Intermediate Accounting II Exam
Bank
Course Introduction
Intermediate Accounting II builds upon foundational accounting principles by delving deeper into the theory and application of financial accounting standards. The course covers advanced topics such as liabilities, shareholders equity, deferred taxes, pensions, leases, accounting for changes and error analysis, and financial statement analysis. Students will analyze and interpret complex financial transactions, prepare relevant financial statements, and gain a thorough understanding of GAAP and IFRS regulations. Emphasis is placed on critical thinking, problem-solving, and applying accounting standards to real-world situations, preparing students for higher-level accounting courses and professional accounting challenges.
Recommended Textbook
Intermediate Accounting Reporting and Analysis 1st Edition by James M. Wahlen
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Chapter 1: The Demand for and Supply of Financial
Accounting Information
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Q1) The convergence project between the IASB and GAAP was initiated in 2002 when the two boards entered into the "Northward Agreement".
A)True
B)False
Answer: False
Q2) While formally the SEC is charged with the responsibility for establishing accounting principles to be followed in the preparation of SEC filings, the impact of the SEC generally has been
A) in its assistance to Congress with the development of tax law
B) in guiding the development of stock exchanges
C) ineffective in controlling foreign corporations and investors
D) its informal review and approval of standards developed in the private sector prior to their release
Answer: D
Q3) FASB came to being in 1973 after the AICPA phased out the Accounting Principles Board.
A)True
B)False
Answer: True
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Chapter 2: Financial Reporting: Its Conceptual Framework
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Q1) Information is communicated to external users by the management of the company. Those users cannot dictate desired financial results to the company.
A)True
B)False
Answer: True
Q2) Intracompany comparability would be violated if
A) a company used LIFO as its inventory cost method while other companies in the same industry used FIFO
B) a company changed its bad debts expense estimate from one percent to two percent
C) a bank did not classify its assets as current assets and noncurrent assets
D) a company expenses all expenditures of less than $500 even if the expenditures result in probable future economic benefit
Answer: B
Q3) Relevance and faithful representation are the ultimate objectives of accounting information.
A)True
B)False
Answer: False
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Chapter 3: Review of a Companys Accounting System
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Sample Questions
Q1) Several accounts are listed below:
a. Purchases Returns and Allowances
b. Sales Discounts
c. Wages Expense
d. Allowance for Doubtful Accounts
e. Unearned Rent
f. Income Taxes Payable
g. Dividends
h. Interest Revenue
i. Discount on Bonds Payable
j. Common Stock
k. Additional Paid in Capital-Common Stock
l. Inventory
Required:
List the accounts above that would normally have a debit balance.
Answer: b, c, g, i, l
Q2) ........
Answer: ........
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Page 5
Chapter 4: The Balance Sheet and the Statement of
Shareholders Equity
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Q1) Which of the following assets is most likely reported at its historical cost on the balance sheet?
A) short-term investments
B) merchandise inventory
C) net accounts receivable
D) prepaid insurance
Q2) GAAP requires that all derivative financial instruments be reported at their
A) historical cost
B) fair value
C) present value
D) par value
Q3) A leased asset under capital lease is disclosed on the balance sheet at its A) present value
B) historical cost
C) current replacement cost
D) net realizable value
Q4) What differences exist between IFRS and U.S. GAAP balance sheet presentation?
Q5) How would a common classification of a balance sheet look?
Page 6
Q6) From what two perspectives does the balance sheet report the financial position of a company?
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Chapter 5: The Income Statement and the Statement of Cash Flows
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Q1) Which of the following is not used as a caption if there is nothing to report?
A) income from continuing operations
B) extraordinary items
C) interest expense
D) income taxes
Q2) Refer to Exhibit 5-2. Compute net profit margin for Peace, Love, and Joy Company.
A) 14.25%
B) 15.00%
C) 25.00%
D) 13.25%
Q3) One method of revenue recognition that postpones the recognition until after the time of sale is
A) percentage-of-completion
B) proportional performance
C) cost recovery
D) point of sale
Q4) What are the seven major components of a company's income statement?
Q5) What are the four items of other comprehensive income under U.S. GAAP?
Q6) List five purposes of the income statement.
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Chapter 6: Cash and Receivables
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Q1) A company can record uncollectible account by two different procedures. What are the two procedures? Provide a brief description of both. Which one is preferable by GAAP, and why?
Q2) Which of the following is a key element of internal control over cash payments?
A) Making all payments by check.
B) Authorize and sign checks only after the expenditure is approved.
C) Reconcile the bank account.
