate is 
   12.5%. Hence, the DDB rate is 25% 
   per year. The depreciation for the first 
   year is $10,800 (25% x $43,200). The 
   calculation for the second year is to 
   multiply 25% by the remaining book 
   value of $32,400 ($43,200 - $10,800) 
   to produce a depreciation charge of 
   $8,100. 

   Answer (C) is incorrect because $9,900 
   is the first year's depreciation assuming 
   salvage value is deducted in arriving at 
   the depreciable base. 

   Answer (D) is incorrect because 
   $10,800 is the depreciation for the first 
   year. 


[457] Source: CMA 1286 4-12 

   Answer (A) is correct. The cost should 
   be amortized over the remaining legal 
   life or useful life, whichever is shorter. 
   In addition to the initial costs of 
   obtaining a patent, legal fees incurred in 
   the successful defense of a patent 
   should be capitalized as part of the cost, 
   whether it was internally developed or 
   purchased from an inventor. The legal 
   fees capitalized then should be 
   amortized over the remaining useful life 
   of the patent. 

   Answer (B) is incorrect because R&D 
   costs must be expensed as incurred. 

   Answer (C) is incorrect because R&D 
   costs must be expensed as incurred. 

   Answer (D) is incorrect because 
   unsuccessful patent infringement suit 
   costs should not be capitalized. 


[458] Source: CMA 0695 2-12 

   Answer (A) is incorrect because 
   patents and trademarks are identifiable 
   intangible assets. 

   Answer (B) is incorrect because 
   copyrights are identifiable intangible 
   assets. 

   Answer (C) is correct. Intangible assets 
   are noncurrent, nonphysical assets. APB 
   17 requires intangible assets to be 
   capitalized if purchased from outsiders. 
   Specifically identifiable intangible 
   assets, such as patents, trademarks, and 
   copyrights, may be capitalized even 
   when developed internally. Intangibles 
   that are not specifically identifiable, 
   such as goodwill, may be capitalized 
   only when acquired externally. 
   Goodwill is the difference between the 
   cost and the fair value of the net 
   identifiable assets acquired in a 
   business combination. 

   Answer (D) is incorrect because 
   leaseholds are identifiable intangible 
   assets. 


[459] Source: CMA 0695 2-13 

   Answer (A) is incorrect because 
   $504,000 does not reflect amortization 
   in previous years. 

   Answer (B) is incorrect because $4,200 
   would have been amortized in year 1. 

   Answer (C) is incorrect because year 1 
   amortization would have been only 
   $4,200, not the full year's $12,600. 

   Answer (D) is correct. APB 17 
   requires that goodwill be amortized 
   over a period of 40 years or less. Given 
   that the company paid $6,000,000 for 
   net identifiable assets with a fair value 
   of $5,496,000, goodwill was $504,000. 
   Annual amortization was $12,600 
   ($504,000  40). For the year of 
   purchase, the amortization period was 
   only 4 months; thus, year 1 amortization 
   was $4,200 [$12,600 x (4  12)]. 
   Amortization was $12,600 per year for 
   year 2 and year 3, bringing the total 
   amortization to $29,400 [$4,200 + (2 x 
   $12,600)]. Hence, the book value to be 
   written off is $474,600 ($504,000 - 
   $29,400). 


[460] Source: CIA 0594 IV-7 

   Answer (A) is incorrect because 
   collection float is the difference 
   between the recorded amount and the 
   amount collected by the bank. 

   Answer (B) is incorrect because a 
   general checking account is the 
   principal bank account. 

   Answer (C) is correct. An imprest bank 
   account serves as a clearing house for a 
   specific type of check (e.g., payroll) or 
   for a large volume of checks. Transfers, 
   typically from the general checking 
   account, are made to the imprest 
   account for the intended disbursements. 
   Hence, imprest bank accounts are used 
   to make a specific amount of cash 
   available for a limited purpose. 

   Answer (D) is incorrect because a 
   lockbox is a local post office box from 
   which a local bank is authorized to pick 
   up and deposit remittances. 


[461] Source: CIA 0594 IV-8 

   Answer (A) is incorrect because the 
   company's president is not directly 
   responsible for the amount of the petty 
   cash fund. 

   Answer (B) is incorrect because the 
   general office manager is not directly 
   responsible for the amount of the petty 
   cash fund. 

   Answer (C) is incorrect because the 
   general cashier is not directly 
   responsible for the amount of the petty 
   cash fund. 

   Answer (D) is correct. The duties of the 
   petty cash custodian include obtaining 
   signed receipts for cash disbursements 
   and requesting reimbursement from the 
   general cashier. Consequently, the petty 
   cash custodian is responsible for the 
   petty cash fund (both cash and signed 
   receipts) at all times. 


[462] Source: CIA 0594 IV-9 

   Answer (A) is correct. It would be 
   inappropriate for the petty cash 
   custodian to retain the petty cash 
   receipts because the receipts could be 
   used for a second reimbursement. The 
   receipts should be canceled or 
   mutilated after submission for 
   reimbursement. 

   Answer (B) is incorrect because 
   surprise counts may deter fraudulent 
   activity. 

   Answer (C) is incorrect because 
   requiring signed receipts is an 
   appropriate control procedure. The 
   signed receipts provide documentation 
   of cash transactions. 

   Answer (D) is incorrect because 
   reimbursement by company check is an 
   appropriate control procedure. It is 
   unwise to have excessive amounts of 
   cash readily available. 


[463] Source: CIA 0594 IV-10 

   Answer (A) is incorrect because this 
   entry does not recognize that $10 is 
   missing from the petty cash fund. 

   Answer (B) is incorrect because this 
   entry credits petty cash rather than cash 
   and does not recognize that $10 is 
   missing from the petty cash fund. 

   Answer (C) is correct. Each expense 
   item is recognized, cash is credited for 
   the total expenditures plus the cash 
   shortage ($173 + $112 + $42 + $10 = 
   $337), and the discrepancy is debited to 
   the cash over and short account. The 
   discrepancy is the original balance of 
   the fund, minus total documented 
   expenditures, minus the ending balance 
   of the fund ($500 - $327 - $163 = $10). 

   Answer (D) is incorrect because this 
   entry credits the cash account for the 
   wrong amount ($317 rather than $337) 
   and credits the cash over and short 
   account rather than debiting it. 


[464] Source: CIA 1196 IV-6 

   Answer (A) is incorrect because the 
   check payable to the company is a 
   receivable. 

   Answer (B) is correct. The check 
   payable to the company is dated after 
   the balance sheet date, so the amount of 
   the check should be reported as a 
   receivable in the December 31, year 1 
   balance sheet. The check drawn on the 
   company's account was dated and 
   recorded in the company books in year 
   1 but not mailed until after the financial 
   statement date. Thus, the amount of the 
   check should be included in both the 
   amount reported as cash and the amount 
   reported as accounts payable in the 
   company's December 31, year 1 
   balance sheet. Control of cash requires 
   a proper cutoff of cash receipts and 
   cash disbursements. 

   Answer (C) is incorrect because the 
   check payable to the company is a 
   receivable. 

   Answer (D) is incorrect because the 
   check drawn on the company's account 
   was dated and recorded in the 
   company's books in year 1, so it should 
   be included in both the amount reported 
   as cash and the amount reported as 
   accounts payable. 


[465] Source: CIA 1196 IV-7 

   Answer (A) is incorrect because 
   $41,100 mistakenly includes the $100 
   interest and subtracts the $1,000 of NSF 
   checks, amounts already reflected in the 
   bank statement balance. 

   Answer (B) is incorrect because 
   $41,000 is computed by subtracting the 
   $1,000 of NSF checks, an amount 
   already reflected in the bank statement 
   balance. 

   Answer (C) is incorrect because 
   $42,100 includes the $100 interest, an 
   amount already reflected in the bank 
   statement balance. 

   Answer (D) is correct. The correct cash 
   balance is $42,000 ($40,000 cash 
   balance per bank statement + $5,000 
   deposit in transit - $3,000 checks 
   outstanding). The $100 interest earned 
   and the $1,000 NSF checks are 
   reflected in the $40,000 bank balance. 


[466] Source: CIA 1193 IV-41 

   Answer (A) is incorrect because 
   $67,000 results from subtracting the 
   writeoffs and the bad debt expense from 
   the sum of net income and beginning net 
   accounts receivable. 

   Answer (B) is incorrect because 
   $68,500 assumes a zero balance in the 
   beginning allowance account and 
   deducts bad debt expense from the sum 
   of net income and beginning net 
   accounts receivable. 

   Answer (C) is incorrect because 
   $68,000 deducts bad debt expense from 
   the sum of net income and beginning net 
   accounts receivable. 

   Answer (D) is correct. The cash 
   collected equals net income adjusted 
   for the change in net accounts 
   receivable (gross A/R - allowance for 
   bad debts). An increase in net accounts 
   receivable implies that cash collected 
   was less than net income. Hence, cash 
   collected was $70,000 ($100,000 - 
   $30,000 increase in net A/R). 
   Write-offs (debit the allowance, credit 
   A/R) do not affect the computation of 
   cash collected because the allowance 
   and gross accounts receivable are 
   reduced by the same amount. Moreover, 
   recognition of bad debt expense (debit 
   bad debt expense, credit the allowance) 
   is not included in this calculation 
   because it is already reflected in the net 
   accounts receivable balance. 


[467] Source: CIA 1196 IV-33 

   Answer (A) is incorrect because 
   $1,200 results from subtracting the 
   recoveries instead of adding them. 

   Answer (B) is incorrect because $1,800 
   results from subtracting bad debt 
   expense from the allowance account. 

   Answer (C) is correct. Under the 
   allowance method, uncollectible 
   accounts are written off by a debit to the 
   allowance account and a credit to 
   accounts receivable. The $500 of 
   recovered bad debts is accounted for by 
   a debit to accounts receivable and a 
   credit to the allowance account. The 
   $2,000 bad debt expense is also 
   credited to the allowance account. The 
   amount of accounts receivable written 
   off as uncollectible is $2,200 [$5,000 
   ending allowance - ($4,700 beginning 
   allowance + $500 recoveries + $2,000 
   bad debt expense)]. 

   Answer (D) is incorrect because 
   $2,800 results from subtracting the 
   recoveries and bad debt expense from 
   the allowance account. 


[468] Source: CIA 1191 IV-34 

   Answer (A) is incorrect because the net 
   method requires a sales discount 
   forfeited but not a sales discount 
   account. 

   Answer (B) is incorrect because the net 
   method requires a sales discount 
   forfeited but not a sales discount 
   account. 

   Answer (C) is incorrect because the net 
   method requires a sales discount 
   forfeited but not a sales discount 
   account. 

   Answer (D) is correct. The gross 
   method accounts for receivables at their 
   face value. If a discount is taken, a sales 
   discount is recorded and classified as 
   an offset to sales in the income 
   statement to yield net sales. The net 
   method records receivables net of the 
   applicable discount. If the payment is 
   not received during the discount period, 
   an interest revenue account such as 
   sales discounts forfeited is credited at 
   the end of the discount period or when 
   the payment is received. Accordingly, 
   the application of the net method 
   requires a sales discount forfeited but 
   not a sales discount account. 


[469] Source: CIA 1195 IV-15 

   Answer (A) is correct. The amount of 
   future returns does not have to be 
   known with certainty before a company 
   can recognize sales revenue at the time 
   of sale. However, the amount of future 
   returns must be capable of reasonable 
   estimation. 

   Answer (B) is incorrect because, under 
   SFAS 48, sales revenue and cost of 
   sales must be reduced by expected 
   returns when goods are sold with a right 
   of return (all related expected costs 
   should be accrued). The sale may be 
   recognized at the time of sale if all of 
   the following conditions are met: (1) 
   The seller's price is substantially fixed 
   or determinable; (2) the buyer has paid 
   the seller, or the buyer is obligated to 
   pay, and the obligation is not contingent 
   on resale; (3) the buyer's obligation to 
   the seller is unchanged by damage to, 
   theft of, or destruction of the product; 
   (4) the buyer has economic substance 
   apart from the seller; (5) the seller does 
   not have any significant obligations 
   regarding resale of the product by the 
   buyer; and (6) the amount of future 
   returns can be reasonably estimated. If 
   these conditions are not met, revenue 
   recognition is deferred until they are 
   met or the return privilege expires. 

   Answer (C) is incorrect because, under 
   SFAS 48, sales revenue and cost of 
   sales must be reduced by expected 
   returns when goods are sold with a right 
   of return (all related expected costs 
   should be accrued). The sale may be 
   recognized at the time of sale if all of 
   the following conditions are met: (1) 
   The seller's price is substantially fixed 
   or determinable; (2) the buyer has paid 
   the seller, or the buyer is obligated to 
   pay, and the obligation is not contingent 
   on resale; (3) the buyer's obligation to 
   the seller is unchanged by damage to, 
   theft of, or destruction of the product; 
   (4) the buyer has economic substance 
   apart from the seller; (5) the seller does 
   not have any significant obligations 
   regarding resale of the product by the 
   buyer; and (6) the amount of future 
   returns can be reasonably estimated. If 
   these conditions are not met, revenue 
   recognition is deferred until they are 
   met or the return privilege expires. 

   Answer (D) is incorrect because, under 
   SFAS 48, sales revenue and cost of 
   sales must be reduced by expected 
   returns when goods are sold with a right 
   of return (all related expected costs 
   should be accrued). The sale may be 
   recognized at the time of sale if all of 
   the following conditions are met: (1) 
   The seller's price is substantially fixed 
   or determinable; (2) the buyer has paid 
   the seller, or the buyer is obligated to 
   pay, and the obligation is not contingent 
   on resale; (3) the buyer's obligation to 
   the seller is unchanged by damage to, 
   theft of, or destruction of the product; 
   (4) the buyer has economic substance 
   apart from the seller; (5) the seller does 
   not have any significant obligations 
   regarding resale of the product by the 
   buyer; and (6) the amount of future 
   returns can be reasonably estimated. If 
   these conditions are not met, revenue 
   recognition is deferred until they are 
   met or the return privilege expires. 


[470] Source: CIA 0591 IV-31 

   Answer (A) is incorrect because 
   valuation allowances may be formally 
   recognized for sales returns and 
   allowances, collection expenses, 
   losses, etc. 

   Answer (B) is incorrect because 
   valuation allowances may be formally 
   recognized for sales returns and 
   allowances, collection expenses, 
   losses, etc. 

   Answer (C) is incorrect because the 
   entry to record the assignment of 
   specific accounts receivable includes a 
   debit to accounts receivable assigned 
   and a credit to accounts receivable. 

   Answer (D) is correct. Receivables 
   from officers and owners are assets and 
   should be presented in the balance sheet 
   as assets, not as offsets to owners' 
   equity. If material, they should be 
   segregated from the other categories of 
   receivables. 


[471] Source: CIA 0594 IV-32 

   Answer (A) is incorrect because tax 
   receivable should be debited and tax 
   revenue credited. Also, only the portion 
   of the taxes levied that is expected to be 
   collected should be credited to tax 
   revenue, with the remainder credited to 
   an allowance for uncollectible taxes. 

   Answer (B) is incorrect because only 
   the portion of the taxes levied that is 
   expected to be collected should be 
   credited to tax revenue, with the 
   remainder credited to an allowance for 
   uncollectible taxes. 

   Answer (C) is incorrect because tax 
   revenue and allowance for 
   uncollectible taxes are credited and tax 
   receivable is debited. 

   Answer (D) is correct. Tax receivable 
   is debited for the full amount of the 
   taxes levied. Only the portion of the 
   taxes levied that is expected to be 
   collected is credited to tax revenue. The 
   uncollectible portion is credited to an 
   allowance for uncollectible taxes. 


[472] Source: CIA 0595 IV-28 

   Answer (A) is incorrect because 
   lenders with claims against assigned 
   receivables have recourse against the 
   borrower. 

   Answer (B) is incorrect because the 
   risk of default on pledged accounts 
   receivable remains with the borrower. 

   Answer (C) is incorrect because, in 
   general assignment of receivables, all 
   receivables serve as collateral. Thus, 
   the borrower can substitute new 
   receivables for those collected. 

   Answer (D) is correct. In a specific 
   assignment of receivables, the lender 
   and borrower agree on which specific 
   accounts receivable represent collateral 
   for the loan, whether debtors are to be 
   notified of the arrangement, the amount 
   of finance charges, and who will 
   receive collections. As receivables are 
   collected, the borrower cannot 
   unilaterally substitute different 
   receivables as security. 


[473] Source: CPA 0594 F-12 

   Answer (A) is incorrect because 
   $12,000 excludes the check that was 
   recorded but not mailed. 

   Answer (B) is correct. The cash 
   account on the balance sheet should 
   consist of (1) coin and currency on 
   hand, (2) demand deposits (checking 
   accounts), (3) time deposits (savings 
   accounts), and (4) near-cash assets 
   (e.g., deposits in transit or checks 
   written to creditors but not yet mailed). 
   Thus, the cash balance should be 
   $13,800 ($12,000 checkbook balance + 
   $1,800 check drawn but not mailed). 
   The checkbook balance should be used 
   because it more closely reflects the 
   amount of cash that is unrestricted as of 
   the balance sheet date. 

   Answer (C) is incorrect because 
   $14,200 equals the bank statement 
   balance minus the check not mailed. 

   Answer (D) is incorrect because 
   $16,000 is the bank statement balance. 


[474] Source: CMA 0688 3-28 

   Answer (A) is incorrect because all 
   R&D expenditures must normally be 
   written off in the year incurred. Thus, 
   the costs of design, construction, and 
   testing of prototypes are R&D costs. 
   The only exception is for costs incurred 
   for the benefit of others under a 
   contractual agreement. 

   Answer (B) is incorrect because all 
   R&D expenditures must normally be 
   written off in the year incurred. Thus, 
   the costs of design, construction, and 
   testing of prototypes are R&D costs. 
   The only exception is for costs incurred 
   for the benefit of others under a 
   contractual agreement. 

   Answer (C) is incorrect because all 
   R&D expenditures must normally be 
   written off in the year incurred. Thus, 
   the costs of design, construction, and 
   testing of prototypes are R&D costs. 
   The only exception is for costs incurred 
   for the benefit of others under a 
   contractual agreement. 

   Answer (D) is correct. SFAS 2 requires 
   that R&D expenditures be expensed in 
   the year incurred, unless such costs 
   were incurred for the benefit of others, 
   in which case the costs are akin to 
   inventory. Although the FASB 
   recognized that this treatment might 
   often be a violation of the matching 
   principle, it was believed that the future 
   benefits that might arise from most 
   R&D expenditures could not be easily 
   estimated. Thus, the best course is to 
   expense R&D costs in the year 
   incurred. 


[475] Source: CMA 0696 2-5 

   Answer (A) is incorrect because 
   accounts receivable will be understated 
   and cost of goods sold will be 
   unaffected. 

   Answer (B) is incorrect because cost of 
   goods sold will be unaffected. 

   Answer (C) is incorrect because 
   inventory and cost of goods sold will 
   be unaffected. 

   Answer (D) is correct. The failure to 
   record a sale means that both accounts 
   receivable and sales will be 
   understated. Since inventory was 
   correctly counted, there will be no 
   effect on that account. Because the 
   inventory account is correct, there will 
   also be no effect on the cost of goods 
   sold. 


[476] Source: CMA 0696 2-3 

   Answer (A) is incorrect because the 
   year 1 income will be understated as a 
   result of the understatement in ending 
   inventory. 

   Answer (B) is incorrect because the 
   cost of goods sold for year 1 will be 
   overstated, therefore causing the year 2 
   cost of goods sold to be understated. 

   Answer (C) is correct. Because the 
   inventory was written down incorrectly, 
   the ending inventory value will be 
   understated at the end of year 1. The 
   understatement in ending inventory 
   causes cost of goods sold to be 
   overstated. The overstatement in cost of 
   goods sold causes year 1 income to be 
   understated. Conversely, the 
   understatement in year 2 beginning 
   inventory causes cost of goods sold for 
   year 2 to be understated and income to 
   be overstated. 

   Answer (D) is incorrect because the 
   closing inventory for year 1 will be 
   understated since the inventory will be 
   valued at $17.50 instead of the $25 
   correct figure. 


[477] Source: CMA 0696 2-4 

   Answer (A) is incorrect because 
   accounts receivable will be 
   understated. 

   Answer (B) is incorrect because 
   inventory will be overstated. 

   Answer (C) is incorrect because cost of 
   goods sold will be understated due to 
   the overstatement in inventory. 

   Answer (D) is correct. The term "FOB 
   shipping point" means that title passes 
   to the buyer at the time and place of 
   shipment. Thus, a sale should have been 
   recorded at the time the goods were 
   shipped. The result is that accounts 
   receivable and sales will be 
   understated since no entry was 
   recorded. At the same time, inventory 
   will be overstated since the goods that 
   have been sold are still included in 
   inventory. The overstatement in ending 
   inventory will cause the cost of goods 
   sold to be understated on the income 
   statement. 


[478] Source: CMA 0696 2-12 

   Answer (A) is incorrect because 
   $196,115 is the answer under the 
   periodic LIFO method. 

   Answer (B) is incorrect because 
   $197,488 is the answer under the LIFO 
   method using the $64.75 cost of the 
   March 4 purchase (instead of the 
   beginning inventory cost). 

   Answer (C) is correct. The company 
   began March with 3,200 units in 
   inventory at $64.30 each. The March 4 
   purchase added 3,400 additional units 
   at $64.75 each. Under the FIFO 
   assumption, the 3,600 units sold on 
   March 14 were the oldest units. That 
   sale eliminated all of the 3,200 units 
   priced at $64.30 and 400 of the units 
   priced at $64.75, leaving an inventory 
   of 3,000 units at $64.75 prior to the 
   March 25 purchase. On March 25, 
   3,500 units were acquired at $66. The 
   3,450 units sold on March 28 were the 
   3,000 remaining units priced at $64.75 
   and 450 units priced at $66. Therefore, 
   the ending inventory consists of 3,050 
   units at $66 each, or $201,300. Note 
   that the answer would have been the 
   same under the periodic FIFO method. 

   Answer (D) is incorrect because 
   $263,825 is based on the $86.50 selling 
   price at March 1, not the cost of the 
   items. 


[479] Source: CMA 0696 2-13 

   Answer (A) is correct. The ending 
   inventory consists of 3,050 units 
   (beginning inventory plus purchases, 
   minus sales). Under the periodic LIFO 
   method, those units are valued at the 
   oldest prices for the period, which is 
   $64.30 of the beginning inventory. 
   Multiplying $64.30 times 3,050 units 
   produces a total inventory value of 
   $196,115. 

   Answer (B) is incorrect because 
   $197,488 is the answer under the LIFO 
   method but is based on the $64.75 cost 
   of the March 4 purchase, instead of the 
   beginning inventory cost. 

   Answer (C) is incorrect because 
   $201,300 is based on the FIFO method. 

   Answer (D) is incorrect because 
   $268,400 is based on the $88 selling 
   price at the end of the month. 


[480] Source: CMA 0696 2-14 

   Answer (A) is correct. Under the 
   perpetual LIFO method, the company 
   begins with 3,200 units at $64.30. To 
   this is added the March 4 purchase of 
   3,400 units at $64.75. The March 14 
   sale uses all of the March 4 purchase 
   and 200 of the original inventory units. 
   Thus, the firm is left with 3,000 units at 
   $64.30. The March 25 purchase of 
   3,500 at $66 is added to the previous 
   3,000 units. The March 28 sale of 3,450 
   units comes entirely from the March 25 
   purchase, leaving just 50 of those units 
   at $66 each. Thus, at the end of the 
   month, the inventory consists of two 
   layers: 3,000 units at $64.30, or 
   $192,900, and 50 units at $66, or 
   $3,300. Adding the two layers together 
   produces a total ending inventory of 
   $196,200. 

   Answer (B) is incorrect because 
   $197,488 is the answer under the 
   periodic LIFO method but is based on 
   the $64.75 cost of the March 4 
   purchase. 

   Answer (C) is incorrect because 
   $263,863 is based on the $86.50 selling 
   price at March 1, not the cost of the 
   items. 

   Answer (D) is incorrect because 
   $268,400 is based on the $88 selling 
   price at the end of the month, not the 
   cost. 


[481] Source: CMA 0696 2-15 

   Answer (A) is incorrect because 
   $194,200 ignores the March 25 
   purchase. 

   Answer (B) is incorrect because 
   $198,301 is based on the unweighted 
   average of the three unit purchase 
   prices. 

   Answer (C) is correct. Under the 
   weighted-average method, all inventory 
   available for sale during the period is 
   weighted, as follows, to determine the 
   average cost per unit:

            3,200 @ $64.30     =  $205,760
            3,400 @ $64.75     =   220,150
            3,500 @ $66.00     =   231,000
            -----                  -------
   Total   10,100              =  $656,910
   Dividing the $656,910 total cost by the 
   10,100 available units produces an 
   average unit cost of $65.04059. 
   Multiplying the unit cost times the 3,050 
   units in ending inventory produces a 
   total value at March 31 of $198,374. 

   Answer (D) is incorrect because 
   $199,233 is based on a perpetual 
   moving average, not a periodic 
   weighted average. 


[482] Source: CMA 0696 2-16 

   Answer (A) is incorrect because 
   $194,200 ignores the March 25 
   purchase. 

   Answer (B) is incorrect because 
   $198,301 is based on the unweighted 
   average of the three unit purchase 
   prices. 

   Answer (C) is correct. Under the 
   perpetual moving-average method, the 
   inventory is revalued after every 
   purchase and sale. The unit cost will 
   change after every purchase. The 
   calculations for the first purchase are as 
   follows:

           3,200 @ $64.30      =  $205,760
           3,400 @ $64.75      =   220,150
            -----                  -------
   Total   6,600               =  $425,910
   The unit cost of $64.531818 was 
   calculated by dividing the total 
   inventory value of $425,910 by the 
   6,600 units. After selling 3,600 units on 
   March 14, the company would be left 
   with 3,000 units at $64.531818, or 
   $193,595.45. This amount is added to 
   the next purchase on March 25:

            3,000 @ $64.531818  =  $193,595.45
            3,500 @ $66.00      =   231,000.00
            -----                  -----------
   Total    6,500               =  $424,595.45
   The unit cost of $65.322376 was 
   calculated by dividing the $424,595.45 
   of total cost by the 6,500 available 
   units. Deducting the 3,450 units sold on 
   March 28 leaves 3,050 ending units at 
   $65.322376 each, for a total cost of 
   $199,233. 

   Answer (D) is incorrect because 
   $265,960 is based on selling prices. 


[483] Source: CMA 1296 2-1 

   Answer (A) is incorrect because credit 
   sales should be used instead of total 
   sales. 

   Answer (B) is incorrect because credit 
   sales are preferred to total sales, and 
   the ending balance in receivables can 
   also be used as the basis for estimating 
   bad debts. 

   Answer (C) is correct. The allowance 
   method records bad debt expense 
   systematically as a percentage of either 
   sales or the level of accounts 
   receivable. The latter calculation 
   considers the amount already existing in 
   the allowance account. The credit is to 
   a contra asset (allowance) account. As 
   accounts receivable are written off, they 
   are charged to the allowance account. 

   Answer (D) is incorrect because each 
   year's bad debt expense should be 
   matched with its revenues. 


[484] Source: CMA 1296 2-2 

   Answer (A) is correct. The extruding 
   machine's depreciable base is $240,000 
   ($200,000 + $40,000 installation costs 
   - $0 salvage), so the annual charge is 
   $30,000 ($240,000  8). The molding 
   equipment's depreciable base is 
   $450,000 ($500,000 - $50,000 
   salvage). Hence, annual depreciation is 
   $45,000 ($450,000  10). The 
   assembly equipment's depreciable base 
   is $740,000 ($800,000 - $60,000 
   salvage), resulting in an annual charge 
   of $92,500 ($740,000  8). However, 
   given that year 3 is the first year of use, 
   the half-year convention is applied. 
   Under this income tax convention, half a 
   year's depreciation is recorded in the 
   year of acquisition and in the year of 
   disposal. Accordingly, year 3 
   depreciation is $46,250 ($92,500  2). 
   Total depreciation for the three types of 
   equipment is $121,250 ($30,000 + 
   $45,000 + $46,250). 

   Answer (B) is incorrect because 
   $233,750 is based on the 
   double-declining-balance method and 
   fails to consider installation costs. 

   Answer (C) is incorrect because 
   $242,500 is based on the 
   double-declining-balance method. 

   Answer (D) is incorrect because 
   $246,400 is based on the composite 
   method. 


[485] Source: CMA 1296 2-3 

   Answer (A) is incorrect because 
   $121,250 is the depreciation under the 
   straight-line method. 

   Answer (B) is incorrect because 
   $233,750 fails to consider installation 
   costs. 

   Answer (C) is correct. Under the 
   double-declining-balance method, the 
   depreciation rate is twice the 
   straight-line rate, and salvage value is 
   ignored initially. The extruding machine 
   is depreciated at a 25% rate because it 
   has an 8-year life. For year 2, 
   depreciation based on the half-year 
   convention is $30,000 {[25% x 
   ($200,000 + $40,000 installation cost)] 
    2}. The depreciation for year 3 is 
   therefore $52,500 [25% x ($240,000 - 
   $30,000). The molding equipment is 
   depreciated at a 20% rate given its 
   10-year life, so year 2 depreciation 
   based on the half-year convention is 
   $50,000 [(20% x $500,000)  2]. 
   Accordingly, year 3 depreciation is 
   $90,000 [20% x ($500,000 - $50,000)]. 
   The assembly equipment is depreciated 
   at a 25% rate based on an 8-year life. 
   Under the half-year convention, year 3 
   depreciation is $100,000 [(25% x 
   $800,000)  2]. Total depreciation 
   expense is $242,500 ($52,500 + 
   $90,000 + $100,000). 

   Answer (D) is incorrect because 
   $246,400 is based on the composite 
   method. 


[486] Source: CMA 1296 2-4 

   Answer (A) is incorrect because 
   $121,250 is the year 3 straight-line 
   depreciation. 

   Answer (B) is incorrect because 
   $233,750 is the year 3 DDB 
   depreciation without regard to 
   installation costs. 

   Answer (C) is incorrect because 
   $242,500 is the DDB depreciation for 
   year 3. 

   Answer (D) is correct. The composite 
   method of depreciation relates to 
   groups of dissimilar assets with varying 
   useful lives. The depreciation rate 
   applied is an average found by dividing 
   the sum of the straight-line amounts 
   (after allowance for salvage value) by 
   the total cost. The rate is applied to the 
   total cost, and the group is depreciated 
   to the salvage value (if no changes 
   occur in the group). Accordingly, year 4 
   composite depreciation is $246,400 
   [16% given composite rate x ($240,000 
   + $500,000 + $800,000)]. 


[487] Source: CMA 1296 2-28 

   Answer (A) is correct. SFAS 34 
   requires capitalization of material 
   interest costs for certain assets 
   constructed for internal use and for sale 
   or lease as discrete units. SFAS 34 
   does not apply to products routinely 
   produced for inventory, assets in use or 
   ready for use, assets not being used or 
   prepared for use, or idle land. 

   Answer (B) is incorrect because 
   interest capitalization does not apply to 
   assets that are not being used in the 
   earning activities of a company. 

   Answer (C) is incorrect because 
   interest capitalization does not apply to 
   assets acquired with externally 
   restricted gifts or grants. 

   Answer (D) is incorrect because 
   interest capitalization does not apply to 
   assets that are routinely produced. 


[488] Source: CMA 0697 2-7 

   Answer (A) is correct. The depreciable 
   cost of the plane is $112,500 ($123,750 
   cost - $11,250 residual value). Hence, 
   the per-hour depreciation charge is 
   $7.50 ($112,500  15,000-hour useful 
   life), and the total 2001 depreciation 
   expense is $13,680 ($7.50 x 1,824 
   hours). 

   Answer (B) is incorrect because 
   $14,880 is based on 1998 operations. 

   Answer (C) is incorrect because 
   $15,048 ignores the residual value of 
   the airplane. 

   Answer (D) is incorrect because 
   $18,750 is based on the straight-line 
   method. 


[489] Source: CMA 0697 2-8 

   Answer (A) is incorrect because 
   $17,188 is based on the straight-line 
   percentage of 16-2/3%. 

   Answer (B) is incorrect because 
   $25,000 subtracted residual value from 
   initial cost. 

   Answer (C) is correct. Under the DDB 
   method, the depreciation percentage 
   used is double the straight-line rate. For 
   the airplane, the DDB rate is 33-1/3% 
   [2 x (100%  6 years)]. In the first year, 
   the DDB rate is applied to the initial 
   cost of the asset (residual value is 
   ignored). Thus, depreciation is $41,250 
   (33-1/3% x $123,750). This amount is 
   subtracted from the initial cost to 
   determine the new depreciable base. 
   Accordingly, depreciation for the 
   second year is $27,500 [33-1/3% x 
   ($123,750 - $41,250)]. 

   Answer (D) is incorrect because 
   $41,250 is the depreciation expense for 
   the first year. 


[490] Source: CMA 0697 2-9 

   Answer (A) is incorrect because 
   $17,679 is based on the fourth-year rate 
   and ignores residual value. 

   Answer (B) is incorrect because 
   $18,750 is based on the straight-line 
   method. 

   Answer (C) is correct. Under the SYD 
   method, the depreciable base is 
   $112,500 ($123,750 cost - $11,250 
   residual value). The annual 
   depreciation rate equals the years 
   remaining divided by the sum of the 
   digits in the years of the asset's life. For 
   a 6-year life, the denominator is 21 (1 + 
   2 + 3 + 4 + 5 + 6). Thus, third-year 
   depreciation is $21,429 [$112,500 x (4 
    21)]. 

   Answer (D) is incorrect because 
   $23,571 ignores residual value. 


[491] Source: CMA 0697 2-11 

   Answer (A) is incorrect because 
   unrealized gains and losses on 
   available-for-sale securities do not 
   appear on the income statement. 

   Answer (B) is correct. 
   Available-for-sale securities include 
   (1) equity securities with readily 
   determinable fair values that are not 
   classified as trading securities and (2) 
   debt securities that are not classified as 
   held-to-maturity or trading securities. 
   Unrealized holding gains and losses are 
   measured by the difference between 
   recorded cost and fair value at 
   year-end. These holding gains and 
   losses are excluded from earnings and 
   reported in other comprehensive 
   income and the unrealized gain is 
   reported as a credit to accumulated 
   other comprehensive income rather than 
   shareholders' equity. The balance is 
   reported net of the tax effect. Thus, the 
   difference at May 31, year 3 is $8,005 
   ($643,500 fair value - $635,495 
   amortized cost). This unrealized gain is 
   reported as a credit to accumulated 
   other comprehensive income. 

   Answer (C) is incorrect because gains 
   are credits (increases in equity) and 
   losses are debits (decreases in equity). 

   Answer (D) is incorrect because SFAS 
   115 requires unrealized gains and 
   losses on available-for-sale securities 
   to be recorded in other comprehensive 
   income. 


[492] Source: CMA 0697 2-12 

   Answer (A) is incorrect because 
   unrealized gains and losses on 
   held-to-maturity securities are not 
   recorded. 

   Answer (B) is incorrect because 
   unrealized gains and losses on 
   held-to-maturity securities are not 
   recorded. 

   Answer (C) is incorrect because 
   unrealized gains and losses on 
   held-to-maturity securities are not 
   recorded. 

   Answer (D) is correct. Debt securities 
   that the reporting enterprise has the 
   positive intent and ability to hold to 
   maturity are classified as 
   held-to-maturity. Held-to-maturity 
   securities are reported at amortized 
   cost. Under the provisions of SFAS 
   115, any unrealized gains or losses are 
   not recognized. 


[493] Source: CMA 0697 2-27 

   Answer (A) is correct. SFAS 121 
   applies to long-lived assets, certain 
   identifiable intangibles, and goodwill 
   related to those assets to be held and 
   used. It also applies to long-lived assets 
   and certain identifiable intangibles to 
   be disposed of. Thus, it applies to 
   buildings, computers and other 
   equipment, patents, trademarks, etc. 
   SFAS 121 does not apply to financial 
   instruments, long-term customer 
   relationships of a financial institution, 
   mortgage and other servicing rights, 
   deferred policy acquisition costs, 
   deferred tax assets, and certain assets 
   subject to specialized industry 
   accounting principles. 

   Answer (B) is incorrect because 
   goodwill is an asset to which SFAS 
   121 applies. 

   Answer (C) is incorrect because 
   minicomputers used to run a production 
   process are assets to which SFAS 121 
   applies. 

   Answer (D) is incorrect because 
   patents on a production process are 
   assets to which SFAS 121 applies. 


[494] Source: CMA 0697 2-30 

   Answer (A) is incorrect because it is a 
   condition for recognition of a sale. 

   Answer (B) is correct. SFAS 48 
   requires sales revenue and cost of sales 
   to be reduced by expected returns when 
   goods are sold with a right of return. 
   The pronouncement states that the sale 
   may be recognized at the time of sale if 
   all of the following conditions are met: 
   (1) The seller's price is substantially 
   fixed or determinable; (2) the buyer has 
   paid the seller, or the buyer is obligated 
   to pay, and the obligation is not 
   contingent on resale; (3) the buyer's 
   obligation to the seller is unchanged by 
   damage to, or theft or destruction of, the 
   product; (4) the buyer has economic 
   substance apart from the seller; (5) the 
   seller does not have any significant 
   obligations regarding resale of the 
   product by the buyer; and (6) the amount 
   of future returns can be reasonably 
   estimated. Hence, if the seller has 
   significant obligations for future 
   performance to help the buyer resell the 
   product, revenue should not be 
   recorded. 

   Answer (C) is incorrect because it is a 
   condition for recognition of a sale. 

   Answer (D) is incorrect because it is a 
   condition for recognition of a sale. 


[495] Source: Publisher 

   Answer (A) is incorrect because the 
   transferor has not surrendered control 
   of the assets if he/she retains any 
   beneficial interest in the assets. 

   Answer (B) is correct. The focus is on 
   control. A transfer of financial assets 
   over which the transferor surrenders 
   control is a sale to the extent it receives 
   consideration other than a beneficial 
   interest in the transferred assets. The 
   transferor has not surrendered control if 
   the transferee does not have an 
   unconstrained right to pledge or 
   exchange the assets. However, a 
   transferor's right of first refusal on a 
   bona fide offer from a third party, a 
   requirement to obtain the transferor's 
   permission to sell that is not 
   unreasonably withheld, or a prohibition 
   on sale to the transferor's competitor 
   generally does not constrain a 
   transferee from pledging or exchanging 
   the asset. The prohibition on selling to 
   the transferor's competitor does not 
   constrain the transferee when there are 
   numerous willing buyers. 

   Answer (C) is incorrect because the 
   transferor has not surrendered control 
   of the assets if the transferred assets are 
   not beyond his/her reach, even in the 
   event of bankruptcy. 

   Answer (D) is incorrect because the 
   transferor maintains effective control 
   over the transferred assets through an 
   agreement that entitles and obligates the 
   transferor to repurchase or redeem 
   substantially the same assets on 
   substantially the agreed terms at a fixed 
   or determinable price before their 
   maturity. 


[496] Source: CMA 0689 3-6 

   Answer (A) is incorrect because 
   interest capitalization ends when the 
   construction has been completed and the 
   asset is in use or ready for its intended 
   use. Capitalization must also cease if 
   the asset is not in use in the earnings 
   activities of the enterprise and is not 
   undergoing the activities necessary to 
   get it ready for use. 

   Answer (B) is incorrect because 
   interest capitalization ends when the 
   construction has been completed and the 
   asset is in use or ready for its intended 
   use. Capitalization must also cease if 
   the asset is not in use in the earnings 
   activities of the enterprise and is not 
   undergoing the activities necessary to 
   get it ready for use. 

   Answer (C) is incorrect because there 
   is no such provision in SFAS 34. 

   Answer (D) is correct. SFAS 34 
   requires the capitalization of material 
   interest costs incurred to construct or 
   otherwise produce certain assets 1) for 
   internal use and 2) discrete units (for 
   example, buildings or ships). The 
   interest costs to be capitalized are those 
   that could have been avoided if the 
   asset had not been constructed. 


[497] Source: CMA 1294 2-8 

   Answer (A) is incorrect because 
   $4,400 assumes all items cost $20. It is 
   the value under periodic LIFO. 

   Answer (B) is incorrect because $4,480 
   assumes that the ending inventory 
   consists of 200 units at $20 and 20 units 
   at $24. 

   Answer (C) is correct. Moving average 
   is a weighted-average method used only 
   with perpetual inventory records. After 
   each purchase, a new weighted-average 
   cost is computed based on the cost of 
   the inventory on hand. Sales prior to the 
   next purchase are then removed from 
   inventory at the previously calculated 
   weighted average. Thus, the average 
   cost is recomputed after every 
   purchase. The following demonstrates 
   how inventory is determined under a 
   perpetual moving average system. The 
   ending inventory of $4,785 consists of 
   220 units at $21.75 each.

                                                  Average
                        +       -     Inventory     Cost
                     ------   -----   ---------   -------
   + 200 x $20 =     $4,000            $4,000      $20.00
   + 160 x $20 =      3,200             7,200       20.00
   - 180 x $20 =              3,600     3,600       20.00
   + 140 x $24 =      3,360             6,960       21.75
   - 100 x $21.75 =           2,175     4,785       21.75

   Answer (D) is incorrect because 
   $4,960 is the value under the FIFO 
   method. 


[498] Source: CMA 0695 2-4 

   Answer (A) is incorrect because 
   $6,000 is based on the 
   units-of-production method. 

   Answer (B) is correct. Under the SYD 
   method, the amount to be depreciated is 
   $40,000 ($50,000 original cost - 
   $10,000 salvage). The portion expensed 
   each year is based on a fraction, the 
   denominator of which is the summation 
   of the years of life of the asset being 
   depreciated. For an asset with a 5-year 
   life, the denominator is 15 (5 + 4 + 3 + 
   2 + 1). The numerator equals the years 
   remaining. For Year 3, the fraction is 3 
   15, and depreciation expense is 
   $8,000 [$40,000 x (3  15)]. 

   Answer (C) is incorrect because 
   $10,000 omits the vehicle's salvage 
   value from the calculation. 

   Answer (D) is incorrect because 
   $13,333 is the depreciation expense for 
   Year 1. 


[499] Source: CMA 0695 2-5 

   Answer (A) is incorrect because 
   $8,000 is the SYD depreciation for 
   Year 4. 

   Answer (B) is incorrect because 
   $12,000 is the depreciation expense for 
   Year 3. 

   Answer (C) is incorrect because 
   $16,000 is the depreciation expense for 
   Year 1 if salvage value is deducted 
   from original cost. 

   Answer (D) is correct. For an asset 
   with a 5-year life, the straight-line rate 
   is 20%. Under DDB, the applicable 
   percentage is 40%. This rate is applied 
   to the book value of the asset, which for 
   the first year is the original cost. Thus, 
   first-year DDB depreciation is $20,000 
   (40% x $50,000), second-year 
   depreciation is $12,000 [40% x 
   ($50,000 - $20,000)], and total 
   depreciation for Year 1 and Year 2 is 
   $32,000. 


[500] Source: CMA 0695 2-6 

   Answer (A) is correct. Under the 
   units-of-production method, periodic 
   depreciation is based on the proportion 
   of expected total production that 
   occurred. For the years Year 1 through 
   Year 4, the total depreciation was 
   $36,000 {($50,000 - $10,000) x 
   [(30,000 + 20,000 + 15,000 + 25,000) 
    100,000]}. Hence, the remaining 
   depreciable base was $4,000 ($50,000 
   cost - $10,000 salvage - $36,000). 
   Given that the 12,000 miles driven in 
   Year 5 exceeded the remaining 
   estimated production of 10,000 miles 
   (100,000 - 30,000 - 20,000 - 15,000 - 
   25,000), only the $4,000 of the 
   remaining depreciable base should be 
   recognized in Year 5. 

   Answer (B) is incorrect because $4,800 
   is based on a Year 5 rate of 12% 
   (12,000 miles  100,000 miles of 
   estimated usage). It ignores the effects 
   of depreciation expense deducted in 
   prior years. 

   Answer (C) is incorrect because $5,000 
   assumes that depreciation is based on 
   original cost without regard to salvage 
   value. 

   Answer (D) is incorrect because 
   $6,000 is based on a 12% rate and 
   ignores salvage value. 


[501] Source: Publisher 

   Answer (A) is incorrect because 
   $12,000 is based on the 
   units-of-production method. 

   Answer (B) is correct. Under SYD, the 
   amount depreciated is the original cost 
   ($100,000) minus salvage value 
   ($20,000), or $80,000. The portion 
   expensed each year is based on a 
   fraction, the denominator of which is 
   the sum of the years of life of the asset. 
   For an asset with a 5-year life, the 
   denominator is 15 (5 + 4 + 3 + 2 + 1). 
   The numerator is 5 in the first year, 4 in 
   the second year, etc. The year 1999 was 
   the third year of the vehicle's life; thus, 
   the fraction is 3  15, and annual 
   expense was $16,000 [(3  15) x 
   $80,000]. 

   Answer (C) is incorrect because 
   $20,000 results from not deducting 
   salvage value from the cost. 

   Answer (D) is incorrect because 
   $26,667 was the depreciation for the 
   first year. 


[502] Source: Publisher 

   Answer (A) is incorrect because 
   $16,000 is the difference between 1997 
   and 1998 depreciation expense. 

   Answer (B) is incorrect because 
   $24,000 is the depreciation expense for 
   1998. 

   Answer (C) is incorrect because 
   $32,000 is the first year's depreciation 
   if salvage value were deducted to 
   determine the depreciable amount. 

   Answer (D) is correct. For an asset 
   with a 5-year life, the straight-line rate 
   is 20%. Under DDB, the applicable 
   percentage is double the straight-line 
   rate, or 40%. This rate is multiplied 
   times the book value of the asset, which 
   for the first year is the original cost. 
   Hence, DDB depreciation was $40,000 
   (40% x $100,000) for 1997 and 
   $24,000 [40% x ($100,000 - $40,000)] 
   for 1998. Accumulated depreciation at 
   the end of 1998 was therefore $64,000 
   ($40,000 + $24,000). 


[503] Source: Publisher 

   Answer (A) is correct. Unit 
   depreciation is calculated and then 
   multiplied by the units produced in a 
   given year. Accordingly, unit 
   depreciation is $.80 per mile 
   [($100,000 cost - $20,000 salvage 
   value)  100,000 miles]. For 1997 
   through 2000, the annual depreciation 
   simply equaled the unit depreciation 
   times the miles driven. For 2001, this 
   must be modified because 90,000 
   (30,000 + 20,000 + 15,000 + 25,000) 
   of the 100,000 miles of the estimated 
   useful life have already been driven. 
   Because only 10,000 miles of the useful 
   life remain after 2000, 2001 
   depreciation is $8,000 ($.80 x 10,000 
   miles). 

   Answer (B) is incorrect because $9,600 
   assumes the full 12,000 miles driven in 
   2001 are eligible for depreciation. 

   Answer (C) is incorrect because 
   $10,000 assumes that depreciation is 
   based on original cost without regard to 
   salvage value. 

   Answer (D) is incorrect because 
   $12,000 is based on 12,000 miles and 
   ignores salvage value. 


[504] Source: Publisher 

   Answer (A) is correct. Under SYD, the 
   amount depreciated is the original cost 
   ($100,000) minus salvage value 
   ($20,000), or $80,000. The portion 
   expensed each year equals the 
   depreciable base times the SYD 
   fraction (remaining years of useful life 
    sum of the years' digits). The fraction 
   for 1997 was 5  15 [5 years remaining 
    (5 + 4 + 3 + 2 + 1)], so annual 
   expense was $26,667. However, the 
   half-year convention reduced this 
   amount to $13,333 (50% x $26,667). 

   Answer (B) is incorrect because 
   $16,667 results from not subtracting 
   salvage value. 

   Answer (C) is incorrect because 
   $26,667 does not consider the half-year 
   convention. 

   Answer (D) is incorrect because 
   $33,333 does not consider either 
   salvage value or the half-year 
   convention. 


[505] Source: Publisher 

   Answer (A) is incorrect because 
   $8,000 is the units-of-production 
   depreciation for 2001. 

   Answer (B) is incorrect because 
   $10,667 is the depreciation for the last 
   half of 1998. 

   Answer (C) is incorrect because 
   $21,333 is the charge for the full second 
   year of the asset's life. 

   Answer (D) is correct. Under SYD, the 
   amount depreciated is the original cost 
   ($100,000) minus salvage value 
   ($20,000), or $80,000. The portion 
   expensed each year equals the 
   depreciable base times the SYD 
   fraction. For 1997, this fraction was 5  
   15 [5 years remaining  (5 + 4 + 3 + 2 
   + 1)], and annual depreciation was 
   $26,667 [(5  15) x 80,000]. Under the 
   half-year convention, $13,333 (50% x 
   $26,667) of this amount was expensed 
   in 1997. The remaining $13,333 was 
   expensed during the first 6 months of 
   1998. The expense for the last 6 months 
   of 1998 was half of the second year's 
   depreciation, or $10,667 [(4  15) x 
   50% x $80,000]. Thus, total 
   depreciation for 1998 was $24,000 
   ($13,333 + $10,667). 


[506] Source: Publisher 

   Answer (A) is correct. For an asset 
   with a 5-year life, the straight-line rate 
   is 20%. Under DDB, the applicable 
   percentage is double the straight-line 
   rate, or 40%. This rate is multiplied by 
   the book value of the asset, which for 
   the first year is the original cost. 
   Consequently, DDB depreciation was 
   $40,000 (40% x $100,000) for 1997, 
   $24,000 for 1998 [40% x ($100,000 - 
   $40,000)], and $14,400 for 1999 [40% 
   x ($100,000 - $40,000 - $24,000)]. 
   Because accumulated depreciation 
   through 1999 was $78,400 ($40,000 + 
   $24,000 + $14,400), book value was 
   $21,600 ($100,000 - $78,400), and 
   2000 depreciation (before considering 
   salvage value) was $8,640 (40% x 
   $21,600). However, the asset cannot be 
   depreciated below its salvage value. 
   Thus, the company cannot recognize 
   more than $1,600 of depreciation 
   expense ($21,600 - $20,000 salvage 
   value) in 2000. 

   Answer (B) is incorrect because $6,912 
   is the amount that would be expensed if 
   the depreciable base was net of the 
   salvage value and the asset was 
   depreciated below this salvage value. 

   Answer (C) is incorrect because $8,640 
   assumes no salvage value. 

   Answer (D) is incorrect because 
   $14,400 is the expense for 1999. 


[507] Source: Publisher 

   Answer (A) is incorrect because cash is 
   debited for $270,000. 

   Answer (B) is correct. The entry to 
   record a nonrecourse sale of 
   receivables is to debit cash for the 
   proceeds of the sale [(100% - 5% - 
   5%) x $300,000 = $270,000], debit a 
   receivable from the factor for the 
   proceeds retained to cover probable 
   adjustments (5% x $300,000 = 
   $15,000), and credit accounts 
   receivable for the face value of the 
   receivables transferred ($300,000). The 
   difference of $15,000 (the finance 
   charge) is debited to a loss on sale of 
   receivables. 

   Answer (C) is incorrect because the 
   company will have no contingent 
   liability. The accounts were transferred 
   without recourse. 

   Answer (D) is incorrect because the 
   company did not borrow money; it sold 
   an asset. Thus, "interest expense" is not 
   an appropriate term. 


[508] Source: Publisher 

   Answer (A) is incorrect because 
   $392,230 is the inventory under the 
   periodic LIFO method. 

   Answer (B) is incorrect because 
   $394,975 is the inventory under the 
   periodic LIFO method using the $64.75 
   cost of the May 4 purchase. 

   Answer (C) is correct. The available 
   inventory consisted of 20,200 units 
   (6,400 BI + 6,800 May 4 purchase + 
   7,000 May 24 purchase), and 14,100 
   units (7,200 May 13 sale + 6,900 May 
   27 sale) were sold. Hence, ending 
   inventory consists of 6,100 units. Under 
   a FIFO assumption, these units are 
   deemed to be from the last purchase. 
   The value of the ending inventory is 
   therefore $402,600 (6,100 units x $66 
   unit cost of the May 24 purchase). The 
   answer would have been the same in a 
   periodic system, a statement that cannot 
   be made for other inventory flow 
   assumptions. 

   Answer (D) is incorrect because 
   $536,800 is based on the $88 selling 
   price at the end of the month. 


[509] Source: Publisher 

   Answer (A) is incorrect because 
   $392,230 is the inventory under the 
   periodic LIFO method. 

   Answer (B) is incorrect because 
   $394,975 is the inventory under the 
   periodic LIFO method using the $64.75 
   cost of the May 4 purchase. 

   Answer (C) is correct. The available 
   inventory consisted of 20,200 units 
   (6,400 BI + 6,800 May 4 purchase + 
   7,000 May 24 purchase), and 14,100 
   units (7,200 May 13 sale + 6,900 May 
   27 sale) were sold. Hence, ending 
   inventory consists of 6,100 units. Under 
   a FIFO assumption, these units are 
   deemed to be from the last purchase. 
   The value of the ending inventory is 
   therefore $402,600 (6,100 units x $66 
   unit cost of the May 24 purchase). The 
   answer would have been the same in a 
   perpetual system, a statement that 
   cannot be made for other inventory flow 
   assumptions. 

   Answer (D) is incorrect because 
   $536,800 is based on the $88 selling 
   price at the end of the month. 


[510] Source: Publisher 

   Answer (A) is correct. The ending 
   inventory consists of 6,100 units 
   (beginning inventory + purchases - 
   sales). Under the periodic LIFO 
   method, ending inventory is deemed to 
   come from the beginning 6,400-unit 
   inventory priced at $64.30 per unit. 
   Thus, the inventory value is $392,230 
   (6,100 x $64.30). 

   Answer (B) is incorrect because 
   $394,975 is based on the $64.75 cost of 
   the March 4 purchase. 

   Answer (C) is incorrect because 
   $402,600 is based on the FIFO method. 

   Answer (D) is incorrect because 
   $536,800 is based on the $88 selling 
   price at the end of the month. 


[511] Source: Publisher 

   Answer (A) is incorrect because 
   $392,230 is the inventory under the 
   LIFO periodic method. 

   Answer (B) is correct. Under perpetual 
   LIFO, the 7,200-unit sale on May 13 is 
   deemed to have eliminated the 
   6,800-unit layer acquired on May 4 and 
   to have reduced the 6,400-unit May 1 
   layer to 6,000 units. The 6,900-unit sale 
   on May 27 reduced the 7,000-unit May 
   24 layer to 100 units. The ending 
   inventory therefore has two layers 
   under LIFO periodic: 6,000 units at 
   $64.30 per unit and 100 units at $66.00 
   per unit, a total of $392,400. 

   Answer (C) is incorrect because 
   $394,975 is based on the $64.75 cost of 
   the May 4 purchase. 

   Answer (D) is incorrect because 
   $402,600 is based on the FIFO method. 


[512] Source: Publisher 

   Answer (A) is incorrect because 
   $393,633 is based on the amount of the 
   weighted-average unit cost immediately 
   after the May 4 purchase. 

   Answer (B) is incorrect because 
   $396,622 is based on the unweighted 
   average of the three unit purchase 
   prices. 

   Answer (C) is correct. Under the 
   weighted-average periodic method, all 
   inventory available for sale during the 
   period is weighted to determine the 
   average cost per unit.

                         6,400 x $64.30 = $  411,520
                         6,800 x $64.75 =    440,300
                         7,000 x $66.00 =    462,000
                        ------            ----------
                        20,200            $1,313,820
                        ======            ==========
   Thus, the weighted-average unit cost 
   (rounded) is $65.04 ($1,313,820  
   20,200 units). The total value at March 
   31 is therefore $396,744 ($65.04 x 
   6,100 units). 

   Answer (D) is incorrect because 
   $398,467 is based on a perpetual 
   moving average. 


[513] Source: Publisher 

   Answer (A) is incorrect because 
   $393,633 is based on the amount of the 
   weighted-average unit cost immediately 
   after the May 4 purchase. 

   Answer (B) is incorrect because 
   $396,622 is based on the unweighted 
   average of the three unit purchase 
   prices. 

   Answer (C) is incorrect because 
   $396,744 is based on a periodic 
   weighted average. 

   Answer (D) is correct. Under the 
   perpetual moving-average method, the 
   inventory is revalued after every 
   purchase and sale. The calculations for 
   the first purchase are as follows:

                       Units     Unit Cost
                       ------    ---------
                        6,400 x  $64.30 = $411,520
                        6,800 x  $64.75 =  440,300
                       ------             --------
                       13,200           = $851,820
                       ======             ========
   The unit cost is $64.53 (rounded) 
   ($851,820  13,200 units). After selling 
   7,200 units on May 13, the company had 
   6,000 units at $64.53, or $387,180. 
   This amount is added to the next 
   purchase on May 25:

                        6,000 x  $64.53 = $387,180
                        7,000 x  $66.00 =  462,000
                       ------             --------
                       13,000           = $849,180
                       ======             ========
   The unit cost is $65.32 (rounded) 
   ($849,180  13,000 units). Subtracting 
   the 6,900 units sold on May 27 leaves 
   6,100 units at $65.32 each, or 
   $398,452. 


[514] Source: Publisher 

   Answer (A) is incorrect because 
   $480,000 is the inventory at the end of 
   year 1. 

   Answer (B) is incorrect because 
   $500,000 is the year 2 inventory at 
   base-year prices. 

   Answer (C) is correct. The year 2 
   ending inventory must be converted into 
   base-year prices by dividing it by the 
   year 2 price index of 1.10, resulting in 
   an inventory value of $500,000 
   ($550,000  1.10) at base-year prices. 
   This amount consists of two layers: 
   $480,000 purchased during the base 
   year and $20,000 acquired in year 2. 
   The latter amount must be converted 
   back into year-end prices because the 
   merchandise was not purchased during 
   the base year. Accordingly, this 
   $20,000 increment is multiplied by the 
   price index for the current year. The 
   result is an increment of $22,000 
   ($20,000 x 1.10). The total inventory is 
   $502,000 ($480,000 + $22,000). 

   Answer (D) is incorrect because 
   $550,000 is the value at year-end 
   prices. 


[515] Source: Publisher 

   Answer (A) is incorrect because 
   $480,000 was the inventory at the end 
   of year 1. 

   Answer (B) is incorrect because 
   $500,000 is the year 3 inventory at 
   base-year prices. 

   Answer (C) is correct. The ending 
   inventory at year-end prices must be 
   converted into base-year prices by 
   dividing it by the year 3 price index of 
   1.20, resulting in an inventory value of 
   $500,000 ($600,000  1.20) at 
   base-year prices. This amount is the 
   same as the inventory for year 2 at 
   base-year prices. Thus, no increment 
   was added during year 3. Consequently, 
   the ending inventory for year 3 is the 
   same as at the end of year 2, or 
   $502,000. This amount consists of 
   $480,000 of inventory purchased in 
   year 1 and $22,000 purchased in year 2. 
   Under LIFO, the assumption is that 
   nothing is still on hand from year 3 
   purchases because the inventory is the 
   same as at the end of the preceding 
   year. 

   Answer (D) is incorrect because 
   $600,000 is the year 3 inventory at 
   year-end prices. 


[516] Source: CMA 0697 2-19 

   Answer (A) is incorrect because 
   $1,400 is the value under periodic 
   LIFO. 

   Answer (B) is incorrect because $1,460 
   is the value under perpetual LIFO. 

   Answer (C) is incorrect because $1,493 
   is the value under the weighted-average 
   method. 

   Answer (D) is correct. The FIFO 
   assumption is that the first units 
   purchased are the first sold, so the 
   ending inventory consists of the most 
   recent units purchased. Thus, ending 
   inventory consists of 140 units (100 
   beginning balance + 200 purchased - 
   190 sold + 150 purchased - 120 sold) 
   from the May 21 purchase of 150 units. 
   Its value is $1,680 ($12 x 140). Under 
   FIFO, the inventory value is the same 
   regardless of whether the inventory 
   system is perpetual or periodic. 


[517] Source: CMA 0697 2-20 

   Answer (A) is incorrect because 
   $1,400 is the value under periodic 
   LIFO. 

   Answer (B) is correct. The LIFO 
   assumption is that the last items 
   purchased are the first sold. Moreover, 
   the inventory value must be recalculated 
   after each purchase and sale of 
   merchandise when the perpetual LIFO 
   method is used. After the May 16 sale, 
   the company held 110 units (100 
   beginning balance + 200 May 9 
   purchase - 190 May 16 sale) at a unit 
   cost of $10. The May 21 purchase 
   created a layer of 150 units at $12 per 
   unit. Because the May 29 sale of 120 
   units is deemed to have come entirely 
   from the layer created on May 21, the 
   ending inventory of 140 units has two 
   layers: 110 units at $10 and 30 units at 
   $12. Ending inventory is therefore 
   $1,460 [(110 x $10) + (30 x $12)]. 

   Answer (C) is incorrect because $1,493 
   is the value under the weighted-average 
   method. 

   Answer (D) is incorrect because 
   $1,562 is the value under the 
   moving-average method. 


[518] Source: CMA 0690 3-3 

   Answer (A) is incorrect because 
   $17,500 is the ending inventory based 
   on LIFO retail. 

   Answer (B) is correct. The 
   conventional retail inventory method 
   adds beginning inventory, net 
   purchases, and markups (but not 
   markdowns) to calculate a cost 
   percentage. The purpose of excluding 
   markdowns is to approximate a 
   lower-of-average-cost-or-market 
   valuation. The cost percentage is then 
   used to reduce the retail value of the 
   ending inventory to cost. FCL's 
   cost-retail ratio is 40% ($90,000  
   $225,000), and ending inventory at cost 
   is therefore $20,000 (40% x $50,000 
   ending inventory at retail).

                                 Cost         Retail
                                -------     ---------
   Beginning inventory          $35,000     $ 100,000
   Purchases                     55,000       110,000
   Markups                                     15,000
                                -------     ---------
   Total goods available        $90,000     $ 225,000
   Sales                                     (150,000)
   Markdowns                                  (25,000)
                                -------     ---------
   Calculated retail value of
     ending inventory                       $  50,000
                                            =========

   Answer (C) is incorrect because 
   $27,500 is based on FIFO retail. 

   Answer (D) is incorrect because 
   $50,000 is the ending inventory at 
   retail. 


[519] Source: CIA 1196 IV-21 

   Answer (A) is incorrect because 
   $2,330 is based on periodic LIFO 
   inventory pricing. 

   Answer (B) is incorrect because $2,805 
   is the FIFO gross profit. 

   Answer (C) is correct. LIFO assumes 
   that the latest goods purchased are the 
   first sold. In a perpetual system, 
   purchases are directly recorded in the 
   inventory account, and cost of goods 
   sold is determined as each sale is made. 
   Accordingly, the cost of goods sold 
   using perpetual LIFO is $2,375.

   Units Sold   Unit Cost
   ----------   ---------
      150     x   $3.50  = $  525
      100     x    3.30  =    330
      200     x    3.10  =    620
      300     x    3.00  =    900
                           ------
                           $2,375
                           ======

   Answer (D) is incorrect because 
   $2,445 is the FIFO cost of goods sold. 


[520] Source: Publisher 

   Answer (A) is incorrect because 
   $27,000 equals 1.5 years of 
   depreciation. 

   Answer (B) is incorrect because 
   $21,000 is a full year's depreciation 
   assuming no salvage value. 

   Answer (C) is correct. The straight-line 
   method calculates periodic depreciation 
   expense by dividing the depreciable 
   cost (original cost - salvage value) by 
   the estimated useful life. The skidder 
   cost $168,000 and had an estimated 
   $24,000 salvage value, so the 
   depreciable cost is $144,000. Thus, 
   annual depreciation is $18,000 
   ($144,000  8 years). Under the 
   half-year convention, the company 
   recognizes $9,000 depreciation in the 
   year of purchase. 

   Answer (D) is incorrect because 
   $18,000 is the depreciation for a full 
   year. 


[521] Source: Publisher 

   Answer (A) is incorrect because 
   $4,000 is based on the last year of the 
   asset's life. 

   Answer (B) is incorrect because $4,667 
   is based on the last year of the asset's 
   life and ignores salvage value. 

   Answer (C) is correct. Under SYD, the 
   amount depreciated is the original cost 
   ($168,000) minus salvage value 
   ($24,000), or $144,000. The portion 
   expensed each year is based on a 
   fraction, the denominator of which is 
   the sum of the estimated years of life of 
   the asset. For an asset with an 8-year 
   life, the denominator is 36 (8 + 7 + 6 + 
   5 + 4 + 3 + 2 + 1). The numerator is 8 
   in the first year, 7 in the second year, 
   etc. The year ending June 30, 2001 is 
   the first year of the skidder's life; thus, 
   the fraction is 8  36. Annual 
   depreciation is therefore $32,000 
   [$144,000 x (8  36)]. 

   Answer (D) is incorrect because 
   $37,333 ignores salvage value. 


[522] Source: CMA 1290 2-14 

   Answer (A) is incorrect because 
   design, construction, and testing of 
   preproduction models are R&D 
   activities. 

   Answer (B) is incorrect because 
   laboratory research aimed at discovery 
   of a new knowledge is an example of 
   R&D activity. 

   Answer (C) is incorrect because 
   engineering activity required to advance 
   the design of a product to the 
   manufacturing stage is an example of 
   R&D activity. 

   Answer (D) is correct. SFAS 2 requires 
   the immediate expensing of most types 
   of R&D activities. Laboratory research 
   aimed at new knowledge is an example 
   of an R&D activity. Moreover, R&D 
   costs include those related to 
   preproduction, design, and 
   modifications of design. Costs incurred 
   during the early phases of commercial 
   production, however, are costs of 
   manufacturing and not R&D costs. 


[523] Source: CMA 0692 2-17 

   Answer (A) is incorrect because lack of 
   significant future obligations on the part 
   of the seller is a criterion mentioned in 
   SFAS 48. 

   Answer (B) is incorrect because the 
   buyer must have economic substance 
   apart from the seller. 

   Answer (C) is incorrect because the 
   amount of future returns must be 
   capable of reasonable estimation. 

   Answer (D) is correct. SFAS 48 states 
   that the sale may be recognized at the 
   time of sale if all of the following 
   conditions are met:

   1. The seller's price is substantially fixed or determinable.
   2. The buyer has paid the seller, or the buyer is obligated to pay,
      and the obligation is not contingent on resale.
   3. The buyer's obligation to the seller is unchanged by damage to or
      theft of or destruction of the product.
   4. The buyer has economic substance apart from the seller.
   5. The seller does not have any significant obligations regarding resale
      of the product by the buyer.
   6. The amount of future returns can be reasonably estimated.
   Thus, the seller's price must not be 
   contingent on the resale price; the 
   seller's price must be substantially fixed 
   or determinable. 


[524] Source: CMA 1292 2-23 

   Answer (A) is incorrect because 20% 
   ownership is the threshold for a 
   presumption of significant influence. 

   Answer (B) is incorrect because 20% 
   ownership is the threshold for a 
   presumption of significant influence. 

   Answer (C) is correct. The equity 
   method is appropriate when an investor 
   has the ability to exercise significant 
   influence. An investment of 20% or 
   more of the voting stock of an investee 
   leads to a presumption that an investor 
   has the ability to exercise significant 
   influence. An investment of less than 
   20% leads to a presumption that an 
   investor does not have such ability. 
   However, those presumptions can be 
   overcome by predominant evidence to 
   the contrary. 

   Answer (D) is incorrect because 20% 
   ownership is the threshold for a 
   presumption of significant influence. 


[525] Source: CPA 0593 II-10 

   Answer (A) is incorrect because 
   $7,000 results from recognizing no gain. 

   Answer (B) is correct. Amble has a 
   potential gain of $8,000 ($15,000 fair 
   value of truck received + $5,000 cash - 
   $12,000 carrying amount of truck given 
   up). Because the exchange did not give 
   rise to a loss and is also not considered 
   the culmination of an earning process 
   (similar productive assets were 
   exchanged), the transaction should be 
   accounted for at book value (APB 29). 
   The receipt of boot, however, is 
   considered a partial culmination of an 
   earning process requiring recognition of 
   a partial gain. The recognized gain is 
   determined by the ratio of boot to total 
   consideration received. Boot was 
   $5,000 and total consideration received 
   was $20,000. Thus, boot was 25% of 
   total consideration received. The gain 
   to be reported is $2,000 (25% x $8,000 
   potential gain). Accordingly, the entry 
   is to credit the carrying amount of the 
   truck given up ($12,000), credit a 
   partial gain of $2,000, debit cash for the 
   $5,000 received, and debit the truck 
   received for $9,000. 

   Answer (C) is incorrect because 
   $12,000 is the carrying amount of the 
   asset given up. 

   Answer (D) is incorrect because 
   $15,000 is the amount that would be 
   recorded for the asset received if the 
   exchange had been of dissimilar assets. 


[526] Source: CMA 1292 2-13 

   Answer (A) is incorrect because the 
   cost recovery method is used only when 
   the collection is not expected to be 
   made in full. 

   Answer (B) is correct. When a right of 
   return exists, SFAS 48 states that 
   revenue may be recognized at the time 
   of sale if all of the following conditions 
   are met:

   1. The seller's price is substantially fixed or determinable.
   2. The buyer has paid the seller, or the buyer is obligated to pay,
      and the obligation is not contingent on resale.
   3. The buyer's obligation to the seller is unchanged by damage to or
      theft of or destruction of the product.
   4. The buyer has economic substance apart from the seller.
   5. The seller does not have any significant obligations regarding
      resale of the product by the buyer.
   6. The amount of future returns can be reasonably estimated.
   Thus, the seller's price must not be 
   contingent on the resale price; the 
   seller's price must be substantially fixed 
   or determinable. One criterion is that 
   the buyer must have paid, or be 
   obligated to pay, and the obligation is 
   not contingent on resale. Because the 
   obligations incurred by Roth's 
   customers are contingent on resale, the 
   company may not recognize revenue 
   until the return privilege has expired or 
   all conditions are subsequently met. 

   Answer (C) is incorrect because failure 
   to meet one of the criteria prevents 
   revenue recognition at the time of sale. 

   Answer (D) is incorrect because the 
   installment method is used when 
   collectibility is in question; For Roth, 
   the recognition of the sale itself, not just 
   collectibility, is in question. 


[527] Source: CMA 0691 2-21 

   Answer (A) is incorrect because the 
   recognizable gain is $61.22. 

   Answer (B) is correct. APB 29 permits 
   the recognition of gains on like-kind 
   exchanges only when boot is involved. 
   Baron received a computer with a fair 
   value of $4,300 and $600 of boot in 
   exchange for a computer with a $4,400 
   book value. The potential gain is $500 
   ($4,900 - $4,400). However, the 
   recognized gain is in the ratio of the 
   boot received to the total asset value 
   received. Boot is 12.24% ($600  
   $4,900) of the fair value received. 
   Consequently, the recognizable gain is 
   $61.22 (12.24% x $500 potential gain). 

   Answer (C) is incorrect because the 
   recognizable gain is $61.22. 

   Answer (D) is incorrect because the 
   recognizable gain is $61.22. 


[528] Source: CMA 0691 2-22 

   Answer (A) is correct. APB 29 
   precludes the recognition of gain on 
   like-kind exchanges unless boot is 
   received. Because boot is given but not 
   received in this transaction, Baron may 
   not record a gain. 

   Answer (B) is incorrect because Baron 
   may not record a gain. 

   Answer (C) is incorrect because Baron 
   may not record a gain. 

   Answer (D) is incorrect because Baron 
   may not record a gain. 


[529] Source: CMA 0691 2-23 

   Answer (A) is correct. Baron should 
   not record a gain because the 
   transaction did not culminate an earning 
   process. Baron simply purchased 
   inventory, which does not result in a 
   gain. 

   Answer (B) is incorrect because no 
   gain is recognized. 

   Answer (C) is incorrect because no 
   gain is recognized. 

   Answer (D) is incorrect because no 
   gain is recognized. 


[530] Source: CMA 0691 2-24 

   Answer (A) is incorrect because the 
   gain is $500. 

   Answer (B) is correct. APB 29 requires 
   that the transfer of a nonmonetary asset 
   to another entity be accounted for at the 
   fair value of the asset transferred. 
   Given that the computer has a fair value 
   of $4,900 and a book value of $4,400, it 
   must first be written up by $500, which 
   is also the amount of the gain recorded. 
   Baron must also recognize a 
   contribution expense of $4,900 in 
   accordance with SFAS 116. 

   Answer (C) is incorrect because the 
   gain is $500. 

   Answer (D) is incorrect because the 
   gain is $500. 


[531] Source: CMA 0691 2-25 

   Answer (A) is incorrect because the 
   gain is $275. 

   Answer (B) is incorrect because the 
   gain is $275. 

   Answer (C) is incorrect because the 
   gain is $275. 

   Answer (D) is correct. Given that the 
   computer had a $4,400 book value and 
   $4,675 was received from the insurance 
   company, the gain is $275. Essentially, 
   this transaction was a sale of the asset 
   to the insurance company. The 
   subsequent purchase of new inventory 
   is not relevant. The earning process 
   with respect to the stolen inventory 
   culminated with the sale to the 
   insurance company. 


[532] Source: CPA 1188 I-1 

   Answer (A) is incorrect because 
   $1,775,000 results from subtracting the 
   $600,000 of compensating balances 
   from cash in banks. 

   Answer (B) is incorrect because cash 
   on hand should be included in the 
   current assets section. 

   Answer (C) is correct. Compensating 
   balances related to short-term 
   borrowing arrangements that are not 
   legally restricted should be reported 
   among the cash and cash equivalents in 
   the current assets section. Legally 
   restricted amounts related to long-term 
   arrangements should be classified as 
   noncurrent. Thus, the amount restricted 
   for additions should be classified as 
   noncurrent because it relates to a plant 
   asset. Total cash reported as current 
   assets therefore equals $2,375,000 
   ($2,250,000 + $125,000). 

   Answer (D) is incorrect because the 
   legally restricted cash related to a 
   long-term arrangement should be 
   classified as noncurrent. 


[533] Source: CPA 1194 F-45 

   Answer (A) is incorrect because 
   $5,000 is the difference between gross 
   and net accounts receivable ($25,000) 
   and the balance in the allowance 
   account at the beginning of the year 
   ($30,000). 

   Answer (B) is correct. The allowance 
   for uncollectible accounts before 
   year-end adjustment is $14,000 
   ($30,000 beginning balance - $18,000 
   write-offs + $2,000 recovered). The 
   balance should be $25,000 ($350,000 
   year-end A/R - $325,000 net value 
   based on aging). Thus, the allowance 
   account should be credited and 
   uncollectible accounts expense debited 
   for $11,000 ($25,000 desired balance - 
   $14,000). 

   Answer (C) is incorrect because 
   $15,000 equals $25,000 minus the 
   difference between the $30,000 
   allowance and the $18,000 written off, 
   reduced by the $2,000 recovered. 

   Answer (D) is incorrect because 
   $21,000 equals $30,000 allowance, 
   plus $18,000 written off, reduced by 
   $2,000 recovered, minus $25,000. 


[534] Source: Publisher 

   Answer (A) is incorrect because $45 
   does not include the call option. 

   Answer (B) is incorrect because $90 
   does not include the interest rate swap. 

   Answer (C) is correct. The gain equals 
   the net proceeds (cash, derivatives, or 
   other assets obtained in a transfer of 
   financial assets, minus liabilities 
   incurred) minus the carrying amount of 
   the assets derecognized. Any asset 
   obtained that is not an interest in the 
   transferred assets is included in the 
   proceeds. Moreover, any derivative 
   obtained concurrently with the transfer 
   of financial assets is an asset obtained 
   (or liability incurred) and is part of the 
   proceeds. Thus, the cash received and 
   the fair values of the interest rate swap 
   and the call option are debited as part 
   of the proceeds. Any liability incurred, 
   even if related to the assets transferred, 
   reduces the proceeds, so the recourse 
   obligation should be credited. After 
   crediting the carrying amount of the 
   loans sold and measuring assets and 
   liabilities at fair value, Seller should 
   recognize a gain on sale (a credit) of 
   $150 ($1,575 cash + $60 interest rate 
   swap + $105 call option - $90 recourse 
   obligation - $1,500 carrying amount). 

