Accounting Theory
Midterm Exam
Course Introduction
Accounting Theory explores the fundamental concepts, principles, and frameworks that shape the field of accounting, examining both historical and contemporary perspectives. The course delves into the philosophical foundations of accounting standards, the motivations and implications behind various accounting practices, and the regulatory environment influencing current accounting policies. Students analyze differing theoretical approaches, such as positive and normative accounting theories, and apply critical thinking to discuss issues including measurement, disclosure, ethics, and the role of accounting information in decision-making. This course equips learners with a deep understanding of how accounting theory informs practical standards and shapes the evolution of the profession.
Recommended Textbook
Intermediate Accounting IFRS 6th Edition by
J. David Spiceland
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Page 2
Chapter 1: Environment and Theoretical Structure of Financial Accounting
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Q1) The matching principle is:
A)A valuation method.
B)An expense recognition accounting principle.
C)A cash basis reporting principle.
D)An asset classification procedure.
Answer: B
Q2) When a registrant company submits its annual filing to the SEC, it uses:
A)Form 10-A.
B)Form 10-K.
C)Form 10-Q.
D)Form S-1.
Answer: B
Q3) Accounting standard setting has been characterized as:
A)A political process.
B)Using the scientific method.
C)Pure deductive reasoning.
D)Pure inductive reasoning.
Answer: A
Q4) Compute the cash balance at the end of the first year for Alpaca Corporation. Answer: 11ea92df_7315_c472_9bd4_870d7e0adb46_TB5911_00
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Chapter 2: Review of the Accounting Process
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Q1) When the amount of interest receivable decreases during an accounting period:
A)Accrual-basis interest revenues exceed cash collections from borrowers.
B)Accrual-basis net income exceeds cash-basis net income.
C)Accrual-basis interest revenues are less than cash collections from borrowers.
D)Accrual-basis net income is less than cash-basis net income.
Answer: C
Q2) The post-closing trial balance contains only permanent accounts.
A)True
B)False
Answer: True
Q3) Wages have been earned but are unpaid at the end of an accounting period. Answer: \(\begin{array}{lccc}
\text { TRANSACTION }&\text { Account(s) } & \text { Account(s) } & \text { Transaction } \\
&\text { debited } & \text { credited } & \text { type } \\ \text { Accrued wages due but unpaid at the end of an }&6230&2141&2\\\text { accounting period. } \end{array}\)
Q4) Kline's 12/31/09 total shareholders' equity:
Answer: Kline's 12/31/09 total owners' equity = $628,000
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Chapter 3: The Balance Sheet and Financial Disclosures
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Q1) Compute the times interest earned ratio for Marjoram Company.
Answer: ($73,080 + 31,320 + 11,000) /$11,000 = 10.49 Times interest earned ratio
Q2) Altoid Co.'s times interest earned ratio
Answer: Times interest earned ratio: $(350 + 150 + 90) /$90 = 6.56
Q3) Current assets
Answer: Current assets (Ca./Current Liabilities (CL) = 2.75; therefore, CA = 2.75 CL
Quick assets (Qa./Current Liabilities = 1.5; therefore, QA = 1.5 CL
QA = CA - Inventory = CA $180,000
1.5CL = 2.75 CL $180,000
1.25CL = $180,000
CL = $144,000
CA = $396,000 - -
Q4) Disclosure notes would not include:
A)Depreciation methods used and estimated useful life.
B)Definition of cash equivalents.
C)Details of pension plans.
D)Data to adjust the financial statements so that they are not misleading.
Answer: D
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Chapter 4: The Income Statement and Statement of Cash Flows
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Q1) Major Co. reported 2009 income of $300,000 from continuing operations before income taxes and a before-tax extraordinary loss of $80,000. All income is subject to a 30% tax rate. In the 2009 income statement, Major Co. would show the following line-item amounts for income tax expense and net income:
A)$66,000 and $210,000.
B)$90,000 and $154,000.
C)$90,000 and $276,000.
D)$66,000 and $220,000.
