Harvard Financial Accounting Final Exam 3

Q1. Freeman, Inc., reported net income of $40,000 for 2015. However, the
company’s income tax return excluded a revenue item of $3,000 (reported on
the income statement) because under the tax laws the $3,000 would not be
reported for tax purposes until 2016. Assuming a 30% income tax rate, this
situation would cause a 2015 deferred tax amount of

 $3,000 asset.
 $3,000 liability
 $ 900 asset.
 $ 900 liability.

Q2. What is the major accounting difference between interest incurred during
a period and cash dividends declared during the same period?

 Interest decreases retained earnings while dividend declared increases

retained earnings
 Interest reduces net income while dividends declared do not affect net
income
 Interest does not affect net income while dividends reduce net income
 There is no major difference. Both are treated identically for accounting
purposes.

Q3. ABC expenses stock options as required by GAAP. On January 1, 2015, ABC
granted 50 key executives 100 options each. Each option entitled the option
holder to purchase 1 share of ABC common stock at $60 per share. The
options will vest on January 1st 2018. On the grant date, January 1st, 2015, the
stock was quoted on the stock exchange at $63 per share. The fair value of the
options on the grant date was estimated at $15 per option. The amounts of
compensation expense ABC should recognize with respect to the options
during 2015, 2016, and 2017 are:

 1
 2
 3
 4

Q4. International, Inc. established an allowance for bad debts at the end of
October. In November, International wrote off a $500 account receivable
because payment was considered to be remote. What would be the effect of
the $500 account receivable write-off on International’s November financial
statements?
 Assets would decrease, liabilities would remain constant and retained
earning would decrease.
 Assets would remain constant; liabilities would increase and retained
earnings would decrease.
 No change would be made in total assets, liabilities or shareholder’s
equity.
 Assets would decrease, liabilities would decrease and retained earnings
would remain constant.

Q5. On June 30, 2011, Cole Inc., exchanged 3,000 shares of Stone Corp. $30 par
value common stock for a patent owned by Gore Co. The Stone stock was
acquired in 2009 at a cost of $80,000. At the exchange date, Stone common
stock had a fair value of $45 per share, and the patent had a net carrying value
of $160,000 on Gore’s books. Cole should record the patent at:

 $80,000
 $90,000
 $135,000
 $160,000

Q6. On January 1, 2007, Phillips, Inc. leased a new machine from U.S. Leasing.
The specific information on the lease is as follows:

On January 1, 2007, Phillips, Inc. should record a lease liability of:

 $275,000
 $359,464
 $0
 $250,000
Q7. FRC Inc. acquired Marketing Inc on 1/1/2014. Marketing Inc. has 10,000
shares outstanding. Each share in Marketing Inc. was exchanged for half a
share in FRC, Inc. Shares of FRC Inc., were trading at $100 per share at the
date of the announcement of the transaction. Marketing Inc, had the following
assets and liabilities that were assumed by FRC Inc.

The amount of Goodwill recognized by FRC, Inc. on January 1, 2014 is:

 $400,000
 $360,000
 $495,000
 $455,000

Q8. Use the following information to answer the next two questions.
Downey Company bought a delivery truck for $62,000 on January 1, 2015.
They installed a rear hydraulic lift for $8,000 and paid sales tax of $3,000. In
addition, Downey paid $2,400 for a one-year insurance policy. They estimate
the useful life of the truck to be 10 years and its residual value to be $8,000.
If Downey uses the straight-line method of depreciation, what is the
depreciation expense for 2016 and book value at the end of 2016?

 $7,300 and $58,400

 $6,500 and $60,000
 $6,790 and $62,320
 $6,500 and $66,500

Q9. Which statement is false?

 An unrealized gain or loss on hold-to-maturity marketable securities is

recognized in income.
 An unrealized gain or loss on trading securities is recognized in income.
 An unrealized gain or loss on a company’s common stock held by the
owners’ of the company is not recognized by the company.
 An unrealized gain or loss on available-for-sale marketable securities is
not recognized in income
Q10. Goodwill should

 be written off as soon as possible against retained earnings.

 absent impairment, not be written off because it has an indefinite life.
 written off as soon as possible as an expense.
 amortized over a maximum of forty years.

