ACC 423 Final Exam Version 2 Answers ACC 423 FINAL EXAM TEST Version 2 1) When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par value of the bonds and the fair market value of the warrants, the excess should be credited to A. a liability account. B. retained earnings. C. premium on bonds payable. D. additional paid-in capital from stock warrants. 2) The conversion of preferred stock into common stock requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be A. treated as a prior period adjustment. B. reflected currently in income as an extraordinary item. C. treated as a direct reduction of retained earnings. D. reflected currently in income, but NOT as an extraordinary item 3) When convertible debt is retired by the issuer, any material difference between the cash acquisition price and the carrying amount of the debt should be

1. ACC 423 Final Exam Version 2
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ACC 423 Final Exam Version 2 Answers
ACC 423 FINAL EXAM TEST Version 2
1) When the cash proceeds from a bond issued with detachable stock warrants exc
eed
the sum of the par value of the bonds and the fair market value of the warrants, the

2. excess should be credited to
A. a liability account.
B. retained earnings.
C. premium on bonds payable.
D. additional paid-in capital from stock warrants.
2) The conversion of preferred stock into common stock requires that any excess o
f the
par value of the common shares issued over the carrying amount of the preferred b
eing
converted should be
A. treated as a prior period adjustment.
B. reflected currently in income as an extraordinary item.
C. treated as a direct reduction of retained earnings.
D. reflected currently in income, but NOT as an extraordinary item
3) When convertible debt is retired by the issuer, any material difference between t
he
cash acquisition price and the carrying amount of the debt should be
A. treated as a prior period adjustment.
B. reflected currently in income as an extraordinary item.
C. treated as an adjustment of additional paid-in capital.

3. D. reflected currently in income, but NOT as an extraordinary item
4) When a corporation issues its capital stock in payment for services, the least
appropriate basis for recording the transaction is the
A. market value of the shares issued.
B. par value of the shares issued.
C. Any of these provides an appropriate basis for recording the transaction.
D. market value of the services received.
5) The accounting problem in a lump sum issuance is the allocation of proceeds
between the classes of securities An acceptable method of allocation is the
A. incremental method.
B. proportional method.
C. either the proportional method or the incremental method.
D. pro forma method.
6) Which of the following represents the total number of shares that a corporation
may
issue under the terms of its charter?
A. unissued shares
B. issued shares
C. outstanding shares

4. D. authorized shares
7) How should a “gain” from the sale of treasury stock be reflected
when using the cost
method of recording treasury stock transactions?
A. As an increase in the amount shown for common stock.
B. As paid-in capital from treasury stock transactions.
C. As an extraordinary item shown on the income statement.
D. As ordinary earnings shown on the income statement.
8) Treasury shares are
A. issued and outstanding shares.
B. shares held as an investment by the treasurer of the corporation.
C. issued but NOT outstanding shares.
D. shares held as an investment of the corporation.
9) When treasury stock is purchased for more than the par value of the stock and t
he
cost method is used to account for treasury stock, what account(s) should be debit
ed?
A. Treasury stock for the purchase price.
B. Treasury stock for the par value and paid-
in capital in excess of par for the excess of the
purchase price over the par value.

5. C. Treasury stock for the par value and retained earnings for the excess of the purc
hase price
over the par value.
D. Paid-in capital in excess of par for the purchase price.
10) When computing diluted earnings per share, convertible bonds are
A. assumed converted only if they are antidilutive.
B. ignored.
C. assumed converted only if they are dilutive.
D. assumed converted whether they are dilutive or antidilutive.
11) In computing earnings per share, the equivalent number of shares of convertibl
e
preferred stock are added as an adjustment to the denominator (number of shares
outstanding)If the preferred stock is cumulative, which amount should then be adde
d
as an adjustment to the numerator (net earnings)?
A. Annual preferred dividend times the income tax rate
B. Annual preferred dividend
C. Annual preferred dividend divided by the income tax rate
D. Annual preferred dividend times (one minus the income tax rate)
12) Antidilutive securities

