Final Exam with Answers - Intermediate Financial Accounting | BUS 165B, Exams of Introduction to Business Management

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UC RIVERSIDE - INTERMEDIATE ACCOUNTING (II) - BUS 165B - SPRING 2015 -

PROFESSOR WEAVER

Name: ___________________________________ Date: ______________ MULTIPLE CHOICE

1. An example of an item which is not a liability is A) dividends payable in stock. B) advances from customers on contracts. C) accrued estimated warranty costs. D) the portion of long-term debt due within one year.
2. The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the A) bond indenture. B) bond debenture. C) registered bond. D) bond coupon.
3. The term used for bonds that are unsecured as to principal is A) junk bonds. B) debenture bonds. C) indebenture bonds. D) callable bonds.
4. If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be A) greater than if the straight-line method were used. B) greater than the amount of the interest payments. C) the same as if the straight-line method were used. D) less than if the straight-line method were used.

5. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that A) the effective yield or market rate of interest exceeded the stated (nominal) rate. B) the nominal rate of interest exceeded the market rate. C) the market and nominal rates coincided. D) no necessary relationship exists between the two rates.
6. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to A) the stated (nominal) rate of interest multiplied by the face value of the bonds. B) the market rate of interest multiplied by the face value of the bonds. C) the stated rate multiplied by the beginning-of-period carrying amount of the bonds. D) the market rate multiplied by the beginning-of-period carrying amount of the bonds.
7. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be A) decreased by accrued interest from June 1 to November 1. B) decreased by accrued interest from May 1 to June 1. C) increased by accrued interest from June 1 to November 1. D) increased by accrued interest from May 1 to June 1.
8. In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, A) a loss should be recognized by the debtor. B) a gain should be recognized by the debtor. C) a new effective-interest rate must be computed. D) no interest expense or revenue should be recognized in the future.

9. Downing Company issues $3,000,000, 6%, 5-year bonds dated January 1, 2012 on January 1, 2012. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue? 2.5% 3.0% 5.0% 6.0% Present value of a single sum for 5 periods .88385 .86261 .78353. Present value of a single sum for 10 periods .78120 .74409 .61391. Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4. Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7. A) $3,000, B) $3,129, C) $3,131, D) $3,130,
10. When a business enterprise enters into what is referred to as off-balance-sheet financing, the company A) is attempting to conceal the debt from shareholders by having no information about the debt included in the balance sheet. B) wishes to confine all information related to the debt to the income statement and the statement of cash flow. C) can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost. D) is in violation of generally accepted accounting principles.
11. The pre-emptive right of a common stockholder is the right to A) share proportionately in corporate assets upon liquidation. B) share proportionately in any new issues of stock of the same class. C) receive cash dividends before they are distributed to preferred stockholders. D) exclude preferred stockholders from voting rights.
12. Total stockholders' equity represents A) a claim to specific assets contributed by the owners. B) the maximum amount that can be borrowed by the enterprise. C) a claim against a portion of the total assets of an enterprise. D) only the amount of earnings that have been retained in the business.

13. Stockholders' equity is generally classified into two major categories: A) contributed capital and appropriated capital. B) appropriated capital and retained earnings. C) retained earnings and unappropriated capital. D) earned capital and contributed capital.
14. Direct costs incurred to sell stock such as underwriting costs should be accounted for as
    1. a reduction of additional paid-in capital.
    2. an expense of the period in which the stock is issued.
    3. an intangible asset. A) 1 B) 2 C) 3 D) 1 or 3
15. When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited? A) Treasury stock for the par value and paid-in capital in excess of par for the excess of the purchase price over the par value. B) Paid-in capital in excess of par for the purchase price. C) Treasury stock for the purchase price. D) Treasury stock for the par value and retained earnings for the excess of the purchase price over the par value.
16. “Gains" on sales of treasury stock (using the cost method) should be credited to A) paid-in capital from treasury stock. B) capital stock. C) retained earnings. D) other income.
17. Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as A) an increase in current liabilities. B) an increase in stockholders' equity. C) a footnote. D) an increase in current liabilities for the current portion and long-term liabilities for the long-term portion.