Q2) The accounting records of Rockness Company provided the data below ($ in 000s). Required: Prepare a reconciliation of net income to net cash flows from operating activities.
\[\begin{array} { l r }
\text { Net income } & \$ 25,200 \\
\text { Depreciation and amortization expense } & 3,300 \\
\text { Decrease in accounts receivable } & 2,000 \\
\text { Increase in inventory } & 4,500 \\
\text { Increase in prepaid insurance } & 300 \\
\text { Increase in salaries payable } & 900 \\
\text { Decrease in interest payable } & 400
\end{array}\]
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Chapter 5: Income Measurement
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Q1) Under the completed contract method, gross profit or loss is never recognized until the contract is completed.
A)True
B)False
Q2) Assuming that the initial services to be performed by Flapper Jack's subsequent to the signing are substantial and that collection of the receivable is reasonably assured, the journal entry required at signing would include a credit to:
A)Unearned franchise fee revenue for $36,000.
B)Unearned franchise fee revenue for $30,000.
C)Franchise fee revenue for $36,000.
D)Franchise fee revenue for $ 6,000.
Q3) In its December 31, 2009, balance sheet, Rigsby would report:
A)Realized gross profit of $100,000.
B)Deferred gross profit of $100,000.
C)Installment receivables (net) of $3,200,000.
D)Installment receivables (net) of $4,000,000.
Q4) Its inventory turnover ratio for 2009.
Q5) Identify and explain the criteria for recognition of revenue added by SAB 101.
Q6) Required: Compute the inventory turnover ratio for 2008.
Page 7
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Chapter 6: Time Value of Money Concepts
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Q1) Koko Company pays $10 million at the beginning of each year for 10 years to Mocha Inc. for a building with a fair value of $75 million. What interest rate is Mocha earning on financing this land sale?
A)Between 13% and 14%.
B)Between 7% and 8%.
C)Between 5.5% and 6%.
D)Cannot be determined from the given information.That is, the present value of a 10-year annuity due of $10 million is $75 million, when the discount factor (from Table 6) equals 7.5000.That point is between 7% and 8% in the table.
Q2) Column 6 is an interest table for the:
A)Present value of an ordinary annuity of 1.
B)Future value of an ordinary annuity of 1.
C)Present value of an annuity due of 1.
D)Future value of an annuity due of 1.
Q3) Describe how present value methods affect Eastern's long-term lease debt.
Q4) The calculation of future value requires the removal of interest.
A)True
B)False
Q5) Provide two examples of the use of present value techniques in accounting.
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Chapter 7: Cash and Receivables
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Q1) Calistoga's accounts receivable at December 31, 2009, are:
A)$467,000.
B)$473,280.
C)$465,280.
D)$469,280.
Q2) On February 1, 2009, Stealth Trucks sold a diesel rig to Kansas Transports for $250,000, receiving a $50,000 down payment and a 12-month, 10% note for the balance. Principal and interest are due at maturity and the 10% interest rate reflected the market rate of interest at the time of sale. On August 1, 2009, Kansas Transports discounted the note without recourse at the First South Bank at 12% interest.
Required:
Prepare all required journal entries at August 1 to recognize interest revenue and the discounting of the note.
Q3) In Dinty's adjusting entry for bad debts at year-end, which of these would be included?
A)Debit to bad debt expense for $114,000
B)Credit to allowance for uncollectible accounts for $82,000
C)Debit to accounts receivable for $32,000
D)All of these are correct.
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Chapter 8: Inventories: Measurement
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Q1) Selected financial statement data from Western Colorado Stores is shown below. Required:
1. Compute the gross profit ratio for 2009.
2. Compute the inventory turnover ratio for 2009. \(\begin{array}{lrr}&2009&2008\\
\text { Net sales } & \$ 625,000 & \$ 690,000 \\
\text { Cost of goods sold } & 500,000 & 490,000 \\
\text { Operating expenses } & 105,000 & 85,000 \\
\text { Inventory } & 90,000 & 70,000 \end{array}\)
Q2) What is cost of goods available for sale, assuming CBC uses the gross method?
