MGMT 501

Financial Accounting Final Exam Review

Multiple Choice Practice

1. What is an example of what would create a deferred tax asset?
A) Depreciation Expense
B) Deferred Revenue
C) Prepaid Expenses
D) Goodwill and other intangible assets

2. Depreciation Exepense is typically

A) Accelerated for Tax purposes creating a deferred tax liability
B) Accelerated for book (GAAP) purposes creating a deferred tax asset
C) The same for both Tax and book(GAAP) purposes.
D) Accelerated for Tax purposes creating a deferred tax asset

3. How do deferred tax liabilities differ from other liabilities?

A) Amount is not owed to the IRS
B) Not interest is accrued
C) Not recognized at present value Accelerated for book (GAAP) purposes creating a
deferred tax asset
D) All of the above

4. Do deferred tax assets and liabilities result from Temporary or Permanent Tax-to-Book
differences?
Temporary

5. Permanent differences:
A) Never Reverse
B) Result from revenue reported for GAAP but not for taxes
C) Result from expenses reported to the IRS but not included in expenses for GAAP
D) All of the above

6. Due to permanent differences:

A) Statutory rate > Effective Rate
B) Statutory rate < Effective Rate
C) Statutory rate = Effective Rate
D) None of the above

6. For small stock dividends, by what amount are retained earnings reduced?
A) Par value of the dividend
B) Book value of the dividend
C) Par value of the stock
D) Market value of the dividend
7. If a company issues 10,000 shares of $1 par value common stock at a market price of $50 per
share, which of the following is the correct balance sheet entry?
A) Increase common stock and cash by $10,000
B) Increase cash by $500,000 and increase earned capital by $500,000
C) Increase revenues by $500,000
D) Increase cash by $500,000 and increase contributed capital by $500,000

8. Which is not an item that should be included in the computation of ‘other comprehensive
income’?
A) Interest expense
B) Foreign currency translation adjustment
C) Unrealized gains (losses)
D) Adjustments to pension plans

9. During May, 2024, Riptide Corporation announced a 2-for-1 stock split. This brought the
number of shares outstanding from 25,000,000 shares to _____ shares, and its $2.00 par
value to _____ per share.
A) 12,500,000; $4.00
B) 12,500,000; $2.00
C) 50,000,000; $2.00
D) 50,000,000; $1.00

10. If a company feels that its shares are undervalued and it wants to send a signal to the
market, the company may:
A) Issue more stock (as allowed under its charter)
B) Decrease regular cash dividends in an attempt to increase share price
C) Repurchase shares
D) Do nothing and wait - the market will realize the undervaluation

11. Venus Company plans to issue a large stock dividend. In accounting for this transaction,
what effects occur to the contributed capital section of stockholders’ equity?

A) Common stock increases by the total market value of the dividend.

B) Common stock increases by the number of dividend shares × par value per share,
and retained earnings decreases for the same amount.
C) Common stock increases by the number of dividend shares × par value per share, and
retained earnings increases for the balance.
D) Retained earnings increases by the number of dividend shares × par value per share, and
additional paid-in capital increases for the balance.

12. Stone Company reported net income of $4,500,000 in 2024. The weighted average number
of common shares outstanding during 2024 was 200,000 shares. Stone paid $250,000 in
dividends on preferred stock, which was convertible into 40,000 shares of common stock.
How much is basic earnings per share for 2024?
A) $22.50
B) $21.25
 C) $18.75
D) $17.71

How much is diluted earnings per share for 2024?

A) $22.50
B) $21.25
C) $18.75
D) $17.71

13. Shroff Company has 50,000 shares of $100 par value, 4% cumulative preferred stock and
150,000 shares of $10 par value common stock. Sunny declares and pays cash dividends
amounting to $470,000.
If no arrearage on the preferred stock exists, how much in dividends per share is paid to the
common stockholders?
A) $3.13
B) $4.00
C) $5.40
D) $1.80

14. In which one of the following intercorporate investment classifications are unrealized
gains and losses in marketable securities always reflected in the income statement of the
investor company?
A) Equity method securities
B) Passive securities
C) Trading securities
D) Available-for-sale securities
E) Purchase method securities

