Intermediate Accounting I Exam Practice Tests
Course Introduction
Intermediate Accounting I provides an in-depth exploration of financial accounting principles and practices, focusing on the preparation and analysis of financial statements in accordance with Generally Accepted Accounting Principles (GAAP). The course covers topics such as the conceptual framework of accounting, income measurement, revenue recognition, time value of money concepts, and detailed examination of assets including cash, receivables, inventories, and long-lived assets. Emphasis is placed on both the theoretical foundation and practical application of accounting standards, equipping students with the analytical skills necessary to interpret and report complex financial information.
Recommended Textbook
Intermediate Accounting IFRS 6th Edition by J. David Spiceland
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Chapter 1: Environment and Theoretical Structure of Financial Accounting
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Q1) Comprehensive income is another term for net income.
A)True
B)False
Answer: False
Q2) The conceptual framework's recognition and measurement concepts recognize which of the following as a principle, rather than an assumption?
A)Periodicity.
B)Monetary unit.
C)Conservatism.
D)Full disclosure.
Answer: D
Q3) The conceptual framework's qualitative characteristic of relevance includes:
A)Timeliness.
B)Verifiability.
C)Representational faithfulness.
D)Neutrality.
Answer: A
Q4) Compute net income for the first year for Tri Fecta. Answer: 11ea92df_7315_eb83_9bd4_21d13bda4553_TB5911_00
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Chapter 2: Review of the Accounting Process
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Q1) When a magazine sells subscriptions to customers, it is an example of:
A)An accrued liability transaction.
B)An accrued receivable transaction.
C)A prepaid expense transaction.
D)An unearned revenue transaction.
Answer: D
Q2) In its first year of operations Acme Corp. had income before tax of $400,000. Acme made income tax payments totaling $150,000 during the year and has an income tax rate of 40%. What would be the balance in income tax payable at the end of the year?
A)$160,000 credit.
B)$150,000 credit.
C)$ 10,000 credit.
D)$ 10,000 debit.Income tax expense = $400,000 40% = $160,000
Answer: C
Q3) The statement of cash flows summarizes transactions that caused cash and cash equivalents to change during a reporting period.
A)True
B)False
Answer: True
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Chapter 3: The Balance Sheet and Financial Disclosures
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Q1) The balance sheet reports:
A)Net income at a point in time.
B)Cash flows for a period of time.
C)Assets and equities at a point in time.
D)Assets and liabilities for a period of time.
Answer: C
Q2) Which of the following is never a current liability account?
A)Accrued payroll
B)Dividends payable
C)Prepaid rent
D)Subscriptions collected in advance
Answer: C
Q3) Subsequent events are significant developments that take place after a firm's year-end, and after the financial statements are issued.
A)True
B)False
Answer: False
Q4) Compute the return on shareholders' equity ratio for Marjoram Company. Answer: $73,080 / ($70,000 + 157,000) = 32% Return on shareholders' equity
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Chapter 4: The Income Statement and Statement of Cash
Flows
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Q1) Changes in accounting estimates require disclosure of their effects, if material, on current year net income and EPS but do not require restatement of prior years' financial statements.
A)True
B)False
Q2) Material restructuring costs are reported as an element of income from continuing operations.
A)True
B)False
Q3) Required: Prepare a multiple-step income statement with earnings per share disclosure.
Q4) Give an example of a non-cash financing and investing activity and explain when and how it would be reported in the financial statements.
Q5) The financial statement presentation of a change in depreciation method is most similar to that of reporting:
A)Changes in accounting estimates.
B)Prior period adjustments.
C)Correction of errors.
D)Extraordinary items.
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Chapter 5: Income Measurement
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Q1) Under the cost recovery method used to account for long-term contracts under IFRS, equal amounts of revenue and cost are recognized until all costs are recovered.
A)True
B)False
Q2) Briefly explain the critical similarities and differences between the completed contract method used by US GAAP and the cost recovery method used in IFRS for accounting for long-term contracts when the percentage-of-completion method is not appropriate. (Ignore accounting for contract losses.)
Q3) Briefly explain how you can determine if a company is effectively using leverage.
Q4) Slick's Used Cars sells pre-owned cars on the installment basis and carries its own notes because its customers typically cannot qualify for a bank loan. Default rates tend to be high or unpredictable. However, in the event of nonpayment, Slick's can usually repossess the cars without loss. The revenue method Slick would use is the:
A)Installment sales method.
B)Point of sales method.
C)Cost recovery method.
D)Answer A or C is correct.
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Chapter 6: Time Value of Money Concepts
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Q1) 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.
Q2) An investment product promises to pay $42,000 at the end of ten years. If an investor feels this investment should produce a rate of return of 12 percent, compounded annually, what's the most the investor should be willing to pay for the investment?