A)$312,480.
B)$326,000.
C)$331,480.
D)$337,000.
Q3) The choice of cost flow assumption (FIFO, LIFO, or average) does not depend on the physical flow of the product.
A)True
B)False
Q4) Briefly explain the advantages of dollar-value LIFO (DVL).
Page 10
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Chapter 9: Inventories: Additional Issues
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Q1) Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to individual types of feeds.
Q2) When computing the cost-to-retail percentage for the conventional retail method, included in the denominator are:
A)Net markups and net markdowns.
B)Neither net markups nor net markdowns.
C)Net markups, but not net markdowns.
D)Net markdowns, but not net markups.
Q3) \[\begin{array} { | c | c | c | }
\hline \text { Error } & \text { Cost of goods sold } & \text { Retained earnings } \\
\hline \text { Understated beginning inventory } & & \\
\hline
\end{array}\]
Q4) For a change from the average cost method to FIFO, the current year's income includes the cumulative after-tax difference that would have resulted if the company had used FIFO in all prior years.
A)True
B)False
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Chapter 10: Operational Assets: Acquisition and Disposition
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Q1) Agasse Industries began construction of a new facility and took out a $1,500,000, 8% construction loan on April 1, 2009. Agasse made payments to the general contractor of $400,000 on April 1, $900,000 on August 31, and $500,000 on December 31.
Required: Compute the amount of interest that Agasse would capitalize in 2009.
Q2) It's not unusual for one company to buy another company in order to obtain technology that the acquired company has developed or is in the process of developing. Required: Explain the accounting treatment of purchased technology.
Q3) How are donated assets recorded?
Q4) Costs incurred after discovery of a natural resource but before production begins are reported as expenses of the period in which the expenditures are made. A)True B)False
Q5) What disclosures are required relative to interest costs incurred during the year?
Q6) Why are software development costs treated differently than other types of R&D?
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Chapter 11: Operational Assets: Utilization and Impairment
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Q1) Briefly explain the following statement. Depreciation is a process of cost allocation, not valuation.
Q2) Depreciation:
A)Is always considered a period cost.
B)Could be a product cost or a period cost depending on the use of the asset.
C)Is usually based on the declining-balance method.
D)Per books is usually higher than MACRS in the early years of an asset's life.
Q3) Activity-based methods of depreciation are appropriate for assets whose service life is a function of use rather than time.
A)True
B)False
Q4) On September 30, 2009, Sternberg Company sold office equipment for $12,000. The equipment was purchased on March 31, 2006, for $24,000. The asset was being depreciated over a five-year life using the straight-line method, with depreciation based on months in service. No residual value was anticipated.
Required:
Prepare the journal entries to record 2009 depreciation and the sale of the equipment.
Q5) Briefly differentiate between activity-based and time-based allocation methods.
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Chapter 12: Investments
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Q1) The equity method is in many ways a partial consolidation.
A)True
B)False
Q2) Investments in securities available for sale are reported at:
A)Discounted present value.
B)Lower of cost or market.
C)Historical cost.
D)Fair value on the reporting date.
Q3) On March 17, 2009, Union Corporation purchased 5,000 shares of AZQ common stock as a long-term investment at $40 per share. On December 31, 2009, and December 31, 2010, the market value of the AZQ stock is $42 and $43, respectively.
Required:
(1.) What is the appropriate reporting category for this stock? Why?
(2.) Prepare the adjusting entry on December 31, 2009.
(3.) Prepare the adjusting entry on December 31, 2010.
Q4) Net unrealized holding gains (losses) are reported in the income statement for trading securities.
A)True
B)False
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Chapter 13: Current Liabilities and Contingencies
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Q1) What was General's coupon liability as of December 31, 2009?
A)$7.5 million.
B)$13.5 million.
C)$16.5 million.
D)$21.0
Q2) Which of the following may create employer liabilities in connection with their payrolls?
A)Employee withholding taxes
B)Employee voluntary deductions
C)Employee fringe benefits
D)All of these are correct.
