Intermediate Accounting II
Exam Answer Key
Course Introduction
Intermediate Accounting II builds upon principles introduced in earlier accounting courses, focusing on the application of accounting standards to complex financial transactions and reporting issues. The course covers topics such as liabilities, stockholders equity, earnings per share, income taxes, pensions, leases, revenue recognition, and the preparation of statement of cash flows. Students will analyze and interpret financial statements, understand the impact of various accounting methods on business decisions, and enhance their ability to solve practical accounting problems using generally accepted accounting principles (GAAP). This course prepares students for advanced studies in accounting and offers a solid foundation for professional accounting careers.
Recommended Textbook
Intermediate Accounting 8th Edition by J. David Spiceland
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Page 2
Chapter 1: Environment and Theoretical Structure of Financial Accounting
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Q1) A rules-based approach to standard-setting stresses professional judgment as opposed to following a list of rules.
A)True
B)False
Answer: False
Q2) Which of the following is not a provision of the Public Company Accounting Reform and Investor Protection Act of 2002?
A)Corporate executive accountability.
B)Auditor rotation.
C)Retention of work papers.
D)All of the above are provisions of the Act.
Answer: D
Q3) What is the SEC and how is it involved with accounting standard-setting?
Answer: The Securities and Exchange Commission is a federal agency that has the authority to set accounting standards.However,the SEC has always delegated the task to a private-sector body,such as the current FASB.
Q4) Compute the cash balance at the end of the first year for Tri Fecta.
Answer: 11ea906f_5651_c387_a7a0_1b181fe04ce3_TB2444_00
Page 3
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Chapter 2: Review of the Accounting Process
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Q1) What is the difference between permanent accounts and temporary accounts,and why does an accounting system have both types of accounts?
Answer: Permanent accounts represent assets,liabilities,and shareholders' equity at a point in time.Temporary accounts represent changes in retained earnings caused by dividend,revenue,expense,and gain and loss accounts.The temporary accounts are closed out annually to facilitate measuring income on an annual basis.Temporary accounts are a convenience to aid the preparation of financial statements by recording revenues and expenses in these accounts rather than directly into retained earnings.
Q2) Salaries and wages have been earned but are unpaid at the end of an accounting period.
Answer: 11ea906f_564d_2f7d_a7a0_c91e918dca9f_TB2444_00
Q3) The statement of cash flows summarizes transactions that caused cash to change during a reporting period.
A)True
B)False
Answer: True
Q4) Sold merchandise to a customer in exchange for a promissory note.
Answer: 11ea906f_564c_ba47_a7a0_67dd83749add_TB2444_00
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Chapter 3: The Balance Sheet and Financial Disclosures
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Q1) The criteria for determining which items comprise cash equivalents often is disclosed in the summary of significant accounting policies.
A)True
B)False
Answer: True
Q2) Assets classified as property,plant,and equipment include machinery,equipment,and inventories.
A)True
B)False
Answer: False
Q3) The compensation of top executives is disclosed in the proxy statement.
A)True
B)False
Answer: True
Q4) Rent collected in advance is:
A)An asset account in the balance sheet.
B)A liability account in the balance sheet.
C)A shareholders' equity account in the balance sheet.
D)A temporary account,not in the balance sheet at all.
Answer: B
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Chapter
and the Statement of Cash Flows
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Q1) Intraperiod income tax presentation is primarily a matter of:
A)Valuation.
B)Going concern.
C)Periodicity.
D)Allocation.
Q2) Income from continuing operations sometimes includes gains from nonoperating activities.
A)True
B)False
Q3) Comprehensive income is the change in equity from:
A)Owner transactions.
B)Nonowner transactions.
C)Owner or nonowner transactions.
D)Capital transactions.
Q4) Which of the following is added to net income as an adjustment under the indirect method of preparing the statement of cash flows?
A)Salaries payable decrease.
B)Gain on the sale of land.
C)Loss on the sale of equipment.
D)Accounts receivable increase.
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Chapter 5: Income Measurement
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Q1) Under which of the following circumstances is it most appropriate to use the residual method to estimate stand-alone selling prices?
A)The seller hasn't previously sold the product and hasn't determined a price for it.
B)The seller provides the product bundled with other goods and services.
C)The seller does not have competitors from which to observe market prices of similar products.
D)The seller is unable to accurately estimate variable consideration associated with the contract.
Q2) If the seller is a principal,the seller should recognize gross revenue and cost of sales associated with the transaction.
A)True
B)False
Q3) What is the fixed contract price for CCC's project?