A)$ 15,146.
B)$ 13,523.
C)$ 42,000.
D)$130,446.$42,000 x .32197* = $13,523 (rounded) *PV of $1: n=10; i=12%
Q3) Column 3 is an interest table for the:
A)Present value of 1.
B)Future value of 1.
C)Present value of an ordinary annuity of 1.
D)Present value of an annuity due of 1.
Q4) The total cash interest payments in 2009 for these notes.
Q5) Describe how present value methods affect Eastern's long-term lease debt.
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Chapter 7: Cash and Receivables
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Q1) The income statement approach to estimating bad debts requires an adjusting entry at the end of the period to reduce receivables to net realizable value.
A)True
B)False
Q2) Explain the transactions that typically would affect the discount on notes receivable account.
Q3) Discounts on notes receivable are recognized as interest earned over the term of the related note.
A)True
B)False
Q4) A note receivable Mild Max Cycles discounted with recourse was dishonored on its maturity date. Mild Max would debit:
A)A loss on dishonored receivable.
B)A receivable.
C)Dishonored note expense.
D)Interest expense.
Q5) For each posted entry in the allowance account during 2007, prepare the journal entry.
Q6) Define what it is meant by internal control.
Page 9
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Chapter 8: Inventories: Measurement
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Q1) Dollar-value LIFO:
A)Starts with ending inventory measured at current costs and recreates LIFO layers for measuring inventory costs.
B)Increases the recordkeeping costs of LIFO.
C)Only is allowed for internal reporting purposes.
D)None of these is correct.
Q2) Required: Compute the ending inventory and cost of goods sold assuming Random Creations uses average cost and a periodic inventory system.
Q3) Required: Compute the ending inventory and cost of goods sold assuming Random Creations uses average cost and a perpetual inventory system.
Q4) Unit LIFO is more costly to implement than dollar-value LIFO.
A)True
B)False
Q5) The largest expense on a retailer's income statement is typically:
A)Salaries and wages.
B)Cost of goods sold.
C)Income tax expense.
D)Depreciation expense.
Q6) Briefly explain the advantages of dollar-value LIFO (DVL).
Page 10
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Chapter 9: Inventories: Additional Issues
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Sample Questions
Q1) To the nearest thousand, estimated ending inventory is:
A)$41,000.
B)$37,000.
C)$51,000.
D)None of these is correct.The correct answer is $39,000 (rounded)
Q2) In the year 2009, the internal auditors of Goofy Co. discovered that goods costing $25 million that were purchased in December of 2008 were recorded for $20 million. The goods were properly measured in the 12/31/08 ending physical inventory.
Required:
Prepare the journal entry needed in 2009 to correct the error. Also, briefly describe any other measures Goofy would take in connection with correcting the error. (Ignore income taxes.)
Q3) To the nearest thousand, estimated ending inventory is:
A)$55,000.
B)$52,000.
C)$57,000.
D)None of these is correct.
Q4) Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to classes of trees.
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Chapter 10: Operational Assets: Acquisition and Disposition
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Q1) Show the journal entry to record Plank's disposal of the fixed assets during 2009.
Q2) The exclusive right to display a symbol of product identification is a:
A)Patent.
B)Copyright.
C)Trademark.
D)Franchise.
Q3) During 2009, Prospect Oil Corporation incurred $4,000,000 in exploration costs for each of 15 oil wells drilled in 2009. Of the 15 wells drilled, 10 were dry holes. Prospect uses the successful efforts method of accounting. Assuming that Prospect depletes 30% of the oil discovered in 2009, what amount of these exploration costs would remain on its 12/31/09 balance sheet?
A)$ 6 million
B)$14 million
C)$20 million
D)$42 million Capitalize the wells that are not dry holes: 5 $4 million = $20 million.Of this, 30% is depleted in 2009 and the rest remains on the balance sheet.
Q4) How are donated assets recorded?
Q5) Briefly explain how R & D is reported in financial statements.
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Chapter 11: Operational Assets: Utilization and Impairment
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Q1) Depreciation for 2010, using double-declining balance, would be:
A)$32,000.
B)$34,000.
C)$38,000.
D)$40,000.Depreciation for 2010 = [$200,000 ($200,000 20% 3/12] 20% = $38,000
Q2) Briefly explain the disclosures that are required relative to depreciable assets.
Q3) In the first year of an asset's life, which of the following methods has the smallest depreciation?
A)Straight-line.
B)Declining balance.
C)Sum-of-the-years' digits.
D)Composite or group.
Q4) Briefly differentiate between activity-based and time-based allocation methods.