Q3) Stern Corporation borrowed $10 million cash on September 1, 2009, to provide additional working capital for the year's production. Stern issued a 6-month, 10% promissory note to Second State Bank. Interest on the note is payable at maturity. Each firm uses the calendar year as the fiscal year.
Required:
1. Prepare all journal entries from issuance to maturity for Stern Corporation.
2. Prepare all journal entries from issuance to maturity for Second State Bank.
Q4) Define a loss contingency and give two examples that almost always are accrued.
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Chapter 14: Bonds and Long-Term Notes
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Q1) Determine the price of a $500,000 bond issue under each of the following independent assumptions:
\[\begin{array} { l l c c }
\text { Maturity } & \text { Interest Paid } & \text { Stated Rate } & \text { Effective Rate } \\
\text { 1. 10 years } & \text { annually } & 10 \% & 12 \% \\
\text { 2. 10 years } & \text { semiannually } & 10 \% & 12 \% \\
\text { 3. 10 years } & \text { semiannually } & 12 \% & 10 \% \end{array}\]
Q2) On January 1, 2009, Legion Company sold $200,000 of 10% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were sold for $177,000, priced to yield 12%. Legion records interest at the effective rate. Legion should report bond interest expense for the six months ended June 30, 2009, in the amount of:
A)$ 8,850
B)$10,000
C)$10,620
D)$12,000 6% $177,000 = $10,620
Q3) How should bond issue costs be accounted for on the books of the issuing corporation?
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Chapter 15: Leases
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Q1) In accounting for operating leases, the lessor, rather than the lessee, will recognize depreciation on the leased asset.
A)True
B)False
Q2) What would the lessee record as annual depreciation on the asset using the straight-line method, assuming no residual value?
A)$3,325.
B)$6,920.
C)$4,325.
D)$5,320.Deprecation = $34,600 / 8 years = $4,325
Q3) From the perspective of the lessee, leases may be classified as either:
A)Direct financing or sales-type.
B)Capital or direct financing.
C)Capital or operating.
D)Direct financing or operating.
Q4) Discuss the financial statement disclosure requirements for all leases entered into by the lessee.
Q5) How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with respect to classifying a lease as a capital lease?
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Chapter 16: Accounting for Income Taxes
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Q1) North Dakota Corporation began operations in January 2008, and purchased a machine for $20,000. North Dakota uses straight-line depreciation over a four-year period for financial reporting purposes. For tax purposes, the deduction is 50% of cost in 2008, 30% in 2009, and 20% in 2010. Pretax accounting income for 2008 was $150,000, which includes interest revenue of $20,000 from municipal bonds. The enacted tax rate is 30% for all years. There are no other differences between accounting and taxable income.
Required:
Prepare a journal entry to record income taxes for the year 2008. Show well-labeled computations for the amount of income tax payable and the change in the deferred tax account.
Q2) Which of the following creates a deferred tax liability?
A)An unrealized loss from recording inventory at lower of cost or market.
B)Accelerated depreciation in the tax return.
C)Estimated warranty expense.
D)Subscriptions collected in advance.
Q3) Indicate why LMC lists Net operating loss carryforwards as a component of deferred tax assets.
Q4) What is a valuation allowance for deferred tax assets and when is it used?
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Chapter 17: Pensions and Other Postretirement Benefits
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Q1) The expected postretirement benefit obligation is the discounted present value of the total benefits expected to be paid by the employer to the plan participants.
A)True
B)False
Q2) What are the five components of postretirement benefit expense?
Q3) Amortizing prior service cost for pension plans will:
A)Increase retained earnings and increase accumulated other comprehensive income.
B)Decrease retained earnings and decrease accumulated other comprehensive income.
C)Increase retained earnings and decrease accumulated other comprehensive income.
D)Decrease retained earnings and increase accumulated other comprehensive income.
Q4) A company's total obligation for postretirement benefits is measured by the: A)APBO. B)HMOP.
C)HOBO. D)EPBO.
