A corporation was organized in January 2004 with authorized capital of $10 par value common stock.

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1. A corporation was organized in January 2004 with authorized capital of $10 par value common stock. On February 1, 2007, shares were issued at par for cash. On March 1, 2007, the corporation's attorney accepted 7,000 shares of common stock in settlement for legal services with a fair value of $90,000. Additional paid-in capital would increase on
February 1, 2007 March 1, 2007
a. Yes No
b. Yes Yes
c. No No
d. No Yes

2. On July 1, 2007, Cole Co. issued 2,500 shares of its $10 par common stock and 5,000 shares of its $10 par convertible preferred stock for a lump sum of $125,000. At this date Cole's common stock was selling for $24 per share and the convertible preferred stock for $18 per share. The amount of the proceeds allocated to Cole's preferred stock should be
a. $62,500.
b. $75,000.
c. $90,000.
d. $68,750.

3. Norton Co. was organized on January 2, 2007, with 500,000 authorized shares of $10 par value common stock. During 2007, Norton had the following capital transactions:
January 5?issued 375,000 shares at $14 per share.
July 27?purchased 25,000 shares at $11 per share.
November 25?sold 15,000 shares of treasury stock at $13 per share.
Norton used the cost method to record the purchase of the treasury shares. What would be the balance in the Paid-in Capital from Treasury Stock account at December 31, 2007?
a. $0.
b. $15,000.
c. $30,000.
d. $45,000.

4. In 2006, Marly Corp. acquired 9,000 shares of its own $1 par value common stock at $18 per share. In 2007, Marly issued 4,000 of these shares at $25 per share. Marly uses the cost method to account for its treasury stock transactions. What accounts and what amounts should Marly credit in 2007 to record the issuance of the 4,000 shares?
Treasury Additional Retained Common
Stock Paid-in Capital Earnings Stock
a. $72,000 $70,000
b. $72,000 $28,000
c. $96,000 $4,000
d. $68,000 $28,000 $4,000

5. At its date of incorporation, Wilson, Inc. issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Wilson acquired 20,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. There have been no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts?
Retained Earnings Additional Paid-in Capital
a. Decrease Decrease
b. No effect Decrease
c. Decrease No effect
d. No effect No effect

6. Peine Co. had 300,000 shares of common stock issued and outstanding at December 31, 2006. No common stock was issued during 2007. On January 1, 2007, Peine issued 200,000 shares of nonconvertible preferred stock. During 2007, Peine declared and paid $100,000 cash dividends on the common stock and $80,000 on the preferred stock. Net income for the year ended December 31, 2007 was $620,000. What should be Peine's 2007 earnings per common share?
a. $2.07
b. $1.80
c. $1.73
d. $1.47

7. At December 31, 2007 and 2006, Glass Corp. had 180,000 shares of common stock and 10,000 shares of 5%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2007 or 2006. Net income for 2007 was $400,000. For 2007, earnings per common share amounted to
a. $2.22.
b. $1.94.
c. $1.67.
d. $1.11.

8. Royce Co. had 2,400,000 shares of common stock outstanding on January 1 and December 31, 2007. In connection with the acquisition of a subsidiary company in June 2006, Royce is required to issue 100,000 additional shares of its common stock on July 1, 2008, to the former owners of the subsidiary. Royce paid $200,000 in preferred stock dividends in 2007, and reported net income of $3,400,000 for the year. Royce's diluted earnings per share for 2007 should be
a. $1.42.
b. $1.36.
c. $1.33.
d. $1.28.

9. Eller, Inc., had 560,000 shares of common stock issued and outstanding at December 31, 2006. On July 1, 2007, an additional 40,000 shares of common stock were issued for cash. Eller also had unexercised stock options to purchase 32,000 shares of common stock at $15 per share outstanding at the beginning and end of 2007. The average market price of Eller's common stock was $20 during 2007. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2007?
a. 580,000
b. 588,000
c. 608,000
d. 612,000

10. When computing diluted earnings per share, convertible securities are
a. ignored.
b. recognized only if they are dilutive.
c. recognized only if they are antidilutive.
d. recognized whether they are dilutive or antidilutive

11. On October 1, 2006, Ming Co. purchased 600 of the $1,000 face value, 8% bonds of Loy, Inc., for $702,000, including accrued interest of $12,000. The bonds, which mature on January 1, 2013, pay interest semiannually on January 1 and July 1. Ming used the straight-line method of amortization and appropriately recorded the bonds as available-for-sale. On Ming's December 31, 2007 balance sheet, the carrying value of the bonds is
a. $690,000.
b. $684,000.
c. $681,600.
d. $672,000.