18. An entry is not made on the A) date of declaration. B) date of record. C) date of payment. D) An entry is made on all of these dates.
19. The issuer of a 5% common stock dividend to common stockholders preferably should transfer from retained earnings to contributed capital an amount equal to the A) fair value of the shares issued. B) book value of the shares issued. C) minimum legal requirements. D) par or stated value of the shares issued.
20. Quirk Corporation issued a 100% stock dividend of its common stock which had a par value of $10 before and after the dividend. At what amount should retained earnings be capitalized for the additional shares issued? A) There should be no capitalization of retained earnings. B) Par value C) Fair value on the declaration date D) Fair value on the payment date
21. Convertible bonds A) have priority over other indebtedness. B) are usually secured by a first or second mortgage. C) pay interest only in the event earnings are sufficient to cover the interest. D) may be exchanged for equity securities.
22. When convertible debt is retired by the issuer, any material difference between the cash acquisition price and the carrying amount of the debt should be A) reflected currently in income, but not as an extraordinary item. B) reflected currently in income as an extraordinary item. C) treated as a prior period adjustment. D) treated as an adjustment of additional paid-in capital.

23. Compensation expense resulting from a compensatory stock option plan is generally A) recognized in the period of exercise. B) recognized in the period of the grant. C) allocated to the periods benefited by the employee's required service. D) allocated over the periods of the employee's service life to retirement.
24. The date on which total compensation expense is computed in a stock option plan is the date A) of grant. B) of exercise. C) that the market price exceeds the option price.
25. An executive pays no taxes at time of exercise in a(an) A) stock appreciation rights plan. B) incentive stock option plan. C) nonqualified stock option plan. D) Taxes would be paid in all of these.
26. Litke Corporation issued at a premium of $5,000 a $100,000 bond issue convertible into 2,000 shares of common stock (par value $25). At the time of the conversion, the unamortized premium is $2,000, the market value of the bonds is $110,000, and the stock is quoted on the market at $60 per share. If the bonds are converted into common, what is the amount of paid-in capital in excess of par to be recorded on the conversion of the bonds? A) $55, B) $52, C) $62, D) $70,

27. In order to retain certain key executives, Jensen Corporation granted them incentive stock options on December 31, 2011. 70,000 options were granted at an option price of $35 per share. Market prices of the stock were as follows: December 31, 2012 $46 per share December 31, 2013 51 per share The options were granted as compensation for executives' services to be rendered over a two-year period beginning January 1, 2012. The Black-Scholes option pricing model determines total compensation expense to be $700,000. What amount of compensation expense should Jensen recognize as a result of this plan for the year ended December 31, 2012 under the fair value method? A) $350,000. B) $700,000. C) $550,000. D) $1,750,000.
28. Antidilutive securities A) should be included in the computation of diluted earnings per share but not basic earnings per share. B) are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share. C) include stock options and warrants whose exercise price is less than the average market price of common stock. D) should be ignored in all earnings per share calculations.
29. Foyle, Inc., had 610,000 shares of common stock issued and outstanding at December 31,
    2012. On July 1, 2013, an additional 40,000 shares of common stock were issued for cash. Foyle also had unexercised stock options to purchase 32,000 shares of common stock at $15 per share outstanding at the beginning and end of 2013. The average market price of Foyle's common stock was $20 during 2013. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2013? A) 630, B) 638, C) 658, D) 662,

30. Warrants exercisable at $20 each to obtain 50,000 shares of common stock were outstanding during a period when the average market price of the common stock was $25. Application of the treasury stock method for the assumed exercise of these warrants in computing diluted earnings per share will increase the weighted average number of outstanding shares by A) 50,000. B) 40,000. C) 10,000. D) 12,500.
31. Unrealized holding gains or losses which are recognized in income are from securities classified as A) held-to-maturity. B) available-for-sale. C) trading. D) none of these.
32. Use of the effective-interest method in amortizing bond premiums and discounts results in A) a greater amount of interest income over the life of the bond issue than would result from use of the straight-line method. B) a varying amount being recorded as interest income from period to period. C) a variable rate of return on the book value of the investment. D) a smaller amount of interest income over the life of the bond issue than would result from use of the straight-line method.
33. In accounting for investments in debt securities that are classified as trading securities, A) a discount is reported separately. B) a premium is reported separately. C) any discount or premium is not amortized. D) none of these.

34. Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods? Fair Value Method Equity Method A) No Effect Decrease B) Increase Decrease C) No Effect No Effect D) Decrease No Effect
35. When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies? A) The investor should always use the equity method to account for its investment. B) The investor should use the equity method to account for its investment unless circum- stances indicate that it is unable to exercise "significant influence" over the investee. C) The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee. D) The investor should always use the fair value method to account for its investment.
36. If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the A) cost method. B) fair value method. C) divesture method. D) equity method.

37. When an investment in a held-to-maturity security is transferred to an available-for-sale security, the carrying value assigned to the available-for-sale security should be A) its original cost. B) its fair value at the date of the transfer. C) the lower of its original cost or its fair value at the date of the transfer. D) the higher of its original cost or its fair value at the date of the transfer.
38. Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as A) a reduction of the carrying value of the investment. B) additional paid-in capital. C) an addition to the carrying value of the investment. D) dividend income.
39. When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment A) by using the equity method. B) by using the fair value method. C) by using the effective interest method. D) by consolidation.
40. Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders' equity are A) available-for-sale securities where a company has holdings of less than 20%. B) trading securities where a company has holdings of less than 20%. C) securities where a company has holdings of between 20% and 50%. D) securities where a company has holdings of more than 50%. PROBLEMS - Begin on the next Page

41. Bond issue price and premium amortization. On January 1, 2013, Piper Co. issued ten-year bonds with a face value of $4,000,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are: Present value of 1 for 10 periods at 10%. Present value of 1 for 10 periods at 12%. Present value of 1 for 20 periods at 5%. Present value of 1 for 20 periods at 6%. Present value of annuity for 10 periods at 10% 6. Present value of annuity for 10 periods at 12% 5. Present value of annuity for 20 periods at 5% 12. Present value of annuity for 20 periods at 6% 11. Instructions (a) Calculate the issue price of the bonds. (b) Without prejudice to your solution in part (a), assume that the issue price was $3,536,000. Prepare the amortization table for 2013, assuming that amortization is recorded on interest payment dates.
42. Amortization of discount or premium. Grider Industries, Inc. issued $8,000,000 of 8% debentures on May 1, 2012 and received cash totaling $7,098,102. The bonds pay interest semiannually on May 1 and November 1. The maturity date on these bonds is November 1, 2020. The firm uses the effective-interest method of amortizing discounts and premiums. The bonds were sold to yield an effective- interest rate of 10%. Instructions Calculate the total dollar amount of discount or premium amortization during the first year (5/1/12 through 4/30/13) these bonds were outstanding. (Show computations and round to the nearest dollar.)

43. Treasury stock transactions. The original sale of the $50 par value common shares of Gray Company was recorded as follows: Cash 290, Common Stock 250, Paid-in Capital in Excess of Par 40, Instructions Record the treasury stock transactions (given below) under the cost method: Transactions: (a) Bought 350 shares of common stock as treasury shares at $62. (b) Sold 100 shares of treasury stock at $60. (c) Sold 50 treasury shares at $68.
44. Dividends on preferred stock. In each of the following independent cases, it is assumed that the corporation has $600, of 6% preferred stock and $2,400,000 of common stock outstanding, each having a par value of $10. No dividends have been declared for 2011 and 2012. (a) As of 12/31/13, it is desired to distribute $250,000 in dividends. How much will the preferred stockholders receive if their stock is cumulative and nonparticipating? (b) As of 12/31/13, it is desired to distribute $600,000 in dividends. How much will the preferred stockholders receive if their stock is cumulative and participating up to 11% in total? (c) On 12/31/13, the preferred stockholders received a $180,000 dividend on their stock which is cumulative and fully participating. How much money was distributed in total for dividends during 2013?