6. A. include stock options and warrants whose exercise price is less than the averag
e market
price of common stock.
B. should be included in the computation of diluted earnings per share but NOT ba
sic earnings
per share.
C. should be ignored in all earnings per share calculations.
D. are those whose inclusion in earnings per share computations would cause basi
c earnings
per share to exceed diluted earnings per share
13) 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 sh
ares
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 Ther
e
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

7. A. Decrease | No effect
B. Decrease |Decrease
C. No effect | No effect
D. No effect |Decrease
14) A corporation declared a dividend, a portion of which was liquidatingHow would
this distribution affect each of the following?
Additional Paid-inCapital | Retained Earnings
A. No effect |Decrease
B. Decrease | No effect
C. No effect | No effect
D. Decrease |Decrease
15) How would the declaration and subsequent issuance of a 10% stock dividend b
y
the issuer affect each of the following when the market value of the shares exceeds
the
par value of the stock?
Additional Common Stock | Paid-in Capital
A. Increase | No effect
B. No effect | No effect

8. C. Increase | Increase
D. No effect | Increase
16) A reclassification adjustment is reported in the
A. statement of comprehensive income as other comprehensive income.
B. income statement as an Other Revenue or Expense.
C. statement of stockholders’ equity.
D. stockholders’ equity section of the balance sheet.
17) Which of the following is correct about the effective-interest method of
amortization?
A. Amortization of a premium decreases from period to period.
B. The effective interest method applied to investments in debt securities is differen
t from
that applied to bonds payable.
C. The effective-
interest method produces a constant rate of return on the book value of
the investment from period to period.
D. Amortization of a discount decreases from period to period.
18) When investments in debt securities are purchased between interest payment
dates, preferably the
A. accrued interest is debited to Interest Revenue.

9. B. securities account should include accrued interest.
C. accrued interest is debited to Interest Receivable.
D. accrued interest is debited to Interest Expense.
19) When an investor’s accounting period ends on a date that does NOT c
oincide with
an interest receipt date for bonds held as an investment, the investor must
A. make an adjusting entry to debit Interest Receivable and to credit Interest Reven
ue for the
total amount of interest to be received at the next interest receipt date.
B. make an adjusting entry to debit Interest Receivable and to credit Interest Reven
ue
for the amount of interest accrued since the last interest receipt date.
C. do nothing special and ignore the fact that the accounting period does NOT coin
cide with
the bond’s interest period.
D. notify the issuer and request that a special payment be made for the appropriate
portion of
the interest period.
20) Which of the following is NOT a debt security?
A. Loans receivable

10. B. Convertible bonds
C. All of these are debt securities.
D. Commercial paper
21) Investments in debt securities should be recorded on the date of acquisition at
A. market value.
B. face value plus brokerage fees and other costs incident to the purchase.
C. lower of cost or market.
D. market value plus brokerage fees and other costs incident to the purchase.
22) When a company holds between 20% and 50% of the outstanding stock of an
investee, which of the following statements applies?
A. The investor should use the equity method to account for its investment unless
circum-
stances indicate that it is unable to exercise “significant influence” o
ver the
investee
B. The investor should always use the fair value method to account for its investme
nt.
C. The investor should always use the equity method to account for its investment.
D. The investor must use the fair value method unless it can clearly demonstrate th
e ability to
exercise “significant influence” over the investee

11. 23) An investor has a long-
term investment in stocks Regular cash dividends received
by the investor are recorded as
Fair Value Method | Equity Method
A. A reduction of the investment |A reduction of the investment
B. A reduction of the investment | Income
C. Income | Income
D. Income |A reduction of the investment
24) BynerCorporation accounts for its investment in the common stock of
YountCompany under the equity methodBynerCorporation should ordinarily record
a
cash dividend received from Yount as
A. additional paid-in capital.
B. dividend income.
C. a reduction of the carrying value of the investment.
D. an addition to the carrying value of the investment
25) Use of the effective-
interest method in amortizing bond premiums and discounts
results in
A. a varying amount being recorded as interest income from period to period.