12. Unruh Corp. began operations in 2007. An analysis of Unruh's equity securities portfolio acquired in 2007 shows the following totals at December 31, 2007 for trading and available-for-sale securities:
Trading Available-for-Sale
Securities Securities
Aggregate cost $90,000 $110,000
Aggregate fair value 65,000 95,000
What amount should Unruh report in its 2007 income statement for unrealized holding loss?
a. $40,000.
b. $10,000.
c. $15,000.
d. $25,000.

13. At December 31, 2007, Malle Corp. had the following equity securities that were purchased during 2007, its first year of operation:
Fair Unrealized
Cost Value Gain (Loss)
Trading Securities:
Security A $ 90,000 $ 60,000 $(30,000)
B 15,000 20,000 5,000
Totals $105,000 $ 80,000 $(25,000)

Available-for-Sale Securities:
Security Y $ 70,000 $ 80,000 $ 10,000
Z 85,000 55,000 (30,000)
Totals $155,000 $135,000 $(20,000)

All market declines are considered temporary. Fair value adjustments at December 31, 2007 should be established with a corresponding charge against
Income Stockholders' Equity
a. $45,000 $ 0
b. $30,000 $30,000
c. $25,000 $20,000
d. $25,000 $ 0

14. On December 29, 2008, Greer Co. sold an equity security that had been purchased on January 4, 2007. Greer owned no other equity securities. An unrealized holding loss was reported in the 2007 income statement. A realized gain was reported in the 2008 income statement. Was the equity security classified as available-for-sale and did its 2007 market price decline exceed its 2008 market price recovery?
2007 Market Price
Decline Exceeded 2008
Available-for-Sale Market Price Recovery
a. Yes Yes
b. Yes No
c. No Yes
d. No No

15. Ramos Corp.'s books showed pretax financial income of $1,500,000 for the year ended December 31, 2008. In the computation of federal income taxes, the following data were considered:
Gain on an involuntary conversion $650,000
(Ramos has elected to replace the property within the statutory
period using total proceeds.)
Depreciation deducted for tax purposes in excess of depreciation
deducted for book purposes 100,000
Federal estimated tax payments, 2008 125,000
Enacted federal tax rate, 2008 30%
What amount should Ramos report as its current federal income tax liability on its December 31, 2008 balance sheet?
a. $100,000
b. $130,000
c. $225,000
d. $255,000

16. Eddy Corp.'s 2008 income statement showed pretax accounting income of $750,000. To compute the federal income tax liability, the following 2008 data are provided:
Income from exempt municipal bonds $ 30,000
Depreciation deducted for tax purposes in excess of depreciation
deducted for financial statement purposes 60,000
Estimated federal income tax payments made 150,000
Enacted corporate income tax rate 30%
What amount of current federal income tax liability should be included in Eddy's December 31, 2008 balance sheet?
a. $48,000
b. $66,000
c. $75,000
d. $198,000

17. On January 1, 2007, Lebo, Inc. purchased a machine for $720,000 which will be depreciated $72,000 per year for financial statement reporting purposes. For income tax reporting, Lebo elected to expense $80,000 and to use straight-line depreciation which will allow a cost recovery deduction of $64,000 for 2007. Assume a present and future enacted income tax rate of 30%. What amount should be added to Lebo's deferred income tax liability for this temporary difference at December 31, 2007?
a. $43,200
b. $24,000
c. $21,600
d. $19,200

18. On January 1, 2007, Magee Corp. purchased 40% of the voting common stock of Reed, Inc. and appropriately accounts for its investment by the equity method. During 2007, Reed reported earnings of $360,000 and paid dividends of $120,000. Magee assumes that all of Reed's undistributed earnings will be distributed as dividends in future periods when the enacted tax rate will be 30%. Ignore the dividend-received deduction. Magee's current enacted income tax rate is 25%. The increase in Magee's deferred income tax liability for this temporary difference is
a. $72,000.
b. $60,000.
c. $43,200.
d. $28,800.

