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    Multiple Choice

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    1. Dane, Inc., owns 35% of Marin Corporation. During the calendar year 2007, Marin had net earnings of $300,000 and paid dividends of $30,000. Dane mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively?
    a. Understate, overstate, overstate
    b. Overstate, understate, understate
    c. Overstate, overstate, overstate
    d. Understate, understate, understate

    2. At the date of the financial statements, common stock shares issued would exceed common stock shares outstanding as a result of the
    a. declaration of a stock split.
    b. declaration of a stock dividend.
    c. purchase of treasury stock.
    d. payment in full of subscribed stock.

    Use the following information for questions 3 and 4.

    Waeglein Corporation purchased machinery on January 1, 2006 for $630,000. The company used the straight-line method and no salvage value to depreciate the asset for the first two years of its estimated six-year life. In 2008, Waeglein changed to the sum-of-the-years'-digits depreciation method for this asset. The following facts pertain:

    2006 2007
    Straight-line $105,000 $105,000
    Sum-of-the-years'-digits $180,000 $150,000

    3. Waeglein is subject to a 40% tax rate. The cumulative effect of this accounting change on beginning retained earnings is
    a. $135,000.
    b. $120,000.
    c. $72,000.
    d. $0.

    4. The amount that Waeglein should report for depreciation expense on its 2008 income statement is
    a. $168,000.
    b. $105,000.
    c. $75,000.
    d. none of the above.

    5. Rensing Company's December 31 year-end financial statements contained the following errors:
    Dec. 31, 2007 Dec. 31, 2008
    Ending inventory $7,500 understated $11,000 overstated
    Depreciation expense $2,000 understated

    An insurance premium of $18,000 was prepaid in 2007 covering the years 2007, 2008, and 2009. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2008, fully depreciated machinery was sold for $9,500 cash, but the sale was not recorded until 2009. There were no other errors during 2008 or 2009 and no corrections have been made for any of the errors. Ignore income tax considerations. What is the total net effect of the errors on Rensing's 2008 net income?
    a. Net income understated by $14,500.
    b. Net income overstated by $7,500.
    c. Net income overstated by $13,000.
    d. Net income overstated by $15,000.

    6. Which of the following is accounted for as a change in accounting principle?
    a. A change in the estimated useful life of plant assets.
    b. A change from the cash basis of accounting to the accrual basis of accounting.
    c. A change from expensing immaterial expenditures to deferring and amortizing them, as they become material.
    d. A change in inventory valuation from average cost to FIFO.

    7. Taxable income of a corporation
    a. differs from accounting income due to differences in intra-period allocation between the two methods of income determination.
    b. differs from accounting income due to differences in inter-period allocation and permanent differences between the two methods of income determination.
    c. is based on generally accepted accounting principles.
    d. is reported on the corporation's income statement.

    Use the following information for questions 8 and 9

    McGee Company deducts insurance expense of $84,000 for tax purposes in 2008, but the expense is not yet recognized for accounting purposes. In 2009, 2010, and 2011, no insurance expense will be deducted for tax purposes, but $28,000 of insurance expense will be reported for accounting purposes in each of these years. McGee Company has a tax rate of 40% and income taxes payable of $72,000 at the end of 2008. There were no deferred taxes at the beginning of 2008.

    8. What is the amount of the deferred tax liability at the end of 2008?
    a. $33,600
    b. $28,800
    c. $12,000
    d. $0

    9. Assuming that income tax payable for 2009 is $96,000; the income tax expense for 2009 would be what amount?
    a. $129,600
    b. $107,200
    c. $96,000
    d. $84,800

    10. Koble, Inc. sponsors a defined-benefit pension plan. The following data relates to the operation of the plan for the year 2008.
    Service cost $ 200,000
    Contributions to the plan $ 220,000
    Actual return on plan assets $ 180,000
    Projected benefit obligation (beginning of year) $2,400,000
    Market-related and fair value of plan assets (beginning of year) $1,600,000

    The expected return on plan assets and the settlement rate were both 10%. The amount of pension expense reported for 2008 is
    a. $200,000.
    b. $260,000.
    c. $280,000.
    d. $440,000.

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    Solution Summary

    The solution explains some multiple choice questions relating to accounting