D) All of these choices
Q3) Theoretically, the amount of estimated future returns and allowances on credit sales should be recorded during the period of the sale so as not to overstate sales and ending accounts receivable. In practice, these estimates are rarely recorded because
A) the amount of such returns and allowances tends to fluctuate too greatly from period to period
B) there is too much uncertainty surrounding such estimates
C) such estimates are not allowed according to generally accepted accounting principles
D) the amount of such returns and allowances is usually not material
Q4) What three conditions must be met for GAAP to consider the transfer of financial assets as a sale?
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Chapter 7: Inventories: Cost Measurement and Flow
Assumptions
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Q1) Which one of the following types of costs is most likely to be included in determining the cost of inventory?
A) freight-in costs
B) freight-out costs
C) interest cost for amounts borrowed to finance the purchase of inventory
D) marketing costs
Q2) A retail firm would normally use an inventory account titled
A) finished goods inventory
B) merchandise inventory
C) goods in process inventory
D) raw materials inventory
Q3) Refer to Exhibit 7-5. The ending inventory at December 31, 2015, using the dollar-value LIFO method would be
A) $422,000
B) $402,000
C) $426,000
D) $420,400
Q4) A manufacturing company uses three inventory accounts. What are the accounts?
Provide a brief description of the costs that accumulate in each account.
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Chapter 8: Inventories: Special Valuation Issues
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Q1) When using the cost-to-retail ratio, net markups and markdowns are
A) always included in the computation of the ending inventory at retail
B) always included in the computation of the ending inventory at cost
C) never computed at retail
D) computed differently in each industry
Q2) At the beginning of 2014, the Joan Company had an inventory valued at $34,375 at cost ($50,000 at retail). During the year, Joan purchased inventory for $50,000 ($70,000 at retail), and made markdowns of $7,500. Joan's sales in 2014 were $62,500. What is Joan's estimated ending inventory at FIFO cost using the retail inventory method?
A) $37,500
B) $40,000
C) $39,000
D) $34,375
Q3) The gross profit method is more sensitive to price changes and produces a more accurate estimate of current period ending inventory.
A)True
B)False
Q4) What is dollar value LIFO retail method?
Q5) Describe the lower of cost or market rule.
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Chapter 9: Current Liabilities and Contingencies
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Sample Questions
Q1) According to current GAAP, which of the following is not a condition suggesting that an accrual for vacation pay be made?
A) The obligation must relate to rights that vest.
B) The payment of compensation is probable.
C) The obligation must relate to employee services already rendered.
D) The amount can be reasonably estimated.
Q2) A client is involved in several different law suits that are all pending at the end of its fiscal year. The controller wants to know if the cases must be accrued in the accounts, disclosed in the footnotes, or neither of these.
Required:
Write an explanation of the criteria used to determine whether an accrual or a disclosure is required for loss and gain contingencies.
Q3) With regard to liabilities, liquidity refers to
A) a company's ability to convert its assets to cash to pay its liabilities
B) a company's ability to use its financial resources to adapt to change
C) a company's operating cycle
D) only liabilities and not assets
Q4) Identify 5 liabilities that are based upon contingent obligations.
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Page 12
Chapter 10: Property, Plant, and Equipment: Acquisition and
Subsequent
Investments
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Q1) Christopher Company borrowed $6 million at 11% on January 1, 2014, to build a new building. The building is expected to take 18 months to complete. Christopher invests the money from the project until it is needed for construction. He is currently earning 10%. The following is the expenditures as they relate to the construction of the building.
January 1 $1,500,000
April 1 $1,850,000
October 1 $1,100,000
December 31 $1,000,000
Required:
1) Compute the amount of interest expense Christopher would capitalize.
2) Compute the amount of interest revenue Christopher would recognize.
Q2) In order to capitalize interest under GAAP there are three issues that must be addressed prior to implementation, what are these three issues?
Q3) Under the Full-cost method, the costs associate with dry wells can be capitalized as part of the oil and gas reserves.
A)True
B)False
Q4) List 5 costs that can be included as part of the building.
Page 13
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Chapter 11: Depreciation, Depletion, Impairment, and Disposal
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Q1) Which one of the following statements is true?
A) The activity method of computing depreciation could result in zero depreciation expense in some periods of time.
B) If the activity method is in use, residual value should not be subtracted from cost to determine the depreciation base.
C) The activity method produces a constant total cost of depreciation each period.
D) The activity method should be used when the service life of the asset is affected mostly by the passage of time.
Q2) Refer to Exhibit 11-04, what amount of depletion was recorded in that first year?
A) $395,000
B) $352,500
C) $437,500
D) $375,000
Q3) In what three respects does the computation for depreciation for federal income tax purposes and financial reporting purposes differ for assets purchased after 1987?
Q4) ....
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Chapter 12: Intangibles
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Q1) Which of the following methods is commonly used to amortize intangible assets over their useful lives?