   Answer (D) is incorrect because $240 
   does not include the recourse 
   obligation. 


[535] Source: CPA 1190 II-1 

   Answer (A) is incorrect because 
   $48,400 results from charging a 
   discount fee for a full year. 

   Answer (B) is incorrect because 
   $52,640 assumes the nominal interest 
   rate is also 12%. 

   Answer (C) is incorrect because 
   $52,250 assumes the discount rate is 
   also 10%. 

   Answer (D) is correct. Following the 
   receipt of the $50,000 plus accrued 
   interest on December 31, 2000, the 
   remaining balance was $50,000. 
   Because the second installment is due 1 
   year after the first, the interest 
   attributable to this balance is $5,000 
   ($50,000 principal x 10% x 1 year). On 
   July 1, 2001, the $55,000 maturity value 
   ($50,000 note + $5,000 interest) is 
   discounted at 12% for the remaining 6 
   months of the term of the note. The 
   discount fee charged would be $3,300 
   ($55,000 maturity value x 12% x 6/12). 
   The net proceeds are equal to the 
   $55,000 maturity value minus the 
   $3,300 discount fee, or $51,700.

           $50,000 x 10% x 1 year = $5,000 interest
           $55,000 x 12% x 6/12   = $3,300 discount fee


[536] Source: CPA 1194 F-38 

   Answer (A) is incorrect because 
   $5,045 does not include the discount 
   amortization. 

   Answer (B) is correct. Leaf Co. will 
   receive cash of $25,045 (5 x $5,009). 
   Hence, interest revenue is $5,560 
   ($25,045 - $19,485 present value). 

   Answer (C) is incorrect because $8,000 
   equals $20,000 times 8% nominal 
   interest for 5 years. 

   Answer (D) is incorrect because 
   $9,000 equals $20,000 times the 9% 
   yield rate for 5 years. 


[537] Source: CPA 1193 I-15 

   Answer (A) is incorrect because 
   $540,000 is the maturity value. 

   Answer (B) is incorrect because 
   $528,400 assumes a nominal rate of 
   10% and a discount rate of 8%. 

   Answer (C) is correct. The maturity 
   value of the note is $540,000 [$500,000 
   face value + (8% x $500,000)]. The 
   discount is $27,000 [10% x $540,000 x 
   (6/12)]. Consequently, the proceeds 
   equal $513,000 ($540,000 - $27,000). 

   Answer (D) is incorrect because 
   $486,000 results from discounting the 
   note for 1 year. 


[538] Source: CPA 1191 I-17 

   Answer (A) is incorrect because 
   $180,000 assumes discounting for a full 
   year. 

   Answer (B) is incorrect because 
   $186,667 assumes discounting for 8 
   months. 

   Answer (C) is correct. The maturity 
   value of a noninterest-bearing note 
   receivable is its face amount. The 
   discount fee is $10,000 [$200,000 
   maturity value x 10% x (6 months  
   12)]. Thus, the proceeds equal 
   $190,000 ($200,000 - $10,000). 

   Answer (D) is incorrect because 
   $188,000 is based on a discount rate of 
   12%. 


[539] Source: CPA 0588 I-22 

   Answer (A) is incorrect because 
   $230,000 is the inventory at base-year 
   cost. 

   Answer (B) is correct. By using price 
   indexes, dollar-value LIFO implements 
   LIFO without the necessity of 
   monitoring the prices of individual 
   items. To compute the ending inventory 
   under dollar-value LIFO, the ending 
   inventory stated in year-end or 
   current-year cost must be restated at 
   base-year cost. The layers at base-year 
   cost are computed using a LIFO flow 
   assumption and then weighted 
   (multiplied) by the relevant indexes to 
   price the ending inventory. The 
   inventory at the end of 2000 in 
   base-year cost is $230,000. This 
   inventory is composed of a $150,000 
   base layer, a $50,000 ($200,000 - 
   $150,000) 1999 layer, and a $30,000 
   ($230,000 - $200,000) 2000 layer. 
   Each of these layers, as indicated 
   below, is multiplied by the relevant 
   price index to translate from base-year 
   cost to the price in effect when the layer 
   was added. The result is a December 
   31, 2000 inventory value of $241,000.

     Base layer  $150,000  x  1.0  =  $150,000
     1999 layer    50,000  x  1.1  =    55,000
     2000 layer    30,000  x  1.2  =    36,000
                 --------             --------
                 $230,000             $241,000
                 ========             ========

   Answer (C) is incorrect because 
   $246,000 assumes an $80,000 layer 
   was added in 2000 and none in 1999. 

   Answer (D) is incorrect because 
   $276,000 is the inventory at 
   current-year cost. 


[540] Source: CPA 0590 I-13 

   Answer (A) is correct. Under FIFO, 
   ending inventory consists of purchases 
   because beginning inventory is assumed 
   to be sold first. Both markdowns and 
   markups are used to calculate the 
   cost-retail ratio because LCM is not 
   being approximated.

                                               Cost        Retail
   Purchases                                 $60,000     $110,000
   Markups                                                 10,000
   Markdowns                                              (20,000)
                                             -------     --------
   Adjusted purchases                        $60,000     $100,000
   Beg. inv. 1/1                              12,000       30,000
                                             -------     --------
   Goods available                           $72,000     $130,000
                                             =======
   Sales                                                  (90,000)
                                                         --------
   Ending inventory - retail                             $ 40,000
   Cost-retail ratio ($60,000  $100,000)                x     .6
                                                         --------
   Ending inventory - FIFO                               $ 24,000
                                                         ========

   Answer (B) is incorrect because 
   $20,000 results from applying the LCM 
   rule (not deducting markdowns in 
   determining the cost-retail ratio) and 
   using the FIFO version of the retail 
   method. 

   Answer (C) is incorrect because 
   $19,200 results from applying the 
   approximate LCM (conventional) retail 
   method. 

   Answer (D) is incorrect because 
   $18,000 results from applying the LIFO 
   retail method (assuming stable prices). 


[541] Source: CPA 0589 I-22 

   Answer (A) is incorrect because 
   $280,000 is the ending inventory at 
   retail. 

   Answer (B) is incorrect because 
   $197,160 (rounded) is the ending 
   inventory using the FIFO version of the 
   retail method without regard to the 
   LCM rule. 

   Answer (C) is correct. The LCM retail 
   method includes net markups but not net 
   markdowns in the determination of 
   goods available for sale. The 
   approximate LCM (conventional) retail 
   method is a weighted-average method. 
   Accordingly, the numerator of the 
   cost-retail ratio is the sum of the 
   beginning inventory at cost plus 
   purchases at cost, and the denominator 
   is the sum of beginning inventory at 
   retail, purchases at retail, and net 
   markups.

                               Cost          Retail
   Beginning inventory       $147,000     $  203,000
   Purchases                  833,000      1,155,000
   Markups, net                               42,000
                             --------     ----------
   Goods available           $980,000     $1,400,000
   Sales                     ========     (1,106,000)
   Markdowns, net                            (14,000)
                                          ----------
   Ending inventory-retail                $  280,000
   Cost-retail ratio ($980  $1,400)      x       70%
                                          ----------
   Ending inventory at cost               $  196,000
                                          ==========

   Answer (D) is incorrect because 
   $194,854 (rounded) is the ending 
   inventory using the LCM rule and the 
   FIFO version of the retail method. 


[542] Source: CPA 1194 F-17 

   Answer (A) is incorrect because 
   $180,000 results when goodwill is 
   amortized over 10 years. 

   Answer (B) is correct. Goodwill is not 
   recorded except when a business is 
   purchased. Thus, only the $200,000 
   recognized at the purchase date should 
   be recorded as goodwill. In accordance 
   with APB 17, a company should 
   continually evaluate whether later 
   events and circumstances merit a 
   revision in the estimated useful life of 
   goodwill. Thus, a change in estimate 
   from 10 years to 40 years is needed. It 
   should be amortized over the shorter of 
   the periods to be benefitted (in this 
   case, 40 years) or 40 years. Hence, 
   goodwill at year-end equals $195,000 
   [$200,000 - ($200,000  40)]. 

   Answer (C) is incorrect because 
   $252,000 results from amortizing an 
   additional $80,000 of expenditures to 
   maintain goodwill over 10 years. 

   Answer (D) is incorrect because 
   $273,000 results from amortizing an 
   additional $80,000 of expenditures for 
   the maintenance of goodwill over 40 
   years. 


[543] Source: CPA 0FIN R98-11 

   Answer (A) is incorrect because 
   $60,000 assumes that both machines are 
   to be capitalized and depreciated. 

   Answer (B) is correct. The costs of 
   equipment that is acquired or 
   constructed for a particular project and 
   that has no alternative future uses (and 
   therefore, no separate economic value) 
   are R&D costs, and are expensed when 
   incurred. The costs of equipment that is 
   acquired for R&D and that has 
   alternative future uses are capitalized as 
   tangible assets when acquired or 
   constructed. Thus, Machine A should be 
   expensed, and Machine B should be 
   capitalized. The cost to include in R&D 
   relating to Machine A is $200,000, the 
   entire cost of the machine. The cost to 
   be included in R&D relating to Machine 
   B is the straight-line depreciation of 
   $20,000 ($200,000  10). Total R&D 
   expense for the machines used is 
   $220,000 ($200,000 + $20,000). 

   Answer (C) is incorrect because 
   $300,000 assumes that all of Machine A 
   and  of Machine B are to be expensed. 

   Answer (D) is incorrect because 
   $400,000 assumes that both machines 
   are to be expensed. 


[544] Source: CPA 1191 I-47 

   Answer (A) is incorrect because 
   $1,080,000 does not include 
   depreciation. 

   Answer (B) is correct. Under SFAS 2, 
   materials used in R&D, compensation 
   costs of personnel, and indirect costs 
   appropriately allocated are R&D costs 
   that should be expensed immediately. 
   The costs of equipment and facilities 
   that are used for R&D activities and 
   that have alternative future uses, 
   whether for other R&D projects or 
   otherwise, are to be capitalized as 
   tangible assets when acquired or 
   constructed. Thus, the depreciation is 
   also expensed immediately. However, 
   SFAS 2 does not apply to R&D 
   activities conducted for others. Hence, 
   the reimbursable costs are not 
   expensed. Ball's total R&D expense is 
   therefore $1,380,000 ($300,000 + 
   $700,000 + $200,000 + $180,000). 

   Answer (C) is incorrect because 
   $1,580,000 includes the reimbursable 
   costs of R&D conducted for others but 
   does not include the indirect costs. 

   Answer (D) is incorrect because 
   $1,780,000 includes the reimbursable 
   costs of R&D conducted for others. 


[545] Source: CPA 1192 I-20 

   Answer (A) is correct. Accounting for 
   nonmonetary transactions should usually 
   be based on the fair values of the assets 
   or services involved (APB 29). The 
   principal exceptions are when the 
   transaction is not the culmination of an 
   earning process, or when the fair value 
   of neither the asset relinquished nor of 
   the asset received is clearly evident. An 
   exchange of dissimilar nonmonetary 
   assets culminates an earning process, 
   and the fair value of the asset 
   relinquished is clearly evident. The fair 
   value of the shares cannot be readily 
   determined from the book value. Hence, 
   Balt should report the investment in Ace 
   as $3,000, the fair value of the asset 
   relinquished. 

   Answer (B) is incorrect because $2,500 
   is the truck's carrying amount, not its 
   fair value. 

   Answer (C) is incorrect because $1,500 
   was the book value of Ace's stock on 
   July 1. 

   Answer (D) is incorrect because 
   $1,250 is the book value of Ace's stock 
   on December 31. 


[546] Source: CPA 0590 T-31 

   Answer (A) is correct. An exchange of 
   similar nonmonetary assets should 
   ordinarily be recorded at the book 
   values of the assets transferred. 
   However, when the book value of the 
   asset surrendered exceeds the fair value 
   of the asset received, the asset received 
   should be recorded at its fair value. 
   Moreover, Scott should recognize a 
   loss for the difference between the 
   carrying amount of the asset 
   surrendered and the fair value of the 
   asset received. 

   Answer (B) is incorrect because the 
   difference should be recognized as a 
   loss. The carrying amount of the asset 
   surrendered was greater than the fair 
   value received. 

   Answer (C) is incorrect because the 
   carrying amount of the asset received 
   does not affect the amount at which the 
   asset should be recorded by the 
   recipient. 

   Answer (D) is incorrect because the 
   carrying amount of the asset received 
   does not affect the amount at which the 
   asset should be recorded by the 
   recipient. 


[547] Source: CPA 1192 T-24 

   Answer (A) is incorrect because a gain 
   is recognized. The exchange culminates 
   an earning process. 

   Answer (B) is incorrect because fair 
   value, not retail price, is the basis of the 
   accounting. 

   Answer (C) is incorrect because fair 
   value, not retail price, is the basis of the 
   accounting. 

   Answer (D) is correct. An exchange of 
   dissimilar assets is considered the 
   culmination of an earning process. 
   Thus, the transaction should be 
   recorded at the fair value of the assets 
   surrendered or of the assets received, 
   whichever is more clearly evident. 
   Hence, Vik's gain is the difference 
   between the fair value, which is the 
   same for the two assets, and the cost 
   (carrying amount) of the asset 
   surrendered. 


[548] Source: CPA 0593 T-16 

   Answer (A) is correct. In an exchange 
   of similar assets involving boot, the 
   party giving the boot normally records 
   the asset acquired at the sum of the boot 
   given plus the book value of the asset 
   surrendered. However, when this 
   amount exceeds the fair value of the 
   asset received, the latter should be 
   recorded at its fair value, with the 
   difference recognized as a loss. 

   Answer (B) is incorrect because the 
   entire indicated loss should be 
   recognized. 

   Answer (C) is incorrect because a loss 
   equal to the cash given up should be 
   recognized. 

   Answer (D) is incorrect because a loss 
   equal to the cash given up should be 
   recognized. 


[549] Source: CPA 0595 F-30 

   Answer (A) is incorrect because the 
   amount of gain recognized is in 
   proportion to the amount of boot (cash) 
   received. 

   Answer (B) is correct. The receipt of 
   boot is considered a partial culmination 
   of an earning process requiring 
   recognition of a partial gain. A gain is 
   realized because the carrying value of 
   Slate's land was less than its fair value 
   and the total consideration received 
   apparently equaled the fair value. The 
   recognized gain equals the realized gain 
   times the ratio of boot to total 
   consideration received. 

   Answer (C) is incorrect because a gain 
   should be recognized. 

   Answer (D) is incorrect because Slate 
   recognizes a gain. 


[550] Source: CMA 0688 3-25 

   Answer (A) is incorrect because the 
   balance in the estimated accrued 
   warranty liability account is found by 
   subtracting $42,000 ($12,000 + 
   $30,000) actual warranty expenditures 
   from the $70,000 [10% x ($300,000 + 
   $400,000)] total warranty cost. 

   Answer (B) is incorrect because 
   $46,000 is the amount found by adding 
   total warranty cost of $30,000 (10% x 
   $300,000) from Year 1 and $16,000 
   [10% x (40% x $400,000)]. The 
   estimated warranty expenditure 
   breakdowns of 40% and 60% are 
   immaterial; the balance in the estimated 
   accrued warranty liability account is 
   found by subtracting $42,000 ($12,000 
   + $30,000) actual warranty 
   expenditures from the $70,000 [10% x 
   ($300,000 + $400,000)] total warranty 
   cost. 

   Answer (C) is incorrect because 
   $30,000 of actual warranty 
   expenditures from Year 2 should also 
   be subtracted. 

   Answer (D) is correct. If the warranty 
   expense is 10% of sales, the total 
   expense for the 2 years is $70,000 
   (10% x $700,000). Of that $70,000, 
   $12,000 was paid in Year 1 and 
   $30,000 in Year 2. The $42,000 of 
   payments leaves an unpaid balance of 
   $28,000 ($70,000 - $42,000). 


[551] Source: CMA 0688 3-27 

   Answer (A) is incorrect because gain 
   from the early extinguishment of debt is 
   an extraordinary gain. 

   Answer (B) is incorrect because the 
   total price of $808,000 ($800,000 x 
   101%) must be reduced by $4,000 of 
   premium amortization [($8,000  10 
   years) x 5 years] before being 
   multiplied by 50% because one-half of 
   the bonds are being repurchased. The 
   repurchase price is $396,000 
   ($400,000 x 99%). The difference is a 
   $6,000 extraordinary gain because the 
   early extinguishment of debt is an 
   extraordinary item. 

   Answer (C) is correct. A gain or loss 
   from extinguishment of debt should be 
   reported as an extraordinary item. 
   These bonds were originally issued at a 
   price of $808,000 (a premium of 
   $8,000). The premium has been 
   amortized over 5 years using the 
   straight-line method. Since the bonds 
   originally had a 10-year life, the 
   premium has been reduced by one-half. 
   Therefore, the book value of the bonds 
   at December 31, Year 5 was $804,000. 
   The 50% of the bonds repurchased after 
   interest and amortization were recorded 
   must have had a book value of 
   $402,000. Because the bonds were 
   purchased at 99, the purchase price 
   must have been $396,000. 
   Consequently, the gain on the 
   transaction was $6,000 (a $402,000 
   liability is extinguished at a cost of 
   $396,000). This gain is treated as 
   extraordinary under the provisions of 
   SFAS 4. 

   Answer (D) is incorrect because the 
   total price of $808,000 ($800,000 x 
   101%) must be reduced by $4,000 of 
   premium amortization [($8,000  10 
   years) x 5 years] before being 
   multiplied by 50% because one-half of 
   the bonds are being repurchased. The 
   repurchase price is $396,000 
   ($400,000 x 99%). The difference is a 
   $6,000 extraordinary gain because the 
   early extinguishment of debt is an 
   extraordinary item. 


[552] Source: CMA 0689 3-12 

   Answer (A) is correct. A 
   noncompensatory stock purchase plan is 
   a fringe benefit offered to employees 
   that entitles them to buy stock in the 
   employer. Its main purpose is to obtain 
   capital or permit employee ownership 
   rather than to compensate purchasers. 
   Such a plan has the characteristics 
   mentioned in the other answer choices 
   (APB 25, Accounting for Stock Issued 
   to Employees). However, at the time of 
   granting the option, the company does 
   not know what the ultimate market price 
   will be. 

   Answer (B) is incorrect because this is 
   a typical characteristic of 
   noncompensatory stock purchase plans. 

   Answer (C) is incorrect because this is 
   a typical characteristic of 
   noncompensatory stock purchase plans. 

   Answer (D) is incorrect because this is 
   a typical characteristic of 
   noncompensatory stock purchase plans. 


[553] Source: CMA 0689 4-16 

   Answer (A) is incorrect because 
   historical cost is adjusted if the 
   settlement value is different. 

   Answer (B) is incorrect because the 
   current cost is irrelevant if the company 
   has a contract to pay a stated dollar 
   amount. 

   Answer (C) is incorrect because the 
   current market value is irrelevant if the 
   company has a contract to pay a stated 
   dollar amount. 

   Answer (D) is correct. Liabilities, such 
   as trade payables and warranty 
   obligations, that involve amounts 
   payable at unknown future dates are 
   usually reported at net settlement value, 
   which is the undiscounted amount of 
   cash (or the equivalent) expected to be 
   paid to liquidate the obligations in the 
   ordinary course of business. Because 
   trade payables will be paid off in the 
   near future, the settlement value is 
   preferable in practice to present value, 
   which is theoretically correct. 


[554] Source: CMA 1289 3-1 

   Answer (A) is incorrect because the 
   ABO is based on current and past 
   salary levels. The projected benefit 
   obligation (PBO) is measured 
   according to assumptions about future 
   compensation levels. 

   Answer (B) is correct. SFAS 87 
   requires a minimum liability to be 
   recognized when the ABO exceeds the 
   fair value of plan assets. The ABO at a 
   given date is the actuarial present value 
   of benefits, whether vested or not, 
   attributed by the benefit formula to 
   employee service and compensation 
   before that date. It is based only on 
   current and past compensation levels. 

   Answer (C) is incorrect because it 
   defines prior service cost. 

   Answer (D) is incorrect because this 
   adjustment for asset gains and losses is 
   included in the net periodic pension 
   cost. 


[555] Source: CMA 1289 3-2 

   Answer (A) is incorrect because 
   $4,000 equals the excess of the ABO 
   over the fair value of the plan assets, 
   which is the minimum liability that must 
   be recognized, divided by 20 years. 

   Answer (B) is correct. Under SFAS 87, 
   amortization of any unrecognized net 
   obligation or net asset arising when the 
   statement is first applied is to be 
   amortized on a straight-line basis over 
   the average remaining service period of 
   participating employees. If the average 
   remaining service life is less than 15 
   years, amortization may be over 15 
   years. If, at the date of adoption of 
   SFAS 87, the PBO was $650,000, but 
   pension plan assets were only 
   $420,000, the unrecognized transition 
   net obligation was $230,000. This 
   amount must be amortized over the 
   20-year average remaining service life 
   of employees. Thus, annual amortization 
   is $11,500 ($230,000  20 years). 

   Answer (C) is incorrect because 
   $80,000 is the excess of the ABO over 
   the fair value of the plan assets, which 
   is the minimum liability that must be 
   recognized. 

   Answer (D) is incorrect because 
   $230,000 is the total unrecognized 
   transition net obligation. This amount 
   must be amortized over the 20-year 
   average remaining service life of 
   employees. 


[556] Source: CMA 1290 2-11 

   Answer (A) is incorrect because total 
   interest expense is $881,046. 

   Answer (B) is incorrect because total 
   interest expense is $881,046. 

   Answer (C) is correct. The discount is 
   $805,230 ($6,000,000 face - 
   $5,194,770 of proceeds), and the life of 
   the bond issue is 5 years. Annual 
   amortization is thus $161,046 
   ($805,230  5). Interest expense will 
   include this amount plus the cash paid 
   during the year and the accrued interest. 
   Interest on $6,000,000 for 1 year at the 
   contract rate of 12% produces an annual 
   charge of $720,000. Total interest 
   expense is therefore $881,046 
   ($161,046 + $720,000). 

   Answer (D) is incorrect because total 
   interest expense is $881,046. 


[557] Source: CMA 1290 2-12 

   Answer (A) is incorrect because the 
   interest expense for the first year is 
   $835,610. 

   Answer (B) is incorrect because the 
   interest expense for the first year is 
   $835,610. 

   Answer (C) is correct. The discount is 
   $805,230 ($6,000,000 face - 
   $5,194,770 of proceeds). Thus, the 
   book value of the liability for the first 6 
   months of the first year was the same as 
   the proceeds. Because the yield rate of 
   interest is 16%, interest expense is 
   computed at the rate of 16% annually, 
   or 8% every 6 months. Hence, interest 
   expense for the first 6 months was 
   $415,581.60 (8% x $5,194,770). Of 
   this amount, $360,000 (12% x 6/12 x 
   $6,000,000) was a cash outlay. The 
   remaining $55,581.60 was the amount 
   of discount amortized. This 
   amortization is simply a plug figure 
   equal to the difference between the 
   nominal interest and the effective 
   interest. For the second 6 months, the 
   book value of the liability was 
   $5,250,351.60 (the previous book value 
   of $5,194,770 + $55,581.60 of discount 
   amortized). Interest expense is 
   $420,028.13 (8% x $5,250,351.60). 
   Adding this latter amount to the interest 
   for the first 6 months produces a total 
   for the year of $835,609.73 
   ($415,581.60 + $420,028.13). Rounded 
   to the nearest dollar, the solution is 
   $835,610. 

   Answer (D) is incorrect because the 
   interest expense for the first year is 
   $835,610. 


[558] Source: CPA 1192 I-24 

   Answer (A) is correct. The company 
   pays $.50 ($.45 + $.05) for the 
   redemption of a coupon, and it expects 
   120,000 to be redeemed at a total cost 
   of $60,000 (120,000 x $.50). Given that 
   payments of $25,000 have been made, 
   the liability at year-end must be 
   $35,000 ($60,000 - $25,000). The cost 
   associated with the unprocessed 
   coupons on hand does not reduce the 
   liability because payment for these 
   coupons has not yet been made. 

   Answer (B) is incorrect because 
   $29,000 does not include the additional 
   $.05 per coupon paid to retailers. 

   Answer (C) is incorrect because 
   $25,000 is the cost of the coupons on 
   hand that have not yet been processed 
   for payment. Case expects to receive 
   additional redeemed coupons for 30 
   days after the balance sheet date. 

   Answer (D) is incorrect because 
   $22,500 equals $.45 times 50,000 
   coupons. 


[559] Source: CMA 1290 2-21 

   Answer (A) is correct. SFAS 87 
   defines the PBO as the actuarial present 
   value of all future benefits attributable 
   to past employee service at a moment in 
   time. 

   Answer (B) is incorrect because the 
   accumulated benefit obligation (ABO) 
   is based only on current salary levels. 

   Answer (C) is incorrect because prior 
   service costs reflect the increase in 
   retroactive benefits at the date of the 
   amendment of the plan. 

   Answer (D) is incorrect because the 
   amortization of actuarial gains and 
   losses is the amount of the adjustment 
   necessary to reflect the difference 
   between actual and estimated actuarial 
   returns. 


[560] Source: CMA 1290 2-22 

   Answer (A) is incorrect because the 
   minimum pension liability is $517,500. 

   Answer (B) is correct. If the 
   accumulated benefit obligation (ABO) 
   exceeds the fair value of the plan assets, 
   SFAS 87 requires recognition in the 
   statement of financial position of a 
   liability that is at least equal to the 
   unfunded ABO. The unfunded ABO is 
   $517,500 ($825,000 ABO - $307,500 
   plan assets at fair value). 

   Answer (C) is incorrect because the 
   minimum pension liability is $517,500. 

   Answer (D) is incorrect because the 
   minimum pension liability is $517,500. 


[561] Source: CMA 1290 2-23 

   Answer (A) is incorrect because the 
   deferred pension cost is $190,000. 

   Answer (B) is correct. The net liability 
   presented in the statement of financial 
   position must be at least equal to the 
   unfunded ABO. Thus, the company 
   should recognize as an additional 
   liability the difference between the 
   ABO and the fair value of plan assets, 
   plus any prepaid pension cost, or minus 
   any accrued pension cost. Hence, 
   $405,000 ($517,500 - $112,500) must 
   be credited as an additional liability. 
   The offsetting debit is to an intangible 
   asset account to the extent of 
   unrecognized prior service cost 
   ($190,000). The remaining debit 
   ($405,000 - $190,000 = $215,000) is to 
   an equity account (excess of additional 
   liability over unrecognized prior 
   service cost). 

   Answer (C) is incorrect because the 
   deferred pension cost is $190,000. 

   Answer (D) is incorrect because the 
   deferred pension cost is $190,000. 


[562] Source: CMA 1290 2-25 

   Answer (A) is incorrect because the 
   sweetener is recognized currently as an 
   ordinary expense, not as a reduction of 
   paid-in capital. 

   Answer (B) is incorrect because the 
   sweetener is recognized currently as an 
   ordinary expense, not as a reduction of 
   retained earnings. 

   Answer (C) is incorrect because the 
   sweetener is recognized currently as an 
   ordinary expense, not as an 
   extraordinary item. 

   Answer (D) is correct. SFAS 84 
   requires that a sweetener offered to 
   induce conversion be recorded as an 
   expense of the period in which it is 
   given. Such an expense may not be 
   treated as an extraordinary item. The 
   expense is equal to the fair value of the 
   additional securities or other 
   consideration. 


[563] Source: CMA 1291 2-26 

   Answer (A) is correct. SFAS 43 
   requires an accrual for vacation pay 
   when the compensation relates to 
   services previously provided, the 
   benefits either vest or accumulate, and 
   payment is both probable and 
   reasonably estimable. Thus, DalCo 
   should debit expense and credit a 
   liability for accrued vacation wages 
   payable in the amount of $48,000 ($400 
   per week x 120 weeks). 

   Answer (B) is incorrect because 
   recording the entry on December 1, 
   Year 1 would fail to allocate the 
   expense to the period in which the 
   benefits to the company occurred. 

   Answer (C) is incorrect because the 
   item is a current expense; it should not 
   be deferred. 

   Answer (D) is incorrect because SFAS 
   43 requires the accrual of vacation pay 
   expense. 


[564] Source: CMA 0692 2-8 

   Answer (A) is incorrect because 
   recognition in the periods the 
   employees become eligible to exercise 
   the options violates the matching 
   concept. 

   Answer (B) is correct. A compensatory 
   stock option plan involves the issuance 
   of stock in whole or in part for 
   employee services. Accordingly, a 
   paid-in capital account such as stock 
   options outstanding should be credited. 
   The compensation cost should be 
   recognized as an expense of one or 
   more periods in which the employee 
   performed services. If the measurement 
   date precedes the rendering of services, 
   a debit is made to deferred 
   compensation expense, a contra 
   stockholders' equity account that will be 
   amortized as employee services are 
   rendered and expenses are recognized. 

   Answer (C) is incorrect because 
   recognition when the stock is issued 
   might result in an expense being 
   recorded years after the benefits of the 
   employee's service had accrued. 

   Answer (D) is incorrect because 
   recognition in the periods the options 
   are granted might result in recording the 
   expense prior to services being 
   performed. 


[565] Source: CMA 0692 2-9 

   Answer (A) is incorrect because 
   participation by all full-time employees 
   is a characteristic of noncompensatory 
   plans. 

   Answer (B) is incorrect because 
   noncompensatory plans should make 
   offers of stock equally to all employees 
   or be based on salary levels. 

   Answer (C) is incorrect because a 
   limited exercise period is a 
   characteristic of noncompensatory 
   plans. 

   Answer (D) is correct. Issuance of 
   stock to employees pursuant to a 
   noncompensatory plan does not result in 
   an expense. A noncompensatory plan is 
   defined as one in which substantially all 
   full-time employees participate, the 
   stock available to each employee is 
   equal or is based on salary, the option 
   exercise period is reasonable, and the 
   discount from market is not greater than 
   reasonable in an offer to stockholders 
   or others. Noncompensatory plans do 
   not provide for the achievement of 
   certain performance criteria. 


[566] Source: CPA 0595 F-21 

   Answer (A) is correct. The liability for 
   coupon redemptions is $3,960 
   {[(110,000 coupons issued  5 per toy) 
   x 60% redemption rate] x ($.80 - $.50) 
   set cost per toy}. 

   Answer (B) is incorrect because 
   $10,560 does not include the $.50 paid 
   by customers for the toy. 

   Answer (C) is incorrect because 
   $19,800 is based on the assumption one 
   coupon can be redeemed for a toy. 

   Answer (D) is incorrect because 
   $52,800 assumes one coupon can be 
   redeemed for a toy, and excludes the 
   $.50 that customers must pay per toy. 


[567] Source: CMA 0692 2-20 

   Answer (A) is incorrect because an 
   event is reasonably possible if the 
   chance of occurrence is more than 
   remote but less than probable. Accrual 
   requires that the event be probable. 

   Answer (B) is incorrect because the 
   amount of the loss must be capable of 
   reasonable estimation. 

   Answer (C) is correct. Loss 
   contingencies should be accrued when 
   information available prior to issuance 
   of financial statements indicates that it 
   is probable that an asset has been 
   impaired or a liability has been 
   incurred, and the amount of loss can be 
   reasonably estimated. Probable is 
   defined as a condition in which future 
   events are likely to occur. 

   Answer (D) is incorrect because an 
   event is remote if the chance of 
   occurrence is slight. 


[568] Source: CMA 0692 2-21 

   Answer (A) is incorrect because 
   contingent gains are not recorded until 
   actually realized, even though highly 
   probable. 

   Answer (B) is incorrect because 
   contingent gains are not recorded until 
   actually realized, even though highly 
   probable. 

   Answer (C) is incorrect because gain 
   contingencies are never recorded. If 
   disclosure would be misleading, the 
   disclosure should not be made. 

   Answer (D) is correct. Loss 
   contingencies are to be recorded when 
   probable and capable of reasonable 
   estimation. Gain contingencies, 
   however, are not to be recorded until 
   realized, but they may be disclosed in a 
   footnote. 


[569] Source: CMA 1292 2-22 

   Answer (A) is incorrect because 
   amortization of prior service costs 
   applies to benefits earned in earlier 
   years that arise from amendment of a 
   pension plan. 

   Answer (B) is incorrect because the 
   ABO is the same as the PBO except that 
   it is limited to past and current 
   compensation levels. 

   Answer (C) is incorrect because the 
   PBO is the actuarial present value of all 
   future benefits attributed to past 
   employee service at a moment in time. 
   It is based on assumptions as to future 
   compensation if the plan formula is 
   based on future compensation. 

   Answer (D) is correct. SFAS 87 
   defines service cost as the present value 
   of the future benefits earned in the 
   current period (as calculated according 
   to the plan's benefit formula). This 
   amount is usually calculated by the 
   plan's actuary. Service cost is a 
   component of net periodic pension cost. 
   It is also a portion of the PBO. 


[570] Source: Publisher 

   Answer (A) is incorrect because 
   accumulated vacation pay and vested 
   sick pay should be accrued. 

   Answer (B) is incorrect because SFAS 
   43 also requires accrual of vested sick 
   pay. 

   Answer (C) is correct. Vacation pay 
   and vested sick pay should be accrued 
   as liabilities. Thus, the minimum 
   accrual is $12,000 ($5,000 + $3,000 + 
   $4,000). 

   Answer (D) is incorrect because SFAS 
   43 does not require accrual of 
   nonvested sick pay. 


[571] Source: Publisher 

   Answer (A) is incorrect because 
   accumulated vacation pay should be 
   accrued for Year 1. 

   Answer (B) is correct. Each employee 
   earns 10 vacation days a year at $64 
   per day (8 hours x $8). Thus, for each 
   employee, the annual expense is $640. 
   The total for 10 workers is $6,400. 
   Since no vacation days were used 
   during Year 1, the entire balance of 
   $6,400 will be a liability at December 
   31. The workers will earn an additional 
   10 days of vacation during Year 2, 
   while using up eight days. 
   Consequently, the liability will increase 
   by two days during Year 2, or $1,280 
   (2 days x 10 workers x $64). Adding 
   the $1,280 to the $6,400 from the 
   preceding year results in a year-end 
   liability of $7,680. 

   Answer (C) is incorrect because 
   accumulated vacation pay should be 
   accrued for Year 1. 

   Answer (D) is incorrect because the 
   $6,400 liability from Year 1 should be 
   carried forward to Year 2. 


[572] Source: CMA 1293 2-12 

   Answer (A) is incorrect because 
   $58,000 is the actual warranty cost in 
   the current year. 

   Answer (B) is incorrect because 
   $96,000 is the amount of the adjusting 
   entry at year-end. The expense account 
   has a $58,000 balance prior to the 
   adjustment. 

   Answer (C) is incorrect because 
   $109,000 represents the adjusting entry 
   plus parts. 

   Answer (D) is correct. Some liabilities 
   are estimated and accrued, including 
   liabilities for product warranties and 
   redemption coupons. If warranty 
   expense is expected to be 4% of sales, 
   that amount should be expensed in the 
   year of sale. Warranty expense for the 
   current year is therefore $154,000 (4% 
   x $3,850,000). The amount actually 
   incurred during the first year is 
   irrelevant because the warranty covers 
   a 3-year period. 


[573] Source: CMA 1282 4-5 

   Answer (A) is incorrect because the 
   entry includes credits to wages payable 
   for $16,485, income tax withholding 
   payable for $3,150, and payroll taxes 
   payable for $1,365. 

   Answer (B) is incorrect because wages 
   payable should be debited for $21,000 
   since the 7 working days included in the 
   period from November 20 through 
   November 30 are 70% of the 10 
   working days in a 2-week pay period. 
   Wages payable should be credited for 
   $16,485, credit income tax withholding 
   payable for $3,150, and credit payroll 
   taxes payable for $1,365. 

   Answer (C) is correct. The 7 working 
   days included in the period from 
   November 20 through November 30 
   represent 70% of the 10 working days 
   in a 2-week pay period. Therefore, 
   $21,000 in wage expense should be 
   accrued ($30,000 x 70%). Of this 
   amount, $3,150 ($21,000 x 15%) must 
   be credited to tax withholding payable, 
   $1,365 ($21,000 x 6.5%) to payroll tax 
   payable, and the remainder, $16,485, to 
   wages payable. 

   Answer (D) is incorrect because wages 
   payable should be debited for $21,000 
   since the 7 working days included in the 
   period from November 20 through 
   November 30 are 70% of the 10 
   working days in a 2-week pay period. 
   Wages payable should be credited for 
   $16,485, credit income tax withholding 
   payable for $3,150, and credit payroll 
   taxes payable for $1,365. 


[574] Source: CMA 1282 4-6 

   Answer (A) is incorrect because the 
   adjusting entry necessary to accrue the 
   company's share of Social Security 
   taxes is to debit payroll tax expense for 
   $1,365 and credit payroll taxes payable 
   for $1,365 (6.5% x $21,000). 

   Answer (B) is correct. In addition to the 
   Social Security taxes that an employer 
   must withhold from employees' wages 
   and remit to the tax collection agency, 
   the employer must also accrue and remit 
   an equivalent amount as the employer's 
   share. Thus, an additional expense of 
   $1,365 must be accrued (6.5% x 
   $21,000). 

   Answer (C) is incorrect because the 
   adjusting entry necessary to accrue the 
   company's share of Social Security 
   taxes is to debit payroll tax expense for 
   $1,365 and credit payroll taxes payable 
   for $1,365 (6.5% x $21,000). 

   Answer (D) is incorrect because the 
   adjusting entry necessary to accrue the 
   company's share of Social Security 
   taxes is to debit payroll tax expense for 
   $1,365 and credit payroll taxes payable 
   for $1,365 (6.5% x $21,000). 


[575] Source: CMA 1282 3-18 

   Answer (A) is incorrect because the 
   sale results in a liability for unearned 
   revenue. 

   Answer (B) is incorrect because a 
   liability for dividends payable must be 
   credited. 

   Answer (C) is incorrect because a 
   credit must be made to deferred taxes 
   payable. 

   Answer (D) is correct. An exchange of 
   common stock for land affects 
   stockholders' equity and does not affect 
   liabilities. The entry is to debit land for 
   its fair market value, credit stock for its 
   par value, and credit the difference to 
   additional paid-in capital. 


[576] Source: CMA 1284 3-29 

   Answer (A) is incorrect because the 
   amount of loss must also be reasonably 
   estimable. 

   Answer (B) is incorrect because if the 
   amount of the loss is known, it is not a 
   loss from contingencies. 

   Answer (C) is correct. SFAS 5, 
   Accounting for Contingencies, requires 
   that a loss from contingencies be 
   accrued when it is probable that, at a 
   balance sheet date, an asset is 
   overstated or a liability has been 
   incurred and the amount of the loss can 
   be reasonably estimated. 

   Answer (D) is incorrect because the 
   criteria require that it be probable, not 
   merely possible, that a liability has 
   been incurred. 


[577] Source: CMA 1284 3-30 

   Answer (A) is correct. SFAS 5 states 
   that a gain from contingencies should be 
   disclosed but should never be recorded 
   in the financial statement. A gain 
   contingency is recognized, however, 
   when it is realized. 

   Answer (B) is incorrect because a gain 
   from contingencies would not be 
   recorded under any circumstances. 

   Answer (C) is incorrect because a gain 
   from contingencies would not be 
   recorded under any circumstances. 

   Answer (D) is incorrect because a gain 
   from contingencies would not be 
   recorded under any circumstances. 


[578] Source: CMA 1286 4-20 

   Answer (A) is incorrect because 
   $1,488 is the difference between cash 
   paid out for interest ($100,000 x 8%) 
   and the interest expense under the 
   effective interest method $6,512 (6% x 
   $108,530). 

   Answer (B) is correct. Under the 
   effective interest method, interest 
   expense is equal to the yield rate 
   (effective interest rate) of interest times 
   the carrying (book) value of the 
   liability. Thus, interest expense is 
   $6,512 (6% x $108,530). 

   Answer (C) is incorrect because $8,000 
   is the amount of cash paid out for 
   interest. 

   Answer (D) is incorrect because 
   $8,682 is calculated using 8% instead 
   of 6% effective interest rate, $8,682 
   (8% x $108,530). 


[579] Source: CMA 1286 4-21 

   Answer (A) is incorrect because 
   $100,000 is the face value of the bonds. 
   Since the bonds were sold at a 
   premium, the premium should be added 
   to the face value. The premium 
   amortization should be subtracted 
   $1,706 ($8,530 premium  5 years). 

   Answer (B) is correct. The $8,530 
   premium is amortized over 5 years, an 
   annual amortization of $1,706. Thus, the 
   carrying value at the end of Year 1 is 
   $106,824 ($108,530 - $1,706). 

   Answer (C) is incorrect because 
   $108,530 is the face value plus the 
   premium. The premium needs to be 
   amortized over 5 years $1,706 ($8,530 
    5 years). Thus, the carrying amount 
   equals $106,824 ($108,530 - $1,706). 

   Answer (D) is incorrect because 
   $107,042 is calculated by subtracting 
   the difference between interest paid and 
   interest expense of $1,488 from the 
   proceeds of $108,530. 


[580] Source: CPA 1190 I-30 

   Answer (A) is incorrect because all 
   warranties have not expired. 

   Answer (B) is incorrect because 
   $39,000 equals the total warranty 
   expenditures to date. 

   Answer (C) is correct. Because this 
   product is new, the beginning balance in 
   the estimated warranty liability account 
   at the beginning of Year 1 is $0. For 
   Year 1, the estimated warranty costs 
   related to dollar sales are 6% (2% + 
   4%) of sales, or $36,000 ($600,000 x 
   6%). For Year 2, the estimated 
   warranty costs are $60,000 ($1,000,000 
   sales x 6%). These amounts are charged 
   to warranty expense and credited to the 
   estimated warranty liability account. 
   This liability account is debited for 
   expenditures of $9,000 and $30,000 in 
   Year 1 and Year 2, respectively. 
   Hence, the estimated warranty liability 
   at 12/31/Year 2 is $57,000.

             Estimated Warranty Liability
   ------------------------------------------------------
                                 $     0  1/1/Year 1
   Year 1 expenditures  $9,000    36,000  Year 1 expense
   Year 2 expenditures  30,000    60,000  Year 2 expense
   ------------------------------------------------------
                                 $57,000  12/31/Year 2
                                 =======

   Answer (D) is incorrect because 
   $96,000 equals the total warranty 
   expense to date. 


[581] Source: CMA 1291 2-28 

   Answer (A) is correct. Warranty 
   expense is expected to be 4% of sales. 
   Thus, $360,000 (4% x $9,000,000) 
   should be recorded as an expense for 
   Year 1. How many units were returned 
   and how much cash was expended for 
   warranty repairs in the current year are 
   irrelevant because the warranty will 
   last for 3 years. Warranty expense is 
   recorded in the year of sale because it 
   is a cost that can be associated with the 
   sales for a given year. 

   Answer (B) is incorrect because 
   warranty expense is $360,000. 

   Answer (C) is incorrect because 
   warranty expense is $360,000. 

   Answer (D) is incorrect because 
   warranty expense is $360,000. 


[582] Source: CIA 0594 IV-15 

   Answer (A) is incorrect because the 
   double payment of a liability does not 
   affect expenses of the period, so it does 
   not affect owners' equity. 

   Answer (B) is incorrect because assets 
   will be reduced. 

   Answer (C) is correct. When a liability 
   is paid, an entry debiting accounts 
   payable and crediting cash is made. If a 
   company erroneously pays a liability 
   twice, the accounts payable and cash 
   accounts will be understated by the 
   amount of the liability. Hence, assets 
   and liabilities will be understated. 

   Answer (D) is incorrect because both 
   assets and liabilities will be 
   understated, whereas net income and 
   owners' equity will be unaffected. 


[583] Source: Publisher 

   Answer (A) is incorrect because the 
   values are prorated between the two 
   securities instead of the warrants being 
   subtracted from the proceeds. 

   Answer (B) is correct. After issuance, 
   the bonds are valued at $98,000, and 
   the warrants are worth $3,000 (500 
   warrants at $6 each). Thus, the value 
   assigned to the bonds at issuance is 
   $97,029.70 [($98,000  $101,000) x 
   $100,000]. 

   Answer (C) is incorrect because 
   $98,000 is the market value of the 
   bonds, not the issue price. 

   Answer (D) is incorrect because 
   $100,000 is the total of bonds and 
   warrants. 


[584] Source: CIA 0593 IV-42 

   Answer (A) is correct. Determination 
   of the imputed interest rate is made at 
   the time the debt instrument is issued, 
   assumed, or acquired. Any subsequent 
   changes in prevailing interest rates are 
   ignored (APB 21). 

   Answer (B) is incorrect because any 
   subsequent changes in prevailing 
   interest rates are ignored. 

   Answer (C) is incorrect because 
   determination of the imputed interest 
   rate is made at the time the debt 
   instrument is issued. 

   Answer (D) is incorrect because 
   determination of the imputed interest 
   rate is made at the time the debt 
   instrument is issued, and any subsequent 
   changes in prevailing interest rates are 
   ignored. 


[585] Source: CIA 0593 IV-37 

   Answer (A) is incorrect because the 
   interest expense is a decreasing amount 
   each period. It is computed by applying 
   a constant rate to a decreasing carrying 
   amount. 

   Answer (B) is correct. When the 
   effective interest method is used, 
   interest expense equals the effective 
   rate (a constant rate) times the carrying 
   amount at the beginning of the period. 
   The carrying amount is the par value 
   plus the balance of the unamortized 
   premium. The difference between 
   interest expense and the nominal 
   interest is the premium amortization for 
   the period. Thus, interest expense is a 
   decreasing amount each period because 
   a constant rate is applied to a 
   decreasing carrying amount. 

   Answer (C) is incorrect because the 
   interest expense is a decreasing amount 
   each period. It is computed by applying 
   a constant rate to a decreasing carrying 
   amount. 

   Answer (D) is incorrect because the 
   interest expense is a decreasing amount 
   each period. It is computed by applying 
   a constant rate to a decreasing carrying 
   amount. 


[586] Source: CIA 1190 IV-46 

   Answer (A) is correct. The balance 
   outstanding during the year was 
   $75,132 ($275,132 - $200,000). At an 
   interest rate of 10%, the company 
   should accrue $7,513.20 (10% x 
   $75,132) of interest for the year. 

   Answer (B) is incorrect because $8,289 
   is the balance due in 3 years minus the 
   balance outstanding during the year 
   divided by 3 [($100,000 - $75,132)  
   3]. 

   Answer (C) is incorrect because 
   $24,868 equals the balance due in 3 
   years minus the balance outstanding 
   during the year. 

   Answer (D) is incorrect because 
   $27,513 equals the interest rate times 
   the cost of the asset ($275,132 x 10%). 


[587] Source: CIA 0592 IV-30 

   Answer (A) is correct. Under the net 
   method, the payable is initially credited 
   at the discounted amount. Because the 
   payment was within the discount period 
   and freight was prepaid, the buyer's 
   remittance to the seller includes the 
   freight cost of $30 and the discounted 
   price of the merchandise [$1,000 x (1.0 
   - .02) = $980], a total of $1,010. 

   Answer (B) is incorrect because 
   freight-in was debited at the invoice 
   date (debit freight-in and purchases, 
   credit accounts payable). Accounts 
   payable needs to be debited for the 
   entire amount (including freight of $30) 
   owed to the seller. 

   Answer (C) is incorrect because this 
   entry would have been made at the 
   invoice date if the gross method had 
   been used. 

   Answer (D) is incorrect because the 
   payment should include the $30 freight 
   cost. 


[588] Source: CIA 1190 IV-37 

   Answer (A) is correct. An expense 
   should be accrued for the coupons still 
   outstanding that are expected to be 
   redeemed. Of the 4,000,000 coupons 
   distributed, 40%, or 1,600,000, are 
   estimated to be redeemable. Of those, 
   1,000,000 have already been redeemed, 
   and 600,000 more are expected to be 
   redeemed. The promotion requires 20 
   coupons to receive one toy, so 30,000 
   (600,000  20) more toys will be 
   required. Each toy costs $3.00, creating 
   a liability of $90,000 (30,000 x $3.00). 

   Answer (B) is incorrect because the 
   debit should be to an expense. 

   Answer (C) is incorrect because, 
   although an expense should be accrued, 
   the amount is incorrect. 

   Answer (D) is incorrect because the 
   debit should be to an expense, and the 
   amount is incorrect. 


[589] Source: CIA 0594 IV-22 

   Answer (A) is incorrect because the 
   exact payee does not have to be known. 

   Answer (B) is incorrect because the 
   exact date payable does not have to be 
   known. 

   Answer (C) is incorrect because the 
   impairment of an asset or the incurrence 
   of a liability must be probable. 

   Answer (D) is correct. SFAS 5, 
   Accounting for Contingencies, requires 
   that a loss from contingencies be 
   accrued when, based on information 
   available prior to the issuance of the 
   financial statements, it is probable that, 
   at a balance sheet date, an asset has 
   been impaired or a liability has been 
   incurred and amount of the loss can be 
   reasonably estimated. 


[590] Source: CIA 0593 IV-33 

   Answer (A) is correct. According to 
   SFAS 5, a contingency is "an existing 
   condition, situation, or set of 
   circumstances involving uncertainty as 
   to possible gain or loss to an enterprise 
   that will ultimately be resolved when 
   one or more future events occur or fail 
   to occur." The accounting treatment of 
   loss contingencies is to charge 
   estimated losses to income when it is 
   probable that an asset has been 
   impaired or a liability has been 
   incurred as of year-end and the amount 
   of loss can be reasonably estimated. If 
   an accrual is not made, disclosure of the 
   contingency should be made when there 
   is a reasonable possibility that a loss 
   will occur. However, if the likelihood 
   of loss is remote, the contingency need 
   not be disclosed in most cases. The 
   exception is for guarantees. Thus, items 
   I and II should be disclosed. 

   Answer (B) is incorrect because items I 
   and II but not III should be disclosed. 

   Answer (C) is incorrect because items I 
   and II but not III should be disclosed. 

   Answer (D) is incorrect because items I 
   and II but not III should be disclosed. 


[591] Source: CIA 0591 IV-36 

   Answer (A) is incorrect because 
   $60,000 equals $200,000 minus 
   $140,000. 

   Answer (B) is incorrect because 
   $340,000 may be excluded from current 
   liabilities. 

   Answer (C) is incorrect because 
   $340,000 may be excluded from current 
   liabilities. 

   Answer (D) is correct. Under SFAS 6, 
   an enterprise is required to exclude a 
   short-term obligation from current 
   liabilities if the entity has the intent and 
   ability to refinance it on a long-term 
   basis. The ability to consummate the 
   refinancing may be demonstrated either 
   by (1) actually refinancing the 
   short-term obligation by issuance of a 
   long-term obligation or equity securities 
   after the date of the balance sheet but 
   before it is issued, or (2) entering into a 
   financing agreement that clearly permits 
   the enterprise to refinance the debt on a 
   long-term basis. The ability to refinance 
   the 17% note payable is demonstrated 
   by the actual refinancing after the 
   balance sheet date but before the date of 
   issuance of the balance sheet. The 
   ability to refinance the 15% note 
   payable is demonstrated by the 
   borrower's entering into a long-term, 
   noncancellable financing agreement 
   given that both parties are financially 
   capable and no violations of its terms 
   have occurred. Thus, $340,000 
   ($140,000 17% note + $200,000 15% 
   note) may be excluded from current 
   liabilities. 


[592] Source: CIA 0592 IV-26 

   Answer (A) is incorrect because no 
   accounting change has occurred, and the 
   transaction does not relate to earnings 
   per share, the computation of which 
   sometimes involves the modified 
   treasury stock method. 

   Answer (B) is incorrect because the 
   transaction does not relate to earnings 
   per share, the computation of which 
   sometimes involves the treasury stock 
   method. It does relate to extraordinary 
   items. 

   Answer (C) is incorrect because the 
   transaction does not relate to earnings 
   per share, the computation of which 
   sometimes involves the modified 
   treasury stock method. It does relate to 
   troubled debt restructuring. 

   Answer (D) is correct. According to 
   SFAS 15, when the new terms of a 
   restructured troubled debt provide for 
   future undiscounted cash payments that 
   are less than the carrying value of the 
   debt, the debtor should record the 
   difference as an extraordinary gain if it 
   is material. This troubled debt 
   restructuring will result in an 
   extraordinary gain for the borrower of 
   $100,000 ($1,000,000 - $900,000). 


[593] Source: CIA 0594 IV-25 

   Answer (A) is incorrect because the 
   projected benefit obligation is a greater 
   measure of liability than one that 
   includes the vested or unvested benefits 
   obligation but not both. 

   Answer (B) is correct. The projected 
   benefit obligation as of a date is the 
   actuarial present value of all benefits 
   attributed by the pension benefit 
   formula to employee service rendered 
   prior to that date. The projected benefit 
   obligation bases the computation of 
   deferred compensation on both vested 
   and unvested service using future salary 
   levels, which can be expected to be 
   higher than current salary levels. 

   Answer (C) is incorrect because the 
   accumulated benefit obligation bases 
   the computation of the obligation on all 
   years of service, both vested and 
   unvested, but uses current salary levels. 

   Answer (D) is incorrect because the 
   unfunded ABO is less than the PBO. 


[594] Source: CIA 1191 IV-45 

   Answer (A) is incorrect because the 
   minimum liability equals the excess of 
   the accumulated benefit obligation over 
   the fair value of plan assets. 

   Answer (B) is incorrect because the 
   projected benefit obligation (PBO) as 
   of a date is equal to the actuarial 
   present value of all benefits attributed 
   by the pension benefit formula to 
   employee service rendered prior to that 
   date. The PBO is measured using 
   assumptions as to future salary levels. 

   Answer (C) is correct. Prior service 
   costs are retroactive benefits arising 
   from plan amendments (including 
   initiation of a plan). The amortization of 
   prior service cost should be recognized 
   as a component of net periodic pension 
   cost during the future service periods of 
   those employees active at the date of the 
   plan amendment who are expected to 
   receive benefits under the plan. The 
   cost of retroactive benefits is the 
   increase in the projected benefit 
   obligation at the date of the amendment. 
   The minimum required amortization is 
   determined by assigning an equal 
   amount to each future period of service 
   of each employee active at the date of 
   the amendment who is expected to 
   receive benefits under the plan. 

   Answer (D) is incorrect because the 
   unrecognized transition net asset or 
   obligation is measured at the date SFAS 
   87 is first applied. It equals the 
   difference between 1) the PBO and 2) 
   the fair value of the plan assets plus any 
   accrued pension cost or minus any 
   prepaid pension cost. 


[595] Source: CIA 0591 IV-30 

   Answer (A) is incorrect because the 
   minimum liability is $800,000. 

   Answer (B) is correct. Under SFAS 87, 
   Employers' Accounting for Pensions, 
   the minimum liability related to the 
   defined benefit pension plan is equal to 
   the excess of the accumulated benefit 
   obligation over the fair value of plan 
   assets. Thus, the minimum liability is 
   $800,000 ($2,600,000 - $1,800,000). 

   Answer (C) is incorrect because the 
   minimum liability is $800,000. 

   Answer (D) is incorrect because 
   $2,600,000 is the ABO. 


[596] Source: CIA 1189 IV-44 

   Answer (A) is incorrect because 
   benefits to be paid to employees for 
   service prior to adoption of the pension 
   plan constitute prior service cost. 

   Answer (B) is incorrect because it is 
   the term for a pension plan with 
   specified benefits. 

   Answer (C) is correct. An employee's 
   right to obtain pension benefits is said 
   to be vested when his/her employer is 
   obligated to pay the benefits regardless 
   of whether the employee is terminated. 
   Consequently, vested pension benefits 
   are not contingent upon future 
   employment. 

   Answer (D) is incorrect because a 
   minimum liability must be recognized 
   by an employer for the unfunded 
   accumulated benefit obligation, that is, 
   the amount in excess of the fair value of 
   the plan's assets. 


[597] Source: CMA 0694 2-19 

   Answer (A) is incorrect because the 
   ABO is based on past and current 
   salary levels only. 

   Answer (B) is correct. SFAS 87 
   defines the projected benefit obligation 
   as the actuarial present value of all 
   benefits attributed by the pension 
   benefit formula to past employee 
   service at a moment in time. It is based 
   on assumptions as to future 
   compensation. The ABO is the same, 
   except that it is based on past and 
   current compensation levels only. 

   Answer (C) is incorrect because the 
   increase in retroactive benefits at the 
   date of the amendment of the plan is the 
   prior service cost. 

   Answer (D) is incorrect because the 
   amount of the adjustment necessary to 
   reflect the difference between actual 
   and estimated actuarial returns is 
   included in the gain or loss component 
   of net periodic pension cost. 


[598] Source: CMA 1294 2-12 

   Answer (A) is incorrect because 
   $365,700 is based on an 8% rate for 10 
   periods. 

   Answer (B) is incorrect because 
   $420,360 is based on an 8% rate for 5 
   periods. 

   Answer (C) is correct. These bonds 
   will sell at a discount because the 
   contract rate of 8% is less than the 10% 
   market rate. The issue price equals the 
   present value of the future cash flows 
   (principal and interest) discounted at a 
   10% annual rate. Because the bonds pay 
   interest for 10 semiannual periods, the 
   appropriate present value factors are 
   those for 10 periods at a discount rate 
   of 5% (10%  2). The proceeds equal 
   the present value of the $500,000 
   principal plus the present value of the 
   annuity represented by the stream of 
   interest payments. Thus, the amount 
   recorded should be $461,440 
   [($500,000 x .614) + (8% x 1/2 x 
   $500,000 x 7.722)]. 

   Answer (D) is incorrect because 
   $478,580 is based on a 5% rate for 5 
   periods. 


[599] Source: CMA 1294 2-13 

   Answer (A) is correct. The bonds were 
   issued on July 1, Year 1 for $461,440 
   [($500,000 principal x .614 present 
   value factor for 10 semiannual periods 
   at 5%) + (8% contract rate x 1/2 x 
   $500,000 principal x 7.722 present 
   value of an annuity factor for 10 
   semiannual periods at 5%)]. Under the 
   effective interest method, interest 
   expense at the end of the first 
   semiannual period equals $23,072 (5% 
   semiannual market rate x $461,440 
   carrying value at 12/31/Year 1). 

   Answer (B) is incorrect because 
   $18,457.60 equals 5% of a carrying 
   value of $369,152. 

   Answer (C) is incorrect because 
   $25,000.00 equals 5% of $500,000. 

   Answer (D) is incorrect because 
   $20,000.00 equals 4% of $500,000. 


[600] Source: CMA 1294 2-14 

   Answer (A) is incorrect because 
   $7,712.00 equals the discount 
   amortization on the straight-line basis 
   for 12 months. 

   Answer (B) is incorrect because 
   $3,856.00 equals the discount 
   amortization on the straight-line basis 
   for 6 months. 

   Answer (C) is incorrect because 
   $1,542.00 equals the difference 
   between actual interest paid at the 
   contract rate and 5% of a carrying value 
   of $369,152. 

   Answer (D) is correct. The bonds were 
   issued on July 1, Year 1 for $461,440 
   [($500,000 principal x .614 present 
   value factor for 10 semiannual periods 
   at 5%) + (8% contract rate x 1/2 x 
   $500,000 principal x 7.722 present 
   value of an annuity factor for 10 
   semiannual periods at 5%)]. Under the 
   effective interest method, interest 
   expense at the end of the first 
   semiannual period equals $23,072 (5% 
   semiannual market rate x $461,440 
   carrying value at 12/31/Year 1). 
   Because nominal interest is $20,000 
   (8% x 1/2 x $500,000), the discount 
   amortization is $3,072 ($23,072 - 
   $20,000). 


[601] Source: CMA 0695 2-15 

   Answer (A) is incorrect because the 
   warranties were not sold separately 
   from the products. Thus, no earned or 
   unearned revenue from warranties is 
   recorded. 

   Answer (B) is incorrect because the 
   warranties were not sold separately 
   from the products. Thus, no earned or 
   unearned revenue from warranties is 
   recorded. 

   Answer (C) is incorrect because sales 
   should not be debited; the cost of 
   servicing the warranty is an expense 
   that should be matched against sales. 

   Answer (D) is correct. Accrual of 
   warranty expense is necessary when the 
   warranty is an integral part of the sale 
   and the requirements for recognition of 
   a loss contingency are met (the loss is 
   probable and can be reasonably 
   estimated). Accrual matches the 
   expense with the revenue that caused it. 
   The company sold 250 units, each of 
   which is expected to result in warranty 
   costs of $150. Given that no warranty 
   costs have yet been incurred, the full 
   $150 per unit should be accrued at 
   year-end. Consequently, the total 
   expense to be accrued is $37,500. The 
   adjusting entry requires a debit to 
   warranty expense and a credit to an 
   estimated liability. 


[602] Source: CMA 1295 2-8 

   Answer (A) is incorrect because the 
   company intends to refinance the debt 
   on a long-term basis. 

   Answer (B) is correct. SFAS 6 states 
   that short-term obligations expected to 
   be refinanced should be reported as 
   current liabilities unless the firm both 
   plans to refinance and has the ability to 
   refinance the debt on a long-term basis. 
   The ability to refinance on a long-term 
   basis is evidenced by a 
   post-balance-sheet date issuance of 
   long-term debt or a financing 
   arrangement that will clearly permit 
   long-term refinancing. 

   Answer (C) is incorrect because the 
   debt has not been retired. 

   Answer (D) is incorrect because the 
   debt is on the balance sheet. 


[603] Source: CIA 1193 IV-39 

   Answer (A) is incorrect because the 
   cash basis calls for recognizing 
   warranty expense as labor and 
   materials are expended to satisfy the 
   warranty. 

   Answer (B) is correct. If the warranty 
   is an integral part of the sale and the 
   expense is regarded as a loss 
   contingency, the accrual method should 
   be used in accordance with SFAS 5. 
   Under the accrual method, the estimated 
   costs of servicing the warranty are 
   charged to income in the same period 
   the revenue from the sale of the product 
   is recognized if it is probable that 
   customers will make claims under 
   warranty relating to goods that have 
   been sold and a reasonable estimate of 
   the costs involved can be made. 

   Answer (C) is incorrect because the 
   sales warranty method is appropriate 
   for situations when a warranty is sold 
   separately from the product. 

   Answer (D) is incorrect because the 
   method of accounting for warranties for 
   tax purposes is the cash basis. The cash 
   basis is unacceptable for accounting 
   purposes because it violates the 
   matching principle. 


[604] Source: CIA 1191 IV-41 

   Answer (A) is incorrect because 
   disability benefits should be accrued to 
   match revenues. 

   Answer (B) is correct. SFAS 43, 
   Accounting for Compensated Absences, 
   requires an accrual when four criteria 
   are met: (1) the payment of 
   compensation is probable, (2) the 
   amount can be reasonably estimated, (3) 
   the benefits either vest or accumulate, 
   and (4) the compensation relates to 
   employees' services that have already 
   been rendered. The single exception is 
   for sick pay benefits, which must be 
   accrued only if the rights vest. 
   Assuming the foregoing conditions are 
   met, the company should debit expense 
   and credit an estimated liability for 
   $100,000. 

   Answer (C) is incorrect because a 
   liability rather than an asset is 
   recognized. 

   Answer (D) is incorrect because the 
   expense is recognized in the income 
   statement. 


[605] Source: CMA 1287 3-22 

   Answer (A) is incorrect because it is a 
   requirement for accrual of a liability for 
   compensated absences. 

   Answer (B) is incorrect because it is a 
   requirement for accrual of a liability for 
   compensated absences. 

   Answer (C) is incorrect because it is a 
   requirement for accrual of a liability for 
   compensated absences. 

   Answer (D) is correct. SFAS 43, 
   Accounting for Compensated Absences, 
   requires the accrual of a liability for 
   employees' compensation for future 
   absences provided in the form of sick 
   pay benefits, holiday pay, or vacation 
   pay. The obligation must arise from past 
   services, employee rights must vest or 
   accumulate, and the payment must be 
   probable and reasonably estimable. 
   Rights are vested if they are not 
   contingent on future service. Rights 
   accumulate if earned, but unused rights 
   can be carried forward to subsequent 
   periods. 


[606] Source: CMA 1290 2-26 

   Answer (A) is incorrect because 
   collectibility of receivables is a loss 
   contingency that may be accrued if it is 
   probable and the amount can be 
   reasonably estimated. 

   Answer (B) is correct. SFAS 5 requires 
   the accrual of loss contingencies when 
   it is probable that an asset has been 
   impaired or a liability has been 
   incurred at the balance sheet date, and 
   the amount can be reasonably estimated. 
   Examples of such contingencies include 
   bad debt losses, obligations related to 
   product warranties, premium offers to 
   customers, liabilities for defective 
   products, threat of expropriation of 
   assets, pending or threatened litigation, 
   guarantees of indebtedness of others, 
   repurchase agreements, and the risk of 
   casualties. Losses from fire, explosion, 
   or other similar hazards are not accrued 
   because, prior to the event, no asset has 
   been impaired or liability incurred. Fire 
   damage and similar hazards are general 
   business risks and do not meet the 
   conditions for accrual. 

   Answer (C) is incorrect because an 
   obligation related to product warranties 
   is a loss contingency that may be 
   accrued if it is probable and the amount 
   can be reasonably estimated. 

   Answer (D) is incorrect because a 
   premium offer to customers is a loss 
   contingency that may be accrued if it is 
   probable and the amount can be 
   reasonably estimated. 


[607] Source: CMA 1292 2-24 

   Answer (A) is incorrect because only 
   those contingent losses that are 
   probable should be recorded. 

   Answer (B) is incorrect because only 
   those contingent losses that are 
   probable should be recorded. 

   Answer (C) is incorrect because a 
   contingency that is reasonably possible 
   should be disclosed. 

   Answer (D) is correct. Contingent 
   losses should be accrued when the loss 
   is probable. A probable event is likely 
   to happen. A reasonably possible event 
   is less than probable but greater than 
   remote. Remote means that the chance 
   of occurrence is slight, or less than 
   reasonably possible. Reasonably 
   possible events should be disclosed but 
   not accrued. Remote events need not be 
   disclosed. 


[608] Source: CMA 0693 2-14 

   Answer (A) is incorrect because SFAS 
   5 requires that a guarantee of another's 
   indebtedness is to be disclosed even if 
   the possibility of loss is remote. 

   Answer (B) is incorrect because remote 
   contingencies ordinarily need not be 
   disclosed. 

   Answer (C) is incorrect because 
   disclosure need not include an amount 
   when that amount cannot be reasonably 
   estimated. 

   Answer (D) is correct. SFAS 5 
   prescribes the accounting for 
   contingencies. Contingencies are 
   divided into three categories: probable 
   (likely to occur), reasonably possible, 
   and remote. When contingent losses are 
   probable and the amount can be 
   reasonably estimated, the amount of the 
   loss should be charged against income. 
   If the amount cannot be reasonably 
   estimated but the loss is at least 
   reasonably possible, full disclosure 
   should be made, including a statement 
   that an estimate cannot be made. 


[609] Source: CIA 0594 IV-27 

   Answer (A) is incorrect because, when 
   transfers of receivables to third parties 
   with recourse are deemed to be sales, 
   they are not recorded as borrowings. 

   Answer (B) is incorrect because 
   guarantees of indebtedness result in loss 
   contingencies that are disclosed but not 
   accrued unless the loss is probable. 
   However, when SFAS 133 becomes 
   effective, derivatives (e.g., interest rate 
   swaps) must be recognized as assets or 
   liabilities at fair value. 

   Answer (C) is incorrect because an 
   unconditional purchase commitment 
   must be disclosed but not recorded at 
   the time of the agreement. 

   Answer (D) is correct. 
   Off-balance-sheet financing is debt that 
   need not be recognized in the financial 
   statements. One purpose is to improve 
   the balance sheet by reducing the 
   debt-equity ratio. Some common 
   examples of off-balance-sheet financing 
   are transfers of receivables with 
   recourse accounted for as sales, project 
   financing arrangements, take-or-pay 
   contracts, unconditional purchase 
   obligations, pension obligations 
   (amounts in excess of the unfunded 
   accumulated benefit obligation), and 
   operating leases. Capitalized leases are 
   recorded as financial commitments on 
   the balance sheet and are not 
   off-balance-sheet financing. 


[610] Source: CMA 1293 2-5 

   Answer (A) is incorrect because the 
   maturity value must be increased by any 
   related unamortized premium. 

   Answer (B) is correct. A bond liability 
   is shown at its face value (maturity 
   value), minus any related discount, or 
   plus any related premium. Thus, a bond 
   issued at a premium is shown at its 
   maturity value plus the unamortized 
   portion of the premium. The premium 
   account is sometimes called an adjunct 
   account because it is shown as an 
   addition to another account. 

   Answer (C) is incorrect because even a 
   bond investment must be adjusted for 
   the related premium or discount. 

   Answer (D) is incorrect because the 
   premium is added to the maturity value 
   of a bond liability. 


[611] Source: CMA 1287 3-23 

   Answer (A) is incorrect because the 
   conditions are not met for accrual of a 
   liability. 

   Answer (B) is incorrect because 
   disclosure is required. 

   Answer (C) is incorrect because the 
   conditions are not met for accrual of a 
   liability. 

   Answer (D) is correct. SFAS 43 lists 
   four requirements that must be met 
   before a liability is accrued for future 
   compensated absences. These 
   requirements are that the obligation 
   must arise for past services, the 
   employee rights must vest or 
   accumulate, payment is probable, and 
   the amount can be reasonably estimated. 
   If the amount cannot be reasonably 
   estimated, no liability should be 
   recorded. However, the obligation 
   should be disclosed. 


[612] Source: CMA 1287 3-30 

   Answer (A) is incorrect because the 
   amount excluded cannot exceed the 
   amount available for refinancing. 

   Answer (B) is correct. If an enterprise 
   intends to refinance short-term 
   obligations on a long-term basis and 
   demonstrates an ability to consummate 
   the refinancing, the obligations should 
   be excluded from current liabilities and 
   classified as noncurrent (SFAS 6, 
   Classification of Short-Term 
   Obligations Expected to Be 
   Refinanced). The ability to consummate 
   the refinancing may be demonstrated by 
   a post-balance-sheet-date issuance of a 
   long-term obligation or equity 
   securities, or by entering into a 
   financing agreement that meets certain 
   criteria. These criteria are that the 
   agreement does not expire within 1 
   year, it is noncancellable by the lender, 
   no violation of the agreement exists at 
   the balance sheet date, and the lender is 
   financially capable of honoring the 
   agreement. 

   Answer (C) is incorrect because SFAS 
   6 has no provision for adjustments. 

   Answer (D) is incorrect because SFAS 
   6 has no provision for reductions. 


[613] Source: CMA 1287 3-29 

   Answer (A) is incorrect because SFAS 
   78 requires classification as a current 
   liability. 

   Answer (B) is incorrect because 
   bankruptcy is not an exception. 

   Answer (C) is correct. In these 
   circumstances, the obligation should be 
   classified as current. However, the debt 
   need not be reclassified if the violation 
   will be cured within a specified grace 
   period or if the creditor formally 
   waives or subsequently loses the right 
   to demand repayment for a period of 
   more than a year from the balance sheet 
   date. Also, reclassification is not 
   required if the debtor expects and has 
   the ability to refinance the obligation on 
   a long-term basis. 

   Answer (D) is incorrect because SFAS 
   78 concerns callable, not contingent, 
   liabilities. 


[614] Source: CMA 0690 3-1 

   Answer (A) is incorrect because the 
   gross investment is not adjusted for the 
   time value of money. 

   Answer (B) is incorrect because the 
   gross investment is not adjusted for the 
   time value of money or fair value. 

   Answer (C) is incorrect because the 
   gross investment is not adjusted for fair 
   value. 

   Answer (D) is correct. For both 
   sales-type and direct-financing leases, 
   the lessor should record as the gross 
   investment in the lease the amount of the 
   minimum lease payments (which 
   include periodic payments plus 
   guaranteed residual value) plus any 
   amounts of unguaranteed residual value. 
   The net investment in the lease is equal 
   to the gross investment, plus any 
   unamortized initial direct costs, minus 
   unearned income. The unguaranteed 
   residual value is the expected value of 
   the leased asset in excess of the 
   guaranteed residual value at the end of 
   the lease term (SFAS 13). 


[615] Source: CMA 0686 3-10 

   Answer (A) is incorrect because 
   $40,000 would have been the deferred 
   tax liability at the end of 1995 if the 
   interest income for the year, not the rent 
   revenue, had been a temporary 
   difference. 

   Answer (B) is incorrect because 
   $32,0000 is the deferred tax liability at 
   the end of 1995. 

   Answer (C) is incorrect because $8,000 
   assumes a $32,000 reduction and a 
   $40,000 increase in a deferred tax 
   liability for 1996. 

   Answer (D) is correct. The correct 
   answer is $0. Permanent differences 
   (such as those caused by nontaxable 
   interest income) do not have deferred 
   tax consequences. The only item 
   resulting in a temporary difference was 
   the rental income. A deferred tax 
   liability would have been created at the 
   end of 1993. Given that the difference 
   reversed in 1994, no deferred amount 
   existed at the end of 1994. 


[616] Source: Publisher 

   Answer (A) is incorrect because 
   $35,000 is the amortization for both 
   Year 1 and Year 2. 

   Answer (B) is correct. For Year 1 and 
   Year 2, there were seven employees 
   with 36 years of expected service (2 + 
   2 + 6 + 8 + 10 + 5 + 3). Thus, for Year 
   1 and Year 2, the amortization would be 
   7/36 of $180,000, or $35,000. For Year 
   3, there are only five employees 
   remaining, resulting in a calculation of 
   5/36 of $180,000, or $25,000. 

   Answer (C) is incorrect because 
   $25,714 is 1/7 of the total and not based 
   on years of future service. 

   Answer (D) is incorrect because 
   $36,000 is 1/5 of the total and not based 
   on years of future service. 


[617] Source: CIA 1192 IV-45 

   Answer (A) is incorrect because GAAP 
   require accrual of a $1,000,000 loss. 

   Answer (B) is incorrect because the 
   loss is probable. 

   Answer (C) is incorrect because the 
   loss is not deferred; it is accrued. 

   Answer (D) is correct. SFAS 5, 
   Accounting for Contingencies, requires 
   that a loss from contingencies be 
   accrued when it is probable that, at a 
   balance sheet date, an asset is 
   overstated or a liability has been 
   incurred and the amount of the loss can 
   be reasonably estimated. According to 
   FASB Interpretation No. 14, 
   Reasonable Estimation of the Amount of 
   a Loss, if the estimate is stated within a 
   given range and no amount within that 
   range appears to be a better estimate 
   than any other, the minimum of the range 
   should be accrued. 


[618] Source: CIA 0596 IV-21 

   Answer (A) is incorrect because 
   $25,000 is the expected amount of 
   warranty claims for the first year of 
   second-year sales. 

   Answer (B) is incorrect because 
   $65,000 is the actual amount of claims 
   in the second year. 

   Answer (C) is incorrect because 
   $85,000 is the expected amount of 
   warranty claims in the second year. 

   Answer (D) is correct. Under the 
   accrual method, the total estimated 
   warranty costs are charged to operating 
   expense in the year of sale. The total 
   estimated warranty cost per unit is 
   $1,000 ($250 + $750). In year two, 100 
   units were sold, so the warranty 
   expense recognized is $100,000. 


[619] Source: CIA 0596 IV-25 

   Answer (A) is incorrect because SFAS 
   5 specifically states that general or 
   unspecified business risks do not meet 
   the criteria for accrual. 

   Answer (B) is incorrect because the 
   existence of the risk of catastrophic 
   events does not meet the criteria 
   necessary for accrual because the risk 
   does not indicate that any diminution in 
   the value of the property has occurred. 
   However, if these events are reasonably 
   possible, disclosure might be 
   appropriate. 

   Answer (C) is incorrect because the 
   existence of the risk of catastrophic 
   events does not meet the criteria 
   necessary for accrual because the risk 
   does not indicate that any diminution in 
   the value of the property has occurred. 
   However, if these events are reasonably 
   possible, disclosure might be 
   appropriate. 