Q11. On January 1, 2013, Dana Corporation purchased equipment for

$450,000. Installation costs were an additional $50,000. The equipment’s
useful life was estimated at 5 years, with a salvage value of $25,000. The
company planned to depreciate the equipment over five years using the
straight-line method for reporting purposes and the double declining balance
method for tax purposes. Dana Corporation’s accumulated depreciation at
December 31, 2014 for reporting purposes and for tax purposes, respectively,
will be:

 $190,000 and $304,000

 $180,000 and $320,000
 $190,000 and $320,000
 $200,000 and $304,000

Q12. The Hastco Company had the following balances in their stockholders’
equity accounts as of December 31, 2010:
Paid-in Capital: $53,000, Retained Earnings: $31,000. During the year ended
December 31, 2010, the Hastco Company generated $36,000 in net income,
and declared and paid $16,000 in Dividends. The ending balance in the
retained earnings account at December 31, 2009 was:

 $11,000
 $37,000
 $5,000
 $61,000

Q13. For accounting purposes, goodwill

 is recorded whenever a company achieves a level of net income that

exceeds the industry average.
 is recorded when a company purchases another business.
 is expensed in the period it is recorded because benefits from goodwill
are difficult to identify.
 is never recorded.

Q14. The ABC Company operates a catering service specializing 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. Collections from
customers have never been an issue in the past. ABC should recognize
revenue from its catering services at the date when a

 customer places an order

 luncheon is served.
 billing is mailed.
 customer’s payment is received.

Q15. Downey Company bought a delivery truck for $62,000 on January 1,

2015. They installed a rear hydraulic lift for $8,000 and paid sales tax of
$3,000. In addition, Downey paid $2,400 for a one-year insurance policy. They
estimate the useful life of the truck to be 10 years and its residual value to be
$8,000.
If Downey uses the double declining-balance method, how much is the truck’s
depreciation expense for 2016?

 $11,680
 $12,144
 $10,400
 $11,760

Q16. The following financial ratios are for Average Corp. and Superior Corp.,
two hardware stores.

Which of the following statements is inconsistent with the above ratios?

 Superior Corp has a higher return on equity primarily because it has a

significantly higher net income margin
 Average Corp. on a relative basis uses significantly more debt financing
than Superior Corp.
 Average Corp. utilizes its assets more effectively than Superior Corp.
 Superior Corp. generates more income per dollar of sales than Average
Corp.
Q17. In December, a Global Grocer customer pays in time and receives a 2%
discounts for prompt payment. The customer had purchased goods worth
$500. Which of the possible answers below correctly states the journal entries
to record the payment and the discount taken. Previously, Global Grocer had
established an allowance for prompt payment discounts.

 Debit Accounts receivable ($500); Credit Cash ($490); credit allowance

for discounts ($10)
 Debit Cash ($500); Credit Accounts receivable ($500)
 Debit Cash ($490); Debit Allowance for sales discounts ($10); Credit
Accounts receivable ($500)
 None of the above

Q18. ABC signed a 5-year operating lease agreement whereby WXY Rentals
will provide a truck which cost WXY $20,000. The lease payments are $2,500,
payable at the end of each year. The truck will revert to WXY at the end of five
years. The truck has a 10-year useful life. At the inception of the lease, what
should ABC do?

 Make no journal entry

 Record rental expense of $2,500 for the first year’s rental
 Record the lease asset and a corresponding liability, at its current
market value
 Record the lease asset and a corresponding liability, at the present value
of the five equal annual lease payments

Q19. Here is International Corp.’s income statement for the month of

December. What is the company’s December EBITDA to total interest
coverage ratio?

 6.5x
 18.5x
 14.5x
 20.2x

Q20. Ignoring any related tax implications, what is the effect on a company’s
balance sheet when depreciation expense is recognized?