12. B. a smaller amount of interest income over the life of the bond issue than would re
sult from
use of the straight-line method.
C. a greater amount of interest income over the life of the bond issue than would re
sult from
use of the straight-line method.
D. a variable rate of return on the book value of the investment.
26) Held-to-maturity securities are reported at
A. acquisition cost plus amortization of a discount.
B. fair value.
C. acquisition cost.
D. acquisition cost plus amortization of a premium.
27) Debt securities acquired by a corporation which are accounted for by recognizi
ng
unrealized holding gains or losses and are included as other comprehensive incom
e
and as a separate component of stockholders’ equity are
A. trading debt securities.
B. never-sell debt securities.
C. held-to-maturity debt securities

13. D. available-for-sale debt securities
28) The accounting for fair value hedges records the derivative at its
A. carrying value.
B. historical cost.
C. amortized cost.
D. fair value.
29) Gains or losses on cash flow hedges are
A. recorded in equity, as part of other comprehensive income.
B. reported directly in retained earnings.
C. ignored completely.
D. reported directly in net income.
30) All of the following statements regarding accounting for derivatives are correct
EXCEPT that
A. gains and losses resulting from hedge transactions are reported in different way
s,
depending upon the type of hedge
B. they should be recognized in the financial statements as assets and liabilities
C. they should be reported at fair value
D. gains and losses resulting from speculation should be deferred
31) The rationale for interperiod income tax allocation is to

14. A. recognize a distribution of earnings to the taxing agency
B. adjust income tax expense on the income statement to be in agreement with inc
ome taxes
payable on the balance sheet
C. recognize a tax asset or liability for the tax consequences of temporary differenc
es
that exist at the balance sheet date
D. reconcile the tax consequences of permanent and temporary differences appear
ing on the
current year’s financial statements
32) Taxable income of a corporation differs from pretax financial income because o
f
Permanent Differences | Temporary Differences
A. No | Yes
B. Yes | No
C. No | No
D. Yes | Yes
33) Which of the following situations would require interperiod income tax allocation
procedures?

15. A. Interest received on municipal bonds
B. Proceeds from a life insurance policy on an officer
C. An excess of percentage depletion over cost depletion
D. A temporary difference exists at the balance sheet date because the tax basis of
an
asset or liability and its reported amount in the financial statements differ
34) Which of the following is a temporary difference classified as a revenue or gain
that
is taxable after it is recognized in financial income?
A. Prepaid royalty received in advance
B. An installment sale accounted for on the accrual basis for financial reporting
purposes and on the installment (cash) basis for tax purposes
C. Subscriptions received in advance
D. Interest received on a municipal obligation
35) At the December 31, 2007 balance sheet date, Garth Brooks Corporation repor
ts an
accrued receivable for financial reporting purposes but NOT for tax purposes. Whe
n
this asset is recovered in 2008, a future taxable amount will occur and
A. Garth will record a decrease in a deferred tax liability in 2008

16. B. total income tax expense for 2008 will exceed current tax expense for 2008
C. pretax financial income will exceed taxable income in 2008
D. Garth will record an increase in a deferred tax asset in 2008
36) Which of the following differences would result in future taxable amounts?
A. Revenues or gains that are taxable before they are recognized in financial incom
e
B. Revenues or gains that are recognized in financial income but are never include
d in
taxable income.
C. Expenses or losses that are tax deductible after they are recognized in financial
income
D. Expenses or losses that are tax deductible before they are recognized in financi
al
income.
37) In a defined-contribution plan, a formula is used that
A. defines the benefits that the employee will receive at the time of retirement.
B. ensures that pension expense and the cash funding amount will be different.
C. requires an employer to contribute a certain sum each period based on the form
ula.

17. D. ensures that employers are at risk to make sure funds are available at retiremen
t.
38) In accounting for a defined-benefit pension plan
A. the employer’s responsibility is simply to make a contribution each year
based on
the formula established in the plan
B. the expense recognized each period is equal to the cash contribution
C. an appropriate funding pattern must be established to ensure that enough monie
s
will be available at retirement to meet the benefits promised
D. the liability is determined based upon known variables that reflect future salary
levels promised to employees
39) In a defined-benefit plan, a formula is used that
A. defines the benefits that the employee will receive at the time of retirement
B. requires that pension expense and the cash funding amount be the same
C. requires that the benefit of gain or the risk of loss from the assets contributed to
the
pension plan be borne by the employee
D. defines the contribution the employer is to make; no promise is made concernin
g the