   Answer (D) is correct. Under SFAS 5, 
   a loss contingency is accrued if 
   information available prior to issuance 
   of the financial statements indicates that 
   an asset had been impaired or a liability 
   incurred at the balance sheet date and if 
   the amount can be reasonably estimated. 
   When premiums are offered to 
   customers, for example, upon 
   redemption of coupons, the company 
   can usually establish that the incurrence 
   of a liability for the premiums is 
   probable. If the company has prior 
   experience with such offers or 
   information about the experience of 
   similar enterprises, the second 
   condition for accrual is met. 


[620] Source: CIA 0595 IV-20 

   Answer (A) is incorrect because the 
   time period in which the underlying 
   cause of action occurred is relevant. If 
   it arose after the date of the financial 
   statements, a liability may not be 
   reflected in those statements. 

   Answer (B) is incorrect because a 
   contingent loss is not recorded unless it 
   is probable that an asset was impaired 
   or a liability was incurred and the 
   amount of the loss can be reasonably 
   estimated. 

   Answer (C) is incorrect because a 
   contingent loss is not recorded unless it 
   is probable that an asset was impaired 
   or a liability was incurred and the 
   amount of the loss can be reasonably 
   estimated. 

   Answer (D) is correct. The number of 
   parties involved in the litigation is 
   irrelevant. For example, the same 
   recording treatment is applied whether 
   a claim is brought by an individual or in 
   a class action suit. 


[621] Source: CIA 0591 IV-36 

   Answer (A) is incorrect because 
   $340,000 may be excluded from current 
   liabilities. 

   Answer (B) is incorrect because the 
   15% note is also excluded from current 
   liabilities. 

   Answer (C) is incorrect because the 
   17% note is also excluded from current 
   liabilities. 

   Answer (D) is correct. Under SFAS 6, 
   an enterprise is required to exclude a 
   short-term obligation from current 
   liabilities if the entity has the intent and 
   ability to refinance it on a long-term 
   basis. The ability to consummate the 
   refinancing may be demonstrated either 
   by (1) actually refinancing the 
   short-term obligation by issuance of a 
   long-term obligation or equity securities 
   after the date of the balance sheet but 
   before it is issued, or (2) entering into a 
   financing agreement that clearly permits 
   the enterprise to refinance the debt on a 
   long-term basis. The ability to refinance 
   the 17% note payable is demonstrated 
   by the actual refinancing after the 
   balance sheet date but before the date of 
   issuance of the balance sheet. The 
   ability to refinance the 15% note 
   payable is demonstrated by the 
   borrower's entering into a long-term, 
   noncancellable financing agreement 
   given that both parties are financially 
   capable and no violations of its terms 
   have occurred. Thus, $340,000 
   ($140,000 17% note + $200,000 15% 
   note) may be excluded from current 
   liabilities. 


[622] Source: CMA 0690 3-2 

   Answer (A) is incorrect because these 
   costs are an expense in the period of 
   sale. However, initial direct costs of a 
   direct-financing lease are recorded as 
   an addition to the gross investment. 

   Answer (B) is correct. In a sales-type 
   lease, the cost or the carrying amount, if 
   different, plus any initial direct costs 
   minus the present value of any 
   unguaranteed residual value is charged 
   against income in the same period that 
   the present value of the minimum lease 
   payments is credited to sales. The result 
   is a net profit or loss on the sales-type 
   lease. 

   Answer (C) is incorrect because initial 
   direct costs of an operating lease may 
   be deferred and allocated over the term 
   of the lease in proportion to the 
   recognition of rental income. 

   Answer (D) is incorrect because initial 
   direct costs of a direct-financing lease 
   are added to the gross investment. 


[623] Source: CIA 0589 IV-33 

   Answer (A) is incorrect because a 
   journal entry is made when the loss 
   contingency is probable and reasonably 
   estimable, not just possible. 

   Answer (B) is correct. A contingency is 
   "an existing condition, situation, or set 
   of circumstances involving uncertainty 
   as to possible gain or loss to an 
   enterprise that will ultimately be 
   resolved when one or more future 
   events occur or fail to occur." The 
   accounting treatment of loss 
   contingencies is to charge estimated 
   losses to income (and record the 
   liability or asset impairment) when 
   information available prior to issuance 
   of financial statements indicates that it 
   is probable that an asset had been 
   impaired or a liability had been 
   incurred (as of year-end) and the 
   amount of loss can be reasonably 
   estimated. If an accrual is not made, 
   disclosure of the contingency should be 
   made when there is a reasonable 
   possibility that a loss will occur. 

   Answer (C) is incorrect because a 
   disclosure must be made when a loss 
   contingency is possible. 

   Answer (D) is incorrect because a 
   journal entry is made when the loss 
   contingency is probable and reasonably 
   estimable, not just possible. 


[624] Source: CIA 1192 IV-31 

   Answer (A) is correct. ARB 43, 
   Chapter 3A, Current Assets and Current 
   Liabilities, defines a current liability as 
   an obligation that will be either 
   liquidated using current assets or 
   replaced by another current liability. 
   SFAS 78, Classification of Obligations 
   That Are Callable by the Creditor, 
   amends ARB 43 to include the 
   following as current liabilities: (1) 
   obligations that, by their terms, are or 
   will be due on demand within 1 year 
   (or the operating cycle if longer), and 
   (2) obligations that are or will be 
   callable by the creditor within 1 year 
   because of a violation of a debt 
   covenant. At the balance sheet date of 
   December 31, 2001, both the principal 
   of the bonds and the interest accrued at 
   the balance sheet date will be due 
   within a year. These amounts are 
   expected to require the use of current 
   assets (there is no evidence to the 
   contrary) and should be classified as 
   current liabilities. 

   Answer (B) is incorrect because the 
   interest payable should be classified as 
   a current liability. It is due within a 
   year after the December 31, 2001 
   balance sheet date. 

   Answer (C) is incorrect because the 
   balance of bonds payable should be 
   classified as a current liability. The 
   bonds are due within a year after the 
   December 31, 2001 balance sheet date. 

   Answer (D) is incorrect because both 
   the balance of bonds payable and 
   interest payable should be classified as 
   current liabilities. 


[625] Source: CIA 0596 IV-23 

   Answer (A) is incorrect because the 
   entry to bonds payable is based on the 
   face, or maturity, value of the bond 
   issued. The difference between the 
   amount received on issuance and the 
   face value is recorded as a premium or 
   discount on bonds payable. 

   Answer (B) is incorrect because the 
   discount should be recognized. 

   Answer (C) is correct. The company 
   received $480,000 cash on the issuance 
   of the bond. Its face value is $500,000, 
   the amount to be paid at maturity. 
   Hence, the credit to bonds payable is 
   $500,000. The $20,000 difference is 
   recorded as a discount on bonds 
   payable (a debit) and is amortized over 
   the life of the issue. 

   Answer (D) is incorrect because the 
   debit to cash is $480,000, a $20,000 
   discount should be debited, and the 
   credit to bonds payable is $500,000. 


[626] Source: CIA 0595 IV-19 

   Answer (A) is incorrect because 
   $990,000 is the result if 1 month of 
   accrued interest is deducted from, 
   rather than added to, the amount 
   received. 

   Answer (B) is incorrect because the 
   purchasers must pay for the accrued 
   interest from the last interest date to the 
   issue date. They will receive 6 months' 
   interest on July 1 despite holding the 
   bonds for 5 months. 

   Answer (C) is correct. The amount the 
   issuing company receives on February 1 
   is the face value of the issue plus 1 
   month of accrued interest, or 
   $1,010,000 {$1,000,000 + 
   [($1,000,000 x 12%)  12]}. 

   Answer (D) is incorrect because 
   $1,020,000 results from adding 2 
   months of accrued interest to the face 
   value. 


[627] Source: CIA 0590 IV-34 

   Answer (A) is incorrect because the 
   bonds should be classified as a 
   long-term liability. 

   Answer (B) is correct. ARB 43, 
   Chapter 3A, states that current 
   liabilities are "obligations whose 
   liquidation is reasonably expected to 
   require the use of existing assets 
   properly classified as current assets or 
   the creation of other current liabilities." 
   At the balance sheet date of December 
   31, 2001, the bonds will be due within 
   a year. However, a special fund has 
   been used to accumulate the necessary 
   funds for retirement, and the assets in 
   the fund are classified in a noncurrent 
   category. According to ARB 43, "The 
   current liability classification is not 
   intended to include debts to be 
   liquidated by funds that have been 
   accumulated in accounts of a type not 
   properly classified as current assets." 

   Answer (C) is incorrect because 
   offsetting assets and liabilities is rarely 
   acceptable. 

   Answer (D) is incorrect because the 
   bonds are a liability and should not be 
   put in an ambiguous category such as 
   deferred credits. 


[628] Source: CIA 1195 IV-21 

   Answer (A) is incorrect because, if the 
   market rate equals the coupon rate, the 
   bonds will not sell at a premium or 
   discount. 

   Answer (B) is incorrect because if the 
   market rate exceeds the coupon rate, the 
   bond issue will sell at a discount. 

   Answer (C) is correct. If the market rate 
   exceeds the coupon rate, the price of the 
   bonds must decline to a level that 
   equates the yield on the bonds with the 
   market rate of interest. Accordingly, the 
   bonds will be recorded by a debit to 
   cash for the proceeds, a debit to 
   discount on bonds payable, and a credit 
   to bonds payable at face value. 

   Answer (D) is incorrect because, if the 
   market rate is less than the coupon rate, 
   the bonds will sell at a price in excess 
   of the face value. The issuing company 
   will record a premium. 


[629] Source: CIA 1191 IV-39 

   Answer (A) is incorrect because the 
   excess of the reacquisition price over 
   the net carrying amount of the old bonds 
   is recognized in full as a loss from 
   extinguishment of debt in the period of 
   refunding. 

   Answer (B) is incorrect because the 
   excess of the reacquisition price over 
   the net carrying amount of the old bonds 
   is recognized in full as a loss from 
   extinguishment of debt in the period of 
   refunding. 

   Answer (C) is correct. The amount paid 
   on redemption before maturity, 
   including any call premium, is the 
   reacquisition price. An excess of the 
   reacquisition price over the carrying 
   amount is a loss from extinguishment of 
   debt. Gains and losses from 
   extinguishment of debt are to be 
   classified as extraordinary items on the 
   income statement in the period of 
   extinguishment. In this case, the loss 
   equals the call premium because the 
   payable is carried at par. 

   Answer (D) is incorrect because the 
   loss is extraordinary. 


[630] Source: CIA 1195 IV-33 

   Answer (A) is incorrect because a 
   restructuring may permit interest 
   reduction or deferral. 

   Answer (B) is incorrect because a 
   restructuring may result in concessions 
   that the creditor might not otherwise 
   consider. 

   Answer (C) is incorrect because a 
   restructuring may constitute either a 
   modification of terms or a settlement at 
   less than the carrying amount of the 
   debt. 

   Answer (D) is correct. Concessions 
   granted by the creditor usually result in 
   a loss, not a gain, to the creditor and in 
   a gain, not a loss, to the debtor. 


[631] Source: CIA 1192 IV-44 

   Answer (A) is incorrect because the 
   liability and receivables should not be 
   increased by the 10% interest rate. 

   Answer (B) is incorrect because the 
   receivables should not be increased by 
   the 10% interest rate. 

   Answer (C) is incorrect because the 
   liability should not be increased by the 
   10% interest rate. 

   Answer (D) is correct. A troubled debt 
   restructuring may occur as an asset 
   exchange, a modification of terms, or as 
   a combination of these two methods. In 
   this instance, the troubled debt 
   restructuring is effected as an asset 
   exchange. In such an exchange, the asset 
   given up for the troubled debt must first 
   be adjusted from its carrying amount to 
   its fair value, with an ordinary gain or 
   loss being recognized for the 
   adjustment. The fair value of the asset 
   provided must then be compared with 
   the carrying value of the troubled debt 
   to determine the extraordinary item to 
   be recognized. In this question, one 
   must assume that the book and fair 
   values of the receivables are the same. 
   Consequently, the liability should be 
   debited for its $100,000 balance. 
   Receivables with $90,000 balance are 
   given up, so that account should be 
   credited. The difference is a gain. 


[632] Source: CMA 0696 2-29 

   Answer (A) is incorrect because the 
   bargain purchase option makes the lease 
   a capital lease. 

   Answer (B) is incorrect because the 
   bargain purchase option makes the lease 
   a capital lease. 

   Answer (C) is incorrect because the 
   land and the building should be 
   recorded in separate accounts. The 
   building is depreciable and the land is 
   not. 

   Answer (D) is correct. A lessee 
   records a lease as a capital lease if it 
   meets any one of four criteria. Existence 
   of a bargain purchase option is one of 
   these criteria. If a lease involving land 
   and a building contains a bargain 
   purchase option or if the lease transfers 
   ownership to the lessee at the end of its 
   term, the lessee separately capitalizes 
   the land and the building. 


[633] Source: CIA 0595 IV-23 

   Answer (A) is incorrect because an 
   interest rate swap is a derivative, and 
   rights to receive interest payments and 
   obligations to make interest payments 
   on swaps are reflected on the balance 
   sheet. 

   Answer (B) is incorrect because an 
   interest rate swap is a derivative, and 
   rights to receive interest payments and 
   obligations to make interest payments 
   on swaps are reflected on the balance 
   sheet. 

   Answer (C) is incorrect because an 
   interest rate swap is a derivative, and 
   rights to receive interest payments and 
   obligations to make interest payments 
   on swaps are reflected on the balance 
   sheet. 

   Answer (D) is correct. Interest rate 
   swaps are derivatives used to alter the 
   terms of original borrowings. For 
   example, a company with variable-rate 
   debt may agree to exchange obligations 
   with a company obligated on fixed-rate 
   debt. Under SFAS 133, derivatives are 
   recognized as assets or liabilities and 
   measured at fair value in the balance 
   sheet as the underlying (for example, a 
   specified interest rate) changes. 
   Consequently, the right to receive 
   interest payments and the obligation to 
   make such payments are reflected on the 
   balance sheet. Moreover, the effect of 
   an interest rate swap is to alter interest 
   revenues or expenses. The interest 
   revenues and expenses reported in the 
   income statement include any effect of 
   swap transactions during the accounting 
   period. Among other things, SFAS 133 
   requires that all derivatives be 
   recognized as assets or liabilities at fair 
   value. 


[634] Source: CIA 1195 IV-28 

   Answer (A) is correct. When a lease 
   agreement transfers the benefits and 
   risks of ownership of the asset to the 
   lessee, the lease is treated as a capital 
   lease because the transaction is in 
   essence an installment purchase. 
   Accordingly, the lessee records a 
   depreciable asset and a liability. A 
   capital lease is therefore regarded as a 
   tangible asset. 

   Answer (B) is incorrect because capital 
   leases are tangible assets. 

   Answer (C) is incorrect because, if it 
   transfers substantially all of the benefits 
   and risks of ownership, the lease is a 
   capital lease. 

   Answer (D) is incorrect because, if it 
   transfers substantially all of the benefits 
   and risks of ownership, the lease is a 
   capital lease. 


[635] Source: CIA 0596 IV-32 

   Answer (A) is incorrect because the 
   lessee obtains use of the asset. 

   Answer (B) is incorrect because the 
   lessee uses the lease as a source of 
   financing under a capital lease, not an 
   operating lease. 

   Answer (C) is incorrect because the 
   lessee makes payments to the lessor. 

   Answer (D) is correct. A lease is a 
   rental or sub-purchase arrangement 
   between a lessor (the owner or seller of 
   the property) and lessee (the renter or 
   purchaser). The issue in all leases is 
   whether the rights and risks of 
   ownership have been transferred from 
   the lessor to the lessee; if so, the lease 
   should be accounted for as a 
   sale-purchase, i.e., a capital lease. If 
   the rights and risks of ownership have 
   not transferred, the lease is a rental 
   arrangement and is called an operating 
   lease. In effect, the lessor provides 
   financing for an installment purchase, 
   and the lessee's payments include both 
   principal and interest components. 


[636] Source: CIA 0595 IV-27 

   Answer (A) is incorrect because the 
   lessor capitalizes the present value of 
   the minimum lease payments as a 
   receivable on the balance sheet. 

   Answer (B) is correct. When a 
   transaction meets the criteria of a 
   capital lease, the lessor removes the 
   leased item from the books and records 
   lease payments receivable regardless of 
   whether the lease is a sales-type or 
   direct-financing capital lease. The 
   lessee records and depreciates the 
   leased item under a capital lease. 

   Answer (C) is incorrect because the 
   lessee records depreciation on the 
   leased asset under a capital lease. This 
   process is separate from the accounting 
   for the lease obligation. 

   Answer (D) is incorrect because, in 
   essence, the leased asset is being 
   purchased when a lease meets the 
   criteria for capitalization. Hence, the 
   lease agreement represents a form of 
   financing. 


[637] Source: CIA 1191 IV-44 

   Answer (A) is correct. A guaranteed 
   residual value is defined as the portion 
   of the expected salvage value that is 
   guaranteed by the lessee. This portion 
   of the expected salvage value is 
   included with the periodic rental 
   payments in the definition of minimum 
   lease payments. Because the leased 
   asset should be recorded in an amount 
   equal to the present value of the 
   minimum lease payments, the 
   guaranteed residual value is included at 
   an amount equal to its present value. 

   Answer (B) is incorrect because the 
   guaranteed residual must be discounted 
   to present value. 

   Answer (C) is incorrect because the 
   guaranteed residual must be discounted 
   to present value. 

   Answer (D) is incorrect because 
   guaranteed residuals are part of the 
   lease contract. 


[638] Source: CIA 0596 IV-31 

   Answer (A) is incorrect because Leases 
   C and D are also capital leases. 

   Answer (B) is incorrect because B is 
   the only operating lease in the set. 

   Answer (C) is correct. SFAS 13, 
   Accounting for Leases, states that a 
   lease must be classified as a capital 
   lease by a lessee if, at its inception, any 
   one of the following criteria is met:

   1) A lease provides for the transfer of ownership of the leased property.
   2) The lease contains a bargain purchase option.
   3) The lease term is 75% or more of the estimated economic life of the
      leased property.
   4) The present value of the minimum lease payments (excluding executory
      costs) is at least 90% of the excess of the fair value of the leased
      property to the lessor at the inception of the lease over any related
      investment tax credit.
   Lease A is a capital lease because the 
   terms of the lease include a bargain 
   purchase option. Leases C and D pass 
   the economic life (75%) test, and lease 
   D also passes the recovery of 
   investment (90%) test. 

   Answer (D) is incorrect because Lease 
   A contains a bargain purchase option, 
   so it qualifies as a capital lease. 


[639] Source: CIA 0596 IV-75 

   Answer (A) is incorrect because this 
   statement describes the deferred method 
   of accounting for deferred income taxes. 

   Answer (B) is correct. Accrual 
   accounting should recognize taxes 
   payable or refundable for the current 
   year. It should also recognize deferred 
   tax liabilities and assets for the future 
   tax consequences of events that have 
   been recognized in the enterprise's 
   financial statements or tax returns. A 
   deferred tax item is measured using the 
   enacted tax rate(s) expected to apply to 
   taxable income in the period(s) in 
   which the deferred tax item is expected 
   to be settled or realized (SFAS 109). 

   Answer (C) is incorrect because this 
   statement describes the net-of-tax 
   method, which recognizes that future 
   taxability and deductibility are 
   important factors in the valuation of 
   individual assets and liabilities. 

   Answer (D) is incorrect because this 
   statement describes the nonallocation or 
   flow-through approach, which does not 
   support the calculation and reporting of 
   deferred income tax. 


[640] Source: Publisher 

   Answer (A) is incorrect because the 
   FASB specifically rejected the term 
   probable (likely) as used in SFAS 5, 
   Accounting for Contingencies. 

   Answer (B) is incorrect because the 
   FASB believes that the appropriate 
   criterion is the one that produces results 
   that are closest to the expected outcome. 
   A reasonable possibility does not meet 
   that standard. 

   Answer (C) is correct. A deferred tax 
   asset shall be reduced by a valuation 
   allowance if the weight of the available 
   evidence, both positive and negative, 
   indicates that it is more likely than not 
   (that is, the probability is greater than 
   50%) that some portion will not be 
   realized. The allowance should suffice 
   to reduce the deferred tax asset to the 
   amount that is more likely than not to be 
   realized. 

   Answer (D) is incorrect because the 
   FASB specifically rejected the term 
   probable (likely) as used in SFAS 5, 
   Accounting for Contingencies. 


[641] Source: CIA 0594 IV-73 

   Answer (A) is incorrect because 
   temporary differences result in taxable 
   or deductible amounts in future years. 

   Answer (B) is incorrect because 
   permanent differences only affect the 
   period in which they occur. Only 
   temporary differences have deferred tax 
   consequences. 

   Answer (C) is correct. Temporary 
   differences include differences between 
   the tax bases of assets or liabilities and 
   their reported amounts in the financial 
   statements that will result in taxable or 
   deductible amounts in future years when 
   the reported amounts of the assets are 
   recovered or the liabilities are settled. 
   A permanent difference is an event that 
   is recognized either in pretax financial 
   income or in taxable income but never 
   in the other. Accordingly, only 
   temporary differences have deferred tax 
   consequences (SFAS 109). 

   Answer (D) is incorrect because 
   permanent differences include items that 
   enter into pre-tax financial income but 
   never into taxable income. 


[642] Source: CIA 1194 IV-69 

   Answer (A) is incorrect because the 
   deferred tax liability will increase then 
   decrease. 

   Answer (B) is incorrect because the 
   deferred tax liability will increase then 
   decrease. 

   Answer (C) is correct. The cumulative 
   deferred tax increases, peaks, then 
   decreases to zero over the life of the 
   asset. In the early years, the asset is 
   depreciated more quickly for tax 
   purposes than for financial reporting 
   purposes. This temporary difference 
   reverses in later years. Hence, in the 
   early years, actual taxes payable will 
   be less than income tax expense 
   reported in the financial statements, and 
   a deferred tax liability will be 
   recognized. By the end of the asset's 
   useful life, cumulative actual taxes paid 
   will equal cumulative reported tax 
   expense, so the deferred tax balance 
   will be zero. 

   Answer (D) is incorrect because the 
   deferred tax liability will increase then 
   decrease. 


[643] Source: CIA 1194 IV-70 

   Answer (A) is correct. Net cash flow 
   equals net income calculated on the 
   accrual basis adjusted for items that 
   have different effects on accounting net 
   income and cash flow, for example, 
   depreciation net of the tax effect. Thus, 
   cash flows are affected by the 
   depreciation method used for tax 
   purposes because that method 
   determines taxes paid. Cash flows are 
   not affected by the method used for 
   reporting purposes. 

   Answer (B) is incorrect because cash 
   flows are not affected by the method of 
   depreciation used for reporting 
   purposes. 

   Answer (C) is incorrect because cash 
   flows are not affected by the method of 
   depreciation used for reporting 
   purposes. 

   Answer (D) is incorrect because cash 
   flows are not affected by the method of 
   depreciation used for reporting 
   purposes. 


[644] Source: Publisher 

   Answer (A) is incorrect because a 
   change in tax law or rates should be 
   recognized as an adjustment as of the 
   date of the change. 

   Answer (B) is incorrect because a 
   change in tax law or rates should be 
   recognized as an adjustment as of the 
   date of the change. 

   Answer (C) is correct. When a change 
   in the tax law or rates occurs, the effect 
   of the change on a deferred tax liability 
   or asset is recognized as an adjustment 
   in the period that includes the enactment 
   date of the change. The adjustment is 
   included in the amount of income tax 
   expense or benefit allocated to income 
   from continuing operations. It is not 
   treated as an extraordinary item. 

   Answer (D) is incorrect because a 
   change in tax law or rates should be 
   recognized as an adjustment as of the 
   date of the change. 


[645] Source: Publisher 

   Answer (A) is incorrect because the 
   deferred income tax expense or benefit 
   is equal to the sum of the net changes in 
   the deferred tax assets and deferred tax 
   liabilities. 

   Answer (B) is correct. The deferred tax 
   expense or benefit recognized is the 
   sum of the net changes in the deferred 
   tax assets and deferred tax liabilities. 
   The deferred income tax expense or 
   benefit is aggregated with the income 
   taxes currently payable or refundable to 
   determine the amount of income tax 
   expense or benefit for the year to be 
   recorded in the income statement. 

   Answer (C) is incorrect because the 
   deferred income tax expense or benefit 
   is equal to the sum of the net changes in 
   the deferred tax assets and deferred tax 
   liabilities. 

   Answer (D) is incorrect because the 
   total income tax liability includes both 
   the current and deferred income tax 
   expense or benefit for the year. 


[646] Source: Publisher 

   Answer (A) is incorrect because a 
   temporary difference related to 
   depreciable equipment results in a 
   liability. 

   Answer (B) is correct. When a deferred 
   tax liability or asset is related to an 
   asset or a liability, its classification as 
   current or noncurrent is based on the 
   classification of the related item for 
   financial reporting purposes. Because 
   tax depreciation for the first year is 
   greater than book depreciation, the tax 
   basis of this noncurrent asset differs 
   from (is less than) its book basis. The 
   result is a taxable temporary difference. 
   The related deferred tax liability is 
   classified as noncurrent because the 
   related asset is noncurrent. 

   Answer (C) is incorrect because 
   depreciable equipment is classified as a 
   noncurrent asset. 

   Answer (D) is incorrect because 
   depreciable equipment is classified as a 
   noncurrent asset. 


[647] Source: Publisher 

   Answer (A) is incorrect because, when 
   the benefits and risks of ownership are 
   transferred from the lessor to the lessee, 
   the transaction is a capital lease. 

   Answer (B) is incorrect because it 
   describes the proper accounting for a 
   lessee's capital lease. 

   Answer (C) is incorrect because 
   satisfaction of any one of these four 
   criteria requires the lease to be treated 
   as a capital lease. 

   Answer (D) is correct. Operating leases 
   are transactions whereby lessees rent 
   the right to use lessor assets without 
   acquiring a substantial portion of the 
   benefits and risks of ownership of those 
   assets. 


[648] Source: Publisher 

   Answer (A) is incorrect because 
   lessees use the same depreciation 
   methods for both kinds of leases. 

   Answer (B) is correct. The difference 
   between direct-financing and sales-type 
   leases arises only for lessor accounting. 
   In a direct-financing lease, the 
   difference between the gross investment 
   and its cost or carrying amount is 
   recorded as unearned income. No gross 
   profit is recognized because the fair 
   value and the cost or carrying amount of 
   the leased asset are the same. In a 
   sales-type lease, however, the lessor 
   recognizes a manufacturer's or dealer's 
   profit or loss because the fair value of 
   the leased property at the lease's 
   inception differs from the cost or 
   carrying amount. 

   Answer (C) is incorrect because the 
   receivable for the lease payments is 
   recorded at gross on the books of the 
   lessor for both the sales-type and 
   direct-financing leases. 

   Answer (D) is incorrect because the 
   undiscounted (gross) residual value is 
   recorded by the lessor for both 
   direct-financing and sales-type leases. 
   It is part of the gross investment. 


[649] Source: J.O. Hall 

   Answer (A) is correct. For a 
   direct-financing or a sales-type lease, 
   the lessor should record the gross 
   investment in the lease at the 
   undiscounted sum of the minimum lease 
   payments (the total of the periodic 
   payments and any guaranteed residual 
   value, net of executory costs) and any 
   unguaranteed residual value. The gross 
   investment is the same regardless of 
   whether any residual value is 
   guaranteed. The five periodic payments 
   of $20,000 equal $100,000. The 
   expected residual value, including both 
   guaranteed and unguaranteed portions, 
   equals $10,000. The gross investment 
   should be $110,000 ($100,000 + 
   $10,000). 

   Answer (B) is incorrect because it fails 
   to include the residual value in the 
   gross investment. 

   Answer (C) is incorrect because the 
   annual lease payments should be 
   recorded at their undiscounted value. 

   Answer (D) is incorrect because the 
   residual value is added to, not 
   subtracted from, the undiscounted lease 
   payments. 


[650] Source: CMA 1295 2-6 

   Answer (A) is correct. 
   Off-balance-sheet debt includes any 
   type of liability that the company is 
   responsible for but that does not appear 
   on the balance sheet. The most common 
   example is the amount due in future 
   years on operating leases. Under SFAS 
   13, operating leases are not capitalized; 
   instead, only the periodic payments of 
   rent are reported when actually paid. 
   Capital leases (those similar to a 
   purchase) must be capitalized and 
   reported as liabilities. 

   Answer (B) is incorrect because 
   transfers of accounts receivable without 
   recourse do not create a liability for the 
   company. This transaction is simply a 
   transfer of receivables for cash. 

   Answer (C) is incorrect because the 
   current portion of long-term debt is 
   reported on the balance sheet as a 
   current liability. 

   Answer (D) is incorrect because 
   amounts due in future years under 
   capital leases are required to be 
   capitalized under SFAS 13. 


[651] Source: CMA 1293 2-27 

   Answer (A) is incorrect because the 
   Hadaway lease does not meet any of the 
   criteria of a capital lease. 

   Answer (B) is incorrect because rental 
   expense is $15,000. 

   Answer (C) is incorrect because the 
   actual cash outlay for rent, $15,000, is 
   charged to expense. 

   Answer (D) is correct. The Hadaway 
   lease is an operating lease with a 
   $15,000 annual rental expense with 
   annual executory costs of $800 to be 
   paid by the lessee. An operating lease 
   does not transfer the rights and risks of 
   ownership to the lessee. The Hadaway 
   lease is nothing more than a rental 
   arrangement. SFAS 13 specifies that if 
   any one of the following criteria is met, 
   the lease is a capital lease: the lease 
   transfers title to the lessee, the lease has 
   a bargain purchase option, the lease 
   term is 75% or more of the useful life of 
   the leased asset, or the present value of 
   the minimum lease payments is 90% or 
   more of the asset's fair value. The 
   Hadaway lease meets none of these four 
   criteria. 


[652] Source: CMA 1293 2-28 

   Answer (A) is incorrect because the 
   initial asset value cannot exceed the fair 
   value of the leased asset. Moreover, 
   $10,960 includes the present value of 
   the executory costs. 

   Answer (B) is incorrect because 
   $10,200 is the fair value of the leased 
   asset. 

   Answer (C) is incorrect because the 
   Cutter lease meets the criteria of a 
   capital lease. 

   Answer (D) is correct. A capital lease 
   is one in which many of the rights of 
   ownership are transferred to the lessee. 
   For accounting purposes, the lessee 
   treats a capital lease as similar to the 
   purchase of an asset. SFAS 13 specifies 
   that if the present value of the minimum 
   lease payments (excluding executory 
   costs) is 90% or more of the asset's fair 
   value, the lease should be accounted for 
   as a capital lease. Given that the 
   executory costs associated with the 
   lease are to be paid by the lessor, a 
   portion of the lease rental price is for 
   those costs, not for the asset. Executory 
   costs include insurance, maintenance, 
   and similar expenses. Consequently, the 
   annual minimum lease payment equals 
   the annual payment minus the executory 
   costs, or $3,500 ($4,000 yearly rental - 
   $500). The present value of the 
   minimum lease payments is therefore 
   $9,590 (2.74 x $3,500), which is 
   greater than 90% of the fair value of the 
   asset. Thus, the lease should be 
   capitalized. The appropriate amount of 
   the initial asset value is the present 
   value of the minimum lease payments 
   calculated above. 


[653] Source: Publisher 

   Answer (A) is incorrect because, in a 
   business combination accounted for as a 
   purchase, unrecognized net gains and 
   losses are eliminated by the assignment 
   of part of the purchase price to a 
   liability (excess of PBO over plan 
   assets) or an asset (excess of plan 
   assets over the PBO). 

   Answer (B) is incorrect because, in a 
   business combination accounted for as a 
   purchase, prior service cost, is 
   eliminated by the assignment of part of 
   the purchase price to a liability (excess 
   of PBO over plan assets) or an asset 
   (excess of plan assets over the PBO). 

   Answer (C) is correct. In a business 
   combination structured as a purchase, 
   the acquiring company should recognize 
   a pension liability if the PBO of the 
   acquired company is in excess of that 
   company's plan assets. Likewise, a 
   pension asset should be recognized if 
   plan assets exceed the PBO. 

   Answer (D) is incorrect because, in a 
   business combination accounted for as a 
   purchase, the transition net asset or 
   obligation of the acquired company's 
   defined benefit plan is eliminated by the 
   assignment of part of the purchase price 
   to a liability (excess of PBO over plan 
   assets) or an asset (excess of plan 
   assets over the PBO). 




[655] Source: Publisher 

   Answer (A) is incorrect because 
   $20,000 is the result of using the full 
   $200,000 liability loss without regard 
   to the corridor amount and assumes an 
   amortization period of ten years instead 
   of twenty. 

   Answer (B) is incorrect because $3,750 
   is the result of using $125,000 (10% x 
   $1,250,000 plan assets) as the corridor 
   amount instead of $150,000. 

   Answer (C) is correct. At a minimum, 
   amortization of the cumulative 
   unrecognized net gain or loss (excluding 
   asset gains and losses not yet reflected 
   in market-related value) must be 
   included as a component of NPPC for a 
   year if, as of the beginning of the year, 
   that unrecognized gain or loss exceeds 
   10% of the greater of the PBO or the 
   market-related value (MRV) of plan 
   assets. At year-end, Penny's PBO was 
   $200,000 greater than estimated (a 
   $200,000 liability loss). Because no 
   other gain or loss has occurred, the 
   unrecognized net loss to be amortized 
   beginning next year is $200,000. The 
   corridor amount is $150,000 (10% of 
   the greater of $1,500,000 PBO or 
   $1,250,000 MRV of plan assets). The 
   amount outside the corridor is $50,000 
   ($200,000 - $150,000), and the amount 
   to be amortized is $2,500 ($50,000  
   20 years of average remaining service 
   life). 

   Answer (D) is incorrect because 
   $50,000 of the liability loss must be 
   amortized over the average remaining 
   service life beginning the year 
   following the loss. 


[656] Source: Publisher 

   Answer (A) is incorrect because 50, not 
   20, must be used as the numerator of the 
   amortization fraction. 

   Answer (B) is incorrect because the use 
   of straight-line amortization over 5 
   years does not recognize the cost of 
   retroactive amendments more quickly. 

   Answer (C) is incorrect because 50, not 
   40, must be used as the numerator of the 
   amortization fraction for the first year. 

   Answer (D) is correct. Prior service 
   cost is amortized by assigning an equal 
   amount to each future period of service 
   of each employee active at the date of 
   the plan amendment who is expected to 
   receive benefits under the plan. If all or 
   almost all of a plan's participants are 
   inactive, the prior service cost is 
   amortized based on the remaining life 
   expectancy of the participants. An 
   alternative amortization approach, such 
   as a straight-line method, that 
   recognizes the cost of retroactive 
   amendments more quickly is also 
   permitted if used consistently. For 
   Emper, total service years rendered 
   during the 5-year period is 150 (50 + 
   40 + 30 + 20 + 10). The amortization 
   fraction for the first year is thus 50/150, 
   and the minimum amortization is 
   $200,000 ($600,000 x 50/150). 


[657] Source: CMA 0694 2-20 

   Answer (A) is incorrect because 
   $38,000 and $140,000 equal the excess 
   of the PBO over the fair value of plan 
   assets at May 31, 2000 and 2001, 
   respectively. 

   Answer (B) is incorrect because 
   $98,000 is the sum of unrecognized 
   prior service cost and prepaid pension 
   cost, and $0 is the difference between 
   the PBO at May 31, 2001 and the sum 
   of the fair value of the plan assets, the 
   unrecognized prior service cost, and the 
   accrued pension cost. 

   Answer (C) is incorrect because 
   $48,000 is the amount of the entry at 
   May 31, 2000 to record the additional 
   liability needed to reflect the required 
   minimum liability. It equals the excess 
   of the ABO over the fair value of plan 
   assets, plus the prepaid pension cost. 
   The entry is to debit an intangible asset 
   and to credit the additional liability for 
   $48,000. At May 31, 2001, $12,000 
   equals the amount of the entry to record 
   the additional liability ($280,000 ABO 
   - $180,000 fair value of plan assets - 
   $88,000 accrued pension cost). 

   Answer (D) is correct. SFAS 87 
   requires the recording of a liability if 
   the ABO is underfunded. Thus, if the 
   ABO is greater than the fair value of 
   plan assets, a net liability must be 
   recognized. At May 31, 2000, the 
   $180,000 ABO is $18,000 greater than 
   the $162,000 fair value of plan assets. 
   At May 31, 2001, a liability of 
   $100,000 exists because the $280,000 
   ABO is $100,000 greater than the 
   $180,000 fair value of plan assets. 


[658] Source: CMA 0696 2-7 

   Answer (A) is incorrect because 
   $7,000 is the tax benefit provided by 
   the $20,000 depreciation expense on the 
   books. 

   Answer (B) is incorrect because 
   $33,330 is the depreciation deduction 
   on the tax return. 

   Answer (C) is incorrect because 
   $11,666 is the tax shield based on 
   MACRS depreciation. 

   Answer (D) is correct. For financial 
   reporting purposes, the reported amount 
   (cost - accumulated depreciation) of the 
   machine at year-end, assuming 
   straight-line depreciation and no 
   salvage value, will be $80,000 
   [$100,000 cost - ($100,000  5 years)]. 
   The tax basis of this asset will be 
   $66,670 [$100,000 - (33.33% x 
   $100,000)]. A taxable temporary 
   difference has arisen because the excess 
   of the reported amount over the tax 
   basis will result in a net future taxable 
   amount over the recovery period. A 
   taxable temporary difference requires 
   recognition of a deferred tax liability. 
   Assuming the 35% rate applies during 
   the asset's entire life, the deferred tax 
   liability equals the applicable enacted 
   tax rate times the temporary difference, 
   or $4,666 [35% x ($80,000 - 
   $66,670)]. 


[659] Source: CMA 0696 2-8 

   Answer (A) is incorrect because a 
   deferred tax liability of $6,332 is 
   recorded for a taxable temporary 
   difference. 

   Answer (B) is incorrect because $9,000 
   is the deferred tax liability for 2001 
   reflecting the excess of book over tax 
   depreciation. 

   Answer (C) is incorrect because $2,668 
   is the deferred tax asset for 2002-2004 
   resulting from the excess of tax over 
   book depreciation during that period. 

   Answer (D) is correct. When one tax 
   rate does not apply to all relevant years, 
   a more complex calculation is 
   necessary. In this question, different 
   rates apply during the recovery period. 
   During the years 2002-2004, book 
   depreciation will equal $60,000 [3 x 
   ($100,000  5)], and tax depreciation 
   will equal $66,670 (the tax basis at 
   December 31, 2001 will be recovered 
   in full by December 31, 2004). Based 
   on the applicable enacted 40% tax rate, 
   the net deferred tax asset for 2002-2004 
   will be $2,668 [40% x ($66,670 - 
   $60,000)]. However, the excess of 
   book over tax depreciation in 2001 will 
   be $20,000 ($20,000 - $0). Based on 
   the applicable enacted 45% tax rate, the 
   deferred tax liability for 2005 will be 
   $9,000 (45% x $20,000). Accordingly, 
   the net deferred tax liability at 
   December 31, 2001 is $6,332 ($9,000 - 
   $2,668). 


[660] Source: CMA 0696 2-9 

   Answer (A) is incorrect because using 
   accelerated depreciation on the tax 
   return results in a deferred tax liability. 

   Answer (B) is incorrect because 
   recognizing installment income on the 
   financial statements but not the tax 
   return results in a taxable temporary 
   difference. 

   Answer (C) is correct. A deferred tax 
   asset records the deferred tax 
   consequences attributable to deductible 
   temporary differences and 
   carryforwards. Advance rental receipts 
   accounted for on the accrual basis for 
   financial statement purposes and on a 
   cash basis for tax purposes would give 
   rise to a deferred tax asset. The 
   financial statements would report no 
   income and no related tax expense 
   because the rental payments apply to 
   future periods. The tax return, however, 
   would treat the rent as income when the 
   cash was received, and a tax would be 
   due in the year of receipt. Because the 
   tax is paid prior to recording the 
   income for financial statement 
   purposes, it represents an asset that will 
   be recognized as an expense when 
   income is finally recorded. 

   Answer (D) is incorrect because 
   recognizing investment gains on the 
   financial statements earlier than they are 
   recognized on the tax return gives rise 
   to a deferred tax liability. 


[661] Source: CMA 0696 2-22 

   Answer (A) is incorrect because the 
   $35,000 is the cash outlay. 

   Answer (B) is incorrect because 
   $70,000 is the cash outlay for a full 
   year. 

   Answer (C) is incorrect because 
   $63,769 is the expense for the first year 
   if interest is paid annually. 

   Answer (D) is correct. The annual 
   interest cash outlay is $70,000 (7% 
   nominal rate x $1,000,000), or $35,000 
   each semiannual period. Interest 
   expense is less than $35,000, however, 
   because the bonds were originally 
   issued at a premium. That premium 
   should be amortized over the life of the 
   bond. Thus, interest expense for the first 
   6 months is $31,884 [$1,062,809 x 6% 
   x (6 months  12 months)], and 
   premium amortization is $3,116 
   ($35,000 - $31,884). 


[662] Source: CMA 0696 2-23 

   Answer (A) is correct. Because the 
   bonds sold for more than their face 
   value, they were sold at a premium. The 
   premium adjusted the yield of the bonds 
   to the effective rate (presumably, the 
   market rate). 

   Answer (B) is incorrect because an 
   amortized value is the carrying amount 
   of the bonds after at least one period's 
   amortization has been recorded. 

   Answer (C) is incorrect because book 
   value is the amount at which bonds 
   appear on the financial statements, 
   including any unamortized premium or 
   discount. For a new issue of bonds, no 
   book value existed before issuance 
   (i.e., they did not appear on the books). 

   Answer (D) is incorrect because a 
   discount arises when bonds are sold at 
   less than their face value. 


[663] Source: CMA 1296 2-25 

   Answer (A) is correct. SFAS 87 
   defines the PBO as the actuarial present 
   value of all future benefits attributable 
   to past employee service at a moment in 
   time. It is based on assumptions as to 
   future compensation if the pension plan 
   formula is based on future 
   compensation. 

   Answer (B) is incorrect because the 
   accumulated benefit obligation (ABO) 
   is based only on current salary levels. 

   Answer (C) is incorrect because prior 
   service costs reflect the increase in 
   retroactive benefits at the date of the 
   amendment of the plan. 

   Answer (D) is incorrect because the 
   amortization of actuarial gains and 
   losses is the amount of the adjustment 
   necessary to reflect the difference 
   between actual and estimated actuarial 
   returns. 


[664] Source: CMA 1296 2-26 

   Answer (A) is incorrect because 
   $190,000 is the unrecognized prior 
   service cost, which can be allocated to 
   future periods. 

   Answer (B) is incorrect because 
   $405,000 is the additional liability to 
   be recognized. 

   Answer (C) is correct. Under SFAS 87, 
   a minimum liability must be recognized 
   when the ABO exceeds the fair value of 
   plan assets. Because the ABO exceeds 
   the fair value of plan assets, the 
   minimum liability to be recognized is 
   $517,500 ($825,000 ABO - $307,500 
   FVPA). 

   Answer (D) is incorrect because 
   $523,850 is based on the market-related 
   asset value. 


[665] Source: CMA 1296 2-27 

   Answer (A) is incorrect because 
   $9,500 is based on a 20-year 
   amortization period. 

   Answer (B) is correct. Unrecognized 
   prior service cost arises from the 
   awarding of retroactive benefits 
   resulting from plan initiation or 
   amendments. Prior service cost is 
   assigned to the future service periods of 
   active employees using either a 
   straight-line or another acceptable 
   method of allocation. Given that the 
   average remaining service life of the 
   firm's employees is 10 years, the annual 
   charge is $19,000 ($190,000  10). 

   Answer (C) is incorrect because 
   $30,250 equals the sum of unrecognized 
   prior service cost and accrued pension 
   cost, divided by 10 years. 

   Answer (D) is incorrect because 
   unrecognized prior service cost can be 
   amortized over the remaining work life 
   of employees; it does not have to be 
   recorded entirely in the year of 
   origination. 


[666] Source: CMA 1296 2-29 

   Answer (A) is incorrect because a loss 
   contingency should not be disregarded 
   unless the chance of occurrence is 
   remote. 

   Answer (B) is incorrect because an 
   event that will probably occur should 
   be accrued in the financial statements. 

   Answer (C) is correct. SFAS 5 
   prescribes accounting for contingencies. 
   Estimated losses from contingencies 
   should be charged to income when 
   information available prior to issuance 
   of financial statements indicates that it 
   is probable that an asset has been 
   impaired or a liability has been 
   incurred and the amount of loss can be 
   reasonably estimated. "Probable" 
   means that the future event is "likely" to 
   occur. Moreover, if an estimate is 
   stated within a given range, and no 
   amount within the range appears to be a 
   better estimate than any other, the 
   minimum of the range should be 
   accrued. Also, the nature of the 
   contingency, the additional loss 
   exposure, and the amount accrued 
   should be disclosed. 

   Answer (D) is incorrect because the 
   minimum amount in the range should be 
   accrued, unless another amount would 
   give a more accurate estimate. 
   Conservatism does not require accrual 
   of the minimum estimate if another is 
   the most likely. 


[667] Source: CMA 0688 3-26 

   Answer (A) is incorrect because the 
   loss must be probable and capable of 
   estimation before it is recorded. 

   Answer (B) is incorrect because the 
   terms unusual and nonrecurring apply to 
   extraordinary items, not contingencies. 

   Answer (C) is correct. SFAS 5 requires 
   a contingent liability to be recorded, 
   along with the related loss, when it is 
   probable that an asset has been 
   impaired or a liability has been 
   incurred, and the amount of the loss can 
   be reasonably estimated. The key words 
   are "probable" and "reasonably 
   estimated." 

   Answer (D) is incorrect because there 
   is no requirement that a contingency be 
   unusual. 


[668] Source: CMA 0697 2-22 

   Answer (A) is incorrect because 
   $31,500 is the current year's outlay for 
   labor. 

   Answer (B) is incorrect because 
   $40,250 is the liability accrued at 
   year-end. 

   Answer (C) is incorrect because 
   $40,600 is the cash outlay for the 
   current year. 

   Answer (D) is correct. If warranty 
   expense is expected to be 3% of sales, 
   that amount should be recorded as an 
   expense for the year. Consequently, the 
   expense is $80,850 (3% x $2,695,000). 
   The amount of cash expended during the 
   year is irrelevant because the expense 
   is expected to be paid over 3 years. A 
   liability is credited for any portion of 
   the expense not paid during 2001. 


[669] Source: Publisher 

   Answer (A) is incorrect because 
   debiting revenue and crediting unearned 
   revenue assumes the initial entry was to 
   a revenue account. 

   Answer (B) is incorrect because 
   $45,000, not $135,000, is the 
   adjustment needed at year-end. 

   Answer (C) is incorrect because 
   debiting revenue and crediting unearned 
   revenue assumes the initial entry was to 
   a revenue account. 

   Answer (D) is correct. The initial entry 
   was to debit cash and credit unearned 
   revenue, a liability account, for 
   $180,000. The subscriptions were for 3 
   years, or 36 months, beginning April 1, 
   2001. Of this period, 25% (9 months  
   36 months) had elapsed as of December 
   31, 2001. Because the earning process 
   for subscriptions revenue is completed 
   in proportion to the delivery of the 
   subscribed materials over the term of 
   the agreement, Felicity should recognize 
   25% of the amounts received for 
   subscriptions as revenue at December 
   31, 2001. The adjusting entry is to debit 
   unearned revenue and credit 
   subscription revenue for $45,000 (25% 
   x $180,000). This entry reduces the 
   liability balance to $135,000, 
   representing the remaining 27 months of 
   subscriptions. 


[670] Source: Publisher 

   Answer (A) is correct. The company 
   initially debited cash and credited 
   subscription revenue, an 
   income-statement account, for 
   $180,000. Of this amount, $45,000 [(9 
   months  36 months) x $180,000] had 
   been earned by year-end. Because 
   $45,000 should be the year-end 
   subscription revenue amount, the 
   adjusting entry is to debit subscription 
   revenue and credit unearned revenue (a 
   liability account) for $135,000 
   ($180,000 - $45,000). 

   Answer (B) is incorrect because 
   debiting unearned revenue and crediting 
   revenue assumes the initial entry was to 
   an unearned revenue account. 

   Answer (C) is incorrect because 
   $135,000, not $45,000, is the necessary 
   adjustment needed at year-end. 

   Answer (D) is incorrect because 
   debiting unearned revenue and crediting 
   revenue assumes the initial entry was to 
   an unearned revenue account. 


[671] Source: Publisher 

   Answer (A) is incorrect because, under 
   GAAP, warranty costs should be 
   accrued in the year of sale when the 
   warranty is an integral part of the sale. 

   Answer (B) is incorrect because the 
   company is selling a product, not 
   warranties. Thus, a liability and an 
   expense must be accrued for the 
   expected cost of servicing the products, 
   not a liability for unearned revenue. 

   Answer (C) is incorrect because a full 
   year's expense should be recorded, not 
   a prorated amount for the remaining 10 
   months in the warranty period. 

   Answer (D) is correct. When the 
   warranty is inseparable from the item 
   sold, warranty costs should be treated 
   as a loss contingency to be accrued at 
   the time of sale if their incurrence is 
   probable and their amount can be 
   reasonably estimated. The company 
   sold 500 units, each of which is 
   expected to result in warranty costs of 
   $150. No warranty costs have yet been 
   incurred, so the full $150 per unit 
   should be accrued at year-end. The 
   estimated expense is $75,000 (500 units 
   x $150). The adjusting entry is therefore 
   to debit warranty expense and credit 
   estimated liability under warranties for 
   $75,000. 


[672] Source: Publisher 

   Answer (A) is incorrect because no 
   liability is recorded as long as the 
   contract is executory. When the other 
   party performs under the contract, 
   Tonya will incur an obligation and must 
   then record a liability. 

   Answer (B) is correct. Purchase 
   commitments ordinarily are not 
   recognized because title has not passed 
   to the buyer, but ARB 43 requires that 
   losses on purchase commitments be 
   recorded in the period in which they 
   occur. Gains, however, should not be 
   recorded. Thus, because a gain 
   ($1,150,000 fair value - $1,000,000 
   price = $150,000 gain) is involved, the 
   accounting treatment is to disclose the 
   material purchase commitment but make 
   no journal entry. 

   Answer (C) is incorrect because no 
   liability is recorded as long as the 
   contract is executory. When the other 
   party performs under the contract, 
   Tonya will incur an obligation and must 
   then record a liability. 

   Answer (D) is incorrect because no 
   liability is recognized until the other 
   party performs. 


[673] Source: Publisher 

   Answer (A) is incorrect because the 
   executed contract must be recorded. 

   Answer (B) is correct. Tonya should 
   debit inventory (purchases) for 
   $900,000 (assuming this amount is the 
   lower-of-cost-or-market valuation), 
   debit a loss for $100,000 ($1,000,000 
   price - $900,000 fair value), and credit 
   a liability for the $1 million agreed 
   purchase price. If the goods had not 
   been shipped by the seller, the entry 
   would have been to debit an estimated 
   loss and credit an estimated liability for 
   $100,000. The subsequent entry when 
   the goods are received would then be to 
   debit inventory, debit the estimated 
   liability, and credit a liability. 

   Answer (C) is incorrect because the 
   entire $1 million liability must be 
   recorded for the executed contract. If 
   the contract were executory 
   (unperformed), only the estimated loss 
   and an equal liability would be 
   recognized. 

   Answer (D) is incorrect because 
   $900,000 is the fair value of the 
   inventory. 


[674] Source: Publisher 

   Answer (A) is incorrect because 
   $70,000 is the semiannual cash outlay. 

   Answer (B) is incorrect because 
   $140,000 is the cash outlay for a full 
   year. 

   Answer (C) is incorrect because 
   $127,537 would be the expense for the 
   first year if interest were paid on an 
   annual basis instead of semiannually. 

   Answer (D) is correct. Given that the 
   bonds paid interest at a 7% contract 
   rate, the annual interest outlay is 
   $140,000 on a $2 million issue, or 
   $70,000 each semiannual period. 
   Interest expense is less than $70,000, 
   however, because the bonds were 
   originally issued at a $125,618 
   premium. That premium, which existed 
   because investors were willing to 
   accept a 6% effective interest rate, 
   should be amortized over the life of the 
   bond. For a semiannual period, that 6% 
   annual effective rate translates to a 3% 
   semiannual rate. Hence, interest 
   expense is $63,769 (3% x $2,125,618 
   face value plus premium), the cash 
   outlay is $70,000, and premium 
   amortization is $6,231 ($70,000 - 
   $63,769). 


[675] Source: Publisher 

   Answer (A) is incorrect because 
   $70,000 is the semiannual cash outlay. 

   Answer (B) is incorrect because the 
   $140,000 is the cash outlay for a full 
   year. 

   Answer (C) is correct. For a 
   semiannual period, the 6% annual 
   effective rate translates to a 3% 
   semiannual rate. For the first 6-month 
   period (ending June 30), interest 
   expense was $63,769 (3% x 
   $2,125,618 face value plus premium), 
   the cash outlay was $70,000 [7% x 
   $2,000,000 x (6  12)], and premium 
   amortization was $6,231 ($70,000 - 
   $63,769). The book value of the bond 
   after 6 months was therefore 
   $2,119,387 ($2,125,618 - $6,231). 
   Consequently, for the second 6-month 
   period (ending December 31, 2001), 
   interest expense was $63,582 (3% x 
   $2,119,387). 

   Answer (D) is incorrect because 
   $63,769 is the expense for the 6-month 
   period ended June 30, 2001. 


[676] Source: Publisher 

   Answer (A) is incorrect because 
   $2,000,000 is the face value of the 
   bonds. 

   Answer (B) is incorrect because 
   $2,125,618 is the issue price. 

   Answer (C) is incorrect because 
   $2,119,387 is the book value after 6 
   months. 

   Answer (D) is correct. For a 
   semiannual period, the 6% annual 
   effective rate translates to a 3% 
   semiannual rate. For the first 6-month 
   period (ending June 30), interest 
   expense was $63,769 (3% x 
   $2,125,618 face value plus premium), 
   the cash outlay was $70,000 [7% x 
   $2,000,000 x (6  12)], and premium 
   amortization was $6,231 ($70,000 - 
   $63,769). The book value of the bond 
   after 6 months was therefore 
   $2,119,387 ($2,125,618 - $6,231). 
   Consequently, for the second 6-month 
   period (ending December 31, 2001), 
   interest expense was $63,582 (3% x 
   $2,119,387), amortization was $6,418 
   ($70,000 - $63,582), and the year-end 
   book value was $2,112,969 
   ($2,119,387 - $6,418). 


[677] Source: Publisher 

   Answer (A) is correct. Because the 
   bonds sold for more than their face 
   value, they were issued at a premium. If 
   they had been sold for less than their 
   face value, they would have been issued 
   at a discount. 

   Answer (B) is incorrect because an 
   amortized value is the amount at which 
   bonds appear on the books after at least 
   one period's amortization has been 
   recorded. 

   Answer (C) is incorrect because book 
   value is the amount at which bonds 
   appear on the financial statements, net 
   of any premium or discount. Given that 
   these bonds were new, they did not 
   have a book value at the time of 
   issuance (i.e., they did not appear on the 
   books). 

   Answer (D) is incorrect because a 
   discount arises when bonds are sold at 
   less than their face value. 


[678] Source: Publisher 

   Answer (A) is incorrect because 
   $14,000 is the tax shield provided by 
   depreciation of $40,000 (straight-line). 

   Answer (B) is incorrect because 
   $66,660 is the depreciation expense on 
   the tax return. 

   Answer (C) is incorrect because 
   $23,331 is the tax shield provided by 
   depreciation of $66,660 (MACRS). 

   Answer (D) is correct. In the first year 
   of its use of an accelerated tax 
   depreciation method, SMC has a 
   taxable temporary difference (TD) 
   because tax depreciation exceeds book 
   depreciation. This difference between 
   the tax basis and the reported amount of 
   the asset is temporary because it will 
   reverse in the future when book 
   depreciation exceeds tax depreciation. 
   It is taxable because in the future it will 
   cause taxable income to exceed book 
   income. Thus, the entity must recognize 
   a deferred tax liability. Book 
   depreciation for each year of the 5-year 
   life is $40,000 [($200,000 - $0 
   salvage) x (1 year  5 years)]. MACRS 
   depreciation for the first year is 
   $66,660 [($200,000 - $0) x 33.33%]. 
   Accordingly, the taxable TD at the end 
   of the first year (the future taxable 
   amount) is $26,660 ($66,660 - 
   $40,000). At the applicable tax rate, the 
   deferred tax liability at the end of 2001 
   is $9,331 (35% x $26,660). 


[679] Source: Publisher 

   Answer (A) is incorrect because the 
   $17,115 is the increase in the deferred 
   tax liability for 2002. 

   Answer (B) is correct. After 2 years, 
   accumulated straight-line depreciation 
   is $80,000 [($200,000 - $0) x (2 years 
    5 years)], and accumulated MACRS 
   depreciation is $155,560 [($200,000 - 
   $0) x (33.33% + 44.45%)]. 
   Accordingly, the taxable TD (the 
   amount by which future taxable income 
   will exceed book income) after 2 years 
   is $75,560 ($155,560 - $80,000). At the 
   applicable tax rate, the deferred tax 
   liability at the end of 2000 is $26,446 
   (35% x $75,560). 

   Answer (C) is incorrect because $7,784 
   equals the increase in 2000 minus the 
   beginning balance. 

   Answer (D) is incorrect because 
   $9,331 is the balance at the end of 
   2001. 


[680] Source: Publisher 

   Answer (A) is incorrect because 
   $11,997 assumes a 45% rate applies to 
   all relevant years. 

   Answer (B) is incorrect because 
   $10,664 assumes a 40% rate applies to 
   all relevant years. 

   Answer (C) is incorrect because 
   $14,000 equals the annual tax shield 
   provided by the straight-line method at 
   a 35% rate. 

   Answer (D) is correct. Deferred tax 
   amounts are measured using the enacted 
   future tax rates that will apply when 
   related future taxable or deductible 
   amounts arise from temporary 
   differences. The following is the pattern 
   of these amounts for SMC:

                           MACRS
                        Depreciation
              Book      ($200,000 x   Annual Taxable
   Year   Depreciation  Annual Rate)  (Deductible) TD
   ----   ------------  ------------  ---------------
   2001     $40,000        $66,660       $(26,660)
   2002      40,000         88,900        (48,900)
   2003      40,000         29,620         10,380
   2004      40,000         14,820         25,180
   2005      40,000              0         40,000
   The table above indicates that the 
   temporary difference at December 31, 
   2001 arising from using different 
   depreciation methods for tax and book 
   purposes will reverse over the next 4 
   years ($40,000 + $25,180 + $10,380 - 
   $48,900 = $26,660). The deferred tax 
   liability at December 31, 2001 is 
   therefore measured as follows:

             Taxable
          (Deductible)        Enacted         Annual Tax
   Year      Amount           Tax Rate     Expense (Benefit)
   ----   ------------        --------     ----------------
   2002    $(48,900)     x       40%    =     $(19,560)
   2003      10,380      x       40%    =        4,152
   2004      25,180      x       40%    =       10,072
   2005      40,000      x       45%    =       18,000
                                             ---------
                                             $  12,664
                                             =========


[681] Source: Publisher 

   Answer (A) is correct. Given that 
   warranty expense is expected to be 4% 
   of sales, $720,000 (4% x $18,000,000) 
   is recorded as an expense for 2001. 
   How many units were returned in the 
   current year and how much cash was 
   expended for warranty repairs in the 
   current year are not relevant because 
   the warranty will last for 3 years. 
   Warranty expense is recorded in the 
   year of sale because warranty expense 
   represents a selling cost. 

   Answer (B) is incorrect because 
   $202,000 equals .4% of sales plus the 
   cash outlay. 

   Answer (C) is incorrect because the 
   total cost is deducted in the year of the 
   sale. It is not allocated over 3 years. 

   Answer (D) is incorrect because 
   $130,000 is the cash outlay in the 
   current year. 


[682] Source: Publisher 

   Answer (A) is incorrect because 15% 
   is the tax rate for the first $50,000 of 
   income. 

   Answer (B) is incorrect because 25% 
   is the tax rate for income over $50,000 
   but less than $100,000. 

   Answer (C) is correct. In measuring a 
   deferred tax liability or asset, the 
   objective is to use the enacted tax 
   rate(s) expected to apply to taxable 
   income in the periods in which the 
   deferred tax liability or asset is 
   expected to be settled or realized. If 
   graduated tax rates are a significant 
   factor for an enterprise, the applicable 
   tax rate is the average graduated tax rate 
   applicable to the amount of estimated 
   future annual taxable income. As 
   indicated, the applicable tax rate is 
   27.5% ($55,000  $200,000).

                Taxable Income   Tax Rate
                --------------   --------
                  $ 50,000     x  15%  =  $  7,500
                    50,000     x  25%  =    12,500
                   100,000     x  35%  =    35,000
                  --------                 -------
                  $200,000                 $55,000
                  ========                 =======

   Answer (D) is incorrect because 35% 
   is the tax rate for income over 
   $100,000. 


[683] Source: Publisher 

   Answer (A) is incorrect because a 
   deferred tax asset equal to $54,000 
   should be recognized and a valuation 
   allowance should be recognized equal 
   to $24,000 to reduce the deferred tax 
   asset to $30,000. 

   Answer (B) is incorrect because a 
   deferred tax asset of $30,000 results 
   from netting the valuation allowance 
   against the deferred tax asset. 

   Answer (C) is correct. The applicable 
   tax rate should be used to measure a 
   deferred tax asset for an operating loss 
   carry-forward that is available to offset 
   future taxable income. Irene should 
   therefore recognize a $54,000 
   ($180,000 x 30%) deferred tax asset. A 
   valuation allowance should be 
   recognized to reduce the deferred tax 
   asset if, based on the weight of the 
   available evidence, it is more likely 
   than not that some portion or all of a 
   deferred tax asset will not be realized. 
   Based on the available evidence, Irene 
   believes that it is more likely than not 
   that the tax benefit of $100,000 of the 
   operating loss will be realized. Thus, 
   the company should recognize a 
   $24,000 valuation allowance to reduce 
   the $54,000 deferred tax asset to 
   $30,000 ($100,000 x 30%), the amount 
   of the deferred tax asset that is more 
   likely than not to be realized. 

   Answer (D) is incorrect because 
   $30,000 is the deferred tax asset, not 
   the valuation allowance, after the two 
   are netted. 


[684] Source: CMA 0696 2-30 

   Answer (A) is incorrect because it is a 
   component of initial direct costs of a 
   lease. 

   Answer (B) is incorrect because it is a 
   component of initial direct costs of a 
   lease. 

   Answer (C) is correct. Under SFAS 91, 
   initial direct costs have two 
   components: (1) the lessor's external 
   costs to originate a lease incurred in 
   dealings with independent third parties 
   and (2) the internal costs directly 
   related to specified activities 
   performed by the lessor for that lease, 
   such as evaluating the lessee's financial 
   condition; evaluating guarantees, 
   collateral, and other security 
   arrangements; negotiating lease terms; 
   preparing and processing lease 
   documents; and closing the transaction. 
   Initial direct costs do not include the 
   costs of advertising and other 
   solicitation, servicing of existing 
   leases, establishing and monitoring of 
   credit policies, supervision, and 
   administration. 

   Answer (D) is incorrect because it is a 
   component of initial direct costs of a 
   lease. 


[685] Source: CMA 1289 3-10 

   Answer (A) is incorrect because the 
   initial direct costs of a lease are to be 
   deferred and matched against the future 
   revenues from the lease. 

   Answer (B) is incorrect because the 
   initial direct costs are to be recognized 
   separately. 

   Answer (C) is correct. SFAS 13, 
   Accounting for Leases, requires lessors 
   to capitalize the initial direct costs of an 
   operating lease and allocate them over 
   the term of the lease in proportion to the 
   recognition of rental income. 

   Answer (D) is incorrect because the 
   initial direct costs are to be amortized 
   over the term of the lease. 


[686] Source: CMA 1289 3-11 

   Answer (A) is incorrect because SFAS 
   13 does not permit the lessor to expense 
   initial direct costs immediately unless a 
   sales-type lease is involved. 

   Answer (B) is correct. SFAS 98, 
   Accounting for Leases, states that initial 
   direct costs should be accounted for as 
   an addition to the gross investment in a 
   direct-financing lease. The net 
   investment equals the gross investment, 
   plus unamortized initial direct costs, 
   minus unearned income (gross 
   investment - carrying amount). The 
   unearned income and the initial direct 
   costs are amortized over the lease term 
   to provide a constant rate of return on 
   the net investment. 

   Answer (C) is incorrect because the 
   treatment of the initial direct costs of 
   direct-financing and operating leases 
   differs. The former are accounted for as 
   an addition to the gross investment. 

   Answer (D) is incorrect because the 
   costs are allocated over the period of 
   the lease by means of increasing the 
   cost of the investment in the lease. 


[687] Source: CPA 0595 F-19 

   Answer (A) is incorrect because 
   $579,000 results from subtracting the 
   $15,000 of interest. 

   Answer (B) is incorrect because 
   $594,000 does not include accrued 
   interest. 

   Answer (C) is incorrect because 
   $600,000 is the face value of the bonds. 

   Answer (D) is correct. The face value 
   of the bonds is $600,000 (600 bonds x 
   $1,000 face value). Excluding interest, 
   the proceeds from the issuance of the 
   bonds were $594,000 ($600,000 x 
   99%). Accrued interest for three months 
   was $15,000 ($600,000 face value x 
   10% coupon rate x 3/12). The net cash 
   received from the issuance of the bonds 
   was therefore equal to $609,000 
   ($594,000 bond proceeds + $15,000 
   accrued interest). 


[688] Source: CPA 0591 I-47 

   Answer (A) is correct. Serial bonds 
   mature in installments at various dates. 
   Debentures are unsecured bonds. The 
   commodity-backed bonds and the 
   registered bonds are serial bonds. They 
   total $475,000 ($275,000 + $200,000). 
   The registered bonds and the 
   convertible bonds are debentures. They 
   total $400,000 ($275,000 + $125,000). 

   Answer (B) is incorrect because the 
   registered bonds are also debentures. 

   Answer (C) is incorrect because the 
   registered bonds, not the guaranty 
   security bonds, are serial bonds. 

   Answer (D) is incorrect because the 
   registered bonds are serial bonds and 
   the guaranty security bonds are not 
   debentures. 


[689] Source: CPA 1193 I-37 

   Answer (A) is incorrect because 
   $950,000 equals the face value of the 
   bonds minus the par value of the stock. 

   Answer (B) is correct. Under the 
   book-value method for recognizing the 
   conversion of outstanding bonds 
   payable to common stock, the stock 
   issued is recorded at the carrying value 
   of the bonds, with no recognition of a 
   gain or loss. Accordingly, the 
   conversion should be recorded at $1.3 
   million. However, this amount must be 
   allocated between common stock and 
   additional paid-in capital. The common 
   stock account is always valued at par 
   value; therefore, $50,000 (50,000 
   shares x $1) will be credited to 
   common stock and $1,250,000 to 
   additional paid-in capital. 

   Answer (C) is incorrect because the 
   carrying value of the bonds is not 
   increased by the par value of the stock. 

   Answer (D) is incorrect because 
   $1,500,000 is the full value of the stock 
   at the market price. 


[690] Source: CPA 1195 F-16 

   Answer (A) is incorrect because 
   interest is accrued annually. 

   Answer (B) is incorrect because $1,000 
   is the 20X0 interest accrual. 

   Answer (C) is incorrect because $1,200 
   is the interest for the first 12 months. 

   Answer (D) is correct. Given annual 
   compounding, interest for the second 
   year is calculated based on a carrying 
   amount equal to the $10,000 principal 
   plus the $1,200 (12% x $10,000) of 
   first-year interest. Thus, accrued 
   interest for the next 10 months is $1,120 
   {[($10,000 + $1,200) x 12%] x (10 
   months  12 months)}. Total accrued 
   interest after 22 months is $2,320 
   ($1,200 + $1,120). 


[691] Source: CPA 0593 II-18 

   Answer (A) is incorrect because 
   $1,200,000 is the amount of the debt. 

   Answer (B) is correct. According to 
   SFAS 15, a debtor that grants an equity 
   interest in full settlement of a payable 
   should account for the equity interest at 
   fair value. The difference between the 
   fair value of the equity interest and the 
   carrying amount of the payable is an 
   extraordinary gain. The appropriate 
   accounting for this troubled debt 
   restructuring is to debit liabilities for 
   $1.2 million and to credit cash for 
   $400,000, common stock at its par 
   value of $80,000 (80,000 shares x $1), 
   additional paid-in capital for $20,000 
   [($1.25 fair value per share - $1 par) x 
   80,000 shares], and an extraordinary 
   gain for $700,000. Accordingly, the net 
   increase in total shareholders' equity is 
   $800,000 ($80,000 + $20,000 + 
   $700,000). 

   Answer (C) is incorrect because 
   $100,000 is the increase in contributed 
   capital. 

   Answer (D) is incorrect because 
   $80,000 is the increase in common 
   stock. 


[692] Source: CPA 1192 I-57 

   Answer (A) is correct. The lease 
   liability at the inception of the lease is 
   $379,000. Under the effective-interest 
   method, the lease liability balance (the 
   carrying value) at the beginning of each 
   year should be multiplied by the 
   implicit interest rate to determine 
   interest for that year. Accordingly, the 
   interest expense for the first year is 
   $37,900 ($10% x $379,000). 

   Answer (B) is incorrect because 
   $27,900 results from assuming that the 
   initial payment was made immediately. 

   Answer (C) is incorrect because 
   $24,200 is one-fifth of the total interest 
   ($500,000 - $379,000 PV). 

   Answer (D) is incorrect because 
   interest must be accrued. 


[693] Source: CPA 0591 I-42 

   Answer (A) is correct. SFAS 13 
   requires that the lessee record a capital 
   lease as an asset and a liability at the 
   present value of the minimum lease 
   payments during the lease term. If no 
   bargain purchase option exists, the 
   minimum lease payments equal the sum 
   of the minimum rental payments, the 
   amount of guaranteed residual value, 
   and any nonrenewal penalty imposed. 
   Accordingly, the present value of the 
   minimum lease payments, minus the first 
   required payment, is $48,620 [($13,000 
   annual payment x 4.240 PV of an 
   annuity due at 9% for 5 periods) + 
   ($10,000 guaranteed residual value x 
   .650 PV of $1 at 9% for 5 periods) - 
   $13,000 first payment]. 

   Answer (B) is incorrect because 
   $44,070 is based on the interest factor 
   for an ordinary annuity. 

   Answer (C) is incorrect because 
   $35,620 results from deducting the first 
   payment twice. 

   Answer (D) is incorrect because 
   $31,070 is based on the interest factor 
   for an ordinary annuity and on deducting 
   the first payment twice. 


[694] Source: CPA 1193 I-44 

   Answer (A) is incorrect because 
   $720,000 is the result of using the list 
   selling price instead of the present 
   value of the lease payments. 

   Answer (B) is correct. Howe Co., the 
   lessor, should report a profit from a 
   sales-type lease. The gross profit 
   equals the difference between the sales 
   price (present value of the minimum 
   lease payments) and the cost. The cost 
   for a sales-type lease is not the same as 
   the fair value. Consequently, the profit 
   on the sale equals $500,000 
   ($3,300,000 - $2,800,000). 

   Answer (C) is incorrect because 
   $90,000 is one-eighth of the difference 
   between the list price and the cost. 

   Answer (D) is incorrect because a 
   profit of $500,000 should be reported. 


[695] Source: CPA 1192 I-56 

   Answer (A) is incorrect because 
   $60,000 does not include the allocation 
   of the leasehold improvements. 

   Answer (B) is correct. During 20X0, 
   this operating lease was effective only 
   for the month of December. The 20X0 
   expenses therefore include the $60,000 
   monthly rent plus the $360,000 cost of 
   the installation of the new walls and 
   offices allocated over the 60 months of 
   the rental agreement. Thus, the total 
   December expense equals $66,000 
   [$60,000 + ($360,000  60 months)]. 

   Answer (C) is incorrect because 
   $126,000 includes the last month's rent. 

   Answer (D) is incorrect because 
   $200,000 includes the last month's rent 
   and the security deposit but does not 
   include the allocation of the cost of the 
   leasehold improvements. 


[696] Source: CPA 0591 I-44 

   Answer (A) is incorrect because 
   $50,000 is the total deferred gain at the 
   inception of the lease. 

   Answer (B) is correct. A profit or loss 
   on the sale in a sale-leaseback 
   transaction is ordinarily deferred and 
   amortized in proportion to the 
   amortization of the leased asset if the 
   leaseback is classified as a capital 
   lease. At 12/31/X0, a gain 
   proportionate to the lease amortization 
   will be recognized [($150,000 - 
   $100,000)  10 years = $5,000]. 
   Hence, the deferred gain will be 
   $45,000 ($50,000 - $5,000). 

   Answer (C) is incorrect because 
   $25,588 is the difference between the 
   total deferred gain and the periodic 
   lease payment. 

   Answer (D) is incorrect because the 
   seller-lessee has retained substantially 
   all of the use of the property and should 
   therefore defer gain. 


[697] Source: Publisher 

   Answer (A) is incorrect because the 
   interest cost component of NPPC is 
   $3,500. 

   Answer (B) is incorrect because 
   prepaid pension cost is $11,500 
   [$15,000 - ($43,500 NPPC - $40,000 
   of funding)]. 

   Answer (C) is correct. NPPC equals the 
   sum of service cost and interest cost, 
   minus the expected return on plan 
   assets, or $43,500 [$45,000 + (10% 
   discount rate x $35,000 PBO) - (10% 
   expected rate of return x $50,000 fair 
   value of plan assets)]. 

   Answer (D) is incorrect because 
   prepaid pension cost is $11,500 
   [$15,000 - ($43,500 NPPC - $40,000 
   of funding)]. 


[698] Source: CPA 0592 II-14 

   Answer (A) is incorrect because 
   $250,000 results from adding, not 
   subtracting, the expected gain on plan 
   assets. 

   Answer (B) is incorrect because 
   $220,000 includes the unexpected loss. 

   Answer (C) is incorrect because 
   $210,000 includes the unexpected loss 
   and subtracts, rather than adds, the 
   amortization of prior service cost. 

   Answer (D) is correct. The six possible 
   components of net periodic pension cost 
   (NPPC) are (1) service cost, (2) 
   interest cost, (3) return on plan assets, 
   (4) gain or loss to the extent recognized, 
   (5) amortization of any unrecognized 
   prior service cost, and (6) amortization 
   of any transition amount. Accordingly, 
   the service cost, gain on plan assets, 
   interest cost, and amortization of prior 
   service cost are included in the 
   computation. Gains and losses arising 
   from changes in the projected benefit 
   obligation or plan assets resulting from 
   experience different from that assumed 
   and from changes in assumptions about 
   discount rates, life expectancies, etc., 
   are not required to be recognized when 
   they occur. Accordingly, the unexpected 
   20X0 loss on plan assets will be 
   included in the net unrecognized gain or 
   loss balance and will be eligible for 
   amortization in 20X1. NPPC is 
   therefore $180,000 ($160,000 service 
   cost - $35,000 actual and expected 
   return on plan assets + $5,000 prior 
   service cost amortization + $50,000 
   interest cost). 


[699] Source: CPA 0595 F-39 

   Answer (A) is incorrect because 
   $65,000 results when benefits paid to 
   employees are not included. 

   Answer (B) is correct. The actual return 
   on plan assets is based on the fair value 
   of plan assets at the beginning and end 
   of the accounting period, adjusted for 
   contributions and payments during the 
   period. The actual return for Gali is 
   $150,000 ($525,000 - $350,000 - 
   $110,000 + $85,000). 