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Chapter 18: Shareholders Equity
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Q1) On October 15, 2009, a 5% stock dividend was declared and distributed. The market value of the common stock on this date was $32 per share. Fractional share rights represented 100,000 shares. Cash was paid in lieu of issuing fractional share rights. On the date of declaration and payment, the company had 10 million shares of common stock outstanding. The par value of the common shares was $5.
Required:
Prepare any necessary journal entries to record the above events.
Q2) What is comprehensive income and how does it differ from net income? Where is it reported in the balance sheet?
Q3) A statement of comprehensive income does not include:
A)Gains resulting from the return on assets exceeding expectations.
B)Gains and losses on unsold held-to-maturity securities.
C)Losses resulting from the return on assets falling short of expectations.
D)Prior service cost.
Q4) The par value of shares issued is normally recorded in the:
A)Paid-in capital in excess of par account.
B)Common stock account.
C)Retained earnings account.
D)Appropriated retained earnings account.
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Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) When recognizing compensation under a stock option plan, unanticipated forfeitures are treated as:
A)A change in accounting principle.
B)A loss.
C)An income item.
D)A change in estimate.
Q2) When we take into account the dilutive effect of convertible securities in the calculation of EPS, the method used is called the:
A)Treasury stock method.
B)If converted method.
C)Optional method.
D)Dilution method.
Q3) When we take into account the dilutive effect of stock options, rights, and warrants in the calculation of EPS, the method used is called the:
A)Optional method.
B)If converted method.
C)Dilution method.
D)Treasury stock method.
Q4) What is the advantage of a stock appreciation right over stock options?
21
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Chapter 20: Accounting Changes
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Q1) Orange Corp. constructed a machine at a total cost of $70 million. Construction was completed at the end of 2005 and the machine was placed in service at the beginning of 2006. The machine was being depreciated over a 10-year life using the sum-of-the-years'-digits method. The residual value is expected to be $4 million. At the beginning of 2009, Orange decided to change to the straight-line method. Ignoring income taxes, what will be Orange's depreciation expense for 2009?
A)$4.8 million.
B)$5.4 million.
C)$6.6 million.
D)$9.4 million.
Q2) Describe the way we account for an error when that error is discovered in a subsequent reporting period.
Q3) A change in the residual value of equipment is treated ______________.
A)currently.
B)prospectively.
C)retrospectively.
D)None of these.
Q4) What are the situations deemed to constitute a change in reporting entity? Describe the way changes in reporting entity are reported.
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Chapter 21: The Statement of Cash Flows
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Q1) Which of the following is not classified as an operating activity?
A)Interest paid on long-term debt.
B)Dividends received on common stock.
C)Dividends paid on common stock.
D)Payments on accounts payable.
Q2) On December 31, 2009, Wellstone Company reported net income of $70,000 and sales of $210,000. The company also reported beginning and ending accounts receivable at $20,000 and $25,000, respectively. Wellstone will report cash collected from customers in its 2009 statement of cash flows (direct method) in the amount of:
A)$215,000.
B)$285,000.
C)$135,000.
D)$205,000.
Q3) Charlene Company sold a printer with a cost of $68,000 and accumulated depreciation of $23,000 for $20,000 cash. This transaction would be reported as:
A)An operating activity.
B)An investing activity.
C)A financing activity.
D)None of these.
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Chapter 22: Appendix a Derivatives
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Q1) Green Import Company held a fixed-rate debt of $4 million. The company wanted to hedge its fair value exposure with an interest rate swap. However, the only notional available at the time on the type of swap it desired was $4.5 million. What will be the effect of any gain or loss on the $500,000 notional difference?
Q2) The seller in a futures contract derives a loss when interest rates rise.
A)True
B)False
Q3) In an interest rate swap on a fixed rate 8% debt of $100,000, where the floating rate is 6%, the annual net interest settlement in cash is:
A)$0
B)$2,000
C)$6,000
D)$8,000
Q4) An options contract to hedge possible future price changes of an inventory of supply parts would:
A)Represent a cash flow hedge.
B)Represent a fair value hedge.
C)Represent a foreign currency hedge.
D)Not qualify as a hedge.
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