A)$120 million.
B)$225 million.
C)$345 million.
D)$349.5 million.
Q4) Its receivables turnover ratio for 2016.Round your answer to one decimal place.
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Chapter 6: Time Value of Money Concepts
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Q1) How much must be deposited at the beginning of each year to accumulate to $10,000 in four years if interest is at 9%?
A)$1,671.
B)$2,570.
C)$2,358.
D)$2,006.
Q2) A firm leases equipment under a capital lease (analogous to an installment purchase)that calls for 12 semiannual payments of $39,014.40.The first payment is due at the inception of the lease.The annual rate on the lease is 6%.What is the value of the leased asset at inception of the lease?
A)$388,349.
B)$400,000.
C)$454,128.
D)$440,082.
Q3) The calculation of future value requires the removal of interest.
A)True
B)False
Q4) Two banks each have annual CD rates of 12%.Bank A compounds quarterly and Bank B compounds semiannually.Explain which bank offers the better CD.
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Chapter 7: Cash and Receivables
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Q1) The income statement approach to estimating bad debts requires an adjusting entry at the end of the period to reduce receivables to net realizable value.
A)True
B)False
Q2) Briefly explain the accounting treatment for estimated sales returns at the end of an accounting period for which accounts receivable remain outstanding..
Q3) What kind of account is the Allowance for Loan Losses in Winchester's financial statements?
Q4) Is there any evidence in Winchester's disclosures above that are consistent with earnings management?
Q5) Describe some key elements of an internal control system for cash.
Q6) Accounts receivable are normally reported at the:
A)Present value of future cash receipts.
B)Current value plus accrued interest.
C)Expected amount to be received.
D)Current value less expected collection costs.
Q7) How could a company with receivables like HP be able to manage earnings in applying generally accepted accounting principles?
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Chapter 8: Inventories: Measurement
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Q1) What is Nueva's net income if it elects FIFO?
A)$440.
B)$264.
C)$620.
D)$372.
Q2) ATC's inventory turnover ratio for 2016 is:
A)2.42.
B)2.76.
C)3.21.
D)None of the above is correct.
Q3) LIFO usually provides a better match of revenue and expense than does FIFO.
A)True
B)False
Q4) FIFO periodic and FIFO perpetual always produce the same dollar amounts for cost of goods sold.
A)True
B)False
Q5) Briefly explain how companies that use LIFO can both increase and decrease reported earnings by "managing" ending inventories.
Q6) Briefly explain the advantages of dollar-value LIFO (DVL).
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Chapter 9: Inventories: Additional Issues
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Q1) The average cost-to-retail percentage (rounded)is:
A)74.5%.
B)55.6%.
C)57.4%.
D)58.7%.
Q2) The estimated ending inventory at retail is:
A)$27,300.
B)$25,000.
C)$26,600.
D)$26,400.
Q3) How much loss on purchase commitment will Johnson recognize in 2016?
A)$10,000.
B)$20,000.
C)$30,000.
D)None.
Q4) Briefly outline the steps in the gross profit method of estimating ending inventory and indicate when the method might be used.
Q5) Briefly explain the difference between the LIFO retail method and the dollar-value LIFO retail method.
Q6) Determine the inventory book value for Products A,B,and C.
Page 11
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Chapter 10: Property, plant, and Equipment and Intangible
Assets: Acquisition and Disposition
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Q1) Grab Manufacturing Co.purchased a 10-ton draw press at a cost of $180,000 with terms of 5/15,n/45.Payment was made within the discount period.Shipping costs were $4,600,which included $200 for insurance in transit.Installation costs totaled $12,000,which included $4,000 for taking out a section of a wall and rebuilding it because the press was too large for the doorway.The capitalized cost of the 10-ton draw press is:
A)$171,000.
B)$183,600.
C)$187,600.
D)$185,760.
Q2) Under current GAAP,fair value is used to measure the components of all nonmonetary exchanges.
A)True
B)False
Q3) The acquisition costs of property,plant,and equipment do not include:
A)The ordinary and necessary costs to bring the asset to its desired condition and location for use.
B)The net invoice price.
C)Legal fees,delivery charges,installation,and any applicable sales tax.
D)Maintenance costs during the first 30 days of use.
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Chapter 11: Property, plant, and Equipment and Intangible
Assets: Utilization and Impairment
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Q1) A change in the estimated useful life and residual value of machinery in the current year is handled as:
A)A retrospective change back to the date of acquisition as though the current estimated life and residual value had been used all along.
B)A prospective change from the current year through the remainder of its useful life,using the new estimates.