Q5) A major expenditure increased a truck's life beyond the original estimate of life.
GAAP permits the expenditure to be debited to:
A)Repairs.
B)Accumulated depreciation.
C)Major repairs.
D)None of these.
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Chapter 12: Investments
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Q1) Assume that, on 1/1/09, Matsui Co. paid $1,200,000 for its investment in 60,000 shares of Yankee Inc. Further, assume that Yankee has 200,000 total shares of stock issued. The book value and fair value of Yankee's identifiable net assets were both $4,000,000 at 1/1/09. The following information pertains to Yankee during 2009: What amount would Matsui report in its year-end 2009 balance sheet for its investment in Yankee?
A)$1,320,000
B)$1,260,000
C)$1,242,000
D)None of these is correct.
Q2) Purchases and sales of securities are always reported as investing activities in a statement of cash flows.
A)True
B)False
Q3) Under the equity method of accounting for a stock investment, cash dividends received are considered a reduction of the investee's net assets.
A)True
B)False
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Chapter 13: Current Liabilities and Contingencies
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Q1) Paul Company issues a product recall due to an apparently pre-existing and material defect discovered after the end of its fiscal year. Financial statements have not yet been issued. The action required of Paul Company for this reasonably estimable contingency for the year just ended is:
A)To disclose it in a footnote.
B)To accrue a long-term liability.
C)To accrue the liability and explain it in a footnote.
D)To do nothing relative to the contingency.
Q2) At the beginning of 2009, Angel Corporation began offering a 2-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2009 were $180 million. Fifteen percent of the units sold were returned in 2009 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel's 2009 income statement is:
A)$ 5.3 million.
B)$ 7.2 million.
C)$10.6 million.
D)$27.0 million.$180 million 4% = $7.2 million
Q3) How are customer advances and refundable deposits similar and yet different?
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) A $500,000 bond issue sold for 98. Therefore, the bonds:
A)Sold at a discount because the stated rate of interest was lower than the effective rate.
B)Sold for the $500,000 face amount less $10,000 of accrued interest.
C)Sold at a premium because the stated rate of interest was higher than the yield rate.
D)Sold at a discount because the effective interest rate was lower than the face rate.
Q2) A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is 11%. These bonds will sell at a price that is:
A)Equal to $500,000.
B)More than $500,000.
C)Less than $500,000.
D)The answer cannot be determined from the information provided.When the market rate of interest is higher than the bonds' stated rate, the bonds will sell at a discount.
Q3) Distinguish between:
(a) Convertible and callable bonds.
(b) Serial and term bonds.
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Chapter 15: Leases
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Q1) On December 31, 2009, Perry Corporation leased equipment to Admiral Company for a 5-year period. The annual lease payment, excluding executory costs is $40,000. The interest rate for this lease is 10%. The payments are due on December 31 of each year. The first payment was made on December 31, 2009. The normal cash price for this type of equipment is $125,000 while the cost to Perry was $105,000. For the year ended December 31, 2009, by what amount will Perry's pretax earnings increase from this lease?
A)$20,000.
B)$24,000.
C)$28,500.
D)$40,000.
Q2) For a leased asset under a lease that qualifies as a capital lease, the depreciation period used by the lessee must be:
A)The same period that was used by the lessor.
B)The useful life to the lessee.
C)The term of the lease regardless of the lease provisions.
D)The remaining life of the asset at the time the lease agreement took effect.
Q3) Discuss the three major types of leases that may apply to the lessor. How do they differ?
Q4) What is meant by the term "minimum lease payments"?
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Chapter 16: Accounting for Income Taxes
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Q1) Reliable Corp. had a pretax accounting income of $30 million this year. This included the collection of $40 million of life insurance proceeds when several key executives died in a plane crash. Temporary differences for the current year netted out to zero. Reliable has had a 40% tax rate and taxable income of $120 million over the previous two years and plans to elect an operating loss carryback for any NOL. In the current year financial statements, Reliable would report:
A)Net income of $34 million.
B)A tax benefit of $10 million.
C)Net income of $30 million.
D)A deferred tax asset of $4 million.
Q2) For the current year ($ in millions), Centipede Corp. had $80 in pretax accounting income. This included bad debt expense of $6 based on the allowance method, and $20 in depreciation expense. Two million in receivables were written off as uncollectible, and MACRS depreciation amounted to $35. In the absence of other temporary or permanent differences, what was Centipede's taxable income?
A)$73 million.
B)$69 million.
C)$63 million.
D)$49 million.
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Chapter 17: Pensions and Other Postretirement Benefits
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Q1) Amortizing prior service cost for pensions and other postretirement benefit plans will:
A)Decrease retained earnings.
B)Increase assets.