19. Brock Corp.'s 2007 income statement had pretax financial income of $250,000 in its first year of operations. Brock uses an accelerated cost recovery method on its tax return and straight-line depreciation for financial reporting. The differences between the book and tax deductions for depreciation over the five-year life of the assets acquired in 2007, and the enacted tax rates for 2007 to 2011 are as follows:
Book Over (Under) Tax Tax Rates
2007 $(50,000) 35%
2008 (65,000) 30%
2009 (15,000) 30%
2010 60,000 30%
2011 70,000 30%
There are no other temporary differences. In Brock's December 31, 2007 balance sheet, the noncurrent deferred income tax liability and the income taxes currently payable should be
Noncurrent Deferred Income Taxes
Income Tax Liability Currently Payable
a. $39,000 $50,000
b. $39,000 $70,000
c. $15,000 $60,000
d. $15,000 $70,000

20. The following information pertains to Mellon Co.'s pension plan:
Actuarial estimate of projected benefit obligation at 1/1/08 $72,000
Assumed discount rate 10%
Service costs for 2008 $18,000
Pension benefits paid during 2008 $15,000
If no change in actuarial estimates occurred during 2008, Mellon's projected benefit obligation at December 31, 2008 was
a. $64,200.
b. $75,000.
c. $79,200.
d. $82,200.

21. Interest cost included in the net pension cost recognized for a period by an employer sponsoring a defined-benefit pension plan represents the
a. shortage between the expected and actual returns on plan assets.
b. increase in the projected benefit obligation due to the passage of time.
c. increase in the fair value of plan assets due to the passage of time.
d. amortization of the discount on unrecognized prior service cost.

22. On January 1, 2008, Pratt Corp. adopted a defined-benefit pension plan. The plan's service cost of $300,000 was fully funded at the end of 2008. Prior service cost was funded by a contribution of $120,000 in 2008. Amortization of prior service cost was $48,000 for 2008. What is the amount of Pratt's prepaid pension cost at December 31, 2008?
a. $72,000
b. $120,000
c. $168,000
d. $180,000

23. Reser Corp., a company whose stock is publicly traded, provides a noncontributory defined-benefit pension plan for its employees. The company's actuary has provided the following information for the year ended December 31, 2008:
Projected benefit obligation $600,000
Accumulated benefit obligation 525,000
Fair value of plan assets 825,000
Service cost 240,000
Interest on projected benefit obligation 24,000
Amortization of unrecognized prior service cost 60,000
Expected and actual return on plan assets 82,500
The market-related asset value equals the fair value of plan assets. Prior contributions to the defined-benefit pension plan equaled the amount of net periodic pension cost accrued for the previous year end. No contributions have been made for 2008 pension cost. In its December 31, 2008 balance sheet, Reser should report an accrued pension cost of
a. $406,500.
b. $324,000.
c. $241,500.
d. $217,500.

24. Effective January 1, 2007, Quayle Co. established a defined-benefit plan with no retro-active benefits. The first of the required equal annual contributions was paid on December 31, 2007. A 10% discount rate was used to calculate service cost and a 10% rate of return was assumed for plan assets. All information on covered employees for 2007 and 2008 is the same. How should the service cost for 2008 compare with 2007, and should the 2007 balance sheet report an accrued or a prepaid pension cost?
Service Cost Pension Cost
for 2008 Reported on the
Compared to 2007 2007 Balance Sheet
a. Equal to Accrued
b. Equal to Prepaid
c. Greater than Accrued
d. Greater than Prepaid

25. Which of the following should be reported as a prior period adjustment?
Change in Change from
Estimated Lives Unaccepted Principle
of Depreciable Assets to Accepted Principle
a. Yes Yes
b. No Yes
c. Yes No
d. No No

26. On December 31, 2008, Ellworth, Inc. appropriately changed its inventory valuation method to FIFO cost from weighted-average cost for financial statement and income tax purposes. The change will result in a $1,500,000 increase in the beginning inventory at January 1, 2008. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is
a. $0.
b. $450,000.
c. $1,050,000.
d. $1,500,000.

27. On January 1, 2008, Bosco Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in an $800,000 increase in the January 1, 2008 inventory. Assume that the income tax rate for all years is 30%. The cumulative effect of the accounting change should be reported by Bosco in its 2008
a. retained earnings statement as a $560,000 addition to the beginning balance.
b. income statement as a $560,000 cumulative effect of accounting change.
c. retained earnings statement as an $800,000 addition to the beginning balance.
d. income statement as an $800,000 cumulative effect of accounting change.

28. On January 1, 2005, Dent Co. purchased a machine for $792,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 1, 2008, Dent determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $72,000. An accounting change was made in 2008 to reflect these additional data. The accumulated depreciation for this machine should have a balance at December 31, 2008 of
a. $438,000.
b. $462,000.
c. $480,000.
d. $528,000.

29. On January 1, 2005, Neer Co. purchased a patent for $595,000. The patent is being amortized over its remaining legal life of 15 years expiring on January 1, 2020. During 2008, Neer determined that the economic benefits of the patent would not last longer than ten years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2008?
a. $357,000
b. $408,000
c. $420,000
d. $436,375

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