   Answer (C) is incorrect because 
   $175,000 is the change in the fair value 
   of plan assets without adjustment for 
   contributions or benefits paid. 

   Answer (D) is incorrect because 
   $260,000 does not deduct employer 
   contributions. 


[700] Source: Publisher 

   Answer (A) is incorrect because they 
   represent differences in income before 
   application of the tax rate. 

   Answer (B) is incorrect because they 
   represent differences in income before 
   application of the tax rate. 

   Answer (C) is incorrect because $2,100 
   is based on the full benefit without 
   consideration that 25% of the benefit 
   will never be realized. 

   Answer (D) is correct. The deferred tax 
   asset is based on the difference 
   ($7,000) between taxable income 
   ($45,000) and financial income 
   ($38,000). However, there is an 
   expectation only 75% of the tax benefit 
   is more likely than not to be realized. 
   Thus, the amount of the future 
   deductible amounts will be $5,250 
   (75% x $7,000). The deferred tax asset 
   is $1,575 (30% enacted tax rate x 
   $5,250). 


[701] Source: CPA 1194 F-51 

   Answer (A) is incorrect because 
   $34,000 equals the $84,000 of income 
   taxes payable minus the $50,000 of 
   income taxes paid. 

   Answer (B) is incorrect because 
   $50,000 equals income taxes paid, not 
   the total current income tax expense. 

   Answer (C) is correct. Income tax 
   expense or benefit is the sum of current 
   tax expense or benefit and deferred tax 
   expense or benefit. A deferred tax 
   expense or benefit is the change in an 
   entity's deferred tax assets and 
   liabilities. However, a permanent 
   difference does not result in a change in 
   a deferred tax asset or liability. Thus, 
   income tax expense equals the current 
   income tax expense, which is the 
   amount of taxes paid or payable for the 
   year. Income taxes payable for 20X0 
   equal $84,000 ($280,000 taxable 
   income x 30%). 

   Answer (D) is incorrect because 
   $90,000 is equal to the reported income 
   of $300,000 multiplied by the tax rate. 


[702] Source: CPA 0593 I-26 

   Answer (A) is incorrect because 
   $5,400 is based on a 30% tax rate. 

   Answer (B) is correct. The $36,000 
   rental payment is taxable in full when 
   received in 20X0, but only $18,000 
   ($36,000 x 6/12) should be recognized 
   in financial accounting income for the 
   year. The result is a deductible 
   temporary difference (deferred tax 
   asset) arising from the difference 
   between the tax basis ($0) of the 
   liability for unearned rent and its 
   reported amount in the year-end balance 
   sheet ($36,000 - $18,000 = $18,000). 
   The income tax payable for 20X0 based 
   on the rental payment is $10,800 (30% 
   tax rate for 20X0 x $36,000), the 
   deferred tax asset is $7,200 (40% 
   enacted tax rate applicable after 20X0 
   when the asset will be realized x 
   $18,000 future deductible amount), and 
   the income tax expense is $3,600 
   ($10,800 current tax expense - $7,200 
   deferred tax benefit). The deferred tax 
   benefit equals the net change during the 
   year in the enterprise's deferred tax 
   liabilities and assets ($7,200 deferred 
   tax asset recognized in 20X0 - $0). 

   Answer (C) is incorrect because 
   $10,800 is the income tax payable. 

   Answer (D) is incorrect because 
   $14,400 would be the income tax 
   payable if the 40% tax rate applied in 
   20X0. 


[703] Source: CPA 0595 F-42 

   Answer (A) is incorrect because 
   $12,000 results from offsetting the 
   deferred tax liability and the deferred 
   tax asset. 

   Answer (B) is incorrect because 
   $21,000 is the deferred tax liability. 

   Answer (C) is correct. Deferred tax 
   expense or benefit is the net change in 
   an entity's deferred tax liabilities and 
   assets during the year. Quinn had a net 
   deferred tax asset of $9,000 at the 
   beginning of 20X1, and a net deferred 
   tax liability of $21,000 ($70,000 x 
   30%) at the end of 20X1. The net 
   change (a deferred tax expense in this 
   case) is $30,000 ($9,000 reduction in 
   the deferred tax asset + $21,000 
   increase in deferred tax liabilities). 

   Answer (D) is incorrect because 
   $60,000 is the income tax expense for 
   the year ($200,000 x .30). 


[704] Source: CPA 0595 F-16 

   Answer (A) is incorrect because the 
   deferred income tax effect is a liability. 
   The temporary difference results in 
   taxable, not deductible, amounts. 

   Answer (B) is incorrect because the 
   deferred income tax effect is a liability. 
   The temporary difference results in 
   taxable, not deductible, amounts. 

   Answer (C) is incorrect because 
   $75,000 is based on the 20X0 tax rate. 

   Answer (D) is correct. The temporary 
   difference arises because the excess of 
   the reported amount of the depreciable 
   asset over its tax basis will result in 
   taxable amounts in future years when 
   the reported amount is recovered. A 
   taxable temporary difference results in 
   a deferred tax liability. Because the 
   enacted tax rate for future years is 40%, 
   the deferred income tax liability is 
   $100,000 ($250,000 x 40%). 


[705] Source: CPA 0593 I-35 

   Answer (A) is correct. According to 
   SFAS 109, the deferred tax liability 
   constitutes the "deferred tax 
   consequences attributable to taxable 
   temporary differences. A deferred tax 
   liability is measured using the 
   applicable enacted tax rate and 
   provisions of the enacted tax law." 
   Taft's recognition of $180,000 of 
   equity-based earnings creates a 
   temporary difference that will result in 
   taxable amounts in future periods when 
   dividends are distributed. The deferred 
   tax liability arising from this temporary 
   difference is measured using the 30% 
   enacted tax rate and the 
   dividends-received deduction. 
   Accordingly, given that all the 
   undistributed earnings will be 
   distributed, a deferred tax liability of 
   $9,000 [($180,000 equity - $30,000 
   dividends received) x 20% not 
   deductible x 30% tax rate applicable 
   after 20X0] should be reported. 

   Answer (B) is incorrect because 
   $10,800 equals 30% of 20% of the 
   equity in the earnings of Flame. 

   Answer (C) is incorrect because 
   $45,000 is the net increase in Taft's 
   investment in Flame account under the 
   equity method multiplied by the 30% 
   tax rate. 

   Answer (D) is incorrect because 
   $54,000 equals 30% of $180,000. 


[706] Source: CPA 1191 I-38 

   Answer (A) is incorrect because 
   $37,500 is the amount of the liability 
   arising from the excess of 
   percentage-of-completion over 
   completed-contract revenue for 2000, 
   assuming a 25% rate. 

   Answer (B) is incorrect because 
   $105,000 is the amount of the liability 
   arising from the excess of 
   percentage-of-completion over 
   completed-contract revenue for 20X1 
   and 20X2, assuming a 30% rate. 

   Answer (C) is correct. In its financial 
   statements issued through 12/31/X2, 
   Mill has reported $1,750,000 
   ($300,000 + $600,000 + $850,000) of 
   income from long-term contracts. In its 
   tax returns for the same period, it has 
   reported $1,100,000 ($400,000 + 
   $700,000) of income from the same 
   sources. The result is a taxable 
   temporary difference. Thus, Mill 
   expects to have future taxable amounts 
   of $650,000 and should recognize a 
   deferred tax liability of $162,500 (25% 
   applicable tax rate x $650,000). 

   Answer (D) is incorrect because 
   $195,000 is based on a 30% rate. 


[707] Source: Publisher 

   Answer (A) is incorrect because 1994 
   depreciation is $14,880 ($7.50 x 
   1,984). 

   Answer (B) is incorrect because 1995 
   depreciation is $21,000 ($7.50 x 
   2,800). 

   Answer (C) is correct. The depreciable 
   cost of the airplane is $112,500 
   ($123,750 cost - $11,250 residual 
   value). Hence, the per-hour 
   depreciation charge is $7.50 ($112,500 
    15,000-hour useful life), and total 
   1996 depreciation is $12,675. 

   Answer (D) is incorrect because 1997 
   depreciation is $13,680 ($7.50 x 
   1,824). 


[708] Source: Publisher 

   Answer (A) is correct. Under the DDB 
   method, the depreciation percentage 
   used is double the straight-line rate. For 
   the airplane, the DDB rate is 33-1/3% 
   [2 x (100%  6 years)]. In the first year, 
   the DDB rate is applied to the initial 
   cost of the asset (residual value is 
   ignored). Thus, depreciation is $41,250 
   (33 % x $123,750). This amount is 
   subtracted from the initial cost to 
   determine the new depreciable base. 
   Accordingly, depreciation for 1995 is 
   $27,500 [33-1/3% x ($123,750 - 
   $41,250)]. 

   Answer (B) is incorrect because the 
   rate of 33-1/3% does not change, and 
   the depreciable base lessens every 
   year, lowering the depreciation expense 
   along with it. 

   Answer (C) is incorrect because the 
   rate of 33-1/3% does not change, and 
   the depreciable base lessens every 
   year, lowering the depreciation expense 
   along with it. 

   Answer (D) is incorrect because the 
   rate of 33-1/3% does not change, and 
   the depreciable base lessens every 
   year, lowering the depreciation expense 
   along with it. 


[709] Source: CMA 0690 3-1 

   Answer (A) is incorrect because the 
   gross investment is not adjusted for the 
   time value of money or fair value. 

   Answer (B) is incorrect because the 
   gross investment is not adjusted for the 
   time value of money or fair value. 

   Answer (C) is incorrect because the 
   gross investment is not adjusted for the 
   time value of money or fair value. 

   Answer (D) is correct. For both 
   sales-type and direct financing leases, 
   the lessor should record as the gross 
   investment in the lease the amount of the 
   minimum lease payments (which 
   include periodic payments plus 
   guaranteed residual value) plus any 
   amounts of unguaranteed residual value. 
   The net investment in the lease is equal 
   to the gross investment, plus any 
   unamortized initial direct costs, minus 
   unearned income. The unguaranteed 
   residual value is the expected value of 
   the leased asset in excess of the 
   guaranteed residual value at the end of 
   the lease term (SFAS 13). 


[710] Source: CPA 0595 F-17 

   Answer (A) is incorrect because the 
   noncurrent asset and noncurrent liability 
   should be offset. 

   Answer (B) is correct. In a classified 
   balance sheet, deferred tax liabilities 
   and assets are classified as current or 
   noncurrent based on the classification 
   of the related asset or liability. For a 
   given tax-paying component of an 
   enterprise and within a given tax 
   jurisdiction, all current deferred tax 
   assets and liabilities are offset and 
   presented as a single amount. 
   Noncurrent items are also offset and 
   presented as a single amount. 
   Accordingly, the amount to be reported 
   in the noncurrent section of the balance 
   sheet is a $12,000 liability ($15,000 
   liability - $3,000 asset). 

   Answer (C) is incorrect because the 
   noncurrent asset and noncurrent liability 
   should be offset. 

   Answer (D) is incorrect because 
   $4,000 results from offsetting the 
   $12,000 net noncurrent liability with the 
   $8,000 current asset. 


[711] Source: CMA 0691 2-19 

   Answer (A) is incorrect because both 
   the land and the building should be 
   recorded as capital leases. 

   Answer (B) is incorrect because both 
   the land and the building should be 
   recorded as capital leases. 

   Answer (C) is incorrect because the 
   depreciable assets are recorded 
   separately from those that are not 
   depreciable. 

   Answer (D) is correct. Under SFAS 13, 
   a capital lease should be recorded in a 
   manner similar to the purchase of an 
   asset. At least one of four criteria must 
   be met for a lease to be considered a 
   capital lease. One of these criteria is 
   the existence of a bargain purchase 
   option. A lease with a bargain-purchase 
   option should be recorded as a capital 
   lease, with any depreciable assets being 
   depreciated over the life of the asset. 
   Thus, a lease involving both land 
   (nondepreciable) and a building 
   (depreciable) should be recorded as a 
   capital lease, with each item being 
   recorded in separate accounts. The 
   present value of the minimum lease 
   payments after deducting executory 
   costs is allocated between the land and 
   the building in proportion to their fair 
   values at the inception of the lease. 


[712] Source: CMA 0691 2-20 

   Answer (A) is incorrect because the 
   costs of evaluating the prospective 
   lessee's financial condition are internal 
   initial direct costs. 

   Answer (B) is incorrect because the 
   costs of evaluating collateral and 
   security arrangements are internal 
   initial direct costs. 

   Answer (C) is correct. SFAS 91, 
   Accounting for Nonrefundable Fees and 
   Costs Associated with Originating or 
   Acquiring Loans and Initial Direct 
   Costs of Leases, which amends SFAS 
   13, defines initial direct costs as having 
   two components: (1) the lessor's 
   external costs to originate a lease 
   incurred in dealings with independent 
   third parties, and (2) the internal costs 
   directly related to specified activities 
   performed by the lessor for that lease, 
   e.g., to evaluate the lessee's financial 
   condition, to evaluate guarantees and 
   collateral (security arrangements), to 
   negotiate lease terms, to prepare and 
   process lease documents, and to close 
   the transaction. Initial direct costs do 
   not include the costs of advertising and 
   other solicitation, servicing of existing 
   leases, establishing and monitoring of 
   credit policies, supervision, and 
   administration. 

   Answer (D) is incorrect because the 
   costs of negotiating lease terms are 
   internal initial direct costs. 


[713] Source: CMA 1292 2-10 

   Answer (A) is correct. If any one of the 
   following criteria is met, a lease should 
   be treated as a capital lease: (1) the 
   lease transfers title to the lessee; (2) the 
   lease has a bargain purchase option; (3) 
   the lease term is at least 75% of the 
   estimated economic life of the leased 
   asset; or (4) the present value of the 
   minimum lease payments (excluding 
   executory costs) is 90% or more of the 
   excess of the leased asset's fair value to 
   the lessor at the inception of the lease 
   over any related investment tax credit. 

   Answer (B) is incorrect because a lease 
   should be capitalized if the lease term 
   is at least 75% of the estimated 
   economic life of the leased asset. 

   Answer (C) is incorrect because the 
   predictability of future costs is not one 
   of the criteria for lease capitalization. 

   Answer (D) is incorrect because rent 
   collectibility is not one of the criteria 
   for lease capitalization. 


[714] Source: CPA 0595 F-43 

   Answer (A) is incorrect because 
   $120,000 is the tax saved. 

   Answer (B) is incorrect because 
   $150,000 is the income tax payable if 
   the loss is carried forward only. 

   Answer (C) is correct. A net operating 
   loss (NOL) may be carried back two 
   years and forward 20 years. 
   Alternatively, the taxpayer may elect to 
   carry the NOL forward only. Given that 
   Mobe's first year of operations was 
   2000 and assuming that it elected to 
   carry the NOL back, it could apply 
   $300,000 (the operating income for 
   2000) to 2000 and the remaining 
   $400,000 to 2002. Given no deferred 
   income taxes, Mobe recorded no 
   deferred tax asset related to the NOL. 
   Thus, total 2002 income tax expense 
   (change in deferred tax accounts and the 
   current tax paid or payable) equals the 
   income tax paid or payable (taxable 
   income x the effective tax rate) of 
   $240,000 [($1,200,000 - $400,000 
   NOL carryforward) x 30%]. 

   Answer (D) is incorrect because 
   $360,000 is the tax on $1,200,000. 


[715] Source: CMA 1293 2-10 

   Answer (A) is incorrect because 
   $64,000 is the total accrued wages 
   payable, not the amount of the 
   adjustment. 

   Answer (B) is incorrect because 
   $51,000 was the correct wage accrual 
   for Year 2. 

   Answer (C) is correct. Failing to record 
   accrued wages is a self-correcting 
   error. Expenses are understated in one 
   year and overstated in the next, resulting 
   in the correction of the error over the 
   2-year period. The Year 1 error 
   overstated Year 1 earnings and 
   understated Year 2 earnings by 
   $56,000. Consequently, no correction is 
   necessary for the Year 1 error. The 
   Year 2 error overstated Year 2 earnings 
   and understated Year 3 earnings by 
   $51,000. The Year 3 error overstated 
   Year 3 earnings by $64,000. Thus, the 
   net effect in Year 3 of the Year 2 and 
   Year 3 errors is a $13,000 ($64,000 - 
   $51,000) overstatement. The correcting 
   entry is to debit expense for $13,000, 
   debit retained earnings for $51,000, and 
   credit wages payable for $64,000. 

   Answer (D) is incorrect because 
   retained earnings should be debited 
   because of the overstatement of Year 2 
   income. 


[716] Source: Publisher 

   Answer (A) is incorrect because the 
   guaranteed residual value is included in 
   the determination of minimum lease 
   payments. 

   Answer (B) is correct. FASB 
   Interpretation No. 19, Lessee Guarantee 
   of the Residual Value of Leased 
   Property, states that the amount of 
   guaranteed residual value to be 
   included in the determination of 
   minimum lease payments is the 
   "specified maximum deficiency that the 
   lessee is obligated to make up." In these 
   circumstances, that amount is materially 
   lower than the expected salvage value. 
   Consequently, the $12,000 guarantee 
   should be included. The additional 
   guarantee of $6,000 ($18,000 - 
   $12,000) in the case of excessive usage 
   is similar to a contingent rental 
   payment. Because it is not determinable 
   at the lease's inception, it is not a lessee 
   guarantee of the residual value that is 
   includible in the minimum lease 
   payments. 

   Answer (C) is incorrect because the 
   additional guarantee of $6,000 
   ($18,000 - $12,000) is not included. It 
   is contingent and thus nondeterminable. 

   Answer (D) is incorrect because the 
   minimum lease payments include only 
   guaranteed residual value. 


[717] Source: CPA 1190 I-37 

   Answer (A) is correct. The net rental 
   income is equal to the $50,000 annual 
   payment minus any expenses to be 
   recorded during the year. These 
   expenses include $12,000 of 
   depreciation, $9,000 for insurance and 
   property taxes, and $1,500 ($15,000  
   10 years) amortization of the finder's 
   fee. The finder's fee is an initial direct 
   cost that should be deferred and 
   allocated over the lease term in 
   proportion to the recognition of rental 
   income (SFAS 13). It should therefore 
   be recorded as a deferred charge and 
   amortized using the straight-line method 
   over the 10-year lease term. 
   Accordingly, the net rental income for 
   20X0 is $27,500.

   Rental income                          $50,000
   Depreciation                           (12,000)
   Insurance and property tax expenses     (9,000)
   Amortization                            (1,500)
                                          -------
   Net rental income                      $27,500
                                          =======

   Answer (B) is incorrect because 
   $29,000 does not include amortization 
   of the finder's fee. 

   Answer (C) is incorrect because 
   $35,000 equals rental income minus the 
   full finder's fee. 

   Answer (D) is incorrect because 
   $36,500 excludes insurance and 
   property taxes from the computation. 


[718] Source: CMA 0695 2-26 

   Answer (A) is incorrect because this 
   disclosure is required of lessees. 

   Answer (B) is correct. A sales-type 
   lease is used by manufacturers or 
   dealers and transfers ownership rights 
   and responsibilities to the lessee. The 
   lessor earns interest revenue and a 
   profit on sales. A direct-financing lease 
   transfers ownership rights and 
   responsibilities to the lessee and 
   provides interest revenue to the lessor 
   but does not profit on sales. However, 
   whether the lease is an operating lease 
   or a capital lease (sales-type or 
   direct-financing), the lessor must 
   disclose any contingent rentals included 
   in income for each period for which an 
   income statement is prepared. 

   Answer (C) is incorrect because this 
   disclosure is required for operating 
   leases. 

   Answer (D) is incorrect because this 
   disclosure is required for operating 
   leases. 


[719] Source: CMA 1295 2-7 

   Answer (A) is incorrect because 
   $750,000 is the cost of the new 
   computer, which has not yet been 
   acquired. 

   Answer (B) is correct. The company 
   has an irrevocable contract to replace 
   the old computer, and the value of the 
   trade-in allowance is $10,000. SFAS 5 
   requires that estimated losses from 
   contingencies be charged to income 
   when information available prior to 
   issuance of the financial statements 
   indicates that it is probable that an 
   asset's value has been impaired. 
   Therefore, the old computer should be 
   written down from its $27,000 book 
   value to its $10,000 fair value since the 
   amount of the loss can be reasonably 
   estimated and the occurrence of the 
   contingency is probable. 

   Answer (C) is incorrect because the 
   $27,000 value has been found to be 
   impaired. 

   Answer (D) is incorrect because the 
   new computer has not yet been 
   acquired; therefore, it should not appear 
   on the balance sheet. 


[720] Source: Publisher 

   Answer (A) is incorrect because a 
   progressive tax is a tax in which 
   individuals with higher (lower) 
   incomes pay a higher (lower) 
   percentage of their income in tax. For 
   example, income taxes are progressive. 

   Answer (B) is correct. With a 
   regressive tax, the percentage paid in 
   taxes decreases as income increases. 
   For example, excise taxes and payroll 
   taxes are both regressive taxes. An 
   excise tax is regressive because its 
   burden falls disproportionally on 
   lower-income persons. As personal 
   income increases, the percentage of 
   income paid declines because an excise 
   tax is a flat amount per quality of the 
   good or service purchased. 

   Answer (C) is incorrect because a 
   proportional tax is a tax in which the 
   individual pays a constant percentage in 
   taxes, regardless of income level. A 
   sales tax is a proportional tax. 

   Answer (D) is incorrect because a 
   progressive tax is a tax in which 
   individuals with higher (lower) 
   incomes pay a higher (lower) 
   percentage of their income in tax. For 
   example, income taxes are progressive. 


[721] Source: CMA 0686 1-20 

   Answer (A) is incorrect because 
   personal income taxes and Social 
   Security taxes levied against the 
   employee are direct taxes. 

   Answer (B) is incorrect because 
   personal income taxes and Social 
   Security taxes levied against the 
   employee are direct taxes. 

   Answer (C) is correct. Indirect taxes 
   are those levied against someone other 
   than individual taxpayers and thus only 
   indirectly affect the individual. Sales 
   taxes are levied against businesses and 
   are then passed along to the individual 
   purchaser. Social Security taxes are 
   levied against both the employer and the 
   employee. Those levied against the 
   employee are direct taxes; those levied 
   against the employer are indirect. 

   Answer (D) is incorrect because 
   personal income taxes and Social 
   Security taxes levied against the 
   employee are direct taxes. 


[722] Source: Publisher 

   Answer (A) is incorrect because 
   $17,700 is the gross tax liability. 

   Answer (B) is incorrect because 
   $15,300 is the net tax liability found 
   when incorrectly treating the tax credit 
   as a direct reduction in taxable income. 

   Answer (C) is correct. The first step in 
   calculating HCC's net tax liability is to 
   subtract the exclusion for tax-exempt 
   interest from income, for a gross 
   income amount of $69,000 ($80,000 - 
   $11,000). Next, the deprecation 
   deduction is subtracted from gross 
   income, for a taxable income of 
   $59,000 ($69,000 - $10,000). Then, the 
   taxable income is multiplied by the tax 
   rate, for a gross tax liability of $17,700 
   ($59,000 x 30%). Finally, net tax 
   liability is computed by subtracting the 
   tax credits from the gross tax liability. 
   Therefore, HCC's net tax liability is 
   $9,700 ($17,700 - $8,000). 

   Answer (D) is incorrect because 
   $2,000 is the net tax liability found 
   when incorrectly treating the exclusion 
   as a credit. 


[723] Source: Publisher 

   Answer (A) is incorrect because an 
   exclusion or deduction reduces gross 
   tax liability by the amount of the 
   exclusion or deduction multiplied by the 
   tax rate. Therefore, the exclusion will 
   reduce HCC's gross tax liability by 
   $3,300 ($11,000 x .30), and the 
   deduction will reduce HCC's gross tax 
   liability by $3,000 ($10,000 x .30). 

   Answer (B) is incorrect because an 
   exclusion or deduction reduces gross 
   tax liability by the amount of the 
   exclusion or deduction multiplied by the 
   tax rate. Therefore, the exclusion will 
   reduce HCC's gross tax liability by 
   $3,300 ($11,000 x .30), and the 
   deduction will reduce HCC's gross tax 
   liability by $3,000 ($10,000 x .30). 

   Answer (C) is incorrect because an 
   exclusion or deduction reduces gross 
   tax liability by the amount of the 
   exclusion or deduction multiplied by the 
   tax rate. Therefore, the exclusion will 
   reduce HCC's gross tax liability by 
   $3,300 ($11,000 x .30), and the 
   deduction will reduce HCC's gross tax 
   liability by $3,000 ($10,000 x .30). 

   Answer (D) is correct. Credits directly 
   reduce taxes, whereas exclusions and 
   deductions reduce income prior to the 
   computation of the gross tax liability. 
   Thus, the credit reduces the gross tax 
   liability on a dollar-for-dollar basis, or 
   $8,000. An exclusion or deduction 
   reduces gross tax liability by the amount 
   of the exclusion or deduction multiplied 
   by the tax rate. Accordingly, the 
   exclusion will reduce HCC's gross tax 
   liability by $3,300 ($11,000 x 30%), 
   and the deduction will reduce HCC's 
   gross tax liability by $3,000 ($10,000 x 
   30%). Gross income does not reduce 
   the gross tax liability; rather, it 
   increases the gross tax liability by 
   $24,000 ($80,000 x 30%). 


[724] Source: CMA 1291 2-11 

   Answer (A) is incorrect because 
   warranty expenses are not deductible 
   until paid. 

   Answer (B) is incorrect because 
   dividends on common stock are never 
   deductible by a corporation; they are 
   distributions of after-tax income. 

   Answer (C) is incorrect because 
   amounts accrued by an accrual-basis 
   taxpayer to be paid to a related 
   cash-basis taxpayer in a subsequent 
   period are not deductible until the latter 
   taxpayer includes the items in income. 
   This rule effectively puts related 
   taxpayers on the cash basis. 

   Answer (D) is correct. Sec. 162(a) 
   states that a deduction is allowed for 
   the ordinary and necessary expenses 
   incurred during the year in any trade or 
   business. A corporation may therefore 
   deduct a reasonable amount for 
   compensation. Accrued vacation pay is 
   a form of compensation that results in 
   an allowable deduction for federal 
   income tax purposes. 


[725] Source: CMA 1291 2-12 

   Answer (A) is incorrect because the 
   gain on an installment sale of real 
   property in excess of $150,000 is an 
   adjustment to taxable income for 
   purposes of computing alternative 
   minimum taxable income. 

   Answer (B) is incorrect because mining 
   exploration and development costs are 
   adjustments to taxable income for 
   purposes of computing alternative 
   minimum taxable income. 

   Answer (C) is incorrect because a 
   charitable contribution of appreciated 
   property is an adjustment to taxable 
   income for purposes of computing 
   alternative minimum taxable income. 

   Answer (D) is correct. Taxable income 
   is adjusted to arrive at alternative 
   minimum taxable income. Some of the 
   common adjustments include gains or 
   losses from long-term contracts, gains 
   on installment sales of real property, 
   mining exploration and development 
   costs, charitable contributions of 
   appreciated property, accelerated 
   depreciation, the accumulated current 
   earnings adjustment, and tax-exempt 
   interest on private activity bonds issued 
   after August 7, 1986. A sales 
   commission accrued in the current year 
   but paid in the following year is not an 
   example of an AMT adjustment. 


[726] Source: Publisher 

   Answer (A) is incorrect because a 
   reorganization that is a mere change in 
   the form of investment is nontaxable. 

   Answer (B) is incorrect because a 
   like-kind exchange allows for the 
   deferral of gain. 

   Answer (C) is correct. Like-kind 
   exchanges, involuntary conversions, and 
   tax-free reorganizations are examples of 
   transactions that result in the deferral or 
   nonrecognition of gain. A 
   reorganization is nontaxable when it is 
   considered a mere change in 
   investment, not a disposition of assets. 

   Answer (D) is incorrect because an 
   involuntary conversion allows for the 
   deferral of gain. 


[727] Source: Publisher 

   Answer (A) is incorrect because 
   $35,000 is the amortization for both 
   Year 1 and Year 2. 

   Answer (B) is correct. For Year 1 and 
   Year 2, there were seven employees 
   with 36 years of expected service (2 + 
   2 + 6 + 8 + 10 + 5 + 3). Thus, for Year 
   1 and Year 2, the amortization would be 
   7/36 of $180,000, or $35,000. For Year 
   3, there are only five employees 
   remaining, resulting in a calculation of 
   5/36 of $180,000, or $25,000. 

   Answer (C) is incorrect because 
   $25,714 is 1/7 of the total and not based 
   on years of future service. 

   Answer (D) is incorrect because 
   $36,000 is 1/5 of the total and not based 
   on years of future service. 


[728] Source: Publisher 

   Answer (A) is incorrect because both 
   conditions are included under SFAS 
   114. 

   Answer (B) is correct. SFAS 114 
   requires a creditor to recognize 
   impairment of a loan when it is 
   probable that the creditor will not be 
   able to collect all amounts due in 
   accordance with the terms of the loan. 
   All amounts include both principal and 
   interest payments. 

   Answer (C) is incorrect because both 
   conditions are included under SFAS 
   114. 

   Answer (D) is incorrect because both 
   conditions are included under SFAS 
   114. 


[729] Source: CPA 1193 I-30 

   Answer (A) is correct. The ending 
   accounts payable balance should 
   include amounts owed as of December 
   31, Year 1 on trade payables. Although 
   Eagle wrote checks for $25,000 to 
   various vendors, that amount should 
   still be included in the accounts payable 
   balance because the company had not 
   surrendered control of the checks at 
   year-end. The advance to the supplier 
   was erroneously recorded as a 
   reduction of (debit to) accounts 
   payable. This amount should be 
   recorded as a prepaid asset, and 
   accounts payable should be credited 
   (increased) by $50,000. Thus, accounts 
   payable should be reported as $275,000 
   ($200,000 + $50,000 + $25,000). 

   Answer (B) is incorrect because 
   $250,000 does not include the $25,000 
   in checks not yet mailed at year-end. 

   Answer (C) is incorrect because 
   $200,000 is the balance for accounts 
   payable before adjustment. 

   Answer (D) is incorrect because 
   $125,000 results from subtracting the 
   advance payment and the checks from 
   $200,000. 


[730] Source: CPA 1192 I-21 

   Answer (A) is correct. The gross 
   method records purchases and accounts 
   payable without regard to purchase 
   discounts available, for example, cash 
   discounts for early payment. The net 
   method records purchases and accounts 
   payable at the cash (discounted) price. 
   If the accounts payable balance at the 
   gross amount is $50,000 and $800 of 
   discounts are available, the accounts 
   payable balance at the net amount must 
   be $49,200. 

   Answer (B) is incorrect because 
   $49,100 results from assuming that 
   purchase discounts of $900 are 
   available. However, the $900 of 
   discounts taken relates to accounts that 
   have already been paid. 

   Answer (C) is incorrect because 
   $47,900 assumes that purchase 
   discounts of $2,100 are available. But 
   discounts of only $800 are available, 
   discounts of $900 were taken, and 
   discounts of $1,300 were lost. 

   Answer (D) is incorrect because 
   $47,800 reduces the accounts payable 
   balance by the sum of discounts taken 
   and lost. These discounts do not relate 
   to the existing payables. 


[731] Source: CPA 0591 I-34 

   Answer (A) is correct. When goods are 
   shipped FOB shipping point, title and 
   risk of loss pass to the buyer at the time 
   and place of shipment. Hence, Kew 
   should currently recognize a $40,000 
   payable for the goods lost in transit. 
   The $70,000 purchase return should be 
   recognized currently because the seller 
   authorized the credit on December 27. 
   However, the goods shipped FOB 
   destination and not received until 
   January should be excluded. Title did 
   not pass to Kew until receipt of the 
   goods. Accordingly, the ending 
   accounts payable balance is $2,170,000 
   ($2,200,000 + $40,000 - $70,000). 

   Answer (B) is incorrect because 
   $2,180,000 results from including the 
   goods shipped FOB destination but not 
   the lost goods. 

   Answer (C) is incorrect because 
   $2,230,000 results from adding the 
   purchase return and deducting the lost 
   goods. 

   Answer (D) is incorrect because 
   $2,290,000 results from adding the lost 
   goods and the goods shipped FOB 
   destination, but making no adjustment 
   for the purchase return. 


[732] Source: CPA 0591 I-37 

   Answer (A) is incorrect because 
   $12,500 results from omitting the half 
   month of the fixed rental and the 
   advertising bill for December. 

   Answer (B) is incorrect because 
   $12,875 omits the half month of the 
   fixed rental. 

   Answer (C) is incorrect because 
   $13,100 excludes the advertising bill 
   for December. 

   Answer (D) is correct. The $375 of 
   advertising expense should be accrued 
   in Year 2 because this amount can be 
   directly related to events in that period. 
   The $125 amount is related to events in 
   Year 3 and should not be accrued in 
   Year 2. The fixed rental is due at 
   midmonth. Thus, the fixed rental for the 
   last half month of Year 2 ($1,200  2 = 
   $600) and the rental based on annual 
   sales [5% x ($550,000 - $300,000) = 
   $12,500] should also be accrued, for a 
   total of $13,475 ($375 + $600 + 
   $12,500). 


[733] Source: CPA 1193 I-28 

   Answer (A) is incorrect because 
   $64,000 does not include vacation pay. 

   Answer (B) is incorrect because 
   $69,000 results from erroneously 
   deducting $20,000. 

   Answer (C) is incorrect because 
   $84,000 results from assuming accrued 
   vacation pay is $20,000. 

   Answer (D) is correct. The salary 
   accrual at December 31, Year 2 was for 
   a four-day period (December 28-31). 
   Thus, the accrued salary (amount earned 
   in Year 2 but not paid until Year 3) 
   should be $64,000 [(4 days  5 days) x 
   $80,000 in salaries for a 5-day week]. 
   Vacation pay ($25,000) for time earned 
   but not taken in Year 2 was not paid 
   until Year 3. Hence, $25,000, not 
   $20,000, should have been accrued at 
   year-end. The total accrual is $89,000. 


[734] Source: CPA 1194 F-18 

   Answer (A) is incorrect because 
   $2,000 results from adding the $15,000 
   to $68,000 and subtracting that sum 
   from the $85,000 interest expense. 

   Answer (B) is incorrect because 
   $15,000 is the interest paid for last 
   year. 

   Answer (C) is incorrect because 
   $17,000 is the difference between the 
   interest expense and cash paid out. 

   Answer (D) is correct. The cash paid 
   for interest was $68,000, including 
   $15,000 of interest paid for last year. 
   Consequently, $53,000 ($68,000 - 
   $15,000) of the cash paid for interest 
   related to this year. Interest payable is 
   therefore $32,000 ($85,000 - $53,000). 


[735] Source: CPA 1193 I-31 

   Answer (A) is incorrect because 
   $36,000 was the accrued interest 
   payable at 12/31/Year 1. 

   Answer (B) is incorrect because 
   $33,000 would have been the accrued 
   interest payable at 12/31/Year 1 if the 
   interest rate had been 11%. 

   Answer (C) is correct. Under the 
   interest method, accrued interest 
   payable is equal to the face amount of 
   the note at the beginning of the interest 
   period, multiplied by the stated interest 
   rate, multiplied by the portion of the 
   interest period that is included within 
   the accounting period. At 9/1/Year 1, 
   the face value of the note was 
   $900,000. After the first payment of 
   $300,000 principal plus interest on 
   9/1/Year 2, the face value of the note 
   was $600,000 ($900,000 - $300,000). 
   Thus, accrued interest payable for the 
   period 9/1/Year 2 to 12/31/Year 2 was 
   $24,000 ($600,000 face value x 12% 
   stated interest rate x 4/12). 

   Answer (D) is incorrect because 
   $22,000 would have been the accrued 
   interest payable if the interest rate had 
   been 11%. 


[736] Source: CPA 1190 I-12 

   Answer (A) is incorrect because 
   $18,200 includes the federal income tax 
   withheld. 

   Answer (B) is incorrect because 
   $12,600 is the sum of the federal 
   income tax withheld and the 
   unemployment tax. 

   Answer (C) is incorrect because 
   $11,800 includes the FICA employee 
   taxes. 

   Answer (D) is correct. The amount of 
   wages subject to payroll taxes for FICA 
   purposes is $80,000. At a 7% rate, the 
   employer's share of FICA taxes equals 
   $5,600 ($80,000 x 7%). Wages subject 
   to unemployment payroll taxes are 
   $20,000. At a 3% rate, unemployment 
   payroll taxes equal $600 ($20,000 x 
   3%). Consequently, the total of payroll 
   taxes is $6,200 ($5,600 + $600). A 7% 
   employee rate also applies to the wages 
   subject to FICA taxes. This amount 
   ($80,000 x 7% = $5,600) should be 
   withheld from the employee's wages 
   and remitted directly to the federal 
   government by the employer, along with 
   the $6,200 in employer payroll taxes. 
   The employee's share, however, should 
   be accrued as a withholding tax (an 
   employee payroll deduction) and not as 
   an employer payroll tax. 


[737] Source: CPA 1195 F-13 

   Answer (A) is incorrect because 
   $1,200 does not include employer and 
   employee shares of current FICA taxes, 
   and $1,400 includes the employees' 
   share of FICA taxes. 

   Answer (B) is incorrect because $1,900 
   does not include $700 of FICA taxes, 
   and $1,400 includes the employees' 
   share of FICA taxes. 

   Answer (C) is incorrect because $1,900 
   does not include $700 of FICA taxes. 

   Answer (D) is correct. The payroll 
   liability is $2,600 ($1,200 federal 
   income tax withheld + $700 employer's 
   FICA + $700 employees' FICA). The 
   payroll tax expense consists of the 
   employer's share of FICA. The 
   employees' share is considered a 
   withholding, not an expense. 


[738] Source: CPA 0594 F-22 

   Answer (A) is correct. A contingent 
   liability should be accrued when it is 
   probable that a liability has been 
   incurred and the amount can be 
   reasonably estimated. Thus, Acme 
   should accrue a liability for $1,000 
   [2% x (5 x $10,000) eligible wages]. 

   Answer (B) is incorrect because $1,500 
   is based on a 3% rate. 

   Answer (C) is incorrect because $2,000 
   is based on the total wages paid to the 
   employees. 

   Answer (D) is incorrect because 
   $3,000 is based on a 3% rate and the 
   total wages paid to the employees. 


[739] Source: CPA 1194 F-19 

   Answer (A) is incorrect because the 
   $4,000 includes real estate taxes for 
   September and October only. 

   Answer (B) is correct. The credit 
   balance in real estate taxes payable at 
   November 1, Year 1 is $8,000. This 
   amount reflects accrued real estate 
   taxes of $2,000 a month [(2 x $12,000) 
    12 months] for four months (July 
   through October). This payable should 
   be debited for $8,000 when the real 
   estate taxes are paid. 

   Answer (C) is incorrect because 
   $10,000 includes real estate taxes for 
   November. 

   Answer (D) is incorrect because 
   $12,000 equals six months of real estate 
   taxes. 


[740] Source: CPA 0595 F-15 

   Answer (A) is incorrect because $600 
   is the sales tax previously remitted. 

   Answer (B) is correct. Because this 
   company records both sales revenue 
   and the 6% state sales tax as sales 
   revenue, the $26,500 in this account is 
   equal to 106% of sales revenue. Sales 
   revenue is equal to $25,000 ($26,500  
   1.06). The difference of $1,500 
   ($26,500 - $25,000) is the quarterly 
   sales tax. Given that $600 of the sales 
   tax has previously been remitted, sales 
   tax payable is $900 ($1,500 - $600). 

   Answer (C) is incorrect because $1,500 
   is the quarterly sales tax. 

   Answer (D) is incorrect because 
   $1,590 equals the total sales revenue, 
   including sales tax, multiplied by 6%. 


[741] Source: CPA 0594 F-21 

   Answer (A) is incorrect because 
   $6,000 excludes October room nights. 

   Answer (B) is correct. Hudson 
   presumably paid its October sales taxes 
   during year 1, but it did not pay sales 
   taxes for November and December and 
   occupancy taxes for October, 
   November, and December until year 2. 
   Consequently, it should accrue a 
   liability for sales taxes in the amount of 
   $39,000 [15% x ($110,000 November 
   rentals + $150,000 December rentals)] 
   and a liability for occupancy taxes in 
   the amount of $8,200 [$2 x (1,100 + 
   1,200 + 1,800) room nights]. 

   Answer (C) is incorrect because 
   $54,000 includes October room rentals, 
   and $6,000 excludes October room 
   nights. 

   Answer (D) is incorrect because 
   $54,000 includes October room rentals. 


[742] Source: CPA 1192 T-42 

   Answer (A) is correct. A customer 
   deposit is a liability because it involves 
   a probable future sacrifice of economic 
   benefits arising from a current 
   obligation of a particular entity to 
   transfer assets or provide services to 
   another entity in the future as a result of 
   a past transaction (SFAC 6). 

   Answer (B) is incorrect because a 
   revenue is not recognized until it is 
   earned. 

   Answer (C) is incorrect because GAAP 
   ordinarily prohibit offsetting assets and 
   liabilities (APB 10). Most deferred 
   credits are liabilities. 

   Answer (D) is incorrect because a 
   contra account is a valuation account. 


[743] Source: CPA 0592 T-26 

   Answer (A) is incorrect because the 
   60% prepayment should be credited to 
   deferred revenue. 

   Answer (B) is incorrect because Dallas 
   has no liability to the subcontractor. 

   Answer (C) is correct. The 60% 
   advance payment is a deferred revenue 
   (liability) because it has been realized 
   but not earned. The entity has not 
   substantially accomplished what it must 
   do to be entitled to the benefits 
   represented by the prepayment. The 
   agreement with the subcontractor does 
   not create a liability because the entity 
   has no current obligation to transfer 
   assets or provide services. That 
   obligation will not arise until the 
   subcontractor has performed. 

   Answer (D) is incorrect because the 
   60% prepayment should be credited to 
   deferred revenue, and Dallas has no 
   liability to the subcontractor. 


[744] Source: CPA 1192 I-26 

   Answer (A) is incorrect because 
   $1,400 equals the deposit plus the last 
   month's rent, an amount that is not 
   refundable. 

   Answer (B) is incorrect because $500 
   is the total deposit. 

   Answer (C) is incorrect because $350 
   does not reflect the expected value of 
   damages. 

   Answer (D) is correct. The refundable 
   security deposit is a liability because it 
   involves a probable future sacrifice of 
   economic benefits arising from a 
   current obligation of a particular entity 
   to transfer assets or provide services to 
   another entity in the future as a result of 
   a past transaction (SFAC 6). A 
   reasonable estimate of the amount to be 
   returned is $320 [$500 - $150 cleaning 
   costs that are almost always deducted - 
   (30% x $100) expected value of 
   damages]. 


[745] Source: CPA 0590 I-30 

   Answer (A) is incorrect because 
   $494,000 is the difference between 
   total deposits for containers delivered 
   in Year 3 and Year 3 deposits returned. 

   Answer (B) is incorrect because 
   $584,000 results from assuming that all 
   Year 1 containers were retired. 

   Answer (C) is correct. At the beginning 
   of Year 3, the liability for returnable 
   containers is given as $580,000. This 
   liability is increased by $780,000 
   attributable to containers delivered in 
   Year 3. The liability is decreased by 
   the $626,000 attributable to containers 
   returned in Year 3. Moreover, the 
   two-year refund period for Year 1 
   deliveries has expired. Accordingly, the 
   liability should also be decreased for 
   $60,000 ($150,000 - $90,000) worth of 
   containers deemed to be retired. As 
   indicated below, the liability for 
   returnable containers at December 31, 
   Year 3 is $674,000.

             Deposits on Returnable Containers
   ------------------------------------------------------------
   Containers returned   $626,000   $580,000  12/31/Year 2
   Year 1 retired          60,000    780,000  Year 3 Containers
                                               delivered
   ------------------------------------------------------------
                                    $674,000 12/31/Year 3
                                    ========

   Answer (D) is incorrect because 
   $734,000 does not include the Year 1 
   containers retired by sale from the 
   calculation. 


[746] Source: CPA 0591 I-39 

   Answer (A) is incorrect because the 
   rent deposit is a noncurrent liability. 

   Answer (B) is correct. The company 
   expects that 3 million cans ($150,000  
   $.05) sold prior to this year will be 
   returned. This year, 10 million were 
   sold and 11 million returned. The 
   ending balance should therefore reflect 
   the estimated 2 million remaining cans 
   that will be returned (assuming no 
   change in estimate). This $100,000 
   balance (2,000,000 x $.05) is a current 
   liability because the return of the cans 
   presumably will occur within the longer 
   of one year or the operating cycle. The 
   rent deposit received this year but not to 
   be applied toward rent until the fifth 
   year has not been earned and should be 
   reported as a noncurrent liability of 
   $25,000. 

   Answer (C) is incorrect because the 
   rent deposit is a noncurrent liability. 

   Answer (D) is incorrect because the 
   rent deposit is a noncurrent liability, 
   and the $100,000 deposit balance for 
   soda cans is current. 


[747] Source: CPA 1190 I-28 

   Answer (A) is incorrect because 
   $7,250,000 equals the beginning 
   balance, plus stamp service revenue, 
   minus redemptions of stamps sold 
   before the current year. 

   Answer (B) is incorrect because 
   $5,500,000 is based on an expected 
   100% redemption rate. 

   Answer (C) is correct. The liability for 
   stamp redemptions at the beginning of 
   this year is given as $6 million. This 
   liability would be increased in the 
   current year by $2,250,000 if all stamps 
   sold in the current year were presented 
   for redemption. However, because only 
   80% are expected to be redeemed, the 
   liability should be increased by 
   $1,800,000 ($2,250,000 x 80%). The 
   liability was decreased by the 
   $2,750,000 attributable to the costs of 
   redemptions. Thus, the liability for 
   stamp redemptions at December 31 of 
   the current year is $5,050,000 
   ($6,000,000 + $1,800,000 - 
   $2,750,000). 

   Answer (D) is incorrect because 
   $3,250,000 is based on the assumption 
   that no stamps were sold in the current 
   year. 


[748] Source: CPA 1195 F-44 

   Answer (A) is correct. The change 
   affects only 2003 sales. No change in 
   the previously recorded estimates is 
   necessary. Thus, the debit to warranty 
   expense is $50,000 (1% x $5,000,000 
   sales). Estimated liability under 
   warranties is credited for $50,000. 

   Answer (B) is incorrect because 
   $88,000 is the average of 2001 and 
   2002 costs. 

   Answer (C) is incorrect because 
   $100,000 results from using 2% instead 
   of 1%. 

   Answer (D) is incorrect because 
   $138,000 includes $88,000, which is 
   the average of 2001 and 2002 costs. 


[749] Source: CPA 0592 I-30 

   Answer (A) is incorrect because 
   $1,000 is the face amount. 

   Answer (B) is incorrect because $943 
   is the result of discounting the interest 
   payments at 9% and the face amount at 
   6%. 

   Answer (C) is incorrect because $864 
   is the result of discounting the interest 
   payments at 6% and the face amount at 
   9%. 

   Answer (D) is correct. The issue price 
   for each bond reflects the fair value. It 
   equals the sum of the present values of 
   the future cash flows (principal + 
   interest). This amount is $807 {(.422 
   PV of 1 for 10 periods at 9% x $1,000 
   face amount) + [6.418 PV of an 
   ordinary annuity for 10 periods at 9% x 
   (6% x $1,000) interest]}. 


[750] Source: CPA 1190 I-24 

   Answer (A) is incorrect because 
   $955,000 equals the net proceeds 
   (assuming no accrued interest was 
   received). 

   Answer (B) is correct. APB 21, Interest 
   on Receivables and Payables, requires 
   that bond discounts or premiums appear 
   as a direct deduction from, or addition 
   to, the face amount of the bond payable, 
   making clear the effective liability for 
   the bonds. Hence, the bond liability is 
   shown net of unamortized discount. At 
   the issue date, no amortization has 
   occurred. Consequently, the carrying 
   amount (bond liability) equals the face 
   amount minus the total discount (99% x 
   1,000 x $1,000 = $990,000). Issue costs 
   should be reported as deferred charges. 
   They should not be commingled with 
   bond premiums or discounts. 

   Answer (C) is incorrect because 
   $1,000,000 is the face amount. 

   Answer (D) is incorrect because 
   $1,025,000 is the sum of the net 
   liability and the issue costs. 


[751] Source: CPA 1193 I-29 

   Answer (A) is incorrect because 
   $27,000 includes the $18,000 already 
   paid on June 30. 

   Answer (B) is incorrect because 
   $24,000 includes the $18,000 already 
   paid on June 30 and erroneously 
   records $6,000, which is the accrued 
   interest for two months. 

   Answer (C) is incorrect because 
   $18,000 is the amount of the semiannual 
   interest payable. 

   Answer (D) is correct. Because interest 
   is paid semiannually on June 30 and 
   December 31, the amount of each 
   payment is $18,000 [($300,000 x 12%) 
    2]. On June 30, $18,000 was paid. 
   From July 1 to September 30, 2001 
   (three months), interest accrued for the 
   December 31, 2001 payment. Thus, 
   $9,000 ($18,000 x 3/6) of accrued 
   interest payable should be reported. 


[752] Source: CPA 1194 F-24 

   Answer (A) is incorrect because 
   $469,500 is the issue price unadjusted 
   for discount amortization. 

   Answer (B) is correct. Accrued interest 
   expense is $23,475 ($469,500 x 10% x 
   6/12). Accrued interest payable is 
   $22,500 ($500,000 x 9% x 6/12). The 
   difference of $975 is the amount of 
   discount amortization for the period. 
   The amount that should be reported as 
   bonds payable equals $470,475 
   ($469,500 + $975). 

   Answer (C) is incorrect because 
   $471,025 reflects a full year's discount 
   amortization. 

   Answer (D) is incorrect because 
   $500,000 is the face value of the bonds. 


[753] Source: CPA 1193 I-36 

   Answer (A) is incorrect because 
   $1,050 equals 18 months of interest 
   payments. 

   Answer (B) is incorrect because $3,950 
   equals the premium minus 18 months of 
   interest payments. 

   Answer (C) is correct. Under the 
   interest method, interest expense is the 
   carrying value of the bonds at the 
   beginning of the interest period 
   multiplied by the market (yield) rate of 
   interest. Assuming interest is paid 
   annually on June 30, interest expense 
   for the year ended 6/30/01 is $6,300 
   (6% x $105,000 carrying value), and 
   the periodic interest payment is $7,000 
   (7% x $100,000). The difference 
   ($7,000 - $6,300 = $700) is the amount 
   of premium amortized. The unamortized 
   premium is therefore $4,300 ($5,000 - 
   $700). 

   Answer (D) is incorrect because 
   $4,500 assumes straight-line 
   amortization and a 6/30/00 issue date. 


[754] Source: CPA 0590 I-37 

   Answer (A) is correct. APB 21 states 
   that issue costs should be reported in 
   the balance sheet as deferred charges to 
   be amortized over the life of the bonds. 
   They should not be commingled with 
   bond premium or discount. Issue costs 
   are incurred to bring a bond to market. 
   They include lawyers', accountants', and 
   underwriters' fees; engraving and 
   printing costs; registration costs; and 
   promotion costs. In this case, they 
   include the $30,000 of printing and 
   engraving costs, the $160,000 of legal 
   fees, the $20,000 of accountants' fees, 
   and the $300,000 of underwriter's 
   commissions. Hence, the amount that 
   should be recorded as a deferred charge 
   to be amortized over the term of the 
   bonds is equal to $510,000. 

   Answer (B) is incorrect because 
   $480,000 does not include the printing 
   and engraving costs. 

   Answer (C) is incorrect because 
   $300,000 includes only the 
   commissions. 

   Answer (D) is incorrect because 
   $210,000 excludes the commissions. 


[755] Source: CPA 1193 I-34 

   Answer (A) is incorrect because an 
   additional full year of amortization 
   should have been claimed. 

   Answer (B) is incorrect because six 
   more months of issue costs should have 
   been amortized for the time between 
   1/1/01 through 6/30/01. 

   Answer (C) is incorrect because 
   $220,800 results from amortization 
   using the interest method. 

   Answer (D) is correct. Bond issue costs 
   are customarily amortized using the 
   straight-line method for the term of the 
   bond. The amortization is $25,000 per 
   year ($250,000  10 years). Because 
   the bond has been held for 18 months, 
   $37,500 ($25,000 + $12,500) of issue 
   costs have been amortized by 6/30/01. 
   The unamortized issue costs are 
   $212,500 ($250,000 - $37,500). 


[756] Source: CPA 1192 I-39 

   Answer (A) is incorrect because the 
   registered bonds are also term bonds. 

   Answer (B) is incorrect because the 
   collateral trust bonds are also term 
   bonds. 

   Answer (C) is incorrect because the 
   collateral trust bonds, not the 
   subordinated debentures, are term 
   bonds. 

   Answer (D) is correct. Term bonds 
   mature on a single date. Hence, the 
   registered bonds and the collateral trust 
   bonds are term bonds, a total of 
   $1,300,000 ($700,000 + $600,000). 


[757] Source: CPA 0593 I-2 

   Answer (A) is incorrect because 
   $750,000 includes the $500,000 that 
   was refinanced. 

   Answer (B) is incorrect because 
   $500,000 is the amount that should be 
   reclassified as noncurrent. 

   Answer (C) is correct. The portion of 
   debt scheduled to mature in the 
   following fiscal year ordinarily should 
   be classified as a current liability. 
   However, if an enterprise intends to 
   refinance short-term obligations on a 
   long-term basis and demonstrates an 
   ability to consummate the refinancing, 
   the obligation should be excluded from 
   current liabilities and classified as 
   noncurrent. One method of 
   demonstrating the ability to refinance is 
   to issue long-term obligations or equity 
   securities after the balance sheet date 
   but before the financial statements are 
   issued. Largo demonstrated an intention 
   to refinance $500,000 of the note 
   payable. Thus, the portion prepaid 
   ($250,000) is a current liability, and the 
   remaining $500,000 should be 
   classified as noncurrent. 

   Answer (D) is incorrect because 
   $250,000 should be classified as a 
   current liability. 


[758] Source: CPA 1194 F-22 

   Answer (A) is incorrect because 
   $368,250 includes a reduction of 
   $50,000 for the first installment. 

   Answer (B) is correct. 
   Noninterest-bearing notes payable 
   should be measured at their present 
   value rather than their face value. Thus, 
   the measure of the note payable (debit 
   contest expense $418,250, debit 
   discount $531,750, credit note payable 
   $950,000) is $418,250 (the present 
   value of the remaining payments). 

   Answer (C) is incorrect because 
   $900,000 equals the face value of the 
   note payable minus two installments. 

   Answer (D) is incorrect because 
   $950,000 equals the face value of the 
   note payable minus the first installment. 


[759] Source: CPA 1193 I-27 

   Answer (A) is incorrect because 
   $10,300 is the sum of the face value of 
   the note and annual 3% interest. 

   Answer (B) is incorrect because 
   $10,000 is the face value of the note. 

   Answer (C) is correct. Under APB 21, 
   absent evidence of the market value of 
   the note or an established exchange 
   price for the services, the present value 
   of a note with an interest rate that is 
   clearly unreasonable is determined by 
   discounting the payments at an imputed 
   rate. The prevailing rate for issuers 
   with similar credit ratings normally 
   helps determine the appropriate rate. 
   Assuming that 8% is the best 
   approximation of the rate that would 
   have resulted in a similar transaction 
   between independent parties, the note 
   payable should be credited at its 
   present value of $9,652 {($10,000 x 
   .944) + [3% x $10,000 x (9  12) x 
   .944]}. 

   Answer (D) is incorrect because 
   $9,440 is the present value of the 
   principal of the note. 


[760] Source: CPA 0FIN R99-14 

   Answer (A) is incorrect because the 
   debtor recognizes both an ordinary gain 
   and an extraordinary gain. 

   Answer (B) is incorrect because 
   $35,000 is the ordinary gain. 

   Answer (C) is correct. Debtors should 
   recognize an extraordinary gain or loss 
   (carrying amount - settlement amount) 
   as a result of the extinguishment of debt 
   when creditors settle a debt by 
   accepting assets with a fair value 
   different from the book value of the 
   debt. Casey should adjust the carrying 
   amount of the asset surrendered to its 
   fair value, resulting in an ordinary gain 
   of $35,000 ($120,000 - $85,000). The 
   extraordinary gain is $65,000 
   ($185,000 - $120,000). 

   Answer (D) is incorrect because 
   $100,000 is the total gain. 


[761] Source: CPA 1193 I-39 

   Answer (A) is correct. For a capital 
   lease, the present value of the minimum 
   lease payments should be recorded at 
   the inception date. The minimum lease 
   payments exclude executory costs such 
   as insurance, maintenance, and taxes. 
   The capitalized lease liability is 
   therefore $280,000 [($52,000 - $2,000) 
   x 5.6]. 

   Answer (B) is incorrect because 
   $291,200 is based on a $52,000 annual 
   payment. 

   Answer (C) is incorrect because 
   $450,000 is the total undiscounted 
   amount of the minimum lease payments. 

   Answer (D) is incorrect because 
   $468,000 is the total undiscounted 
   amount of the minimum lease payments 
   plus real estate taxes. 


[762] Source: CPA 0590 I-35 

   Answer (A) is incorrect because 
   $63,374 includes the PV of $1 
   calculated at 10% for 10 years of the 
   residual value guaranteed by a third 
   party. 

   Answer (B) is correct. This lease 
   qualifies as a capital lease because the 
   10-year lease term is greater than 75% 
   of the 10-year estimated useful life of 
   the equipment. The lessee should record 
   the present value of the minimum lease 
   payments at the lower of the lessee's 
   incremental borrowing rate, or the 
   lessor's implicit rate (if known to the 
   lessee). Because the 10% implicit rate 
   (the lessor's expected return on the 
   lease) is less than the 12% incremental 
   borrowing rate, the lease obligation 
   should be recorded on 1/1/00 at 
   $61,446 ($10,000 periodic payment x 
   6.1446). The end of the fiscal year 
   (10/31/00) is 10 months after the 
   inception of the lease, but the annual 
   lease payments are payable at the end of 
   the calendar year. Hence, the lease 
   obligation recorded at the inception of 
   the lease has not yet been reduced by 
   the first payment. Moreover, given that 
   the residual value of $5,000 is 
   guaranteed by a third party, it is not 
   included in the minimum lease payments 
   by the lessee. 

   Answer (C) is incorrect because 
   $58,112 is based on the interest factor 
   for the PV of an ordinary annuity of $1 
   at 12% for 10 years. It also includes the 
   PV of $1 calculated at 12% for 10 years 
   of the residual value guaranteed by a 
   third party. 

   Answer (D) is incorrect because 
   $56,502 is based on the interest factor 
   for the PV of an ordinary annuity of $1 
   at 12% for 10 years. 


[763] Source: CPA 0594 F-25 

   Answer (A) is incorrect because 
   $66,000 results from treating the full 
   $9,000 payment made in 2002 as 
   principal. 

   Answer (B) is correct. The total lease 
   obligation on 12/31/00 was $76,364 
   ($75,000 + $1,364 current portion). 
   After the 2001 payment, which included 
   the current portion, the lease obligation 
   was $75,000. Consequently, the 2002 
   payment included an interest component 
   of $7,500 [10% lessor's implicit rate 
   known to lessee (lower than the lessee's 
   incremental borrowing rate) x $75,000 
   carrying value during 2001] and a 
   principal component of $1,500 ($9,000 
   - $7,500 interest). The latter is the 
   current portion of the lease obligation 
   on 12/31/01. The capital lease 
   obligation, net of current portion, is 
   therefore $73,500 ($75,000 - $1,500). 

   Answer (C) is incorrect because 
   $73,636 assumes the current portion is 
   the same as the previous years'. 

   Answer (D) is incorrect because 
   $74,250 is based on an 11% rate. 


[764] Source: CPA 1193 I-55 

   Answer (A) is correct. When a lease is 
   capitalized because title passes to the 
   lessee at the end of the lease term or 
   because the lease contains a bargain 
   purchase option, the depreciation 
   period is the estimated economic life of 
   the asset. The asset should be 
   depreciated in accordance with the 
   lessee's normal depreciation policy for 
   owned assets (SFAS 13). Nori 
   regularly uses the straight-line method. 
   Hence, depreciation expense is $13,750 
   [($120,000 leased asset - $10,000 
   salvage value)  8-year economic life]. 

   Answer (B) is incorrect because 
   $15,000 does not consider salvage 
   value. 

   Answer (C) is incorrect because 
   $23,000 erroneously subtracts the 
   bargain purchase option from the 
   present value of the minimum lease 
   payments, uses a 5-year life, and does 
   not consider salvage value. 

   Answer (D) is incorrect because 
   $24,000 uses a 5-year life and does not 
   consider salvage value. 


[765] Source: CPA 1195 F-29 

   Answer (A) is correct. To earn 8% 
   interest over the lease term, the annual 
   payment must be $75,000 ($323,400 
   fair value at the inception of the lease  
   4.312 annuity factor). Given no residual 
   value and no bargain purchase option, 
   total lease payments will be $375,000 
   ($75,000 payment x 5 years). Because 
   no profit is recognized on a 
   direct-financing lease, the fair value is 
   presumably the carrying amount. The 
   difference between the gross lease 
   payments received and their present 
   value is interest revenue of $51,600 
   ($375,000 - $323,400). 

   Answer (B) is incorrect because 
   $75,000 is the annual lease payment. 

   Answer (C) is incorrect because 
   interest revenue equals the total lease 
   payments of $375,000 minus the fair 
   value of $323,400. 

   Answer (D) is incorrect because 
   interest revenue equals the total lease 
   payments of $375,000 minus the fair 
   value of $323,400. 


[766] Source: CPA 0595 F-28 

   Answer (A) is incorrect because 
   interest income for 2000 is $5,750. 

   Answer (B) is incorrect because $5,500 
   equals ($110,000 x 10% x 6/12). 

   Answer (C) is correct. Under the 
   effective-interest method, interest 
   revenue equals the carrying value of the 
   net investment in the lease at the 
   beginning of the interest period 
   multiplied by the interest rate used to 
   calculate the present value of the lease 
   payments. The present value of 
   $135,000 is reduced by the $20,000 
   payment made at the inception of the 
   lease, leaving a carrying value of 
   $115,000. Interest revenue for 2000 is 
   therefore $5,750 ($115,000 x 10% x 
   6/12). 

   Answer (D) is incorrect because 
   $6,750 equals ($135,000 x 10% x 
   6/12). 


[767] Source: CPA 1190 I-46 

   Answer (A) is incorrect because 
   $71,000 results from assuming that 
   additional rent is 6% of all net sales 
   over $300,000. 

   Answer (B) is correct. This lease is 
   properly classified as an operating 
   lease. The expenses for 2000 relating to 
   this lease should include the fixed 
   monthly rental payment, the contingent 
   rental payments, and the executory 
   costs. The 2000 expenses, as indicated 
   below, amount to $68,000.

   Monthly rent     $18,000  ($1,500 x 12 months)
   Additional rent   18,000  ($600,000 - $300,000) x 6%
                     15,000  ($900,000 - $600,000) x 5%
   Executory costs   12,000  (property taxes)
                      5,000  (insurance)
                    -------
   Total expenses   $68,000
                    =======

   Answer (C) is incorrect because 
   $54,000 results from assuming that 
   additional rent is 6% of all net sales 
   over $300,000 but does not include the 
   executory costs. 

   Answer (D) is incorrect because 
   $35,000 does not include the additional 
   rent. 


[768] Source: CPA 0588 I-32 

   Answer (A) is incorrect because the 
   profit not recognized should be 
   deferred. 

   Answer (B) is incorrect because $9,200 
   is the profit recognized. 

   Answer (C) is correct. In an ordinary 
   sale and leaseback, any profit or loss on 
   the sale is amortized over the life of the 
   lease. But SFAS 28 provides for 
   exceptions. One exception applies when 
   a seller-lessee retains more than a 
   minor part but less than substantially all 
   of the use of the property through the 
   leaseback. The "excess" profit on the 
   sale is recognized at the date of the sale 
   if the seller-lessee in this situation 
   realizes a profit on the sale in excess of 
   either

   1.  The present value of the minimum lease payments over the lease
       term if the leaseback is an operating lease, or
   2.  The recorded amount of the leased asset if the leaseback is
       classified as a capital lease.
   "Substantially all" has essentially the 
   same meaning as the "90% test" used in 
   determining whether a lease is a capital 
   or operating lease (the present value of 
   the lease payments is 90% or more of 
   the fair value of the leased property). 
   "Minor" refers to a transfer of 10% or 
   less of the use of the property in the 
   lease. For Ruhl Corp., the $60,800 
   present value of the lease rentals is 
   greater than 10% and less than 90% of 
   the fair value of the leased property as 
   measured by the sales price. Thus, 
   $9,200 in excess profit should be 
   recognized.

   Sales price                     $220,000
   Book value                      (150,000)
                                   --------
   Profit                          $ 70,000
   Minus PV of lease payments       (60,800)
                                   --------
   Profit recognized               $  9,200
                                   ========
   The $60,800 remaining gain on the 
   sale-leaseback should be amortized in 
   proportion to the gross rentals expensed 
   over the lease term, because the 
   leaseback is classified as an operating 
   lease (none of the criteria for a capital 
   lease is met). At 12/31/00, the date of 
   the inception of the lease, the entire 
   $60,800 should be reported in the 
   balance sheet as deferred revenue from 
   the sale of the equipment. 

   Answer (D) is incorrect because 
   $70,000 is the total profit. 


[769] Source: CPA 0590 I-31 

   Answer (A) is incorrect because 
   $34,100 is the present value of 
   reasonable lease rentals. 

   Answer (B) is incorrect because 
   $30,000 is the profit recognized. 

   Answer (C) is incorrect because $4,100 
   is the excess of the present value of 
   reasonable lease rentals over the profit 
   recognized. 

   Answer (D) is correct. The general rule 
   is that profit or loss on the sale in a 
   sale-leaseback transaction is deferred 
   and amortized over the life of the lease. 
   However, SFAS 28 provides for 
   certain exceptions. One exception 
   applies when the seller-lessee 
   relinquishes the right to substantially all 
   of the remaining use of the property 
   sold and retains only a minor portion of 
   such use. This exception is indicated if 
   the present value of a reasonable 
   amount of rentals for the leaseback 
   represents 10% or less of the fair value 
   of the asset sold. In this case, the 
   seller-lessee should account for the sale 
   and the leaseback as separate 
   transactions based upon their respective 
   terms. Because the $34,100 present 
   value of the reasonable lease rentals is 
   less than 10% of the $360,000 sales 
   price (the fair value), Bain should 
   recognize the entire $30,000 difference 
   between the $360,000 sales price and 
   the $330,000 carrying amount as a gain 
   from the sale. The leaseback should 
   then be accounted for as if it were 
   unrelated to the sale, because the 
   leaseback is considered to be minor. 


[770] Source: CPA 0593 I-31 

   Answer (A) is incorrect because 
   $950,000 includes the gain on plane #2. 

   Answer (B) is correct. The lease of 
   plane #1 is a capital lease because its 
   eight-year term exceeds 75% of the 
   10-year estimated remaining economic 
   life of the plane. In a sale and leaseback 
   transaction, any profit or loss on the 
   sale is ordinarily required to be 
   deferred and amortized in proportion to 
   the amortization of the leased asset if 
   the lease is a capital lease. The 
   amortization is in proportion to the 
   gross rental payments expensed over the 
   lease term if the lease is an operating 
   lease. At the inception of this lease, the 
   $500,000 gain ($600,000 sales price - 
   $100,000 carrying amount) should be 
   reported as deferred revenue. The lease 
   of plane #2 is an operating lease that 
   falls under an exception provided by 
   SFAS 28. When the seller-lessee 
   relinquishes the right to substantially all 
   of the remaining use of the property 
   sold and retains only a minor portion of 
   such use (in this case, less than 10% of 
   the remaining useful life), the 
   seller-lessee should account for the sale 
   and the leaseback as separate 
   transactions based upon their respective 
   terms. Dirk should recognize the entire 
   $450,000 gain ($1,000,000 sales price 
   - $550,000 carrying amount). Thus, only 
   the $500,000 gain from the sale of plane 
   #1 is deferred. 

   Answer (C) is incorrect because 
   $450,000 equals the gain on plane #2. 

   Answer (D) is incorrect because the 
   gain on plane #1 should be deferred. 


[771] Source: CPA 1192 I-35 

   Answer (A) is incorrect because 
   $35,000 is the excess of the fair value 
   over the price. 

   Answer (B) is correct. Any profit or 
   loss on the sale in a sale-leaseback 
   transaction is ordinarily deferred and 
   amortized. Immediate recognition of the 
   loss is permitted, however, when the 
   fair value at the time of the transaction 
   is less than the undepreciated cost 
   (SFAS 28). Given a fair value of 
   $465,000 and a carrying amount of 
   $450,000, that exception does not 
   apply. Consequently, the $20,000 
   ($450,000 - $430,000) excess of the 
   carrying amount over the sales price 
   should be deferred. 

   Answer (C) is incorrect because 
   $15,000 is the excess of the fair value 
   over the carrying amount. 

   Answer (D) is incorrect because full 
   recognition of the loss ($0 deferred 
   loss) is not appropriate when the fair 
   value is greater than the carrying 
   amount. In these circumstances, the loss 
   is essentially a prepaid rental expense. 


[772] Source: CPA 1190 II-16 

   Answer (A) is incorrect because 
   $67,800 results from subtracting 
   interest cost. 

   Answer (B) is incorrect because 
   $75,000 excludes interest cost. 

   Answer (C) is incorrect because 
   $79,200 results from ignoring service 
   costs and benefits paid. 

   Answer (D) is correct. The ending 
   balance of the PBO is equal to 
   beginning balance plus the service cost 
   and interest cost components, minus the 
   benefits paid. The interest cost 
   component is equal to the PBO's 
   beginning balance times the discount 
   rate.

   Beginning PBO balance              $72,000
   Service cost                        18,000
   Interest cost (10% x $72,000)        7,200
   Benefits paid                      (15,000)
                                      -------
   Ending PBO balance                 $82,200
                                      =======


[773] Source: CPA 0FIN R99-13 

   Answer (A) is incorrect because 
   amortization of prior service cost is a 
   component of net periodic pension cost. 

   Answer (B) is incorrect because $5,000 
   is the amount assigned to each period of 
   service for each employee. 

   Answer (C) is correct. The cost of 
   retroactive benefits is the increase in 
   the projected benefit obligation at the 
   date of the amendment and should be 
   amortized by assigning an equal amount 
   to each future period of service of each 
   employee active at the date of the 
   amendment who is expected to receive 
   benefits under the plan. However, to 
   reduce the burden of these allocation 
   computations, any alternative 
   amortization approach (e.g., averaging) 
   that more rapidly reduces the 
   unrecognized prior service cost is 
   acceptable, provided that it is applied 
   consistently. The total service years to 
   be rendered by the employees equals 20 
   (3 + 5 + 5 + 7). Hence, the amortization 
   percentage for the first year is 20% (4  
   20), and the minimum amortization is 
   $20,000 (20% x $100,000). 

   Answer (D) is incorrect because 
   $25,000 results from assigning an equal 
   amount to each employee. 


[774] Source: CPA 0595 F-18 

   Answer (A) is correct. The six possible 
   components of net periodic pension cost 
   (NPPC) are (1) service cost, (2) 
   interest cost, (3) return on plan assets, 
   (4) gain or loss to the extent recognized, 
   (5) amortization of any unrecognized 
   prior service cost, and (6) amortization 
   of any transition amount. The NPPC is 
   $87,000 ($19,000 service cost + 
   $38,000 interest cost - $22,000 return 
   on plan assets + $52,000 amortization 
   of unrecognized prior service costs). 
   The excess of the NPPC over 
   contributions and prepaid pension cost 
   is $45,000 ($87,000 - $40,000 - 
   $2,000), which is the unfunded accrued 
   pension cost. Because the fair value of 
   plan assets exceeds the ABO, no 
   additional liability should be 
   recognized. 

   Answer (B) is incorrect because 
   $49,000 results when prepaid pension 
   cost is added instead of subtracted. 

   Answer (C) is incorrect because 
   $67,000 results when actual return on 
   assets is not subtracted. 

   Answer (D) is incorrect because 
   $87,000 results when employer 
   contributions and prepaid pension cost 
   are not subtracted. 


[775] Source: CPA 1195 F-14 

   Answer (A) is incorrect because 
   $5,000 equals the unfunded ABO minus 
   the prior service cost and the NPPC. 

   Answer (B) is incorrect because 
   $13,000 equals the unfunded ABO 
   minus the prior service cost. 

   Answer (C) is correct. An additional 
   pension liability is recognized if the 
   existing liability (unfunded accrued 
   pension cost) is less than the unfunded 
   ABO. No contributions were made in 
   2000, so the entire NPPC is unfunded 
   and should be reported as accrued 
   pension cost. The additional pension 
   liability is equal to the unfunded ABO 
   minus accrued pension cost, or $17,000 
   ($25,000 - $8,000). 

   Answer (D) is incorrect because 
   $25,000 is the unfunded ABO. 


[776] Source: CPA 1195 F-15 

   Answer (A) is correct. An additional 
   pension liability is recorded by a credit 
   to a liability and a debit to an intangible 
   asset. However, if the amount of the 
   additional liability exceeds the 
   unrecognized prior service cost, the 
   excess is debited to a shareholders' 
   equity account. The excess of the 
   additional liability over unrecognized 
   prior service cost is $5,000 ($17,000 - 
   $12,000). 

   Answer (B) is incorrect because 
   $13,000 is the excess of the minimum 
   liability over unrecognized prior 
   service cost. 

   Answer (C) is incorrect because 
   $17,000 is the additional liability. 

   Answer (D) is incorrect because 
   $25,000 is the unfunded ABO. 


[777] Source: Publisher 

   Answer (A) is incorrect because 
   $135,000 is 75% of the transition net 
   asset. 

   Answer (B) is correct. The maximum 
   settlement gain or loss is equal to the 
   unrecognized net gain or loss arising 
   subsequent to transition to SFAS 87 
   plus any remaining unrecognized net 
   asset arising at transition. If the 
   purchase of a participating annuity 
   contract constitutes a settlement, the 
   maximum gain is reduced by the cost of 
   the participation rights, but the 
   maximum loss is not adjusted. The 
   maximum gain or loss is recognized if 
   the entire PBO is settled. If only part is 
   settled, a pro rata share of the maximum 
   gain or loss is recognized equal to the 
   percentage reduction in the PBO.

   Unrecognized transition net asset        $ 180,000
   Unrecognized net loss                     (400,000)
                                            ---------
   Maximum loss                             $(220,000)
   Reduction % ($1,500,000  $2,000,000)    x     .75
                                            ---------
   Settlement loss                          $(165,000)
                                            =========

   Answer (C) is incorrect because 
   $277,500 results from adjusting the 
   maximum loss for the cost of the 
   participation rights. 

   Answer (D) is incorrect because 
   $370,000 is the sum of the cost of the 
   participation rights and the maximum 
   loss. 


[778] Source: CPA 0589 I-42 

   Answer (A) is correct. Most temporary 
   differences arise when (1) the reported 
   amount of an asset or a liability in the 
   financial statements differs from the tax 
   basis of that asset or liability, and (2) 
   the difference will result in taxable or 
   deductible amounts in future years when 
   the asset is recovered or the liability is 
   settled at its reported amount. The 
   expenses for amortization of goodwill 
   acquired prior to 8/11/93 and payment 
   of the premium for life insurance 
   covering a key executive are recognized 
   in the financial statements, but are not 
   deductible for tax purposes. Because 
   neither will result in taxable or 
   deductible amounts in future years, 
   neither meets the definition of a 
   temporary difference. 

   Answer (B) is incorrect because neither 
   expense is deductible for tax purposes. 

   Answer (C) is incorrect because neither 
   expense is deductible for tax purposes. 

   Answer (D) is incorrect because neither 
   expense is deductible for tax purposes. 


[779] Source: CPA R98- 

   Answer (A) is incorrect because 
   $50,000 is calculated by applying a 
   25% tax rate to the amount of the 
   warranty liability expected to be settled 
   in the next three years. 