15. If Pandit & Pearlman, Inc. paid $8,000 at book value for its 25% stake in Zeff Company,
and in the next year total shareholders’ equity for Zeff Company increases by 75%, what will
Pandit & Pearlman’s interest of Zeff’s equity be?
A) $ 7,000
B) $ 1,750
C) $ 3,000
D) $14,000

16. If Trout Company buys 26% of Salmon Company’s stock, and pays $4,000 more than
current book value for these shares, what percentage of Salmon Company’s shareholder
equity belongs to Trout Company?
A) 25%
B) It depends on the dollar value of total shareholders’ equity for Salmon Company.
C) 35%
D) 26%

17. When the fair value of a company’s available-for-sale investments is lower than its book
value, how should the unrealized loss be handled?
 A) Written off as an impairment
B) Not reported
C) Recorded as an expense on the company’s income statement
D) Deducted from the investment account
E) Added to stockholders’ equity of the investor

18. Verdi Brothers owns 100% of Schweinfurt Company. At year-end, Schweinfurt owes
Verdi Brothers $52,000. If a consolidated balance sheet is prepared at year-end, how is the
$52,000 handled?
A) The $52,000 is eliminated on the consolidated balance sheet
B) The $52,000 is reported as goodwill on the consolidated balance sheet
C) The $52,000 is amortized as an intangible asset on the consolidated balance sheet
D) The $52,000 is shown as an unearned revenue on the consolidated balance sheet

19. Under the equity method, how are unrealized gains (losses) reported?
A) As goodwill
B) As a separate component of stockholders' equity
C) As part of net income
D) Not recognized

20. Under the equity method, which of the following does not cause a decrease in the
investment account?
A) The losses of the investee
B) Dividends paid by the investee
C) Declines in the fair value of the investment
D) All of the choices would decrease the investment account

21. Which type of lease would be considered a form of off-balance-sheet financing?

A) Finance lease
B) Deferred tax lease
C) Operating leases with terms greater than 12 months
D) None of the above

22. How are leases classified as operating leases initially reported in the lessee’s financial
statements?

I. As an asset that is amortized, similar to other company assets

II. As a footnote disclosure
III. As both a short-term and a long-term liability
IV. As neither an asset nor a liability.

A) I and III
B) I, II and III
C) IV only
D) II and IV
23. GAAP identifies two different approaches in reporting leases by the lessee: operating
lease method and the finance lease method. Which option best describes the financial
statement effects of leasing on the financial statements of the lessee?
A)
Lease Type Assets Liabilities Expenses
Operating Increased Increased Lease expense
B)
Lease Type Assets Liabilities Expenses
Finance Increased Increased Lease expense
C)
Lease Type Assets Liabilities Expenses
Finance None None Amortization and interest
D)
Lease Type Assets Liabilities Expenses
Operating None None Lease expense

24. FunTime Corp. disclosed the following finance lease information in its 2022 annual
report (in millions).

Aggregate expected maturities of long-term debt and scheduled finance lease

payments for the years shown are as follows:

Long-Term Debt
Scheduled Finance Lease Payments Maturities
2023 $ 2,000 $ 16,286
2024 2,000 16,286
2025 2,000 16,286
2026 2,000 446,286
2027 2,000 136,286
Thereafter 37,000 16,284
47,000 647,714
Finance lease amount representing
interest (21,644)
Present value of net scheduled lease
payments $ 25,356 25,356
Total long-term debt and finance
leases $ 673,070

What finance lease liability does FunTime’s report on its balance sheet at December 31, 2022
(in millions)?
A) $ 21,644
 B) $ 25,356
C) $ 47,000
D) $673,070

25. Which of the following is not a condition requiring the use of the finance lease reporting
method instead of the operating lease reporting method?
A) The lease automatically transfers ownership of the leased asset from the lessor to the
lessee at the termination of the lease
B) The lease term covers the majority of the remaining economic life of the leased asset
C) The lease allows the lessee to use the leased asset during the lease term
D) The lease provides that the lessee can purchase the leased asset for a nominal amount
(bargain purchase price) at the termination of the lease

26. Morgan is considering entering into a contract to sell a building on January 1 in exchange for
a note. The note pays a lump sum payment of $300,000 in ten years and ten annual payments
of $2,500 beginning on the date of sale (January 1). If the annual interest rate is 10 percent,
what is the total present value of the contract?
A) $159,489.92
B) $132,559.55
C) $131,023.42
D) $155,505.55

27. How is interest expense calculated according to GAAP?

A) Stated rate of interest x maturity value.
B) Effective interest rate x maturity value of the obligation.
C) Effective interest rate x balance sheet value.
D) Stated rate of interest x balance sheet value.