 This transaction affects only the income statement, so no change on the

balance sheet will occur.
 Total assets and total stockholder’s equity will decrease by the same
amount.
 There will be no change in the total assets, liabilities and stockholders
equity accounts.
 Total liabilities will increase and total stockholder’s equity will decrease
by the same amount.

Q21. Which of the following is/are criteria for recognizing revenue from a
sale?

 Title and risks of ownership have been exchanged.

 The company is reasonably assured of collecting the receivable.
 The customer has, in turn, sold the product to its own customer.
 Both title and risks of ownership have been exchanged and the
company is reasonably assured of collecting the receivable.

Q22. All of the following would qualify a lease as a capital lease except:

 The lease term is 80% of the asset’s estimated useful life.

 The lease agreement contains a bargain purchase option.
 The present value of the lease payments equals 70% of the fair market
value of the leased asset.
 Title to the leased asset transfers to the lessee at the end of the lease
term.

Q23. In periods with rising prices and increasing quantities of inventories,

which of the following relationships among inventory valuation methods is
generally correct?

 FIFO has a higher inventory balance and a lower net income than LIFO.
 FIFO has a higher inventory balance and a higher net income than LIFO.
 LIFO has a higher inventory balance and a higher net income than FIFO.
 LIFO has a higher inventory balance and a lower net income than FIFO.

Q24. Which of the following situations will not cause a deferred income tax
amount to be recorded?

 An expense that is recognized in 2015 for income tax purposes and in

2016 for financial statement purposes.
 Interest income from municipal bonds that is recognized in 2015 for
financial statement purposes but is tax exempt for income tax purposes.
 A revenue is recognized in 2015 for income tax purposes and in 2016
for financial statement purposes.
 None of the above situations would cause a deferred income tax
amount.

Q25. The Hasting Company began operations on January 1, 2013 and uses the
FIFO method in costing its raw material inventory. An analyst is wondering
what net income would have been if the company had consistently followed
LIFO (instead of FIFO) from the beginning, 1/1/2013. He has the following
information available to him:
What would net income have been in 2014 if Hastings had used LIFO since
1/1/2013?

 $110,000
 $150,000
 $170,000
 $230,000

Q26. On June 30, 2010, Microsoft Corporation was holding $4.8 billion of cash
that it had collected from customers in advance for future software licenses
and the future delivery of other products and services. In its financial
statements, Microsoft classified and recorded this amount as

 part of revenue on its income statement.

 the asset Accounts Receivable on its balance sheet.
 the liability Unearned Revenue on its balance sheet.
 an expense on its income statement.

Q27. Before closing entries were recorded at the end of the accounting period
(December 31, 2015), the following data were taken from the accounts of
Buynow Corporation:

The total amount of owners’ equity that should be reported on the balance
sheet dated December 31, 2015, after all the closing entries, is

 $338,000
 $128,000
 $300,000
 $304,000

Q28. Denny Co. sells major household appliance service contracts for cash.
The service contracts are for a one-year, two-year, or three-year period. Cash
receipts from contracts are credited to Unearned Service Revenues. This
account had a balance of $900,000 at December 31, 2011 before year-end
adjustment. Service contracts still outstanding at December 31, 2011 expire as
follows:
What amount should be reported as Unearned Service Revenues in Denny’s
December 31, 2011 balance sheet?

 $900,000
 $600,000
 $1,500,000
 $300,000

Q29. Merry Co. purchased a machine costing $125,000 for its manufacturing
operations and paid shipping costs of $20,000. Merry spent an additional
$10,000 testing and preparing the machine for use. What amount should
Merry record as the cost of the machine?

 $155,000
 $145,000
 $135,000
 $125,000

Q30. A customer is currently suing a company. A reasonable estimate can be

made of the costs that would result from a ruling unfavorable to the company,
and the amount involved is material. The company’s managers, lawyers, and
auditors agree that there is only a remote likelihood of an unfavorable ruling.
This contingency

 should be disclosed in a footnote.

 should be disclosed as a parenthetical comment in the balance sheet.
 need not to be disclosed.
 should be disclosed by an appropriation of retained earnings.

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