   Answer (B) is incorrect because 
   $75,000 is calculated by applying a 
   25% tax rate to the total warranty 
   liability of $300,000. 

   Answer (C) is incorrect because 
   $90,000 results from applying a 25% 
   tax rate to the amount of the warranty 
   liability that is expected to be settled in 
   2001, a 30% rate to the amounts for 
   2002 and 2003, and a 35% rate to the 
   amount for 2004. 

   Answer (D) is correct. The warranty 
   liability for 2001 to 2004 is equal to 
   $300,000. Because warranty costs are 
   not tax deductible until actually 
   incurred, the tax basis of the warranty 
   liability is $0. Thus, the warranty costs 
   result in a deductible temporary 
   difference (TD) and a deferred tax 
   asset, because the amounts will be tax 
   deductible in the future. The total 
   deferred tax asset to be reported on 
   12/31/00 is $95,000, based on the 
   enacted tax rates in effect when the TD 
   reverses.

     2001 ($100,000 x 30%)      $30,000
     2002 ($50,000 x 30%)        15,000
     2003 ($50,000 x 30%)        15,000
     2004 ($100,000 x 35%)       35,000
                                -------
     Total deferred tax asset   $95,000
                                =======
   The issue of whether to record a 
   valuation allowance (a credit) need not 
   be addressed because the question asks 
   solely for the amount of the deferred tax 
   asset (a debit). 


[780] Source: CPA 1195 F-36 

   Answer (A) is incorrect because 
   $8,000 ignores the balance in the 
   valuation account. 

   Answer (B) is incorrect because $8,500 
   assumes the balance in the valuation 
   account equals 10% of the 2001 
   increase in the deferred tax asset. 

   Answer (C) is correct. The deferred tax 
   expense or benefit recognized is the 
   sum of the net changes in the deferred 
   tax assets and deferred tax liabilities. It 
   is aggregated with the current tax 
   expense or benefit to determine the 
   income tax expense for the year. The 
   amount of income taxes payable 
   (current tax expense) is given as 
   $13,000. The deferred tax asset 
   increased by $5,000, but $2,000 (10% x 
   $20,000) was determined to be an 
   appropriate credit to an allowance 
   account. Thus, income tax expense for 
   2001 is $10,000 [$13,000 current tax 
   expense - ($5,000 increase in the 
   deferred tax asset - $2,000 credit to an 
   allowance account)]. 

   Answer (D) is incorrect because 
   $13,000 is the amount of current income 
   taxes payable. 


[781] Source: CPA 1195 F-37 

   Answer (A) is incorrect because 
   $52,000 results from using taxable 
   income of $130,000. 

   Answer (B) is correct. Pretax financial 
   income is adjusted for permanent and 
   temporary differences to arrive at the 
   current taxable income. The current 
   portion of income tax expense equals 
   income taxes paid or payable as 
   determined by applying enacted tax 
   law. Thus, the current portion of income 
   tax expense equals $56,000 ($140,000 
   x 40% tax rate). 

   Answer (C) is incorrect because 
   $62,000 excludes the temporary 
   differences from consideration. 

   Answer (D) is incorrect because 
   $64,000 is based on pretax financial 
   income. 


[782] Source: CPA 1195 F-38 

   Answer (A) is incorrect because 
   $2,000 is 40% times the $5,000 
   permanent difference. 

   Answer (B) is incorrect because $4,000 
   equals 40% of the deductible temporary 
   difference. 

   Answer (C) is correct. A deferred 
   income tax liability arises from a 
   taxable temporary difference. Because 
   the municipal bond interest is a 
   permanent difference, it should not be 
   included in the calculation of the 
   deferred income tax liability. The 
   $10,000 long-term loss accrual (a 
   deductible temporary difference) results 
   in a deferred tax asset. The $25,000 
   excess depreciation (a taxable 
   temporary difference) is also a 
   noncurrent item. It results in a deferred 
   tax liability. These items should be 
   netted because all noncurrent deferred 
   tax assets and liabilities should be 
   offset and presented as a single amount. 
   Accordingly, the net deferred tax 
   liability is $6,000 [($25,000 - $10,000) 
   x .40]. 

   Answer (D) is incorrect because 
   $8,000 results from combining the 
   temporary differences and the 
   permanent difference (municipal bond 
   interest). 


[783] Source: CPA 1194 F-6 

   Answer (A) is incorrect because 
   $40,000 equals the $50,000 net 
   deferred tax liability minus the $10,000 
   expected to reverse in 2001. 

   Answer (B) is incorrect because 
   $50,000 equals the net deferred tax 
   liability. 

   Answer (C) is incorrect because 
   $65,000 equals the $75,000 noncurrent 
   deferred tax liability minus the $10,000 
   expected to reverse in 2001. 

   Answer (D) is correct. In a classified 
   balance sheet, deferred tax assets and 
   liabilities are separated into current and 
   noncurrent amounts. Classification as 
   current or noncurrent is based on the 
   classification of the related asset or 
   liability. Because the $75,000 deferred 
   tax liability is related to a noncurrent 
   asset, it should be classified as 
   noncurrent. 


[784] Source: CMA 1287 4-10 

   Answer (A) is incorrect because, under 
   the cost method, the correct entry would 
   debit treasury stock and credit cash for 
   $16,000. The entry has no effect on the 
   retained earnings and paid-in capital in 
   excess of par accounts. 

   Answer (B) is incorrect because, under 
   the cost method, the correct entry would 
   debit treasury stock and credit cash for 
   $16,000. The entry has no effect on the 
   retained earnings and paid-in capital in 
   excess of par accounts. 

   Answer (C) is incorrect because, under 
   the cost method, the correct entry would 
   debit treasury stock and credit cash for 
   $16,000. The entry has no effect on the 
   retained earnings and paid-in capital in 
   excess of par accounts. 

   Answer (D) is correct. The correct 
   entry would debit treasury stock (a 
   contra equity account) and credit cash 
   for $16,000, the amount of the purchase 
   price. The entry has no effect on 
   retained earnings or paid-in capital in 
   excess of par. 


[785] Source: CMA 1287 4-11 

   Answer (A) is incorrect because, under 
   the par value method, the entry would 
   debit treasury stock at par ($10,000) 
   and paid-in capital in excess of par 
   ($4,000). Cash is credited for $16,000. 
   The entry is completed by plugging in 
   the remainder ($2,000) as a debit to 
   retained earnings. Therefore, both the 
   paid-in capital in excess of par and the 
   retained earnings accounts decrease. 

   Answer (B) is incorrect because, under 
   the par value method, the entry would 
   debit treasury stock at par ($10,000) 
   and paid-in capital in excess of par 
   ($4,000). Cash is credited for $16,000. 
   The entry is completed by plugging in 
   the remainder ($2,000) as a debit to 
   retained earnings. Therefore, both the 
   paid-in capital in excess of par and the 
   retained earnings accounts decrease. 

   Answer (C) is correct. Under the par 
   value method of recording the purchase 
   of treasury stock, the entry would debit 
   treasury stock at par ($10,000), debit 
   paid-in capital in excess of par for the 
   amount recorded in that account at the 
   time of sale ($4,000), and credit cash 
   ($16,000). The difference ($2,000) is 
   charged to retained earnings. Thus, both 
   paid-in capital in excess of par and 
   retained earnings would decrease. 

   Answer (D) is incorrect because, under 
   the par value method, the entry would 
   debit treasury stock at par ($10,000) 
   and paid-in capital in excess of par 
   ($4,000). Cash is credited for $16,000. 
   The entry is completed by plugging in 
   the remainder ($2,000) as a debit to 
   retained earnings. Therefore, both the 
   paid-in capital in excess of par and the 
   retained earnings accounts decrease. 


[786] Source: CMA 0689 3-11 

   Answer (A) is correct. A transaction is 
   typically recorded at the fair value of 
   the asset given up unless the fair value 
   of the asset received is more clearly 
   evident. No information is given about 
   the value of the services, so the value of 
   the treasury stock must be used. The 
   value was $21.50 on March 26 of the 
   current year, the date of the agreement 
   to trade the stock for services. Thus, the 
   value of the services to be received 
   was the same on that date as the value 
   of the treasury stock, or $21.50 per 
   share. 

   Answer (B) is incorrect because $22.25 
   is the average of the stock values on the 
   beginning and ending date of the 
   contract. The value of the stock on 
   March 26 of the current year, the date of 
   the agreement to trade stock for 
   services, is $21.50 and should be used 
   to value the services. 

   Answer (C) is incorrect because $23.00 
   is the value of the stock on April 30 of 
   the current year. The value of the stock 
   on March 26 of the current year, the 
   date of the agreement to trade stock for 
   services, is $21.50 and should be used 
   to value the services. 

   Answer (D) is incorrect because 
   $25.00 is the Zepher's cost basis for the 
   treasury stock. The value of the stock on 
   March 26 of the current year, the date of 
   the agreement to trade stock for 
   services, is $21.50 and should be used 
   to value the services. 


[787] Source: CMA 0689 3-13 

   Answer (A) is incorrect because 
   additional paid-in capital, not retained 
   earnings, is credited $6,000. 

   Answer (B) is incorrect because the 
   correct credit to treasury stock is 
   $27,000, not $28,000. 

   Answer (C) is incorrect because this 
   account should be credited $6,000. 

   Answer (D) is correct. Under the cost 
   method, treasury stock is carried at its 
   cost. In this case, cost is $27,000 ($27 x 
   1,000 shares). The journal entry to 
   record a sale at $33 per share is

        Cash                      $33,000
            Treasury stock               $27,000
            Additional paid-in capital     6,000


[788] Source: CMA 1289 4-13 

   Answer (A) is incorrect because the 
   declaration of a cash dividend reduces 
   working capital. 

   Answer (B) is incorrect because the 
   subsequent payment of a previously 
   declared dividend has no effect on 
   working capital. 

   Answer (C) is incorrect because the 
   declaration of a cash dividend reduces 
   working capital. 

   Answer (D) is correct. Working capital 
   is the excess of current assets over 
   current liabilities. The declaration of a 
   dividend requires a debit to retained 
   earnings and a credit to dividends 
   payable (a current liability). Thus, 
   working capital is decreased by the 
   amount of the increased current 
   liability. The subsequent payment of the 
   dividend has no effect on working 
   capital because current assets (cash) 
   and current liabilities (dividends 
   payable) are both decreased by the 
   same amount. 


[789] Source: CMA 1289 4-14 

   Answer (A) is correct. The dividend 
   declaration decreased retained earnings 
   and increased current liabilities by 
   $750,000. The subsequent payment 
   decreased both current assets and 
   current liabilities by $750,000. Before 
   the dividend declaration, the current 
   ratio was 3.03 (5,431,000  
   $1,789,000). The declaration increased 
   current liabilities to $2,539,000, and 
   the new current ratio was 2.14 
   ($5,431,000  $2,539,000). The 
   payment reduced current assets to 
   $4,681,000 and current liabilities to 
   $1,789,000. Thus, after the payment, the 
   current ratio was 2.61 ($4,681,000  
   $1,789,000). 

   Answer (B) is incorrect because a 
   dividend declaration reduces the 
   current ratio. 

   Answer (C) is incorrect because 
   payment of the dividend increased the 
   ratio. Reducing the numerator and 
   denominator by equal amounts always 
   increases a ratio that is greater than 1.0. 

   Answer (D) is incorrect because a 
   dividend declaration reduces the 
   current ratio. 


[790] Source: CMA 1289 4-15 

   Answer (A) is incorrect because the 
   declaration of a cash dividend reduces 
   equity. 

   Answer (B) is incorrect because the 
   payment of a cash dividend decreases 
   assets and liabilities, but has no effect 
   on equity. 

   Answer (C) is incorrect because the 
   declaration of a cash dividend reduces 
   equity. 

   Answer (D) is correct. A dividend 
   declaration decreases equity, of which 
   retained earnings is a component, by the 
   amount of the dividend. Because equity 
   equals assets minus liabilities, the 
   subsequent payment of the dividend had 
   no effect on equity because an asset and 
   a liability were decreased by the same 
   amount. 


[791] Source: CMA 1289 4-16 

   Answer (A) is incorrect because neither 
   the declaration nor the distribution of a 
   stock dividend has an effect on current 
   liabilities. 

   Answer (B) is incorrect because neither 
   the declaration nor the distribution of a 
   stock dividend has an effect on current 
   liabilities. 

   Answer (C) is incorrect because neither 
   the declaration nor the distribution of a 
   stock dividend has an effect on current 
   liabilities. 

   Answer (D) is correct. A stock 
   dividend (one less than 20% to 25% of 
   the shares outstanding) requires a debit 
   to one equity account (retained 
   earnings) and a credit to one or more 
   other equity accounts (common stock 
   dividend distributable and paid-in 
   capital in excess of par) for the fair 
   value of the stock. The subsequent 
   distribution of that stock dividend 
   involves a debit to common stock 
   dividend distributable and a credit to 
   common stock, both of which are equity 
   accounts. Thus, liabilities are 
   unaffected by either the declaration or 
   distribution of a stock dividend. 


[792] Source: CMA 0692 2-2 

   Answer (A) is incorrect because the 
   establishment of a sinking fund is 
   entirely independent of appropriating 
   retained earnings. 

   Answer (B) is incorrect because cash is 
   unaffected. 

   Answer (C) is incorrect because the 
   total retained earnings will not change; 
   however, the total will appear as the 
   sum of two retained earnings accounts 
   instead of one. 

   Answer (D) is correct. The 
   appropriation of retained earnings is a 
   transfer from one retained earnings 
   account to another. The only practical 
   effect is to decrease the amount of 
   retained earnings available for 
   dividends. An appropriation of retained 
   earnings is purely for disclosure 
   purposes. 


[793] Source: CMA 0682 3-14 

   Answer (A) is incorrect because the 
   amount of retained earnings transferred 
   is equal to the market value of the 
   issued shares. 

   Answer (B) is correct. A small stock 
   dividend (one that is less than 20 to 
   25% of the shares outstanding) results 
   in a transfer from retained earnings to 
   common stock and additional paid-in 
   capital. The debit to retained earnings 
   is equal to the fair value of the shares to 
   be distributed. 

   Answer (C) is incorrect because the 
   amount available for future dividends 
   decreases as retained earnings is 
   reduced. 

   Answer (D) is incorrect because each 
   shareholder's percentage of ownership 
   remains unchanged. 


[794] Source: CMA 1284 4-24 

   Answer (A) is incorrect because 
   $2,000,000 equals the 2,000,000 stock 
   dividend times $1 par instead of $4 
   market price. 

   Answer (B) is correct. Small stock 
   dividends (those less than 20% to 25% 
   of the shares outstanding) are recorded 
   (capitalized) at fair value of the stock at 
   the time of declaration. Because 
   20,000,000 shares are currently 
   outstanding, the stock dividend equals 
   2,000,000 shares. Each share reduces 
   retained earnings by $4, for a total of 
   $8,000,000. 

   Answer (C) is incorrect because 
   retained earnings would be reduced by 
   2,000,000 shares times the $4 market 
   price, or $8,000,000. 

   Answer (D) is incorrect because 
   $1,600,000 is 10% of retained earnings. 


[795] Source: CMA 1284 4-25 

   Answer (A) is incorrect because, under 
   the book value method of recording 
   conversions, the retained earnings 
   account is not affected. 

   Answer (B) is incorrect because, under 
   the book value method of recording 
   conversions, the retained earnings 
   account is not affected. 

   Answer (C) is incorrect because, under 
   the book value method of recording 
   conversions, the retained earnings 
   account is not affected. 

   Answer (D) is correct. Under the book 
   value method of recording conversions, 
   the retained earnings account is not 
   affected. The carrying value of the 
   bonds is simply transferred to paid-in 
   capital accounts. 


[796] Source: CMA 1284 4-26 

   Answer (A) is correct. When the 
   number of shares issued is less than 
   20% to 25% of the outstanding stock, 
   the issuance is considered a stock 
   dividend. Stock distributions in excess 
   of 20% to 25% of the outstanding stock 
   are considered stock splits (ARB 43, 
   Chapter 7b). Retained earnings should 
   be debited for the fair value of the stock 
   distributed as stock dividends but not as 
   a stock split. Consequently, a 
   two-for-one stock split will double the 
   number of shares outstanding, but no 
   entries will be recorded. Thus, each 
   bond that was formerly convertible into 
   300 shares of common stock will be 
   convertible into 600 shares. 

   Answer (B) is incorrect because no 
   entry is made to the retained earnings 
   account (or any other account). 

   Answer (C) is incorrect because the 
   number of shares outstanding will be 
   doubled. 

   Answer (D) is incorrect because equity 
   will not change. 


[797] Source: CMA 1284 4-27 

   Answer (A) is incorrect because 7.5 
   years is calculated without subtracting 
   the salvage value. 

   Answer (B) is incorrect because the 
   building has been in service for 9 years. 
   The building cost $36,000,000. The 
   salvage value is $6,000,000. Annual 
   depreciation is $1,500,000 
   [($36,000,000 - $6,000,000)  20 
   years]. Accumulated depreciation 
   divided by annual depreciation equals 9 
   years. 

   Answer (C) is correct. The building 
   cost $36,000,000. When the $6,000,000 
   salvage value is subtracted, the 
   depreciable amount is $30,000,000. 
   Since annual depreciation is 
   $1,500,000 ($30,000,000  20), the 
   building must have been in service for 9 
   years ($13,500,000  $1,500,000). 

   Answer (D) is incorrect because the 
   building has been in service for 9 years. 
   The building cost $36,000,000. The 
   salvage value is $6,000,000. Annual 
   depreciation is $1,500,000 
   [($36,000,000 - $6,000,000)  20 
   years]. Accumulated depreciation 
   divided by annual depreciation equals 9 
   years. 


[798] Source: CMA 1284 4-28 

   Answer (A) is incorrect because $4.00 
   is the market price. 

   Answer (B) is incorrect because $1.61 
   is calculated without including retained 
   earnings in equity. 

   Answer (C) is incorrect because $1.00 
   is calculated using par value of common 
   stock instead of total equity. 

   Answer (D) is correct. Book value is 
   computed by dividing the equity 
   attributable to common shareholders by 
   the number of common shares 
   outstanding. The book value is therefore 
   $2.41 per share ($48,200,000 total 
   equity  20,000,000 shares 
   outstanding). 


[799] Source: CMA 1284 4-30 

   Answer (A) is incorrect because the 
   retained earnings balance is calculated 
   by determining that net income was 
   $5,000,000 ($4,000,000 dividends  
   80%). Therefore, retained earnings 
   increased by $1,000,000 during the 
   year. The year-end balance is 
   $16,000,000, so the beginning balance 
   was $15,000,000. 

   Answer (B) is incorrect because the 
   retained earnings balance is calculated 
   by determining that net income was 
   $5,000,000 ($4,000,000 dividends  
   80%). Therefore, retained earnings 
   increased by $1,000,000 during the 
   year. The year-end balance is 
   $16,000,000, so the beginning balance 
   was $15,000,000. 

   Answer (C) is correct. If the dividend 
   payout ratio is 80% and cash dividends 
   were $4,000,000, net income must have 
   been $5,000,000 ($4,000,000  .8). The 
   retained earnings account increased by 
   $1,000,000 during the year (net income 
   - dividends). Because the year-end 
   balance of retained earnings is 
   $16,000,000, the beginning balance 
   must have been $15,000,000. 

   Answer (D) is incorrect because the 
   retained earnings balance is calculated 
   by determining that net income was 
   $5,000,000 ($4,000,000 dividends  
   80%). Therefore, retained earnings 
   increased by $1,000,000 during the 
   year. The year-end balance is 
   $16,000,000, so the beginning balance 
   was $15,000,000. 


[800] Source: CMA 0686 3-4 

   Answer (A) is correct. Since the 
   common stock account is always 
   credited for the par value of the shares 
   issued, the correct answer is $50,000 
   (10,000 shares x $5 per share). The 
   difference between the cash debited and 
   the common stock credited at par value 
   is a credit to paid-in capital. Thus, 
   paid-in capital would be credited for 
   $130,000 ($180,000 cash - $50,000 
   common stock). 

   Answer (B) is incorrect because the 
   credit to common stock is $50,000 
   (10,000 shares x $5.00 par value). 
   Paid-in capital would be credited for 
   $130,000. 

   Answer (C) is incorrect because 
   $130,000 would be credited to paid-in 
   capital. $50,000 would be credited to 
   common stock. 

   Answer (D) is incorrect because 
   $50,000 would be credited to common 
   stock (10,000 x $5.00 par value). 
   $130,000 would be credited to paid-in 
   capital. 


[801] Source: CMA 0686 3-5 

   Answer (A) is incorrect because 
   $50,000 would be credited to common 
   stock. 

   Answer (B) is correct. The common 
   stock account would be credited for the 
   par value of $50,000. The additional 
   amount of $125,000 would be credited 
   to paid-in capital in excess of par. 

   Answer (C) is incorrect because 
   $50,000 would be credited to common 
   stock (10,000 x $5.00 par value). The 
   remaining $125,000 would be credited 
   to paid-in capital. 

   Answer (D) is incorrect because 
   $50,000 would be credited to common 
   stock (10,000 x $5.00 par value). The 
   remaining $125,000 would be credited 
   to paid-in capital. 


[802] Source: CMA 0686 3-6 

   Answer (A) is incorrect because the 
   only possibility is to record the 
   transaction at the fair market value of 
   the stock. The company entered an 
   agreement on August 1, so they should 
   use the market value at that date, which 
   was $18 per share, or $180,000 for the 
   stock exchanged. 

   Answer (B) is correct. Because no 
   information is given regarding the value 
   of the services received, the only 
   possibility is to record the transaction 
   at the fair market value of the stock 
   given. The company apparently entered 
   an agreement on August 1 for the 
   issuance of the shares, so they should be 
   valued at $180,000, their fair market 
   value at that date. 

   Answer (C) is incorrect because the 
   only possibility is to record the 
   transaction at the fair market value of 
   the stock. The company entered an 
   agreement on August 1, so they should 
   use the market value at that date, which 
   was $18 per share, or $180,000 for the 
   stock exchanged. 

   Answer (D) is incorrect because the 
   only possibility is to record the 
   transaction at the fair market value of 
   the stock. The company entered an 
   agreement on August 1, so they should 
   use the market value at that date, which 
   was $18 per share, or $180,000 for the 
   stock exchanged. 


[803] Source: CMA 1288 4-22 

   Answer (A) is correct. Under the cost 
   method, the purchase of treasury stock 
   is recorded by a debit to treasury stock 
   at cost and a credit to cash. Thus, assets 
   and equity are both reduced because 
   treasury stock is a contra-equity 
   account. 

   Answer (B) is incorrect because both 
   assets and equity are decreased. 

   Answer (C) is incorrect because 
   retained earnings are unaffected by the 
   purchase of treasury stock recorded on 
   the cost basis. 

   Answer (D) is incorrect because 
   retained earnings are unaffected by the 
   purchase of treasury stock recorded on 
   the cost basis. 


[804] Source: CMA 1288 4-30 

   Answer (A) is correct. A stock 
   dividend transfers a portion of retained 
   earnings to permanent capital accounts. 
   Thus, the retained earnings balance 
   decreases as a result of a stock 
   dividend. For a small stock dividend 
   (one that is less than 20% to 25% of the 
   outstanding shares), this transfer is 
   made at the fair value of the new shares 
   issued. Total equity is not affected by 
   this entry, however, because paid-in 
   capital (common stock and paid-in 
   capital in excess of par) increases by 
   the same amount that the retained 
   earnings balance decreases. A stock's 
   par value does not change if the 
   company merely issues more stock at 
   the same par value as that already 
   outstanding. Par value is an arbitrary 
   value established in a firm's corporate 
   charter. 

   Answer (B) is incorrect because there 
   is no effect on par value. 

   Answer (C) is incorrect because there 
   is no effect on par value and retained 
   earnings would decrease. 

   Answer (D) is incorrect because there 
   would be no effect on total equity. 


[805] Source: CMA 0690 3-7 

   Answer (A) is incorrect because no 
   fund is established when retained 
   earnings are appropriated. 

   Answer (B) is incorrect because cash is 
   not involved in an appropriation. 

   Answer (C) is correct. The 
   appropriation of retained earnings 
   essentially has no effect on any aspect 
   of the financial records. An 
   appropriation is intended solely to 
   disclose to the readers of financial 
   statements that the company has no 
   intention to distribute a portion of 
   retained earnings to shareholders as 
   dividends. An appropriation is most 
   commonly recorded by means of a 
   footnote to the financial statements. If 
   journal entries are recorded, the effect 
   is to increase one retained earnings 
   account while simultaneously 
   decreasing another retained earnings 
   account, with no net effect on total 
   retained earnings. 

   Answer (D) is incorrect because there 
   is no net effect on retained earnings. 


[806] Source: CIA 0594 IV-11 

   Answer (A) is incorrect because cash 
   dividend payments do not affect 
   accounts receivable. 

   Answer (B) is correct. When dividends 
   are declared, the debit is to retained 
   earnings or dividends declared (a 
   nominal account closed to retained 
   earnings at year-end). The credit is to 
   dividends payable. When dividends are 
   paid, the debit is to dividends payable 
   and the credit is to cash. 

   Answer (C) is incorrect because cash 
   dividend payments do not affect fixed 
   assets (net). 

   Answer (D) is incorrect because cash 
   dividend payments do not affect 
   inventory. 


[807] Source: CIA 0594 IV-12 

   Answer (A) is incorrect because 3.375 
   times results from including in the 
   numerator deductions for taxes and 
   interest. 

   Answer (B) is incorrect because 6.75 
   times results from including in the 
   numerator a deduction for interest. 

   Answer (C) is correct. The TIE ratio is 
   a leverage ratio. It emphasizes the 
   company's ability to pay interest 
   expense. The ratio equals income 
   before interest and taxes divided by 
   interest.

        (Sales - CGS - Administrative Expense - Depreciation)
      = -----------------------------------------------------
                         Interest Expense
        $600,000 - $400,000 - $35,000 - $10,000
      = ---------------------------------------
                       $20,000
      = 7.75 times

   Answer (D) is incorrect because 9.5 
   times results from failing to deduct the 
   administrative expenses from the 
   numerator. 




[809] Source: CIA 0593 IV-34 

   Answer (A) is correct. Using the cost 
   method, the journal entry to record the 
   purchase of the treasury shares is

   Treasury stock                           17,000
       Cash                                             17,000
   The journal entry to record the sale is
   Cash                                     18,000
       Treasury stock                                   17,000
       Paid-in capital from treasury stock               1,000
   Consequently, the net effect is to increase equity by $1,000.

   Answer (B) is incorrect because the 
   purchase of treasury stock reduces 
   equity by the cost of the shares, and the 
   sale of treasury stock increases equity 
   by the sales price. 

   Answer (C) is incorrect because the 
   purchase of treasury stock reduces 
   equity by the cost of the shares, and the 
   sale of treasury stock increases equity 
   by the sales price. 

   Answer (D) is incorrect because the 
   purchase of treasury stock reduces 
   equity by the cost of the shares, and the 
   sale of treasury stock increases equity 
   by the sales price. 


[810] Source: CMA 1294 2-17 

   Answer (A) is incorrect because 
   options and warrants are always CSEs 
   and are included in PEPS and FDEPS 
   unless they are antidilutive. 

   Answer (B) is incorrect because 
   options and warrants are always CSEs 
   and are included in PEPS and FDEPS 
   unless they are antidilutive. 

   Answer (C) is incorrect because 
   options and warrants are always CSEs 
   and are included in PEPS and FDEPS 
   unless they are antidilutive. 

   Answer (D) is correct. Primary EPS is 
   based on outstanding common stock and 
   common stock equivalents (CSE). CSEs 
   are equivalent to common stock or 
   entitle the holders to become common 
   shareholders. Potential CSEs include 
   convertible securities issued to yield 
   less than 2/3 of the average Aa 
   corporate bond yield at the time of 
   issuance, all stock options and 
   warrants, contingent issuances, and 
   participating securities and two-class 
   common stock. CSEs are included in 
   PEPS if dilutive. 


[811] Source: CMA 0695 2-18 

   Answer (A) is incorrect because 
   treasury stock is not an asset. A 
   corporation cannot own itself. 

   Answer (B) is incorrect because 
   treasury stock accounted for at cost is 
   subtracted from the total of the other 
   equity accounts. 

   Answer (C) is incorrect because 
   treasury stock accounted for at cost is 
   subtracted from the total of the other 
   equity accounts. 

   Answer (D) is correct. Treasury stock 
   is a corporation's own stock that has 
   been reacquired but not retired. The 
   entry to record the acquisition of 
   treasury stock accounted for at cost is to 
   debit an equity account and to credit 
   cash. Because it has a debit balance, 
   treasury stock is a contra account. In the 
   balance sheet, treasury stock recorded 
   at cost is subtracted from the total of the 
   capital stock balances, additional 
   paid-in capital, and retained earnings. It 
   is not allocated. 


[812] Source: CMA 0695 2-19 

   Answer (A) is incorrect because 
   premiums on capital stock issued to 
   shareholders are credited to additional 
   paid-in capital. 

   Answer (B) is correct. The sale of 
   treasury stock at a price less than cost 
   can result in a debit to additional 
   paid-in capital. A corporation's sales of 
   its own stock cannot result in gains or 
   losses; thus, any would-be gains are 
   credited to additional paid-in capital. 
   Any excesses of cost over selling price 
   are debited to additional paid-in 
   capital, if such an account has a credit 
   balance as a result of previous treasury 
   stock transactions. If there is no such 
   credit balance, the amount is debited to 
   retained earnings. 

   Answer (C) is incorrect because 
   additional assessments on shareholders 
   are credited to additional paid-in 
   capital. 

   Answer (D) is incorrect because the 
   conversion of convertible bonds is 
   usually recorded at book value. The 
   normal result is a credit to common 
   stock and possibly a credit to additional 
   paid-in capital. 


[813] Source: CMA 1289 4-17 

   Answer (A) is incorrect because the 
   declaration of a stock dividend has no 
   effect on total shareholders' equity. 

   Answer (B) is incorrect because the 
   distribution of a stock dividend has no 
   effect on total shareholders' equity. 

   Answer (C) is incorrect because the 
   declaration of a stock dividend has no 
   effect on total shareholders' equity. 

   Answer (D) is correct. The entry to 
   record the declaration of a small stock 
   dividend (one less than 20% to 25% of 
   the shares outstanding) involves a debit 
   to one shareholders' equity account 
   (retained earnings) and a credit to one 
   or more other shareholders' equity 
   accounts (common stock dividend 
   distributable and paid-in capital in 
   excess of par) for the fair value of the 
   stock. Consequently, the declaration has 
   no effect on total shareholders' equity 
   because the entry merely entails a 
   transfer from retained earnings to 
   permanent capital. The subsequent 
   distribution of a stock dividend requires 
   only a debit to common stock dividend 
   distributable and a credit to common 
   stock. Because both are shareholders' 
   equity accounts, the distribution has no 
   effect on total shareholders' equity. 


[814] Source: CIA 1193 IV-45 

   Answer (A) is incorrect because the 
   difference between book and fair values 
   does not result in a journal entry. 

   Answer (B) is incorrect because the 
   difference between book and fair values 
   does not result in a journal entry. 

   Answer (C) is incorrect because the 
   difference between book and fair values 
   does not result in a journal entry. 

   Answer (D) is correct. In most 
   instances, the fair value of a company's 
   stock exceeds its book value. Unless the 
   company is being acquired or 
   undergoing a reorganization, the 
   difference in stock values (book and 
   fair values) is ignored for financial 
   reporting purposes. 


[815] Source: CIA 1192 IV-36 

   Answer (A) is correct. Some preferred 
   stock may be redeemed at a given time 
   or at the option of the holder or 
   otherwise at a time not controlled by the 
   issuer. This feature makes preferred 
   stock more nearly akin to debt, 
   particularly in the case of transient 
   preferred stock, which must be 
   redeemed within a short time (e.g., 5 to 
   10 years). The SEC requires a separate 
   presentation of redeemable preferred, 
   nonredeemable preferred, and common 
   stock. 

   Answer (B) is incorrect because 
   short-term preferreds is not a term in 
   common usage. 

   Answer (C) is incorrect because 
   preferred stock obligations is not a term 
   in common usage. 

   Answer (D) is incorrect because 
   temporary preferreds is not a term in 
   common usage. 


[816] Source: CIA 0592 IV-39 

   Answer (A) is incorrect because bonds 
   normally have a coupon yield stated in 
   percentage and may be convertible but 
   are not participating. 

   Answer (B) is incorrect because 
   common stock is not described as 
   convertible or participating on the 
   financial statements. 

   Answer (C) is incorrect because 
   common stock options are not 
   participating and do not have a stated 
   yield rate. 

   Answer (D) is correct. Preferred 
   shareholders have priority over 
   common shareholders in the assets and 
   earnings of the enterprise. If preferred 
   dividends are cumulative, any past 
   preferred dividends must be paid 
   before any common dividends. 
   Preferred stock may also be convertible 
   into common stock, and it may be 
   participating. For example, 10% fully 
   participating preferred stock will 
   receive additional distributions at the 
   same rates as other shareholders if 
   dividends paid to all shareholders 
   exceed 10%. 


[817] Source: CIA 0591 IV-37 

   Answer (A) is incorrect because the 
   common stock account balance is not 
   affected when treasury stock is 
   acquired. 

   Answer (B) is incorrect because 
   additional paid-in capital is not affected 
   when treasury stock is acquired and 
   accounted for by the cost method. 

   Answer (C) is incorrect because the 
   retained earnings account is not affected 
   by treasury stock acquisitions when the 
   cost method is used. 

   Answer (D) is correct. Using the cost 
   method, the journal entry to record the 
   acquisition of the treasury stock 
   includes a debit to treasury stock for 
   $60,000. The balance of the treasury 
   stock account is classified as a contra 
   equity item. Thus, the acquisition of the 
   treasury stock reduces total equity by 
   $60,000 ($30 x 2,000 shares = 
   $60,000). 


[818] Source: CIA 1196 IV-55 

   Answer (A) is incorrect because stock 
   dividends involve a bookkeeping 
   transfer. Stock splits do not involve a 
   change in the capital accounts. 

   Answer (B) is incorrect because stock 
   dividends are paid in additional shares 
   of common stock. In stock splits, all 
   outstanding shares are replaced with a 
   new issue of shares. 

   Answer (C) is correct. A stock split 
   does not involve any accounting entries. 
   Instead, a larger number of new shares 
   are issued to replace and retire all 
   outstanding shares. 

   Answer (D) is incorrect because, in a 
   stock split, there is a large decline in 
   the book value, and in the market value, 
   per share. A stock dividend does not 
   affect the par value of stock. 


[819] Source: CIA 0596 IV-54 

   Answer (A) is correct. The dividend 
   becomes a liability of the company on 
   the declaration date (May 26), which is 
   the date the directors meet and formally 
   vote to declare a dividend. 

   Answer (B) is incorrect because May 
   28 is the announcement date. The 
   dividend becomes a liability as soon as 
   it is declared. 

   Answer (C) is incorrect because June 
   20 is the record date, on which the list 
   of shareholders owning the shares who 
   will receive the dividend payments is 
   determined. 

   Answer (D) is incorrect because July 5 
   is the dividend payment date. The 
   declared dividend is no longer a 
   liability after the payment is made. 


[820] Source: CIA 0596 IV-55 

   Answer (A) is incorrect because cash 
   dividends provide ordinary income. 

   Answer (B) is correct. If the form of the 
   distribution does not affect future 
   earnings, EPS and the share price after 
   the stock repurchase will be higher for 
   the remaining shares. This share price 
   appreciation provides capital gains for 
   shareholders in place of cash 
   dividends. Cash dividends provide 
   ordinary income. 

   Answer (C) is incorrect because stock 
   repurchases provide capital gains, and 
   cash dividends provide ordinary 
   income. 

   Answer (D) is incorrect because stock 
   repurchases provide capital gains. 


[821] Source: CIA 0593 IV-58 

   Answer (A) is incorrect because the 
   cash dividend would not be stable, but 
   a residual. 

   Answer (B) is incorrect because the 
   residual theory concerns cash 
   dividends. 

   Answer (C) is incorrect because all 
   earnings are not distributed as 
   dividends. 

   Answer (D) is correct. Under the 
   residual theory of dividends, the amount 
   (residual) of earnings paid as dividends 
   depends on the available investment 
   opportunities and the debt-equity ratio 
   at which cost of capital is minimized. 
   The rational investor should prefer 
   reinvestment of retained earnings when 
   the return exceeds what the investor 
   could earn on investments of equal risk. 
   However, the firm may prefer to pay 
   dividends when investment 
   opportunities are poor and the use of 
   internal equity financing would move 
   the firm away from its ideal capital 
   structure. 


[822] Source: CMA 1292 2-7 

   Answer (A) is incorrect because a 
   liability should be recorded. 

   Answer (B) is correct. Dividends are 
   recorded on their declaration date by a 
   debit to retained earnings and a credit 
   to dividends payable. The dividend is 
   the amount payable to all shares 
   outstanding. Treasury stock is not 
   eligible for dividends because it is not 
   outstanding. Thus, the December 1 entry 
   is to debit retained earnings and credit 
   dividends payable for $50,000 (50,000 
   x $1). 

   Answer (C) is incorrect because the 
   treasury stock is not eligible for a 
   dividend. 

   Answer (D) is incorrect because 
   paid-in capital is not affected by the 
   declaration of a dividend. 


[823] Source: CMA 0695 2-16 

   Answer (A) is incorrect because 
   common shareholders have the right to 
   vote (although different classes of 
   shares may have different privileges). 

   Answer (B) is incorrect because 
   common shareholders have the right to 
   share proportionately in corporate 
   assets upon liquidation (but only after 
   other claims have been satisfied), and 
   in any new issues of stock of the same 
   class (this latter right is known as the 
   preemptive right). 

   Answer (C) is correct. Common stock 
   does not have the right to accumulate 
   unpaid dividends. This right is often 
   attached to preferred stock. 

   Answer (D) is incorrect because 
   common shareholders have the right to 
   share proportionately in any new issues 
   of stock of the same class (this latter 
   right is known as the preemptive right). 


[824] Source: Publisher 

   Answer (A) is incorrect because 
   interest is not paid on preferred stock. 
   Taxability of interest is a disadvantage 
   of bonds. 

   Answer (B) is incorrect because an 
   investment in preferred stock usually 
   does not confer voting rights. 

   Answer (C) is incorrect because an 
   investment in preferred stock does not 
   include a maturity date. 

   Answer (D) is correct. By investing in 
   preferred stock instead of bonds, a 
   corporation receives a significant tax 
   advantage in the form of the 
   dividends-received deduction. Under 
   the dividends-received deduction, at 
   least 70% of dividends received from 
   preferred stock is deductible for tax 
   purposes. With bonds, any interest 
   received is fully taxable. Furthermore, 
   the dividends-received deduction also 
   applies when a corporation holds an 
   investment in common stock. 


[825] Source: CIA 1188 IV-36 

   Answer (A) is incorrect because the 
   $30,000 excess of cash paid over the 
   carrying value of the redeemed stock 
   should be debited to retained earnings. 

   Answer (B) is incorrect because the 
   $30,000 excess of cash paid over the 
   carrying value of the redeemed stock 
   should be debited to retained earnings. 

   Answer (C) is incorrect because the 
   $30,000 excess of cash paid over the 
   carrying value of the redeemed stock 
   should be debited to retained earnings. 
   Additionally, paid-in capital in excess 
   of par: preferred should be debited for 
   $20,000. 

   Answer (D) is correct. The exercise of 
   the call provision resulted in the 
   redemption of the 10,000 shares of 
   preferred stock issued and outstanding 
   at the call price of $550,000 (10,000 
   shares x $55 call price per share). To 
   eliminate the carrying value of the 
   preferred stock and recognize the cash 
   paid in this transaction, the required 
   journal entry is to debit preferred stock 
   for $500,000, debit paid-in capital in 
   excess of par: preferred for $20,000, 
   and credit cash for $550,000. The 
   difference of $30,000 ($550,000 cash - 
   $520,000 carrying value of the 
   preferred stock) is charged to retained 
   earnings. No loss is reported because 
   GAAP do not permit the recognition of 
   a gain or loss on transactions involving 
   a company's own stock. 


[826] Source: CMA 0692 2-9 

   Answer (A) is incorrect because 
   participation by all full-time employees 
   is a characteristic of noncompensatory 
   plans. 

   Answer (B) is incorrect because 
   noncompensatory plans should make 
   offers of stock equally to all employees 
   or be based on salary levels. 

   Answer (C) is incorrect because a 
   limited exercise period is a 
   characteristic of noncompensatory 
   plans. 

   Answer (D) is correct. Issuance of 
   stock to employees pursuant to a 
   noncompensatory plan does not result in 
   an expense. A noncompensatory plan is 
   defined as one in which substantially all 
   full-time employees participate, the 
   stock available to each employee is 
   equal or is based on salary, the option 
   exercise period is reasonable, and the 
   discount from market is not greater than 
   reasonable in an offer to shareholders 
   or others. Noncompensatory plans do 
   not provide for the achievement of 
   certain performance criteria. 


[827] Source: CMA 0692 2-8 

   Answer (A) is incorrect because 
   recognition in the periods the 
   employees become eligible to exercise 
   the options violates the matching 
   concept. 

   Answer (B) is correct. A compensatory 
   stock option plan involves the issuance 
   of stock in whole or in part for 
   employee services. Accordingly, a 
   contributed capital account such as 
   stock options outstanding should be 
   credited. The compensation cost should 
   be recognized as an expense of one or 
   more periods in which the employee 
   performed services. If the measurement 
   date precedes the rendering of services, 
   a debit is made to deferred 
   compensation expense, a contra equity 
   account that will be amortized as 
   employee services are rendered and 
   expenses are recognized. 

   Answer (C) is incorrect because 
   recognition when the stock is issued 
   might result in an expense being 
   recorded years after the benefits of the 
   employee's service had accrued. 

   Answer (D) is incorrect because 
   recognition in the periods the options 
   are granted might result in recording the 
   expense prior to services being 
   performed. 


[828] Source: Publisher 

   Answer (A) is incorrect because an 
   entity that already uses the intrinsic 
   value method need not change to the 
   fair-value-based method described in 
   SFAS 123. 

   Answer (B) is incorrect because SFAS 
   123 encourages use of a 
   fair-value-based method. The 
   differences between quoted market 
   price and the exercise price at the grant 
   date is the intrinsic value. 

   Answer (C) is incorrect because SFAS 
   123 encourages use of a 
   fair-value-based method. The 
   differences between quoted market 
   price and the exercise price at the grant 
   date is the intrinsic value. 

   Answer (D) is correct. SFAS 123, 
   Accounting for Stock-Based 
   Compensation, is an alternative to APB 
   25. It applies to stock purchase plans, 
   stock options, restricted stock, and 
   stock appreciation rights. 
   Fair-value-based accounting for stock 
   compensation plans is not required. An 
   entity may continue to apply APB 25. 
   Nevertheless, the fair-value-based 
   method is preferable for purposes of 
   justifying a change in accounting 
   principle. However, initial adoption of 
   an accounting principle for a new 
   transaction is not a change in principle. 
   Thus, an entity that is already measuring 
   stock-based employee compensation 
   cost using the intrinsic-value method 
   stated in APB 25 need not change its 
   accounting. 


[829] Source: CIA 1195 IV-10 

   Answer (A) is incorrect because cash 
   dividends reduce retained earnings. 

   Answer (B) is incorrect because cash 
   dividends decrease both retained 
   earnings and equity. 

   Answer (C) is correct. A stock 
   dividend results in a transfer from 
   retained earnings to paid-in capital 
   equal to the fair value of the stock. 

   Answer (D) is incorrect because stock 
   dividends have no net effect on equity. 


[830] Source: Publisher 

   Answer (A) is incorrect because the 
   procedure may be applied to the parent 
   and/or some or all subsidiaries. 

   Answer (B) is incorrect because losses 
   are first written off to retained earnings. 
   The retained earnings deficit is then 
   written off to contributed capital. 

   Answer (C) is incorrect because, if the 
   legal capital is reduced by more than 
   the deficit, contributed capital from 
   quasi-reorganization arises. 

   Answer (D) is correct. Consistent with 
   the treatment of an individual 
   enterprise, all consolidated retained 
   earnings should be eliminated in a 
   quasi-reorganization of a consolidated 
   entity by a charge to contributed capital. 


[831] Source: CMA 0693 2-9 

   Answer (A) is incorrect because 
   accounting errors of any type are 
   corrected by a prior-period adjustment. 

   Answer (B) is incorrect because a 
   prior-period adjustment will affect the 
   presentation of prior-period 
   comparative financial statements. 

   Answer (C) is incorrect because 
   prior-period adjustments should be 
   fully disclosed in the notes or 
   elsewhere in the financial statements. 

   Answer (D) is correct. Prior-period 
   adjustments are made for the correction 
   of errors. According to SFAS 16, Prior 
   Period Adjustments, the effects of 
   errors on prior-period financial 
   statements are reported as adjustments 
   to beginning retained earnings for the 
   earliest period presented in the retained 
   earnings statement. Such errors do not 
   affect the income statement for the 
   current period. 


[832] Source: CMA 0694 2-30 

   Answer (A) is incorrect because no 
   fund is established by the appropriation 
   of retained earnings. 

   Answer (B) is incorrect because no 
   cash is involved in an appropriation of 
   retained earnings. 

   Answer (C) is incorrect because no 
   cash is involved in an appropriation of 
   retained earnings. 

   Answer (D) is correct. An 
   appropriation of retained earnings 
   simply transfers a portion of the 
   retained earnings balance into a 
   separate retained earnings account. The 
   sole purpose of such an event is to 
   disclose that earnings retained in the 
   business are to be used for special 
   purposes and will not be available for 
   dividends. The same result could be 
   obtained as effectively by a note. No 
   funds are set aside by an appropriation 
   of retained earnings. 


[833] Source: CMA 0695 2-17 

   Answer (A) is incorrect because a 
   corporation purchases its own stock to 
   comply with employee stock 
   compensation contracts. 

   Answer (B) is incorrect because a 
   corporation purchases its own stock to 
   increase EPS and book value. 

   Answer (C) is incorrect because a 
   corporation purchases its own stock to 
   support the market for the stock. 

   Answer (D) is correct. The acquisition 
   of treasury stock does not improve a 
   company's short-term cash flow. Cash 
   must be expended to purchase the 
   shares. 


[834] Source: Publisher 

   Answer (A) is incorrect because the 
   allocation to detachable stock warrants 
   decreases the premium or increases any 
   discount. 

   Answer (B) is correct. The portion of 
   the price allocated to the detachable 
   stock warrants decreases the allocation 
   to investment in bonds. Thus, amounts 
   debited to investment in stock warrants 
   increase the discount or decrease the 
   premium recorded for the investment in 
   bonds. 

   Answer (C) is incorrect because the 
   allocation to detachable stock warrants 
   decreases the premium or increases any 
   discount. 

   Answer (D) is incorrect because the 
   allocation to detachable stock warrants 
   decreases the premium or increases any 
   discount. 


[835] Source: Publisher 

   Answer (A) is incorrect because 
   $3,000 is the excess of the fair value of 
   2,000 rights over the sale price of 1,000 
   rights. 

   Answer (B) is correct. The recipient of 
   stock rights must allocate the carrying 
   value of the shares owned between 
   those shares and the rights based on 
   their relative fair values at the time the 
   rights are received. Thus, the amounts 
   to be allocated to the common stock and 
   warrants are $47,250 ({($49 x 1,000)  
   [($49 x 1,000) + ($3.50 x 2,000)]} x 
   $54,000) and $6,750 ($54,000 - 
   $47,250), respectively. The realized 
   gain is therefore $625 [$4,000 - 
   ($6,750 x 50%)]. 

   Answer (C) is incorrect because $500 
   equals the excess of the sale price of 
   1,000 rights over their fair value. 

   Answer (D) is incorrect because Starr 
   should recognize a realized gain for the 
   excess of the price over the carrying 
   amount. 


[836] Source: Publisher 

   Answer (A) is incorrect because, when 
   rights previously issued without 
   consideration are allowed to lapse, 
   there is no effect on contributed capital. 

   Answer (B) is incorrect because, when 
   rights previously issued without 
   consideration are allowed to lapse, 
   there is no effect on contributed capital. 

   Answer (C) is incorrect because, when 
   rights previously issued without 
   consideration are allowed to lapse, 
   there is no effect on contributed capital. 

   Answer (D) is correct. When rights are 
   issued without consideration, such as in 
   a dividend distribution, only a 
   memorandum entry is made by the 
   issuer. If the rights are exercised and 
   stock is issued, the effect on the books 
   of the issuing company is an increase in 
   common stock at par value with any 
   remainder credited to additional paid-in 
   capital. However, if the rights are 
   allowed to lapse, contributed capital is 
   unaffected. 


[837] Source: CMA 0695 1-13 

   Answer (A) is incorrect because the 
   investor would be allowed to purchase 
   1% of any new issues. 

   Answer (B) is incorrect because 
   preferred shareholders do not share in 
   preemptive rights. 

   Answer (C) is correct. Common 
   shareholders usually have preemptive 
   rights, which means they have the right 
   to purchase any new issues of stock in 
   proportion to their current ownership 
   percentages. The purpose of a 
   preemptive right is to allow 
   shareholders to maintain their current 
   percentages of ownership. Given that 
   Smith had 2,000,000 shares outstanding 
   ($10,000,000  $5 par), an investor 
   with 20,000 shares has a 1% 
   ownership. Hence, this investor must be 
   allowed to purchase 4,000 (1% x 
   400,000 shares) of the additional 
   shares. 

   Answer (D) is incorrect because 
   preferred shareholders do not share in 
   preemptive rights. 


[838] Source: CMA 0693 1-18 

   Answer (A) is incorrect because par 
   value is rarely the same as market 
   value. Normally, market value will be 
   equal to or greater than par value, but 
   there is no relationship between the 
   two. 

   Answer (B) is correct. Par value 
   represents a stock's legal capital. It is 
   an arbitrary value assigned to stock 
   before it is issued. Par value represents 
   a shareholder's liability ceiling 
   because, as long as the par value has 
   been paid in to the corporation, the 
   shareholders obtain the benefits of 
   limited liability. 

   Answer (C) is incorrect because all 
   assets received for stock must be 
   entered into a corporation's records. 
   The amount received is very rarely the 
   par value. 

   Answer (D) is incorrect because all 
   assets received for stock represent 
   paid-in capital. Thus, paid-in capital 
   may exceed par value. 


[839] Source: CIA 0595 IV-48 

   Answer (A) is incorrect because failure 
   to pay dividends will not force the firm 
   into bankruptcy, whether the dividends 
   are for common or preferred stock. 
   Only failure to pay interest will force 
   the firm into bankruptcy. 

   Answer (B) is incorrect because 
   preferred dividends are fixed. 

   Answer (C) is correct. In the event of 
   bankruptcy, the claims of preferred 
   shareholders must be satisfied before 
   common shareholders receive anything. 
   The interests of common shareholders 
   are secondary to those of all other 
   claimants. 

   Answer (D) is incorrect because neither 
   common nor preferred dividends are tax 
   deductible. 


[840] Source: CIA 1195 IV-47 

   Answer (A) is incorrect because 
   preferred stock has priority over 
   common stock with regard to earnings, 
   so dividends must be paid on preferred 
   stock before they can be paid on 
   common stock. 

   Answer (B) is incorrect because 
   preferred stock has priority over 
   common stock with regard to assets. In 
   the event of liquidation, for example, 
   because of bankruptcy, the claims of 
   preferred shareholders must be satisfied 
   in full before the common shareholders 
   receive anything. 

   Answer (C) is correct. Preferred stock 
   does not usually have voting rights. 
   Preferred shareholders are usually 
   given the right to vote for directors only 
   if the company has not paid the 
   preferred dividend for a specified 
   period of time, such as ten quarters. 
   Such a provision is an incentive for 
   management to pay preferred dividends. 

   Answer (D) is incorrect because 
   cumulative preferred stock has the right 
   to receive any dividends not paid in 
   prior periods before common stock 
   dividends are paid. 


[841] Source: CMA 0695 1-11 

   Answer (A) is incorrect because 
   $350,000 is the common stock 
   dividend. 

   Answer (B) is incorrect because 
   $380,000 omits the $30,000 of 
   cumulative dividends for 2000. 

   Answer (C) is incorrect because 
   $206,000 is based on a flat rate of $1 
   per share of stock. 

   Answer (D) is correct. If a company has 
   cumulative preferred stock, all 
   preferred dividends for the current and 
   any unpaid prior years must be paid 
   before any dividends can be paid on 
   common stock. The total preferred 
   dividends that must be paid equal 
   $60,000 (2 years x 5% x $100 par x 
   6,000 shares), and the common 
   dividend is $350,000 ($1,750,000 x 
   20%), for a total of $410,000. 


[842] Source: CMA 0695 1-9 

   Answer (A) is correct. Dividend policy 
   determines the portion of net income 
   distributed to shareholders. 
   Corporations normally try to maintain a 
   stable level of dividends, even though 
   profits may fluctuate considerably, 
   because many shareholders buy stock 
   with the expectation of receiving a 
   certain dividend every year. Thus, 
   management tends not to raise 
   dividends if the payout cannot be 
   sustained. The desire for stability has 
   led theorists to propound the 
   information content or signaling 
   hypothesis: a change in dividend policy 
   is a signal to the market regarding 
   management's forecast of future 
   earnings. This stability often results in a 
   stock that sells at a higher market price 
   because shareholders perceive less risk 
   in receiving their dividends. 

   Answer (B) is incorrect because most 
   companies try to maintain stable 
   dividends. 

   Answer (C) is incorrect because mature 
   firms have less need of earnings to 
   reinvest for expansion; thus, they tend to 
   pay a higher percentage of earnings as 
   dividends. 

   Answer (D) is incorrect because 
   dividend payout ratios normally 
   fluctuate with earnings to maintain 
   stable dividends. 


[843] Source: CMA 1291 1-11 

   Answer (A) is correct. Stock prices 
   often move in the same direction as 
   dividends. Moreover, companies 
   dislike cutting dividends. They tend not 
   to raise dividends unless anticipated 
   future earnings will be sufficient to 
   sustain the higher payout. Thus, some 
   theorists have proposed the information 
   content or signaling hypothesis. 
   According to this view, a change in 
   dividend policy is a signal to the market 
   regarding management's forecast of 
   future earnings. Consequently, the 
   relation of stock price changes to 
   changes in dividends reflects not an 
   investor preference for dividends over 
   capital gains but rather the effect of the 
   information conveyed. 

   Answer (B) is incorrect because an 
   active dividend policy suggests 
   management assumes that dividends are 
   relevant to investors. 

   Answer (C) is incorrect because 
   preferred shareholders always receive 
   their dividends ahead of common 
   shareholders. 

   Answer (D) is incorrect because an 
   active dividend policy recognizes that 
   investors want dividends. 


[844] Source: CIA 1195 IV-51 

   Answer (A) is incorrect because a 
   higher dividend payout ratio is 
   associated with a lower stock price 
   when the tax environment favors capital 
   gains over dividends. The reason is that 
   the after-tax return to investors is lower 
   for dividend payments than for capital 
   gains (share price appreciation). 

   Answer (B) is incorrect because there 
   is no relationship between the book 
   value of equity and the relative taxation 
   of dividends and capital gains. 

   Answer (C) is correct. Lower dividend 
   payout ratios will be favored by 
   investors if dividends are taxed at a 
   higher rate than capital gains. The cost 
   of equity for the company will be lower 
   under the lower dividend payout policy 
   because more retained earnings will be 
   available for reinvestment. 

   Answer (D) is incorrect because a 
   lower dividend payout ratio is 
   associated with a higher, not a lower, 
   stock price when the tax environment 
   favors dividends over capital gains. 


[845] Source: CIA 1195 IV-49 

   Answer (A) is correct. Under the 
   residual theory of dividends, the firm 
   prefers to pay dividends when 
   investment opportunities are poor and 
   internal financing would move the firm 
   away from its ideal capital structure. 
   Thus, a company with less attractive 
   investment opportunities will have a 
   lower optimal capital budget. Under a 
   residual dividend policy, a lower 
   optimal capital budget will result in a 
   higher dividend payout ratio, other 
   factors being constant. 

   Answer (B) is incorrect because, when 
   lower earnings are available for 
   reinvestment, any level of capital 
   expenditures will require, other factors 
   being constant, a greater proportion of 
   available internal funds. The dividend 
   payout ratio will then be lower, not 
   higher, under a residual payout policy. 

   Answer (C) is incorrect because the 
   lower the debt-to-equity ratio, the 
   higher the proportion of new 
   investments financed with equity. Under 
   a residual dividend payout policy, the 
   result will be a lower, not a higher, 
   dividend payout as more internally 
   available funds are retained for 
   reinvestment. 

   Answer (D) is incorrect because the 
   lower the opportunity cost of funds, the 
   lower the discount rate used to evaluate 
   capital projects and the more attractive 
   the investment opportunities. Under a 
   residual payout policy, more internally 
   generated funds will be required to 
   finance the optimal capital budget, and 
   the dividend payout will be lower, not 
   higher. 


[846] Source: CMA 0695 1-14 

   Answer (A) is incorrect because 90% 
   is the reinvestment ratio. 

   Answer (B) is incorrect because 66.7% 
   is the ratio between earnings and 
   investment. 

   Answer (C) is incorrect because 40% 
   is the ratio of debt in the ideal capital 
   structure. 

   Answer (D) is correct. Under the 
   residual theory of dividends, the 
   residual of earnings paid as dividends 
   depends on the available investments 
   and the debt-equity ratio at which cost 
   of capital is minimized. The rational 
   investor should prefer reinvestment of 
   retained earnings when the return 
   exceeds what the investor could earn on 
   investments of equal risk. However, the 
   firm may prefer to pay dividends when 
   investment returns are poor and the 
   internal equity financing would move 
   the firm away from its ideal capital 
   structure. If Residco wants to maintain 
   its current structure, 60% of investments 
   should be financed from equity. Hence, 
   it needs $720,000 (60% x $1,200,000) 
   of equity funds, leaving $80,000 of net 
   income ($800,000 NI - $720,000) 
   available for dividends. The dividend 
   payout ratio is therefore 10% ($80,000 
    $800,000 NI). 


[847] Source: CIA 0590 IV-48 

   Answer (A) is incorrect because, on the 
   declaration date, the directors formally 
   vote to declare a dividend. 

   Answer (B) is correct. The ex-dividend 
   date is 4 days before the date of record. 
   Unlike the other relevant dates, it is not 
   established by the corporate board of 
   directors but by the stock exchanges. 
   The period between the ex-dividend 
   date and the date of record gives the 
   stock exchange members time to 
   process any transactions in time for the 
   new shareholders to receive the 
   dividend to which they are entitled. An 
   investor who buys a share of stock 
   before the ex-dividend date will 
   receive the dividend that has been 
   previously declared. An investor who 
   buys after the ex-dividend date (but 
   before the date of record or payment 
   date) will not receive the declared 
   dividend. 

   Answer (C) is incorrect because, on the 
   date of record, the corporation 
   determines which shareholders will 
   receive the declared dividend. 

   Answer (D) is incorrect because, on the 
   date of payment, the dividend is 
   actually paid. 


[848] Source: CIA 0593 IV-46 

   Answer (A) is incorrect because a 
   positive NPV project should increase 
   the value of the firm. 

   Answer (B) is incorrect because the 
   higher credit rating should reduce the 
   cost of capital and therefore increase 
   the value of the firm. 

   Answer (C) is correct. A stock 
   dividend does not significantly affect 
   the value of the firm. It simply divides 
   ownership interests into smaller pieces 
   without changing any shareholder's 
   proportionate share of ownership. 

   Answer (D) is incorrect because the 
   lower cost of capital should reduce the 
   required rate of return and increase the 
   value of the firm. 


[849] Source: CIA 0595 IV-30 

   Answer (A) is incorrect because cash 
   dividends reduce equity. They involve 
   an immediate or promised future 
   nonreciprocal distribution of assets. 

   Answer (B) is incorrect because 
   property dividends reduce equity. They 
   involve an immediate or promised 
   future nonreciprocal distribution of 
   assets. 

   Answer (C) is incorrect because 
   liquidating dividends reduce equity. 
   They involve an immediate or promised 
   future nonreciprocal distribution of 
   assets. 

   Answer (D) is correct. The issuance of 
   a stock dividend results in a debit to 
   retained earnings and credits to 
   contributed capital for the fair value of 
   the stock. A split-up effected in the form 
   of a dividend requires capitalization of 
   retained earnings equal to the amount 
   established by the issuer's state of 
   incorporation (usually par value). 
   Consequently, neither a stock dividend 
   nor a split-up effected in the form of a 
   dividend has a net effect on equity. 


[850] Source: CIA 1194 IV-50 

   Answer (A) is incorrect because the 
   stock split results in a greater number of 
   shares outstanding and a lower EPS. 

   Answer (B) is incorrect because the 
   stock split results in a greater number of 
   shares outstanding and a lower EPS. 

   Answer (C) is correct. The stock split 
   will double the number of shares 
   outstanding to 2,000. The 50% split-up 
   effected in the form of a dividend will 
   increase the number of outstanding 
   shares to 1,500. The higher number of 
   shares in the stock split will result in a 
   lower earnings per share than will 
   result from the split-up effected in the 
   form of a dividend. 

   Answer (D) is incorrect because the 
   stock split results in a greater number of 
   shares outstanding and a lower EPS. 


[851] Source: CIA 1194 IV-51 

   Answer (A) is incorrect because par 
   value per share does not change 
   following a split-up effected in the form 
   of a dividend. 

   Answer (B) is incorrect because par 
   value per share decreases following a 
   stock split. 

   Answer (C) is incorrect because par 
   value per share does not change 
   following a split-up effected in the form 
   of a dividend. 

   Answer (D) is correct. A stock split 
   results in a lower par value per share 
   because the total number of shares 
   increases but the total par value of 
   outstanding stock does not change. 


[852] Source: CMA 0693 1-7 

   Answer (A) is incorrect because a sale 
   of treasury stock increases the supply of 
   shares and could lead to a decline in 
   market price. 

   Answer (B) is correct. A reverse stock 
   split decreases the number of shares 
   outstanding, thereby increasing the 
   market price per share. A reverse stock 
   split may be desirable when a stock is 
   selling at such a low price that 
   management is concerned that investors 
   will avoid the stock because it has an 
   undesirable image. 

   Answer (C) is incorrect because a sale 
   of preferred stock will take dollars out 
   of investors' hands, thereby reducing 
   funds available to invest in common 
   stock. Hence, market price per share of 
   common stock will not increase. 

   Answer (D) is incorrect because a 
   stock split increases the shares issued 
   and outstanding. The market price per 
   share is likely to decline as a result. 


[853] Source: CMA 0689 1-7 

   Answer (A) is incorrect because a 
   stock dividend has no effect except on 
   the composition of the equity section of 
   the balance sheet. 

   Answer (B) is correct. A stock 
   dividend is a transfer of equity from 
   retained earnings to paid-in capital. The 
   debit is to retained earnings, and the 
   credits are to common stock and 
   additional paid-in capital. More shares 
   are outstanding following the stock 
   dividend, but every shareholder 
   maintains the same percentage of 
   ownership. In effect, a stock dividend 
   divides the pie (the corporation) into 
   more pieces, but the pie is still the same 
   size. Hence, a corporation will have a 
   lower EPS and a lower book value per 
   share following a stock dividend, but 
   every shareholder will be just as well 
   off as previously. 

   Answer (C) is incorrect because a stock 
   dividend has no effect except on the 
   composition of the equity section of the 
   balance sheet. 

   Answer (D) is incorrect because a 
   stock dividend has no effect except on 
   the composition of the equity section of 
   the balance sheet. 


[854] Source: CMA 1291 1-5 

   Answer (A) is incorrect because assets 
   decrease when treasury stock is 
   purchased. 

   Answer (B) is correct. A purchase of 
   treasury stock involves a decrease in 
   assets (usually cash) and a 
   corresponding decrease in 
   shareholders' equity. Thus, equity is 
   reduced and the debt-to-equity ratio and 
   financial leverage increase. 

   Answer (C) is incorrect because a 
   firm's interest coverage ratio is 
   unaffected. Earnings, interest expense, 
   and taxes will all be the same 
   regardless of the transaction. 

   Answer (D) is incorrect because the 
   purchase of treasury stock is 
   antidilutive; the same earnings will be 
   spread over fewer shares. Some firms 
   purchase treasury stock for this reason. 


[855] Source: Publisher 

   Answer (A) is correct. Corporations 
   are formed under authority of state 
   statutes. Accordingly, the incorporation 
   statute of a state is one source of 
   shareholder rights. However, some 
   shareholder rights have common law 
   origins, for example, the power to 
   remove directors for cause, the right to 
   inspect corporate records, and the 
   preemptive right. The articles of 
   incorporation may grant specific 
   shareholder rights not detailed in the 
   general language of a statute. Federal 
   law is still another source of 
   shareholder rights, for example, 
   regulation of the issuance and trading of 
   securities. 

   Answer (B) is incorrect because the 
   articles of incorporation, state and 
   federal statutes, and the common law 
   are sources of shareholder rights. 

   Answer (C) is incorrect because the 
   articles of incorporation, state and 
   federal statutes, and the common law 
   are sources of shareholder rights. 

   Answer (D) is incorrect because the 
   articles of incorporation, state and 
   federal statutes, and the common law 
   are sources of shareholder rights. 


[856] Source: Publisher 

   Answer (A) is incorrect because 
   straight voting allows a freeze-out. 

   Answer (B) is correct. In straight 
   voting, a majority shareholder has the 
   ability to elect the entire board of 
   directors because each shareholder has 
   a single vote for each share owned for 
   each director to be elected, resulting in 
   a "freeze-out" of minority shareholders. 
   Cumulative voting, on the other hand, 
   enables a shareholder to cast his total 
   number of votes for any director. Thus, 
   minority shareholders can obtain 
   representation on the board of directors. 

   Answer (C) is incorrect because proxy 
   voting allows management to gain 
   control of minority shareholder votes. 

   Answer (D) is incorrect because trustee 
   voting refers to transferring voting 
   rights to a trustee to allow a group of 
   owners not to lose control of a 
   corporation. 


[857] Source: Publisher 

   Answer (A) is incorrect because 
   general partners operate the business, 
   but shareholders who are not directors 
   or officers have only an indirect effect 
   on management. 

   Answer (B) is incorrect because 
   shareholders have the right to exercise 
   indirect control by electing or removing 
   directors; by adopting amendment or 
   repealing bylaws; by amending the 
   corporate charter; or by effecting other 
   fundamental changes. 

   Answer (C) is incorrect because 
   shareholders have the right to exercise 
   indirect control by electing or removing 
   directors; by adopting amendment or 
   repealing bylaws; by amending the 
   corporate charter; or by effecting other 
   fundamental changes. 

   Answer (D) is correct. The directors 
   make decisions about policy and certain 
   major transactions but delegate 
   day-to-day operational control to 
   officers and other employees. The 
   directors are chosen by, and are 
   accountable to, the shareholders, who 
   exert only indirect control over the 
   operations of the corporation. 
   However, in most publicly held 
   companies, management uses the proxy 
   solicitation process to nominate and 
   secure the election of directors 
   favorable to its policies. Hence, 
   management is usually in effective 
   control of the company. 


[858] Source: Publisher 

   Answer (A) is incorrect because the 
   voting trust is a legal arrangement that 
   has a statutory or case law basis in most 
   states. 

   Answer (B) is correct. Irrevocable 
   voting trust agreements authorizing a 
   trustee to hold and vote shares for up to 
   10 years are valid if they are written, 
   filed with the corporation, and 
   available for inspection by 
   shareholders. 

   Answer (C) is incorrect because one of 
   the usual statutory requirements for a 
   valid voting trust is that the agreement 
   be filed with the corporation and be 
   available for inspection. 

   Answer (D) is incorrect because the 
   voting trust differs substantially from a 
   proxy. It is irrevocable for the agreed 
   period. 


[859] Source: Publisher 

   Answer (A) is incorrect because 
   cumulative voting is not required in all 
   states. 

   Answer (B) is incorrect because a 
   proxy must usually be written. 

   Answer (C) is incorrect because 
   proxies commonly authorize action 
   regarding all matters presented at the 
   shareholders' meeting. 

   Answer (D) is correct. A proxy is a 
   written authorization to vote another 
   person's shares. The rule that the last 
   proxy signed by a shareholder revokes 
   prior proxies is a significant issue in 
   proxy battles. A proxy is also revoked 
   when the share-holder actually attends 
   the meeting and votes his/her shares or 
   when (s)he dies. 


[860] Source: Publisher 

   Answer (A) is correct. Notice is not 
   usually required for regular meetings 
   because the time and place of such 
   meetings are normally specified in the 
   bylaws. The ordinary business of the 
   corporation may be transacted at 
   regular meetings with-out specific 
   notice being given to shareholders. 
   However, a special meeting requires a 
   timely notice specifying the time, place, 
   and issues on the agenda. 

   Answer (B) is incorrect because the 
   directors, holders of a specified 
   percentage of shares, or others may call 
   a special meeting. 

   Answer (C) is incorrect because 
   attendance and participation in the 
   meeting by shareholders who did not 
   receive notice usually constitute a 
   waiver of the right to notice. 

   Answer (D) is incorrect because a 
   majority of the shares entitled to vote 
   must be represented to constitute a 
   quorum, but they may be represented in 
   person or by proxy. 


[861] Source: Publisher 

   Answer (A) is incorrect because most 
   states allow shareholders to act without 
   a meeting if unanimous written consent 
   is given. 

   Answer (B) is incorrect because 
   attendance at the meeting is also an 
   effective waiver. 

   Answer (C) is correct. If a quorum is 
   present (50% of the outstanding shares), 
   resolutions ordinarily may be adopted 
   by a simple majority of the voting 
   shares. To protect minority 
   shareholders, however, the bylaws, 
   articles, or a statute may require more 
   than a simple majority (supermajority) 
   with regard to extraordinary matters. 

   Answer (D) is incorrect because only 
   those owning stock at the record date 
   may vote. The record date is a date 
   prior to the meeting used to determine 
   those eligible to vote. 


[862] Source: CMA 0688 4-19 

   Answer (A) is correct. A purchase of 
   treasury stock would increase earnings 
   per share because fewer shares would 
   be outstanding. The numerator of the 
   EPS fraction (income available to 
   common shareholders) would remain 
   unchanged, but the denominator 
   (weighted-average number of shares 
   outstanding) would decrease. 

   Answer (B) is incorrect because a stock 
   split reduces EPS. More shares are 
   outstanding after the split. 

   Answer (C) is incorrect because a stock 
   dividend increases the shares 
   outstanding and thus decreases EPS. 

   Answer (D) is incorrect because a 
   change in cash dividends paid to 
   common shareholders has no effect on 
   EPS. Dividends on common shares are 
   declared out of income available to 
   common shareholders. 


[863] Source: CPA 0593 I-6 

   Answer (A) is incorrect because the 
   excess of the issue price of the common 
   stock over its stated value is credited to 
   additional paid-in capital, not common 
   stock, and the excess of the issue price 
   of the preferred stock over its par value 
   is credited to additional paid-in capital, 
   not preferred stock. 

   Answer (B) is incorrect because the 
   excess of the issue price of the common 
   stock over its stated value is credited to 
   additional paid-in capital, not common 
   stock, and the excess of the issue price 
   of the preferred stock over its par value 
   is credited to additional paid-in capital, 
   not preferred stock. 

   Answer (C) is incorrect because the 
   excess of the issue price of the common 
   stock over its stated value is credited to 
   additional paid-in capital, not common 
   stock, and the excess of the issue price 
   of the preferred stock over its par value 
   is credited to additional paid-in capital, 
   not preferred stock. 

   Answer (D) is correct. The common 
   stock was issued for a total of $150,000 
   (10,000 shares x $15). Of this amount, 
   $10,000 (10,000 shares x $1 stated 
   value) should be allocated to the 
   common stock, with the remaining 
   $140,000 ($150,000 - $10,000) 
   credited to additional paid-in capital. 
   The preferred stock was issued for 
   $75,000 (3,000 shares x $25), of which 
   $30,000 (3,000 shares x $10 par value) 
   should be allocated to the preferred 
   stock and $45,000 ($75,000 - $30,000) 
   to additional paid-in capital. In the 
   February 1 statement of shareholders' 
   equity, King therefore should report 
   $10,000 in the common stock account, 
   $30,000 in the preferred stock account, 
   and $185,000 ($140,000 + $45,000) as 
   additional paid-in capital. 


[864] Source: Publisher 

   Answer (A) is correct. The cost method 
   debits treasury stock for the amount 
   paid. In this case, the cost is $57.50 per 
   share, or $28,750 for 500 shares. 

   Answer (B) is incorrect because 
   $25,000 is the aggregate par value of 
   500 shares. It is the amount debited to 
   treasury stock under the par value 
   method. 

   Answer (C) is incorrect because 
   $30,000 was the original issuance price 
   of the reacquired shares. 

   Answer (D) is incorrect because 
   $3,750 is the amount paid in excess of 
   par. 


[865] Source: Publisher 

   Answer (A) is incorrect because 
   $28,750 is the cost of the treasury stock. 
   This amount is debited to treasury stock 
   under the cost method. 

   Answer (B) is correct. The par value 
   method debits the par value of 
   reacquired stock to treasury stock. The 
   par value of 500 shares at $50 each is 
   $25,000. 

   Answer (C) is incorrect because 
   $30,000 was the original issuance price 
   of the reacquired shares. 

   Answer (D) is incorrect because 
   $3,750 is the amount paid in excess of 
   par. It is debited to additional paid-in 
   capital. 


[866] Source: CMA 0694 2-3 

   Answer (A) is incorrect because equity 
   is decreased by the declaration of a 
   dividend, but the payment of a 
   previously declared dividend has no 
   effect on equity. 

   Answer (B) is incorrect because equity 
   is decreased by the declaration of a 
   dividend, but the payment of a 
   previously declared dividend has no 
   effect on equity. 

   Answer (C) is incorrect because equity 
   is decreased by the declaration of a 
   dividend, but the payment of a 
   previously declared dividend has no 
   effect on equity. 

   Answer (D) is correct. The declaration 
   of a dividend results in an increase in 
   current liabilities and a corresponding 
   decrease in retained earnings (a 
   shareholders' equity account). Thus, the 
   declaration of a dividend decreases 
   equity. The subsequent payment of the 
   dividend has no effect on equity 
   because that transaction involves using 
   cash (a current asset) to pay the 
   previously recorded current liability. 


[867] Source: CMA 0694 2-4 

   Answer (A) is incorrect because a 
   current liability account is not affected 
   by either the declaration or the payment 
   of a stock dividend. 

   Answer (B) is incorrect because a 
   current liability account is not affected 
   by either the declaration or the payment 
   of a stock dividend. 

   Answer (C) is incorrect because a 
   current liability account is not affected 
   by either the declaration or the payment 
   of a stock dividend. 

   Answer (D) is correct. The declaration 
   and distribution of a stock dividend 
   involves transferring some amount from 
   retained earnings to permanent equity. 
   No liability account is affected by 
   either the declaration or the distribution 
   because shareholders are not receiving 
   anything that they did not already have. 
   A stock dividend merely divides the 
   corporate pie into more pieces. 


[868] Source: CMA 1289 4-17 

   Answer (A) is incorrect because the 
   declaration of a stock dividend has no 
   effect on total equity. 

   Answer (B) is incorrect because the 
   distribution of a stock dividend has no 
   effect on total equity. 

   Answer (C) is incorrect because the 
   declaration of a stock dividend has no 
   effect on total equity. 

   Answer (D) is correct. The entry to 
   record the declaration of a stock 
   dividend involves a debit to one equity 
   account (retained earnings) and a credit 
   to one or more other equity accounts 
   (common stock dividend distributable 
   and possibly additional paid-in capital) 
   for the fair value of the stock. 
   Consequently, the declaration has no 
   effect on total equity because the entry 
   merely entails a transfer from retained 
   earnings to permanent capital. The 
   subsequent distribution of a stock 
   dividend requires only a debit to 
   common stock dividend distributable 
   and a credit to common stock. Because 
   both are equity accounts, the 
   distribution has no effect on total 
   shareholders' equity. 