C)A cumulative adjustment to income in the current year for the difference in depreciation under the new versus old estimates.
D)All of these answer choices are incorrect.
Q2) According to International Financial Reporting Standards (IFRS),the level of testing for goodwill impairment is the:
A)Reporting unit.
B)Subsidiary companies.
C)Cash-generating unit.
D)None of these answer choices are correct.
Q3) The physical life of a depreciable asset is bounded by its service life.
A)True
B)False
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Chapter 12: Investments
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Q1) From time to time,debt and equity securities must be reclassified when conditions and circumstances surrounding the investment change.
Required:
Describe the general accounting procedures for reclassifying securities from one category to another-held to maturity,available for sale,or trading.
Q2) On January 1,2016,Green Corporation purchased 20% of the outstanding voting common stock of Gold Company for $300,000.The book value of the acquired shares was $275,000.The excess of cost over book value is attributable to an intangible asset on Gold's books that was undervalued and had a remaining useful life of five years.For the year ended December 31,2016,Gold reported net income of $125,000 and paid cash dividends of $25,000.What is the carrying value of Green's investment in Gold at December 31,2016?
A)$295,000.
B)$300,000.
C)$315,000.
D)$320,000.
Q3) Prepare appropriate entry(s)at December 31,2018,and indicate how the scenario will affect net income,OCI,and comprehensive income.
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Chapter 13: Current Liabilities and Contingencies
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Q1) Which of the following may create employer liabilities in connection with their payrolls?
A)Employee withholding taxes.
B)Employee voluntary deductions.
C)Employee fringe benefits.
D)All of these answer choices are correct.
Q2) Revenue for gift card breakage should be recognized:
A)When the gift card is sold.
B)No later than the last day of the operating period in which the gift card is delivered to the customer.
C)When the probability of gift card redemption is viewed as remote.
D)Under no circumstances,as gift cards are not themselves a delivered product,but rather a selling technique.
Q3) Providing a monetary rebate program for purchasing a product:
A)Is accounted for similarly to product warranties.
B)Creates an expense for the seller in the period of sale.
C)Creates a contingent liability for the seller at the time of sale.
D)All these answer choices are correct.
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Chapter 14: Bonds and Long-Term Notes
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Q1) Required: What was the annual effective interest rate in the market when the bonds were issued?
Q2) TMC issued $50 million of its 12% bonds on April 1,2016,at 98 plus accrued interest.The bonds are dated January 1,2016,and mature on December 31,2035.Interest is payable semiannually on June 30 and December 31.What amount did TMC receive from the bond issuance?
A)$50.5 million.
B)$51.5 million.
C)$49.0 million.
D)$49.5 million.
Q3) Patrick Rach International issued 5% bonds convertible into shares of the company's common stock.Rach applies U.S.GAAP.Upon issuance,Patrick Rach International should record:
A)The proceeds of the bond issue as part debt and part equity.
B)The proceeds of the bond issue entirely as debt.
C)The proceeds of the bond issue entirely as equity.
D)The proceeds of the bond issue entirely as debt if the bonds are mandatorily redeemable.
Q4) Why do companies find the issuance of convertible bonds to be an attractive form of financing?
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Chapter 15: Leases
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Q1) A noncancelable lease contains a bargain purchase option.The fair value of the asset exceeds the lessor's cost of the asset.Collectibility of the lease payments is assured and there are no material cost uncertainties surrounding the lease.Therefore,the lease will be accounted for by the lessor as a(n):
A)Sales-type lease.
B)Direct financing lease.
C)Operating lease.
D)Guaranteed lease.
Q2) Francisco leased equipment from Julio on December 31,2016.The lease is a 10-year lease with annual payments of $150,000 due on December 31 of each year beginning December 31,2016.The present value of the lease is $1,020,000.Francisco's incremental borrowing rate is 12% for this type of lease.The implicit rate of 10% is known by the lessee.What should be the balance in Francisco lease liability at December 31,2017?
A)$824,400.
B)$807,000.
C)$806,400.
D)$792,000.
Q3) What is meant by the term "minimum lease payments"?
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Chapter 16: Accounting for Income Taxes
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Q1) A magazine publisher collects one year in advance for subscription revenue.In the year of providing the magazines to customers,the company would record:
A)An increase in a deferred tax asset.
B)A decrease in a deferred tax asset.
C)An increase in a deferred tax liability.
D)A decrease in a deferred tax liability.
Q2) What should Tringali report as income tax payable for its first year of operations?
A)$120,000.
B)$114,000.
