Final Examination Study Guide 1 ACC/422 Version 7

ACC/422 Final Examination Study Guide

This study guide prepares you for the Final Examination you complete in the last week of the course. It contains practice questions, which are related to each week’s objectives. Highlight the correct response, and then refer to the answer key at the end of this Study Guide to check your answers.

Use each week’s questions as a self-test at the start of a new week to reflect on the previous week’s concepts. When you come across concepts that you are unfamiliar with, refer to the Student Guide for that particular week.

Week One: Key Current Assets (Cash, Receivables, and Inventory)

Objective: Identify the components of cash and cash equivalents.

1. When a customer purchases merchandise inventory from a business organization, she may be given a discount, which is designed to induce prompt payment. Such a discount is called a(n)

a. trade discount b. nominal discount c. enhancement discount d. cash discount

Objective: Calculate the value of net realizable receivables.

2. Which of the following is true when accounts receivable are factored without recourse?

a. The transaction may be accounted for either as a secured borrowing or as a sale, depending on the substance of the transaction. b. The receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables. c. The factor assumes the risk of collectability and absorbs any credit losses in collecting the receivables. d. The financing cost (interest expense) should be recognized ratably over the collection period of the receivables.

Objective: Compare and contrast inventory cost flow assumptions.

3. Cross Co. accepted delivery of merchandise, which it purchased on account. As of December 31, Cross had recorded the transaction, but did NOT include the merchandise in its inventory. The effect of this on its financial statements for December 31 would be

a. net income, current assets, and retained earnings were understated b. net income was correct and current assets were understated c. net income was understated and current liabilities were overstated d. net income was overstated and current assets were understated

Objective: Calculate the value of inventories using different cost flow assumptions.

4. Quayle Corporation’s inventory cost on its balance sheet was lower using first-in, first-out than it would have been using last-in, first-out. Assuming no beginning inventory, in what direction did the cost of purchases move during the period?

a. Up b. Down Final Examination Study Guide 2 ACC/422 Version 7

c. Steady d. Cannot be determined

Week Two: Advanced Concepts in Inventory Valuation and Fixed Assets

Objective: Apply the lower-of-cost-or-market concept to the valuation of inventories.

5. Recording inventory at net realizable value is permitted, even if it is above cost, when there are no significant costs of disposal involved and

a. the ending inventory is determined by a physical inventory count b. a normal profit is NOT anticipated c. there is a controlled market with a quoted price applicable to all quantities d. the internal revenue service is assured that the practice is NOT used only to distort reported net income

Objective: Calculate estimated inventory value using the gross profit and retail inventory methods.

6. To produce an inventory valuation that approximates the lower-of-cost-or-market using the conventional retail inventory method, the computation of the ratio of cost to retail should

a. include markups but NOT markdowns b. include markups and markdowns c. ignore both markups and markdowns d. include markdowns but NOT markups

Objective: Apply criteria for fixed asset capitalization.

7. Fences and parking lots are reported on the balance sheet as

a. current assets b. land improvements c. land d. property and equipment

Objective: Calculate the costs of fixed assets.

8. Which of the following statements is true regarding capitalization of interest?

a. Interest cost capitalized in connection with the purchase of land to be used as a building site should be debited to the land account and NOT to the building account. b. The amount of interest cost capitalized during the period should NOT exceed the actual interest cost incurred. c. When excess borrowed funds NOT immediately needed for construction are temporarily invested, any interest earned should be offset against interest cost incurred when determining the amount of interest cost to be capitalized. d. The minimum amount of interest to be capitalized is determined by multiplying a weighted- average interest rate by the amount of average accumulated expenditures on qualifying assets during the period.

Objective: Apply the methods of accounting for asset exchange.

9. When a closely held corporation issues preferred stock for land, the land should be recorded at the Final Examination Study Guide 3 ACC/422 Version 7

a. total par value of the stock issued b. total book value of the stock issued c. total liquidating value of the stock issued d. fair market value of the land

Week Three: Cost Allocation and Intangibles

Objective: Compare and contrast depreciation methods.

10. A graph is set up with “yearly depreciation expense” on the vertical axis and “time” on the horizontal axis. Assuming linear relationships, how would the graphs for straight-line and sum-of- the-years’-digits depreciation, respectively, be drawn?

a. Vertically and sloping down to the right b. Vertically and sloping up to the right c. Horizontally and sloping down to the right d. Horizontally and sloping up to the right

Objective: Calculate depreciation using various methods.