[869] Source: CMA 0696 2-10 

   Answer (A) is correct. Under the cost 
   method, the amount debited to treasury 
   stock is the amount paid. The cost is 
   $115 per share, or $57,500 for 500 
   shares. 

   Answer (B) is incorrect because 
   $50,000 is the amount recorded under 
   the par value method. 

   Answer (C) is incorrect because 
   $60,000 was the original issuance price 
   of the reacquired shares. 

   Answer (D) is incorrect because 
   $7,500 is the amount in excess of par. 
   The full amount paid for the treasury 
   stock is debited to treasury stock under 
   the cost method. 


[870] Source: CMA 0696 2-11 

   Answer (A) is incorrect because 
   $57,500 is the cost of the treasury stock. 

   Answer (B) is correct. Under the par 
   value method, only the par value of 
   stock is debited to treasury stock. The 
   par value of 500 shares at $100 each is 
   $50,000. 

   Answer (C) is incorrect because 
   $60,000 was the original issuance price 
   of the reacquired shares. 

   Answer (D) is incorrect because 
   $10,000 is the difference between the 
   issuance price and par value. 


[871] Source: CPA 1194 F-28 

   Answer (A) is correct. When stock is 
   issued for property or services, the 
   transaction is recorded at the fair value 
   of the stock or of the property or 
   services received. In this case, the 
   value of the stock is used because it is 
   more definite. The $140,000 should be 
   allocated as follows: $5,000 ($5 par x 
   1,000 shares) to common stock and 
   $135,000 to additional paid-in capital. 

   Answer (B) is incorrect because $5,000 
   should be allocated to common stock. 

   Answer (C) is incorrect because the 
   value of the stock should be used to 
   record the transaction. 

   Answer (D) is incorrect because the 
   value of the stock should be used to 
   record the transaction. 


[872] Source: CPA 1192 II-42 

   Answer (A) is incorrect because, if the 
   reacquisition price is less than the 
   issuance price, a credit is made to 
   additional paid-in capital, not retained 
   earnings. 

   Answer (B) is incorrect because, if the 
   reacquisition price is less than the 
   issuance price, a credit is made to 
   additional paid-in capital, not retained 
   earnings. 

   Answer (C) is correct. Under the cost 
   method, the entry to record a treasury 
   stock purchase is to debit treasury stock 
   at cost ($22,500) and credit cash. The 
   entry to retire this stock is to debit 
   preferred stock at par [(25% x 2,000 
   shares) x $50 = $25,000], debit 
   additional paid-in capital from the 
   original issuance (25% x $30,000 = 
   $7,500), credit treasury stock at cost 
   ($22,500), and credit additional paid-in 
   capital from stock retirement ($10,000). 
   No entry to retained earnings is 
   necessary. 

   Answer (D) is incorrect because 
   preferred stock must be debited for the 
   par value of the retired shares. 


[873] Source: CPA 0594 F-8 

   Answer (A) is incorrect because 
   dividends in arrears do not meet 
   recognition criteria. 

   Answer (B) is incorrect because 
   $15,000 is the arrearage for one year. 

   Answer (C) is incorrect because 
   dividends in arrears do not meet 
   recognition criteria. 

   Answer (D) is correct. Dividends in 
   arrears on preferred stock are not an 
   obligation of the company and are not 
   recognized in the financial statements. 
   However, the aggregate and per-share 
   amounts of arrearages in cumulative 
   preferred dividends should be 
   disclosed on the face of the balance 
   sheet or in the notes (APB 10). The 
   aggregate amount in arrears is $20,000 
   [(2 years x 5% x $100 par x 3,000 
   shares) - $10,000 paid in 20X2]. 


[874] Source: CPA 1191 II-5 

   Answer (A) is incorrect because 
   $10,000 is the basic return to common 
   shareholders. 

   Answer (B) is incorrect because 
   $34,000 results from assuming that no 
   basic return is paid to the common 
   shareholders. 

   Answer (C) is correct. The stated rate 
   of dividends must be paid to preferred 
   shareholders before any amount is paid 
   to common shareholders. Given no 
   dividends in arrears, this amount is 
   $15,000 (5% x $10 par x 30,000 
   shares). The preferred stock will also 
   participate equally in the cash dividend 
   after a 5% return is paid on the 
   common. The basic return to common 
   shareholders is $10,000 (5% x 200,000 
   shares x $1 par). The remaining 
   $75,000 ($100,000 - $15,000 - 
   $10,000) will be shared in proportion 
   to the par values of the shares 
   outstanding.

   The aggregate par value of the preferred 
   is $300,000 ($10 par x 30,000 shares). 
   The aggregate par value of the common 
   is $200,000 ($1 par x 200,000 shares). 
   The distribution will therefore be in the 
   ratio of 3:2, and $45,000 ($75,000 x 
   60%) is the participating share of the 
   preferred shareholders. The balance of 
   $30,000 ($75,000 - $45,000) will be 
   paid to the common shareholders. The 
   total dividends on the common stock is 
   $40,000 ($10,000 + $30,000). 

   Answer (D) is incorrect because 
   $60,000 is paid to the preferred 
   shareholders. 


[875] Source: CPA 1194 F-31 

   Answer (A) is incorrect because 
   $50,000 does not reflect the stock split. 

   Answer (B) is correct. The 100,000 
   shares of common stock split 2-for-1, 
   leaving 200,000 shares at year-end. The 
   dividends declared equaled $100,000 
   (200,000 shares x $0.50). 

   Answer (C) is incorrect because 
   $850,000 equals the fair value of the 
   stock on March 15 plus the dividend, 
   assuming no stock split. 

   Answer (D) is incorrect because 
   $950,000 equals the fair value of the 
   stock on March 15 plus the dividend on 
   200,000 shares. 


[876] Source: Publisher 

   Answer (A) is correct. Retained 
   earnings is increased by net income and 
   can be decreased by net losses, certain 
   treasury stock transactions, and 
   dividends. Therefore, retained earnings 
   is $190,000 ($200,000 - $70,000 - 
   $20,000 + $80,000). The $1,000 excess 
   of proceeds over the cost of treasury 
   stock does not affect retained earnings 
   because Page uses the cost method to 
   account for treasury stock. Under the 
   cost method, the excess should be a 
   credit to additional paid-in capital. 

   Answer (B) is incorrect because 
   $191,000 includes the $1,000 excess 
   from the sale of treasury stock. 

   Answer (C) is incorrect because 
   $210,000 results from a failure to 
   subtract $20,000 due to the distribution 
   of the property dividends. 

   Answer (D) is incorrect because 
   $211,000 is the result of erroneously 
   including the $1,000 excess from the 
   sale of treasury stock and failing to 
   subtract $20,000 in distributed property 
   dividends. 


[877] Source: Publisher 

   Answer (A) is incorrect because 
   $20,500 includes the $500 debit to 
   retained earnings on the retirement of 
   treasury stock. 

   Answer (B) is correct. Under the cost 
   method, additional paid-in capital is 
   credited for $20,000 (2,000 shares x 
   $10 excess over par) for the initial sale 
   of common stock. Additional paid-in 
   capital from treasury stock transactions 
   is then credited for $2,000 (400 shares 
   x $5 excess over the cost of shares) for 
   the sale of treasury stock. Additional 
   paid-in capital is then debited for 
   $1,000 (100 shares x $10 excess over 
   par) for the retirement of the remaining 
   treasury stock. Thus, total ending 
   additional paid-in capital is $21,000 
   ($20,000 + $2,000 - $1,000). 

   Answer (C) is incorrect because 
   $22,000 does not include the $1,000 
   debit from the retirement of treasury 
   stock. 

   Answer (D) is incorrect because 
   $23,000 includes a $5,000 debit from 
   purchase of treasury stock and an 
   $8,000 credit from sale of treasury 
   stock. 


[878] Source: Publisher 

   Answer (A) is incorrect because 
   $15,000 excludes the $8,000 credit 
   from the reissuance of treasury stock. 

   Answer (B) is incorrect because 
   $20,500 includes the $2,500 debit to 
   retained earnings on the acquisition of 
   treasury stock. 

   Answer (C) is incorrect because 
   $21,000 includes a $2,000 credit from 
   the sale of treasury stock and a $1,000 
   debit from the retirement of treasury 
   stock. 

   Answer (D) is correct. Under the 
   par-value method, additional paid-in 
   capital is credited for $20,000 (2,000 
   shares x $10 excess over par) for the 
   initial sale of common stock. It is then 
   debited for $5,000 (500 shares x $10 
   excess over par) for the purchase of 
   treasury stock. Additional paid-in 
   capital is then credited for $8,000 (400 
   shares x $20 excess over par) for the 
   reissuance of treasury stock. Thus, 
   ending additional paid-in capital is 
   $23,000 ($20,000 - $5,000 + $8,000). 


[879] Source: CPA 0591 II-4 

   Answer (A) is correct. The 
   reacquisition and retirement of the 
   preferred stock result in debits to 
   preferred stock at par (5,000 shares x 
   $20 = $100,000) and additional paid-in 
   capital [(5,000  20,000 shares) x 
   $30,000 = $7,500]. The transfer of the 
   nonmonetary asset should be recorded 
   at the fair value of the asset transferred, 
   and a gain should be recognized in 
   accordance with APB 29 (credit 
   securities at their $80,000 book value 
   and credit a gain for the $70,000 excess 
   of fair value over the book value). The 
   balancing debit is to retained earnings 
   for $42,500. 

   Answer (B) is incorrect because a gain 
   should be recognized for the 
   appreciation of the securities, and only 
   a proportionate amount of the additional 
   paid-in capital should be removed from 
   the accounts. 

   Answer (C) is incorrect because the 
   preferred stock should be debited at par 
   and only a proportionate amount of the 
   additional paid-in capital should be 
   removed from the accounts. 

   Answer (D) is incorrect because the 
   preferred stock should be debited at par 
   and only a proportionate amount of the 
   additional paid-in capital should be 
   removed from the accounts. 


[880] Source: CPA 1192 II-44 

   Answer (A) is incorrect because 
   $75,000 results from adding the par 
   value to the total allocable to the stock. 

   Answer (B) is correct. The proceeds of 
   the combined issuance of different 
   classes of securities should be 
   allocated based on the relative fair 
   values of the securities. However, the 
   fair value of the stock is not known. 
   Accordingly, the bonds should be 
   recorded at their fair value ($40,000), 
   with the remainder of the proceeds 
   ($110,000 - $40,000 = $70,000) 
   credited to common stock at par value 
   ($5 x 1,000 shares = $5,000) and 
   additional paid-in capital ($70,000 - 
   $5,000 par = $65,000). 

   Answer (C) is incorrect because 
   $55,000 is based on an allocation of 
   $60,000 to the stock. 

   Answer (D) is incorrect because 
   $45,000 is based on an allocation of 
   $60,000 (maturity value) to the bonds. 


[881] Source: CPA 0591 II-4 

   Answer (A) is correct. The 
   reacquisition and retirement of the 
   preferred stock result in debits to 
   preferred stock at par (5,000 shares x 
   $20 = $100,000) and additional paid-in 
   capital [(5,000  20,000 shares) x 
   $30,000 = $7,500]. The transfer of the 
   nonmonetary asset should be recorded 
   at the fair value of the asset transferred, 
   and a gain should be recognized in 
   accordance with APB 29 (credit 
   securities at their $80,000 book value 
   and credit a gain for the $70,000 excess 
   of fair value over the book value). The 
   balancing debit is to retained earnings 
   for $42,500. 

   Answer (B) is incorrect because a gain 
   should be recognized for the 
   appreciation of the securities, and only 
   a proportionate amount of the additional 
   paid-in capital should be removed from 
   the accounts. 

   Answer (C) is incorrect because the 
   preferred stock should be debited at par 
   and only a proportionate amount of the 
   additional paid-in capital should be 
   removed from the accounts. 

   Answer (D) is incorrect because the 
   preferred stock should be debited at par 
   and only a proportionate amount of the 
   additional paid-in capital should be 
   removed from the accounts. 


[882] Source: CPA 0592 II-4 

   Answer (A) is incorrect because the 
   dividend must be charged to retained 
   earnings. 

   Answer (B) is incorrect because 
   $18,000 is the gain recognized. 

   Answer (C) is correct. A nonreciprocal 
   transfer of nonmonetary assets to 
   owners ordinarily should be recorded 
   at the fair value of the asset transferred 
   on the declaration date. As a 
   consequence of the declaration, the 
   property should be written up to its fair 
   value and a gain recognized. The 
   dividend should then be debited to 
   retained earnings and credited to a 
   dividend payable. The distribution is 
   recognized by a debit to property 
   dividend payable and a credit to the 
   property. The net effect of recognition 
   of the gain and the declaration of the 
   dividend is a $60,000 decrease in 
   retained earnings ($78,000 fair value of 
   the property dividend - $18,000 gain). 

   Answer (D) is incorrect because 
   $78,000 is the fair value of the shares. 


[883] Source: CPA 0594 F-32 

   Answer (A) is incorrect because the 
   company paid a liquidating dividend. 

   Answer (B) is correct. A common 
   practice of companies whose major 
   activity is the exploitation of depletable 
   resources is to pay dividends in 
   amounts up to the sum of retained 
   earnings and accumulated depletion. 
   However, any distribution by a 
   corporation to its shareholders in 
   excess of the dollar balance in the 
   retained earnings account is considered 
   a liquidating dividend and return of 
   capital to the shareholders. 
   Consequently, the liquidating dividend 
   equals $100,000 ($400,000 dividend - 
   $300,000 RE). 

   Answer (C) is incorrect because 
   $150,000 is the additional paid-in 
   capital. 

   Answer (D) is incorrect because 
   $300,000 equals retained earnings. 


[884] Source: CPA 0581 I-20 

   Answer (A) is incorrect because 
   common stock must be reduced. 

   Answer (B) is incorrect because 
   $100,000 ignores the increase in the 
   deficit covered by writing down assets. 

   Answer (C) is incorrect because 
   $400,000 is the amount of the deficit. 

   Answer (D) is correct. In many states, 
   corporations with negative retained 
   earnings are not permitted to pay 
   dividends. Accordingly, a corporation 
   that has reversed a trend of business 
   failure and has begun to be profitable 
   may nevertheless not be able to pay 
   dividends for years to come because of 
   accumulated losses found in the 
   retained earnings account. In this 
   situation, a quasi-reorganization may be 
   permitted to reduce the deficit in 
   retained earnings to zero. ARB 43, 
   Chapter 7A, requires that 
   quasi-reorganization be accomplished 
   first by revaluing assets to fair values, a 
   process that usually increases the 
   deficit in retained earnings.

   Lutz wrote down its asset accounts by 
   $500,000 ($150,000 + $350,000) and 
   debited retained earnings for the same 
   amount, thereby increasing the deficit to 
   $900,000. Given that the balance in 
   additional paid-in capital is only 
   $300,000, the par value of the common 
   stock must be reduced by $600,000, an 
   amount sufficient to provide the 
   additional paid-in capital to offset the 
   deficit. The last entry in the process is a 
   debit to paid-in capital and a credit to 
   retained earnings for $900,000, leaving 
   zero balances in both accounts. 


[885] Source: Publisher 

   Answer (A) is incorrect because 
   $63,000 assumes dividends received 
   are not taxable. 

   Answer (B) is incorrect because 
   $74,200 deducts the dividends paid. 

   Answer (C) is correct. The dividends 
   received are not fully taxable because 
   of the dividends-received deduction. 
   Taxable income is given by

   Income from operations         $224,000
   Interest income                  32,000
   30% of dividends                 24,000
                                  --------
                                  $280,000
   Less interest expense            44,000
                                  --------
   Taxable income                 $236,000
                                  ========
   Tax is 35% of $236,000, which is 
   $82,600. 

   Answer (D) is incorrect because 
   $102,200 does not take the 
   dividends-received deduction of 70%. 


[886] Source: CMA 0688 4-19 

   Answer (A) is correct. A purchase of 
   treasury stock would increase earnings 
   per share because fewer shares would 
   be outstanding. The numerator of the 
   EPS fraction (net income) would 
   remain unchanged, but the denominator 
   (number of shares outstanding) would 
   decrease. 

   Answer (B) is incorrect because a stock 
   split reduces EPS since more shares are 
   outstanding after the split. 

   Answer (C) is incorrect because a stock 
   dividend increases the shares 
   outstanding and thus decreases EPS. 

   Answer (D) is incorrect because EPS is 
   based on issued shares. 


[887] Source: CMA 1289 3-7 

   Answer (A) is correct. Under APB 15, 
   Earnings per Share, the EPS 
   computation assumes that the 
   hypothetical proceeds from the exercise 
   of all dilutive options and warrants are 
   used for the purchase of treasury stock. 
   As long as the exercise price is equal to 
   or greater than the market price, no 
   dilution of stock occurs because 
   treasury stock can theoretically be 
   purchased to offset the additional shares 
   assumed to be issued pursuant to the 
   rights agreement. However, if the 
   exercise price is less than the market 
   price, funds from the hypothetical sale 
   of new stock will be insufficient to 
   acquire an equal amount of treasury 
   stock. The new shares issued will 
   exceed those assumed to be purchased 
   as treasury stock, and a dilution 
   (increase in shares assumed to be 
   outstanding) will result. 

   Answer (B) is incorrect because par 
   value is irrelevant to EPS calculations; 
   the important values are the exercise 
   price and market price. 

   Answer (C) is incorrect because par 
   value is irrelevant to EPS calculations; 
   the important values are the exercise 
   price and market price. 

   Answer (D) is incorrect because as 
   long as the exercise price is equal to or 
   greater than market price, no dilution 
   will occur. 


[888] Source: CMA 0691 2-27 

   Answer (A) is incorrect because an 
   extraordinary gain of $47,500 should be 
   recognized. 

   Answer (B) is incorrect because an 
   extraordinary gain of $47,500 should be 
   recognized. 

   Answer (C) is correct. SFAS 15 
   requires that extinguishments of debt for 
   less than book value be recorded as 
   extraordinary gains, net of tax effect. 
   The difference between the fair value of 
   the stock given up ($700,000) and the 
   debt eliminated ($650,000 + $97,500 = 
   $747,500) therefore results in an 
   extraordinary gain of $47,500. 
   Assuming Merle uses the cost method of 
   accounting for treasury stock and 
   without regard to the tax effect, the 
   journal entry to record this transaction 
   would have been:

   Notes payable              $650,000
   Interest payable             97,500
      Treasury stock                                 $640,000
      Paid-in capital from  treasury stock             60,000
      Extraordinary gain                               47,500
   This transaction was complicated by the 
   appreciation of the firm's treasury stock. 
   When a troubled debt restructuring is in 
   the form of an asset exchange, the asset 
   given up is customarily adjusted from 
   its carrying value to its fair value, and 
   the difference is reported as an ordinary 
   gain or loss. However, no gains should 
   be recognized for the appreciation. 
   Gains and losses on transactions in a 
   company's own stock are not included 
   in income. Thus, the restructuring is 
   accounted for as if the stock had first 
   been sold for cash (credit treasury stock 
   and paid-in capital) and the proceeds 
   used to pay the creditor. 

   Answer (D) is incorrect because an 
   extraordinary gain of $47,500 should be 
   recognized. 


[889] Source: CMA 1291 2-19 

   Answer (A) is correct. At the beginning 
   of Year 2, 1,000,000 shares were 
   outstanding. Another 100,000 were 
   issued as a result of a stock dividend on 
   September 30. Because a stock 
   dividend is nothing more than dividing 
   the existing shares into more pieces, the 
   dividend is assumed to have occurred at 
   the beginning of the year. Accordingly, 
   the number of shares outstanding 
   throughout Year 2 would have been 
   1,100,000. No stock dividends or stock 
   splits occurred in Year 3. Thus, the 
   same 1,100,000 shares used in the EPS 
   calculation on the Year 2 income 
   statement would still be used to 
   determine the Year 2 EPS in the Year 3 
   comparative statements. 

   Answer (B) is incorrect because the 
   weighted average was 1,100,000 
   shares. 

   Answer (C) is incorrect because the 
   weighted average was 1,100,000 
   shares. 

   Answer (D) is incorrect because the 
   weighted average was 1,100,000 
   shares. 


[890] Source: CMA 1291 2-20 

   Answer (A) is incorrect because the 
   appropriate weighted average is 
   1,850,000 shares. 

   Answer (B) is correct. At the beginning 
   of Year 3, 1,100,000 shares were 
   outstanding. This figure remained 
   unchanged for 3 months until March 31 
   when an additional 1,000,000 shares 
   were issued. Hence, for the last 9 
   months of the year, 2,100,000 shares 
   were outstanding. Weighting the shares 
   outstanding by the amount of time they 
   were outstanding results in a weighted 
   average of 1,850,000 shares {[(3/12) x 
   1,100,000] + [(9/12) x 2,100,000]}. 

   Answer (C) is incorrect because the 
   appropriate weighted average is 
   1,850,000 shares. 

   Answer (D) is incorrect because the 
   appropriate weighted average is 
   1,850,000 shares. 


[891] Source: CMA 1291 2-21 

   Answer (A) is incorrect because the 
   appropriate weighted average is 
   3,700,000 shares. 

   Answer (B) is incorrect because the 
   appropriate weighted average is 
   3,700,000 shares. 

   Answer (C) is correct. A stock 
   dividend or split occurring at any time 
   must be treated as though it occurred at 
   the beginning of the earliest period 
   presented for purposes of computing the 
   weighted-average number of shares. 
   Thus, prior period EPS figures 
   presented for comparative purposes 
   must be retroactively restated for the 
   effects of a stock dividend or a stock 
   split. The number of shares used in 
   computing the Year 3 EPS on the Year 
   3 income statement was 1,850,000 
   {[(3/12) X 1,100,000] + [(9/12) X 
   2,100,000]}. However, because of the 
   stock split on March 31, Year 4, the 
   number of shares doubled. Thus, the 
   EPS calculation for Year 3 on the Year 
   4 comparative income statement should 
   be based on 3,700,000 shares (2 x 
   1,850,000). 

   Answer (D) is incorrect because the 
   appropriate weighted average is 
   3,700,000 shares. 


[892] Source: CMA 1291 2-22 

   Answer (A) is incorrect because the 
   weighted average of shares outstanding 
   equaled 4,200,000. 

   Answer (B) is incorrect because the 
   weighted average of shares outstanding 
   equaled 4,200,000. 

   Answer (C) is incorrect because the 
   weighted average of shares outstanding 
   equaled 4,200,000. 

   Answer (D) is correct. At the beginning 
   of Year 4, 2,100,000 shares were 
   outstanding. Because of the March 31 
   two-for-one stock split, that number 
   increased to 4,200,000. The stock split 
   is assumed to have occurred on the first 
   day of the year. Consequently, the 
   number of shares outstanding throughout 
   Year 4 was 4,200,000. 


[893] Source: CMA 0692 2-18 

   Answer (A) is incorrect because 
   extinguishment at less than the net 
   carrying amount results in an 
   extraordinary gain. 

   Answer (B) is correct. According to 
   SFAS 64, Extinguishment of Debt Made 
   to Satisfy Sinking-Fund Requirements, 
   gains and losses from extinguishments 
   of debt made to satisfy sinking fund 
   requirements that must be met within 1 
   year of the date of extinguishment 
   should be treated as ordinary (not 
   extraordinary) gains or losses. This 
   classification is determined without 
   regard to the means (cash or otherwise) 
   of extinguishment. 

   Answer (C) is incorrect because 
   extinguishments by means of exchanging 
   common stock (other than as conversion 
   privileges granted at the date of 
   issuance of the debt) can result in an 
   extraordinary gain or loss. 

   Answer (D) is incorrect because 
   extinguishment at more than the net 
   carrying amount results in an 
   extraordinary loss. 


[894] Source: CMA 0692 2-24 

   Answer (A) is incorrect because a 
   description of the major changes in 
   terms and/or major features of 
   settlement must be disclosed. 

   Answer (B) is incorrect because the 
   aggregate gain on restructuring and the 
   related tax effect must be disclosed. 

   Answer (C) is incorrect because the 
   per-share amount of the aggregate gain 
   on restructuring must be disclosed. 

   Answer (D) is correct. In addition to 
   the items in the other answer choices, 
   debtors must, in subsequent periods, 
   disclose the extent to which contingent 
   amounts are included in the carrying 
   value of restructured payables. The 
   gross interest revenue that would have 
   been recorded in the period is not a 
   required disclosure for debtors because 
   interest revenue is applicable to 
   receivables, not debt. 


[895] Source: CMA 0693 2-15 

   Answer (A) is correct. APB 26 
   requires that material gains or losses on 
   the extinguishment of debt be reported 
   in the period of extinguishment. SFAS 4 
   requires such gains or losses to be 
   recorded as extraordinary items. 

   Answer (B) is incorrect because SFAS 
   4 requires material gains or losses on 
   early extinguishment to be accounted for 
   as extraordinary gains or losses. 

   Answer (C) is incorrect because the 
   gain or loss must be shown on the face 
   of the income statement for the period 
   of the extinguishment. 

   Answer (D) is incorrect because the 
   per-share amount of the aggregate gain 
   or loss net of the related income tax 
   effect should be disclosed. 


[896] Source: CMA 0693 2-16 

   Answer (A) is incorrect because the 
   aggregate net gain or loss on transfers 
   of assets must be disclosed. 

   Answer (B) is incorrect because both 
   the gain on the restructuring and the 
   income tax effect must be disclosed. 

   Answer (C) is correct. In the period of 
   the restructuring, debtors must describe 
   the principal changes in terms, the 
   major features of settlement, or both; the 
   aggregate gain on restructuring and the 
   related tax effect; the aggregate net gain 
   or loss on asset transfers; and the per 
   share aggregate gain on restructuring 
   (net of tax). In subsequent periods, the 
   debtor must disclose the extent to which 
   contingent amounts are included in the 
   carrying value of restructured payables 
   (SFAS 15). 

   Answer (D) is incorrect because a 
   creditor that measures loan impairment 
   using a present value calculation must 
   report the period-to-period change in 
   the present value. The creditor may 
   elect to report interest income for the 
   change in the present value of the 
   impaired loan's future cash flows 
   attributable to the passage of time. If 
   that election is made, the amount of 
   interest income recognized as a result 
   must be disclosed (SFAS 114). 




[898] Source: CMA 1286 3-16 

   Answer (A) is incorrect because 
   extraordinary items are to be disclosed 
   separately in the income statement net 
   of applicable income taxes. 

   Answer (B) is correct. A transaction 
   that is unusual in nature and infrequent 
   in occurrence should be reported as an 
   extraordinary item and shown 
   separately in the income statement, net 
   of tax, after results of discontinued 
   operations but before the cumulative 
   effect of a change in accounting 
   principle. The order of appearance in 
   the income statement is

   1) Income from continuing operations
   2) Discontinued operations
   3) Extraordinary items
   4) Cumulative effect of accounting changes
   5) Net income

   Answer (C) is incorrect because 
   extraordinary items are to be disclosed 
   separately in the income statement net 
   of applicable income taxes. 

   Answer (D) is incorrect because 
   extraordinary items are to be disclosed 
   separately in the income statement net 
   of applicable income taxes. 


[899] Source: CMA 0690 3-6 

   Answer (A) is incorrect because this 
   item is specifically excluded from the 
   category of extraordinary items by APB 
   30. 

   Answer (B) is incorrect because this 
   item is specifically excluded from the 
   category of extraordinary items by APB 
   30. 

   Answer (C) is incorrect because this 
   item is specifically excluded from the 
   category of extraordinary items by APB 
   30. 

   Answer (D) is correct. APB 26 
   requires that gains or losses from the 
   early extinguishment of debt be 
   recorded as gains or losses in the 
   period incurred. SFAS 4 requires such 
   gains or losses to be treated as 
   extraordinary items, net of income tax 
   effects. 


[900] Source: CMA 1290 2-10 

   Answer (A) is incorrect because early 
   extinguishment gains and losses are 
   normally treated as extraordinary items. 

   Answer (B) is correct. APB 26, Early 
   Extinguishment of Debt, requires that 
   differences between the reacquisition 
   prices and the net carrying amounts of 
   extinguished debt to be recognized 
   currently as gains or losses in income of 
   the period of extinguishment. SFAS 4, 
   Reporting Gains and Losses from 
   Extinguishment of Debt, requires that 
   such gains or losses be aggregated and, 
   if material, classified as extraordinary 
   items, net of related income tax effect. 
   An exception is made for gains or 
   losses from extinguishments of debt that 
   satisfy sinking fund requirements due 
   within one year (SFAS 64, 
   Extinguishments of Debt Made to 
   Satisfy Sinking-Fund Requirements). 

   Answer (C) is incorrect because early 
   extinguishment gains and losses are 
   normally treated as extraordinary items. 

   Answer (D) is incorrect because early 
   extinguishment gains and losses are 
   normally treated as extraordinary items. 


[901] Source: CMA 0691 2-29 

   Answer (A) is incorrect because 
   disclosure of aggregate recorded 
   investment in receivables is required. 

   Answer (B) is correct. SFAS 15 
   requires that a creditor disclose the 
   aggregate recorded investment in 
   outstanding receivables whose terms 
   have been modified in troubled debt 
   restructurings, gross interest revenue 
   that would have been recorded in the 
   period were it not for a restructuring, 
   gross interest revenue on those 
   receivables that was recorded for the 
   period, and the amount of commitments 
   to lend additional funds to debtors 
   owing receivables whose terms have 
   been modified. The provision requiring 
   disclosure of the aggregate net gain or 
   loss on transfers of assets that occurred 
   as part of troubled debt restructurings 
   applies to debtors, not creditors. 

   Answer (C) is incorrect because 
   disclosure of gross interest revenue that 
   would have been recorded in the period 
   ignoring restructure is required. 

   Answer (D) is incorrect because 
   disclosure of gross interest revenue on 
   receivables that was recorded in the 
   period is required. 


[902] Source: CMA 1290 2-9 

   Answer (A) is incorrect because a 
   refinancing entails a formal 
   reacquisition of the debt. 

   Answer (B) is incorrect because a 
   troubled debt restructuring occurs when 
   a creditor, for economic or legal 
   reasons related to the debtor's financial 
   difficulties, is compelled to grant relief 
   to a debtor owing to the debtor's 
   inability to service the debt. This 
   transaction usually involves either a 
   continuation of debt with modified 
   terms or a settlement at a value less than 
   the amount of the debt owed. 

   Answer (C) is incorrect because a 
   defeasance may apply to secured as 
   well as unsecured debt. 

   Answer (D) is correct. When a debtor 
   irrevocably places cash or other assets 
   in a trust to be used solely for satisfying 
   scheduled payments of both interest and 
   principal of a specific obligation, and 
   the possibility that the debtor will be 
   required to make future payments with 
   respect to that debt is remote, SFAS 76, 
   Extinguishment of Debt, considers the 
   debt to be extinguished. This 
   defeasance procedure is therefore 
   construed as a retirement of debt in 
   substance, even though the debt is not 
   extinguished in form. 


[903] Source: CIA 1193 IV-32 

   Answer (A) is incorrect because the 
   loss should be treated as extraordinary. 
   It is both infrequent and unusual. 

   Answer (B) is correct. APB 30 defines 
   an extraordinary item as one that occurs 
   infrequently and is unusual in nature in 
   the environment in which the entity 
   operates. It must also be material to 
   merit separate classification. 

   Answer (C) is incorrect because only 
   errors are accounted for as prior period 
   adjustments. Furthermore, this item is 
   presumably current. 

   Answer (D) is incorrect because the 
   loss should be treated as extraordinary. 
   It is both infrequent and unusual. 


[904] Source: CIA 0592 IV-39 

   Answer (A) is incorrect because bonds 
   normally have a coupon yield stated in 
   percentage and may be convertible but 
   are not participating. 

   Answer (B) is incorrect because 
   common stock is not described as 
   convertible or participating on the 
   financial statements. 

   Answer (C) is incorrect because 
   common stock options and rights are not 
   participating and do not have a stated 
   yield rate. 

   Answer (D) is correct. Preferred 
   stockholders have priority over 
   common stockholders in the assets and 
   earnings of the enterprise. If preferred 
   dividends are cumulative, any past 
   preferred dividends must be paid 
   before any common dividends. 
   Preferred stock may also be convertible 
   into common stock, and it may be 
   participating. For example, 10% fully 
   participating preferred stock will 
   receive additional distributions at the 
   same rates as other stockholders if 
   dividends paid to all stockholders 
   exceed 10%. 


[905] Source: CIA 0592 IV-25 

   Answer (A) is correct. The treasury 
   stock method used to compute diluted 
   earnings per share assumes conversion 
   of options and warrants into common 
   stock. The assumed conversion results 
   in assumed proceeds that are used for a 
   hypothetical purchase of treasury 
   shares, but only up to 20% of common 
   shares outstanding at the end of the 
   period. Any excess proceeds are used 
   first to pay off debt. 

   Answer (B) is incorrect because 
   extraordinary items and accounting 
   changes are unrelated to the assumed 
   conversion of warrants and options, etc. 

   Answer (C) is incorrect because 
   retroactive-effect changes are unrelated 
   to the assumed conversion of warrants 
   and options, etc. 

   Answer (D) is incorrect because the 
   "if-converted" method pertains to EPS 
   computations involving convertible 
   securities. 


[906] Source: CIA 0594 IV-31 

   Answer (A) is incorrect because 
   $40.00 equals net income minus 
   common dividends, divided by the 
   weighted average of preferred shares. 

   Answer (B) is incorrect because $60.00 
   equals net income divided by half of the 
   sum of the weighted-average of 
   preferred shares and the 
   weighted-average of common. 

   Answer (C) is incorrect because $66.67 
   subtracts common dividends, instead of 
   preferred dividends, from net income. 

   Answer (D) is correct. Earnings per 
   share indicates the income earned by 
   each share of common stock. The 
   numerator equals earnings available to 
   common shareholders (net income - 
   preferred dividends). The denominator 
   is the weighted-average number of 
   common shares outstanding over the 
   accounting period. Thus, earnings per 
   share for this company for the current 
   year is $76.67 [($120,000 - $5,000)  
   1,500 shares]. 


[907] Source: CMA 0694 2-15 

   Answer (A) is incorrect because $1.07 
   fails to adjust the numerator for the 
   interest savings and extra taxes. 

   Answer (B) is incorrect because the 
   $1.12 is based on a calculation that 
   used the complement of the tax rate 
   (i.e., 66% instead of 34%). 

   Answer (C) is correct. All potentially 
   dilutive securities are included in the 
   determination of FDEPS whether or not 
   they qualify as CSE. Consequently, the 
   denominator of the EPS calculation is 
   100,000 shares (80,000 common shares 
   outstanding + 20,000 shares that could 
   be issued if the bonds were converted 
   as of the beginning of the year). The 
   calculation of FDEPS assumes the 
   conversion of the bonds at the beginning 
   of the year, so the assumption is that no 
   interest would be paid. Because bond 
   interest was subtracted in determining 
   net income, the FDEPS numerator 
   should be increased by the interest paid 
   (net of tax effect). This after-tax effect 
   was a $10,560 reduction of net income 
   [($8% x $200,000) x (1 - 34% tax 
   rate)]. As indicated below, FDEPS is 
   equal to $1.18 per share.

                           $107,000 + $10,560
                           ------------------  = $1.18
                             80,000 + 20,000

   Answer (D) is incorrect because $1.20 
   uses the Aa bond rate of 10%, which is 
   not relevant to the calculation of 
   FDEPS. 


[908] Source: CMA 1295 2-9 

   Answer (A) is correct. One form of 
   troubled debt restructuring is a 
   modification of the terms of a debt 
   arrangement. Under SFAS 15, a debtor 
   recognizes a gain when the terms of the 
   troubled debt are modified if the total 
   undiscounted payments to be made 
   (including interest) are less than the 
   book value of the debt. 

   Answer (B) is incorrect because the 
   debtor records a gain. 

   Answer (C) is incorrect because a loan 
   is impaired when it is probable that the 
   creditor will be unable to collect all 
   amounts due under the contract terms. 
   The creditor should credit a valuation 
   allowance and debit bad debt expense 
   (SFAS 114). 

   Answer (D) is incorrect because this 
   troubled debt restructuring involves 
   only a modification of terms. 


[909] Source: CMA 0687 3-5 

   Answer (A) is incorrect because 
   operating results during the phase-out 
   period are part of the gain (loss) on 
   disposal. 

   Answer (B) is incorrect because 
   discontinued operations should be 
   presented as two subcategories. The 
   first is operating income (loss) of the 
   segment in the current period up to the 
   measurement date. The second is the 
   gain (loss) on disposal. The gain (loss) 
   on disposal includes estimated 
   operating income (loss) of the segment 
   from the measurement date to the 
   disposal date plus the estimated gain 
   (loss) on the actual disposal. The direct 
   costs of discontinuance are included in 
   the gain (loss) on the actual disposal 
   and should thus not be included as an 
   expense of continuing operations. 

   Answer (C) is correct. The results of 
   operations of a segment that has been or 
   will be discontinued, together with any 
   gain or loss on disposal, should be 
   reported separately as a component of 
   income before extraordinary items and 
   the cumulative effect of accounting 
   changes. Income from discontinued 
   operations and the gain or loss on 
   disposal should each be disclosed net 
   of tax. 

   Answer (D) is incorrect because 
   discontinued operations should be 
   presented as two subcategories. The 
   first is operating income (loss) of the 
   segment in the current period up to the 
   measurement date. The second is the 
   gain (loss) on disposal. The gain (loss) 
   on disposal includes estimated 
   operating income (loss) of the segment 
   from the measurement date to the 
   disposal date plus the estimated gain 
   (loss) on the actual disposal. The direct 
   costs of discontinuance are included in 
   the gain (loss) on the actual disposal 
   and should thus not be included as an 
   expense of continuing operations. 


[910] Source: CMA 0693 2-24 

   Answer (A) is correct. Extraordinary 
   items should be presented net of tax 
   after income from operations. APB 30 
   states, "Descriptive captions and the 
   amounts for individual extraordinary 
   events or transactions should be 
   presented, preferably on the face of the 
   income statement, if practicable; 
   otherwise, disclosure in related notes is 
   acceptable." 

   Answer (B) is incorrect because 
   extraordinary items are to be reported 
   net of the related tax effect. 

   Answer (C) is incorrect because 
   extraordinary items are not reported in 
   the continuing operations section of the 
   income statement. 

   Answer (D) is incorrect because each 
   extraordinary item is to be reported 
   separately. 


[911] Source: CIA 0590 IV-35 

   Answer (A) is correct. According to 
   APB 30, extraordinary items are events 
   and transactions that are distinguished 
   by their unusual nature and the 
   infrequency of their occurrence. Gains 
   or losses from the sale or abandonment 
   of property, plant, or equipment used in 
   the business constitute extraordinary 
   items only if they are a direct result of a 
   major casualty, an expropriation, or a 
   prohibition under a newly enacted law 
   or regulation that clearly meets the 
   foregoing criteria. 

   Answer (B) is incorrect because this 
   item is expressly denied extraordinary 
   treatment under APB 30. 

   Answer (C) is incorrect because this 
   item is expressly denied extraordinary 
   treatment under APB 30. 

   Answer (D) is incorrect because the 
   infrequency criterion has not been met. 


[912] Source: CMA 0695 2-28 

   Answer (A) is incorrect because SFAS 
   4 requires disclosure of a description of 
   the extinguishment transactions, 
   including the sources, if practicable, of 
   the cash used to extinguish the debt. 

   Answer (B) is correct. APB 26, Early 
   Extinguishment of Debt, as amended by 
   SFAS 4, Reporting Gains and Losses 
   from Extinguishment of Debt, requires 
   that gains or losses on early 
   extinguishment of debt be reported as 
   extraordinary items. However, no 
   pronouncement requires that interest 
   expense avoided be disclosed. 

   Answer (C) is incorrect because SFAS 
   4 requires disclosure of the income tax 
   effect in the period of extinguishment. 

   Answer (D) is incorrect because SFAS 
   4 requires disclosure of the per-share 
   amount of the aggregate gain or loss, net 
   of related tax effect. 


[913] Source: CMA 1282 3-20 

   Answer (A) is correct. The 
   understatement of Year 1 inventory by 
   $43,000 resulted in an understatement 
   of Year 2 beginning inventory. Thus, 
   when the beginning inventory was 
   added to purchases, the cost of goods 
   available was understated, resulting in 
   an understatement of cost of goods sold. 
   This understatement of cost resulted in 
   an overstatement of income by $43,000. 
   The Year 2 inventory was overstated by 
   $9 each on 5,000 items. This 
   overstatement of ending inventory in the 
   amount of $45,000 resulted in an 
   understatement of cost of goods sold. 
   The understatement of cost overstated 
   income by $45,000. The accrued 
   salaries which were not recorded meant 
   that expenses were understated by 
   $5,000. If expenses were understated, 
   then income was overstated. Therefore, 
   the Year 2 income was overstated by a 
   total of $93,000 ($43,000 + $45,000 + 
   $5,000). 

   Answer (B) is incorrect because a 
   $7,000 overstatement is based on the 
   $43,000 error's being an understatement 
   rather than an overstatement of income. 

   Answer (C) is incorrect because a 
   $3,000 overstatement is based on the 
   $45,000 error's being an understatement 
   rather than an overstatement of income. 

   Answer (D) is incorrect because an 
   $83,000 understatement is based on the 
   $43,000 and $45,000 errors' being 
   understatements rather than 
   overstatements of income. 


[914] Source: CMA 1282 4-7 

   Answer (A) is incorrect because stores 
   inventory must be credited. 

   Answer (B) is incorrect because the 
   inventory shortage is not a purchase or 
   an expense. 

   Answer (C) is correct. The 
   overstatement arose from spoilage, 
   theft, etc., or because a transfer of 
   inventory was not recorded. In any 
   case, stores inventory must be credited 
   for $5,130. If the goods were, in fact, 
   transferred to work-in-process and then 
   to finished goods, cost of goods sold 
   should be charged. If the loss was 
   abnormal, it should be charged to a 
   loss. But the only correct choice in this 
   question is to debit cost of goods sold. 

   Answer (D) is incorrect because stores 
   inventory must be credited. 


[915] Source: CPA 0585 I-41 

   Answer (A) is incorrect because the 
   average exchange rate, not the current 
   year-end rate, should be used. 

   Answer (B) is incorrect because the 
   average exchange rate, not a 
   combination of rates, should be used. 

   Answer (C) is correct. When the local 
   currency of the subsidiary is the 
   functional currency, translation into the 
   reporting currency is necessary. Assets 
   and liabilities are translated at the 
   exchange rate at the balance sheet date, 
   and revenues, expenses, gains, and 
   losses are usually translated at average 
   rates for the period. Thus, the $400,000 
   in total expenses should be translated at 
   the average exchange rate of $.44, 
   resulting in expenses reflected in the 
   consolidated income statement of 
   $176,000 ($400,000 x $.44). 

   Answer (D) is incorrect because the 
   average exchange rate, not a 
   combination of rates, should be used. 


[916] Source: CMA 0685 4-7 

   Answer (A) is correct. In a periodic 
   system, purchases should be debited 
   and accounts payable credited. The 
   error thus causes purchases and 
   accounts payable to be understated. 
   Since purchases is an element of cost of 
   goods sold, total annual expenses will 
   also be understated. 

   Answer (B) is incorrect because net 
   income would be overstated as a result 
   of understatement of costs. 

   Answer (C) is incorrect because 
   liabilities (accounts payable) will be 
   understated. 

   Answer (D) is incorrect because assets 
   will be correctly stated. 


[917] Source: CMA 0685 4-8 

   Answer (A) is incorrect because 
   revenue will be understated. 

   Answer (B) is incorrect because total 
   assets will be understated. 

   Answer (C) is incorrect because 
   liabilities will be unaffected. 

   Answer (D) is correct. The adjusting 
   entry should include a debit to an asset, 
   interest receivable, and a credit to an 
   interest revenue account. Failing to 
   make the entry understates revenue and 
   net income. Since the net income figure 
   is carried to retained earnings, 
   stockholders' equity will also be 
   understated. 


[918] Source: CMA 0685 4-9 

   Answer (A) is incorrect because net 
   income and shareholders' equity would 
   be overstated (not understated). 

   Answer (B) is incorrect because total 
   liabilities are not affected. 

   Answer (C) is incorrect because assets 
   are overstated. 

   Answer (D) is correct. When an asset is 
   acquired, the expenses of maintaining 
   the asset are expenses of the period in 
   which the ordinary repairs are 
   rendered. To charge such ordinary 
   repairs to the machinery and equipment 
   asset account would thus overstate total 
   assets, the current year's net income, 
   and stockholders' equity. Liabilities, 
   however, would not be affected. 


[919] Source: CMA 1288 4-11 

   Answer (A) is incorrect because 
   $508,500 does not include the $2,400 
   decrease for the salary error. 

   Answer (B) is incorrect because 
   $529,100 includes a $120,000 increase 
   and an $11,500 increase. 

   Answer (C) is incorrect because 
   $546,400 includes a $2,400 decrease. 

   Answer (D) is correct. Failing to 
   capitalize $120,000 of equipment 
   resulted in an expense of $120,000 in 
   Year 1 and $0 in Year 2. The equipment 
   should have been capitalized and 
   depreciated over 10 years. With an 
   estimated salvage value of $5,000, 
   annual depreciation should have been 
   $11,500 ($115,000 cost minus salvage 
    10 years). Thus, this error overstated 
   expenses for Year 1 by $108,500 
   ($120,000 - $11,500). Moreover, 
   expenses for Year 2 were understated 
   by $11,500 (depreciation not recorded). 
   The failure to record the $2,400 in 
   accrued salaries at the end of Year 1 
   meant that the Year 1 expenses were 
   understated by $2,400, and Year 2 
   expenses were overstated by $2,400. 
   Not accruing salaries at the end of Year 
   2 resulted in Year 2 expenses being 
   understated by $5,100. The net 
   understatement of salary expense in 
   Year 2 was $2,700 ($5,100 - $2,400). 
   Thus, income would have been 
   overstated by $2,400 in Year 1 and 
   $2,700 in Year 2. Adjusting for the two 
   errors produces the following corrected 
   net income amounts:

                                          Year 1       Year 2
                                         --------    ---------
   Income originally reported            $400,000    $563,000
   Year 1 increase for first error        108,500
   Year 2 decrease for first error                    (11,500)
   Year 1 decrease for second error        (2,400)
   Year 2 decrease for second error                    (2,700)
                                         --------    --------
   Restated net income                   $506,100    $548,800
                                         ========    ========




[921] Source: CMA 1288 4-20 

   Answer (A) is incorrect because Year 1 
   cost of goods sold was understated. 

   Answer (B) is incorrect because the 
   Year 1 overstatement of inventory is 
   offset by the understatement of 
   beginning inventory in Year 2, so Year 
   2 ending inventory is correct. 

   Answer (C) is incorrect because the 
   Year 1 and Year 2 net income effects of 
   the error will be offsetting. The retained 
   earnings at the end of Year 2 will be 
   correct. 

   Answer (D) is correct. The 
   overstatement of ending inventory 
   understates cost of goods sold and 
   overstates net income and retained 
   earnings for Year 1. However, the Year 
   1 error will understate Year 2 income 
   by the same amount because of the 
   understatement of beginning inventory. 
   The Year 1 and Year 2 net income 
   effects of the error will be offsetting, 
   and the balance in retained earnings at 
   the end of Year 2 will be correct. 


[922] Source: CMA 1288 4-21 

   Answer (A) is correct. Under APB 20 
   most changes in principle are 
   effectuated by applying the new 
   principle in the period of change and 
   recognizing in net income the 
   cumulative effect of the change on the 
   beginning balance of retained earnings. 
   This cumulative effect is shown on the 
   income statement between extraordinary 
   items and net income. However, there 
   are some exceptions to this rule. The 
   following require or permit retroactive 
   adjustment of prior years' financial 
   statements: (1) changing from LIFO to 
   another inventory method, (2) changing 
   the method of accounting for long-term 
   contracts, (3) changing to or from the 
   full-cost method of accounting used in 
   the extractive industries, (4) a change in 
   the reporting entity, (5) a change in the 
   accounting for contingencies, (6) a 
   change in the method of accounting for 
   railroad track structures, (7) an initial 
   public distribution by a closely held 
   company, and (8) changing from the 
   deferred to the asset-liability method of 
   accounting for income taxes. Thus, 
   changing the method of accounting for 
   long-term contracts requires restatement 
   of prior financial statements. 

   Answer (B) is incorrect because this is 
   an example of a change in estimates. 
   Changes in estimates should be 
   accounted for currently and 
   prospectively. 

   Answer (C) is incorrect because this is 
   an example of a change in estimates. 
   Changes in estimates should be 
   accounted for currently and 
   prospectively. 

   Answer (D) is incorrect because this is 
   an example of a change in estimates. 
   Changes in estimates should be 
   accounted for currently and 
   prospectively. 


[923] Source: CMA 0693 2-29 

   Answer (A) is incorrect because an 
   in-substance defeasance is an 
   extinguishment of debt, not a refinancing 
   of debt with similar debt. 

   Answer (B) is incorrect because an 
   in-substance defeasance is an 
   extinguishment of debt, not a 
   restructuring of debt. 

   Answer (C) is correct. In an 
   in-substance defeasance of debt, a 
   debtor places cash or risk-free 
   securities in an irrevocable trust to be 
   used solely for satisfying scheduled 
   payments of a specific debt. The 
   possibility must be remote that the 
   debtor will be required to make future 
   payment with respect to the debt. Under 
   such circumstances, the debt will be 
   considered as extinguished for 
   accounting purposes (SFAS 76). 

   Answer (D) is incorrect because 
   in-substance defeasance is permitted 
   under SFAS 76. 


[924] Source: CMA 0692 2-14 

   Answer (A) is correct. Warranty costs 
   are based on estimates of future claims. 
   Thus, a change in the liability for 
   warranty costs is a change in accounting 
   estimate. Changes in estimates are 
   accounted for on a prospective basis by 
   allocating the adjustment over the 
   current and future periods. 

   Answer (B) is incorrect because a 
   change in method is a change from one 
   acceptable method to another. 

   Answer (C) is incorrect because a 
   change in principle is a change from 
   one acceptable principle to another. 

   Answer (D) is incorrect because a prior 
   period adjustment is the means used to 
   correct an error. 


[925] Source: CMA 1292 2-11 

   Answer (A) is correct. The general rule 
   is that changes in accounting principle 
   are accounted for by showing the 
   cumulative effect of the change on the 
   income statement during the year of 
   change. There are a few exceptions, but 
   changes in depreciation is not one of 
   them. 

   Answer (B) is incorrect because prior 
   periods are not adjusted for changes in 
   depreciation. 

   Answer (C) is incorrect because 
   spreading a change over the remaining 
   life of the assets is permitted only for 
   changes in estimate, such as when the 
   life of an asset is adjusted. 

   Answer (D) is incorrect because only 
   error corrections are accounted for by 
   adjusting the beginning balance of 
   retained earnings. 


[926] Source: CMA 0693 2-7 

   Answer (A) is correct. In most 
   situations, the cumulative effect of a 
   change in accounting principle on the 
   beginning balance of retained earnings 
   for the period (net of the related tax 
   effect) is included in the net income of 
   the period of change. The cumulative 
   effect is to be shown in a separate 
   section of the income statement after 
   extraordinary items. In a few specific 
   cases, for example, a change from 
   LIFO, a change from the 
   completed-contract to the 
   percentage-of-completion method (or 
   vice versa), a change to or from the 
   full-cost method used in the extractive 
   industries, or a change in the reporting 
   entity, changes in principle require 
   retroactive restatement of financial 
   statements with full disclosure in the 
   year of the change. 

   Answer (B) is incorrect because most 
   changes are to be reported only in the 
   year of change and without retroactive 
   restatement. 

   Answer (C) is incorrect because the 
   cumulative adjustment is reported in the 
   income statement after extraordinary 
   items. 

   Answer (D) is incorrect because these 
   pro forma effects are required to be 
   shown on the face of the income 
   statement. 


[927] Source: CIA 1188 IV-45 

   Answer (A) is correct. A retroactive 
   adjustment of the financial statements 
   presented is made by recasting the 
   statements of prior years on a basis 
   consistent with the newly adopted 
   principle. Any part of the cumulative 
   effect attributed to years prior to those 
   presented is treated as an adjustment of 
   beginning retained earnings of the 
   earliest year presented. Retroactive 
   changes occur for such things as a 
   change from LIFO to another method, a 
   change from one method of accounting 
   for long-term construction type 
   contracts to another, and a change from 
   one method of materials resource 
   exploration to another. 

   Answer (B) is incorrect because it 
   describes cumulative effect treatment 
   for a current-type accounting change. 

   Answer (C) is incorrect because this 
   answer describes one of the disclosure 
   requirements for cumulative effect 
   accounting changes. 

   Answer (D) is incorrect because it 
   describes appropriate procedures for 
   accounting changes not affecting the 
   current period but having effects in 
   future periods. 


[928] Source: CIA 0593 IV-36 

   Answer (A) is incorrect because 
   $120,000 ignores the failure to accrue 
   interest expense. 

   Answer (B) is incorrect because 
   $130,000 ignores the errors related to 
   prepaid rent and prepaid advertising 
   expense. 

   Answer (C) is correct. The computation 
   is as follows:

                           Effect on Current     Effect on Current
          Error               Year Expense        Year Net Income
   ---------------------   -------------------   -----------------
   Failure to accrue
    interest expense       Understate  $50,000   Overstate  $50,000
   Failure to record
    depreciation           Understate  $80,000   Overstate  $80,000
   Failure to amortize
    prepaid rent expense   Understate $100,000   Overstate $100,000
   Failure to recognize
    prepaid advertising    Overstate   $60,000   Understate $60,000
                           -------------------   ------------------
      Totals               Understate $170,000   Overstate $170,000
                           ===================   ==================

   Answer (D) is incorrect because 
   $230,000 ignores the error related to 
   prepaid advertising expense. 


[929] Source: CIA 0591 IV-45 

   Answer (A) is incorrect because the net 
   effect of these errors was a $65,000 
   overstatement. 

   Answer (B) is correct. The effect of the 
   understatement of the Year 1 year-end 
   inventory (beginning inventory for Year 
   2) was to overstate Year 2 net income 
   by $40,000. The reason is that 
   beginning inventory is a component of 
   cost of sales. The overstatement of the 
   December 31, Year 2 inventory 
   overstated Year 2 net income by 
   $15,000 because the amounts in ending 
   inventory are excluded from cost of 
   sales. The understatement of Year 1 
   depreciation expense (a nominal 
   account) has no effect on Year 2 net 
   income. Finally, the failure to accrue 
   $10,000 of expenses for Year 2 
   overstated Year 2 net income. The net 
   effect of these errors was a $65,000 
   ($40,000 + $15,000 + $0 + $10,000) 
   overstatement. 

   Answer (C) is incorrect because an 
   overstatement of $55,000 ignores the 
   understatement of accrued expenses. 

   Answer (D) is incorrect because the net 
   effect of these errors was a $65,000 
   overstatement. 


[930] Source: CIA 0591 IV-46 

   Answer (A) is correct. The Year 1 
   inventory error reversed in Year 2 
   (excluding tax considerations) and 
   therefore had no effect on reported 
   retained earnings at December 31, Year 
   2. The $15,000 inventory error at 
   year-end Year 2 and the failure to 
   accrue $10,000 of expenses for Year 2 
   both overstated retained earnings as 
   well as Year 2 net income. The 
   omission of $7,000 of depreciation 
   overstated Year 1 net income and Year 
   1 and Year 2 retained earnings. Hence, 
   the net effect of the errors on December 
   31, Year 2 retained earnings was a 
   $32,000 ($0 + $15,000 + $7,000 + 
   $10,000) overstatement. 

   Answer (B) is incorrect because the net 
   effect of the errors was a $32,000 
   overstatement. 

   Answer (C) is incorrect because an 
   overstatement of $17,000 ignores the 
   overstatement of ending inventory for 
   Year 2. 

   Answer (D) is incorrect because the net 
   effect of the errors was a $32,000 
   overstatement. 


[931] Source: CIA 0594 IV-23 

   Answer (A) is incorrect because a 
   failure to record accrued wages will 
   correct itself over two periods. 

   Answer (B) is correct. Self-correcting 
   errors are those that have no effect on 
   the combined amounts reported for two 
   periods. Examples of self-correcting 
   errors are nonaccrual of wages, 
   unrecorded prepaid expenses, failure to 
   defer revenue, and under- or 
   overstatement of purchases or 
   inventory. An example of an item that is 
   not self-correcting is failure to record 
   depreciation. Ultimately, when the asset 
   is written off, the error will reverse, but 
   not within two periods. 

   Answer (C) is incorrect because the 
   overstatement of purchases will correct 
   itself over two periods. 

   Answer (D) is incorrect because a 
   failure to record prepaid expenses will 
   correct itself over two periods. 


[932] Source: CIA 0594 IV-24 

   Answer (A) is correct. Restatement may 
   be impracticable for a change to LIFO 
   because determining the LIFO inventory 
   valuation retroactively may not be 
   feasible. Information concerning the 
   composition of inventory throughout the 
   history of the entity, as well as all 
   individual unit prices, usually cannot be 
   reconstructed. Accordingly, a change to 
   LIFO may result in no recognition of the 
   cumulative effect of the change. 
   Disclosure is limited to showing the 
   effect on current results and to an 
   explanation of the reason for omitting 
   accounting for the cumulative effect 
   (APB 20). 

   Answer (B) is incorrect because prior 
   period and current statements would be 
   more comparable if the latter were 
   restated. 

   Answer (C) is incorrect because 
   restatement is likely to change reported 
   results. 

   Answer (D) is incorrect because 
   restatement could decrease, increase, or 
   not change prior years' income. 


[933] Source: CMA 0692 2-12 

   Answer (A) is correct. Presentation of 
   financial statements in accordance with 
   GAAP ordinarily requires use of the 
   accrual basis. Accordingly, the change 
   from the cash to the accrual basis was 
   the correction of an error that 
   necessitated a prior period adjustment. 
   In comparative financial statements, all 
   prior periods affected by the prior 
   period adjustment should be restated 
   (SFAS 16). 

   Answer (B) is incorrect because 
   prospective treatment applies only to 
   changes in estimates. 

   Answer (C) is incorrect because an 
   error correction requires retroactive 
   treatment. 

   Answer (D) is incorrect because 
   retroactive treatment on a pro forma 
   basis is not required. 


[934] Source: CMA 0692 2-13 

   Answer (A) is correct. Most changes in 
   accounting principle should be 
   recognized by including the cumulative 
   effect, based on a retroactive 
   computation, of changing to a new 
   accounting principle in net income of 
   the period of the change. However, a 
   change from LIFO to any other method 
   of inventory pricing is a special change 
   in accounting principle that requires a 
   retroactive restatement of financial 
   statements with full disclosure in the 
   year of change. 

   Answer (B) is incorrect because 
   prospective treatment applies only to 
   changes in estimates. 

   Answer (C) is incorrect because a 
   change from LIFO to FIFO is a special 
   exception to which the general rule 
   does not apply. 

   Answer (D) is incorrect because the 
   change must be shown on the face of the 
   statements, not just in the notes. 


[935] Source: CMA 0693 2-9 

   Answer (A) is incorrect because errors 
   of any type are corrected by a prior 
   period adjustment. 

   Answer (B) is incorrect because a prior 
   period adjustment will affect the 
   presentation of prior period 
   comparative financial statements. 

   Answer (C) is incorrect because prior 
   period adjustments should be fully 
   disclosed in the notes or elsewhere in 
   the financial statements. 

   Answer (D) is correct. Prior period 
   adjustments are made for the correction 
   of errors. Prior-period adjustments 
   reported in single-period statements are 
   reflected as adjustments of the opening 
   balance of retained earnings. According 
   to APB 9, Reporting the Results of 
   Operations, if comparative statements 
   are presented, corresponding 
   adjustments should be made to the 
   amounts of net income (and its 
   components) and retained earnings 
   balances (as well as other affected 
   balances) for all periods reported to 
   reflect the retroactive application of the 
   prior-period adjustments. 


[936] Source: CMA 1293 2-21 

   Answer (A) is incorrect because a prior 
   period adjustment involves retroactive 
   restatement. Prior period adjustments 
   are made for errors only. 

   Answer (B) is correct. A change in the 
   realizability of accounts receivable 
   (e.g., a change in the bad debt write-off 
   percentage) is a change in accounting 
   estimate because it is based on new 
   information or subsequent 
   developments. Changes in estimates are 
   accounted for prospectively. Thus, 
   prior years' financial statements are not 
   restated. Only the current and future 
   years' statements are affected. 

   Answer (C) is incorrect because 
   changes in accounting principles are 
   changes in the application or 
   implementation of accounting 
   principles, such as switching from LIFO 
   to FIFO inventory valuation. 

   Answer (D) is incorrect because an 
   accounting method change is a change in 
   principle. 


[937] Source: CMA 0694 2-28 

   Answer (A) is incorrect because a 
   change in principle is not a change of an 
   estimate. 

   Answer (B) is incorrect because the 
   cumulative effect of the change is 
   separately stated on the current year's 
   income statement and not as an 
   adjustment of beginning retained 
   earnings. 

   Answer (C) is incorrect because the 
   cumulative effect of the change is 
   recognized in full on the current year's 
   income statement. 

   Answer (D) is correct. Under APB 20, 
   changes in principle are normally 
   effected by using the new principle in 
   the period of change, determining the 
   cumulative effect of the change on all 
   prior periods, and presenting this 
   cumulative effect (net of tax) as a 
   separate component after extraordinary 
   items in the income statement. Thus, the 
   financial statements are not 
   retroactively adjusted. 


[938] Source: CMA 0681 3-24 

   Answer (A) is incorrect because it is a 
   change in estimate and is accounted for 
   currently and prospectively. 

   Answer (B) is correct. A change in 
   depreciation methods is reported as a 
   change in accounting principle. The 
   cumulative effect on beginning retained 
   earnings, based on a retroactive 
   calculation, should be reflected as a 
   component of net income between 
   extraordinary items and net income. 

   Answer (C) is incorrect because a 
   change in the reporting entity requires a 
   retroactive restatement of the financial 
   statements. 

   Answer (D) is incorrect because it is a 
   change in estimate and is accounted for 
   currently and prospectively. 


[939] Source: C.J. Skender 

   Answer (A) is incorrect because 
   $205,625 results from applying the 
   year-end rate to the total liabilities. 

   Answer (B) is incorrect because the 
   historical, not current, rate should be 
   used to remeasure the deferred income. 

   Answer (C) is incorrect because the 
   historical rate is used to remeasure 
   nonmonetary balance sheet items, 
   including deferred tax assets and 
   liabilities. 

   Answer (D) is correct. When a foreign 
   entity's functional currency is the U.S. 
   dollar, the financial statements of the 
   entity recorded in a foreign currency 
   must be remeasured in terms of the U.S. 
   dollar. In accordance with SFAS 52, 
   revenue received in advance (deferred 
   income) is considered a nonmonetary 
   balance sheet item and is translated at 
   the applicable historical rate (400,000 
   LCU x $.50/LCU = $200,000). 
   Deferred charges and credits (except 
   policy acquisition costs for life 
   insurance companies) are also 
   remeasured at historical exchange rates. 
   Deferred taxes were formerly not 
   subject to this rule, but SFAS 109 
   amended SFAS 52 to eliminate the 
   exception. Consequently, the deferred 
   tax liability (a deferred credit) should 
   be remeasured at the historical rate 
   (187,500 LCU x $.40/LCU) = $75,000). 
   The total for these liabilities is 
   therefore $275,000 ($200,000 + 
   $75,000). 


[940] Source: CMA 1291 2-5 

   Answer (A) is incorrect because the 
   extent of any gain or loss cannot be 
   known at the date of the original 
   transaction. 

   Answer (B) is incorrect because 
   retroactive recognition is not permitted. 

   Answer (C) is correct. A foreign 
   currency transaction is one whose terms 
   are denominated in a currency other 
   than the entity's functional currency. 
   When a foreign currency transaction 
   gives rise to a receivable or a payable 
   that is fixed in terms of the amount of 
   foreign currency to be received or paid, 
   a change in the exchange rate between 
   the functional currency and the currency 
   in which the transaction is denominated 
   results in a gain or loss that ordinarily 
   should be included as a component of 
   income from continuing operations in 
   the period in which the exchange rate 
   changes. 

   Answer (D) is incorrect because gains 
   and losses are to be recognized in the 
   period of the rate change. 


[941] Source: CMA 1288 3-28 

   Answer (A) is incorrect because SFAS 
   52 specifies an inflation rate of at least 
   100% over a 3-year period. 

   Answer (B) is incorrect because SFAS 
   52 specifies an inflation rate of at least 
   100% over a 3-year period. 

   Answer (C) is incorrect because SFAS 
   52 specifies an inflation rate of at least 
   100% over a 3-year period. 

   Answer (D) is correct. SFAS 52 
   recognized that the currency in a highly 
   inflationary economy is not stable 
   enough to be a functional currency. 
   Instead, the more stable currency of the 
   parent corporation should be used as 
   the functional currency. A highly 
   inflationary economy has a cumulative 
   inflation rate over a 3-year period of at 
   least 100%. 


[942] Source: CMA 1291 2-6 

   Answer (A) is incorrect because the 
   primary financial statements are based 
   on historical cost and nominal dollar 
   accounting. They do not reflect changes 
   in general or specific price levels, 
   except for changes in foreign exchange 
   rates. 

   Answer (B) is incorrect because SFAS 
   52 ordinarily requires immediate 
   recognition of changes in exchange 
   rates. 

   Answer (C) is incorrect because SFAS 
   52 also applies to revenues, expenses, 
   gains, and losses. 

   Answer (D) is correct. The elements of 
   the financial statements of separate 
   entities within an enterprise must be 
   consolidated if the performance, 
   financial position, and cash flows of the 
   enterprise are to be presented. If those 
   statements are in different currencies, 
   they must be translated into the 
   reporting currency. According to SFAS 
   52, the functional currency translation 
   approach is appropriate for use in 
   accounting for and reporting the 
   financial results and relationships of 
   foreign subsidiaries in consolidated 
   statements. It involves identifying the 
   functional currency of the entity (the 
   currency of the primary economic 
   environment in which the entity 
   operates), measuring all elements of the 
   financial statements in the functional 
   currency, and using a current exchange 
   rate for translation from the functional 
   currency to the reporting currency. 


[943] Source: CMA 0692 2-15 

   Answer (A) is incorrect because cash 
   flows that are primarily in a foreign 
   currency indicate that the foreign 
   currency is the functional currency. 

   Answer (B) is incorrect because, when 
   financing is obtained primarily from 
   foreign sources and operations, the 
   foreign currency is likely to be the 
   functional currency. 

   Answer (C) is correct. The functional 
   currency is the currency of the primary 
   economic environment in which an 
   entity operates. It is normally the 
   currency of the environment in which an 
   entity primarily generates and expends 
   cash. If a U.S. company's foreign 
   affiliate's sales prices are responsive to 
   short-term changes in exchange rates 
   and worldwide competition, its 
   functional currency is likely to be the 
   U.S. dollar. 

   Answer (D) is incorrect because, when 
   costs are primarily paid in the foreign 
   country, the foreign currency is likely to 
   be the functional currency. 


[944] Source: CMA 0692 2-16 

   Answer (A) is correct. The current rate 
   should be used for all items except 
   common nonmonetary balance sheet 
   accounts and their related revenues, 
   expenses, gains, and losses, which are 
   remeasured at historical rates. Thus, 
   most monetary items, such as an 
   investment in bonds, are remeasured at 
   the current exchange rate. 

   Answer (B) is incorrect because plant 
   assets and marketable equity securities 
   are not monetary assets. They should be 
   remeasured at historical rates. 

   Answer (C) is incorrect because a 
   patent is remeasured at historical rates. 

   Answer (D) is incorrect because the 
   revenue from a long-term construction 
   contract is one of the exceptions for 
   which the current rate is not to be used. 


[945] Source: CMA 0693 2-21 

   Answer (A) is incorrect because 
   allocation of income tax expense is 
   required, including those income taxes 
   related to translation adjustments and 
   those transaction gains and losses 
   recorded in a separate component of 
   equity. 

   Answer (B) is incorrect because the 
   adjustment for foreign currency 
   translation is a component of equity, not 
   net income. 

   Answer (C) is correct. SFAS 52 adopts 
   the functional currency translation 
   approach. Translation adjustments 
   resulting from translating the functional 
   currency into U.S. dollars are not 
   reported in the income statement but are 
   accumulated in a separate shareholders' 
   equity account to be recognized in 
   income upon the sale or liquidation of 
   the foreign entity. However, foreign 
   currency transaction gains or losses are 
   ordinarily recognized in the income 
   statement of the period in which the 
   exchange rate changes. Accordingly, the 
   aggregate transaction gain or loss 
   included in earnings shall be disclosed. 

   Answer (D) is incorrect because an 
   enterprise's financial statements are not 
   adjusted for rate changes after their 
   effective date or after the date of 
   foreign currency statements of a foreign 
   entity if they are consolidated, 
   combined, or accounted for under the 
   equity method in the enterprise's 
   financial statements. 


[946] Source: CIA 0593 IV-41 

   Answer (A) is incorrect because the 
   currency of the parent may or may not 
   be the functional currency of the foreign 
   subsidiary, depending on where the 
   subsidiary and parent conduct 
   operations. 

   Answer (B) is incorrect because the 
   U.S. dollar may or may not be the 
   functional currency of a foreign 
   subsidiary, depending on where the 
   subsidiary conducts its operations. 

   Answer (C) is correct. An entity's 
   functional currency is the currency of 
   the primary economic environment in 
   which the entity operates; normally, that 
   is the currency of the environment in 
   which an entity primarily generates and 
   expends cash. 

   Answer (D) is incorrect because a 
   foreign entity's functional currency 
   might not be the currency of the country 
   in which the entity is located or 
   incorporated. 


[947] Source: CIA 0591 IV-41 

   Answer (A) is incorrect because losses 
   of $5,000 in Year 1 and $2,000 in Year 
   2 should be recognized. 

   Answer (B) is correct. When a foreign 
   currency transaction gives rise to a 
   receivable or a payable, a change in the 
   exchange rate between the functional 
   currency and the currency in which the 
   transaction is denominated is a foreign 
   currency transaction gain or loss that 
   should be included as a component of 
   income from continuing operations in 
   the period in which the exchange rate 
   changes (SFAS 52). The transaction 
   was recorded at $1.50 per pound 
   sterling. At December 31, Year 1, the 
   exchange rate had risen to $1.55, so 
   Company X should recognize a loss of 
   $5,000 [($1.55 - $1.50) x 100,000] in 
   Year 1. The Year 2 recognized loss is 
   $2,000 [($1.57 - $1.55) x 100,000]. 

   Answer (C) is incorrect because losses 
   of $5,000 in Year 1 and $2,000 in Year 
   2 should be recognized. 

   Answer (D) is incorrect because losses 
   of $5,000 in Year 1 and $2,000 in Year 
   2 should be recognized. 


[948] Source: CMA 0694 2-29 

   Answer (A) is incorrect because APB 
   30 specifically excludes a write-down 
   of inventories from the definition of 
   extraordinary items. 

   Answer (B) is incorrect because APB 
   30 specifically excludes a loss due to 
   the effects of a strike against a major 
   supplier from the definition of 
   extraordinary items. 

   Answer (C) is incorrect because APB 
   30 specifically excludes a gain or loss 
   on the disposal of a portion of the 
   business from the definition of 
   extraordinary items. 

   Answer (D) is correct. APB 30 gives 
   examples of certain transactions that are 
   not to be considered extraordinary 
   items. These include write-downs of 
   receivables and inventories, translation 
   of foreign exchange, disposal of a 
   business segment, disposal of 
   productive assets, the effects of strikes, 
   and the adjustments of accruals on 
   long-term contracts. A gain or loss on 
   the early extinguishment of debt is to be 
   shown as an extraordinary item under 
   the provisions of SFAS 4. 


[949] Source: CIA 1191 IV-42 

   Answer (A) is correct. Extraordinary 
   items are material gains or losses that 
   are unusual in nature and infrequent in 
   occurrence within the environment in 
   which the business operates. APB 28 
   requires that extraordinary items be 
   disclosed separately and included in the 
   determination of net income for the 
   interim period in which they occur. 
   Gains and losses similar to those that 
   would not be deferred at year-end 
   should not be deferred to later interim 
   periods of the same year. Hence, the 
   extraordinary gain should not be 
   prorated. 

   Answer (B) is incorrect because the 
   gain should be recognized in full in the 
   second quarter. 

   Answer (C) is incorrect because the 
   gain should be recognized in full in the 
   second quarter. 

   Answer (D) is incorrect because the 
   gain should be recognized in full in the 
   second quarter. 


[950] Source: CIA 1195 IV-23 

   Answer (A) is correct. To correct the 
   prior error, the company must debit 
   equipment for its cost and credit 
   accumulated depreciation for the 
   depreciation expense appropriate for 
   the first year of the estimated useful life. 
   Retained earnings must be credited 
   because the error understated net 
   income in the prior period. 

   Answer (B) is incorrect because this 
   entry is the reverse of the correct entry. 

   Answer (C) is incorrect because 
   retained earnings should be credited. 

   Answer (D) is incorrect because 
   accumulated depreciation and retained 
   earnings should be credited. 


[951] Source: CMA 1288 4-28 

   Answer (A) is incorrect because it 
   would appear on the income statement. 

   Answer (B) is incorrect because it 
   would appear on the income statement. 

   Answer (C) is incorrect because the 
   resale of treasury stock at a price 
   greater than cost would result in a 
   credit to a paid-in capital account, not 
   to retained earnings. Thus, this 
   transaction would not appear on the 
   retained earnings statement. 

   Answer (D) is correct. The only items 
   that appear on a retained earnings 
   statement are dividends, net income, 
   and prior-period adjustments. 
   Prior-period adjustments are essentially 
   defined as clerical errors. Thus, the 
   discovery that estimated warranty 
   expense had been recorded twice 
   would result in a prior-period 
   adjustment. 


[952] Source: CIA 1196 IV-3 

   Answer (A) is incorrect because the 
   failure to record an accrued expense 
   will result in an overstatement of net 
   income and an overstatement of 
   working capital, and will have no effect 
   on cash. 

   Answer (B) is incorrect because the 
   failure to record an accrued expense 
   will result in an overstatement of net 
   income. 

   Answer (C) is incorrect because the 
   failure to record an accrued expense 
   will result in an overstatement of 
   working capital. 

   Answer (D) is correct. An accrued 
   expense is an expense that has been 
   incurred but not paid. The appropriate 
   adjusting entry to record an accrued 
   expense will increase an expense 
   account and increase a liability account. 
   The failure to record an accrued 
   expense will result in an understatement 
   of expenses leading to an overstatement 
   of net income. The failure to record the 
   increase in a liability account will 
   result in an understatement of current 
   liabilities leading to an overstatement 
   of working capital. There will be no 
   effect on cash. 


[953] Source: CIA 1196 IV-31 

   Answer (A) is incorrect because a 
   failure to record accrued wages will 
   correct itself when the wages are paid 
   in the following period and represents a 
   counterbalancing error. 

   Answer (B) is correct. A failure to 
   record depreciation must be corrected 
   as it does not correct itself over two 
   periods. It is a noncounterbalancing 
   error. 

   Answer (C) is incorrect because the 
   overstatement of inventory will correct 
   itself over two periods and is therefore 
   a counterbalancing error. 

   Answer (D) is incorrect because a 
   failure to record prepaid expenses will 
   correct itself in the next period when 
   the prepaid expense is consumed and is 
   therefore a counter-balancing error. 


[954] Source: CIA 0595 IV-8 

   Answer (A) is incorrect because the 
   double payment of a liability does not 
   affect expenses of the period, so it does 
   not affect net income and owners' 
   equity. 

   Answer (B) is incorrect because assets 
   will be reduced. 