45. Basic and diluted EPS. Assume that the following data relative to Kane Company for 2013 is available: Net Income $2,100, Transactions in Common Shares Change Cumulative Jan. 1, 2013, Beginning number 700, Mar. 1, 2013, Purchase of treasury shares (60,000) 640, June 1, 2013, Stock split 2-1 640,000 1,280, Nov. 1, 2013, Issuance of shares 180,000 1,460, 8% Cumulative Convertible Preferred Stock Sold at par, convertible into 200,000 shares of common (adjusted for split). $1,000, Stock Options Exercisable at the option price of $25 per share. Average market price in 2013, $30 (market price and option price adjusted for split). 90,000 shares Instructions (a) Compute the basic earnings per share for 2013. (Round to the nearest penny.) (b) Compute the diluted earnings per share for 2013. (Round to the nearest penny.)
46. Investment in equity securities. Agee Corp. acquired a 30% interest in Trent Co. on January 1, 2013, for $500,000. At that time, Trent had 1,000,000 shares of its $1 par common stock issued and outstanding. During 2013, Trent paid cash dividends of $160,000 and thereafter declared and issued a 5% common stock dividend when the fair value was $2 per share. Trent's net income for 2013 was $360,000. What is the balance in Agee's equity investment account at the end of 2013?

Answer Key - BUS 165B - Final Exam - Spring 2015

1. A
2. A
3. B
4. A
5. B
6. D
7. D
8. C
9. C
10. C
11. B
12. C
13. D
14. A
15. C
16. A
17. C
18. B
19. A
20. B
21. D
22. A
23. C
24. A
25. B
26. B
27. A
28. D
29. B
30. C
31. C
32. B
33. C
34. A
35. B
36. D
37. B
38. A
39. B
40. A

(a) .312 × $4,000,000 = $1,248, 11.470 × $200,000 = 2,294, $3,542, (b) Date Cash Expense Amortization Carrying Amount 1/1/13 $3,536, 6/30/13 $200,000 $212,160 12,160 3,548, 12/31/13 200,000 212,890 12,890 3,561,

Interest Cash Discount Carrying Date Expense Interest Amortized Value of Bonds 5/1/12 $7,098, 11/1/12 $354,905 $320,000 $34,905 7,133, 5/1/13 356,650 320,000 36,650 7,169, Total $71,

(a) Treasury Stock 21, Cash 21, (b) Cash 6, Retained Earnngs 200 Treasury Stock 6, (c) Cash 3, Paid-in Capital from Treasury Stock 300 Treasury Stock 3,

(a) $108,000 ($600,000 x .06 x 3 yrs.). (b) $138,000 ($600,000 x .06 x 3 yrs.) +. (c) $612,000 ($432,000* to common and $180,000 to preferred).

• ($2,400,000 x .06) + [($180,000 - $108,000) ÷ $600,000) x $2,400,000].

45. Computation of weighted average shares outstanding during the year:

January 1 Outstanding 700, March 1 Repurchase (5/6 × 60,000) (50,000) 650, June 1 2-for-1 split 1,300, November 1 Issued (1/6 × 180,000) 30, 1,330, Additional shares for purposes of diluted earnings per share: Potentially dilutive securities 8% convertible preferred stock 200, Stock options Proceeds from exercise of 90,000 options (90,000 × $25) $2,250, Shares issued upon exercise of options 90, Less: treasury stock purchasable with proceeds ($2,250,000 ÷ $30) 75,000 15, Dilutive securities—additional shares 215, (a) (b)

Cost $500, Share of net income (.30 × $360,000) 108, Share of dividends (.30 × $160,000) (48,000) Balance in equity investment account $560,