ACC 423 Final Exam

Name: ACC 423 Final Exam
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Final examination covering advanced accounting principles.

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ACC 423 Final Exam
1) Proceeds from an issue of debt securities having stock warrants should
NOT be allocated between debt and equity features when
A. the allocation would result in a discount on the debt security
B. the warrants issued with the debt securities are nondetachable
C. exercise of the warrants within the next few fiscal periods seems remote
D. the market value of the warrants is NOT readily available
2) The conversion of preferred stock may be recorded by the
A. market value method
B. par value method
C. book value method
D. incremental method
3) 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. treated as a direct reduction of retained earnings
C. reflected currently in income as an extraordinary item
D. reflected currently in income, but NOT as an extraordinary item
4) A primary source of stockholders’ equity is
A. contributions by stockholders
B. both income retained by the corporation and contributions by
stockholders
C. appropriated retained earnings
D. income retained by the corporation
5) Stockholders’ equity is generally classified into two major categories:
A. retained earnings and unappropriated capital
B. earned capital and contributed capital
C. appropriated capital and retained earnings
D. contributed capital and appropriated capital
6) 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. Any of these provides an appropriate basis for recording the transaction
C. par value of the shares issued
D. market value of the services received
7) Treasury shares are
A. shares held as an investment by the treasurer of the corporation
B. issued but NOT outstanding shares
C. shares held as an investment of the corporation
D. issued and outstanding shares
8) “Gains” on sales of treasury stock (using the cost method) should be
credited to
A. paid-in capital from treasury stock
B. other income

C. capital stock
D. retained earnings
9) How should a “gain” from the sale of treasury stock be reflected when
using the cost method of recording treasury stock transactions?
A. As ordinary earnings shown on the income statement
B. As an extraordinary item shown on the income statement
C. As paid-in capital from treasury stock transactions
D. As an increase in the amount shown for common stock
10) In computing earnings per share, the equivalent number of shares of
convertible 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 added as an adjustment to the
numerator (net earnings)?
A. Annual preferred dividend
B. Annual preferred dividend divided by the income tax rate
C. Annual preferred dividend times (one minus the income tax rate)
D. Annual preferred dividend times the income tax rate
11) When computing diluted earnings per share, convertible bonds are
A. ignored
B. assumed converted only if they are dilutive
C. assumed converted whether they are dilutive or antidilutive
D. assumed converted only if they are antidilutive
12) What effect will the acquisition of treasury stock have on stockholders’
equity and earnings per share, respectively?
A. Decrease and no effect
B. Increase and decrease
C. Increase and no effect
D. Decrease and increase
13) On May 1, 2007, Kent Corp. declared and issued a 10% common stock
dividend. Prior to this dividend, Kent had 100,000 shares of $1 par value
common stock issued and outstanding. The fair value of Kent ‘s common
stock was $20 per share on May 1, 2007. As a result of this stock dividend,
Kent’s total stockholders’ equity
A. did NOT change
B. increased by $200,000
C. decreased by $10,000
D. decreased by $200,000
14) How would the declaration and subsequent issuance of a 10% stock
dividend by 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 | Increase
B. No effect | No effect
C. Increase | No effect
D. No effect | Increase
15) 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. No effect | No effect
B. Decrease | Decrease
C. Decrease | No effect
D. No effect | Decrease
16) Which of the following is correct about the effective-interest method of
amortization?
A. The effective-interest method produces a constant rate of return on the
book value of the investment from period to period.
B. The effective interest method applied to investments in debt securities is
different from that applied to bonds payable.
C. Amortization of a premium decreases from period to period.
D. Amortization of a discount decreases from period to period
17) An unrealized holding loss on a company’s available-for-sale securities
should be reflected in the current financial statements as
A. other comprehensive income and deducted in the equity section of the
balance sheet.
B. an extraordinary item shown as a direct reduction from retained earnings
C. a note or parenthetical disclosure only
D. a current loss resulting from holding securities
18) An unrealized holding gain on a company’s available-for-sale
securities should be reflected in the current financial statements as
A. other comprehensive income and included in the equity section of the
balance sheet.
B. an extraordinary item shown as a direct increase to retained earnings
C. a note or parenthetical disclosure only
D. a current gain resulting from holding securities
19) Investments in debt securities should be recorded on the date of
acquisition at
A. face value plus brokerage fees and other costs incident to the purchase
B. lower of cost or market
C. market value plus brokerage fees and other costs incident to the
purchase
D. market value
20) Securities which could be classified as held-to-maturity are
A. warrants
B. redeemable preferred stock
C. municipal bonds
D. treasury stock
21) Which of the following is NOT a debt security?