11. On July 1, 2006, Rodriguez Corporation purchased factory equipment for $150,000. Salvage value was estimated to be $4,000. The equipment will be depreciated over 10 years using the double-declining balance method. Counting the year of acquisition as one-half year, Gonzalez should record depreciation expense for 2007 on this equipment of

a. $30,000 b. $27,000 c. $26,280 d. $24,000

Objective: Recognize asset impairments.

12. Wriglee, Inc. went to court this year and successfully defended its patent from infringement by a competitor. The cost of this defense should be charged to

a. patents and amortized over the legal life of the patent b. legal fees and amortized over 5 years or less c. expenses of the period d. patents and amortized over the remaining useful life of the patent

Objective: Measure fixed asset impairments.

13. Shangra-La Company incurred $1,500,000 ($400,000 in 2007 and $1,100,000 in 2008) to develop a computer software product; $500,000 of this amount was expended before technological feasibility was established in early 2008. The product will earn future revenues of $4,000,000 over its 5-year life, as follows: 2008 – $1,000,000; 2009 – $1,000,000; 2010 – $800,000; 2011 – $800,000; and 2012 – $400,000. What portion of the $1,500,000 computer software costs should be expensed in 2008?

a. $250,000 b. $300,000 c. $350,000 d. $1,100,000 Final Examination Study Guide 4 ACC/422 Version 7

Objective: Calculate the value of intangible assets.

14. A loss on impairment of an intangible asset is the difference between the asset’s

a. carrying amount and the expected future net cash flows b. carrying amount and its fair value c. fair value and the expected future net cash flows d. book value and its fair value

Objective: Apply criteria for the treatment of research and development costs.

There are no test questions associated with this objective.

Week Four: Liabilities

Objective: Determine the components of current liabilities.

15. In accounting for compensated absences, the difference between vested rights and accumulated rights is

a. vested rights are normally for a longer period of employment than are accumulated rights b. vested rights are NOT contingent upon an employee’s future service c. vested rights are a legal and binding obligation on the company, whereas accumulated rights expire at the end of the accounting period in which they arose d. vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do NOT represent monetary compensation

Objective: Calculate various types of current liabilities.

16. A company buys an oil rig for $2,000,000 on January 1, 2007. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $400,000 (present value at 10% is $154,220); 10% is an appropriate interest rate for this company. What expense should be recorded for 2007 as a result of these events?

a. Depreciation expense of $240,000 b. Depreciation expense of $200,000 and interest expense of $15,422 c. Depreciation expense of $200,000 and interest expense of $40,000 d. Depreciation expense of $215,420 and interest expense of $15,422

Objective: Identify the criteria for disclosing contingencies.

17. A company is legally obligated for the costs associated with the retirement of a long-lived asset

a. only when it hires another party to perform the retirement activities b. only if it performs the activities with its own workforce and equipment c. whether it hires another party to perform the retirement activities or performs the activities itself d. when it is probable the asset will be retired

Objective: Determine the value of long-term liabilities.

18. The interest rate written in the terms of the bond indenture is known as the

a. coupon rate b. nominal rate c. stated rate Final Examination Study Guide 5 ACC/422 Version 7

d. coupon rate, nominal rate, or stated rate

Week Five: Accounting for Leases

Objective: Differentiate between operating and capital leases.

19. A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the

a. asset’s remaining economic life b. term of the lease c. life of the asset or the term of the lease, whichever is shorter d. life of the asset or the term of the lease, whichever is longer

Objective: Record leases from both the lessor and lessee perspectives.

20. A lessor with a sales-type lease involving an unguaranteed residual value available to the lessor at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?

a. The minimum lease payments plus the unguaranteed residual value b. The present value of the minimum lease payments c. The cost of the asset to the lessor, less the present value of any unguaranteed residual value d. The present value of the minimum lease payments plus the present value of the unguaranteed residual value Final Examination Study Guide 6 ACC/422 Version 7

Answer Key

1. d 2. c 3. a 4. b 5. c 6. a 7. b 8. b 9. d 10. c 11. b 12. d 13. c 14. b 15. b 16. d 17. c 18. d 19. a 20. b