A) declining balance
B) straight line
C) annual review for impairment
D) none of these since intangible assets are not amortized
Q2) Which of the following statements regarding goodwill is false?
A) Goodwill is never amortized for financial reporting purposes.
B) A company must review its goodwill for impairment annually.
C) A company must review its goodwill for impairment whenever events or changes in circumstances occur that would more likely than not reduce the fair value below its carrying value.
D) A company records goodwill at the time that it acquires another company or at the time it determines that material intellectual capital exists in its employees.
Q3) The costs associated with internally developed goodwill are capitalized.
A)True
B)False
Q4) List 5 activities that would be excluded from R &D.
Q5) Provide two examples that would indicate goodwill is impaired.
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Chapter 13: Investments and Long-Term Receivables
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Q1) When an investor currently using the fair value method acquires significant influence over the investee at mid-year, the investor should
A) restate its investment in the investee by debiting the investment account and crediting Retained Earnings for its previous percentage of investee earnings (less dividends) for the period from the original date of acquisition to the date significant influence was obtained
B) begin using the equity method from the date of acquiring significant influence and make no retroactive adjustments
C) restate its investment in the investee by debiting the investment account and crediting Investment Income for its percentage of investee earnings for the period from the last financial statement until the date significant influence was obtained
D) continue to use the fair value method until the end of the accounting period and then switch to the equity method in order to comply with the accounting conventions of consistency and conservatism
Q2) List 3 investments in debt securities and 3 investments in equity securities.
Q3) In addition to the fair value measurement of the investment what else must a company disclose?
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Page 16
Chapter 14: Financing Liabilities: Bonds and Notes Payable
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Q1) On April 1, 2013, Bond Corporation issued 8% debentures dated January 1, 2013. The debentures had a face value of $3,000,000 and interest was payable on January 1 and July 1. The debentures were sold at par plus accrued interest. To record this event on April 1, 2013, Everly should debit cash for
A) $3,080,000
B) $3,060,000
C) $3,000,000
D) $2,920,000
Q2) If a company sells its 20-year bonds at a discount, the discount account should be reported on the balance sheet as a(n)
A) unearned liability
B) addition to the bonds payable
C) accrued expense
D) deduction from bonds payable
Q3) Discount on Bonds Payable is a(n)
A) contra account
B) valuation account
C) accumulation account
D) adjunct account
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Chapter 15: Contributed Capital
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Q1) Common stock issued to employees through the exercise of stock purchase rights under a stock option plan that is classified as a noncompensatory share purchase plan is recorded by the corporation at the
A) market price of the stock
B) exercise price of the stock
C) market price of the stock at the first date that the stock purchase right can be exercised
D) option price of the stock plus the value assigned to the stock purchase right
Q2) Accumulated other comprehensive income is not reported with shareholder's equity.
A)True
B)False
Q3) Under the cost method of accounting for treasury stock transactions, when the proceeds from a sale are greater than the cost, the excess over cost is treated as a(n)
A) increase in Other Expenses from Treasury Stock Sales
B) increase in Additional Paid-in Capital from Treasury Stock
C) increase in a contra-stockholders' equity account
D) None of these choices
Q4) What is a stock subscription?
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Chapter 16: Retained Earnings and Earnings Per Share
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Q1) The assumed conversion of convertible debt and preferred stock in diluted earnings per share calculations affects
A) the numerator only
B) the denominator only
C) both the numerator and denominator
D) neither the numerator nor the denominator
Q2) In the determination of the diluted earnings per share, convertible securities are
A) included if they are dilutive
B) included whether they are dilutive or not
C) included if they are antidilutive
D) not included
Q3) A simple capital structure consists of
A) only preferred stock
B) common stock outstanding and possibly nonconvertible preferred stock
C) common stock and common stock options only
D) preferred stock and preferred stock options
Q4) Describe the two types of corporate capital structures.
Q5) What is the basic earnings per share calculation? What is the weighted average shares calculation?
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Chapter 17: Advanced Issues in Revenue Recognition
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Q1) If Consignment-out has a debit balance, the account should be disclosed on the balance sheet as a(n)
A) expense account
B) contra-receivable account
C) inventory account
D) liability account
Q2) Which method of revenue recognition do IFRS require for construction contracts when the percentage-of-completion method cannot be applied?
A) completed contract
B) installment sales
C) completed contract.
D) cost recovery
Q3) The deferral method is usually associated with
A) revenue recognition in the period of sale
B) revenue recognition prior to the period of sale
C) revenue recognition after the period of sale
D) revenue recognition delayed until a future event occurs
Q4) What conditions must be met in order to recognize revenue under SEC Staff Bulletin 104?
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Chapter 18: Accounting for Income Taxes
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Q1) Deferred tax liabilities and deferred tax assets must be reported on the balance sheet.