A. Commercial paper
B. Convertible bonds
C. Loans receivable
D. All of these are debt securities
22) 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. Income | Income
C. Income | A reduction of the investment
D. A reduction of the investment | Income
23) 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” over the investee
B. The investor should always use the equity method to account for its
investment
C. The investor must use the fair value method unless it can clearly demonstrate
the ability to exercise “significant influence” over the investee
D. The investor should always use the fair value method to account for its
investment
24) Bista Corporation declares and distributes a cash dividend that is a
result of current earnings. How will the receipt of those dividends affect
the investment account of the investor under each of the following
accounting methods?
Fair Value Method | Equity Method
A. Increase | Decrease
B. No Effect | Decrease
C. No Effect | No Effect
D. Decrease | No Effect
25) Debt securities that are accounted for at amortized cost, NOT fair
value, are
A. trading debt securities
B. held-to-maturity debt securities
C. available-for-sale debt securities
D. never-sell debt securities
26) Equity securities acquired by a corporation which are accounted for by
recognizing unrealized holding gains or losses as other comprehensive
income and as a separate component of stockholders’ equity are
A. trading securities where a company has holdings of less than 20%
B. available-for-sale securities where a company has holdings of less than
20%
C. securities where a company has holdings of between 20% and 50%
D. securities where a company has holdings of more than 50%
27) Use of the effective-interest method in amortizing bond premiums and

discounts results in
A. a smaller amount of interest income over the life of the bond issue than would
result from use of the straight-line method
B. a greater amount of interest income over the life of the bond issue than would
result from use of the straight-line method
C. a varying amount being recorded as interest income from period to
period
D. a variable rate of return on the book value of the investment
28) All of the following are characteristics of a derivative financial
instrument EXCEPT the instrument
A. All of these are characteristics
B. has one or more underlyings and an identified payment provision
C. requires a large investment at the inception of the contract
D. requires or permits net settlement
29) The accounting for fair value hedges records the derivative at its
A. historical cost
B. amortized cost
C. carrying value
D. fair value
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
ways, 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) Taxable income of a corporation differs from pretax financial income
because of
Permanent Differences | Temporary Differences
A. Yes | No
B. No | No
C. No | Yes
D. Yes | Yes
32) The rationale for interperiod income tax allocation is to
A. adjust income tax expense on the income statement to be in agreement with
income taxes payable on the balance sheet
B. recognize a tax asset or liability for the tax consequences of temporary
differences that exist at the balance sheet date
C. recognize a distribution of earnings to the taxing agency
D. reconcile the tax consequences of permanent and temporary differences
appearing on the current year’s financial statements
33) Interperiod income tax allocation causes
A. tax expense in the income statement to be presented with the specific
revenues causing the tax
B. tax expense shown on the income statement to equal the amount of
income taxes payable for the current year plus or minus the change in the

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deferred tax asset or liability balances for the year.
C. tax expense shown in the income statement to bear a normal relation to the
tax liability
D. tax liability shown in the balance sheet to bear a normal relation to the
income before tax reported in the income statement
34) At the December 31, 2007 balance sheet date, Garth Brooks
Corporation reports an accrued receivable for financial reporting
purposes but NOT for tax purposes. When 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
B. pretax financial income will exceed taxable income in 2008
C. Garth will record an increase in a deferred tax asset in 2008
D. total income tax expense for 2008 will exceed current tax expense for 2008
35) Which of the following differences would result in future taxable
amounts?
A. Revenues or gains that are taxable before they are recognized in financial
income
B. Expenses or losses that are tax deductible after they are recognized in
financial income
C. Expenses or losses that are tax deductible before they are recognized in
financial income
D. Revenues or gains that are recognized in financial income but are never
included in taxable income
36) Which of the following are temporary differences that are normally
classified as expenses or losses that are deductible after they are
recognized in financial income?
A. Product warranty liabilities
B. Advance rental receipts
C. Fines and expenses resulting from a violation of law
D. Depreciable property
37) In a defined-contribution plan, a formula is used that
A. ensures that pension expense and the cash funding amount will be different
B. defines the benefits that the employee will receive at the time of retirement
C. ensures that employers are at risk to make sure funds are available at
retirement
D. requires an employer to contribute a certain sum each period based on
the formula
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. an appropriate funding pattern must be established to ensure that
enough monies will be available at retirement to meet the benefits
promised
C. the liability is determined based upon known variables that reflect future
salary levels promised to employees
D. the expense recognized each period is equal to the cash contribution

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University of Phoenix

Subject

Accounting

ACC 423 Final Exam

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