18. ultimate benefits to be paid out to the employees
40) A corporation has a defined-
benefit plan. An accrued pension cost will result at the
end of the first year if the
A. fair value of the plan assets exceeds the accumulated benefit obligation
B. amount of employer contributions exceeds the net periodic pension cost
C. accumulated benefit obligation exceeds the fair value of the plan assets
D. amount of net periodic pension cost exceeds the amount of employer contributio
ns
41) In accounting for a pension plan, any difference between the pension cost char
ged
to expense and the payments into the fund should be reported as
A. accrued or prepaid pension cost
B. an accrued actuarial liability
C. an offset to the liability for prior service cost
D. a charge or credit to unrealized appreciation and depreciation
42) The interest on the projected benefit obligation component of pension expense
A. reflects the rates at which pension benefits could be effectively settled
B. is the same as the expected return on plan assets
C. reflects the incremental borrowing rate of the employer
D. may be stated implicitly or explicitly when reported

19. 43) Yeager Co. maintains a defined-
benefit pension plan for its employees. At each
balance sheet date, Yeager should report a minimum liability at least equal to the
A. projected benefit obligation
B. unfunded accumulated benefit obligation
C. accumulated benefit obligation
D. unfunded projected benefit obligation
44) 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 wa
s
funded by a contribution of $120,000 in 2008. Amortization of prior service cost wa
s
$48,000 for 2008. What is the amount of Pratt’s prepaid pension cost at December
31,
2008?
A. $120,000
B. $168,000
C. $72,000
D. $180,000
45) Interest cost included in the net pension cost recognized for a period by an

20. employer sponsoring a defined-benefit pension plan represents the
A. increase in the projected benefit obligation due to the passage of time
B. shortage between the expected and actual returns on plan assets
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
46) On January 1, 2005, Foley Corporation acquired machinery at a cost of $250,0
00.
Foley adopted the double-
declining balance method of depreciation for this machinery
and had been recording depreciation over an estimated useful life of ten years, with
no
residual value. At the beginning of 2008, a decision was made to change to the stra
ight-
line method of depreciation for the machinery. The depreciation expense to be
recorded for the machinery in 2008 is (round to the nearest dollar)
A. $18,286
B. $25,600
C. $22,857
D. $25,000

21. 47) Accrued salaries payable of $51,000 were NOT recorded at December 31, 200
7.
Office supplies on hand of $24,000 at December 31, 2008 were erroneously treate
d as
expense instead of supplies inventory. Neither of these errors was discovered nor
corrected. The effect of these two errors would cause
A. 2007 net income and December 31, 2007 retained earnings to be understated
$51,000 each
B. 2008 net income to be understated $75,000 and December 31, 2008 retained
earnings to be understated $24,000
C. 2007 net income to be overstated $27,000 and 2008 net income to be understat
ed
$24,000
D. 2008 net income and December 31, 2008 retained earnings to be understated
$24,000 each
48) On January 1, 2005, Lynn Corporation acquired equipment at a cost of $600,00
0.
Lynn adopted the double-
declining balance method of depreciation for this equipment
and had been recording depreciation over an estimated life of eight years, with no

22. residual value. At the beginning of 2008, a decision was made to change to the stra
ight-
line method of depreciation for this equipment. Assuming a 30% tax rate, the
cumulative effect of this accounting change on beginning retained earnings, net of t
ax,
is
A. $0
B. $121,875
C. $78,750
D. $77,109
49) The estimated life of a building that has been depreciated 30 years of an origin
ally
estimated life of 50 years has been revised to a remaining life of 10 years. Based o
n this
information, the accountant should
A. depreciate the remaining book value over the remaining life of the asset
B. continue to depreciate the building over the original 50-year life
C. adjust accumulated depreciation to its appropriate balance, through net income,
based on a 40-
year life, and then depreciate the adjusted book value as though the
estimated life had always been 40 years

23. D. adjust accumulated depreciation to its appropriate balance through retained
earnings, based on a 40-year life, and then depreciate the adjusted book value as
though the estimated life had always been 40 years
50) Which type of accounting change should always be accounted for in current an
d
future periods
A. Change in reporting entity
B. Change in accounting principle
C. Correction of an error
D. Change in accounting estimate
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