C)Decrease assets.
D)Decrease shareholders' equity.
Q2) The key elements of a defined benefit pension plan include all of the following except:
A)The pension expense.
B)The plan assets.
C)Amortized future benefits.
D)The employer's obligation.
Q3) With respect to Ralph, what is Oregon's expected postretirement benefit obligation (EPBO) at the end of 2009, rounded to the nearest dollar?
A)$137,045
B)$205,593
C)$246,810
D)$768,000
Q4) Discuss income smoothing as the term relates to pension plans.
Q5) What are the five components of postretirement benefit expense?
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Chapter 18: Shareholders Equity
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Q1) Identify the three common forms of business organization and the primary difference in the way we account for them.
Q2) What was the average cost per share of the treasury stock purchased by Stubblefield during 2006 and 2007, respectively?
Q3) Paid-in capital in excess of par is reported:
A)As a reduction of shareholders' equity.
B)As a noncurrent asset.
C)As a noncurrent liability.
D)As an increase in shareholders' equity.
Q4) The par value of common stock represents:
A)The arbitrary dollar amount assigned to a share of stock.
B)The liquidation value of a share.
C)The book value of a share of stock.
D)The amount received when the stock was issued.
Q5) Details of each class of stock must be reported:
A)On the face of the balance sheet only.
B)In disclosure notes only.
C)On the face of the balance sheet or in disclosure notes.
D)On the face of the balance sheet and in disclosure notes.
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Chapter 19: Share-Based Compensation and Earnings Per Share
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Q1) Contingently issuable shares may be included in:
A)Basic EPS.
B)Diluted EPS.
C)Both a and b.
D)None of these is correct.
Q2) Compare the concepts of basic and diluted earnings per share with respect to their calculation.
Q3) M, Inc. supplies consumer products used in the U.S. and other markets. In its 2009 Annual Report to Shareholders, M, Inc. disclosed the following footnote about its EPS: "The consolidated financial statements are presented in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per common share incorporate the incremental shares issuable upon the assumed exercise of stock options and upon the assumed conversion of the Company's Convertible Notes in fiscal 2009 as if conversion to common shares had occurred at the beginning of the fiscal year. Earnings have also been adjusted for interest expense on the Convertible Notes in fiscal 2009."
Explain why M mentioned the adjustment in the last sentence of the footnote.
Q4) How is a complex capital structure different from a simple capital structure?
Page 21
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Chapter 20: Accounting Changes
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Q1) When an accounting change is reported under the retrospective approach, account balances in the general ledger:
A)Are not adjusted.
B)Are closed out and then updated.
C)Are adjusted net of the tax effect.
D)Are adjusted to what they would have been had the new method been used in previous years.
Q2) At the end of the current year, a company failed to accrue interest of $500,000 on its investments in municipal bonds. Its tax rate is 30%. As a result of this error, net income is:
A)Unaffected.
B)Understated by $350,000.
C)Understated by $500,000.
D)Understated by $150,000.$500,000 (1 0%) = $500,000 Municipal bond interest is tax exempt.
Q3) Both changes in reporting entities and material error corrections are reported prospectively.
A)True
B)False
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Chapter 21: The Statement of Cash Flows
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Q1) How is the amortization of patents reported in a statement of cash flows that is prepared using the indirect method?
A)A decrease in cash flows from investing activities.
B)An increase in cash flows from investing activities.
C)A deduction from net income in arriving at cash flows from operations.
D)An addition to net income in arriving at cash flows from operations.
Q2) Why are "cash equivalents" included as part of cash in the statement of cash flows?
Q3) Do the statement of cash flows and its related disclosure note report only transactions that cause an increase or decrease in cash? Explain.
Q4) Which of the following never requires an outflow of cash?
A)Early extinguishment of debt.
B)Retirement of common stock.
C)Payment of dividends.
D)Amortization of patent.
Q5) Transactions that involve merely purchases or sales of cash equivalents generally are not reported on a statement of cash flows. Describe an exception to this generalization. What is the essential characteristic of the transaction that qualifies as an exception?
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Chapter 22: Appendix a Derivatives
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Q1) If a futures contract is used to hedge a debt sale, and interest rates go down causing debt security prices to rise, the potential benefit of being able to issue debt at that lower interest rate (higher price) will be offset by a loss on the futures position.
A)True
B)False
Q2) 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?
Q3) All derivatives, no exceptions, are carried on the balance sheet as either assets or liabilities at fair (or market) value.
A)True
B)False
Q4) To be adequately informed about the adequacy of a company's risk management, investors and creditors need information about strategies for holding derivatives and specific hedging activities. Toward that end, extensive disclosure requirements are required. Identify several of these requirements.
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