Study Questions

The following questions are ones that I am unsure of. I need this to study for my final. It is multiple choice but I want to be confident I have the correct answers to study with. My final is Monday so if I can get this answered by Sunday it would be great. Thank you.

Use the following to answer question 2:

Kimm, Inc. acquired 30% of Carne Corp.'s voting stock on January 1, 2007 for $400,000. During 2007, Carne earned $160,000 and paid dividends of $100,000. Kimm's 30% interest in Carne gives Kimm the ability to exercise significant influence over Carne's operating and financial policies. During 2008, Carne earned $200,000 and paid dividends of $60,000 on April 1 and $60,000 on October 1. On July 1, 2008, Kimm sold half of its stock in Carne for $264,000 cash.

2. What should be the gain on sale of this investment in Kimm's 2008 income statement?

a) $64,000.
b) $55,000.
c) $49,000.
d) $40,000.

6. Dividends are NOT paid on

a) noncumulative preferred stock.
b) nonparticipating preferred stock.
c) treasury common stock.
d) Dividends are paid on all of these.

Use the following to answer questions 7-8:

Friend Co. began operations on January 1, 2007. Financial statements for 2007 and 2008 con- tained the following errors:
Dec. 31, 2007 Dec. 31, 2008
Ending inventory $132,000 too high $156,000 too low
Depreciation expense 84,000 too high ?
Insurance expense 60,000 too low 60,000 too high
Prepaid insurance 60,000 too high ?
In addition, on December 31, 2008 fully depreciated equipment was sold for $28,800, but the sale was not recorded until 2009. No corrections have been made for any of the errors. Ignore income tax considerations.

7. The total effect of the errors on Friend's 2008 net income is

a) understated by $376,800.
b) understated by $244,800.
c) overstated by $115,200.
d) overstated by $199,200.

8. The total effect of the errors on the amount of Friend's working capital at December 31, 2008 is understated by

a) $400,800.
b) $316,800.
c) $184,800.
d) $124,800.

Use the following to answer question 9:

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.

9. What is the total effect of the errors on the balance of Rensing's retained earnings at December 31, 2008?

a) Retained earnings understated by $10,000
b) Retained earnings understated by $4,500
c) Retained earnings understated by $2,500
d) Retained earnings overstated by $3,500
Use the following to answer question 11:

Tyler Company made the following journal entry in late 2008 for rent on property it leases to Danford Corporation.
Cash 60,000
Unearned Rent 60,000
The payment represents rent for the years 2009 and 2010, the period covered by the lease. Tyler Company is a cash basis taxpayer. Tyler has income tax payable of $92,000 at the end of 2008, and its tax rate is 35%.

11. What amount of income tax expense should Tyler Company report at the end of 2008?

a) $53,000
b) $71,000
c) $81,500
d) $113,000

12. Which of the following is NOT a debt security?

a) Convertible bonds
b) Commercial paper
c) Loans receivable
d) All of these are debt securities.

13. The main purpose of the Pension Benefit Guaranty Corporation is to

a) require minimum funding of pensions.
b) require plan administrators to publish a comprehensive description and summary of their plans.
c) administer terminated plans and to impose liens on the employer's assets for certain unfunded pension liabilities.
d) all of these.

15. Interperiod income tax allocation procedures are appropriate when

a) an extraordinary loss will cause the amount of income tax expense to be less than the tax on ordinary net income.
b) an extraordinary gain will cause the amount of income tax expense to be greater than the tax on ordinary net income.
c) differences between net income for tax purposes and financial reporting occur because tax laws and financial accounting principles do not concur on the items to be recognized as revenue and expense.
d) differences between net income for tax purposes and financial reporting occur because, even though financial accounting principles and tax laws concur on the item to be recognized as revenues and expenses, they don't concur on the timing of the recognition.

17. In determining the present value of the prospective benefits (often referred to as the projected benefit obligation), the following are considered by the actuary:

a) retirement and mortality rate.
b) interest rates.
c) benefit provisions of the plan.
d) all of these factors.

18. Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future salaries in its computation?

a) Vested benefit obligation
b) Accumulated benefit obligation
c) Projected benefit obligation
d) Restructured benefit obligation

21. Which of the following is NOT correct in regard to trading securities?

a) They are held with the intention of selling them in a short period of time.
b) Unrealized holding gains and losses are reported as part of net income.
c) Any discount or premium is not amortized.
d) All of these are correct.

23. According to the FASB, redeemable preferred stock should be

a) included with common stock.
b) included as a liability.
c) excluded from the stockholders' equity heading.
d) included as a contra item in stockholders' equity.

27. Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted. The other is

a) the ease with which convertible debt is sold even if the company has a poor credit rating.
b) the fact that equity capital has issue costs that convertible debt does not.
c) that many corporations can obtain financing at lower rates.
d) that convertible bonds will always sell at a premium.

28. The relationship between the amount funded and the amount reported for pension expense is as follows:

a) pension expense must equal the amount funded.
b) pension expense will be less than the amount funded.
c) pension expense will be more than the amount funded.
d) pension expense may be greater than, equal to, or less than the amount funded.

29. An intangible asset (deferred pension cost) is created when

a) the accumulated benefit obligation exceeds the fair value of pension plan assets, but accrued pension cost and unrecognized prior service cost is greater than this excess.
b) the accumulated benefit obligation exceeds the fair value of pension plan assets, but accrued pension cost is less than this excess, and unrecognized prior service cost exists.
c) pension plan assets at fair value exceed the accumulated benefit obligation.
d) pension plan assets at book value exceed the projected benefit obligation.

30. A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be

a) the net deferred tax consequences of temporary differences that will result in net taxable amounts during the next year.
b) totally eliminated from the financial statements if the amount is related to a noncurrent asset.
c) based on the classification of the related asset or liability for financial reporting purposes.
d) the total of all deferred tax consequences that are not expected to reverse in the operating period or one year, whichever is greater.

32. The date on which to measure the compensation element in a stock option granted to a corporate employee ordinarily is the date on which the employee

a) is granted the option.
b) has performed all conditions precedent to exercising the option.
c) may first exercise the option.
d) exercises the option.

Use the following to answer question 33:

Neasha Corporation reported the following results for its first three years of operation:
2006 income (before income taxes) $ 100,000
2007 loss (before income taxes) (900,000)
2008 income (before income taxes) 1,000,000
There were no permanent or temporary differences during these three years. Assume a corporate tax rate of 30% for 2006 and 2007, and 40% for 2008.

33. Assuming that Neasha elects to use the carryback provision, what income (loss) is reported in 2007? (Assume that any deferred tax asset recognized is more likely than not to be realized.)

a) $(900,000)
b) $ -0-
c) $(870,000)
d) $(550,000)

34. The accounting for fair value hedges records the derivative at its

a) amortized cost.
b) carrying value.
c) fair value.
d) historical cost.

36. The accumulated benefit obligation measures

a) the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.
b) the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.
c) an estimated total benefit at retirement and then computes the level cost that will be sufficient, together with interest expected to accumulate at the assumed rate, to provide the total benefits at retirement.
d) the shortest possible period for funding to maximize the tax deduction.