C)$106,000.
D)$ 8,000.
Q3) Future taxable amounts result in deferred tax assets.
A)True B)False
Q4) An unrealized gain from marking an investment to fair value typically creates a deferred tax asset.
A)True
B)False
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Chapter 17: Pensions and Other Postretirement Benefits
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Q1) With respect to Ralph,what is Oregon's accumulated postretirement benefit obligation (APBO)at the end of 2016,rounded to the nearest dollar?
A)$130,544.
B)$205,593.
C)$195,050.
D)None of these answer choices is correct.
Q2) Silver Springs Company has an unfunded retiree health care plan.Each of the company's four employees has been with the organization since its inception at the beginning of 2015.As of the end of 2016,the actuary estimates the total net cost of providing benefits to employees during their retirement years to have a present value of $196,000.Each of the employees will become fully eligible for benefits after 28 more years of service,but aren't expected to retire for 30 more years.The interest rate is 8%.
Required:
1)What is the expected postretirement benefit obligation at the end of 2016?
2)What is the accumulated postretirement benefit obligation at the end of 2016?
Q3) If a pension plan is underfunded,the company has a net loss-OCI.
A)True
B)False
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Chapter 18: Shareholders Equity
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Q1) What is comprehensive income and how does it differ from net income? Where is it reported in the balance sheet?
Q2) Outstanding common stock is:
A)Stock that is performing well on the New York Stock Exchange.
B)Stock that has been authorized by the state for issue.
C)Stock held in the corporate treasury.
D)Stock in the hands of shareholders.
Q3) Coy,Inc. ,initially issued 200,000 shares of $1 par value stock for $1,000,000 in 2014.In 2015,the company repurchased 20,000 shares for $200,000.In 2016,10,000 of the repurchased shares were resold for $160,000.In its balance sheet dated December 31,2016,Coy,Inc.'s treasury stock account shows a balance of:
A)$ 0.
B)$ 40,000.
C)$100,000.
D)$200,000.
Q4) Stock dividends cause a reduction in retained earnings,but they never reduce total shareholders' equity.
A)True
B)False
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Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) Hammerstein Corporation offers a variety of share-based compensation plans to employees.Under its restricted stock award plan,the company,on January 1,2016,granted 2 million of its $1 par common shares to various division managers.The shares are subject to forfeiture if employment is terminated within four years.The common shares have a market price of $20 per share on the award date.
Required:
(1. )Determine the total compensation cost from these restricted shares.
(2. )Prepare the appropriate journal entry to record the award on January 1,2016.
(3. )Prepare the appropriate journal entry to record compensation expense on December 31,2016.
(4. )Suppose a 15% forfeiture rate was expected prior to vesting.Determine the total compensation cost,assuming the company follows the fair value approach and chooses to anticipate forfeitures at the grant date.
Q2) Dilutive convertible bonds affect both the numerator and the denominator in computing diluted EPS.
A)True
B)False
Q3) What is an antidilutive security?
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Chapter 20: Accounting Changes
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Q1) A change in the residual value of equipment is accounted for:
A)As a prior period adjustment.
B)Prospectively.
C)Retrospectively.
D)None of these answer choices is correct.
Q2) At the end of the current year,a company failed to accrue interest of $500,000 on its investments in municipal bonds.Its tax rate is 30%.As a result of this error,net income is:
A)Unaffected.
B)Understated by $350,000.
C)Understated by $500,000.
D)Understated by $150,000.
Q3) When an accounting change is reported under the retrospective approach,prior years' financial statements are:
A)Revised to reflect the use of the new principle.
B)Reported as previously prepared.
C)Left unchanged.
D)Adjusted using prior period adjustment procedures.
Q4) Describe in detail the way companies report most voluntary changes in accounting principle.
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Chapter 21: The Statement of Cash Flows
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Q1) Cash equivalents have each of the following characteristics except:
A)Little risk of loss.
B)Highly liquid.
C)Maturity of at least three months.
D)Short-term.
Q2) Explain why Sisters Corporation subtracts equity income from its net income in its measurement of cash flows.
Q3) Payments to acquire bonds of other corporations should be classified on a statement of cash flows as:
A)A lending activity.
B)An operating activity.
C)A financing activity.
D)An investing activity.
Q4) What was the net change in cash and cash equivalents experienced by Henchman & Co.during 2015? Was it positive or negative?
Q5) The statement of cash flows has been a required financial statement since 1988,but is the reporting of cash flows a relatively new concept? Explain.
Q6) Is depreciation a source of cash? Explain.
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