Required:
Explain the process of classifying and reporting deferred tax liabilities and deferred tax assets.
Q2) The amount owed the IRS is recorded in the accounting records in which account?
A) Income Tax Expense
B) Income Tax Liability
C) Deferred Tax Expense
D) Deferred Tax Liability
Q3) Each of the following can result in a temporary difference between pretax financial income and taxable income except
A) depreciation expense
B) product warranty costs
C) percentage depletion in excess of cost depletion on wasting assets
D) contingent liabilities
Q4) What disclosures are required for "uncertain tax positions" where the position is "more likely than not" of being upheld during a tax audit by the IRS?
Q5) What is intraperiod tax allocation?
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Chapter 19: Accounting for Postretirement Benefits
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Q1) The Lucas Company offers employees a defined contribution pension plan. In 2014, Lucas contributed $175,000 to the plan, which paid $195,000 to retired employees. Which of the following statements is true?
A) Lucas will record an accrued liability of $20,000.
B) Lucas will report pension expense of $175,000.
C) Lucas will recognize prior service cost of $20,000.
D) Lucas will recognize actuarial gains and losses on the plan over current and future periods.
Q2) Under contributory plans the employees bear the majority of the costs of the plan and contribute towards the plan with deductions from their salaries.
A)True
B)False
Q3) Which of the following disclosures are required by GAAP for OPEBs?
A) the assumed healthcare cost trend rates
B) the amounts of securities included in the plan assets
C) the types of securities included in the plan assets
D) All of these choices
Q4) What disclosures are required by GAAP about a company's defined benefit pension plan?
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Chapter 20: Accounting for Leases
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Q1) On January 1, 2014, Luke, Inc. leased equipment, signing a five-year lease that requires five payments of $40,000 due on January 1 of each year with the first payment due January 1, 2014. Luke accounted for the lease as a capital lease. Using a rate of 9%, Luke determined the present value on January 1, 2014, to be $169,589. What is the amount of the long-term lease obligation that Luke should report on its December 31, 2015 balance sheet?
A) $ 70,364
B) $101,252
C) $112,915
D) $129,589
Q2) Because the risks and benefits of ownership transfer to the lessor with a capital lease, the executed costs incurred do not get included when determining the present value of the minimum lease payments.
A)True
B)False
Q3) What three criteria must be met for the lessor to account for the lease of land as a sales-type lease?
Q4) What three classifications can lessor's categorize their leases?
Q5) What are the two components of net receivables for leases?
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Chapter 21: The Statement of Cash Flows
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Q1) On the statement of cash flows prepared using the direct method, cash from customers would be sales plus
A) an increase in accounts receivable
B) an increase in accounts payable
C) a decrease in accounts receivable
D) a decrease in accounts payable
Q2) Refer to Exhibit 21-2. The Cash Flows from Operating Activities section prepared using the indirect method would include which of the following deductions or add-back amounts related to patents?
A) $(310)
B) $(290)
C) $ 290
D) $ 600
Q3) The statement of cash flows, along with other financial and operating information, enables investors, creditors, and other users to assess a company's liquidity, financial flexibility, and operating capability. Distinguish between liquidity, financial flexibility, and operating capability.
Q4) What are the four steps necessary to complete the statement of cash flows using the visual inspection method?
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Chapter 22: Accounting for Changes and Errors
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Q1) Refer to Exhibit 22-2. Accordingly, the appropriate accounting change was made in 2017. How much depreciation expense for this machine should Nathan record for the year ended December 31, 2017?
A) $4,200
B) $5,250
C) $7,000
D) $ 0
Q2) On January 1, 2014, the Master Company purchased a machine for $36,000 that had a ten-year estimated useful life and no estimated salvage value. At the start of the seventh year of use, a new energy saving device was added to the machine that extended its original useful life an additional two years. This change should be accounted for in the seventh year by
A) including the cumulative effect of the change in net income for the current period
B) depreciating the remaining book value over four years
C) retroactively adjusting income of prior periods using the newly adjusted useful life
D) depreciating the remaining book value over six years
Q3) ......
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Chapter 23: Time Value of Money Module
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Q1) When the present value of an annuity is calculated as of two or more periods before the payment of the first cash flow, the annuity is
A) an ordinary annuity
B) a deferred ordinary annuity
C) an annuity due
D) a simple annuity
Q2) Interest calculated on the original principal regardless of the number of time periods that have passed or the amount of interest that has been paid or accrued in the past is A) compound interest
B) simple interest
C) present value of future cash flows
D) future value of a single sum
Q3) An ordinary annuity is if the cash flows occur on the first day of each period. A)True B)False
Q4) What is the formula to compute the future value of a single sum?
Q5) Discounting is the process of converting a future cash flow to a present value. A)True
B)False
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