   Answer (C) is correct. When a liability 
   is paid, an entry debiting accounts 
   payable and crediting cash is made. If a 
   company erroneously pays a liability 
   twice, the accounts payable and cash 
   accounts will be understated by the 
   amount of the liability. Hence, assets 
   and liabilities will be understated. 

   Answer (D) is incorrect because both 
   assets and liabilities will be 
   understated, whereas net income and 
   owners' equity will be unaffected. 


[955] Source: CIA 1195 IV-24 

   Answer (A) is incorrect because 
   extraordinary items are unusual and 
   infrequent. Changes in accounting 
   estimates are normal and frequent. 

   Answer (B) is incorrect because 
   changes in accounting estimates are not 
   prior errors. They are changes in 
   response to new conditions or 
   circumstances. 

   Answer (C) is incorrect because 
   catch-up adjustments to prior reported 
   amounts are retroactive. Changes in 
   accounting estimates are accounted for 
   currently and prospectively. 

   Answer (D) is correct. A change in 
   accounting estimate is a normal, 
   recurring correction or adjustment. 
   Examples include changes in the 
   realizability of receivables and 
   inventories. A change in estimate is 
   accounted for in the period of change if 
   it affects that period only, or in the 
   period of the change and future periods 
   if the change affects both. 


[956] Source: CIA 1195 IV-25 

   Answer (A) is incorrect because 
   changes in accounting estimates should 
   be reported. 

   Answer (B) is correct. Changes in 
   accounting estimates arise as new 
   events occur, as more experience is 
   obtained, or as additional evidence is 
   acquired. A change should be reported 
   in the period in which it occurs, as well 
   as prospectively if future periods are 
   affected. Retroactive reporting is 
   impracticable because it would result in 
   continual adjustments of prior years' 
   income. 

   Answer (C) is incorrect because 
   changes in accounting estimates arise 
   from changes in current, not prior, 
   circumstances. 

   Answer (D) is incorrect because 
   changes in accounting estimates arise 
   from changes in current, not prior, 
   circumstances. 


[957] Source: CIA 1194 IV-39 

   Answer (A) is incorrect because gains 
   or losses resulting from an 
   expropriation are extraordinary items. 

   Answer (B) is incorrect because a 
   change from accelerated to straight-line 
   depreciation is a change in accounting 
   principle. 

   Answer (C) is incorrect because 
   transaction gains or losses resulting 
   from a change in foreign exchange rates 
   are not changes in estimate. When a 
   transaction denominated in a foreign 
   currency is recorded, the rate of 
   exchange between the functional 
   currency and the reporting currency is 
   known. 

   Answer (D) is correct. An accounting 
   estimate may change as new events 
   occur, as more experience is acquired, 
   or as additional information is obtained. 
   A change in the collectibility of 
   receivables is a change in an accounting 
   estimate. 


[958] Source: CIA 0596 IV-28 

   Answer (A) is incorrect because the 
   purchase price for an acquired building 
   can be calculated with certainty. No 
   estimate is required. 

   Answer (B) is incorrect because the 
   price of a marketable security can be 
   calculated with certainty. No estimate is 
   required. 

   Answer (C) is correct. According to 
   APB 20, "Changes in estimates used in 
   accounting are necessary consequences 
   of periodic presentations of financial 
   statements. Preparing financial 
   statements requires estimating the 
   effects of future events. Examples of 
   items for which estimates are necessary 
   are uncollectible receivables, inventory 
   obsolescence, service lives and salvage 
   values of depreciable assets, warranty 
   costs, periods benefited by a deferred 
   cost, and recoverable mineral 
   reserves." 

   Answer (D) is incorrect because the 
   physical quantity of inventory as of the 
   financial statement date can be 
   measured. Although some estimation of 
   the correct amount may be required, the 
   estimates will not depend on future 
   conditions and events but on current 
   conditions and measurement methods. 


[959] Source: CIA 1194 IV-40 

   Answer (A) is correct. A change in an 
   accounting estimate is accounted for 
   prospectively and is shown on the 
   income statement only in the relevant 
   account. Prior period statements and 
   opening balances are not adjusted. 

   Answer (B) is incorrect because 
   changes in an accounting estimate are 
   not unusual and infrequent in the 
   environment in which the entity 
   operates. 

   Answer (C) is incorrect because 
   changes in accounting estimates are 
   shown only in the relevant accounts. 
   Discontinued operations are shown 
   after continuing operations but before 
   extraordinary items. 

   Answer (D) is incorrect because a 
   change in an accounting estimate is only 
   shown in the relevant account. No 
   cumulative effect of the change is 
   recognized. 


[960] Source: CIA 0596 IV-27 

   Answer (A) is incorrect because 
   $8,750 is the result of depreciating the 
   remaining carrying value over 20 years 
   rather than the remaining 17 years. 

   Answer (B) is correct. In 2001, the 
   book value at the start of the period will 
   be amortized over the revised estimated 
   years of useful life. The depreciation 
   recognized during 1998-2000 was 
   $75,000 [3 years x ($250,000  10)]. 
   Thus, the book value at the beginning of 
   2001 was $175,000, and 2001 
   depreciation based on the revised 
   estimated useful life is $10,294 
   [$175,000  (20 - 3)]. 

   Answer (C) is incorrect because 
   $12,500 results from accounting for the 
   change in estimate retroactively. 

   Answer (D) is incorrect because 
   $14,706 results from depreciating the 
   original book value over the revised 
   estimate of remaining useful life. 


[961] Source: Publisher 

   Answer (A) is incorrect because a 
   $90,000 credit fails to consider Subs B 
   and C. 

   Answer (B) is incorrect because a 
   $70,000 net credit fails to consider Sub 
   C. 

   Answer (C) is correct. FASB 
   Interpretation No. 37, Accounting for 
   Translation Adjustments upon Sale of 
   Part of an Investment in a Foreign 
   Entity, clarifies SFAS 52. A pro rata 
   portion of the accumulated translation 
   adjustment attributable to an investment 
   shall be recognized in measuring the 
   gain or loss on the sale of all or part of 
   a company's interest in a foreign entity. 
   Here, the total amount to be reported is 
   a $67,500 net credit [(100% x $90,000) 
   - (50% x $40,000) - (10% x $25,000)]. 

   Answer (D) is incorrect because a 
   translation adjustment is recognized as 
   part of the gain on the sale of the 
   subsidiaries. 


[962] Source: CIA 1190 IV-58 

   Answer (A) is correct. The returns on 
   the stock are presumably paid in marks. 
   Hence, the change in the value of the 
   mark relative to the dollar does not 
   affect the German company's return. 
   However, the weakening of the mark 
   reduces the number of dollars it will 
   buy, and the U.S. company's return in 
   dollars is correspondingly reduced. 

   Answer (B) is incorrect because the 
   return to the U.S. company is adversely 
   affected by the exchange rate movement. 

   Answer (C) is incorrect because the 
   return to the U.S. company was directly 
   affected by the exchange rate movement, 
   but the return to the German company 
   was not. 

   Answer (D) is incorrect because the 
   return to the U.S. company was directly 
   affected by the exchange rate movement, 
   but the return to the German company 
   was not. 


[963] Source: CMA 0693 2-22 

   Answer (A) is incorrect because the 
   operating gain or loss for the partial 
   period is not combined with the gain or 
   loss on disposal. 

   Answer (B) is incorrect because gain or 
   loss on disposal is reported on the 
   income statement, not the retained 
   earnings statement. 

   Answer (C) is incorrect because gain or 
   loss on disposal is reported in a 
   discontinued operations section prior to 
   extraordinary items. 

   Answer (D) is correct. Discontinued 
   operations should be presented as two 
   subcategories. The first is operating 
   income or loss of the segment prior to 
   the measurement date. The second is the 
   gain or loss on disposal. The gain or 
   loss on disposal includes estimated 
   operating income or loss of the segment 
   from the measurement date to the 
   disposal date and any disposal costs 
   incurred during the phaseout period, 
   plus the estimated gain or loss on the 
   actual disposal. 


[964] Source: CPA 0593 I-57 

   Answer (A) is correct. The results of 
   operations of a segment that has been or 
   will be discontinued, together with any 
   gain or loss on disposal, should be 
   reported separately as a component of 
   income before extraordinary items and 
   the cumulative effect of accounting 
   changes. Income or loss from 
   discontinued operations and the gain or 
   loss on disposal should each be 
   disclosed net of tax. Accordingly, the 
   loss from discontinued operations, net 
   of tax effect, is $1,105,000 [$1,700,000 
   loss prior to the 12/31/01 measurement 
   date x (1.0 - 35% tax rate)]. 

   Answer (B) is incorrect because 
   $1,690,000 equals the after-tax 2001 
   loss from discontinued operations, plus 
   the estimated after-tax operating loss 
   for 2002. 

   Answer (C) is incorrect because 
   $1,700,000 is the pretax 2001 loss from 
   discontinued operations. 

   Answer (D) is incorrect because 
   $2,600,000 equals the pretax 2001 loss 
   from discontinued operations, plus the 
   estimated pretax operating loss for 
   2002. 


[965] Source: CPA 0593 I-58 

   Answer (A) is incorrect because 
   $260,000 does not include the expected 
   operating loss. 

   Answer (B) is incorrect because 
   $400,000 is a pretax amount that does 
   not include the expected operating loss. 

   Answer (C) is correct. The gain or loss 
   on disposal should include not only the 
   gain or loss on disposal of the assets 
   but also any income or loss from 
   operations during the phaseout period. 
   If a net loss is expected, it should be 
   provided for at the measurement date 
   (12/31/01). Thus, loss on disposal of 
   discontinued operations, net of taxes, is 
   $845,000 [($900,000 expected 
   operating loss + $400,000 estimated 
   loss on asset sale) x (1 - 35%)]. 

   Answer (D) is incorrect because the 
   loss on disposal of discontinued 
   operations should be reported net of 
   tax. 


[966] Source: CMA 0681 3-23 

   Answer (A) is incorrect because, under 
   SFAS 16, it is a prior interim (not 
   annual) period adjustment. 

   Answer (B) is incorrect because, under 
   SFAS 16, it is a prior interim (not 
   annual) period adjustment. 

   Answer (C) is correct. The correction 
   of an error in the financial statements of 
   a prior period is accounted for and 
   reported as a prior-period adjustment 
   and excluded from the determination of 
   net income for the current period (SFAS 
   16, Prior Period Adjustments). 

   Answer (D) is incorrect because, under 
   SFAS 16, it is a prior interim (not 
   annual) period adjustment. 


[967] Source: Publisher 

   Answer (A) is incorrect because paying 
   the creditor includes the delivery of 
   cash, other financial assets, goods, or 
   services or the reacquisition of the 
   outstanding debt securities whether the 
   securities are canceled or held as 
   so-called treasury bonds. 

   Answer (B) is correct. SFAS 140 does 
   not allow the debtor to derecognize a 
   liability unless the liability is 
   considered extinguished. A liability is 
   extinguished if either of the following 
   conditions is met: (1) The debtor pays 
   the creditor and is relieved of its 
   obligation for the liability, or (2) the 
   debtor is legally released from bing the 
   primary obligor of the liability, either 
   judicially or by the creditor. Creating 
   an irrevocable trust and using the 
   proceeds (principal and interest) to pay 
   off the debt securities as they mature is 
   called "in-substance defeasance." 
   In-substance defeasance does not meet 
   the derecognition criteria. First, the 
   debtor is not legally released as the 
   primary obligor of the liability. Second, 
   the debtor has not been relieved of its 
   obligation for the liability because the 
   creditor has not been paid. In many 
   cases, the creditor is not even aware 
   that the trust has been created. 

   Answer (C) is incorrect because a 
   debtor may be legally released as the 
   primary obligor of the liability either 
   judicially or by the creditor. 

   Answer (D) is incorrect because paying 
   the creditor includes the delivery of 
   cash, other financial assets, goods, or 
   services or the reacquisition of the 
   outstanding debt securities whether the 
   securities are canceled or held as 
   so-called treasury bonds. 


[968] Source: Publisher 

   Answer (A) is incorrect because certain 
   disclosures are required when a 
   company previously extinguished debt 
   through in-substance defeasance. 

   Answer (B) is incorrect because the 
   disclosures required when a company 
   previously extinguished debt through 
   in-substance defeasance include a 
   general description of the transaction 
   and the amount of debt considered 
   extinguished at year-end until the debt is 
   no longer outstanding. 

   Answer (C) is correct. Under SFAS 
   125, in-substance defeasance 
   transactions do not meet the 
   derecognition criteria for removing debt 
   from the financial statements. However, 
   derecognition was previously allowed 
   by SFAS 76. If debt was considered to 
   be extinguished by in-substance 
   defeasance under SFAS 76, prior to the 
   effective date of SFAS 125, certain 
   disclosures must be made. The 
   disclosures include a general 
   description of the transaction and the 
   amount of debt that is considered 
   extinguished at the end of the period so 
   long as that debt remains outstanding. 

   Answer (D) is incorrect because certain 
   disclosures are required when a 
   company previously extinguished debt 
   through in-substance defeasance. 


[969] Source: CMA 1287 3-20 

   Answer (A) is incorrect because gains 
   or losses from extinguishments at more 
   than carrying value are treated as 
   extraordinary under SFAS 4. 

   Answer (B) is correct. Extinguishment 
   of debt may arise from the reacquisition 
   of debt instruments. Gains or losses 
   from early extinguishment are 
   customarily treated as extraordinary. 
   However, SFAS 64 emphasizes that 
   gains and losses on early 
   extinguishments made to satisfy current 
   (due within 1 year) sinking-fund 
   requirements are not extraordinary. 

   Answer (C) is incorrect because APB 
   26 and SFAS 4 state that gains or losses 
   on refinancing are treated as 
   extraordinary. 

   Answer (D) is incorrect because gains 
   or losses from extinguishments at less 
   than carrying value are treated as 
   extraordinary under SFAS 4. 


[970] Source: Publisher 

   Answer (A) is incorrect because it 
   describes a circumstance under which 
   debt may be extinguished. 

   Answer (B) is incorrect because it 
   describes a circumstance under which 
   debt may be extinguished. 

   Answer (C) is correct. SFAS 140, 
   Accounting for Transfers and Servicing 
   of Financial Assets and Extinguishments 
   of Liabilities, prescribes the 
   derecognition of a liability only if it has 
   been extinguished. Extinguishment 
   occurs when either (1) the debtor pays 
   the creditor and is relieved of its 
   obligation for the liability, or (2) the 
   debtor is legally released from being 
   the primary obligor under the liability, 
   either judicially or by the creditor. 

   Answer (D) is incorrect because it 
   describes a circumstance under which 
   debt may be extinguished. 


[971] Source: Publisher 

   Answer (A) is incorrect because an 
   in-substance defeasance does not result 
   in the derecognition of a liability. 

   Answer (B) is correct. SFAS 140 
   prohibits the recognition of a gain (loss) 
   from an in-substance defeasance. 

   Answer (C) is incorrect because an 
   in-substance defeasance does not result 
   in the derecognition of a liability. 

   Answer (D) is incorrect because an 
   in-substance defeasance does not result 
   in the derecognition of a liability. 


[972] Source: CMA 0687 3-6 

   Answer (A) is incorrect because 
   transaction gains (losses) are not so 
   unusual as to warrant extraordinary 
   status. 

   Answer (B) is incorrect because 
   adjustments to retained earnings are 
   made only for prior-period adjustments, 
   and transaction gains (losses) do not 
   meet the criteria for such treatment. 

   Answer (C) is incorrect because 
   foreign currency translation gains and 
   losses (not transaction gains and losses) 
   are reported in other comprehensive 
   income, a component of equity. 

   Answer (D) is correct. When a foreign 
   currency transaction gives rise to a 
   receivable or a payable, a change in the 
   exchange rate between the measurement 
   currency and the currency in which the 
   transaction is denominated is a foreign 
   currency transaction gain (loss) that 
   should be included as a component of 
   income from continuing operations. 


[973] Source: CMA 1288 3-30 

   Answer (A) is correct. SFAS 52 
   requires foreign currency transaction 
   (not translation) gains and losses to be 
   recognized in income in the period in 
   which exchange rates changed. Gains 
   and losses on hedged contracts, 
   however, are deferred and recognized 
   as part of the related transaction. 

   Answer (B) is incorrect because 
   whether a transaction gain or loss will 
   occur cannot be known when the 
   transaction originates. Only when the 
   exchange rates change can the exchange 
   gain or loss be determined. 

   Answer (C) is incorrect because 
   hedging gains and losses are handled 
   differently from normal transaction 
   gains and losses. 

   Answer (D) is incorrect because 
   intercompany transactions are handled 
   through consolidation and translation. 


[974] Source: CMA 0688 4-20 

   Answer (A) is incorrect because 
   foreign currency transaction gains and 
   losses are included in earnings. 

   Answer (B) is correct. SFAS 52 (as 
   amended) requires that adjustments 
   resulting from translation of an entity's 
   foreign-currency denominated financial 
   statements into the reporting currency 
   be reported on the balance sheet in the 
   equity section under accumulated other 
   comprehensive income (OCI). 

   Answer (C) is incorrect because certain 
   items, for example, gains and losses on 
   a qualifying foreign currency fair value 
   hedge, are included in earnings. 

   Answer (D) is incorrect because GAAP 
   require translation adjustments to be 
   reported in OCI. 


[975] Source: CMA 0697 2-23 

   Answer (A) is correct. SFAS 16 
   requires prior-period adjustments 
   (error corrections) to be accounted for 
   through retained earnings, not the 
   income statement. Thus, the beginning 
   balance of retained earnings should be 
   credited for revenue that was 
   erroneously not accrued in a prior 
   period. The amount of the credit at May 
   31, 2001 is $91,800 (2000 accrued 
   interest revenue). 

   Answer (B) is incorrect because the 
   prior-period adjustment is to retained 
   earnings. 

   Answer (C) is incorrect because the 
   2001 credit to interest revenue is 
   $100,200. 

   Answer (D) is incorrect because 
   $100,200 is debited to interest 
   receivable. 


[976] Source: CMA 0697 2-24 

   Answer (A) is incorrect because 
   prepaid rent should be credited for 
   $42,180. 

   Answer (B) is incorrect because the 
   existing amount in prepaid rent also 
   needs to be expensed. 

   Answer (C) is incorrect because 
   prepaid rent should be credited for 
   $42,180. 

   Answer (D) is correct. The existing 
   balance ($30,780) in prepaid rent at 
   March 1, 2001 reflects a prepayment 
   for the first 9 months of the fiscal year 
   that should now be expensed. The 
   initial payment on the new lease is for 
   the last 3 months of the current fiscal 
   year and the first 9 months of the next. 
   Accordingly, 25% (3 months  12 
   months) of this initial payment should 
   be expensed. The entry is therefore to 
   debit rent expense and credit prepaid 
   rent for $42,180 [$30,780 + (25% x 
   $45,600)]. 


[977] Source: CMA 0697 2-25 

   Answer (A) is incorrect because a 
   change in the life of a depreciable asset 
   is an example of a change in estimate. 

   Answer (B) is correct. Switching 
   depreciation methods is an ordinary 
   change in accounting principle. Such 
   changes are accounted for by using the 
   new principle in the period of change 
   and by recognizing the cumulative effect 
   of the change for all prior periods as the 
   last item in the income statement 
   (before per-share amounts). 

   Answer (C) is incorrect because 
   changing from one generally accepted 
   method to another is not an error 
   correction. 

   Answer (D) is incorrect because only 
   error corrections result in prior-period 
   adjustments. 


[978] Source: CMA 0697 2-26 

   Answer (A) is incorrect because 
   prior-period statements are not adjusted 
   for changes in estimates. 

   Answer (B) is incorrect because APB 
   20 specifically prohibits the reporting 
   of pro forma amounts for prior periods 
   as a result of a change in estimate. 

   Answer (C) is incorrect because only 
   prior-period adjustments are accounted 
   for through an adjustment of retained 
   earnings. 

   Answer (D) is correct. A change in the 
   liability is merely a change in an 
   estimate; it is not a change in principle. 
   APB 20 requires changes in estimate to 
   be accounted for prospectively, that is, 
   in the current and future periods. The 
   cumulative effect of the change is not 
   recognized in the income statement, and 
   retroactive adjustment of the financial 
   statements is not permitted. 


[979] Source: CMA 0697 2-28 

   Answer (A) is incorrect because it is a 
   factor indicating that the functional 
   currency is the foreign currency. 

   Answer (B) is correct. SFAS 52 states 
   that the functional currency is that of the 
   primary economic environment in 
   which an entity operates. Thus, it is 
   usually the currency in which cash is 
   generated and expended by the entity 
   whose financial statements are being 
   translated. Indications that the 
   subsidiary's currency is the functional 
   currency include the following: Its cash 
   flows are primarily in that foreign 
   currency, they do not affect the parent's 
   cash flows, labor and materials are 
   obtained in the local market of the 
   foreign subsidiary, subsidiary financing 
   is obtained from local foreign sources 
   and from the subsidiary's operations, 
   and few intercompany transactions take 
   place between the foreign subsidiary 
   and the parent. However, sales prices 
   that are responsive to exchange rate 
   fluctuations and international 
   competition suggest that the functional 
   currency is the parent's currency. 

   Answer (C) is incorrect because it is a 
   factor indicating that the functional 
   currency is the foreign currency. 

   Answer (D) is incorrect because it is a 
   factor indicating that the functional 
   currency is the foreign currency. 


[980] Source: Publisher 

   Answer (A) is incorrect because 2000 
   income is understated as a result of the 
   understatement of ending inventory. 

   Answer (B) is incorrect because the 
   understatement of 2000 ending 
   inventory results in understated 2001 
   beginning inventory and understated 
   2001 cost of sales. 

   Answer (C) is correct. The effect of 
   erroneously writing down inventory is 
   to understate inventory at the end of 
   2000. The understatement of ending 
   inventory causes cost of goods sold to 
   be overstated in 2000. The 
   overstatement of cost of goods sold in 
   turn causes 2000 income to be 
   understated. The understatement of 
   2001 beginning inventory causes cost of 
   goods sold to be understated and 
   income to be overstated in 2001. 

   Answer (D) is incorrect because the 
   2001 income will be overstated due to 
   the understatement of beginning 
   inventory. 


[981] Source: Publisher 

   Answer (A) is correct. There were 2 
   million shares outstanding at the 
   beginning of 1999. Another 200,000 
   were issued as a result of a stock 
   dividend on September 30. Because a 
   stock dividend merely divides existing 
   shares into more pieces, the dividend is 
   assumed to have occurred at the 
   beginning of the year. Thus, on the 1999 
   income statement, the number of shares 
   outstanding throughout the year would 
   have been 2.2 million. No subsequent 
   changes were made in those 2.2 million 
   shares in 2000 (no stock dividends or 
   stock splits). Consequently, the 
   comparative statements for 1999 and 
   2000 will report basic earnings per 
   share using the same weighted-average 
   number of common shares for 1999 as 
   the 1999 income statement. 

   Answer (B) is incorrect because no 
   weighting is required. Common stock 
   outstanding during 1999 did not change 
   as a result of 2000 transactions. 

   Answer (C) is incorrect because no 
   weighting is required. Common stock 
   outstanding during 1999 did not change 
   as a result of 2000 transactions. 

   Answer (D) is incorrect because the 
   stock split does not occur until 2001. 


[982] Source: Publisher 

   Answer (A) is incorrect because 
   3,150,000 is the weight assigned to 
   4,200,000 shares for 9 months. 

   Answer (B) is correct. At the beginning 
   of 2000, 2.2 million shares were 
   outstanding. This figure remained 
   unchanged for 3 months until March 31 
   when an additional 2 million shares 
   were issued. Thus, for the last 9 months 
   of the year, 4.2 million shares were 
   outstanding. Hence, the 
   weighted-average number of shares 
   outstanding throughout the year was 
   3,700,000 {[2,200,000 x (3  12)] + 
   [4,200,000 x (9  12)]}. 

   Answer (C) is incorrect because 
   4,200,000 shares were not outstanding 
   during the first 3 months of the year. 

   Answer (D) is incorrect because the 
   stock split did not occur until the 
   following year. 


[983] Source: Publisher 

   Answer (A) is incorrect because 
   3,700,000 is the number of shares used 
   on the 2000 income statement. 

   Answer (B) is incorrect because the 
   shares outstanding must be weighted. 
   The full 4,200,000 shares were not 
   outstanding during the first 3 months of 
   2000. 

   Answer (C) is correct. The number of 
   shares used in computing the 2000 basic 
   EPS on the 2000 income statement was 
   3.7 million. However, because of the 
   stock split on March 31, 2001, those 
   shares were doubled. Thus, the basic 
   EPS calculation for 2000 on the 2001 
   comparative income statement is 7.4 
   million shares (2 x 3,700,000 shares). 

   Answer (D) is incorrect because the 
   shares outstanding must be weighted. 
   The full 4,200,000 shares were not 
   outstanding during the first 3 months of 
   2000. 


[984] Source: Publisher 

   Answer (A) is incorrect because 
   4,200,000 does not consider the stock 
   split. 

   Answer (B) is incorrect because stock 
   splits do not require a weighting of the 
   shares outstanding; stock splits and 
   stock dividends are assumed to have 
   occurred on the first day of the fiscal 
   year. 

   Answer (C) is incorrect because stock 
   splits do not require a weighting of the 
   shares outstanding; stock splits and 
   stock dividends are assumed to have 
   occurred on the first day of the fiscal 
   year. 

   Answer (D) is correct. At the beginning 
   of 2001, 4.2 million shares were 
   outstanding. However, the March 31 
   stock split in-creased that number to 8.4 
   million. Because a stock split is 
   assumed to have occurred on the first 
   day of the year, the number of shares 
   outstanding throughout 2001 is 8.4 
   million. 


[985] Source: Publisher 

   Answer (A) is incorrect because 
   444,000 is the adjusted 
   weighted-average number of shares 
   used in the DEPS calculation. 

   Answer (B) is incorrect because 
   372,000 is the total outstanding at 
   March 31. 

   Answer (C) is correct. The number of 
   shares outstanding at January 1 was 
   300,000, 12,000 shares were issued on 
   March 1, and 60,000 shares of 
   preferred stock were converted to 
   60,000 shares of common stock on 
   February 1. Thus, the weighted-average 
   number of shares used to calculate 
   BEPS amounts for the first quarter is 
   344,000 {300,000 + [12,000 x (1  3)] 
   + [60,000 x (2  3)]}. 

   Answer (D) is incorrect because 
   300,000 equals the shares outstanding at 
   January 1. 


[986] Source: Publisher 

   Answer (A) is incorrect because 
   $1,000,000 is unadjusted income from 
   continuing operations. 

   Answer (B) is correct. If a company 
   reports discontinued operations, 
   extraordinary items, or accounting 
   changes, it uses income from continuing 
   operations (in Pubco's case, income 
   before extraordinary item), adjusted for 
   preferred dividends, as the control 
   number for determining whether 
   potential common shares are dilutive or 
   antidilutive. Hence, the number of 
   potential common shares used in 
   calculating DEPS for income from 
   continuing operations is also used in 
   calculating the other DEPS amounts 
   even if the effect is antidilutive with 
   respect to the corresponding BEPS 
   amounts. However, if the entity has a 
   loss from continuing operations 
   available to common shareholders, no 
   potential common shares are included 
   in the calculation of any DEPS amount 
   (SFAS 128). The control number for 
   Pubco is $994,000 {$1,000,000 income 
   before extraordinary item - [$.10 per 
   share dividend x (120,000 preferred 
   shares - 60,000 preferred shares 
   converted)]}. 

   Answer (C) is incorrect because 
   $(206,000) is the net loss available to 
   common shareholders after subtracting 
   the extraordinary loss. 

   Answer (D) is incorrect because 
   $(1,200,000) is the extraordinary loss. 


[987] Source: Publisher 

   Answer (A) is incorrect because $2.89 
   is the BEPS amount for income 
   available to common shareholders 
   before the extraordinary item. 

   Answer (B) is incorrect because 
   $(0.46) uses the denominator of the 
   DEPS calculation. 

   Answer (C) is correct. The 
   weighted-average of shares used in the 
   BEPS denominator is 344,000. The 
   numerator equals income before 
   extraordinary item, minus preferred 
   dividends, minus the extraordinary loss. 
   Thus, it equals the control number (see 
   question 36) minus the extraordinary 
   loss, or $(206,000) [$994,000 - 
   $1,200,000]. The BEPS amount for the 
   net income or loss available to common 
   shareholders after the extraordinary 
   item is $(0.60) [$(206,000)  344,000 
   shares]. 

   Answer (D) is incorrect because 
   $(3.49) is the BEPS amount for the 
   extraordinary loss. 


[988] Source: Publisher 

   Answer (A) is correct. The 
   denominator of DEPS equals the 
   weighted-average number of shares 
   used in the BEPS calculation (344,000 
   as determined in question 35) plus 
   dilutive potential common shares 
   (assuming the control number is not a 
   loss). The incremental shares from 
   assumed conversion of warrants is zero 
   because they are antidilutive. The $25 
   market price is less than the $28 
   exercise price. The assumed conversion 
   of all the preferred shares at the 
   beginning of the quarter results in 
   80,000 incremental shares {[120,000 
   shares x (3  3)] - [60,000 shares x (2  
   3)]}. The assumed conversion of all the 
   bonds at the beginning of the quarter 
   results in 20,000 incremental shares 
   [($2,000,000  $1,000 per bond) x 10 
   common shares per bond]. 
   Consequently, the weighted-average 
   number of shares used to calculate 
   DEPS amounts for the first quarter is 
   444,000 (344,000 + 0 + 80,000 + 
   20,000). 

   Answer (B) is incorrect because 
   438,000 assumes the hypothetical 
   exercise of all the warrants at the 
   beginning of the period at a price of $28 
   and the repurchase of shares using the 
   proceeds at a price of $25. 

   Answer (C) is incorrect because 
   372,000 is the total outstanding at 
   March 31. 

   Answer (D) is incorrect because 
   344,000 is the denominator of the BEPS 
   fraction. 


[989] Source: Publisher 

   Answer (A) is incorrect because 
   $31,000 disregards the tax shield 
   provided by bond interest. 

   Answer (B) is incorrect because 
   $25,000 equals one quarter's bond 
   interest payment. 

   Answer (C) is correct. If all of the 
   convertible preferred shares are 
   assumed to be converted on January 1, 
   $6,000 of dividends [$.10 x (120,000 - 
   60,000) preferred shares] will not be 
   paid. Furthermore, if the bonds are 
   assumed to be converted on January 1, 
   interest of $17,500 {[5% x $2,000,000 
    4] x (1.0 - .3 tax rate)} will not be 
   paid. Accordingly, the effect of 
   assumed conversions on the numerator 
   of the DEPS fraction is an addition of 
   $23,500 ($6,000 + $17,500) to the 
   income available to common 
   shareholders. 

   Answer (D) is incorrect because 
   $17,500 is the effect of the assumed 
   conversion of the bonds alone. 


[990] Source: Publisher 

   Answer (A) is incorrect because $2.89 
   is the difference between DEPS and 
   BEPS for the extraordinary loss. 

   Answer (B) is incorrect because $2.10 
   is the difference between DEPS for the 
   extraordinary loss and the BEPS for the 
   net loss available to common 
   shareholders after the extraordinary 
   loss. 

   Answer (C) is correct. BEPS for the 
   extraordinary loss is $(3.49) 
   [$(1,200,000)  344,000]. DEPS for 
   the extraordinary item is $(2.70) 
   [$(1,200,000)  444,000 shares]. 

   Answer (D) is incorrect because $.60 is 
   the BEPS for the net loss available to 
   common shareholders after the 
   extraordinary loss. 


[991] Source: Publisher 

   Answer (A) is incorrect because $2.29 
   is the DEPS amount for income before 
   the extraordinary item. 

   Answer (B) is correct. The numerator 
   equals the income available to common 
   shareholders (the control number), plus 
   the effect of the assumed conversions, 
   minus the extraordinary loss. The 
   denominator equals the 
   weighted-average of shares outstanding 
   plus the dilutive potential common 
   shares. Hence, the DEPS amount for the 
   net income or loss available to common 
   shareholders after the extraordinary 
   item is $(.41) [($994,000 + $23,500 - 
   $1,200,000)  444,000]. 

   Answer (C) is incorrect because 
   $(0.53) is based on the BEPS 
   denominator. 

   Answer (D) is incorrect because 
   $(2.70) is the DEPS for the 
   extraordinary item. 


[992] Source: CIA 1196 IV-2 

   Answer (A) is incorrect because the 
   cost of goods sold will be 
   overestimated. 

   Answer (B) is incorrect because the 
   cost of goods sold will be 
   overestimated, and net earnings will be 
   underestimated. 

   Answer (C) is correct. Cost of goods 
   sold equals beginning inventory, plus 
   purchases, minus ending inventory. If 
   the ending inventory is underestimated, 
   the cost of goods sold will be 
   overestimated. If cost of goods sold is 
   overestimated, net earnings will be 
   underestimated. 

   Answer (D) is incorrect because net 
   earnings will be underestimated. 


[993] Source: Publisher 

   Answer (A) is incorrect because EPS 
   for income from continuing operations 
   must be disclosed on the face of the 
   income statement. 

   Answer (B) is correct. According to 
   SFAS 95, the presentation of per share 
   amounts for cash flows is not permitted. 
   Cash flow is not a substitute for net 
   income. 

   Answer (C) is incorrect because EPS 
   amounts for an extraordinary item must 
   be reported on the face of the income 
   statement or in the notes. 

   Answer (D) is incorrect because EPS 
   amounts for the cumulative effect of a 
   change in accounting principle must be 
   reported on the face of the income 
   statement or in the notes. 


[994] Source: CIA 1191 IV-39 

   Answer (A) is incorrect because the 
   excess of the reacquisition price over 
   the net carrying amount of the old bonds 
   is recognized in full as a loss from 
   extinguishment of debt in the period of 
   refunding. 

   Answer (B) is incorrect because the 
   excess of the reacquisition price over 
   the net carrying amount of the old bonds 
   is recognized in full as a loss from 
   extinguishment of debt in the period of 
   refunding. 

   Answer (C) is correct. The amount paid 
   on redemption before maturity, 
   including any call premium, is the 
   reacquisition price. An excess of the 
   reacquisition price over the carrying 
   amount is a loss from extinguishment of 
   debt. Gains and losses from 
   extinguishment of debt are to be 
   classified as extraordinary items on the 
   income statement in the period of 
   extinguishment. In this case, the loss 
   equals the call premium because the 
   payable is carried at par. 

   Answer (D) is incorrect because the 
   loss is extraordinary. 


[995] Source: CMA 1288 3-27 

   Answer (A) is incorrect because SFAS 
   52 requires translation using a current 
   exchange rate. Noncurrent (historical) 
   rates are used in the remeasurement of 
   certain items. 

   Answer (B) is incorrect because 
   consideration of whether items are 
   monetary or nonmonetary is a factor in 
   remeasurement, not translation. Thus, 
   nonmonetary balance sheet items and 
   related revenues and expenses are 
   remeasured at historical exchange rates. 

   Answer (C) is incorrect because, 
   although the temporal method should be 
   used for remeasurement, the question 
   does not state whether the financial 
   statements are presented in a currency 
   other than the functional currency. 

   Answer (D) is correct. SFAS 52 
   requires that the affiliate's statements 
   first be remeasured into its functional 
   currency. Then, a current exchange rate 
   is used to translate the foreign entity's 
   financial statements into U.S. dollars. 
   This method applies the current 
   exchange rate to all elements of the 
   financial statements. The gains and 
   losses are accumulated in a separate 
   shareholders' equity account to be 
   recognized in income upon the sale or 
   liquidation of the foreign entity. 


[996] Source: CMA 1288 3-29 

   Answer (A) is incorrect because the 
   premium or discount is the difference 
   between the contracted forward rate 
   and the spot rate at the date of inception 
   of the contract. 

   Answer (B) is incorrect because the 
   premium or discount is the difference 
   between the contracted forward rate 
   and the spot rate at the date of inception 
   of the contract. 

   Answer (C) is incorrect because the 
   premium or discount is the difference 
   between the contracted forward rate 
   and the spot rate at the date of inception 
   of the contract. 

   Answer (D) is correct. A forward 
   exchange contract is an agreement to 
   exchange different currencies at a 
   specified future date and at a specified 
   rate (the forward rate). The premium or 
   discount on the forward contract is 
   calculated using the difference between 
   the contracted forward rate and the spot 
   rate (the exchange rate for immediate 
   delivery of currencies exchanged) at the 
   date of the contract. SFAS 52 requires 
   this discount or premium to be 
   amortized over the life of the contract. 
   However, if the forward contract is a 
   hedge of a net investment, the discount 
   or premium may be deferred. 


[997] Source: Publisher 

   Answer (A) is correct. A speculative 
   forward contract is a contract that does 
   not hedge any exposure to foreign 
   currency fluctuations; it creates the 
   exposure. Both the receivable from the 
   broker and the liability to the broker are 
   recorded at the forward exchange rate 
   existing at the date of the contract. The 
   receivable or liability denominated in 
   the foreign currency is adjusted to 
   reflect the forward rate at each ensuing 
   balance sheet date and at the date of 
   settlement, with a corresponding 
   recognition of exchange gain or loss. 

   Answer (B) is incorrect because for 
   foreign exchange hedges the receivable 
   or payable denominated in dollars is 
   recorded at the forward exchange rate, 
   and the payable or receivable 
   denominated in foreign exchange units 
   is recorded at the spot rate. The 
   difference is recorded as a discount or 
   premium. 

   Answer (C) is incorrect because for 
   foreign exchange hedges the receivable 
   or payable denominated in dollars is 
   recorded at the forward exchange rate, 
   and the payable or receivable 
   denominated in foreign exchange units 
   is recorded at the spot rate. The 
   difference is recorded as a discount or 
   premium. 

   Answer (D) is incorrect because for 
   foreign exchange hedges the receivable 
   or payable denominated in dollars is 
   recorded at the forward exchange rate, 
   and the payable or receivable 
   denominated in foreign exchange units 
   is recorded at the spot rate. The 
   difference is recorded as a discount or 
   premium. 


[998] Source: Publisher 

   Answer (A) is incorrect because 
   $48,000 is the amortization for the final 
   6 months. 

   Answer (B) is incorrect because 
   $52,000 is the unamortized premium on 
   July 1, 2001; it would be the gain if the 
   bonds had been purchased at face value. 

   Answer (C) is correct. The gain is the 
   difference in carrying (book) value at 
   the date of extinguishment and the price 
   paid. As of December 31, 2000, the 
   bonds had been outstanding 25 months. 
   Since $200,000 ($2.3 million - $2.1 
   million) had been amortized over those 
   25 months, the straight-line rate is 
   apparently $8,000 per month ($200,000 
    25 months). Therefore, during the first 
   half of 2001, an additional $48,000 (6 x 
   $8,000) would be amortized, leaving a 
   book value of $2,052,000. Subtracting 
   the $1,940,000 (97% x $2 million) from 
   the $2,052,000 carrying value results in 
   a gain of $112,000. 

   Answer (D) is incorrect because 
   $160,000 is the result of including the 
   amount to be amortized during the first 
   half of the year into the gain. 


[999] Source: CPA 1195 F-39 

   Answer (A) is incorrect because a gain 
   is reported in the period in which it is 
   realized. 

   Answer (B) is correct. A gain or loss 
   on disposal includes estimated income 
   or loss from the measurement date 
   (January 1999) to the disposal date 
   (January 15, 2000), any disposal costs 
   incurred, and the estimated gain or loss 
   on the actual disposal. A gain on 
   disposal is recognized when realized. If 
   the measurement and disposal dates are 
   in different periods, the portion of a net 
   gain realized in the period in which the 
   measurement date occurs may be 
   recognized in that period. Doe's net gain 
   on disposal is $250,000 ($900,000 gain 
   on actual disposal - $600,000 operating 
   losses in 1999 - $50,000 operating 
   losses in 2000). Because no part of the 
   gain on disposal is realized in 1999, 
   Doe should not recognize a gain or a 
   loss on disposal in the 1999 income 
   statement. The entire $250,000 gain on 
   disposal should therefore be recognized 
   in 2000. 

   Answer (C) is incorrect because the 
   gains and losses during the phaseout 
   period are treated as one transaction. 
   Hence, they are offset. 

   Answer (D) is incorrect because the 
   gains and losses during the phaseout 
   period are treated as one transaction. 
   Hence, they are offset. 


[1000] Source: CPA 0595 F-44 

   Answer (A) is incorrect because 
   $200,000 is the operating loss from 
   10/1/00 to 12/31/00. 

   Answer (B) is correct. The segment is 
   expected to be sold for a gain of 
   $350,000. However, $600,000 in 
   operating losses is estimated during the 
   phaseout period (measurement date 
   through the disposal date). Thus, a net 
   loss of $250,000 should be recognized. 
   APB 30 states that if a loss is expected 
   on disposal, the estimated loss should 
   be reported at the measurement date and 
   recognized in the period of the 
   measurement date. 

   Answer (C) is incorrect because 
   $500,000 is the operating loss for 2000. 

   Answer (D) is incorrect because the 
   $600,000 loss is offset by the $350,000 
   gain on sale. 


[1001] Source: CPA 1190 I-50 

   Answer (A) is correct. The gain or loss 
   on the retirement of debt is equal to the 
   difference between the proceeds paid 
   and the carrying value of the debt. The 
   carrying value of the debt is equal to the 
   face value plus any unamortized 
   premium or minus any unamortized 
   discount. In addition, any unamortized 
   issue costs are considered, in effect, a 
   reduction of the carrying value, even 
   though they are accounted for separately 
   from the bond discount or premium. The 
   unamortized discount is $2,000 {3/15 x 
   [(1 - 98%) x $500,000]}, and the 
   unamortized bond issue costs equal 
   $4,000 (3/15 x $20,000). Hence, the 
   effective carrying amount is $494,000 
   ($500,000 - $2,000 - $4,000), and the 
   extraordinary loss on this early 
   extinguishment of debt is $16,000 
   [(102% x $500,000 redemption price) - 
   $494,000]. 

   Answer (B) is incorrect because 
   $12,000 does not consider the issue 
   costs. 

   Answer (C) is incorrect because 
   $10,000 does not consider the issue 
   costs or the discount. 

   Answer (D) is incorrect because an 
   extraordinary loss should be 
   recognized. 


[1002] Source: CPA 1190 I-47 

   Answer (A) is correct. To be classified 
   as an extraordinary item, a transaction 
   must be both unusual in nature and 
   infrequent in occurrence in the 
   environment in which the business 
   operates. APB 30 specifies six items 
   that are not considered extraordinary. 
   These items include the write-down of 
   equipment, the adjustment of accruals 
   on long-term contracts, and the 
   write-off of obsolete inventory. Thus, 
   Strand should report $215,000 
   ($90,000 + $50,000 + $75,000) of total 
   infrequent losses as a component of 
   income from continuing operations. 

   Answer (B) is incorrect because 
   $165,000 improperly excludes the 
   adjustment of accruals. 

   Answer (C) is incorrect because 
   $140,000 improperly excludes the 
   write-off of inventory. 

   Answer (D) is incorrect because 
   $125,000 improperly excludes the 
   write-down of equipment. 


[1003] Source: CPA 0593 I-59 

   Answer (A) is correct. Extraordinary 
   items are both unusual in nature and 
   infrequent in occurrence in the 
   environment in which the entity 
   operates. Gains and losses from 
   exchange or translation of foreign 
   currencies, including those from major 
   devaluations or revaluations, are among 
   the items cited in APB 30 as not 
   extraordinary. The results of 
   discontinued operations are reported 
   separately, before extraordinary items, 
   on the income statement. However, 
   under APB 30, a loss directly resulting 
   from a major unexpected act of nature 
   that is infrequent and unusual within the 
   environment in which an entity operates 
   is presented in the income statement as 
   an extraordinary item net of tax. Thus, 
   the loss from the hurricane should be 
   reported net of insurance proceeds as 
   $100,000 ($300,000 building carrying 
   value + $800,000 equipment damage - 
   $1,000,000 insurance proceeds). 

   Answer (B) is incorrect because 
   $1,300,000 includes the loss from the 
   foreign currency devaluation. 

   Answer (C) is incorrect because 
   $1,800,000 includes the loss from the 
   foreign currency devaluation and the 
   loss from discontinued operations. 

   Answer (D) is incorrect because 
   $2,500,000 is the pretax sum of all the 
   listed losses without regard to the 
   insurance proceeds. 


[1004] Source: CPA 1190 I-51 

   Answer (A) is correct. For each of the 
   first 3 years (1997 - 1999), 
   depreciation expense was recorded as 
   $66,000 ($528,000 cost  8 years). 
   Accumulated depreciation at 1/1/00 
   was $198,000 ($66,000 x 3), and the 
   carrying value of the machine was 
   $330,000 ($528,000 cost - $198,000 
   accumulated depreciation). For 2000, 
   the depreciation expense is $94,000 
   [($330,000 carrying amount - $48,000 
   estimated salvage value)  3 remaining 
   years of expected useful life]. 
   Consequently, the accumulated 
   depreciation at 12/31/00 is $292,000 
   ($198,000 accumulated depreciation at 
   December 31, 1999 + $94,000 
   depreciation for 2000). 

   Answer (B) is incorrect because 
   $308,000 is based on the new estimated 
   life, but without consideration of 
   salvage value. 

   Answer (C) is incorrect because 
   $320,000 assumes that the machine was 
   depreciated from the beginning, based 
   on a 6-year life and a $48,000 salvage 
   value. 

   Answer (D) is incorrect because 
   $352,000 assumes that the machine was 
   depreciated from the beginning, based 
   on a 6-year life and no salvage value. 


[1005] Source: CPA 0595 F-45 

   Answer (A) is incorrect because 
   $2,800 results from using the ending 
   inventory instead of the beginning 
   inventory. 

   Answer (B) is incorrect because $4,000 
   results from using the ending inventory 
   and does not consider taxes. 

   Answer (C) is correct. A change in 
   accounting principle usually requires 
   that the cumulative effect of the change 
   on beginning retained earnings, based 
   on a retroactive computation, be 
   reported separately in the income 
   statement of the year of the change. In 
   this case, the cumulative effect results 
   from the increase in beginning 
   inventory. This change increases net 
   income for prior periods by decreasing 
   aggregate cost of goods sold (net of tax) 
   by $4,200 [($77,000 - $71,000) x (1.0 - 
   .30)]. 

   Answer (D) is incorrect because 
   $6,000 is the increase before income 
   taxes. 


[1006] Source: CPA 1192 I-60 

   Answer (A) is correct. Under APB 
   Opinion No. 20, a change from LIFO to 
   any other method of inventory pricing is 
   a special change in accounting principle 
   that must be accounted for as a 
   prior-period adjustment. The financial 
   statements for all periods presented 
   must be restated. The adjustment should 
   be made directly to the balance of 
   beginning retained earnings. 
   Consequently, the change does not 
   result in the recognition of the 
   cumulative effect in income in the year 
   of change. 

   Answer (B) is incorrect because the 
   cumulative effect is a direct adjustment 
   to beginning retained earnings. 

   Answer (C) is incorrect because the 
   cumulative effect is a direct adjustment 
   to beginning retained earnings. 

   Answer (D) is incorrect because the 
   cumulative effect is a direct adjustment 
   to beginning retained earnings. 


[1007] Source: CPA 0FIN R99-12 

   Answer (A) is incorrect because 
   $140,000 is the incremental after-tax 
   effect in 2001 of making no accounting 
   change. 

   Answer (B) is incorrect because 
   $200,000 is the amount that would have 
   been deferred at 12/31/00 under the 
   prior accounting method. 

   Answer (C) is correct. Given that the 
   question requires the amount of the 
   2000 cumulative effect of a change in 
   accounting principle, the amount to be 
   reported is $350,000 ($500,000 
   deferred cost x (1.0 - .3 tax rate). A 
   cumulative-effect adjustment is made to 
   reflect the difference in retained 
   earnings that would have resulted if the 
   new principle had been applied in prior 
   periods. A potential issue is whether 
   this question describes a change in 
   accounting principle inseparable from 
   an accounting estimate. Off-Line Co. 
   has changed from deferring and 
   amortizing a cost to immediate 
   recognition. If the change in principle is 
   inseparable from the change in estimate, 
   the change should be accounted for as a 
   change in estimate only (APB 20). In 
   that case, the correct answer is $0 
   because no cumulative effect should be 
   reported separately after extraordinary 
   items in the income statement. No 
   answer of $0 is provided, so the best 
   strategy on the examination is to give 
   the answer required: the amount of the 
   cumulative effect. 

   Answer (D) is incorrect because 
   $500,000 is pre-tax amount of the 
   deferred cost. 


[1008] Source: CPA 0592 II-2 

   Answer (A) is incorrect because 1999 
   net income is $125,000, and the 
   prior-period adjustment is made to the 
   beginning balance of retained earnings 
   for 1999. 

   Answer (B) is incorrect because the 
   prior-period adjustment is for $25,000 
   (the overstatement of 1998 net income). 

   Answer (C) is correct. A prior-period 
   adjustment is necessary to correct an 
   error. In the comparative financial 
   statements presented for 1999 and 
   2000, all prior periods affected by the 
   prior-period adjustment should be 
   restated to reflect the adjustment. 
   Consequently, the beginning balance of 
   retained earnings for 1999 should be 
   debited to correct the $25,000 
   overstatement of after-tax income for 
   1998, a year for which financial 
   statements are not presented. Because 
   the statements for 1999 should be 
   restated to reflect the correction of the 
   error in 1999 net income, this amount 
   will be correctly reported in the 2000 
   and 1999 comparative financial 
   statements as $125,000 ($150,000 in 
   the previously issued 1999 statements - 
   $25,000 overstatement). No 
   prior-period adjustment to the 2000 
   financial statements is necessary. The 
   1999 statements, including the ending 
   retained earnings balance, will have 
   been revised to correct the errors. 
   Hence, the 2000 beginning retained 
   earnings (1999 ending retained 
   earnings) will need no further revision. 

   Answer (D) is incorrect because a 
   prior-period adjustment must be made 
   in the 1999 statements. 


[1009] Source: CPA 0FIN R97-6 

   Answer (A) is correct. Interest expense 
   for the 1-year loan that should be 
   recognized in 2000 is $1,000 [12% x 
   $10,000 x (10  12 months)]. Interest 
   expense for the 6-month loan that should 
   be recognized in 2000 is $1,800 [12% x 
   $30,000 x (6  6 months) x (6  12 
   months)]. Interest expense for the 
   9-month loan that should be recognized 
   in 2000 is $1,280 [12% x $16,000 x (8 
    9 months) x (9  12 months)]. 
   Accordingly, if $3,000 of interest is 
   recorded, the understatement of interest 
   expense is $1,080 [($1,000 + $1,800 + 
   $1,280) - $3,000]. 

   Answer (B) is incorrect because $1,240 
   assumes that a full year's interest should 
   be recognized in 2000 on the 9-month 
   loan. 

   Answer (C) is incorrect because $1,280 
   assumes that a full year's interest should 
   be recognized in 2000 on the 1-year 
   loan. 

   Answer (D) is incorrect because 
   $1,440 equals the total interest on the 
   loans minus $3,000. 


[1010] Source: CPA 0590 II-51 

   Answer (A) is incorrect because $3.20 
   equals BEPS. 

   Answer (B) is incorrect because $2.95 
   excludes the convertible preferred 
   stock. 

   Answer (C) is incorrect because $2.92 
   excludes the convertible debt. 

   Answer (D) is correct. Potential 
   common stock is included in the 
   calculation of DEPS if it is dilutive. 
   When two or more issues of potential 
   common stock are outstanding, each 
   issue is considered separately in 
   sequence, from the most to the least 
   dilutive. This procedure is necessary 
   because a convertible security may be 
   dilutive on its own, but antidilutive 
   when included with other potential 
   common shares in the calculation of 
   DEPS. The incremental effect on EPS 
   determines the degree of dilution. The 
   lower the incremental effect, the more 
   dilutive. The incremental effect of the 
   convertible preferred stock is $1.50 
   [($3 preferred dividend x 10,000)  
   20,000 potential common shares]. The 
   incremental effect of the convertible 
   debt is $2.10 {[$1,000,000 x 9% x (1.0 
   - 30%)]  30,000 potential common 
   shares}. Because the $1.50 incremental 
   effect of the convertible preferred is 
   lower, it is the more dilutive, and its 
   incremental effect is compared with the 
   BEPS amount, which equals $3.20 
   [($350,000 - $30,000)  100,000]. 
   Because $1.50 is lower than $3.20, the 
   convertible preferred is dilutive and is 
   included in a trial calculation of DEPS. 
   The result is $2.92 [($350,000 - 
   $30,000 + $30,000)  (100,000 + 
   20,000)]. However, the $2.10 
   incremental effect of the convertible 
   debt is lower than the $2.92 trial 
   calculation, so the convertible debt is 
   also dilutive and should be included in 
   the calculation of DEPS. Thus, the 
   DEPS amount is $2.75 as indicated 
   below.

   $350,000 - $30,000 + $30,000 + $63,000
   --------------------------------------  =  $2.75
          100,000 + 20,000 + 30,000


[1011] Source: Publisher 

   Answer (A) is incorrect because $2.15 
   equals BEPS. 

   Answer (B) is incorrect because $2.14 
   excludes the convertible preferred 
   stock. 

   Answer (C) is incorrect because $2.05 
   includes the convertible debt. 

   Answer (D) is correct. As calculated in 
   question 38, the incremental effect of 
   the convertible preferred is $1.50 and 
   of the convertible debt is $2.10. Given 
   net income of $245,000, the BEPS 
   amount equals $2.15 [($245,000 - 
   $30,000)  100,000]. The $1.50 
   incremental effect of the convertible 
   preferred stock is lower than BEPS, so 
   it is dilutive and should be included in a 
   trial calculation of DEPS. The result is 
   $2.04 [($245,000 - $30,000 + $30,000) 
    (100,000 + 20,000)]. Because the 
   $2.10 incremental effect of the 
   convertible debt is higher than $2.04, 
   the convertible debt is antidilutive and 
   should not be included in the DEPS 
   calculation. Thus, DEPS should be 
   reported as $2.04. 


[1012] Source: Publisher 

   Answer (A) is correct. Given net 
   income of $170,000, the BEPS amount 
   equals $1.40 [($170,000 - $30,000)  
   100,000]. This amount is lower than 
   both the $2.10 incremental effect of the 
   convertible debt and the $1.50 
   incremental effect of the convertible 
   preferred. Thus, both convertible 
   securities are antidilutive, and Peters 
   should report that DEPS is equal to 
   BEPS. This dual presentation can be 
   presented in one line on the income 
   statement. 

   Answer (B) is incorrect because $1.42 
   includes the convertible preferred 
   stock. 

   Answer (C) is incorrect because $1.56 
   includes the convertible debt. 

   Answer (D) is incorrect because $1.70 
   results from not adjusting the $170,000 
   of net income for the $30,000 of 
   preferred dividends when determining 
   income available to common 
   shareholders. 


[1013] Source: CPA 0595 F-32 

   Answer (A) is incorrect because a loss 
   resulted when the spot rate increased. 

   Answer (B) is incorrect because $500 
   results from using the spot rates at 
   12/31/00 and 3/20/01. 

   Answer (C) is incorrect because $1,000 
   results from using the spot rates at 
   9/22/00 and 3/20/01. 

   Answer (D) is correct. The FASB 
   requires that a receivable or payable 
   denominated in a foreign currency be 
   adjusted to its current exchange rate at 
   each balance sheet date. The resulting 
   gain or loss should ordinarily be 
   reflected in current income. It is the 
   difference between the spot rate on the 
   date the transaction originates and the 
   spot rate at year-end. Thus, the 2000 
   transaction loss for Yumi Corp. is 
   $1,500 [($0.55 - $0.70) x 10,000 units]. 


[1014] Source: CMA 0688 4-20 

   Answer (A) is incorrect because 
   transaction gains and losses (as 
   opposed to translation gains and losses) 
   are recognized in the income statement 
   as they occur. 

   Answer (B) is correct. Unrealized 
   foreign currency gains and losses in the 
   other comprehensive income section of 
   the balance sheet can arise from 
   unrealized gains and losses on 
   available-for-sale securities, from 
   certain hedging transactions (cash flow 
   hedges), and from translation of foreign 
   currency financial statements. SFAS 52 
   requires that foreign currency 
   translation adjustments resulting from 
   translation of an entity's financial 
   statements into the reporting currency 
   be reported on the balance sheet in 
   other comprehensive income. 
   Accumulated currency translation gains 
   or losses remain in that section until the 
   foreign entity is sold or liquidated. At 
   that time, translation gains or losses 
   will be recognized in the income 
   statement. 

   Answer (C) is incorrect because 
   remeasurement gains and losses are 
   included in net income. 

   Answer (D) is incorrect because SFAS 
   52 states the GAAP for reporting of 
   translation adjustments. 


[1015] Source: CPA 0593 I-57 

   Answer (A) is correct. The results of 
   operations prior to the measurement 
   date of a segment that has been or will 
   be discontinued, together with any gain 
   or loss on disposal, should each be 
   reported separately as a component of 
   income before extraordinary items and 
   the cumulative effect of accounting 
   changes. Each component of 
   discontinued operations should be 
   disclosed net of tax. Accordingly, the 
   loss from discontinued operations 
   recognized at December 31, 2000 is 
   $980,000 [($1,400,000 operating loss 
   in 2000) x (1 - 30% tax rate)]. 

   Answer (B) is incorrect because 
   $1,330,000 equals the sum of the loss 
   from discontinued operations prior to 
   the measurement date and the estimated 
   operating loss in 2001, net of tax effect. 

   Answer (C) is incorrect because 
   $1,400,000 is the pretax 2000 loss by 
   Alpha prior to the measurement date. 

   Answer (D) is incorrect because 
   $1,900,000 equals the pretax 2000 loss 
   from Alpha's operations plus the 
   estimated pretax operating loss for 
   2001. 


[1016] Source: CPA 0593 I-58 

   Answer (A) is incorrect because 
   $210,000 does not include the expected 
   operating loss. 

   Answer (B) is incorrect because 
   $300,000 is a pretax amount that does 
   not include the expected operating loss. 

   Answer (C) is correct. The gain or loss 
   on disposal should include not only the 
   gain or loss on disposal of the assets, 
   but also any income or loss from 
   operations during the phase-out period. 
   If a net loss is expected, it should be 
   provided for at the measurement date 
   (December 31, 2000). Thus, loss on 
   disposal of discontinued operations, net 
   of taxes, is $560,000 [($500,000 
   expected operating loss + $300,000 
   estimated loss on asset sale) x (1 - 
   30%)]. 

   Answer (D) is incorrect because the 
   loss on disposal of discontinued 
   operations should be reported net of 
   tax. 


[1017] Source: CPA 1189 I-46 

   Answer (A) is correct. Both the 
   measurement date (January 1) and the 
   disposal date (December 31) fall in 
   2000. Thus, discontinued operations for 
   2000 will include only a gain or loss on 
   disposal. This gain or loss equals the 
   $225,000 operating loss from the 
   measurement date to the disposal date, 
   plus the $400,000 gain on disposition. 
   The pretax gain on disposal is therefore 
   $175,000 ($400,000 - $225,000). The 
   after-tax amount is $122,500 [$175,000 
   x (1 - 30%)]. Because 1999 was prior 
   to the measurement date, the $125,000 
   of operating losses would have been 
   reported under income from continuing 
   operations in the 1999 income statement 
   as originally issued. This loss is now 
   attributable to discontinued operations, 
   and the 1999 financial statements 
   presented for comparative purposes 
   must be reclassified. In the reclassified 
   1999 income statement, the $125,000 
   pretax loss should be shown as an 
   $87,500 [$125,000 x (1 - 30%)] loss 
   from discontinued operations prior to 
   the measurement date. 

   Answer (B) is incorrect because the 
   comparative statement of income for 
   2000 and 1999 should show a loss on 
   discontinued operations for 1999. 

   Answer (C) is incorrect because an 
   after-tax loss of $157,500 for 2000 
   does not consider the gain on the actual 
   disposition. 

   Answer (D) is incorrect because the 
   comparative statement of income for 
   2000 and 1999 should show a loss on 
   discontinued operations for 1999, and 
   an after-tax loss of $157,500 for 2000 
   does not consider the gain on the actual 
   disposition. 


[1018] Source: CPA 0592 I-57 

   Answer (A) is incorrect because 
   $50,000 is the excess of the actual gain 
   on disposition of the assets over the 
   segment's operating losses for 1999 and 
   2000. 

   Answer (B) is incorrect because 
   reporting a $0 gain (loss) for 2000 and 
   a $50,000 gain for 1999 wrongly 
   assumes (1) that the unrealized 
   estimated net gain on disposal is 
   recognized on the measurement date and 
   (2) that the prior period's statements are 
   restated. 

   Answer (C) is correct. On 12/31/99, 
   Greer should recognize the $300,000 
   actual operating loss of the segment for 
   the period up to the measurement date 
   (12/31/99). Because Greer estimated a 
   net gain from disposal ($700,000 gain 
   from asset disposition - $200,000 
   phaseout period operating loss = 
   $500,000 gain) at the measurement date, 
   no gain or loss on disposal is 
   recognized in the 1999 income 
   statement. In the 2000 income statement, 
   Greer should recognize the actual 
   realized gain on disposal of $350,000 
   ($650,000 gain on disposition of assets 
   - $300,000 operating loss during the 
   phaseout period). If Greer had 
   estimated a loss on disposal at the 
   measurement date and actual results 
   differed from the estimate, the 
   adjustment would have been in the form 
   of a change in estimate included in the 
   determination of net income in 2000. 
   Thus, the 1999 financial statements 
   would not have been restated. 

   Answer (D) is incorrect because 
   reporting a $150,000 loss for 2000 and 
   a $200,000 gain for 1999 assumes that 
   the unrealized estimated net gain on 
   disposal is recognized on the 
   measurement date, but that the 
   adjustment for the difference between 
   the estimated and actual results is 
   treated as a change in estimate. 


[1019] Source: CPA 0593 I-59 

   Answer (A) is correct. Extraordinary 
   items are both unusual in nature and 
   infrequent in occurrence in the 
   environment in which the entity 
   operates. Gains and losses from 
   exchange or translation of foreign 
   currencies, including those from major 
   devaluations or revaluations, are among 
   the items cited in APB 30 as not 
   extraordinary. The results of 
   discontinued operations are reported 
   separately, before extraordinary items, 
   on the income statement. However, 
   under APB 30, a loss directly resulting 
   from a major unexpected act of nature 
   that is infrequent and unusual within the 
   environment in which an entity operates 
   is presented in the income statement as 
   an extraordinary item net of tax. Thus, 
   the loss from the hurricane should be 
   reported net of insurance proceeds as 
   $100,000 ($300,000 building carrying 
   value + $800,000 equipment damage - 
   $1,000,000 insurance proceeds). 

   Answer (B) is incorrect because 
   $1,300,000 includes the loss from the 
   foreign currency devaluation. 

   Answer (C) is incorrect because 
   $1,800,000 includes the loss from the 
   foreign currency devaluation and the 
   loss from discontinued operations. 

   Answer (D) is incorrect because 
   $2,500,000 is the pretax sum of all the 
   listed losses without regard to the 
   insurance proceeds. 


[1020] Source: CPA 0FIN R99-12 

   Answer (A) is incorrect because 
   $140,000 is the incremental after-tax 
   effect in 2001 of making no accounting 
   change. 

   Answer (B) is incorrect because 
   $200,000 is the amount that would have 
   been deferred at 12/31/00 under the 
   prior accounting method. 

   Answer (C) is correct. Given that the 
   question requires the amount of the 
   2000 cumulative effect of a change in 
   accounting principle, the amount to be 
   reported is $350,000 ($500,000 
   deferred cost x (1.0 - .3 tax rate). A 
   cumulative-effect adjustment is made to 
   reflect the difference in retained 
   earnings that would have resulted if the 
   new principle had been applied in prior 
   periods. A potential issue is whether 
   this question describes a change in 
   accounting principle inseparable from 
   an accounting estimate. Off-Line Co. 
   has changed from deferring and 
   amortizing a cost to immediate 
   recognition. If the change in principle is 
   inseparable from the change in estimate, 
   the change should be accounted for as a 
   change in estimate only (APB 20). In 
   that case, the correct answer is $0 
   because no cumulative effect should be 
   reported separately after extraordinary 
   items in the income statement. No 
   answer of $0 is provided, so the best 
   strategy on the examination is to give 
   the answer required: the amount of the 
   cumulative effect. 

   Answer (D) is incorrect because 
   $500,000 is pre-tax amount of the 
   deferred cost. 


[1021] Source: CPA 0FIN R97-6 

   Answer (A) is correct. Interest expense 
   for the 1-year loan that should be 
   recognized in 2000 is $1,000 [12% x 
   $10,000 x (10  12 months)]. Interest 
   expense for the 6-month loan that should 
   be recognized in 2000 is $1,800 [12% x 
   $30,000 x (6  6 months) x (6  12 
   months)]. Interest expense for the 
   9-month loan that should be recognized 
   in 2000 is $1,280 [12% x $16,000 x (8 
    9 months) x (9  12 months)]. 
   Accordingly, if $3,000 of interest is 
   recorded, the understatement of interest 
   expense is $1,080 [($1,000 + $1,800 + 
   $1,280) - $3,000]. 

   Answer (B) is incorrect because $1,240 
   assumes that a full year's interest should 
   be recognized in 2000 on the 9-month 
   loan. 

   Answer (C) is incorrect because $1,280 
   assumes that a full year's interest should 
   be recognized in 2000 on the 1-year 
   loan. 

   Answer (D) is incorrect because 
   $1,440 equals the total interest on the 
   loans minus $3,000. 


[1022] Source: CPA 0585 I-41 

   Answer (A) is incorrect because the 
   average exchange rate, not the current 
   year-end rate, should be used. 

   Answer (B) is incorrect because the 
   average exchange rate, not a 
   combination of rates, should be used. 

   Answer (C) is correct. When the local 
   currency of the subsidiary is the 
   functional currency, translation into the 
   reporting currency is necessary. Assets 
   and liabilities are translated at the 
   exchange rate at the balance sheet date, 
   and revenues, expenses, gains, and 
   losses are usually translated at average 
   rates for the period. Thus, the $400,000 
   in total expenses should be translated at 
   the average exchange rate of $.44, 
   resulting in expenses reflected in the 
   consolidated income statement of 
   $176,000 ($400,000 x $.44). 

   Answer (D) is incorrect because the 
   average exchange rate, not a 
   combination of rates, should be used. 


[1023] Source: CIA 0591 IV-39 

   Answer (A) is incorrect because the 
   principal and interest payments must be 
   discounted at the indicated market rate. 

   Answer (B) is incorrect because the 
   present value of the principal must be 
   computed based on the 12% market 
   rate. 

   Answer (C) is correct. The present 
   value of the principal equals $100,000 
   times the time value of money factor for 
   the present value of $1 discounted at 
   12% (the current market rate) for three 
   periods. The present value of the annual 
   interest payments equals $8,000 (8% 
   nominal rate x $100,000) times the time 
   value of money factor for the present 
   value of an ordinary annuity of $1 
   discounted at 12% for three periods. 
   The basis of the bonds is the sum of 
   these two present values. 

   Answer (D) is incorrect because the 
   present value of the interest payments 
   must be computed based on the 12% 
   market rate. 


[1024] Source: CIA 0591 IV-34 

   Answer (A) is incorrect because, when 
   the equity method is used, investment 
   income (loss) is recognized for the 
   investee's share of earnings (losses) of 
   the investee. Dividends received from 
   the investee are recorded as a reduction 
   of the investment account. 

   Answer (B) is correct. When the equity 
   method is used, the investment is 
   initially recorded at cost on the 
   investor's books. The carrying amount 
   is subsequently adjusted to recognize 
   earnings or losses of the investee after 
   the date of acquisition. Dividends 
   received from an investee reduce the 
   carrying amount (APB 18). 

   Answer (C) is incorrect because the 
   investment account is credited. 

   Answer (D) is incorrect because the 
   investment account is credited. 


[1025] Source: CMA 1291 2-7 

   Answer (A) is incorrect because APB 
   16 limits common ownership of the 
   constituent companies. 

   Answer (B) is incorrect because 
   substantially all (at least 90%) of one 
   company's outstanding voting common 
   stock must be exchanged for the issuer's 
   majority voting common stock. 

   Answer (C) is incorrect because 
   contingent issues must not exist after a 
   combination. 

   Answer (D) is correct. According to 
   APB 16, the 12 criteria are grouped 
   into three categories:

   Combining Companies
   -------------------
   1. Each combining company is autonomous.
   2. Each company is independent of the other combining companies.
   Combining Interests
   -------------------
   1. A combination is a single transaction or is completed within 1 year
      of initiation.
   2. An issuance is made solely of common stock for at least 90% of the
      outstanding voting common stock of the other company.
   3. No change in stockholders' equities is made in contemplation of the
      combination.
   4. No reacquisition of more than a normal number of shares prior to the
      combination occurs.
   5. The ratio of ownership among individual stockholders remains the
      same.
   6. Voting rights of stockholders are not restricted.
   7. No contingent stock issuances, payments, etc., exist after the
      combination is consummated.
   Absence of Planned Transactions
   -------------------------------
   1. There are no plans to retire any of the common stock issued in the
      combination.
   2. No special arrangements exist to benefit former stockholders.
   3. There is no intention to dispose of significant assets, except
      duplicate facilities or excess capacity, for 2 years.
   Thus, APB 16 has no provision 
   regarding the officers of the combined 
   companies. 


[1026] Source: CMA 1292 2-9 

   Answer (A) is incorrect because 
   valuation at book value, which may 
   equal original (historical) cost or 
   original cost minus accumulated 
   depreciation, is characteristic of 
   pooling accounting. In a pooling, 
   ownership interests are combined, not 
   purchased. Accordingly, the book 
   values of the accounts of the combining 
   entities are added. Assets and liabilities 
   are not revalued. 

   Answer (B) is correct. The purchase 
   method of accounting for a business 
   combination requires the assignment of 
   fair values to all identifiable assets 
   acquired and liabilities assumed. Any 
   excess of cost over the net fair value 
   acquired should be recorded as 
   goodwill. However, if the fair value of 
   the identifiable net assets acquired 
   exceeds the price (negative goodwill), 
   the values of noncurrent assets (other 
   than long-term marketable securities) 
   are reduced accordingly. 

   Answer (C) is incorrect because 
   valuation at book value, which may 
   equal original (historical) cost or 
   original cost minus accumulated 
   depreciation, is characteristic of 
   pooling accounting. In a pooling, 
   ownership interests are combined, not 
   purchased. Accordingly, the book 
   values of the accounts of the combining 
   entities are added. Assets and liabilities 
   are not revalued. 

   Answer (D) is incorrect because 
   replacement cost is not used unless it is 
   the same as the fair value. 


[1027] Source: CMA 0693 2-11 

   Answer (A) is incorrect because a 
   description of the stock transaction 
   should be disclosed in the consolidated 
   financial statements. 

   Answer (B) is incorrect because the 
   names and descriptions of the 
   combining enterprises should be 
   disclosed in the consolidated financial 
   statements. 

   Answer (C) is correct. Under APB 16, 
   the disclosures made in the statements 
   for the year in which a pooling of 
   interests occurred should include the 
   items in all other answer choices as 
   well as the method of accounting for the 
   combination, descriptions of the nature 
   of the adjustments of net assets required 
   for the combining companies to adopt 
   the same accounting principles and of 
   the effects on net income previously 
   reported, and reconciliations of revenue 
   and earnings previously reported by the 
   company that issued stock in the 
   combination with the combined amounts 
   in the current statements. The names of 
   the finance companies cooperating with 
   or providing funds to the acquiring 
   company to facilitate the acquisition 
   need not be disclosed. 

   Answer (D) is incorrect because 
   financial statements of prior periods 
   should be shown for the pooled entities. 


[1028] Source: CMA 0693 2-30 

   Answer (A) is incorrect because 
   consolidation is not required if control 
   is temporary. 

   Answer (B) is correct. SFAS 94 
   specifies that all majority-owned 
   subsidiaries are to be consolidated 
   unless control is temporary or is not 
   held by the majority owner. Previously, 
   some foreign subsidiaries and 
   subsidiaries with nonhomogeneous 
   operations were not always 
   consolidated. Those exceptions were 
   eliminated by SFAS 94. 

   Answer (C) is incorrect because 
   nonhomogeneous operations must be 
   consolidated under SFAS 94. 

   Answer (D) is incorrect because the 
   degree of minority interest is not a 
   factor, unless it has control. 


[1029] Source: CIA 0591 IV-42 

   Answer (A) is incorrect because the 
   retained earnings balances of the 
   combining companies are added 
   together to determine the retained 
   earnings balance of the combined entity 
   at the date of acquisition. 

   Answer (B) is correct. Under the 
   pooling of interests method, the 
   contributed capital and retained 
   earnings of the combining companies 
   are normally recorded at the total of 
   their carrying values in the owners' 
   equity section of the financial 
   statements for the pooled entity. 
   However, the capital stock of the 
   surviving corporation must equal the 
   par or stated value of outstanding shares 
   of that entity. When the par value dollar 
   amount of the combined company's 
   outstanding shares is greater than the 
   total capital stock of the separate 
   combining companies, and additional 
   paid-in capital is less than this 
   difference, a transfer must be made 
   from retained earnings. By application 
   of this requirement, the total net assets 
   (shareholders' equity) of the combined 
   entity remains the same as that for the 
   separate combining companies. 

   Answer (C) is incorrect because no 
   goodwill is created when the pooling 
   method is used. 

   Answer (D) is incorrect because no 
   goodwill is created when the pooling 
   method is used. 


[1030] Source: CIA 0591 IV-29 

   Answer (A) is correct. The purchase 
   method of accounting for a business 
   combination ordinarily follows the 
   same accounting principles used in 
   purchasing any assets. The specifically 
   identifiable assets and liabilities of the 
   acquired companies are recorded on the 
   books of the acquiring entity at their fair 
   values, with any excess of cost (fair 
   value of the consideration given over 
   fair value of the assets minus liabilities 
   assumed) designated as goodwill. 
   Under the pooling of interests method, 
   the assets, liabilities, and owners' 
   equity of the participating entities are 
   combined (pooled) at their current book 
   values. A pooling of interests is a 
   combination rather than an acquisition, 
   and maintenance of original historical 
   costs is inconsistent with an acquisition. 

   Answer (B) is incorrect because fair 
   values are used in a purchase, not a 
   pooling. 

   Answer (C) is incorrect because 
   consolidated goodwill can result under 
   purchase but not pooling accounting. 

   Answer (D) is incorrect because when 
   a business combination is accounted for 
   as a pooling of interests, this method 
   should be applied retroactively to the 
   earliest period presented in 
   comparative financial statements. The 
   effects of the combination are reported 
   as if the companies had been combined 
   as of the beginning of the earliest period 
   presented. This treatment is not 
   applicable to a purchase. 


[1031] Source: CIA 0592 IV-54 

   Answer (A) is incorrect because the 
   pooling-of-interests method of 
   recording a merger can never result in 
   the recording of goodwill. 

   Answer (B) is correct. The purchase 
   method of accounting for a business 
   combination requires the assignment of 
   fair values to all identifiable assets 
   acquired and liabilities assumed. Any 
   excess of cost over the fair value of the 
   identifiable net assets acquired should 
   be recorded as goodwill. Goodwill is 
   recorded only as a result of a business 
   combination accounted for as a 
   purchase. 

   Answer (C) is incorrect because the 
   pooling-of-interests method of 
   recording a merger can never result in 
   the recording of goodwill. Furthermore, 
   the existence of a goodwill account 
   indicates that, at the time of the merger, 
   assets were recorded at their estimated 
   fair value. 

   Answer (D) is incorrect because a 
   goodwill account can never be created 
   by adding the asset accounts of 
   combining firms. 


[1032] Source: CIA 0593 IV-43 

   Answer (A) is correct. Goodwill is the 
   excess of cost over the fair value of the 
   identifiable net assets acquired. The 
   cost of $4,000,000 ($40 x 100,000 
   shares) is in excess of the $3,550,000 
   ($5,000,000 + $550,000 - $2,000,000) 
   fair value of the identifiable net assets 
   by $450,000. This excess is attributable 
   to an unidentifiable asset and is 
   reported as goodwill. 