28. Interest expense calculated under GAAP is equal to the stated rate of interest times the
maturity value if the interest-bearing obligation is issued at
A) a discount.
B) either a discount or a premium.
C) a premium.
D) par.

29. If a company issues a note payable when the market rate of interest is greater than the
stated rate, then
A) the cash received will exceed the maturity value of the note.
B) the note will be issued at a discount.
C) the note will be issued at a premium.
D) the cash received will be equal to the maturity value of the note.

30. Which of the following is not a condition requiring the use of the finance lease reporting
method instead of the operating lease reporting method?
A) The lease automatically transfers ownership of the leased asset from the lessor to the
lessee at the termination of the lease
 B) The lease term covers the majority of the remaining economic life of the leased asset
C) The lease allows the lessee to use the leased asset during the lease term
D) The lease provides that the lessee can purchase the leased asset for a nominal amount
(bargain purchase price) at the termination of the lease

31. Corning Company issued $8,000 of 10% bonds on January 1, 2009. The bonds were
issued at a premium. The cash payment for annual interest on the bonds
A) is equal to annual interest expense.
B) is greater than annual interest expense.
C) is less than annual interest expense.
D) equals the balance in Premium on Bonds Payable on the day the bonds were issued.

32. Flutie Company issued $8,000 of 8% bonds on January 1, 2009, at a discount of $940.
The market rate of interest on the issue date was 10%. The carrying value of the bonds on
December 31, 2009 is
A) $6,994.
B) $7,060.
C) $8,940.
D) $7,126.

33. The amount of amortized bond premium

A) reduces interest expense on the income statement.
B) is reported as a deduction from bonds payable on the balance sheet.
C) is reported as an addition to bonds payable on the balance sheet.
D) is added to the present value of bonds.

34. On April 30, 2024, one year before maturity, Hill Corporation retired $500,000 of 6%
bonds payable at 102. The book value of the bonds on April 30 was $492,500. Bond interest
was last paid on April 30, 2024.
What is the gain or loss on the retirement of the bonds?
A) $17,500 gain
B) $ 7,500 gain
C) $ 7,500 loss
D) $17,500 loss
Problems:

1. Halloween Inc. has 50,000 outstanding shares of common stock with par value of $0.50
per share and market price on January 1 of $80.

A. Show the journal entries of the two independent equity transactions in the template
below.
1. 10% stock dividend paid to common shareholders with current market price at $80
2. 30% stock dividend paid to common shareholders with current market price at $100
B. How have these two transactions changed the overall valuation of the firm?

2. Following is the stockholder’s equity section of Silver, Inc. at December 31, 2024:

December 31,
Stockholders' Equity 2024
Common stock - $0.50 par value, authorized 1,000,000
shares $ 100,000
Additional paid-in capital 980,000
Treasury stock—5,000 shares (30,000)
Retained earnings 250,000
Total stockholders' equity $1,300,000

A. Compute the number of shares that have been issued. 200,000 shares
B. At what average issue price were the shares issued? $5.40
C. At what average cost were the treasury stock purchased? $6
3. Jaguar Company purchases an investment in South America Preserve Company at the
purchase price of $6 million cash. This represents 25% of the book value of South America
Preserve. During the year, South America Preserve reports net income of $1,200,000 and
pays cash dividends of $100,000. At the end of the year, the fair value of Jaguar’s investment
is $6.4 million.

Required
A. At what amount is the investment reported on Jaguar’s balance sheet at year-end?
B. What amount of income from investments does Jaguar report? Explain.
C. Prepare journal entries to record the transactions for Jaguar Company.

4. Eduardo Corp. owns 100% of Arkansas Group, Inc.’s stock. Eduardo Corp. prepares
consolidated financial statements. Data from the annual reports of the two companies are:

Sales Net Income Dividends

Eduardo Corp. (consolidated) $3,000,000 $800,000 $100,000
Arkansas Group, Inc. $ 600,000 $ 140,000 $ 20,000

Required
A. How much of the $3,000,000 consolidated sales reported by Eduardo Corp. is from
operations of Arkansas Group? $600,000
B. How much of the $800,000 consolidated net income reported by Eduardo Corp. is from
operations of Arkansas Group? 140,000
5. Computer Castle Corporation reported the following in its 2022 annual report regarding
acquisition of Mary’s Motherboards:

Acquisition of Mary’s Motherboards, Inc.