   Answer (B) is incorrect because 
   $550,000 is the excess of fair value 
   over the carrying amount of the 
   identifiable net assets on the seller's 
   books. 

   Answer (C) is incorrect because the 
   purchase price of $4,000,000 exceeds 
   the seller's $3,000,000 carrying value 
   by $1,000,000. 

   Answer (D) is incorrect because 
   $3,000,000 is the carrying value. 


[1033] Source: CIA 1192 IV-35 

   Answer (A) is incorrect because 
   $120,000 equals $200,000 of goodwill 
   minus $80,000 of additional 
   expenditures to maintain goodwill. 

   Answer (B) is incorrect because 
   goodwill is recorded only when an 
   entire business is purchased. The 
   $200,000 is to be capitalized as 
   goodwill, but the full $80,000 should be 
   expensed. 

   Answer (C) is correct. APB 16, 
   Business Combinations, requires that 
   the cost of goodwill from a business 
   combination accounted for as a 
   purchase be capitalized and amortized 
   over its estimated useful life. In 
   contrast, the cost of developing, 
   maintaining, or restoring intangible 
   assets that are inherent in a continuing 
   business and related to an enterprise as 
   a whole should be expensed as 
   incurred. Hence, the purchased 
   goodwill ($200,000) is capitalized, but 
   the $80,000 spent to maintain goodwill 
   should be expensed in the current year. 

   Answer (D) is incorrect because 
   $280,000 incorrectly reflects the 
   capitalization of the internally generated 
   goodwill of $80,000. That $80,000 
   should be expensed in the current year. 


[1034] Source: CMA 1286 4-22 

   Answer (A) is incorrect because the 
   costs to register and issue stock reduce 
   its fair value. 

   Answer (B) is correct. In applying the 
   purchase method of accounting for a 
   business combination, the cost to the 
   purchasing entity of acquiring another 
   entity is the amount of cash or the fair 
   value of other assets given up in the 
   transaction. In addition, any direct fees 
   paid related to the combination are 
   added to the consideration given. Costs 
   of registering and issuing equity 
   securities are a reduction of the 
   otherwise determinable fair value of the 
   securities. The amount charged to 
   expenses of business combination is 
   therefore the indirect acquisition 
   expense of $60,000. 

   Answer (C) is incorrect because the 
   costs to register and issue stock reduce 
   its fair value. 

   Answer (D) is incorrect because direct 
   fees are added to the consideration 
   given. 


[1035] Source: CMA 1286 4-23 

   Answer (A) is incorrect because all the 
   listed costs should be expensed. 

   Answer (B) is incorrect because all the 
   listed costs should be expensed. 

   Answer (C) is incorrect because all the 
   listed costs should be expensed. 

   Answer (D) is correct. According to 
   APB 16, Business Combinations, "The 
   pooling of interests method records 
   neither the acquiring of assets nor the 
   obtaining of capital. Therefore, costs 
   incurred to effect a combination 
   accounted for by that method and to 
   integrate the continuing operations are 
   expenses of the combined corporation 
   rather than additions to assets or direct 
   reductions of stockholders' equity. 
   Accordingly, all expenses related to 
   effecting a business combination 
   accounted for by the pooling of interests 
   method should be deducted in 
   determining the net income of the 
   resulting combined corporation for the 
   period in which the expenses are 
   incurred. Those expenses include, for 
   example, registration fees, costs of 
   furnishing information to stockholders, 
   fees of finders and consultants, salaries 
   and other expenses related to services 
   of employees, and costs and losses of 
   combining operations of the previously 
   separate companies and instituting 
   efficiencies." Thus, $220,000 
   ($120,000 + $60,000 + $40,000) 
   should be expensed. 


[1036] Source: CMA 0695 2-7 

   Answer (A) is incorrect because 
   historical-cost accounting for purchase 
   method transactions requires the 
   identifiable net assets to be recorded at 
   fair value or the purchase price of the 
   acquired company, whichever is less. 

   Answer (B) is incorrect because 
   goodwill is the excess of the price over 
   the fair value of the identifiable net 
   assets. 

   Answer (C) is correct. When a business 
   combination is accounted for as a 
   purchase, the cost is allocated to the 
   specifically identifiable assets acquired 
   and liabilities assumed based on their 
   fair values. If the cost exceeds the sum 
   of the amounts assigned to the net 
   identifiable assets, the excess is 
   recorded as goodwill, an intangible that 
   is not specifically identifiable. Thus, 
   the acquiring company will seldom 
   record goodwill equal to the amount on 
   the acquired company's balance sheet. 
   Indeed, goodwill may not be recorded 
   because the fair value of the identifiable 
   net assets exceeds the cost. 

   Answer (D) is incorrect because the 
   stock issued by the parent is recorded at 
   its fair value, just as in any purchase 
   transaction. 


[1037] Source: CMA 0695 2-8 

   Answer (A) is incorrect because 
   pooling-of-interests accounting assumes 
   a combining of ownership interests, not 
   a purchase, and no basis exists for 
   revaluing assets. No readjustment of 
   asset and liability balances occurs 
   except to conform the accounting 
   principles of the pooled companies. 
   Accordingly, the retained earnings of 
   the acquired company are also carried 
   forward to the consolidated financial 
   statements. 

   Answer (B) is correct. Costs incurred 
   to effect a business combination 
   accounted for as a pooling-of-interests 
   are expenses of the combined 
   corporation, not additions to assets or 
   direct reductions of stockholders' 
   equity. Consequently, they are deducted 
   in determining the net income of the 
   combined company for the period in 
   which they are incurred (APB 16). 

   Answer (C) is incorrect because no 
   goodwill is recorded in a pooling 
   unless it was already on the books of a 
   combining company. Goodwill is 
   recognized only if a purchase has 
   occurred to establish an objective 
   valuation. 

   Answer (D) is incorrect because 
   pooling-of-interests accounting assumes 
   a combining of ownership interests, not 
   a purchase, and no basis exists for 
   revaluing assets. No readjustment of 
   asset and liability balances occurs 
   except to conform the accounting 
   principles of the pooled companies. 
   Accordingly, the retained earnings of 
   the acquired company are also carried 
   forward to the consolidated financial 
   statements. 


[1038] Source: CMA 0695 2-9 

   Answer (A) is incorrect because a 
   pooling of interests records assets 
   acquired at their book values. 

   Answer (B) is incorrect because the old 
   book values are not carried forward 
   unless they are equal to the fair values 
   at the time of acquisition. 

   Answer (C) is incorrect because the 
   fair values may be written down if the 
   purchase price is less than the fair 
   value, that is, if negative goodwill 
   exists. 

   Answer (D) is correct. The purchase 
   method follows principles normally 
   applied under historical-cost 
   accounting. Assets acquired for cash or 
   other assets are recorded at cost (cash 
   paid or the fair value of the other 
   assets). Assets acquired by incurring 
   liabilities are also recorded at cost (the 
   present value of the amounts to be 
   paid). Assets acquired by issuing stock 
   are recorded at their fair value. 
   Whatever the form of the price paid, it 
   must then be allocated to the individual 
   assets acquired and liabilities assumed. 


[1039] Source: CMA 1291 2-8 

   Answer (A) is incorrect because 
   negative goodwill is not added to 
   shareholders' equity. 

   Answer (B) is incorrect because the 
   difference is not goodwill, which is the 
   excess of cost over the fair value of the 
   identifiable net assets, but negative 
   goodwill. 

   Answer (C) is incorrect because 
   allocations are made only to noncurrent 
   assets. 

   Answer (D) is correct. APB 16 
   requires that the excess (negative 
   goodwill) be allocated proportionately 
   based on their fair values to all 
   noncurrent assets except long-term 
   investments in marketable securities. 
   Any excess remaining after noncurrent 
   assets are adjusted to zero should be 
   classified as a deferred credit to be 
   amortized over a period not exceeding 
   40 years. 


[1040] Source: CMA 0687 3-13 

   Answer (A) is incorrect because 
   $400,000 equals Pushway's 
   depreciation for the year of the 
   combination. 

   Answer (B) is incorrect because 
   $500,000 assumes a pooling of 
   interests. 

   Answer (C) is incorrect because 
   $510,000 includes Pushway's 
   depreciation, Stroker's depreciation, 
   and 6 months of the extra depreciation. 

   Answer (D) is correct. Under the 
   purchase method, depreciation expense 
   consists of that recorded by each of the 
   companies, plus depreciation on the 
   written-up assets. Allocating the 
   $200,000 write-up over 10 years 
   results in extra depreciation on the 
   consolidated worksheet (appearing on 
   neither company's individual books) of 
   $20,000 per year. Since the 
   combination occurred at midyear, only 
   one-half year's extra depreciation 
   should be recorded, or $10,000. 
   Therefore, the consolidated 
   depreciation expense is $460,000 
   ($400,000 + $50,000 Stroker 
   depreciation for 6 months + $10,000). 


[1041] Source: CMA 0687 3-14 

   Answer (A) is incorrect because 
   $400,000 equals Pushway's 
   depreciation for the year of the 
   combination. 

   Answer (B) is correct. In a pooling of 
   interests, assets are recorded at the 
   book values at which they appeared on 
   the investee's books. Accordingly, no 
   goodwill or write-up of assets is 
   recognized, and depreciation expense 
   simply consists of the $500,000 
   ($400,000 + $100,000) recorded on the 
   books of the separate companies. 

   Answer (C) is incorrect because 
   $510,000 includes $100,000 of Stroker 
   depreciation. 

   Answer (D) is incorrect because 
   $520,000 assumes a write-up of the 
   equipment. 


[1042] Source: CMA 1287 4-12 

   Answer (A) is incorrect because 
   elimination entries appear only in the 
   working papers. 

   Answer (B) is incorrect because 
   elimination entries appear only in the 
   working papers. 

   Answer (C) is incorrect because 
   elimination entries appear only in the 
   working papers. 

   Answer (D) is correct. Elimination 
   entries appear only in the working 
   papers used to consolidate a parent and 
   its subsidiaries. They never appear on 
   the books of either the parent or the 
   subsidiary. Each corporation is a 
   separate entity, and individual company 
   books should show intercompany 
   payables and receivables without 
   adjustment for the effect of elimination 
   entries. 


[1043] Source: CMA 1287 4-13 

   Answer (A) is incorrect because an 
   elimination entry will always have to 
   be made when a consolidation is 
   recorded as a purchase, regardless of 
   the year. 

   Answer (B) is correct. When a business 
   combination is recorded as a purchase, 
   the cost of the net assets acquired and 
   their fair value will usually differ. The 
   purchase price is allocated to the 
   specifically identifiable assets acquired 
   and liabilities assumed based on their 
   fair values. The excess of cost over the 
   fair value of net assets received is 
   designated as goodwill. In a pooling of 
   interests, the assets acquired and 
   liabilities assumed are recorded at their 
   book values prior to consolidation. In a 
   pooling, no goodwill and no differential 
   will exist to allocate. 

   Answer (C) is incorrect because 
   allocations must be made whenever a 
   purchase is involved under the cost 
   method of accounting. 

   Answer (D) is incorrect because 
   allocations must be made whenever a 
   purchase is involved under the equity 
   method of accounting. 


[1044] Source: CMA 0688 4-22 

   Answer (A) is incorrect because each 
   corporation is a separate legal entity. 
   However, there is no legal entity 
   representing the entire group. 

   Answer (B) is incorrect because 
   consolidated financial statements are 
   for the parent company and all of its 
   subsidiaries. 

   Answer (C) is incorrect because the 
   financial statements represent the 
   holdings of the consolidated group, not 
   the minority interest. The minority 
   interest has equity only in certain 
   subsidiaries. 

   Answer (D) is correct. The preparation 
   of consolidated financial statements is 
   based upon the concept of economic 
   entity, not legal entity. Each of the 
   corporations in a consolidated group is 
   a separate legal entity, but consolidated 
   statements are prepared because all of 
   the corporations are under common 
   economic control. 


[1045] Source: CMA 0688 4-23 

   Answer (A) is incorrect because all 
   shareholders' equity accounts of the 
   subsidiary are eliminated against the 
   investment account. 

   Answer (B) is incorrect because all 
   shareholders' equity accounts of the 
   subsidiary are eliminated against the 
   investment account. 

   Answer (C) is incorrect because all 
   shareholders' equity accounts of the 
   subsidiary are eliminated against the 
   investment account. 

   Answer (D) is correct. Intercompany 
   accounts receivables must be 
   eliminated (credited) in the 
   consolidation working papers, but the 
   offsetting debit is to intercompany 
   payables. In the preparation of 
   consolidated financial statements, the 
   investment in subsidiary account has to 
   be eliminated (credited) in the working 
   papers against the accounts of the 
   subsidiaries. In addition to this 
   elimination entry, other entries 
   eliminate intercompany receivables, 
   payables, sales, and purchases. 


[1046] Source: CMA 0688 4-24 

   Answer (A) is incorrect because 
   intercompany profits in inventory, or 
   any other assets still within the group, 
   must be eliminated. 

   Answer (B) is incorrect because 
   intercompany profits in inventory, or 
   any other assets still within the group, 
   must be eliminated. 

   Answer (C) is incorrect because 
   intercompany dividends 
   receivable/payable must be eliminated. 
   Otherwise, the consolidated company 
   would report an asset receivable from 
   itself. 

   Answer (D) is correct. Intercompany 
   profits must be eliminated whenever the 
   assets sold are still within the 
   consolidated group. For example, if the 
   parent sells equipment to a subsidiary at 
   a profit, the intercompany profit must be 
   eliminated before the consolidated 
   statements are prepared or the assets 
   will not be recorded (on the 
   consolidated balance sheet) at 
   historical cost to the group. If the 
   subsidiary subsequently sells the assets 
   to someone outside the group, the 
   original intercompany profit will be 
   realized (through sale to the outsider) 
   and no longer will need to be 
   eliminated. 


[1047] Source: CMA 0688 4-25 

   Answer (A) is incorrect because the 
   entity theory results in greater assets 
   and a larger minority interest than the 
   proprietary theory. 

   Answer (B) is incorrect because the 
   entity theory results in greater assets 
   and a larger minority interest than the 
   proprietary theory. 

   Answer (C) is correct. The issue is 
   whether goodwill is recognized only on 
   the portion of the subsidiary bought by 
   the parent (proprietary theory), or 
   whether goodwill should be recognized 
   in total for the subsidiary, i.e., on the 
   portion of assets bought by the parent 
   plus the portion retained by the minority 
   shareholders (the entity theory). For 
   example, if a subsidiary's net assets are 
   $100,000 and the parent pays $99,000 
   for a 90% interest, goodwill is $9,000 
   under the proprietary theory. In other 
   words, equity of $90,000 in identifiable 
   assets was acquired for $99,000. 
   Hence, goodwill must be $9,000. 
   However, if $9,000 of goodwill is 
   attributable to the $90,000 of assets 
   acquired by the parent, the entity theory 
   argues that $1,000 of goodwill should 
   be attributable to the $10,000 (10%) of 
   identifiable assets owned by the 
   minority shareholders. Because the 
   consolidated assets are greater under 
   the entity theory ($10,000 of goodwill 
   versus $9,000 under the proprietary 
   theory), the minority interest is also 
   greater. 

   Answer (D) is incorrect because the 
   minority interest is always separately 
   disclosed in the consolidated balance 
   sheet. 


[1048] Source: CMA 1288 4-26 

   Answer (A) is incorrect because 
   $1,425,000 assumes the recorded 
   amount of the assets was their fair 
   value. 

   Answer (B) is incorrect because 
   $1,300,000 is the excess of the fair 
   value over the carrying amount of the 
   assets. 

   Answer (C) is incorrect because 
   $700,00 equals the fair value of the 
   assets minus the cost of 75% of the 
   outstanding shares. 

   Answer (D) is correct. The fair value of 
   the subsidiary's net assets was 
   $4,600,000 ($11,800,000 - 
   $7,200,000). Palmer acquired 75% of 
   these net assets, or $3,450,000. 
   Subtracting the $3,450,000 fair value of 
   net identifiable assets from the purchase 
   price of $3,900,000 results in goodwill 
   of $450,000. 


[1049] Source: CMA 0693 2-12 

   Answer (A) is incorrect because the 
   provisions requiring taxes to be 
   allocated among entities relates only to 
   financial accounting income tax 
   expense, not the tax return income tax 
   expense. 

   Answer (B) is correct. A description of 
   all significant accounting policies 
   should be included as an integral part of 
   the financial statements. An example of 
   a required disclosure is the basis of 
   consolidation. This disclosure is 
   normally made in the first footnote to 
   the financial statements or in a separate 
   summary preceding the notes (APB 22). 

   Answer (C) is incorrect because there 
   are no prohibitions against reporting 
   parent company and consolidated 
   statements in a comparative format. 

   Answer (D) is incorrect because 
   consolidation policies may be shown on 
   the face of the financial statements. 


[1050] Source: CMA 0687 3-3 

   Answer (A) is incorrect because it is a 
   direct component of the operating 
   results of a segment. 

   Answer (B) is incorrect because it is a 
   direct component of the operating 
   results of a segment. 

   Answer (C) is correct. Segment 
   information must be disclosed in the 
   annual financial statements of publicly 
   held companies. Interest expense cannot 
   be identified with any particular 
   segment. Therefore, it should not be 
   included in the computation of operating 
   profit or loss on a segmented financial 
   statement. 

   Answer (D) is incorrect because 
   indirect operating expenses that can be 
   reasonably allocated should appear as a 
   part of the operating results of 
   segments. They differ from general 
   corporate expenses in the degree of 
   traceability. 


[1051] Source: Publisher 

   Answer (A) is correct. In a business 
   combination legally structured as a 
   merger, the assets and liabilities of one 
   of the combining companies are 
   transferred to the books of the other 
   combining company (the surviving 
   company). The surviving company 
   continues to exist as a separate legal 
   entity. The nonsurviving company 
   ceases to exist as a separate entity. Its 
   stock is canceled, and its books are 
   closed. 

   Answer (B) is incorrect because it 
   describes a consolidation, in which a 
   new firm is formed to account for the 
   assets and liabilities of the combining 
   companies. 

   Answer (C) is incorrect because they 
   describe an acquisition. A 
   parent-subsidiary relationship exists 
   when the investor company holds more 
   than 50% of the outstanding stock of the 
   investee company. 

   Answer (D) is incorrect because they 
   describe an acquisition. A 
   parent-subsidiary relationship exists 
   when the investor company holds more 
   than 50% of the outstanding stock of the 
   investee company. 


[1052] Source: CMA 1293 1-6 

   Answer (A) is incorrect because a 
   merger between firms in different and 
   unrelated markets is a conglomerate 
   merger. 

   Answer (B) is incorrect because a 
   merger between two or more firms at 
   different stages of the production 
   process is a vertical merger. 

   Answer (C) is incorrect because a 
   merger between a producer and a 
   supplier is a vertical merger. 

   Answer (D) is correct. A horizontal 
   merger is one between competitors in 
   the same market. From the viewpoint of 
   the Justice Department, it is the most 
   closely scrutinized type of merger 
   because it has the greatest tendency to 
   reduce competition. 


[1053] Source: Publisher 

   Answer (A) is incorrect because a 
   merger is not an acquisition. In a 
   merger, only one of the combining 
   companies survives. 

   Answer (B) is correct. Purchasing the 
   stock of another company is 
   advantageous when management and the 
   board of directors of the purchased 
   company are hostile to the combination 
   because the acquisition does not require 
   a formal vote by the shareholders. Thus, 
   the management and the board of 
   directors cannot influence shareholders. 
   Also, after the acquisition both 
   companies continue to operate 
   separately. 

   Answer (C) is incorrect because an 
   acquisition of all of the firm's assets 
   requires a vote from the shareholders. 

   Answer (D) is incorrect because a 
   consolidation is different from an 
   acquisition because, in a consolidation, 
   a new company is formed and neither of 
   the merging companies survives. 


[1054] Source: Publisher 

   Answer (A) is incorrect because a 
   tender offer is used in an acquisition by 
   a firm to the shareholders of another 
   firm to tender their shares for a 
   specified price. 

   Answer (B) is incorrect because, in an 
   acquisition of assets, both companies 
   continue to operate separately. 

   Answer (C) is incorrect because, in an 
   acquisition of assets or stock, both 
   companies continue to operate 
   separately. 

   Answer (D) is correct. A consolidation 
   is a business transaction in which a new 
   company is organized to take over the 
   combining companies. An entirely new 
   company is formed, and neither of the 
   merging companies survives. Firm B 
   merges with firm C to form an entirely 
   new company called BC, and neither B 
   nor C survives. Therefore, this is a 
   consolidation. 


[1055] Source: Publisher 

   Answer (A) is incorrect because it is a 
   true statement about mergers. 

   Answer (B) is incorrect because it is a 
   true statement about mergers. 

   Answer (C) is incorrect because it is a 
   true statement about mergers. 

   Answer (D) is correct. A merger is a 
   business combination in which the 
   acquiring firm absorbs a second firm, 
   and the acquiring firm remains in 
   business as a combination of the two 
   merged firms. The acquiring firm 
   usually maintains its name and identity. 
   Mergers are legally straightforward 
   because there is usually a single bidder 
   and payment is made primarily with 
   stock. The shareholders of each firm 
   involved with the merger are required 
   to vote to approve the merger. 
   However, merger of the operations of 
   two firms may ultimately result from an 
   acquisition of stock. 


[1056] Source: Publisher 

   Answer (A) is correct. A merger is a 
   business combination in which an 
   acquiring firm absorbs another firm. 
   The acquiring firm remains in business 
   as a combination of the two merged 
   firms. Thus, the acquiring firm 
   maintains its name and identity. 
   However, approval of the merger is 
   required by votes of the shareholders of 
   each firm. 

   Answer (B) is incorrect because a 
   consolidation merges two companies 
   and forms a new company in which 
   neither of the two merging firms 
   survives. It is similar to a merger, but 
   one firm is not absorbed by another. 

   Answer (C) is incorrect because a 
   proxy fight is an attempt by dissident 
   shareholders to gain control of the 
   corporation by electing directors. 

   Answer (D) is incorrect because both 
   companies continue to operate 
   separately after an acquisition. 


[1057] Source: Publisher 

   Answer (A) is incorrect because a 
   diversifying merger brings together 
   companies in different industries. 

   Answer (B) is correct. A horizontal 
   merger occurs when two firms in the 
   same industry combine. General Motors 
   and Ford are both in the automobile 
   industry. A merger of these two 
   companies would be a horizontal 
   merger. 

   Answer (C) is incorrect because a 
   conglomerate merger is a combination 
   of two firms in unrelated industries. 

   Answer (D) is incorrect because a 
   vertical merger is a combination of a 
   firm with one of its suppliers or 
   customers. 


[1058] Source: Publisher 

   Answer (A) is incorrect because it 
   supports choosing a merger over an 
   acquisition. 

   Answer (B) is incorrect because it 
   supports choosing a merger over an 
   acquisition. 

   Answer (C) is incorrect because it 
   supports choosing a merger over an 
   acquisition. 

   Answer (D) is correct. Many factors 
   influence whether a transaction should 
   be a merger or an acquisition of stock. 
   Whether the companies are in the same 
   industry or not is usually not a factor. In 
   an acquisition of stock, an acquiring 
   firm usually makes a tender offer 
   directly to the shareholders of another 
   firm to obtain a controlling interest. 
   Therefore, the acquiring firm must 
   directly deal with shareholders of the 
   other firm. There is the possibility that 
   some minority shareholders will not 
   tender their shares. Management may be 
   hostile to the combination, which 
   usually causes an increase in the stock 
   price. This increase will require the 
   acquiring firm to pay more money in its 
   tender offer. On the other hand, a 
   merger is much more straightforward 
   legally. It is usually a negotiated 
   arrangement between a single bidder 
   and the acquired firm. However, a 
   merger does require a formal vote of 
   the shareholders of each of the merging 
   firms, whereas an acquisition does not. 


[1059] Source: Publisher 

   Answer (A) is incorrect because a 
   conglomerate merger involves the 
   combination of two firms in unrelated 
   industries. 

   Answer (B) is incorrect because a 
   white knight is a firm from which the 
   target firm seeks a competitive offer to 
   avoid being acquired by a less 
   desirable suitor. 

   Answer (C) is correct. A vertical 
   merger is the combination of a firm with 
   one or more of its suppliers or 
   customers. The acquiring firm remains 
   in business as a combination of the two 
   merged firms. The chain of gasoline 
   stations is acquiring an oil refinery, 
   which is a supplier. Therefore, this is a 
   vertical merger. 

   Answer (D) is incorrect because 
   horizontal mergers combine companies 
   in the same industry. 


[1060] Source: Publisher 

   Answer (A) is incorrect because it is a 
   true statement about the acquisition of 
   stock through tender offers. 

   Answer (B) is incorrect because it is a 
   true statement about the acquisition of 
   stock through tender offers. 

   Answer (C) is incorrect because it is a 
   true statement about the acquisition of 
   stock through tender offers. 

   Answer (D) is correct. An acquisition 
   of stock by a corporation does not 
   require a formal vote of the target firm's 
   shareholders. Thus, shareholder 
   meetings do not need to be held. A 
   tender offer is usually made in an 
   acquisition of stock. This is a general 
   invitation by an individual or 
   corporation to the other corporation's 
   shareholders to tender their shares for a 
   specified price. The acquiring firm or 
   individual must directly deal with the 
   target firm's shareholders. Minority 
   shareholders are not required to tender 
   their shares. Therefore, not all of the 
   target firm's stock is usually tendered. 


[1061] Source: CMA 1295 1-25 

   Answer (A) is correct. The acquisition 
   of a shoe retailer by a shoe 
   manufacturer is an example of vertical 
   integration. Vertical integration is 
   typified by a merger or acquisition 
   involving companies that are in the 
   same industry but at different levels in 
   the supply chain. In other words, one of 
   the companies supplies inputs for the 
   other. 

   Answer (B) is incorrect because a 
   conglomerate is a company made up of 
   subsidiaries in unrelated industries. 

   Answer (C) is incorrect because market 
   extension involves expanding into new 
   market areas. 

   Answer (D) is incorrect because 
   horizontal integration involves a merger 
   between competing firms in the same 
   industry. 


[1062] Source: Publisher 

   Answer (A) is incorrect because a 
   tax-free reorganization may or may not 
   be a combination, and it may or may not 
   result in a parent-subsidiary 
   relationship. 

   Answer (B) is incorrect because 
   vertical combinations may also be 
   accomplished by a merger or a 
   consolidation, in which case the 
   combining companies become one. A 
   vertical combination combines a 
   supplier or a customer firm with the 
   acquiring company. 

   Answer (C) is incorrect because 
   horizontal combinations may also be 
   accomplished by a merger or a 
   consolidation, in which case the 
   combining companies become one. A 
   horizontal combination combines two 
   firms in the same line of business. 

   Answer (D) is correct. A 
   parent-subsidiary relationship arises 
   from an effective investment in the stock 
   of another enterprise in excess of 50%. 
   The financial statements for the two 
   companies ordinarily should be 
   presented on a consolidated basis. To 
   the extent the corporation is not wholly 
   owned, a minority interest is presented. 


[1063] Source: Publisher 

   Answer (A) is incorrect because a 
   consolidation may be accounted for as a 
   purchase wherein assets are recorded at 
   fair values. 

   Answer (B) is incorrect because 
   aggregation is a nonsense term in this 
   context. 

   Answer (C) is incorrect because 
   purchase accounting records fair, not 
   book, values. 

   Answer (D) is correct. In pooling of 
   interests, assets and liabilities are 
   recorded by the combined entity at their 
   carrying (book) value, a treatment 
   compatible with historical cost. If the 
   separate companies recorded assets and 
   liabilities using different methods, the 
   amounts may be adjusted to the same 
   basis of accounting if the change would 
   have been appropriate for the separate 
   company. 


[1064] Source: Publisher 

   Answer (A) is incorrect because a 
   consolidation may be accounted for as a 
   pooling, a method that records only 
   book values. 

   Answer (B) is incorrect because 
   aggregation is a nonsense term in this 
   context. 

   Answer (C) is correct. The purchase 
   method treats the combination as an 
   acquisition of one company by another. 
   The acquirer records the identifiable 
   assets obtained and liabilities assumed 
   at their fair values. Goodwill is the 
   excess of the purchase price of the 
   assets or an investee over the sum of the 
   assigned costs (fair values) of the net 
   identifiable assets (sum of the 
   identifiable tangible and identifiable 
   intangible assets, minus liabilities 
   assumed). 

   Answer (D) is incorrect because, in a 
   pooling, assets and liabilities are 
   recorded at book value, so goodwill is 
   not recognized. 


[1065] Source: Publisher 

   Answer (A) is incorrect because a 
   pooling involves an issuance solely of 
   common stock, and retained earnings is 
   ordinarily unaffected. 

   Answer (B) is incorrect because certain 
   tax-free reorganizations are accounted 
   for using the purchase method. 

   Answer (C) is incorrect because, when 
   a stock investment includes more than 
   50% but less than 100% of the 
   outstanding stock of a company, a 
   minority interest exists in the 
   consolidated balance sheet. 

   Answer (D) is correct. In a pooling, 
   assets are recorded at their existing 
   book values. In a purchase, assets are 
   recorded at fair value. The purchase 
   method will write up the assets if fair 
   value is greater than book value. 
   However, if book value exceeds fair 
   value, the pooling method records the 
   larger amounts on the balance sheet. 


[1066] Source: CMA 0697 2-21 

   Answer (A) is incorrect because assets 
   are recorded at their fair value in a 
   purchase. 

   Answer (B) is incorrect because assets 
   are recorded at their fair value in a 
   purchase. 

   Answer (C) is correct. Business 
   combinations are accounted for either 
   as a purchase or as a pooling of 
   interests. Under purchase accounting, 
   the cost of the acquired company is 
   allocated to the assets acquired and 
   liabilities assumed on the basis of their 
   fair values. Any excess of the cost over 
   the fair value of the identifiable net 
   assets acquired is allocated to 
   goodwill. If the fair value of the 
   identifiable net assets acquired is 
   greater than cost, the excess (negative 
   goodwill) is allocated proportionately 
   to reduce the values assigned to 
   noncurrent assets (except long-term 
   investments in marketable securities). 
   Any remainder is classified as a 
   deferred credit (APB 16). 

   Answer (D) is incorrect because book 
   value is the method used to record 
   assets in a pooling of interests. 


[1067] Source: Publisher 

   Answer (A) is incorrect because 
   $1,008,000 is the initial asset balance. 

   Answer (B) is incorrect because it 
   omits the 1999 amortization of $8,400. 

   Answer (C) is incorrect because the 
   1999 amortization was $8,400, not 
   $25,200. 

   Answer (D) is correct. APB Opinion 17 
   requires that goodwill be amortized 
   over a period of 40 years or less. Given 
   that the company paid $12 million for 
   identifiable net assets with a fair value 
   of $10,992,000, goodwill is 
   $1,008,000. Over 40 years, annual 
   amortization is $25,200 ($1,008,000  
   40). For 1999, the amortization is 
   $8,400 [$25,200 x (4 months  12 
   months)]. For 2000 and 2001, total 
   amortization was $50,400 (2 x 
   $25,200). The book value of the 
   goodwill after adjusting entries at 
   December 31, 2001 is therefore 
   $949,200 ($1,008,000 - $8,400 - 
   $50,400). This amount is written off 
   when the goodwill is determined to be 
   worthless. 


[1068] Source: Publisher 

   Answer (A) is incorrect because SFAS 
   131 superseded SFAS 14, which 
   required line-of-business information 
   classified by industry segment. Instead, 
   SFAS 131 defines segments based on 
   the entity's internal organization. 

   Answer (B) is correct. The objective of 
   segment reporting is to provide 
   information about the different types of 
   business activities of the entity and the 
   economic environments in which it 
   operates. This information is reported 
   on an operating segment basis. SFAS 
   131 defines an operating segment as "a 
   component of an enterprise that engages 
   in business activities from which it may 
   earn revenues and incur expenses 
   (including revenues and expenses 
   relating to transactions with other 
   components of the same enterprise), 
   whose operating results are regularly 
   reviewed by the enterprise's chief 
   operating decision maker to make 
   decisions about resources to be 
   allocated to the segment and assess its 
   performance, and for which discrete 
   financial information is available." A 
   reportable segment is one that satisfies 
   the foregoing definition and also meets 
   one of three quantitative thresholds. 

   Answer (C) is incorrect because SFAS 
   131 applies to public business 
   enterprises. 

   Answer (D) is incorrect because SFAS 
   131 applies to public business 
   enterprises. 


[1069] Source: Publisher 

   Answer (A) is incorrect because 
   Segments T, U, and V each meet the 
   profit or loss test, but Segment S does 
   not. 

   Answer (B) is incorrect because 
   Segments T, U, and V each meet the 
   profit or loss test, but Segment S does 
   not. 

   Answer (C) is correct. Under SFAS 
   131, information must be reported 
   separately about an operating segment 
   that reaches one of three quantitative 
   thresholds. Under the profit or loss test, 
   if the absolute amount of the reported 
   profit or loss equals at least 10% of the 
   greater, in absolute amount, of (1) the 
   combined profit of all operating 
   segments not reporting a loss, or (2) the 
   combined loss of all operating segments 
   reporting a loss, the segment meets the 
   threshold. Segments T, U, and V are 
   reportable segments. As shown below, 
   the sum of the reported profits of S and 
   U ($1,000,000) is greater than the sum 
   of the losses of T and V ($520,000). 
   Consequently, the test criterion is 
   $100,000 (10% x $1,000,000).

   Segment       Reported Profit       Reported Loss
   -------       ---------------       -------------
      S           $   90,000             $      0
      T                    0              100,000
      U              910,000                    0
      V                    0              420,000
                  ----------             --------
                  $1,000,000             $520,000
                  ==========             ========

   Answer (D) is incorrect because 
   Segments T, U, and V each meet the 
   profit or loss test, but Segment S does 
   not. 


[1070] Source: Publisher 

   Answer (A) is incorrect because 
   segment cash flow need not be reported. 

   Answer (B) is incorrect because 
   interest revenue and expense are 
   reported separately unless a majority of 
   revenues derive from interest and the 
   chief operating decision maker relies 
   primarily on net interest revenue for 
   assessing segment performance and 
   allocating resources. 

   Answer (C) is correct. For each 
   reportable segment, an enterprise must 
   report a measure of profit or loss, 
   certain items included in the 
   determination of that profit or loss, total 
   segment assets, and certain related 
   items. Segment cash flow need not be 
   reported. 

   Answer (D) is incorrect because, if 
   practicable, geographic information is 
   reported for external revenues 
   attributed to the home country and to all 
   foreign countries in total. If external 
   revenues attributed to a foreign country 
   are material, they are disclosed 
   separately. 


[1071] Source: Publisher 

   Answer (A) is incorrect because each 
   governmental unit is to be treated as a 
   separate customer in applying the 10% 
   revenue test. 

   Answer (B) is incorrect because each 
   governmental unit is to be treated as a 
   separate customer in applying the 10% 
   revenue test. 

   Answer (C) is correct. For purposes of 
   SFAS 131, a group of customers under 
   common control must be regarded as a 
   single customer in determining whether 
   10% or more of the revenue of an 
   enterprise is derived from sales to any 
   single customer. A parent and a 
   subsidiary are under common control, 
   and they should be regarded as a single 
   customer. Major customer disclosure is 
   required when the parent company has 
   6% revenue and the subsidiary of the 
   parent has 4% revenue because total 
   combined revenue is 10% (6% + 4%). 

   Answer (D) is incorrect because each 
   governmental unit is to be treated as a 
   separate customer in applying the 10% 
   revenue test. 


[1072] Source: CPA 0590 II-56 

   Answer (A) is incorrect because 
   segments A, B, C, D, and E, but not F, 
   meet at least one of the tests. 

   Answer (B) is incorrect because 
   segments A, B, C, D, and E, but not F, 
   meet at least one of the tests. 

   Answer (C) is correct. Four operating 
   segments (A, B, C, and E) have revenue 
   equal to or greater than 10% of the 
   $32,750,000 total revenue of all 
   operating segments. These four 
   segments also have profit equal to or 
   greater than 10% of the $5,800,000 
   total profit of all operating segments 
   that did not report a loss. Five segments 
   (A, B, C, D, and E) have assets greater 
   than 10% of the $67,500,000 total 
   assets of all operating segments. 
   Because an operating segment is 
   reportable if it meets one or more of the 
   three tests established by SFAS 131, 
   Correy Corp. has five reportable 
   operating segments for the year. 

   Answer (D) is incorrect because 
   segments A, B, C, D, and E, but not F, 
   meet at least one of the tests. 


[1073] Source: CPA 0590 II-54 

   Answer (A) is incorrect because no 
   amount of interest expense should be 
   included in the calculation. 

   Answer (B) is incorrect because Clay's 
   share of interest expense (25% x 
   $300,000 = $75,000) is excluded from 
   the calculation of profit. 

   Answer (C) is correct. The amount of a 
   segment item reported, such as profit or 
   loss, is the measure reported to the 
   chief operating decision maker for 
   purposes of making resource allocation 
   and performance evaluation decisions 
   regarding the segment. However, SFAS 
   131 does not stipulate the specific items 
   included in the calculation of that 
   measure. Consequently, allocation of 
   revenues, expenses, gains, and losses 
   are included in the determination of 
   reported segment profit or loss only if 
   they are included in the measure of 
   segment profit or loss reviewed by the 
   chief operating decision maker. Given 
   that this measure for Clay reflects 
   traceable costs and an allocation of 
   nontraceable operating costs, the profit 
   is calculated by subtracting the 
   $1,900,000 traceable costs and the 
   $125,000 ($500,000 x 25%) of the 
   allocated costs from the division's sales 
   of $3,000,000. The profit for the 
   division is $975,000.

        Sales                   $ 3,000,000
        Traceable costs          (1,900,000)
        Allocated costs (25%)      (125,000)
                                -----------
        Profit                  $   975,000
                                ===========

   Answer (D) is incorrect because the 
   allocated nontraceable operating costs 
   must also be subtracted. 


[1074] Source: Publisher 

   Answer (A) is correct. A fair-value 
   hedge includes a hedge of an exposure 
   to changes in the fair value of a 
   recognized asset or liability or of an 
   unrecognized firm commitment. 
   Changes in both (1) the fair value of a 
   derivative that qualifies and is 
   designated as a fair-value hedge and (2) 
   the fair value of the hedged item 
   attributable to the hedged risk are 
   included in earnings in the period of 
   change. Thus, the net effect on earnings 
   is limited to the ineffective portion, i.e., 
   the difference between the changes in 
   fair value. A cash-flow hedge includes 
   a hedge of an exposure to variability in 
   the cash flows of a recognized asset or 
   liability or a forecasted transaction. 
   Changes in the fair value of a derivative 
   that qualifies and is designated as a 
   cash-flow hedge are recognized as a 
   component of other comprehensive 
   income to the extent the hedge is 
   effective. The ineffective portion of the 
   hedge is recognized in current earnings. 
   The changes accumulated in other 
   comprehensive income are reclassified 
   to earnings in the period(s) the hedged 
   transaction affects earnings. For 
   example, accumulated amounts related 
   to a forecasted purchase of equipment 
   are reclassified as the equipment is 
   depreciated. 

   Answer (B) is incorrect because, to the 
   extent a hedge is effective, only the 
   changes in fair value of a hedge 
   qualified and designated as a fair-value 
   hedge are included in earnings in the 
   periods the changes take place. 

   Answer (C) is incorrect because, to the 
   extent a hedge is effective, only the 
   changes in fair value of a hedge 
   qualified and designated as a fair-value 
   hedge are included in earnings in the 
   periods the changes take place. 

   Answer (D) is incorrect because, to the 
   extent a hedge is effective, only the 
   changes in fair value of a hedge 
   qualified and designated as a fair-value 
   hedge are included in earnings in the 
   periods the changes take place. 


[1075] Source: Publisher 

   Answer (A) is incorrect because it 
   involves a net investment equal to the 
   fair value of the stock. 

   Answer (B) is incorrect because it is 
   based on an identifiable event, not an 
   underlying. 

   Answer (C) is incorrect because it is 
   based on an identifiable event, not an 
   underlying. 

   Answer (D) is correct. SFAS 133 
   defines a derivative as a financial 
   instrument or other contract that (1) has 
   (a) one or more underlyings and (b) one 
   or more notional amounts or payment 
   provisions, or both; (2) requires either 
   no initial net investment or an 
   immaterial net investment; and (3) 
   requires or permits net settlement. An 
   underlying may be a specified interest 
   rate, security price, commodity price, 
   foreign exchange rate, index of prices 
   or rates, or other variable. A notional 
   amount is a number of currency units, 
   shares, bushels, pounds, or other units 
   specified. Settlement of a derivative is 
   based on the interaction of the notional 
   amount and the underlying. The 
   purchase of the forward contract as a 
   hedge of a forecasted need to purchase 
   wheat meets the criteria prescribed by 
   SFAS 133. 


[1076] Source: Publisher 

   Answer (A) is incorrect because a 
   financial instrument does not involve 
   the delivery of a product. 

   Answer (B) is correct. A firm 
   commitment is an agreement with an 
   unrelated party, binding on both parties 
   and usually legally enforceable, that 
   specifies all significant terms and 
   includes a disincentive for 
   nonperformance. 

   Answer (C) is incorrect because a 
   forecasted transaction is a transaction 
   that is expected to occur for which no 
   firm commitment exists. 

   Answer (D) is incorrect because the 
   purchase commitment is an exposure to 
   risk, not a hedge of an exposure to risk. 


[1077] Source: Publisher 

   Answer (A) is incorrect because the 
   effect on earnings is equal to the 
   ineffective portion of the hedge. 

   Answer (B) is correct. A hedge of an 
   exposure to changes in the fair value of 
   a recognized asset or liability is 
   classified as a fair value hedge. Gains 
   and losses arising from changes in fair 
   value of a derivative classified as a fair 
   value hedge are included in the 
   determination of earnings in the period 
   of change. They are offset by losses or 
   gains on the hedged item attributable to 
   the risk being hedged. Thus, earnings of 
   the period of change are affected only 
   by the net gain or loss attributable to the 
   ineffective aspect of the hedge. The 
   ineffective portion is equal to $25,000 
   ($350,000 - $325,000). 

   Answer (C) is incorrect because each is 
   a gross effect. 

   Answer (D) is incorrect because each 
   is a gross effect. 


[1078] Source: Publisher 

   Answer (A) is incorrect because the 
   futures contracts should be recorded as 
   a liability. 

   Answer (B) is correct. SFAS 133 
   requires that derivative instruments be 
   recorded as assets and liabilities and 
   measured at fair value. At March 12, 
   the inception of the futures contracts, the 
   fair value of the futures contracts was 
   $0 because the contracts were entered 
   into at the futures price at that date. On 
   March 31, the fair value of the futures 
   contract is equal to the change in the 
   futures price between the inception 
   price and the March 31 price. Given 
   that the futures contracts created an 
   obligation to deliver 5 million lbs. 
   (25,000 lbs. x 200 contracts) of copper 
   at $0.83/lb. and that the price had risen 
   to $0.85/lb. at the date of the financial 
   statements, the company should record a 
   loss and a liability of $100,000 [5 
   million lbs. x ($0.83 - $0.85)]. 

   Answer (C) is incorrect because the 
   contracts should be measured at the 
   $100,000 change in the futures price 
   rather than at the March 31 futures 
   price. 

   Answer (D) is incorrect because the 
   futures contracts should be recorded as 
   a liability. 


[1079] Source: Publisher 

   Answer (A) is incorrect because the 
   hedged copper inventory should be 
   recorded at its $2,900,000 original cost 
   plus the $100,000 gain in fair value 
   attributable to the hedged risk. 

   Answer (B) is incorrect because the 
   hedged copper inventory should be 
   recorded at its $2,900,000 original cost 
   plus the $100,000 gain in fair value 
   attributable to the hedged risk. 

   Answer (C) is correct. For a fair-value 
   hedge, changes in the fair value of the 
   hedged item attributable to the hedged 
   risk are reflected as adjustments to the 
   carrying value of the hedged recognized 
   asset or liability or the previously 
   unrecognized firm commitment on the 
   statement of financial position. The 
   adjustments to carrying value are 
   accounted for in the same manner as 
   other components of the carrying value 
   of the asset or liability. Thus the 
   inventory should be recorded at 
   $3,000,000 [(5 million lbs. x $0.58) 
   original cost + $100,000 gain in fair 
   value]. 

   Answer (D) is incorrect because the 
   hedged copper inventory should be 
   recorded at its $2,900,000 original cost 
   plus the $100,000 gain in fair value 
   attributable to the hedged risk. 


[1080] Source: Publisher 

   Answer (A) is incorrect because 
   Forecast should recognize earnings for 
   period 1 of $2,000. The increase in fair 
   value of the derivative exceeds the 
   decrease in PV of the cash flows by 
   $2,000. The derivative is adjusted to 
   fair value by a $50,000 debit, OCI is 
   credited for $48,000, and earnings is 
   credited for $2,000. 

   Answer (B) is correct. The effective 
   portion of a cash flow hedge of a 
   forecasted transaction is included in 
   OCI until periods in which the 
   forecasted transaction affects earnings. 
   At the end of period 3, the net change in 
   the hedging derivative's fair value is 
   $16,000 ($50,000 + $47,000 - 
   $81,000), and the change in the PV of 
   the expected cash flows on the 
   forecasted transaction is -$19,000 
   ($80,000 - $48,000 - $51,000). Thus, 
   the hedge is effective at the end of 
   period 3 to the extent it offsets $16,000 
   of the net $19,000 decrease in the cash 
   flows of the forecasted transaction that 
   are expected to occur in period 4. 

   Answer (C) is incorrect because the 
   entry for period 2 is to debit the 
   derivative for $47,000, debit earnings 
   for $2,000, and credit OCI for $49,000 
   ($50,000 + $47,000 - $48,000 credit in 
   period 1). At the end of period 2, OCI 
   should have a credit balance of $97,000 
   (the extent of the hedge's effectiveness). 

   Answer (D) is incorrect because the 
   entry for period 2 is to debit the 
   derivative for $47,000, debit earnings 
   for $2,000, and credit OCI for $49,000 
   ($50,000 + $47,000 - $48,000 credit in 
   period 1). At the end of period 2, OCI 
   should have a credit balance of $97,000 
   (the extent of the hedge's effectiveness). 


[1081] Source: Publisher 

   Answer (A) is correct. The hedge of the 
   foreign currency exposure of a 
   forecasted transaction is designated as a 
   cash flow hedge. The effective portion 
   of gains and losses associated with 
   changes in fair value of a derivative 
   instrument designated and qualifying as 
   a cash flow hedging instrument is 
   reported as a component of other 
   comprehensive income. 

   Answer (B) is incorrect because a 
   hedge of the foreign currency exposure 
   of an unrecognized firm commitment 
   may be a fair value hedge or a cash 
   flow hedge. The effective portion of 
   gains and losses arising from changes in 
   fair value of a derivative classified as a 
   fair value hedge is included in earnings 
   of the period of change. It is offset by 
   losses and gains on the hedged item that 
   are attributable to the risk being hedged. 

   Answer (C) is incorrect because a 
   hedge of the foreign currency exposure 
   of a recognized asset or liability for 
   which a foreign currency transaction 
   gain or loss is recognized in earnings 
   may be a fair value hedge or a cash 
   flow hedge. The effective portion of 
   gains and losses arising from changes in 
   fair value of a derivative classified as a 
   fair value hedge is included in earnings 
   of the period of change. It is offset by 
   losses and gains on the hedged item that 
   are attributable to the risk being hedged. 

   Answer (D) is incorrect because gains 
   and losses associated with changes in 
   fair value of a derivative used as a 
   speculation in a foreign currency are 
   included in earnings of the period of 
   change. 


[1082] Source: Publisher 

   Answer (A) is incorrect because the 
   effective portion of gains and losses on 
   this hedge is reported as a component of 
   the cumulative translation adjustment in 
   other comprehensive income. 

   Answer (B) is incorrect because the 
   effective portion of gains and losses on 
   these hedges is included in other 
   comprehensive income until periods in 
   which the forecasted transaction affects 
   earnings. 

   Answer (C) is correct. A fair value 
   hedge includes a hedge of an exposure 
   to changes in the fair value of a 
   recognized asset or liability or an 
   unrecognized firm commitment. Such a 
   hedge minimizes the risk associated 
   with fixed cash flows. A foreign 
   currency fair value hedge includes a 
   hedge of a foreign currency exposure of 
   an unrecognized firm commitment. It 
   also includes a hedge of a foreign 
   currency exposure of a recognized asset 
   or liability (including an 
   available-for-sale security) for which a 
   foreign currency transaction gain or loss 
   is recognized in earnings under SFAS 
   52. Gains and losses arising from 
   changes in fair value of a derivative 
   classified as either a fair value or a 
   foreign fair value hedge are included in 
   the determination of earnings in the 
   period of change. They are offset by 
   losses or gains on the hedged item 
   attributable to the risk being hedged. 
   Thus, earnings of the period of change 
   are affected only by the net gain or loss 
   attributable to the ineffective aspect of 
   the hedge. 

   Answer (D) is incorrect because the 
   effective portion of gains and losses on 
   these hedges is included in other 
   comprehensive income until periods in 
   which the forecasted transaction affects 
   earnings. 


[1083] Source: Publisher 

   Answer (A) is incorrect because the 
   contract meets the definition of a firm 
   commitment. Thus, it cannot be a 
   forecasted transaction. 

   Answer (B) is incorrect because the 
   contract meets the definition of a firm 
   commitment. Thus, it cannot be a 
   forecasted transaction. 

   Answer (C) is correct. SFAS 133 
   defines a firm commitment as an 
   agreement between unrelated parties, 
   binding on both and usually legally 
   enforceable, that specifies all 
   significant terms and includes a 
   disincentive for nonperformance. SFAS 
   133 defines a forecasted transaction as 
   a transaction that is expected to occur 
   for which there is no firm commitment. 

   Answer (D) is incorrect because the 
   contract meets the definition of a firm 
   commitment. Thus, it cannot be a 
   forecasted transaction. 


[1084] Source: Publisher 

   Answer (A) is incorrect because the 
   balance sheet amounts should be based 
   on the discounted changes in forward 
   rates, not the undiscounted changes in 
   spot rates. 

   Answer (B) is correct. This hedge is a 
   foreign currency fair value hedge 
   because it hedges a foreign currency 
   exposure of an unrecognized firm 
   commitment whose cash flows are 
   fixed. Thus, unlike a foreign currency 
   cash flow hedge, it does not hedge the 
   foreign currency exposure to variability 
   in the functional-currency-equivalent 
   cash flows associated with an 
   unrecognized firm commitment. SFAS 
   133 requires recognition of the forward 
   contract receivable as an asset at fair 
   value, with the changes in fair value 
   recognized in earnings. SFAS 133 
   further requires recognition of the 
   changes in the fair value of the firm 
   commitment that are attributable to the 
   changes in exchange rates. These 
   changes in fair value are recognized in 
   earnings and as entries to a liability. 
   Fair values should reflect changes in the 
   forward exchange rates on a 
   net-present-value basis. Thus, the 
   forward contract receivable should be 
   debited and a gain credited for $19,600 
   at 12/31/01. A loss should be debited 
   and a firm commitment liability should 
   be credited in the same amount at the 
   same date. (NOTE: Under current 
   GAAP, no asset or liability is 
   recognized for a firm commitment when 
   the contract is signed.) At 2/15/02, a 
   further $10,400 forward contract gain 
   and firm commitment loss should be 
   recorded. Because the changes in value 
   of both the forward contract and the 
   U.S.-dollar equivalent of the firm 
   commitment are based on changes in 
   forward rates, the hedge is completely 
   effective; the changes in fair values 
   ($19,600 and $10,400) of the forward 
   contract receivable (gains) and the firm 
   commitment (losses) offset each other 
   in the income statement. 

   Answer (C) is incorrect because 
   $19,600 and $10,400 are the respective 
   income statement effects. 

   Answer (D) is incorrect because 
   $20,000 is the undiscounted change in 
   the forward rates at 12/31/01. 


[1085] Source: Publisher 

   Answer (A) is incorrect because 
   $350,000 is the amount that would have 
   been recognized if the equipment had 
   been delivered on 11/15/01. 

   Answer (B) is correct. The equipment 
   should be recorded at $360,000. This 
   amount equals $390,000 (FC1,000,000 
   x $0.39 spot rate at 2/15/02) minus the 
   $30,000 balance in the firm commitment 
   liability account. The entry is to debit 
   equipment for $360,000, debit the firm 
   commitment liability for $30,000, and 
   credit a payable for $390,000. On the 
   same date, Hector will debit the 
   payable for $390,000, credit the 
   forward contract receivable for 
   $30,000, and credit cash for $360,000. 
   The latter entry reflects settlement of the 
   payable and of the forward contract. 

   Answer (C) is incorrect because 
   $390,000 is the amount that would have 
   been recognized if the firm commitment 
   had not been hedged. 

   Answer (D) is incorrect because 
   $420,000 equals $390,000 plus the 
   $30,000 balance in the firm commitment 
   liability account. 


[1086] Source: Publisher 

   Answer (A) is correct. Weeks should 
   record the forward contract as a 
   receivable at fair value. Fair value is 
   based on changes in forward rates 
   discounted on a net present value basis. 
   Thus, the receivable should be recorded 
   at $9,800 on December 31, 2001 and 
   $25,000 ($9,800 + $15,200) on March 
   31, 2002. Because a hedge of the 
   foreign currency exposure of a 
   forecasted transaction is a cash flow 
   hedge, Weeks should also credit these 
   amounts to other comprehensive 
   income. On March 31, the sale should 
   be recorded at $500,000 ($475,000 
   value based on the spot rate at March 
   31 + $25,000 balance in other 
   comprehensive income). The amount of 
   cash received also is equal to $500,000 
   ($475,000 + $25,000 balance in the 
   forward contract receivable). 

   Answer (B) is incorrect because the 
   change in forward rates should be 
   adjusted for the time value of money. 

   Answer (C) is incorrect because 
   $540,000 and $475,000 reflect the 
   value of FC500,000 at spot rates. 

   Answer (D) is incorrect because 
   $490,000 and $475,000 reflect the 
   value of FC500,000 at forward rates. 


[1087] Source: CPA 0595 F-54 

   Answer (A) is correct. Under the 
   purchase method, no part of the 
   shareholders' equity of the acquired 
   company is carried forward after the 
   combination. Thus, only the $100,000 
   of dividends declared by Poe will be 
   included in the statement of retained 
   earnings. Under the pooling-of-interests 
   method, the retained earnings balances 
   of the combining companies at the time 
   of the combination are carried forward. 
   Accordingly, the dividends declared by 
   Shaw prior to the combination date plus 
   the dividends declared by Poe 
   ($100,000 + $30,000 = $130,000) will 
   be reported in the consolidated 
   statement of retained earnings. 

   Answer (B) is incorrect because 
   $140,000 erroneously includes the 
   $10,000 dividend declared by Shaw 
   after the combination date. 

   Answer (C) is incorrect because only 
   the dividends declared by Poe should 
   be reported under the purchase method. 

   Answer (D) is incorrect because 
   $130,000 should be the amount 
   declared under the pooling of interests 
   method rather than the purchase method, 
   and $140,000 erroneously includes the 
   dividends declared by Shaw after the 
   combination date. 


[1088] Source: CPA 0593 I-7 

   Answer (A) is incorrect because 
   $5,200,000 includes the dividends paid 
   by Pane. 

   Answer (B) is correct. In a pooling of 
   interests, the contributed capital of the 
   surviving entity should be equal to the 
   total of the contributed capital for the 
   combining entities. The retained 
   earnings for the surviving entity should 
   also be equal to the total of the retained 
   earnings of the combining entities, 
   except in certain circumstances, e.g., 
   when an allocation of retained earnings 
   was made to contributed capital, or the 
   effects of intercompany transactions 
   must be eliminated. The total of the 
   retained earnings of the combining 
   companies on June 30, 2000 is 
   $4,450,000 ($3,200,000 Pane's RE at 
   12/31/99 + $800,000 Pane's NI at 
   6/30/00 + $925,000 Sky's RE at 
   12/31/99 + $275,000 Sky's NI at 
   6/30/00 - $750,000 dividends paid by 
   Pane on 3/25/00). 

   Answer (C) is incorrect because 
   $3,525,000 does not include Sky's 
   beginning retained earnings. 

   Answer (D) is incorrect because 
   $3,250,000 equals Pane's separate 
   retained earnings on June 30, 2000. 


[1089] Source: CPA 0593 I-8 

   Answer (A) is incorrect because 
   $5,200,000 includes Sky's retained 
   earnings at 6/30/00 and does not deduct 
   the dividends paid. 

   Answer (B) is incorrect because 
   $4,450,000 equals the consolidated 
   retained earnings if the combination is 
   accounted for as a pooling. 

   Answer (C) is incorrect because 
   $3,525,000 includes Sky's net income 
   through 6/30/00. 

   Answer (D) is correct. A purchase is 
   viewed as an acquisition of net assets. 
   Thus, only the fair value of the net 
   assets of a subsidiary is included in a 
   consolidated balance sheet prepared 
   using the purchase method. The 
   shareholders' equity, including retained 
   earnings, is excluded. Pane's separate 
   retained earnings is therefore equal to 
   the amount in the consolidated balance 
   sheet, i.e., $3,250,000 ($3,200,000 
   beginning RE + $800,000 NI - 
   $750,000 dividends). 


[1090] Source: CPA 1189 I-10 

   Answer (A) is incorrect because 
   $950,000 is the additional paid-in 
   capital reported under the pooling of 
   interests method. 

   Answer (B) is incorrect because 
   $1,300,000 is the amount reported by 
   Poe immediately before the 
   combination. 

   Answer (C) is incorrect because 
   $1,450,000 is the sum of the amounts 
   reported by Poe and Saxe immediately 
   before the combination. 

   Answer (D) is correct. A business 
   combination accounted for as a 
   purchase is treated as an acquisition. To 
   effect the acquisition, the 200,000 
   shares were issued for $3,600,000 
   (200,000 shares x $18 market price per 
   share). Of this amount, $2,000,000 
   (200,000 shares x $10 par) should be 
   allocated to the common stock of Poe, 
   with the remaining $1,600,000 
   ($3,600,000 - $2,000,000) allocated to 
   additional paid-in capital. The 
   additional paid-in capital recorded on 
   Poe's (the parent company's) books is 
   $2,900,000 ($1,300,000 + $1,600,000). 
   This balance is also reported on the 
   2000 consolidated balance sheet. 


[1091] Source: CPA 1189 I-11 

   Answer (A) is correct. If the transaction 
   is accounted for as a pooling of 
   interests, the contributed capital for the 
   combined entity is equal to the sum of 
   the contributed capital for the 
   combining entities. Poe's contributed 
   capital is $4,300,000 ($3,000,000 
   common stock + $1,300,000 additional 
   paid-in capital). Saxe's contributed 
   capital is $1,650,000 ($1,500,000 
   common stock + $150,000 additional 
   paid-in capital). Contributed capital for 
   the consolidated entity is therefore 
   equal to $5,950,000. Of this total, 
   $3,000,000 should be allocated to the 
   common stock account for the Poe stock 
   outstanding prior to the combination. An 
   additional $2,000,000 (200,000 shares 
   x $10 par value) should also be 
   allocated to common stock because of 
   the issuance of stock to effect the 
   combination. Hence, the total recorded 
   in common stock is $5,000,000. The 
   remaining $950,000 ($5,950,000 total 
   contributed capital - $5,000,000 total 
   common stock) is allocated to 
   additional paid-in capital for Poe as the 
   parent and for the consolidated entity. 

   Answer (B) is incorrect because 
   $1,300,000 is the amount reported by 
   Poe immediately before the 
   combination. 

   Answer (C) is incorrect because 
   $1,450,000 is the sum of the amounts 
   reported by Poe and Saxe immediately 
   before the combination. 

   Answer (D) is incorrect because 
   $2,900,000 is the additional paid-in 
   capital reported under the purchase 
   method. 


[1092] Source: CPA 1194 F-56 

   Answer (A) is correct. Subsidiary 
   stockholdings in a parent are normally 
   treated as treasury stock on the 
   consolidated balance sheet. Gains and 
   losses on treasury stock are not 
   recognized. Thus, no gain is recognized 
   in the consolidated income statement 
   when a subsidiary purchases the 
   parent's stock on the open market. 

   Answer (B) is incorrect because 
   $390,000 equals the $700,000 paid, 
   minus the $300,000 book value, minus 
   the $10,000 dividend. 

   Answer (C) is incorrect because 
   $400,000 equals the $700,000 paid 
   minus the $300,000 book value. 

   Answer (D) is incorrect because 
   $410,000 equals the $700,000 paid, 
   minus the $300,000 book value, plus the 
   $10,000 dividend. 


[1093] Source: CPA 0595 F-50 

   Answer (A) is incorrect because 
   $6,000 is the gross profit eliminated. 

   Answer (B) is incorrect because 
   $12,000 is the amount of accounts 
   receivable eliminated. 

   Answer (C) is incorrect because 
   $58,000 is the cost of goods sold 
   eliminated. 

   Answer (D) is correct. Intercompany 
   transactions are eliminated in 
   consolidations. The amount of revenue 
   eliminated in the consolidation is 
   $64,000 [($400,000 Pare revenue + 
   $280,000 Shel revenue) - $616,000 
   consolidated revenue]. 


[1094] Source: CPA 0595 F-51 

   Answer (A) is incorrect because 
   $6,000 is the gross profit eliminated. 

   Answer (B) is correct. Reciprocal 
   balances should be eliminated. Given 
   that $12,000 [($52,000 Pare A/R + 
   $38,000 Shel A/R) - $78,000 
   consolidated A/R] of accounts 
   receivable was eliminated, $12,000 of 
   accounts payable on Shel's books must 
   also have been eliminated. 

   Answer (C) is incorrect because 
   $58,000 is the cost of goods sold 
   eliminated. 

   Answer (D) is incorrect because 
   $64,000 is the amount of intercompany 
   sales from Pare to Shel during 2000. 


[1095] Source: CPA 0595 F-52 

   Answer (A) is correct. The unrealized 
   intercompany profit eliminated is 
   $6,000 ($64,000 intercompany sales 
   eliminated - $58,000 cost of goods sold 
   eliminated). 

   Answer (B) is incorrect because 
   $12,000 is the amount of Shel's payable 
   to Pare. 

   Answer (C) is incorrect because 
   $58,000 is the cost of goods sold 
   eliminated. 

   Answer (D) is incorrect because 
   $64,000 is the amount of intercompany 
   sales eliminated. 


[1096] Source: CPA 0593 I-9 

   Answer (A) is incorrect because 
   $320,000 does not eliminate 
   intercompany transactions. 

   Answer (B) is incorrect because 
   $314,000 does not involve eliminating 
   the effect of the transactions with Kent 
   but does involve deducting the gross 
   profit included in the inventory held by 
   Dean. 

   Answer (C) is correct. When a parent 
   buys inventory from a subsidiary (an 
   upstream transaction), the inventory on 
   the consolidated balance sheet must be 
   adjusted to the price paid by the 
   subsidiary until the inventory is sold to 
   an outside party. Hence, the gross profit 
   made by Kent, which was included in 
   the $60,000 of inventory held by Clark, 
   must be reduced by the pro rata share of 
   profit made on the sale by Kent, 
   reducing the inventory to Kent's original 
   cost. The reduction is $12,000 
   [($60,000 EI  $240,000 purchases) x 
   $48,000 gross profit]. Thus, current 
   assets equal $308,000 ($320,000 - 
   $12,000). Because Kent is wholly 
   owned, no allocation of the reduction in 
   gross profit to a minority interest is 
   necessary. The transaction with Dean 
   requires no elimination. Dean is not 
   consolidated. 

   Answer (D) is incorrect because 
   $302,000 treats the sales to Dean as 
   occurring between a parent and a 
   consolidated subsidiary. 


[1097] Source: CPA 1195 F-8 

   Answer (A) is incorrect because Lion, 
   Monk, and Nevi all qualify as 
   reportable operating segments. 

   Answer (B) is incorrect because Lion, 
   Monk, and Nevi all qualify as 
   reportable operating segments. 

   Answer (C) is incorrect because Lion, 
   Monk, and Nevi all qualify as 
   reportable operating segments. 

   Answer (D) is correct. For the purpose 
   of identifying reportable operating 
   segments, SFAS 131 defines revenue to 
   include sales to external customers and 
   intersegment sales or transfers. In 
   accordance with the revenue test, a 
   reportable operating segment has 
   revenue equal to 10% or more of the 
   total combined revenue, internal and 
   external, of all of the enterprise's 
   operating segments. Given combined 
   revenues of $150,000, Lion, Monk, and 
   Nevi all qualify because their revenues 
   are at least $15,000 (10% x $150,000). 


[1098] Source: Publisher 

   Answer (A) is incorrect because such 
   behavior may prevent governmental 
   action. 

   Answer (B) is incorrect because it is an 
   argument for such behavior. 

   Answer (C) is incorrect because it is an 
   argument for such behavior. 

   Answer (D) is correct. Socially 
   responsible behavior clearly has 
   immediate costs to the entity, for 
   example, the expenses incurred in 
   affirmative action programs, pollution 
   control, and improvements in worker 
   safety. When one firm incurs such costs 
   and its competitor does not, the other 
   may be able to sell its products or 
   services more cheaply and increase its 
   market share at the expense of the 
   socially responsible firm. The rebuttal 
   argument is that in the long run the 
   socially responsible company may 
   maximize profits by creating goodwill 
   and avoiding or anticipating 
   governmental regulation. 


[1099] Source: CPA 0591 II-13 

   Answer (A) is incorrect because 
   $3,600,000 results from ignoring the 
   other costs of the combination. 

   Answer (B) is incorrect because 
   $3,680,000 results from treating the 
   registration and issuance costs as a 
   reduction of the investment instead of 
   paid-in capital. 

   Answer (C) is correct. Three types of 
   costs may be incurred in effecting a 
   business combination: direct costs of 
   acquisition, costs of registering and 
   issuing equity securities, and indirect 
   and general expenses. Direct costs, such 
   as finders' and consultants' fees, should 
   be included in the determination of the 
   cost of the company acquired. Costs of 
   registering and issuing equity securities 
   should be treated as a reduction in the 
   otherwise determinable fair value of the 
   securities, ordinarily as a charge to 
   additional paid-in capital. Indirect and 
   general expenses should be included in 
   the determination of net income when 
   incurred.

   An asset acquired by issuing stock is 
   recorded at the fair value of the asset. 
   However, the fair value of securities is 
   normally more clearly evident than the 
   fair value of an acquired company. 
   Hence, the quoted price of the equity 
   securities issued to effect the 
   combination may be used to 
   approximate the fair value of the 
   acquired company. The investment 
   should be debited for $3,760,000 
   [(100,000 shares x $36) + $160,000 
   consultant's fee], and additional paid-in 
   capital should be debited for $80,000 
   (the registration and issuance costs). 
   The credits are to common stock for 
   $2,000,000 ($20 x 100,000 shares), 
   additional paid-in capital for 
   $1,600,000 [($36 - $20 par) x 100,000 
   shares], and cash for $240,000 
   ($160,000 + $80,000). 

   Answer (D) is incorrect because 
   $3,840,000 results from treating the 
   registration and issuance costs as an 
   addition to the investment instead of as 
   a reduction of paid-in capital. 


[1100] Source: CPA 0596 F-3 

   Answer (A) is incorrect because 
   Mega's contributed capital exceeds 
   Lone and Small's par value of common 
   stock, resulting in Mega's having 
   additional paid-in capital. 

   Answer (B) is correct. In a pooling of 
   interests, the contributed capital of the 
   surviving company must equal the 
   contributed capital of the combining 
   entities. Lone's contributed capital is 
   $112,500 ($100,000 common stock + 
   $12,500 additional paid-in capital). 
   Small's contributed capital is $217,500 
   ($200,000 common stock + $17,500 
   additional paid-in capital). Therefore, 
   total contributed capital is $330,000 
   ($112,500 + $217,500). Mega issued 
   31,000 shares of $10 par voting stock, 
   resulting in common stock of $310,000 
   (31,000 x $10). Thus, additional 
   paid-in capital is $20,000 ($330,000 
   contributed capital - $310,000 common 
   stock). 

   Answer (C) is incorrect because 
   $30,000 equals the additional paid-in 
   capital before the business combination 
   took place. 

   Answer (D) is incorrect because 
   $195,000 equals the total additional 
   paid-in capital plus retained earnings 
   for Lone and Small before the business 
   combination took place ($30,000 + 
   $165,000). 


[1101] Source: CPA 0593 I-14 

   Answer (A) is incorrect because the 
   effects of intercompany transactions 
   should be completely eliminated in 
   consolidated financial statements. 

   Answer (B) is incorrect because the 
   effects of intercompany transactions 
   should be completely eliminated in 
   consolidated financial statements. 

   Answer (C) is incorrect because the 
   effects of intercompany transactions 
   should be completely eliminated in 
   consolidated financial statements. 

   Answer (D) is correct. In a 
   consolidated balance sheet, reciprocal 
   balances, such as receivables and 
   payables, between a parent and a 
   consolidated subsidiary should be 
   eliminated in their entirety, regardless 
   of the portion of the subsidiary's stock 
   held by the parent. Thus, Wright should 
   report $0 as intercompany receivables. 


[1102] Source: CMA 0696 2-6 

   Answer (A) is incorrect because these 
   are all pooling criteria specified in 
   APB 16. 

   Answer (B) is incorrect because these 
   are all pooling criteria specified in 
   APB 16. 

   Answer (C) is incorrect because these 
   are all pooling criteria specified in 
   APB 16. 

   Answer (D) is correct. Under APB 16, 
   all 12 of the following criteria must be 
   met: (1) The combining companies are 
   autonomous; i.e., one has not been a 
   subsidiary of the other during the past 2 
   years. (2) Not more than 10% of the 
   stock of any combining company is held 
   by the other combining companies 
   before the pooling. (3) The combination 
   is effected in a single transaction within 
   1 year after the plan is initiated. (4) 
   Only common stock of the surviving 
   company is issued for at least 90% of 
   the outstanding voting stock of the other 
   combining companies. (5) The 
   combining companies do not change the 
   composition of shareholders' equity or 
   the amount of common stock in 
   contemplation of the combination. (6) 
   The combining companies reacquire 
   treasury stock only for purposes other 
   than the business combination. (7) The 
   ratio of ownership of individual 
   common shareholders to that of other 
   common shareholders remains the same 
   after the exchange of stock; i.e., each 
   shareholder maintains his/her relative 
   percentage of ownership. (8) The new 
   shareholders are not deprived of or 
   restricted in exercising the voting rights 
   of their stock. (9) The combination is 
   resolved when initiated, and there are 
   no provisions for contingent issuances 
   of securities or for the payment of other 
   contingent consideration. (10) There is 
   no plan to retire any stock issued to 
   effect the combination. (11) No special 
   financial arrangements are made to 
   benefit former shareholders of the 
   combining companies. (12) There is no 
   plan to dispose of a significant amount 
   of the combining companies' assets for 
   the 2 years following the combination, 
   except to eliminate duplicate facilities 
   or excess capacity. As noted above, an 
   agreement to directly or indirectly retire 
   or acquire all of the common stock 
   issued to effect the combination would 
   rule out the use of the pooling method. 


[1103] Source: CPA 1195 F-49 

   Answer (A) is incorrect because 
   $5,000 is the subsidiary's dividends 
   paid. 

   Answer (B) is correct. In consolidated 
   statements, the amount of dividends 
   paid equals the parent's dividends paid. 
   The subsidiary's dividends paid to the 
   parent (75% x $5,000 = $3,750) are 
   eliminated as an intercompany 
   transaction. The remaining $1,250 of 
   the subsidiary's dividends reduces the 
   amount reported as the minority interest. 

   Answer (C) is incorrect because 
   $26,250 includes the minority interest. 

   Answer (D) is incorrect because 
   $30,000 includes the subsidiary's 
   dividends paid. 


[1104] Source: CPA 1195 F-50 

   Answer (A) is incorrect because the 
   minority interest in net assets is 
   $30,000 [($180,000 - $60,000) x 25%]. 

   Answer (B) is correct. Given that 25% 
   of the stock is held by minority 
   interests, $30,000 equals the minority 
   interest in net assets [($180,000 - 
   $60,000) x 25%]. 

   Answer (C) is incorrect because the 
   minority interest in net assets is 
   $30,000 [($180,000 - $60,000) x 25%]. 

   Answer (D) is incorrect because the 
   minority interest in net assets is 
   $30,000 [($180,000 - $60,000) x 25%]. 


[1105] Source: CPA 1195 F-51 

   Answer (A) is incorrect because, in 
   consolidated statements, the parent's 
   common stock equals the consolidated 
   common stock. 

   Answer (B) is correct. In consolidated 
   statements, the parent's common stock 
   equals the consolidated common stock. 

   Answer (C) is incorrect because, in 
   consolidated statements, the parent's 
   common stock equals the consolidated 
   common stock. 

   Answer (D) is incorrect because, in 
   consolidated statements, the parent's 
   common stock equals the consolidated 
   common stock. 


[1106] Source: Publisher 

   Answer (A) is incorrect because, given 
   that the hedge was fully effective, the 
   $55,000 gain should be recognized in 
   the period in which the forecasted 
   transaction affects earnings. 

   Answer (B) is correct. A cash flow 
   hedge is a hedge of an exposure to 
   variability in the cash flows of a 
   recognized asset or liability or a 
   forecasted transaction. The accounting 
   treatment of gains and losses arising 
   from changes in fair value of a 
   derivative designated as a cash flow 
   hedge varies for the effective and 
   ineffective portions. The effective 
   portion initially is reported as other 
   comprehensive income. It is 
   reclassified into earnings when the 
   forecasted transaction affects earnings. 
   The ineffective portion is immediately 
   included in earnings. This hedge has no 
   ineffective portion. Given that the sale 
   occurred in 2002, the $30,000 gain in 
   2001 is recognized as other 
   comprehensive income in 2001. It is 
   reclassified and included in earnings in 
   2002. Thus, 2002 earnings include the 
   $30,000 reclassified from other 
   comprehensive income and the $25,000 
   gain attributable to the increase in fair 
   value in 2002. 

   Answer (C) is incorrect because, given 
   that the hedge was fully effective, the 
   $55,000 gain should be recognized in 
   the period in which the forecasted 
   transaction affects earnings. 

   Answer (D) is incorrect because, given 
   that the hedge was fully effective, the 
   $55,000 gain should be recognized in 
   the period in which the forecasted 
   transaction affects earnings. 


[1107] Source: Publisher 

   Answer (A) is correct. The hedge of a 
   foreign currency exposure of a 
   forecasted 
   foreign-currency-denominated 
   transaction is a cash flow hedge. The 
   effective portion of gains and losses 
   associated with changes in fair value of 
   a derivative instrument designated and 
   qualifying as a cash flow hedging 
   instrument is reported as a component 
   of other comprehensive income. 

   Answer (B) is incorrect because a 
   hedge of a foreign currency exposure of 
   either a foreign-currency-denominated 
   firm commitment or an 
   available-for-sale security is 
   designated as a fair value hedge. The 
   effective portion of gains and losses 
   arising from changes in fair value of a 
   derivative classified as a fair value 
   hedge is included in earnings of the 
   period of change. It is offset by losses 
   and gains on the hedged item that are 
   attributable to the risk being hedged. 

   Answer (C) is incorrect because a 
   hedge of a foreign currency exposure of 
   either a foreign-currency-denominated 
   firm commitment or an 
   available-for-sale security is 
   designated as a fair value hedge. The 
   effective portion of gains and losses 
   arising from changes in fair value of a 
   derivative classified as a fair value 
   hedge is included in earnings of the 
   period of change. It is offset by losses 
   and gains on the hedged item that are 
   attributable to the risk being hedged. 

   Answer (D) is incorrect because gains 
   and losses associated with changes in 
   fair value of a derivative used as a 
   speculation in a foreign currency are 
   included in earnings of the period of 
   change. 