On January 31, 2022 we completed our acquisition of Mary’s Motherboards, Inc., a
provider of hardware systems, software and services, by means of a merger of one of
our wholly owned subsidiaries with and into Motherboards such that Motherboards
became a wholly owned subsidiary of See the Future. We acquired Motherboards to,
among other things, expand our product offerings by adding Motherboards’s existing
hardware systems business and broadening our software and services offerings. We
have included the financial results of Motherboards in our consolidated financial
statements from the date of acquisition.

(in millions)
Cash, cash equivalents and marketable securities $ 5,142
Trade receivables 4,860
Inventories 662
Goodwill 2,582
Intangible assets 7,694
In-process research and development 830
Other assets 4,070
Deferred tax assets, net 2,500
Accounts payable and other liabilities (7,900)
Deferred revenues (2,230)
Total preliminary purchase price $18,210

Required
A. Of the total assets acquired, what portion is allocated to tangible assets and what portion
to intangible assets?
B. Are Motherboards’s assets (both tangible and intangible) reported on the consolidated
balance sheet at the book value or at the fair market value on the date of the acquisition?
Explain.
C. Explain how the intangible assets are valued at the time of the acquisition.
D. How are the tangible and intangible assets accounted for subsequent to the acquisition?
6. Paris Company issues $5,000,000 of 5% bonds that pay interest semiannually and mature in
10 years. Compute the bonds’ issue price assuming that the bonds’ effective interest rate is:

A. 4% per year compounded semiannually

B. 6% per year compounded semiannually

7. Company A borrowed cash, signing a two-year, interest bearing note payable with a face
value of $10,000 and an effective interest rate of 8%. Interest payments on the note are made
annually. Provide journal entries that would be recorded over the life of the note assuming the
following stated interest rates: A. 0%, B. 8%, C. 6% and D. 10%
8. In January, Company A issued 10,000 shares of Common Stock with a par value of $1 for $5
per share. In February they bought back 1,000 shares at $4 each. In March they reissued 500 of
those shares for $6 per share. In June they reissued the remaining shares for $2 per share.
Prepare the journal entries associated with these transactions.

9. FunTime Corp. disclosed the following lease information in its 2022 annual report related to
its leasing activities.

(In millions) 2022 2021

Operating Leases
Operating lease right-of-use assets $3,155 $2,855

Other current liabilities $750 $685

Operating lease liabilities 3,550 3,125

Finance Leases
Property and equipment, at cost $2,580 $1,450
Accumulated depreciation (250) (185)

Other current liabilities $180

Other long-term liabilities 2,235 1,410

Required
a. What amounts did FunTime’s report on its balance sheet, in total for 2022, related to
leased assets?
b. Where would the principal payments on the finance leases appear in the statement of cash
flows?
10. On January 1 of the current year, Samuels, Inc., purchased a building for $2.5 million to be
leased. The building is expected to have a 45 year life with no salvage value. The building was
leased immediately by Verdi Corp. (a calendar year-end company) for $162,500 a year payable
December 31 each year. The lease term is 5 years. The rate of interest implicit in the lease is
7%. The lease is classified as an operating lease.
a. Prepare an amortization schedule of the lease liability.
b. Prepare an amortization schedule for the right o fuse asset.
c. Prepare the journal entries for the current year and the following year.
11. Carter, Inc. began operations in 2022. The company reported $104,000 of deprecation expense on its
2022 income statement and $102,400 in 2023. Carter deducted $112,000 for depreciation on its tax return
in 2022 and $97,600 in 2023. The company reports a tax obligation of $36,120 for 2023 based on a tax
rate of 25%.
a. Determine the temporary difference between the book value of depreciable assets and the tax basis of
these assets at the end of 2022 and 2023.
b. Calculate the deferred tax liability at the end of each year.
c. Calculate the income tax expense for 2023.
d. Prepare the journal entry to record income tax expense for 2023.